Work under way in Christchurch. Photo by Linda Robertson.
Is the rebuilding of Christchurch really a bonanza for our economy? Peter Lyons asks.We seem to be deluding ourselves that the rebuilding of Christchurch after the earthquakes will be a bonanza for our economy.
There are frequent references to "the stimulus to our economy" of rebuilding Christchurch as though this provides a path to future sustainable growth. The same logic suggests floods, wars, tsunamis and other major destructive events are a boon to an economy. This is nonsense.
The nonsense relates to the confusion between wealth and income. The Christchurch earthquake was hugely destructive to the wealth of New Zealand as a society. Apart from the tragic loss of life, there was also the destruction of businesses, homes and physical infrastructure on a massive scale. To suggest that the rebuilding provides a bonanza for our economy implies that a builder who rebuilds his house after a fire is somehow wealthier as a result of the process.
The rebuilding of Christchurch will provide a stimulus for our economy but that is because we have been languishing at, or near, recession since 2007. Some workers and machinery that would otherwise be idle could be employed in the rebuilding. This increase in employment should lead to increased incomes, leading to further demand in the economy and more jobs and output but this is only if these resources are currently unemployed.
Economists call this stimulus the multiplier effect. From a purely economic perspective, we are slightly fortunate that this tragic disaster happened during an economic downturn, when some resources are available.
To suggest that the rebuilding is a bonanza for our economy is ridiculous.
If that was the case, we could grow our economy by burning down large parts of Dunedin on a regular basis, then employing people and machinery to rebuild it. I can't think of any society that has achieved economic prosperity through such a strategy.
The Christchurch earthquake has reduced the wealth of our country but could lead to a stimulus to employment and incomes during a difficult time.
The rebuilding process will create jobs and incomes and output which will increase New Zealand's gross domestic product (GDP). Successful rebuilding may allow us to regain the wealth that was lost by this disaster. It is not a recipe for increasing national prosperity.
From a purely economic point of view, the resources tied up in the rebuilding will cost the rest of the economy dearly. Parts of the Auckland property market are currently experiencing a mini price boom.
Some of this is likely due to the internal migration caused by the earthquake as a number of Christchurch residents relocate to Auckland. Migration has a huge effect on house prices, because the supply of new houses is so slow to respond to increased demand. The builders and materials tied up in the rebuilding mean there will be less building activity in other parts of the country.
This is likely to drive up the cost of housing construction, because of resource constraints.
The rebuilding of Christchurch does offer opportunities for our national development. If housing construction can be made more cost-effective due to economies of scale and streamlined consent requirements during the rebuilding, these efficiencies could be applied to new housing developments in other parts of the country. A recent report by the Productivity Commission showed the excessive costs of new housing relate partially to the costly consent processes and the lack of economics of scale in the construction industry.
The father of modern economics, Adam Smith, pointed out that a nation's prosperity depended on its production of saleable goods and services. This is measured in a system of national income accounting that produces figures for gross domestic product. The rebuilding will stimulate our GDP. It will create more jobs and output and incomes in our economy.
But this process is not creating new wealth for our society. It is attempting to regain the assets that were lost in this disaster.
The fact that we have some spare capacity to do this is because our economy has been in the doldrums for several years. Unfortunately, the labour required for the rebuilding is generally skilled and this reduces its availability for use in other parts of the economy.
If the Government is astute in how it manages the rebuilding, then some good could come out of it in new skills training, better construction techniques and streamlined consent processes. If this doesn't occur then the disaster has been compounded.
? Peter Lyons teaches economics at St Peter's College in Epsom.
Source: http://www.odt.co.nz/opinion/opinion/222750/rebuilding-sorry-burst-your-bubble
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