- The Washington Times - Thursday, May 29, 2008

ANALYSIS/OPINION:

The terrible devastation caused by the earthquake in Sichuan reminds us of the randomness of nature, the uncertainty of life, and the compassion people have for those who suffer.

But there is a more important, if less understood lesson: Countries that have well-developed markets, widespread private property rights, and a vibrant civil society are much more able to withstand and recover from natural disasters than countries lacking those institutions.

Price and profit controls, and the lack of private property rights, increase the duration and magnitude of natural disasters. Market-led development provides the best insurance against disasters by increasing wealth and allowing the economic system to quickly adapt to shocks. The now-retired Purdue University economist George Horwich showed how countries that adhered to market-liberal principles weathered natural disasters more readily than those that suppressed economic freedom.

In 1988, Soviet Armenia lost 25,000 people when an earthquake hit. The following year an earthquake of the same magnitude struck San Francisco, and only 67 lives were lost. In an extensive study of the 1995 Kobe earthquake, Mr. Horwich found Japan’s mainly market-driven economy, which had created tremendous wealth in the postwar era, along with a strong civil society, allowed Japan to recover quickly without any lasting damage to the overall economy.

Schools in Kobe, which were well-constructed, were used to house about a third of the homeless, which totaled 300,000. “Price-directed market responses” to the quake minimized overall losses. Japan’s recovery, says Mr. Horwich, would have been even faster had it not been for burdensome regulations and various impediments to a free market, including outmoded land-use policies.

The major lessons from Mr. Horwich’s study of natural disasters are that losses are minimized to the extent there is a free flow of information, resilient private markets and a government that protects property rights and allows civil society to function. Market-led development can mitigate natural disasters by fostering economic freedom, creating wealth and cultivating individual responsibility.

To see the importance of market liberalism in lessening the damage from natural disasters, one need only compare the slow response of Myanmar (Burma), a centrally planned and rigidly controlled country, to the rapid response of China, which has liberalized its economy since 1978 and opened itself to trade with the outside world.

Moreover, China learned from the SARS crisis that the best policy in dealing with disaster is to allow the free flow of information, which has been improved by people’s access to modern communications technology occasioned by the market reforms.

Yet, obviously the slower marketization in rural areas - and especially the lack of private property rights in land - make it difficult to escape poverty and hamper efforts to respond to and mitigate losses from natural disasters. Building codes for schools in Beichuan and other underdeveloped areas in Sichuan were not up to standard or were not enforced, and innocent children died as a result. That tragedy was not a market failure, but rather a failure of government to protect the lives, liberty and property of the people.

When property rights are secure, private owners have an incentive to maintain quality and are liable for malfeasance. When land can be freely bought and sold, owners will invest in that property and can use it for collateral. Wealth will be created and market transactions will expand, making people better off. Families will use their newly acquired wealth to educate their children, and that investment in human capital will in turn benefit society.

Family, neighbors and friends are always the first to lend a hand when disaster strikes. Those efforts will be more successful in a market-liberal economy, with private ownership and a smoothly operating price system than in a planned economy in which property and information are controlled by a ruling elite. People will not be hampered by lack of information, crippling government regulations and price controls. And the better-off will be able to rely on well-organized private charitable agencies to help direct the relief effort.

We cannot avoid the wrath of nature, but we can help minimize risk and uncertainty by adopting institutions that provide a framework of freedom. As Mr. Horwich showed, freedom and prosperity are the best ways to produce a safer environment.

China’s march toward the market has allowed it to weather natural disasters more effectively, but the lesson from the Sichuan disaster is that much remains to be done.

China must continue advancing economic and personal freedom, and privatize collectively owned property so the rural poor will be better able to provide for themselves and their families without relying on public officials.

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