Economics serving society

Benefit in the wake of disaster: Long-run effects of earthquakes on welfare in rural Indonesia

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Jérémie Gignoux and Marta Menendez

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Following natural disasters, what economic losses do rural households incur and much time do they lose ? While the most extreme disasters resulting in numerous victims come to mind first, mostly, it is more regular natural catastrophes that affect the goods (such as houses) and economic resources (especially farms, but also infrastructure) of families and communities. Do the material losses created by these disasters plunge people into poverty from which they little chance of escaping or do mechanisms of reconstruction, individual or collective, allow them to reestablish their economic activities and living standards? The study of the case of Indonesia, where a number of strong but not extreme seismic events occur every year, offers some answers to these questions.
In this article, Gignoux and Menendez study the effects of these earthquakes on the economic situation of rural Indonesian households. They are assisted in this by data from a US Geological Survey catalogue of dozens of large earthquakes that occurred in Indonesia between 1985 and 2007, and by data collected in the context of a Rand Corporation inquiry titled Indonesia Family Life Survey, based on a sample of households followed between 1993 and 2007. With the help of tools developed by seismologists that allow the measurement of the local intensity of tremors, the authors adopt a refined approach with which they were able to reconstruct the past experiences of each household. No fewer than 25 earth tremors of an intensity identified by seismologists as strong enough to have inflicted severe damage affected the sample studied in that period. Their results indicate that the individuals affected incur significant economic losses in the first two years following a strong earthquake, with significant decreases in the value of their goods, income and consumption. These people recuperate their pre-earthquake standard of living after three to five years and even manage to increase their standard of living after six to twelve years. In the same way, the stocks of productive capital in farms are reconstituted and agricultural income reestablished in the medium to long-term. This post-disaster recuperation is explained in part by the financial aid that households receive and the rebuilding of infrastructure such as roads, which are essential for taking agricultural products to market.
The results tend to disprove the hypothesis that individual victims of earthquakes are plunged into situations of lasting poverty, and reveal the long-term benefits of policies of aid and post-disaster reconstruction. In the case of Indonesia, the potential benefits can be explained by the capacities for mobilising financial resources and for redistribution between regions.

Original title of the article : “Benefit in the wake of disaster: Long-run effects of earthquakes on welfare in rural Indonesia”
Published in : PSE Working Papers n°2014-27. 2014.
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