President Sebastian Piñera will have to solve urgent issues like homelessness among quake victims before his economic plans.
On February 27, a large number of ports, towns and large cities along Chile’s south-central coast were devastated by an earthquake measuring 8.8 on the Richter scale, and the tsunami that followed it. The disaster has left a toll of more than 479 people dead and 497 missing, according to the latest official figures.
The day after the catastrophe, the government of President Michelle Bachelet acknowledged in public that it had committed a mistake by not providing timely information to warn of a possible tsunami following the quake. Proper warnings were not provided to maritime authorities, and hundreds of lives were lost. This was a serious reversal for Chile’s first female president, who was about to leave office. On March 11, Sebastian Piñera became the country’s president, putting an end to 20 years of leadership by the so-called Concertacion Party, a coalition of centrist and leftist parties.
The devastating quake and the force of gigantic waves, which in some localities were about 20 meters in height, wiped out service for water, light and gas in the center and south of the country for several days. The survivors in the most heavily hit regions had to wait days for the arrival of teams of rescue and medical workers who brought water, food, and clothing.
MISTAKES IN MANAGEMENT
These chaotic conditions generated a flood of criticism about the government’s performance from a wide range of social groups, who argued that the response to the national emergency had come too late. “We Chileans were thinking that institutions were better prepared than what we could see,” said Juan Sebastián Montes, professor of strategy and economic sociology at the business school of the Adolfo Ibáñez University. “The way the crisis was managed was worse than what we should have anticipated.”
Montes notes that although no country is truly prepared to deal with an earthquake of a magnitude of eight on the Richter scale, “there are some countries that are better prepared than others, as shown by the enormous destruction in Haiti, which recently experienced an earthquake of a lower magnitude than that of Chile.” The Haitian quake had an intensity of seven on the Richter scale, according to the U.S. Geological Service.
Although Chilean specialists say that structural damage to the country was not as extensive as the damage in Haiti, Chile still has a lot of room for improvement when it comes to taking measures to mitigate these sorts of incidents in the future. “There is no sure system for prevention against tsunamis,” notes Hans Niemeyer, professor of geological sciences at the Universidad Católica del Norte in Chile. It turned out, he adds, that “it was more valuable …for the people in the coastal regions to know how to leave quickly for the hills, once the earthquake occurred.”
THE TASK OF RECONSTRUCTION
Experts say that there is no reason why the recent change in the Chilean government should affect the way this crisis is managed in coming weeks. Piñera has already held several working meetings with Bachelet, who has named new managers -- regional officials whose backgrounds are more technical than political -- in those areas that were most affected by the earthquake. Clearly, the Piñera administration has a titanic task ahead of it. It must transform itself into a government of “national reconstruction,” as Niemeyer notes.
He adds, “Because it is a country with a large territory, the new country’s political leadership will have to strengthen its north-south connectivity through our vertebral column, Highway 5 South, which suffered serious damage. No doubt, the government will have to emphasize anti-earthquake construction projects. We can’t have Chile go without air traffic because the international airport in Santiago collapses. These situations cannot happen again in the future; not with highways, hospitals or airports.”
According to experts, Piñera will have to forget the economic promises he made during the election campaign – higher salaries and lower crime, among others – and deal with more urgent priorities such as the large number of people who remain homeless, especially in those areas most damaged by the catastrophe. “Since many people lost their housing, this is going to produce a significant amount of overcrowding, which has to be dealt with over the short term,” notes Rodrigo Morrás, professor of organizational service management at the Adolfo Ibáñez University’s business school.
The earthquake has not only had a significant economic impact on the country’s infrastructure but it also has had significant social repercussions, such as in the loss of the quality of life of the population because of the destruction of property and material goods. People are now talking about a “social earthquake” in Chile. According to Morrás, “The damage that has been done to possessions and physical assets, particularly those that belong to people who live in the coastal areas that suffered the most damage, will be hard to recover, especially if you consider that these social groups have modest means, fewer [financial] resources, and less access to influential networks for rebuilding their assets.”
In addition, in those coastal locations – the southern regions of O’Higgins, El Maule, and Bío Bío – there were many micro-enterprises that will now have to start from zero, adds Morrás. “We are talking about fishermen, transport workers and merchants who lost their boats, trucks, hotels, restaurants, etc. In other words, the progress they had achieved after years of developing a region with interesting tourist attractions has been wiped out. It is going to take these micro-enterprises time to recover; at least two or three years.”
Nevertheless, Morrás does not rule out the possibility that in the short term, these regions will attract more efficient and larger-scale investments because of their attractiveness to tourists.
Some analysts have predicted that the earthquake could prevent Chile’s economy from growing during 2010. Initially, economists had been forecasting growth of 5.5 percent this year, and Piñera had promised to accelerate growth through a forceful governmental program.
For Montes, an earthquake with a magnitude of eight on the Richter scale means a loss of capital, inventory and productivity. It is “a net loss; although it is still too early to quantify the impact, it will certainly be reflected in the quarterly figures. In addition, it is very likely that fiscal spending will increase, so it will be very hard to predict the impact of the catastrophe on the indicators of economic growth.” Early estimates indicate that the damages caused by the earthquake could cost Chile about US$30 billion, the equivalent of 15 percent of its GDP, but in Montes’ opinion, that figure could wind up being even higher.
In contrast, Matías Braun, professor of financial markets and economic development at the Adolfo Ibáñez University’s business school, has a less alarmist view of the financial cost of the quake. “Although the losses generated by the catastrophe are quite significant, generally speaking, people are exaggerating the toll,” he says. “I would estimate a maximum of between $4 billion and $8 billon. My estimates could be divided the following way: $2.5 billion in housing construction – equivalent to the destruction of 20 percent of the homes in the zones that are most affected; $1.5 billion in commercial and industrial construction; US$2 billion in road and port construction; $500 million in machinery and equipment; and another US$500 million in lost inventory.”
Braun asserts that the earthquake could even have a positive impact on job growth – because of [the subsequent] reconstruction efforts – and on the growth of the country “because it will lead to a higher percentage of GDP growth of between 1 and 1.5 percent for two years, and because of the net effect of the loss of capital and subsequent reconstruction.” Although there would have to be a temporary increase in prices of about 2 percent in coming months, “the repercussions on the [Chilean] exchange rate should be significantly lower.”
Rafael Romero, professor of corporate finance and business valuation at the Adolfo Ibáñez University’s business school, agrees with Braun’s projections. Romero notes that “rebuilding is necessary, which means that economic activity should soar, leading to growth in construction activity and investments in public works. Financial markets have already reacted by showing increases in the prices of companies involved in construction and inputs for construction, such as cement producers.” The best examples of that upward trend in prices include Cementós Melon, which experienced a gain of 251% in its share price on the Santiago stock exchange in recent days, and Grupo Polpaico (which rose 44%), one of the country’s leading manufacturers of cement and concrete.
REAL ESTATE AND CONSTRUCTION COLLAPSE
The shares that plummeted after the earthquake were in real estate and construction firms, following analysts’ observations about the destruction of new buildings and structural damage in other buildings that were no more than three years old but had to be evacuated because of the risk of collapse.
Some experts have been surprised by the collapse of modern buildings, and have questioned the controls of Chile’s anti-seismic regulations. According to the Chilean Chamber of Construction, the country’s industry trade group, buildings must be built to withstand a grade-eight earthquake. “Some companies are managing to avoid those controls,” says Felipe Aguilera, professor of geology at the University of Atacama in northern Chile. “On the other hand, this doesn’t explain the degree of destruction in new buildings, unlike others that are in excellent shape after the earthquake.” The most emblematic case is the 30-floor Millennium Building, in the heart of the Santiago business district, which escaped any damage from the quake.
Insurance companies will have to pay out considerable sums of money to compensate for the damages. Recently, Mikel Uriarte, president of the Chilean insurance association, told the Chilean daily newspaper El Mercurio that the total amount will approach $4 billion.
Chile’s leading export industry, copper production, should emerge untouched by the quake, which lasted almost three minutes. A few days after the quake occurred, the price of copper reached $3.32 per pound – 4 percent higher than the $3.20 registered before the quake – because of rumors that Chile was not going to be able to comply with its export commitments. However, experts don’t believe that will be the case.
“Copper production will not be affected, because the principal mines for this metal are in the north of the country, where they have not been affected by the earthquake,” says Niemeyer. “Chile is in perfect shape to comply with its export obligations.” Although several ports in the south of the country have suffered structural damages, the port complex in Valparaíso – from which copper exports are shipped – is operating without any problems, the local press reported.
In contrast, Montes notes that other exporting sectors have suffered serious damage to their production capabilities, including agribusiness and fisheries, where crops and fishing fleets have been destroyed.
LESSONS LEFT BY EARTHQUAKE
Chile can learn various lessons from this unfortunate episode, which has had so many different repercussions. According to Morrás, one of the key lessons is the importance of speed when it comes to detecting a tsunami and providing warnings. Another lesson is the importance of educating the population about how to behave during an earthquake, “whether you are in your house, inside a car, on the street, along the coast or in a high-rise apartment,” he says. “You also need to improve social and community networks, such as groups of neighbors in communities, buildings and neighborhoods, with the goal of being able to construct a communications and containment network. This is because our country covers such a large territory, and it is very likely that numerous localities will remain isolated [for quite a while] after any quake of great magnitude.”
Morrás adds: “It’s worth emphasizing that the earthquake produced a moral deterioration of the population resulting from the belated response of the authorities to the catastrophe. The slow pace of response created disorder and chaos, which favored such behavior as robberies and lootings in supermarkets and shopping malls. This behavior, in turn, became legitimated by the need for food, water and other basic products. As a result, the [importance of] rapid and effective responsiveness by institutions is another major lesson that you have to derive [from the crisis].”
More recently, the country’s largest companies have joined together with governmental institutions, banks, non-governmental organizations, the communications media, artists and ordinary citizens in a national solidarity campaign called “Chile Helps Chile,” which includes the participation of former President Bachelet and newly elected President Piñera. Over the first 25 hours of the campaign, it managed to collect some $58 million, to be spent on the construction of emergency housing and schools -- to many, a sign of hope that the nation can pull itself together more rapidly than people ever imagined.
Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.