Human solidarity and economic self-interest: from disaster we can forge new relationships

People matter more than economics. The financial consequences of the tsunami must and will remain secondary to the human ones. But there will be economic consequences and these will affect people's livelihoods. While it is too early to fully comprehend the human toll, it is possible to set out a framework for thinking through the economic aspects of the catastrophe.

People matter more than economics. The financial consequences of the tsunami must and will remain secondary to the human ones. But there will be economic consequences and these will affect people's livelihoods. While it is too early to fully comprehend the human toll, it is possible to set out a framework for thinking through the economic aspects of the catastrophe.

For we do know quite a lot about the way that natural disasters affect economic activity. We know that at a macro-economic level - the big numbers of gross domestic product or inflation - the overall impact is surprisingly small. We also know that at a micro-economic level - the towns, industries, companies and so on - the effects vary enormously but can be positive or negative. And beyond these purely economic consequences, we can look for changes in society and trading relationships that will affect economic outcomes in the future.

The macro first - there are several points to be made here. One is the strange, but in a way obvious, point that disasters create economic activity as well as destroying it. The huge and wonderful effort the world is making to try to cope with the catastrophe is economic activity.

A second point is that the four main countries most seriously affected - India, Indonesia, Sri Lanka and Thailand - are all fast-growing ones. In addition, India and Indonesia have huge populations while Thailand has more people than the UK or France (see the charts). And while living standards as measured by national income per head are far below those of the developed world, were one to measure by the amount that the income actually buys, the gap would be much smaller.

A third point is that for all its horror and physical scale, the damage to the infrastructure is not - with one exception - so great as to cripple an entire economy. The exception is the Maldives where there are two core industries, fishing and tourism, both of which have been shattered. But then the Maldives' economy is tiny: the population is only 340,000, little more than the figure for a big London borough like Bromley. It matters in human and cultural terms, but the big economic numbers are unaffected.

This question of scale is particularly evident when thinking through the consequences for India and Thailand. In the case of India, a huge, fast-growing and increasingly flexible economy, the macro-economic impact is very small. Capital Economics has calculated that the short-term impact on the region will be a loss of less than 0.5 per cent of GDP - much the same as the effect of the Sars crisis.

The Indian finance minister, Mr P Chidambaram, aroused some criticism when he seemed to be rejecting outside financial help - in favour of other countries that needed it more. But actually it was a thoughtful and admirable response. Where India may need foreign resources will be in investment for reconstruction.

In the case of Thailand, the tourist sector is not much more than 10 per cent of the country's output, even adding in the indirect effects. While many beach communities have been destroyed, the physical infrastructure of the rest of the industry is unaffected. The economic difficulty for Thailand (and Sri Lanka) is that visitors may stay away in the future because they think the damage is greater than it actually is.

It is very hard at this stage to do more than sketch the micro-economic consequences. But the sort of positive thing to look for would be the investment in upgrading the infrastructure and the benefits that might flow from that. A good example of this would be the rebuilding of the city centre of Manchester after the IRA bomb in 1996. Since then, the centre has been revitalised in a way that could not have been predicted. Sadly, some communities will forever be destroyed. Paradoxically, the more sophisticated the activity, the easier it is to reconstruct it. So it is the future of the simpler communities that are most at risk. Outsiders can help rebuild a hotel but they cannot reconstruct the community of an isolated fishing village.

Hardest of all to gauge at this stage will be the long-term social and other consequences. Instinctively, I feel these will be enormous, because the effects of the tsunami go far beyond the regions actually struck down. This is a disaster that affects the rich world as well as the poor in a way that, for example, the earthquake in China in 1976 - which killed an estimated 660,000 people - did not.

At the moment we are still in shock. The outpouring of efforts to help, driven by ordinary citizens, demonstrates the power of human solidarity across physical distance and across different cultures. I cannot imagine that this sense of solidarity will swiftly evaporate and I can imagine that it will have important economic effects.

But what? Well, the most obvious thing to look for will be a change in trading relationships. If, for example, Thailand or Indonesia were to seek better access to European markets, the reaction would surely be much more positive. We would want to do the decent thing. If EU politicians failed to respond in a helpful way, they would be pushed by the people.

I think, too, that we will be more interested in building educational and cultural links. For example, European universities will be more inclined to welcome students from the affected regions - we will be more willing to create scholarships as well as offering places. In the medium term, this will cement economic and cultural relationships. The key thing to realise about economic activity is that it occurs because people do business with other people. The better we know each other, the easier commercial relationships become.

Economic relationships are driven not by charity but by mutual self-interest. It is in the self-interest of a trading nation such as Britain to have the best possible economic relationship with these vibrant, fast-growing parts of the world.

The relationship with India has blossomed over the past decade and there is no reason why the same should not now happen with Indonesia - a huge and important country ehich has recently made political changes that should increase its chances of stable progress. It is in the interests of all European nations to build closer economic ties.

It is surely reasonable to think that, five years from now, there will be a more co-operative and warmer relationship between the countries of Europe on the one hand and the countries affected by the tsunami on the other. Good will come out of it, and not just in economic terms.

So will there be a surprise in 2005?

A new year brings the usual host of economic predictions. There are the formal forecasts from the official bodies, which are usually over-optimistic about growth. Then there are their unofficial counterparts, some good and some wacky.

The market forecasts for shares and currencies are pretty useless, except as a guide to help people define what they think might happen. But the "unexpected shock" prize, with its various candidates, does seem a useful exercise, for it will be surprises that determine whether 2005 fits the broad pattern the consensus predicts.

That consensus runs roughly like this. It will be another year of decent global growth, though slower than 2004, driven by the US and China. The dollar will fall a bit and will be in danger of a more serious collapse. US interest rates will climb; Europe's will be steady. Rates here are not expected to rise much and, were house prices to fall sharply, rates would too.The outlook for property, by the way, seems to be for a plateau. Whether shares or fixed-interest securities will do better is debatable, but most forecasters predict higher share prices a year from now.

Take that as a benchmark and ask from where the surprises might come. Here are my top five - not things I think will necessarily happen, but things that might do so, with a percentage probability of each occurring.

• Eurozone growth below 1 per cent, with recession in Germany in the second half of this year. (50 per cent)
• The dollar ends the year up against major currencies, not down (40 per cent).
• Chinese growth slows to below 5 per cent (35 per cent), taking pressure off commodity prices and allowing ...
• ... an oil price by the year end below $35 a barrel (30 per cent)
• UK house prices resume their rise and end up 10 per cent on the year instead of flat or down (25 per cent).

None of these are profound or original - a bearish view of the eurozone is already starting to appear in broker forecasts. Nor are they mutually consistent. I suppose my underlying feeling is that the big international adjustments that everyone expects - in particular, the decline in the dollar and the correction in the US current account deficit - are further away than we think. So 2005 will be an OK year for most of the world but only because the problems have been pushed back to 2006.

We will see.