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 with well-developed markets, private property rights and a vibrant civil society are much more able to withstand and recover from natural disasters.
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, 25,000 people died when an earthquake hit Soviet Armenia. 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 that Japan's mainly market-driven economy, which had created tremendous wealth in the post-war era, along with a strong civil society, allowed Japan to recover quickly without any lasting damage to the overall economy. Kobe's well-built schools provided shelter for about one-third of the 300,000 homeless.
Mr Horwich's study of natural disasters shows how losses are minimised to the extent that 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, a centrally planned and rigidly controlled country, to the rapid response of China, which has liberalised its economy since 1978 and opened itself to trade with the outside world. Moreover, China learned from the severe acute respiratory syndrome 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, the slower pace of marketisation in rural areas – and especially the lack of private property rights in land – makes it difficult to escape poverty and hampers efforts to respond to, and mitigate losses from, natural disasters. Building codes for schools in Beichuan and other counties 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 lives, liberty and property.
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 will benefit society.
Family, neighbours 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.
We cannot avoid the wrath of nature, but we can help minimise risk and uncertainty by adopting institutions that provide a framework of freedom. China's march towards the market has allowed it to weather natural disasters more effectively, but it must continue advancing economic and personal freedom, and privatise collectively owned property so the rural poor can provide for themselves more without relying on public officials.