Chile's earthquake

In need of repair

Mar 1st 2010 SANTIAGO
From Economist.com

Chile counts the cost of a devastating earthquake and makes plans for recovery


RELIEF was the initial reaction in Chile to what seemed relatively limited damage given the scale of the earthquake that shook the centre and south of the country in the early hours of Saturday February 27th. That picture has been replaced gradually by dismay as the full extent of the cost begins to emerge. By Sunday evening, the number of confirmed deaths had reached over 700 and is still likely to rise, according to President Michelle Bachelet. This is still a low toll, however, for a quake of 8.8magnitude, one of the largest in the world since 1900.

Felt throughout almost all the country, the quake hit most strongly in six central regions, from the capital, Santiago, and the nearby port of Valparaiso in central Chile to the city of Temuco in the Araucanía region of the south. These parts of the country are home to about 60% of Chile's 17m inhabitants and account for around 70% its GDP. An estimated 1.5m homes are thought to have been damaged and around a third may have to be demolished.

The greatest damage and loss of life, however, appears to have been caused not by the earthquake itself but by a subsequent tidal wave that washed over fishing towns on the coast of south-central Chile. In one such town, Constitución, rescue workers found over 300 bodies on Sunday. Much of the only town in the Juan Fernández archipelago in the Pacific Ocean, which belongs to Chile and is best-known as the place where Robinson Crusoe was marooned, was also destroyed.

Chile has developed an efficient disaster-response system to cope with what Ms Bachelet has described as “a history plagued with natural disasters”. However, looters, particularly in the southern city of Concepción and other nearby towns, have dented the image of a country swinging into action to relieve its suffering people. Though some looters may have merely been in search of scarce food and water others were out for what they could take. As a result, on Sunday, the government imposed a curfew in some of the worst-affected areas.

The earthquake struck just as the Chilean economy was beginning to recover after an estimated contraction of 0.9% in 2009. The after-effects will hamper the exports that drive the country's growth. Copper, Chile's biggest earner abroad, is produced mainly in the north of the country which was unscathed. But damage to ports further south may hamper shipments of forestry products, including wood pulp, while exports of fruit, now at the height of the harvest season in the southern hemisphere, will face delays as a result of damage to the main roads of central Chile.

Despite the earthquake’s likely impact on growth in the first and, possibly, the second quarter, it may actually provide a boost for the economy in the medium term as the government spends heavily to repair the damage. This is welcome news for the country’s president-elect, Sebastián Piñera, who is set to take office on March 11th and was voted in on an ambitious promise of average economic growth of 6% annually over his four-year term.

Until assessment of the damage is complete, it is hard to estimate the cost of reconstruction. Eqecat, an American catastrophe-management company, has suggested that it could total as much as $30 billion, equivalent to 20% of Chile’s GDP in 2009. Part of the cost can readily be financed out of the public purse, drawing on savings accumulated while copper price boomed between 2005 and 2008.

However, Mr Piñera, who has indentified increased private investment as one of the most important components of higher growth, has indicated that the government will not do all the work. He expects Chilean companies to play an important role in the reconstruction through a “Lift Chile” plan, which he outlined on Sunday. This may well include a revival of a public-works-concession scheme that Chile successfully launched in the mid-1990s precisely to build many of the motorways that were damaged by Saturday’s earthquake.

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