Economic Lessons of The Kobe Earthquake

Economic Lessons of the Kobe Earthquake
Author(s): George Horwich

Source: Economic Development and Cultural Change, Vol. 48, No. 3 (April 2000), pp. 521-542
Published by: The University of Chicago Press
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Economic Lessons of the Kobe Earthquake*
George Horwich
Purdue University
The earthquake that struck the Japanese port city of Kobe in the early
morning of January 17, 1995, was the most severe quake ever to strike a
modern urban area. In this article, I offer an overview from an economic
perspective of Kobe 19 months after the event and what has been learned
since. Events both preceding and following the quake are analyzed in
terms of basic economic concepts. Though hardly novel, this perspective
is seldom applied systematically to natural disasters. Doing so, I think,
will yield some useful implications for disaster management policies in
Japan and other countries in any stage of economic development.
The Quake and Economic Recovery

The brunt of the quake was felt in a swath roughly 20 kilometers long
and 2 kilometers wide within a metropolitan area of 4 million people.
The intensity of the quake as measured on the Richter scale, 7.2, does
not capture its full force, since it was accompanied by an extraordinary
horizontal movement of 1.52 meters, a vertical thrust of 1.2 meters, and
a twisting motion as well. The port facilities, constituting the worlds
sixth largest container port and the source of 39% of Kobes gross indus-
trial output, were a shambles.1 In the city, 100,000 buildings were de-
stroyed, close to an equal number half destroyed, and 183,000 partially
destroyed.2 The entire underground water system was ruptured, as was
much of the sewage system, the gas system, the power system, the rail
system, and the main coastal highway, one elevated section of which
rolled over on its side. Hundreds of fires broke out, mainly in the older
industrial and residential sections of the city, and burned uncontrollably
because backup water supplies were either inadequate or nonfunc-
tioning.3
Over 300,000 people became homeless on that cold January day.
Sixty-five hundred eventually died as a result of the quake600 or 700
in the fires, the rest in collapsing structures.
The damage to the capital stock, expressed at commercial exchange
2000 by The University of Chicago. All rights reserved.

0013-0079/2000/4803-0004$02.00

522 Economic Development and Cultural Change
rates, has been estimated at US$114 billion, three times the recorded cost
of any previous natural disaster in history.4 On a purchasing power parity
basis, however, the estimate has to be reduced by 44%, placing the dam-
age at $64 billion.5 In terms of the loss of human life, Japan and the rest
of the world have experienced far worse. The 1923 Tokyo earthquake
took 140,000 lives, mostly in the ensuing firestorm. In 1976, approxi-
mately 250,000 died in the earthquake in Tangshan, China. In 1988,
25,000 died almost immediately in the earthquake in Soviet Armenia.
Many, if not most, of the media and others surveyed the broad de-
struction and predicted it would take as many as 10 years for Kobe to
rebuild and for its economy to recover.6 In fact, less than 15 months
later, in March 1996, manufacturing in greater Kobe was 98% of its pre-
earthquake trend.7 Eighteen months after the quake, in July 1996, all de-
partment stores and 79% of shops had reopened. Department store sales
were 76% of pre-earthquake levels.8 Although 1 year after the quake less
than half of the port facilities were rebuilt, import trade was fully recov-
ered and export volume was 85% of the predisruption volume.9 In mid-
1998, there were still empty tracts of land in the inner city where the
fires had raged, and some scattered construction was still in progress.
Forty-five thousand people were still in temporary buildings, but public
housing for 38,600 of them was nearing completion.10 Two years after
the quake, all debris had been removeda colossal achievement;11 life-
line utility services had been fully restored within 3 monthselectric
power in a few days or less; all rail systems and roads, other than the
major expressway, had become operational within 5 and 7 months, re-
spectively; the Hanshin expressway, the major artery, was rebuilt in 21
months, although the collapsed portion, almost as embarrassing to au-
thorities as the surrender to MacArthur 50 years earlier, was pulverized
and hauled away in 13 days;12 and complete reconstruction of the port
was celebrated after 26 months.13
Some Principles of Recovery

How does an economist explain this phenomenally rapid, but not quite
complete, recovery of the greater Kobe economy? The first principle of
economics is that output can be produced by variable combinations of
resources. Even before the capital stock is fully rebuilt and the regions
surface area restored, a given output can be produced using less capital
but more labor than previously, which works longer hours or more inten-
sively; or by using more energy, which provides more heat to compen-
sate for a buildings gaping holes. These and similar substitutions oc-
curred during Kobes recovery.
A fundamental factor in any recovery is that in most economies
physical capital, although the most visible, is not the dominant economic
resourcehuman capital is.14 Destroy any amount of physical capital,
but leave behind a critical number of knowledgeable human beings

George Horwich 523
whose brains still house the culture and technology of a dynamic econ-
omy, and the physical capital will tend to reemerge almost spontane-
ously. Capital accumulation is especially easy the second time around
because the primary goal is to duplicate an investment pattern, not design
it from scratch. And, of course, horrendous as the fatalities were, 99.8%
of the metropolitan areas population survived. The world has seen such
rapid recoveries before. Hiroshima, in which the bomb took a much
larger fraction of both human and physical capital, was a bustling com-
mercial metropolis just 5 years later.15 The German city of Aachen, re-
duced to rubble in World War II, did not even bother to remove the de-
bris for some years. Instead, it moved major sections of the city and was
booming again in the early 1950s.
Even though fatalities were relatively low, Kobes population fell
because not all of its residents elected to remain in the Hanshin (greater
Kobe-Osaka) area. Almost 100,000 migrated to other parts of Japan, and
most have not returned.16 These emigrants were 2.5% of the regions
population. Many clearly had marketable skills and, like most emigrants,
were probably entrepreneurial. Their continued absence will keep Kobe
from returning to its predisaster trend output.
Another aspect of recovery is that the restored economy will not be
a replica of the predisaster one. Any modern economy is normally in
constant flux. As such, the destruction of physical assets is a form of
accelerated depreciation that hastens the adoption of new technologies
and varieties of investment. Thus, in the face of foreign competition, the
small-enterprise plastic shoe industry never fully recovered from the
quake; one major department store permanently altered its line of goods;
and the municipal government undertook to widen previously impassable
streets as part of a major redevelopment of burned out areas. The most
significant industrial changes took place in the port facilities. Although
port commerce quickly regained pre-earthquake levels, it subsequently
fell to reflect Kobes ongoing losses to ports in Japan (Osaka, Yoko-
hama, and Nagoya) and outside Japan (China, Taiwan, and South Korea)
and to air cargo traffic.17 At the same time, any given disaster will itself
tend to influence the character of replacement capital and the composi-
tion of output. A renovated underground water system with flexible plas-
tic joints has been designed and is being gradually installed; automatic
shutoff valves have been fitted to the gas distributors main gas line and
to many individual hookups; the citys fire department has built a new
observation and control center; and Hyogo Prefecture has reorganized
and enlarged its emergency management procedures.
Macroimpacts
Natural disasters in large advanced economies tend not to significantly
reduce current aggregate output or induce an associated rise in the gen-
eral price level.18 In geographically dispersed economies, disasters are al-

most always localized events. But in any economy, it is the capital stock,
not output, that is directly reduced by the disaster. If gross domestic
product is taken as the measure of output, it is not only unaffected di-
rectly by the loss of capital but is enlarged by the production of replace-
ment capital and by disaster-related rescue, relief, and cleanup activity.19
Immediately after the disaster, however, predisaster components and
GDP itself could fall before enough replacement capital becomes avail-
able (it was summer 1995 before significant reconstruction activity be-
gan in Kobe). Although physically intact, resources could also be tempo-
rarily idled owing to disrupted transportation, communication, and
production linkages. But even in this interim period, any negative ma-
croeffects tend to be fleeting and often imperceptible. This may partly
be because physical assets, which suffer the predominant loss, are not
the dominant resource, and partly because resource substitutions occur,
enabling the positive forces acting on GDP (coping and rebuilding) to
dominate. Among these substitutions in Kobe were the transfer of its port
business to other ports, the shift of output of large manufacturing compa-
nies to plants in other locations, and the replacement of both large and
small manufacturers output by that of firms outside the earthquake
zone.20 Although Japans markets are often tightly controlled, cartelized,
and not easily penetrated by newcomers (see next section), firms with
market powerlike comparative firmswill respond to price changes
that alter their optimality conditions. In fact, monopoly and cartelized in-
dustries, by nature, operate under conditions of excess physical capacity,
which increases their ability to raise output on short notice.21 This was
certainly true of the port facilities, whose labor agreements, which pro-
hibited 24-hour 7-day-a-week operations, were suspended following the
earthquake.22 Additional excess capacity came from the general weak-
ness of the Japanese economy after 1990, and even more so of Kobe, a
region in general industrial decline for some years. In addition, the popu-
lation in the afflicted area, temporarily displaced from normal employ-
ment, is available for relief and other postearthquake tasks. Such efforts,
as noted above, are components of gross domestic output.
How, in fact, did the macroeconomy perform? In the first quarter of
1995, when the quake occurred, real GDP increased by only 0.2% but
then rose by 1.3% in each of the next 2 quarters and 2.3% in the fourth
quarter.23 For 1995 as a whole, growth was 1.4%, compared with 0.6%
in 1994. In fact, 1995 was a significantly better year than any since 1990,
when Japans bubble economy collapsed.24 The upturn was almost
certainly fueled by the monetary expansion that began in late 1992 after
the financial meltdown of 1990 and 1991. The growth of high-powered
money had fallen from almost 12% at the beginning of 1990 to 1.5% in
late 1992. Thereafter, it rose more or less steadily, reaching a plateau at
4% in 1995 before continuing sharply upward in the fourth quarter.
Given the usual lags in the effect of monetary policy, it is likely that the

George Horwich 525
monetary expansion of the preceding 2 years helped to expand the econ-

omy in 1995 and minimize any negative macroimpact the earthquake
might have had. The ability of the economy to grow in 1995 is confirmed
by the data on excess production capacity. Capacity utilization in manu-
facturing was more than 100% at the end of 1990, fell to 82% by the
end of 1993, and rose to 87% in 1994, where it remained throughout
1995, apart from a slight drop in the third quarter. In the labor market,
employment remained constant during 1995. The unemployment rate
continued its 1990s upward trend. Starting at 2.1% in 1991, it rose to
2.9% at the beginning of 1995 and to 3.3% at the years end. That trend
is more or less continuous, however, and does not appear to have been
influenced by any external shocks.
Although positive, the growth in 1995 was anemic by earlier post-
war standards. Nevertheless, the evidence does not support the earth-
quake as a dominant macroinfluence. A net reduction in aggregate output
due to a disaster would be a leftward shift of aggregate supply that si-
multaneously raises the general price level and reduces real money bal-
ances, reduces real income and thus saving, raises interest rates because
of the fall in both saving and real balances, reduces investment through
the higher interest rates, reduces employment while raising unemploy-
ment because of the fall in output, lowers real wages, reduces the gov-
ernment surplus, and reduces the trade surplus.25 In fact, throughout
1995, the price level was essentially stable or declining, real balances
rose significantly, and interest rates fell precipitously. Both real saving
and investment (as percentages of GDP) declined in the first quarter and
rose thereafter, with investment for the year remaining constant, on net,
and saving rising. Both the government surplus and the trade balance de-
clined by small amounts, real wages (the monthly earnings of labor)
rose, and, as indicated above, employment remained constant while un-
employment increased along a 1990s trend. A decline in share prices,
which began in mid-1994, accelerated during the first quarter of 1995,
possibly reflecting apprehension triggered by the earthquake. But these
prices turned upward at midyear and recouped most of their losses by
the end of the year.
The picture that emerges from the macroprofile is one in which any
loss of gross aggregate output due to the quake is largely replaced by
market-based factor and product substitutions. In graphic terms, a left-
ward shift of aggregate supply is offset by an almost equal rightward
shift in response to the endogenous market forces. If, alternatively, ag-
gregate supply had remained in a significantly net leftward position, the
rightward shift of aggregate demand due to the monetary increase would
have offset the output loss (in a movement along the supply schedule)
only by raising the general price level. In fact, prices did not rise. With
supply thus remaining at most only slightly to the left after the combined
quake and supply-side adjustments, the increase in demand was able to

stimulate output along a supply path that was quite elastic owing to the
excess capacity and resource substitutability of the Japanese economy.26
One simple way of viewing the potential macroimpact of the quake
is to compare the loss of assets to the size of the total capital stock rather
than to the total annual output, as is usually done. I take Japans capital
stock to be three times its annual gross domestic product. Thus, while
the Kobe earthquake damage of $114 billion was 2.3% of Japans 1995
GDP of $5 trillion, it was only one-third of that or 0.8% of the capital
stock of 3 5 $15 trillion.
Alternatively, and more meaningfully, we can compare the $114
billion loss of capital stock plus the economic loss of human life to the
capitalized value of all of Japans resources, human and nonhuman. As-
suming that the average Japanese has the same economic value as the
average American, and taking a midrange estimate of $2 million,27 the
total earthquake resource loss, on a first approximation, is $114 billion
6,500 $2 million $127 billion. Japans total resource value
is obtained by capitalizing its GDP of $5 trillion by an assumed real rate
of interest of 3%: $5 trillion/.03 $167 trillion.28 Relative to this huge
amount, which includes the value of Japans highly skilled labor force,
the $127 billion earthquake loss is a minuscule 127/(167 103 )
0.08%. In terms of these comparisons, it is not surprising that Japans
vast, integrated, and price-directed markets would be able to compensate
quickly for a single regions loss of some of its physical and human cap-
ital.29
A corollary to the ability of a resilient economy to recover quickly
from shocks is that such an economy will minimize the damage, as a
percentage of its total assets, it suffered in the first place. Kobes $114
billion property loss is as much a reflection of its enormous wealth as
it is of its lack of earthquake preparedness. A better single measure of
fundamental economic damage in Kobe is the loss of life, which, as
noted, does not approach that of urban earthquakes at other times and
places. It is relevant, too, that the fatalities occurred disproportionately
among older, retired persons, and in older, lower-income sections of the
city, often in neighborhoods of prewar construction.30 The authorities of
Kobe and Hyogo Prefecture were aware of the dangers that lurked in
those wardstinderbox houses, narrow impassable streets from which
automobiles were effectively banishedexactly what the aging residents
wanted in order to preserve their flourishing, intimate communities.31 Of-
ficials believed it made no sense to renovate (or permit others to reno-
vate) and uproot those neighborhoods, causing endless dislocation for a
generation that would soon pass. The dislocation and anguish that fol-
lowed the earthquake confirmed those fears and, in some sense, vindi-
cated official inaction with respect to an earthquake whose magnitude
almost no one seriously anticipated.

George Horwich 527
Development and Safety

The critical underlying factor in any economys response to disaster is
its wealth. In the words of Fred Cuny, the late disaster entrepreneur, If
the earthquake that hit San Salvador hit San Francisco, it would rattle
the chinanot kill 1,500 people.32 For Aaron Wildavsky, richer is sim-
ply safer.33 He explains why this is so by interpreting safety as a natural
product of a growing market economy. We define safety broadly as pro-
tection against hazardous things and circumstancesfor example, as less
dangerous machinery and other instruments of production, improved
construction quality, more reliable automobile brakes and steering mech-
anisms, and more extensive, accessible, and reliable means of travel and
communication. Wildavsky describes a trial-and-error market learning
process in which individual buyers weigh the cost of each technically
feasible increment of safety against its expected benefit. If the balance is
favorable, they purchase it. If the new safety feature fulfills its promise,
it is retained; otherwise, it is scrapped. Since the demand for safety rises
with income, a nations per capita income is a good first approximation
of the degree of safety it enjoys.
To a considerable extent, safety standards, although still subject to
a market test, are set more formally by private nonprofit industry associa-
tions.34 Government regulations also play an important role, but less so in
the United States than in Japan, where regulations are crafted by various
ministries with extensive industry participation. Wildavsky and others,
however, are highly critical of governments ability, under any circum-
stances, to weigh costs and benefits objectively or to simulate the trial-
and-error learning process provided by the market. Indeed, governments
basic nature illustrates yet another economic principle; namely, that it
tends to be a noncompetitive monopoly producer subject to political
pressures and bureaucratic incentives. And the ballot box, its main
source of feedback, is generally an infrequent, imprecise, and sometimes
contradictory source of information.35 Still, government is needed to pro-
vide at least the safety infrastructurepublic goods that markets are not
likely to supply: acceptably clean air and water, the sanitation system,
immunization against disease, most roads and highways, and, possibly,
synchronization of building code adoption and other disaster-protective
measures.36 It is significant that most buildings in Kobe, including the
citys highest towers, which were built under a 1981 code, suffered only
minor damage.37 Japan clearly has an advanced, government-provided or
government-assisted safety infrastructure.
Meanwhile, a rise in income will provide not only general safety
but, at high enough income levels, protection specific to disasters. Early
in economic development, most disaster initiatives are public goods and
will be undertaken, if at all, by government or charitable organizations.
But eventually, at some income threshold, the private interest in pro-

tecting life and property from rare but catastrophic events materializes.38
At that point, there emerge emergency and risk management departments
in commercial and other enterprises, private disaster consultants, and di-
saster property insurance, including self-insurance through private sav-
ing. All of these, with the exception of property insurance, have become
major sources of individual self-protection in Japan. Private saving is
perhaps the least recognized source of disaster self-help. Mark Skidmore
has found persuasive empirical evidence that almost a third of Japans
very considerable private saving is earmarked to cover anticipated losses
from natural disasters.39 These self-help measures are exactly what
one should expect in an affluent disaster-prone society in which most
property is privately owned. According to my estimate, roughly three-
quarters of the losses in Kobe involved private property.
In the Wildavsky framework, Japans economy incorporates a rela-
tively high degree of built-in safety: its per capita income (at purchasing
power parity) is roughly 80% that of the United States, the worlds sec-
ond highest (after Singapore). Japans development is the product of a
dynamic market economy supported by a government that has protected
private property rights, contributed to economic and social stability, and
provided public schooling and safety infrastructure. On the negative side,
however, Japan is far from reaching its potential income and safety,
which could equal or exceed that of the United States (or Singapore).
Japans shortfall is caused by a vast array of government regulations and
private practices that insulate its enterprises, large and small, from both
domestic and foreign competition and thereby limit the economys in-
come and growth, its general level of safety, and its disaster resilience.40
For example, many of Japans heavy industries are pure cartels.41 Its
lifeline industries, including telecommunications, are either national or
local monopolies, often lacking the more efficient organizational struc-
ture and advanced technology seen elsewhere in the world. Trucking, air-
lines, and coastal shipping are minutely regulated and barred to uncerti-
fied entrants. Entry into retail and wholesale trade is tightly controlled
and heavily biased toward small shops and big established firms. By
first-world standards, Japans banking, insurance, and capital markets are
underdeveloped and handicapped by many constraints, among them re-
strictions on the pricing of services according to risk.42 Barriers to for-
eign enterprise and capitaloften informalare common. Moreover, as
much as a third of Japans very considerable private saving is channeled
through the postal saving system, where it is allocated by the Ministry of
Finance on political rather than economic criteria.43 Perhaps the clearest
evidence that Japan has fallen short both of its growth and disaster-resil-
ience potential is that bankruptcy and mass layoffs in declining industries
are still exceedingly rare (although corporate failures are rising in light
of Japans current economic crisis). Bankruptcy, in Joseph Schumpeters
memorable phrase, is creative destruction, capitalisms life force.

George Horwich 529
In the next section I will look at the direct involvement of govern-

ment and the private sector in responding to the Kobe earthquake. What-
ever one may regard as the optimal public and private roles, however, it
seems unarguable that disaster policy makers should not settle for an
economy whose manufacturing, communication, transportation, capital
markets, wholesale and retail trade, insurance markets, and overall in-
come and technology are less than they can be. It would be a costly pol-
icy error to focus narrowly on the improvement of public disaster man-
agement, at best a gradual bureaucratic process, while ignoring the
enormous amount of protection that sheer growth can generatequite
readily, I believe, in the case of Japan and other advanced but overregu-
lated economies.
Proactive Responses
In evaluating the proactive roles of public and private responders, the
unfettered market is a logical and well-defined standard of efficiency. Al-
though direct market activity may not be feasible in every circumstance,
including early phases of disaster relief,44 no sequence of nonmarket
transactions can match the precision with which buyers and sellers in a
price-directed competitive market signal their preferences and arrive at
mutually satisfactory exchanges. Even when we cannot have this, we
need to know exactly what we are missing and try to devise techniques
for approaching it.
The earthquake struck a community, almost no member of which
expected it.45 It had been almost a millennium since an event of compara-
ble magnitude had occurred in the Kansai (Kobe-Osaka-Kyoto) region.46
Even businesses and agencies that had previously drawn up emergency
plans were caught by surprise and were unable to implement them. Nei-
ther the local nor central government was prepared.47 Although natural
disasters are usually local events for which local government has primary
responsibility, Japans central authorities know better than any outsider
the numerous ways in which they could have helped but failed to do so.
Merely supplying information about the extent of the disaster would
have been enormously helpful. Tokyo, after all, with its power intact,
had access to that resourceful American television network, CNN, which
many in Kansai did not.
By and large, individuals, businesses, public and private agencies,
lifeline companies, and, before long, as many as a million volunteers
acted spontaneously but without overall coordination.48 As in most natu-
ral disasters, most rescues were carried out by neighbors and most indi-
viduals and households fended for themselves in the immediate after-
math. As expected, most businesses, acting in their own interest, strove
mightily to salvage what they could and to maintain a semblance of the
operations they knew more about than did anyone else. On the day of
the earthquake, the Co-op grocery chain was able to open 97 of its 363

outlets while also delivering relief goods to the citys nine ward offices
under a prior agreement.49 Their computer systems down, managers re-
sorted to the paper and pencil bookkeeping of 20 years earlier. The Daiei
department stores, guided by their Tokyo office, immediately dispatched
helicopters, trucks, and ferryboats in a massive resupply operation.50 The
IBM headquarters staff in Kawasaki established a war room from
which they briefed their Hanshin dealers in emergency procedures and
serviced a hot line for all their area customers. Some of the earliest grass-
roots relief was carried out by members of the Yamaguchi-gumi, a ya-
kuza (Japanese mafia) gang centered in Kobes construction industry.51
They reportedly intimidated merchants into giving or selling them food
at a discount and later they billed city hall (unsuccessfully) for their ser-
vices. Altogether, there were many bold, positive initiatives undertaken
by private, public, and quasi-public entities.
By the end of the first day, about 90,000 of the 300,000 homeless
were housed in public schools, which are built to rigorous standards, or
in churches or tents or with relatives and friends.52 By Day 2 most of the
rest of the homeless were accommodated, except for a significant num-
ber, mainly minorities (e.g., the Vietnamese and the burakumin, the Jap-
anese underclass), who remained in open areas, such as parking lots. By
the end of the first week, government began constructing the first of
40,000 temporary housing units. For the most part, local government
oversaw and coordinated the housing process.
Without piped water or adequate backup water supplies, firefighters
were limited in what they could do to contain the fires.53 Many joined
the massive rescue operation, but without coordination. The power com-
pany was probably the most experienced in emergency response, and the
system was largely functioning again within a day or two. Unfortunately,
electric space heaters, on which flammable objects had fallen, created
fires when the current was restored. Drinking water was eventually
trucked in from many sources. Sanitation became a massive problem and
was only gradually met with portable facilities on a site-by-site basis.
Particularly egregious was the failure of the primary natural gas distribu-
tor, a private utility, to immediately shut off its main valve. Although
employees were on duty and promptly notified headquarters in Osaka of
the quake, a company consensus decision to act did not come until 6
hours later.54 The company argued later that cutting the supply would
have cut off heat and power to much of the city and imperiled hospital
and operating room function. It also candidly admitted that restarting the
flow would have been enormously expensive, requiring (they claimed)
visits to each of 380,000 individual users throughout the city.55 Equally
unfortunate was the prefectural governments failure to activate immedi-
ately rescue units of the Self-Defense Forces, Japans military; they were
not permitted to act until 36 hours had passed.56 On one insider account,
rescue helicopters, lacking authorization to land, refused to do so even

George Horwich 531
while hovering over burning sites in which people were trapped. Some
attributed the authorization delay to an antimilitary animus among pre-
fectural officials.57
Offers of assistance poured in from all over Japan and the outside
world. Almost certainly, there was little needed that was not available
within the Kansai area. Nor is it likely that anyone not on the scene and
without close contact with local residents or officials would have known
what those unmet needs were. Nevertheless, Kansai International Airport
was soon swamped with foreign goods, medical personnel, and search
dogs of various nationalities and breeds, all straining to travel the
clogged highways to Kobe in the company of interpreters who, it was
hoped, would miraculously find housing for them.58 Had the authorities
been adequately prepared in the first place, most of the unsolicited aid
from overseas and even much of it from elsewhere in Japan would have
immediately been seen as unnecessary. Under the circumstances, how-
ever, it all looked good, especially to the victims and the media, neither
of whom had responsibility for sorting it all out and delivering it. Into
this maelstrom the Kobe authorities plunged, wanting instinctively to re-
ject it all (as did the wise leaders of Los Angeles a year earlier when,
following the Northridge earthquake, they let it be known they wanted
nothing, including advice, from outside Californiaexcept money). But
under pressure from the media and the foreign ministry in Tokyo, and
after making bureaucratic-sounding excuses about doctors and dogs lack-
ing proper licenses, Kobe yielded to the foreign assistance.59
Two Economic Principles; Moral Hazards

The resulting mismatches and incompatibilities between Japanese and
foreign medical personnel and search teams were legion. A heavy burden
of sorting donated goods fell upon volunteers, many of whom felt that
their time and effort were not well spent.60 The general problem in these
outcomes is addressed by two economic principles. One is the econo-
mists denial of the so-called physical fallacy, which judges the value of
a good or service by its physical properties, ignoring its packaging, loca-
tion, time of availability, or other characteristics relevant to consumer
satisfaction.61 The latter attributes, when taken into account, may double
or triple a commoditys cost and final delivered price. An example of
this phenomenon would be Danish powdered milk, which arrived in
huge containers and had to be repackaged into smaller units after making
its tortuous way from Kansai Airport to Kobe before being delivered to
the needy. Relief workers, who almost certainly had access to locally
produced powdered milk well before the donated milk became available,
did not view such gifts with enthusiasm or attach quite as much value
to them as their donors likely did.
The other economic principle is that in most circumstances, in-kind
gifts are of much less value to recipients than equal gifts of money.62 In

the absence of market prices or direct communication, donors or their

agents can only guess what recipients want most; money, of course, en-
ables recipients to buy what they please. The myth that survivors are too
dazed or disoriented to make meaningful choices is just a myth, long
since refuted both by economists and sociologists.63 In-kind gifts are jus-
tified only when markets are not functioning, a rare occurrence today in
all but the most remote and backward economies, or recipients and their
representatives are not able to access markets as speedily as the donor
and the donor has reasonably good information about what recipients
want.
One cannot blithely assume, moreover, that donors necessarily are
motivated to satisfy recipients as recipients might satisfy themselves.
Public and private charitable organizations are constrained by their own
fund-raising requirements, which color the kind and degree of aid they
supply, even if the aid is monetary.64 There is much documented evi-
dence that the products of politically influential companies and sectors
loom large in gifts to foreign as well as domestic disaster victims.65 And,
on a more personal level, who has never succumbed to the impulse to
clean out the attic for a humanitarian, tax-deductible cause?
Volunteers, meanwhile, maximize their effectiveness when they are
coordinated by organizations, public or private, who are also account-
able. Student volunteers in Kobe were constrained by class schedules (al-
though the start of the spring semester in 1995 was delayed several
weeks). Doctors, on occasion, failed to keep disaster-related commit-
ments when personal business drew them away.66 The several volunteer
organizations that originated in the earthquake response were given for-
mal legal status only in 1998. Until then they were unable to enter into
contracts and their operations were not tax free. This delay was due to
the requirement that the Ministry of Finance make a determination that
the organization is qualified to conduct rescue and other volunteer ac-
tivities. The ministry, of course, suffers from a conflict of interest in that
it loses revenues when it acts affirmatively.
A further hazard of in-kind charitable or volunteer activity is that it
will compete with and harm still viable commercial enterprises, un-
dermining the communitys long-term economic viability.67 I encoun-
tered only one apparent example of this in Kobe; private for-profit medi-
cal clinics complained that the Red Cross hospitals were providing relief
care well past the time it was justified.
The Japanese government traditionally has offered only minimal di-
saster compensation in the form of immediate relief. Its commitment to
provide 38,000 subsidized low-income housing units and 42,000 middle-
income units for victims of the quake, although understandable, is a de-
parture from that policy. If substantial compensation were to be expected
in future disasters, it could, in some measure, encourage people to place
themselves in harms way more than they might otherwise do. This

George Horwich 533
would be the moral hazard of those policies. Such outcomes are more
likely in economies less tightly regulated than Japans, but such policies
could pose a problem in future disasters if compensations continue and
Japan undergoes serious deregulation.
The Role of Government and the Market

Given that disaster preparedness and planned response spring naturally
from private market activity, public disaster management will maximize
its own effectiveness when it simultaneously promotes market forces. If
Japan, for example, is truly serious about enhancing general communica-
tion capability following a disasterany disaster, anywhere, any time
it will relax the control over local exchanges now exercised by its tele-
communications monopoly, NTT.68 This action will sharply reduce the
cost of domestic calls, increase the quantity, and open the way to numer-
ous technologies that bypass the local exchanges but are not now avail-
able. In a similar fashion, removing the tight controls on Japans distribu-
tion network will uncork myriad wholesale and retail alternatives, vastly
reducing the cost and increasing the quantity and variety of goods avail-
able both pre- and postdisaster (Japan, too, can have the equivalent of,
if not the actual, stores such as Kmart, WalMart, Target, Sams Club,
and Big Lots).
In this framework, government should define its primary disaster
role as overseer. It should retain responsibility for building and main-
taining the public-goods safety infrastructure, as defined above. When
privately based initiatives such as flood walls and improved building
codes become generally cost effective, government should be prepared to
mandate their adoption simultaneously by all involved parties; this will
eliminate any negative externalities posed by stragglers.69 As income and
wealth grow, the private sector will take increasing responsibility for
both anticipation and response, and government should be ready to re-
duce its own managerial role and avoid competing with emerging private
initiatives. Meanwhile, government should rely as much as possible on
privatized contract services, including private disaster consultants, who
can offer a far broader range of experience and specialization than civil
servants are likely to command.70 Japan should avoid granting exclusive
franchises to its lifeline producers, instead converting (or letting market
forces convert) power lines, telephone lines, and gas lines into de facto
common carriers. The use of these facilities, subject to periodic testing
and review, should go to private competitors that meet the highest af-
fordable standards of performance and safety. Government should also
be prepared to mandate (but not subsidize) insurance coverage when the
political process (as in the United States) makes public compensation to
disaster victims almost inevitable despite the failure of victims to take
prudent and feasible preventive measures. Where insurance seems un-
available or inadequate, government, particularly in Japan, should re-

move the regulations that limit or constrain the total amount of insur-
ance, the free determination of ratesincluding rate differentials related
to riskthe accumulation of adequate reserves, and the role of the rein-
surance market in providing the broadest possible geographical pooling
of risks.
Finally, and certainly not least, Japan drastically needs to reform its
land use policies so as to reduce earthquake vulnerability at the source.
The allowable ratios of floor space to land do not distinguish between
hard earthquake-resistant soils, of which there are many in Japan, and
reclaimed land, which is the least stable and most earthquake vulnerable.
Land taxes, moreover, are lowest on agricultural land and, together with
other subsidies, divert considerable acreage into noneconomic urban
farms at the expense of residential and commercial uses. It is surprising
that most of the remaining nonfarm land is not improved to its maximum
permitted limits of building height or occupancy.71 This is partly because
of intricate regulations pertaining to street access and exposure to sun-
shine and partly because tenants rights are so strong as effectively to
vest control of rental units in their hands at the expense of landlords for
indefinite periods. The practical result of these policies is to raise the
price of urban land, limit property development in general, significantly
reduce the supply of rental properties, and encourage one-site production
units instead of generally more efficient multisite production activity.72
These, in turn, cause an uneconomic dispersal of the population, call
forth an enormously expensive high-speed transportation system,73 and
suppress concern for earthquake vulnerability in locational and construc-
tion decision making.
Japan also has a long history of joint ownership of land, partly as a
way of limiting transactions and taxes paid in any consolidation effort.
The resulting complex system of property rights will inhibit development
whenever individual owners find it advantageous to withhold consent.
Such withholding has been particularly prevalent during the earthquake
recovery.74 Government has been reluctant to invoke its powers of emi-
nent domain, slowing the redevelopment of a number of Kobes devas-
tated areas. Clearly, the only long-term solution to this problem is a tax
reform that eliminates the incentive to joint ownership.
Is Japan Different?
Japan exhibits many institutional and cultural characteristics that may
seem incompatible with a long-run market-driven path to economic resil-
ience. These would include the noncompetitive protective measures, both
governmentally and privately imposed, referred to earlier. But even be-
yond these monopoly practices, Japan has pursued and appeared to adopt
a degree of communalism and egalitarianism unusual for an advanced
industrial society. Strong family and community ties, lifetime employ-
ment and the avoidance of enterprise bankruptcyboth at the expense

George Horwich 535
of shareholder interestsplus government-led industrial policy

would all seem potentially to retard market-based growth and the safety
generated by it. Two considerations, however, are relevant to an evalua-
tion of the importance of these characteristics. First, as is often alleged,
they are not innate or culturally ingrained features of Japanese char-
acter. According to Yukio Noguchi, much of the communal, collectivist
tendency in the Japanese economy had its origin in the 1940 setup, a
program designed to unite and prepare the Japanese people for all-out
war.75 To this end, employee identification with a single company, reg-
ulation of competition by empowerment of industry associations, the
strengthening of tenant rights at the expense of landlords via the Land
Lease Law, and the subordination of open capital markets to a govern-
ment-guided banking system were all designed to promote a cooperative
wartime endeavor. At the same time, the more productive export indus-
tries were taxed via a sweeping withholding law to provide subsidies to
agriculture and small shops and service enterprises. These measures, ac-
cording to Noguchi, were not characteristic of prewar Japan and would
have been dismantled by the occupation forces had it not been for the
United States preoccupation with the emerging Cold War.
The second consideration is that in the postwar economic upsurge,
the setup has gradually been loosened and often circumvented. Lifetime
employment now characterizes less than a third of the labor force and
has, in any event, been administered by frequently shifting employees
among a firms multiple departments and plantsan often costly proce-
dure, but less costly than passively accepting the inefficiencies due to the
lifetime commitment. Although the banks and the capital markets have
remained under government influence, they have been porous enough to
enable those not favored by the official industrial policy (Honda and
Sony, to name only two) to secure financing.76 And bankruptcy, though
still rare, has begun to occur more frequently.
Summary and Conclusion

Although the Kobe earthquake was an urban natural disaster of unprece-
dented economic magnitude, recovery proceeded with generally unex-
pected speed. This is attributed to the primacy of human capital, which
suffered comparatively little loss, over the physical stock of capital in
determining the output of a developed economy. Price-directed market
responses were spurred both by the quake and by monetary stimulus in
a setting of excess production capacity. These responses appear to have
led the recovery and countered any macroimpact of the quake.
Safety and disaster resilience are seen both as endogenous to the
private sector and the result of public decision making. They are primar-
ily the product of a market-based trial-and-error learning process and
government provision of a safety infrastructure. In Japan, various minis-
tries, together with industry representatives, supplement the market with

an active safety regulatory role. Since the affordability and demand for
safety rise with income, the higher a societys per capita income, the
greater is its likely level of safety and disaster preparedness. Although
one of the worlds wealthiest economies, and thereby relatively disaster
resistant, Japan remains well below its potential resilience owing to an
overarching regulatory web that limits competition, restrains risk-based
choice in financial markets and land use, and slows general economic
development.
The governments and the private sectors earthquake emergency
responses were hampered by disruption of power, water, sanitation, com-
munication, and the transport system. Most of the homeless were quickly
housed in public schools, churches, and private homes, but the govern-
ment failed to coordinate the overall response, including that of the ma-
jority of volunteers. The government proceeded reasonably well with the
massive cleanup but was unprepared to coordinate the inflow of goods
and services from outside the stricken area. Foreign contributions were
particularly mismatched with local needs and circumstances and, in
many cases, drew resources away from more urgent uses. Several of the
monopoly lifelines, both public and nominally private, were unprepared
and slow in their emergency responses.
Effective disaster management for any country should focus on gen-
eral economic development and encouragement of market-generated
safety and mitigation measures. Privatization and competition, wherever
feasible, including the arena of public-goods provision, should be central
to disaster policy.
Notes
* The fieldwork for this study was conducted under the generous support
of a Fulbright Research grant. My thanks to the administrator of the grant, the
JapanUnited States Educational Commission, its executive director, Samuel
Shepherd, and its program officers, Kazuko Kamimura and Mizuho Iwata, for
assistance and support in carrying out this project at every stage. One hundred
formal interviews and hundreds of more informal contacts and conversations
contributed to the final study. I can only acknowledge some of those who were
particularly helpful to me and apologize for inevitable omissions: Shigeyuki
Abe, Yukio Adachi, Tomohide Atsumi, Catherine Bauman, Stephanie Chang,
Caroline Clarke, Louise Comfort, Oliver Davidson, Lewis Evans, Robert Feld-
man, Masatomi Funaba, James Goltz, Ruth Grubel, Yoko Hasegawa, Haruo
Hayashi, Yutaka Horiba, Sheng Hu, Masahide Ikeuchi, Yasero Kameno, Toshi
Kitazawa, Frederic Maerkle, Brian Mohler, James Morentz, Toshimasa Mori-
waki, Yoshiteru Murosaki, Yujiro Ogawa, Masatoshi Ohga, Yoshihiko Otani,
Charles Robertson, Charles Scawthorn, Ai Sekizawa, Toshiyuki Shikata, Bar-
bara Stoops, Ken Sudo, Shinji Takagi, Toshihisa Toyoda, Aidan Vining, Connie
Watanabe, David Weimer, and Arthur Zegelbone.
1. Stephanie E. Chang, Disasters and Transport Systems: Loss, Recovery,
and Competition at the Port of Kobe after the 1995 Earthquake, Journal of
Transport Geography 8, no. 1 ( January 2000): 5365.
2. United Nations Centre for Regional Development (UNCRD), Compre-

George Horwich 537
hensive Study of the Great Hanshin Earthquake, Research Report Series no. 12
(Nagoya, October 1995), p. 59.
3. Earthquake Engineering Research Institute (EERI), The Hyogo-Ken
Nanbu Earthquake: Preliminary Reconnaissance Report (Oakland, Calif.: EERI,
February 1995); EQE International, The January 17, 1995 Kobe Earthquake: An
EQE Summary Report (San Francisco: EQE, 1995); Bruce W. Nelan, Eco-
nomic Aftershock: With at Least $100 Billion Dollars in Damage, Even Japan
Will Be Hard Pressed to Cope, Time (February 6, 1995), pp. 4546; Risk Man-
agement Solutions, Inc., and Failure Analysis Associates, Inc. (RMS & FAA),
Event Report: Japanthe Great Hanshin Earthquake (Menlo Park, Calif.:
RMS & FAA, January 29, 1995); Charles Scawthorn, Ben Lashkari, and Amjad
Naseer, What Happened in Kobe and What If It Happened Here? in Eco-
nomic Consequence of Earthquakes: Preparing for the Unexpected, ed. Barclay
G. Jones (Buffalo, N.Y.: National Center for Earthquake Engineering Research,
January, 1997), pp. 1549; UNCRD.
4. Toshihisi Toyoda, Economic Impacts and Recovery Process in the
Case of the Great Hanshin Earthquake, in Urban Earthquake Hazard Reduc-
tion: Fifth U.S.-Japan Workshop Proceedings (Oakland, Calif.: EERI, 1997).
5. The World Bank (World Development Report 1997 [New York: Oxford
University Press, 1997], p. 215), estimates Japans 1995 per capita income at
$39,640, using commercial exchange rates, and $22,110 at purchasing power
parity. Hence, purchasing power parity, which converts monetary units into
quantities of comparable goods and services, requires a 1 (22,110/39,640)
0.44 reduction in any dollar magnitude calculated by commercial exchange rates.
6. International Federation of Red Cross and Red Crescent Societies
(IFRCRCS), World Disasters Report 1996 (Oxford: Oxford University Press,
1996), p. 70; Nicholas D. Kristof, Laid Low by Quake, a City Quickly Picks
Itself Up, New York Times ( June 21, 1995), p. A4; Nelan, p. 45.
7. Stephanie E. Chang, Regional Impact of the January 17, 1995 Kobe,
Japan Earthquake, in Proceedings of the 43rd North American RSAI Meetings
(Washington, D.C.: Regional Science Association International, November 14
17, 1996), p. 7.
8. Ibid., pp. 1112.
9. Ibid., pp. 1213.
10. Haruo Hayashi, Individual Mitigation and Organizational Prepared-
ness, Working Paper (Kyoto University, Research Center for Disaster Reduc-
tion Systems, 1998).
11. Haruo Hayashi and Takeshi Katsumi, Generation and Management of
Disaster Waste, Soils and Foundations (Special Issue) ( January 1996), pp.
34958.
12. Ibid., p. 354.
13. In her detailed study of the ports reconstruction, Chang (Disasters
and Transport Systems [n. 1 above], p. 61) reiterates the pronounced lack of
synchronization between recovery of the ports business and restoration of its
physical facilities.
14. Estimates attribute 14%25% of U.S. growth to increases in the physi-
cal stock of capital. The largest single factor in the growth of total output is
innovation or new technology, which, when added to replications in the number
of hours worked, gives labor a total determining share between two-thirds and
three-fourths. For estimates using the Solow growth model, see N. G. Mankiw,
Macroeconomics, 3d ed. (New York: Worth, 1997), pp. 11722. The produc-
tion-function parameter values assumed by Mankiw would be very close to those
of Japan and give capital a 25% share in Japans growth. A lower estimate of
capitals share, based on a less formal but broader empirical investigation by

Denison, finds only 14% of U.S. growth explained by increases in the physical
stock of capital. See E. F. Denison, Accounting for United States Economic
Growth, 19291969 (Washington, D.C.: Brookings, 1974).
15. J. Hirshleifer, Economic Behaviour in Adversity (1963; reprint, Chi-
cago: University of Chicago Press, 1987), pp. 1314.
16. Chang, Regional Impact of the January 17, 1995 Kobe, Japan Earth-
quake, pp. 46.
17. Chang, Disasters and Transport Systems.
18. See J. M. Albala-Bertrand, The Political Economy of Large Natural
Disasters (With Special Reference to Developing Countries) (New York: Oxford
University Press, 1993), chap. 3, pp. 2025, and Appendix A for analysis and
evidence that disasters, other than severe droughts in agricultural countries, do
not generally affect the macroeconomy except positively.
19. Postdisaster rescue, relief, and cleanup activities will enter the national
income accounts only when they are formally reported as expenses of govern-
ment and nonprofit organizations or as sales by commercial enterprises. They
will not generally enter the accounts if they are unrecorded volunteer services.
For detailed analytical and empirical support for the rationale that GDP will ex-
pand following a natural disaster, see Richard S. J. Tol and Frank P. M. Leek,
Economic Analysis of Natural Disasters, chap. 12 in Climate, Change and
Risk, ed. Thomas E. Downing, Alexander J. Olsthoorn, and Richard S. J. Tol
(London: Routledge, 1999); and R. C. Otero and R. Z. Marti, The Impacts of
Natural Disasters on Developing Economies: Implications for the International
and Development Community, chap. 2 in Disaster Prevention for Sustainable
Development: Economic and Policy Issues, ed. Mohan Munasinghe and Caroline
Clarke (Washington, D.C.: International Decade for Natural Disaster Reduction
and World Bank, 1994), esp. pp. 1720. Tol and Leek also remind us (p. 311)
that GDP measures economic activity, not welfare. For welfare, of course, net
national product, which subtracts the loss of capital from GDP, is more appro-
priate. Compare n. 28 below.
20. See Chang, Regional Impact of the January 17, 1995 Kobe, Japan
Earthquake (n. 7 above), p. 8; and Michael Williams and Norihiko Shirouzu,
Kobe Quake Wreckage Poses a Thousand Tests for Japanese Ingenuity: Re-
wired Supply Networks Go to Extreme Lengths to Keep Business Rolling,
Wall Street Journal (March 17, 1995), p. A1.
21. See Michael L. Katz and Harvey S. Rosen, Microeconomics, 3d ed.
(Boston: Irwin McGraw-Hill, 1998), pp. 42830; and Robert S. Pindyck and
Daniel L. Rubinfeld, Microeconomics, 4th ed. (Upper Saddle River, N.J.: Pren-
tice Hall, 1998), p. 438. Japan, according to a McKinsey Global Institute study,
also has, on a per capita basis, 22% more physical capital and produces 23%
less GDP than does the United States. This additional capital and lower produc-
tivity are explained by a lack of competitive pressure in Japans product and
capital markets. For a summary of the McKinsey findings, see Bill Lewis, The
Wealth of a Nation, Wall Street Journal ( June 7, 1996), p. A12.
22. Chang, Disasters and Transport Systems, p. 58.
23. The data in this and the next two paragraphs, including n. 24 and n.
26, are taken from Organization for Economic Cooperation and Development
(OECD), Main Economic Indicators (Paris: OECD, various years)for each
year, the November issue of the year following was used; and Federal Reserve
Bank of St. Louis, International Economic Trends (St. Louis: Federal Reserve
Bank, August 1998).
24. Industrial Production, which differs from GDP mainly in the omission
of services, government product, transportation, and trade, shows a similar but
more erratic pattern and, overall, is more expansive than GDP in 1995. After

George Horwich 539
rising only 0.88% in the fourth quarter of 1994, industrial production (seasonally
adjusted) rose 1.1% in the first quarter of 1995, when the quake struck, but then
only 0.2% in the second quarter; it fell 1.3% in the third quarter and rose a rela-
tively robust 2.0% in the fourth quarter. The rise for all of 1995 was 3.3% and
for 1994, 1.2%.
25. For an aggregate-supply-and-demand analysis of an energy shock, see
G. Horwich, Government Contingency Planning for Petroleum-Supply Inter-
ruptions: A Macroperspective, in Policies for Coping with Oil-Supply Disrup-
tions, ed. G. Horwich and E. J. Mitchell (Washington, D.C.: American Enter-
prise Institute, 1982), pp. 5965. The analysis can be applied to any exogenous
supply reduction, including a natural disaster.
26. In contrast to the imperceptible macroimpact of the earthquake in 1995,
the 197374 oil-supply interruption, which remains the single largest distur-
bance to the postwar global economy, produced characteristic supply-shock re-
sponses in Japan. In 1974 Japans output fell, employment (hours worked) fell,
the price level rose, real balances fell, interest rates rose, saving and investment
fell, and the government surplus and the trade surplus declined. Real wages con-
tinued their upward climb in 1974, but at a slower rate, and then declined in
1975.
27. See A. E. Boardman, D. H. Greenberg, A. R. Vining, and D. L.
Weimer, Cost-Benefit Analysis: Concepts and Practice (Upper Saddle River,
N.J.: Prentice Hall, 1996), pp. 37880.
28. A more accurate calculation would be based on Japans net domestic
product, which is GDP less an estimate of aggregate depreciation. Allowing for
depreciation would reduce the estimate of total resource value by about 10%.
29. It may also be relevant that construction activity is 20% of Japans
GDP, more than twice the percentage in the United States and other advanced
economies. It should also be noted that a majority of those killed in Kobe were
elderly, retired individuals, not active, currently productive members of the labor
force.
30. See the discussion on disaster vulnerability, as related to income and
social status, in Albala-Bertrand (n. 18 above), chap. 4.
31. Even though fire trucks would have been unable to gain access to the
narrow streets, fire officials claimed that their hoses were long enough to reach
any point in Nagata and other inner city wards. It is also a fact that in Japan the
number of fires, on a per capita basis, is only a small fraction of that in the
United States ( Jon McMillan, The All-American Fire Trap, New York Times
[April 17, 1995], p. A15). One explanation for this is that in Japan a severe so-
cial stigma is placed on anyone whose property catches fire and thereby endan-
gers the property of neighbors (not, it seems, from any reluctance of insurance
companies to pay claims in non-earthquake-related fires).
32. Paul Duke, Jr., Disaster-Relief Expert Believes in Self-Help Instead
of Handouts, Wall Street Journal (December 17, 1986), p. A1.
33. Aaron Wildavsky, Searching for Safety (New Brunswick, N.J.: Trans-
action, 1988), chap. 3.
34. R. E. Cheit, Setting Safety Standards (Berkeley and Los Angeles: Uni-
versity of California Press, 1990), chap. 1.
35. D. L. Weimer and A. R. Vining, Policy Analysis (Englewood Cliffs,
N.J.: Prentice Hall, 1999), chap. 8.
36. For the case for government intervention in building-code adoption, see
Linda Cohen and Roger Noll, The Economics of Building Codes to Resist
Seismic Structures, Public Policy 29, no. 1 (Winter 1981): 129. For a quali-
fication to the government role, see n. 69 below.
37. EQE International (n. 3 above), p. 19.

38. George Horwich, The Role of the For-Profit Private Sector in Disaster
Mitigation and Response, International Journal of Mass Emergencies and Di-
sasters 11, no. 2 (August 1993): 189205.
39. Mark Skidmore, Uncertainty, Natural Disasters, and National House-
hold Savings, Working Paper (University of WisconsinWhitewater, Septem-
ber 1997).
40. See David P. Hamilton, Michael Williams, and Norihiko Shirouzu,
Japans Big Problem: Freeing Its Economy from Over-Regulation, Wall
Street Journal (April 25, 1995), p. A1; Lewis (n. 21 above); The Compass
Swings: A Survey of Tomorrows Japan, Economist ( July 13, 1996), p. 10;
Robert A. Feldman, The Golden Goose and the Silver Fox: Productivity, Aging,
and Japans Economic Future (Tokyo: Salomon Brothers, 1996); and Chang-
ing Japan: Whispering Reform, Economist (January 11, 1997), pp. 1921.
41. Mark Tilton, Restrained Trade: Cartels in Japans Basic Materials In-
dustries (Ithaca, N.Y.: Cornell University Press, 1996).
42. See A Survey of Japanese Finance, Economist ( June 28, 1997).
Property insurance is severely restricted in Japan, both in regard to risk-premium
differentials and in the economy-wide total that can be offered. Only 3% of
properties in greater Kobe were insured, in part because the earthquake was al-
most totally unexpected. However, in Tokyo, a widely perceived hazardous area,
only 16% of properties were insured at the time of the Kobe quake (it has since
risen, in part because government has liberalized access and terms).
43. See ibid., pp. 4, 6.
44. Although, in the absence of planning, market-provided goods and ser-
vices may be difficult, if not impossible, to obtain in the early postdisaster pe-
riod, advance provision through predisaster contractual arrangements may sig-
nificantly improve their accessibility.
45. Three seismologists had concluded that Kobe was very vulnerable in-
deed, but their findings received little general support or attention. See Yomiuri
Shimbun, ed., Chronicle: The Great Hanshin Earthquake (Osaka: IBH Commu-
nications, 1996), pp. 22223.
46. See RMS & FAA (n. 3 above), p. 5.
47. See James D. Goltz, Emergency Response in the Great Hanshin-
Awaji Earthquake of January 17, 1995: Planning, Mobilization, and Interorgani-
zational Coordination, in Proceedings of the 11th World Conference on Earth-
quake Engineering (Acapulco, June 2328, 1995).
48. Regarding the number of volunteers, see Yomiuri Shimbun, ed., p. 195.
49. Ibid., pp. 14243.
50. Ibid., pp. 13637.
51. Nicholas D. Kristof, The Quake That Hurt Kobe Helps Its Gangs Get
Richer, New York Times (June 6, 1995), p. A1.
52. Yomiuri Shimbun, ed., pp. 13435; and Nicholas D. Kristof, Earth-
quake Relief for the 200,000 Homeless Overwhelms Japanese Agencies, New
York Times ( January 19, 1995), p. A7.
53. The fire department of Nishinomiya, a Kobe suburb, had adequate wa-
ter reserves and was able to fight the fires, with the result of no loss of life.
54. See UNCRD (n. 2 above), p. 103.
55. Yomiuri Shimbun, ed. (n. 45 above), pp. 9495. The company also
noted that although its gas was, of course, flammable, it contained no carbon
monoxide, which sharply reduced its explosive tendency. The Kobe utility, like
that of Tokyo, now has installed a valve on its main gas line that will shut off
automatically in response to threshold seismic activity.
56. Ibid., pp. 6267. See also UNCRD, p. 151.
57. Such animus was expressed openly when the Self-Defense Forces re-

George Horwich 541
quested permission to construct a landing pad for their rescue helicopters on the
Kobe University campus. Overlooking the city on Mt. Rokko, the campus was
a logical base. But many students and faculty actively opposed the militarys
presence until overruled by the university president, Masahiro Suzuki. Suzuki
(whose mother was killed in the quake) later also vetoed a proposal by faculty
and students to convert the campus into a major housing and treatment facility
for disaster victims, arguing that doing so would cripple university operations.
58. See Ruth M. Grubel, Foreign Assistance for Disasters in Rich Coun-
tries (Kwansei Gakuin University, October 1998); IFRCRCS (n. 6 above), p.
73; Kiyoyuki Kanemitsu, The Ideal Approach to International Exchange and
Cooperation: Lessons from the Great Hanshin/Awaji Earthquake, in Report on
the Local Government International Exchange Seminar (Kobe: Council of Local
Authorities for International Relations, November 27, 1995); Nicholas D. Kris-
tof, Kobes Best Problem: Too Many Gifts, New York Times ( January 28,
1995), p. 5, and Japan Reluctant to Accept Help from Abroad for Quake Vic-
tims, New York Times (February 5, 1995), p. 1; UNCRD, p. 151; Yomiuri
Shimbun, ed., pp. 2069.
59. Sheryl WuDunn, Japan Leaders Criticized on Response to Quake,
New York Times ( January 24, 1995), p. A6.
60. Kanemitsu; Grubel.
61. See Thomas Sowell, Knowledge and Decisions (New York: Basic
Books, 1980), chap. 3.
62. Let Them Eat Cash? Economist (April 10, 1993), pp. 4748.
63. Hirshleifer (n. 15 above), p. 9; Russell Dynes, Organized Behavior in
Disasters (Lexington, Mass.: D.C. Heath, 1970), pp. 78.
64. Frederick C. Cuny, Disasters and Development (New York: Oxford
University Press, 1983); Kanemitsu, p. 132.
65. George Horwich, Disasters and Market Response, Cato Journal 9, no.
3 (Winter 1990): 53155; Albala-Bertrand (n. 18 above), pp. 15153, 2034.
66. UNCRD (n. 2 above), p. 157.
67. Cuny, pp. 9798.
68. The proposed breakup of NTT into three component companies may
not add any real competition to the sector, since it vests control of all three in
a single holding company. See Changing Japan: Whispering Reform (n. 40
above), p. 20.
69. However, government should not, by too active a presence, preclude
the possibility that the involved private parties will themselves find the means
to reach a consensus and eliminate any negative externalities. The latter outcome
is implied by the Coase Theorem, wherein the participants, without outside inter-
vention and under sufficiently low transactions costs, will find the means to
bribe laggard firms and households into complying with the dominant in-
terest.
70. For accounts of the innovative restructuring of the New Zealand gov-
ernment bureaucracy, see Lewis Evans, Arthur Grimes, Bryce Wilkinson, and
David Teece, Economic Reform in New Zealand 198495: The Pursuit of Ef-
ficiency, Journal of Economic Literature 34, no. 4 (December 1996): 1856
1902; and Jack H. Nagel, ed., Special Issue: The New Public Management in
New Zealand and Beyond, Journal of Policy Analysis and Management, vol.
16, no. 3 (Summer 1997). The reforms establish goals for each agency and re-
move any vestige of tenure in executive positions. In many ways, the reforms
are a de facto privatization of agency functions. For an account of Californias
state transportation agencies during and after the Loma Prieta and Northridge
earthquakes, see Nabil Kamel, Dulce-Marie Leon, and Martin Wachs, Transpor-
tation Decisionmaking under Disaster Conditions (Los Angeles: Institute of

Transportation Studies, School of Public Policy and Social Research, University

of California, Los Angeles, 1995). The agencies get high marks, especially dur-
ing Northridge, for having established a high degree of interagency communica-
tion prior to the earthquake and for carrying out their missions after the event
with dispatch and efficiency. The improved Northridge performance is credited
largely to perceived inadequacies of the earlier Loma Prieta response.
71. Yukio Noguchi, Japans Land Problem, in Stock Keizai o Kangaeru,
Yutaka na Shakai eno Scenario (An analysis of the stock economya scenario
for an affluent society) (Tokyo: Chuo Koron Sha, 1991), chap. 3, pp. 5177.
72. Robert A. Feldman (n. 40 above), pp. 2526, 30.
73. All forms of transportation are more expensive in Japan than in the
United States. Taxi and airline fares are about twice as high; bus fares, 14%
higher. See Feldman, p. 30.
74. See Jathon Sapsford, Quake-Hobbled Kobe Shows How Land Law
Can Paralyze Japan, Wall Street Journal (December 12, 1996), p. A1; Michael
J. Oakes, Shaky Recovery, Reason 29, no. 8 ( January 1998): 3035.
75. Yukio Noguchi, Dismantle the 1940 Setup to Restructure the Econ-
omy, Economic Eye 15, no. 3 (Autumn 1994): 2528 (published by the Keizai
Koho Center, Tokyo).
76. On the financing of postwar industry and the failure of government
agencies to control industrial entry, see Kent Calder, Strategic Capitalism: Pri-
vate Business and Public Purpose in Japanese Industrial Finance (Princeton,
N.J.: Princeton University Press, 1993), esp. chaps. 1, 3, 5, and 6. On the poor
record of the Ministry of International Trade and Industry in selecting industrial
winners, see Richard Beason and David Weinstein, The MITI Myth,
American Enterprise 6, no. 4 ( July/August 1995): 8486.


Economic Lessons of The Kobe Earthquake

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Economic Lessons of The Kobe Earthquake

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Economic Lessons of the Kobe Earthquake

Author(s): George Horwich

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The Quake and Economic Recovery

2000 by The University of Chicago. All rights reserved.

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Some Principles of Recovery

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monetary expansion of the preceding 2 years helped to expand the econ-

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Development and Safety

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In the next section I will look at the direct involvement of govern-

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Two Economic Principles; Moral Hazards

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the absence of market prices or direct communication, donors or their

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The Role of Government and the Market

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of shareholder interestsplus government-led industrial policy

Summary and Conclusion

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Transportation Studies, School of Public Policy and Social Research, University

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