Economic development - a perverse view

By DAVID MOON, Moon Capital Management
February 20, 2005

Fitch, the global credit-rating agency, has such a strong reputation in the bond market that I was surprised to read one of its executives say something so stupid. Following the southeast Asian tsunami that killed more than 110,000 people (31,000 in Sri Lanka) Fitch vice-president Alastair Corera offered this weird solace: 'This is an opportunity for growth for Sri Lanka. The much-needed long-term economic pick-up can start happening if the government adopts the right approach.'

The tsunami destroyed three-quarters of the country's coastline, wrecked the roads and railways and left a million people homeless. Nevertheless, analysts, including those available to Fitch, suggest the reconstruction effort will kick-start economic growth, perhaps to an annual rate as high as five percent in 2006.

I hope you'll excuse the Sri Lankans if they don't clamor for another of these fantastic opportunities.

The fallacy behind Corera's statement has been around for a long time. French economist Frederic Bastiat wrote about unseen economic consequences in the early 1800s. If a vandal throws a stone through a shopkeeper's window, he noted, some of the townspeople may see the act as one of economic development. The shopkeeper must replace the window. He calls the glass guy. The glazier earns some additional money which he then spends with the baker, who then buys shoes from the cobbler, and so on. Those are the effects that are seen. Those economic impacts are obvious.

Unseen is what the shopkeeper would have done with his money had he not been forced to buy a new window. He might have purchased a suit instead of a window. As a result of the broken window, unemployment was shifted from the glazier to the tailor. But the most dramatic of the unseen effects is the impact on the shopkeeper's wealth. Had it not been for the vandalism, he would have both a new suit and a window. Now, however, he only has a window.

This is more than just an intellectual exercise. These silly (and sickening) claims about the economics of destruction are also made following disasters in this country.

After every hurricane, newspaper articles point to illusionary silver linings by talking about the economic impact of the upcoming building booms. An especially perverted New York Times article only days following the 9/11 attacks looked forward to the new capital that reconstruction would bring to lower Manhattan.

If you destroy something and replace it with a more productive asset, you create wealth. If you break something merely to create work so you can restore it to its predestruction state, you have destroyed value. In Knoxville, we have plenty of examples of both, although there are constituencies that disagree about which projects fall into which categories.

Perhaps Knoxville should hire Fitch to consult on the revitalization of downtown. If we could just get Mother Nature to cooperate.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

Add me to your commentary distribution list.

MCM website