Chile’s reconstruction after earthquake will slow economic recovery
On 27 February 2010 a major earthquake hit the southern region of Chile, barely six weeks after an earthquake devastated Haiti. Although Chile is far better placed than Haiti to deal with the consequences of an earthquake, the humanitarian and reconstruction costs will be high and Chile’s economic recovery will be slower than expected as a consequence.
- The earthquake struck the southern region of Chile, around its second largest city Concepción. It measured 8.8 on the magnitude scale, higher than that in Haiti;
- Initial estimates of the reconstruction cost vary between US$15 billion and US$30 billion, with the cost to the global insurance industry estimated at US$7 billion;
- The blow comes just as Chile was emerging from an economic slowdown, having contracted by 1.8% annually in 2009, after annual growth of 3.2% in 2008.
|Annual % growth; % of economically active population|
Source: Euromonitor International from International Monetary Fund (IMF), International Financial Statistics and World Economic Outlook/UN/national statistics/International Labour Organisation. Note: 2010 and 2011 figures are forecasts.
Chile is well-positioned to carry out a major reconstruction programme:
- Chile’s economy is one of the most diversified and developed in the region, as demonstrated by its admission into the OECD in late 2009;
- The driver of Chile’s economy is copper production. In 2009, exports of ferrous and non-ferrous metals comprised 41% of Chile’s total exports. Chile’s copper producing region was not affected by the earthquake, although some of its wine producing areas have been affected;
|% of total exports|
Source: Euromonitor International from UN/UN trade Statistics.
- Unlike Haiti, where the large majority of buildings were not earthquake proofed, many of those in southern Chile were, meaning that the devastation and loss of life was less serious than in Haiti;
- In addition, there was a higher rate of insurance in Chile. The majority of buildings in Haiti (particularly in the slum areas of Port-au-Prince) were not insured;
- Chile has the financial capability to launch a large-scale reconstruction programme aimed at swiftly repairing the damage and returning to economic growth. Chile maintains a fiscal stabilisation fund, into which excess copper revenues must be paid by law. In early 2010 this fund totalled approximately US$11 billion, providing a large proportion of the estimated reconstruction cost;
- The large-scale reconstruction projects are likely to significantly boost job creation, particularly in the southern region of the country. Chile’s unemployment rate stood at 8.7% in January 2010, up from 7.1% in early 2009;
- However, the high cost of the reconstruction programme will mean that public funding is directed away from projects in other parts of the country, reducing potential job creation in these areas. In addition, some public investment in social services such as health and education may be reduced and the government is also left with less financial capability to provide a fiscal stimulus for the recovering economy.
Chile’s economic recovery will be slower than expected owing to the earthquake damage and hurricane cost:
- Following the earthquake, the government estimated annual GDP growth of 4.5% for 2010, an improvement from the 1.8% contraction in 2009 but lower than the 5.5-6.0% growth initially forecast;
- The new administration of President Sebastian Pinera (who took office on 11 March 2010) has announced the creation of a special fund to rebuild 300,000 homes, as well as hospitals and schools;
- Ongoing strong copper prices should help support the reconstruction programme, with global copper prices standing at US$7,500 per tonne, up from US$3,800 in March 2009;
- The absorption of the financial reconstruction cost in 2010 should allow the economy to pick up more strongly in 2011, with the government expecting GDP growth in 2011 to reach 5.4%.