Tsunami's impact

Tsunami's impact (source: Citigroup: Hanna et al, 2005)

The above graph (click to enlarge) shows that the impact of the recent Tsunami on financial markets is not gigantic. (Thanks to Anton Gunawan for the article).

On the economics of the Tsunami see the interesting discussion of Posner and Becker today. They both agree that despite the great uncertainty of such catastrophe, a good early warning system should be provided. Becker goes on to offer solutions. In the long run: invest on education; and in the shorter run: good access to market insurance. But, as Becker admits, these both are not easy to do, especially by low income countries. And of course, moral hazard problem. See a rejoinder by Lynne Kiesling.

My take: Yes, the economic costs of the Aceh's Tsunami might not be gigantic. However, this event requires extremely careful response from the government. Yes, we expect (and have been promised) huge amount of foreign aid. Both in the form of grant or of debt forgiveness. Good diplomacy is crucial, because no such thing as a free lunch (recall: Rubin-Summers-Greenspan's unpopular determination to help Mexico in the Clinton years)