The May 12 earthquake took Sichuan Province by surprise, decimating the "land of abundance." While most of the focus in this tragedy has been centered on saving lives, people are also deeply concerned about the impact of the earthquake on the country's economy. Zuo Xiaolei, Chief Economist at China Galaxy Securities Co. Ltd., explains the possible consequences.

Severe repercussions for Sichuan's economy

In the short run, we think that the regional influence will be severe. The earthquakes of high magnitude that hit California in 1989 and 1994 both caused direct economic losses of more than $10 billion and severely damaged the economy. Hurricane Katrina in 2005 almost flooded the whole of New Orleans, and nearly all the people who lived there became homeless. New Orleans is a major oil-processing base in the United States, and the disaster caused economic losses of more than $120 billion.

The May 12 earthquake caused a huge number of casualties in Wenchuan and the surrounding areas. Local infrastructure was severely damaged, supplies of water and electricity were cut off, houses collapsed, transportation came to a standstill, and all market activities were suspended. Although the total losses cannot be calculated yet, Wenchuan area's economy might need years to recover.

We believe that the earthquake will not have a large impact on the macro-economy and that it might even serve as a driving factor. In 2005, high fiscal and trade deficits brought about a severe imbalance in the U.S. economy, which then spread to the rest of the world. Together with the Federal Reserve's interest rate hikes starting in 2004, the American real estate industry began to deteriorate. Many economists, including myself, were discussing whether the U.S. economy would experience a soft landing or a hard landing. That is to say, there has been a consensus that U.S. economic development would slow down.

But after hurricane Katrina, the U.S. Congress still approved a special budget of $44 billion for disaster relief and to restart oil-processing production, despite its huge fiscal deficits. The huge government input was like cardiotonic for the sluggish economy. In 2005, the U.S. economy resumed high growth, and the Federal Reserve continued its monetary policy of raising interest rates.

Although the 8.0-magnitude earthquake in Wenchuan affected almost half of China, its impact on the country's economy will be far less than that of hurricane Katrina on the U.S. economy. The earthquake will influence mainly the economies of Wenchuan and the surrounding areas several hundred km away, while its impact on the economy of other provinces should be very limited. Moreover, after the earthquake, we believe that the central and local governments will exert great efforts on reconstruction. The input itself will stabilize the economic growth from a macro-economic aspect.

Without other variable factors in the present economic growth environment, the Wenchuan earthquake will not change our expectations for the steady growth of the country's macro-economy in 2008.

Western development might get a boost

In the long run, China's western development strategy might see some breakthroughs, especially in infrastructure. The strategy has been short of impetus, perhaps due to limited financial and material resources. Sichuan stands in southwest China, and provinces and autonomous regions in west China all have been affected by the earthquake. In particular, the infrastructure has been severely damaged. The Central Government will pour huge inputs and expenditures into reconstructing education, energy, telecommunications, transport, environment, health care and social security systems and infrastructure. Local governments in Sichuan Province have been crying out for the rapid recovery of their transportation systems. Because the Central Government will greatly increase infrastructure inputs in west China, the infrastructure there will be generally improved, pushing the western development strategy further along. Substantial advancements in the strategy should have an active, strategic significance for China's overall economic development, and especially a balanced development.

International experience also shows that increased input in the technology of anti-quake architecture after the earthquakes has greatly enhanced innovation and technological progress in the construction sector and other related industries, and taken economic development to higher levels. All countries and regions that have suffered destructive earthquakes will strengthen their inputs for earthquake prevention and forecasting. The resulting innovative and technological progress in home construction, water resources, anti-quake capacity of reservoirs, safety of water and power supply facilities, weather and earthquake forecasting and environmental protection will significantly improve mankind's capacity for dealing with unexpected and contingent disasters. Reducing economic losses caused by earthquakes also will have an active influence on the economy.

The Wenchuan earthquake also has raised important considerations about the urbanization of densely populated areas. The California earthquake in 1994 was a low-magnitude one, but because it occurred in a heavily populated area, it caused a disastrous number of casualties and economic losses. China is a country with a large population, and during the process of urbanization, a huge number of rural people have been migrating to cities. Wherever the population is too dense, any disaster will cause a high number of casualties. China might want to take this as a prerequisite consideration in its urbanization development. In areas with a high probability of earthquakes, we may choose to build more small and medium-sized cities, instead of the unitary strategy of building international metropolises.