Endnotes

¹Useful reports on the tsunami are contained in "The Economist" in editions dated 1 January 2005 and 8 January 2005.

²Sri Lanka was completely unprepared for the tsunami. In general, Sri Lanka experiences periodic droughts, floods, landslides, and the occasional cyclone. But the nation had never experienced a tsunami or, indeed, any other type of natural disaster of this scale in recorded history. Even the tsunami generated by the great Krakatoa volcanic eruption of 1883 in Indonesia had lost much of its power by the time it reached Sri Lanka. While minor earth tremors are not uncommon in the country, no serious earthquake has occurred there for three centuries. Historical records indicate that a major earthquake in 1615 inflicted serious damage with large numbers of casualties (http://www.lankalibrary.com/geo/portu/earthquake.htm). Sri Lanka had no effective domestic hazard warning system, and had not felt the need to be part of international early warning systems, such as the Tsunami Warning System (TWS) in the Pacific (with 26 member countries) because the threat of a tsunami was not considered to be of sufficiently high priority to warrant attention to the matter.

³Since the 2004 tsunami, Indonesia has experienced several seriously destructive natural disasters though not on the same scale as the tsunami.

⁴For several years following the tsunami, the BRR was under-spending its allocated budget. However according to the same World Bank website, "disbursements have been steadily rising since November 2005 and were about US$4.2 billion (65% of allocated funds) by end of 2007” (World Bank 2008b) Additionally, in Sri Lanka,“ while individual agencies varied in performance, the bilateral and multilateral agencies had spent on average 29 per cent and 32 per cent respectively of committed funds by end 2006” (Weerakoon et al. 2007: 22).

⁵We do not review many other economic issues related to natural disasters such as the appropriate size and type of government intervention following a disaster, equity issues, and the various types of market failure that can arise depending on the response chosen. For reviews of this literature, see Freeman, Keen, and Mani 2003), and Benson and Clay (2004).

⁶See reviews by Freeman, Keen, and Mani (2003), and Benson and Clay (2004).

⁷For detailed discussion of these issues, see Telford, Cosgrave, and Houghton (2006); for three country studies, see Nazara and Resosudarmo (2007), Weerakoon et al (2007), and Nidhiprabha (2007).

⁸A careful set of adjustments to the data would provide information about the following: (i) flows by donor and recipient country; (ii) terms of aid (time period covered by the funding, form of aid by grants and loans including conditions of loan terms, and conditionalities); (iii) national and local contributions as well as international contributions; (iv) an estimate of net additionality; and (v) other contributions not covered by these flows, including military contributions, resources provided in kind, and private remittances.

⁹See, for example, the USGAO (2007) report.

¹⁰Information about the time periods for which assistance was offered is extremely difficult to compile.

¹¹In principle, it would be useful to convert these various types of loans into net official development assistance flows to allow for more meaningful comparisons to be made between them.

¹²A similar set of issues attracted comment during the response to the earthquake in Yogyakarta in central Java, Indonesia, in May 2006.

¹³The Rehabilitation and Reconstruction Agency, or BRR, was the lead agency established by the Indonesian government to oversee Indonesia's national rehabilitation and reconstruction efforts in Aceh. Details are provided in Nazara and Resosudarmo (2007).

¹⁴The Paris Declaration, endorsed on 2 March 2005 at a high-level OECD forum, is an international agreement to which over one hundred ministers, heads of agencies, and other senior officials committed their countries and organizations to increase efforts towards harmonization, alignment, and managing aid for results with a set of monitorable indicators.

¹⁵See, for example, Foreman and Patrick (eds.) (2000); also see Cuny (1983) for an earlier review of this issue.

¹⁶In the case of Sri Lanka, for example, estimates indicated that at least 100,000 additional workers were required, including about 13,000 masons, 2,000 carpenters, 2,500 painters, and nearly 54,000 unskilled laborers (Jayasuriya, Steele, and Weerakoon 2005: 38).

¹⁷This is the so-called ”small country” case in economic analysis where, because the economy of a country is small compared to the world economy, economic changes within the relevant country do not affect world prices of tradable goods.

¹⁸It should be noted that references to inflation in this context refer to one-off price increases rather than a sustained process of continuing increases in the general price level which extends over a period of time.

¹⁹Recent experience in Pakistan, US (Hurricane Katrina), and even in Indonesia after the Yogyakarta earthquake in 2006 indicate that sharp construction cost increases in disaster zones are common.

²⁰For various reasons, such as local political factors, it may not be possible sometimes to important certain factors of production. In the case the construction sector, for example, it is usually possible, in principle, to import skilled labor from other countries. In Sri Lanka following the tsunami, there was a suggestion that skilled labor shortages in the construction sector should be met by importing skilled labor from India. However this proved to be politically unacceptable.

²¹The reasons for the sharp (and somewhat surprising) increase in the price of timber are discussed by Nazara and Resosudarmo (2007).

²²See Corden and Neary (1982) and Corden (1984) for an outline of a basic analytical model for Dutch Disease. A booming sector also generates expenditure effects which raise the overall demand for goods and services. But higher demand does not always translate into higher prices in the case of (internationally) tradable goods. Generally, such goods can be imported at more or less exogenously fixed world prices while domestically produced and consumed goods (non-tradable goods) tend to experience off-setting price increases. Hence, tradable goods experience cost pressures from booming sectors but do not get much of an offsetting effect from higher income-expenditure related demand increases. As a result the relative price of non-tradables to tradables increases. This fall in the relative profitability of tradable industries is the standard “real exchange rate appreciation” that is a necessary and unavoidable outcome of foreign capital absorption by the domestic economy. This can be minimized in the short-term through foreign exchange market interventions and other sterilization measures, but cannot be entirely avoided.

²³Explanation of terms: (1) Here, there is a distinction between "tradable" and "non-tradable" goods. These goods have the very important difference that "tradable" goods (e.g., oil) are traded freely in world markets and thus have their prices set in world markets. However, "non-tradable" (or "non-traded") goods are not traded in world markets and have their prices set within a country. (2) For most countries, there are two types of tradable" goods—"imported tradables" (also known as “importables”) and "exported tradables" (also known as exportables”). (3) However, whether any tradable good is an "importable" or "exportable" good depends on the particular country being considered—for example, oil is an "importable" (or imported tradable) for Japan but is an "exportable" (or exported tradable) for Saudi Arabia.

²⁴The assumption is that the recipient country is a “small” country in world markets so its international transactions do not have a significant impact on world market prices.

²⁵The regional economy of the disaster affected area may be considered as a distinct entity within the broader national economy that has a fixed exchange rate with the rest of the economy. Then, the same considerations apply for funds coming into the region from within the country itself.

²⁶In the immediate aftermath of the tsunami in Sri Lanka there were euphoric expectations of massive capital flows, peace, and economic prosperity. In this atmosphere, the Sri Lanka rupee appreciated (see Figure 5 in Weerakoon et.al. (2007). Subsequently, the government appeared to have used tsunami aid funds to prop up the currency for political reasons. Such a policy also implies slower absorption (expenditure) of foreign assistance, which reduces domestic cost pressures.

²⁷In the longer term, higher expenditures by the "profiteering" groups who gain these higher incomes will tend to raise costs throughout the economy, thereby tending to squeeze profits in export and import competing industries. In contrast, the availability of services from reconstructed infrastructure and other assets has an offsetting impact in the future on costs, facilitating increased supplies. Thus, investment in domestic capital stock tends, in the first instance, to produce a real exchange rate appreciation. Later, improved international competitiveness may be expected once the capital assets begin to provide services used in the tradable industries.

²⁸The incentives for people to take up training in new skills depend on expectations and incentives. In Thailand, Bhanupong (2007) observed that many people were reluctant to undertake training programs to acquire new skills because they expected to go back to their previous jobs in fisheries and tourism relatively quickly. On the other hand, anecdotal evidence from Sri Lanka suggests that many unemployed people were willing to undertake training in simple construction sector skills.

²⁹This is a more general point that applies to the spending of all types of financial flows—including development aid—that expand the productive capacity of an economy. It should also be mentioned that all economic agents are likely to perceive that the boom is a temporary phenomenon. The boom is therefore unlikely to generate future unemployment later due to downward rigidity of wages and prices when the boom ends.

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