Global economy could endure disaster for a week

LONDON Fri Jan 6, 2012 10:45am EST

Smoke rises from houses damaged by an earthquake and tsunami in Sendai, northeastern Japan, March 12, 2011.   REUTERS/Jo Yong-Hak

Smoke rises from houses damaged by an earthquake and tsunami in Sendai, northeastern Japan, March 12, 2011.

Credit: Reuters/Jo Yong-Hak

LONDON (Reuters) - The global economy could withstand widespread disruption from a natural disaster or attack by militants for only a week as governments and businesses are not sufficiently prepared to deal with unexpected events, a report by a respected think-tank said.

Events such as the 2010 volcanic ash cloud, which grounded flights in Europe, Japan's earthquake and tsunami and Thailand's floods last year, have showed that key sectors and businesses can be severely affected if disruption to production or transport goes on for more than a week.

"One week seems to be the maximum tolerance of the 'just-in-time' global economy," said the report by Chatham House, the London-based policy institute for international affairs.

The current fragile state of the world's economy leaves it particularly vulnerable to unforeseen shocks. Up to 30 percent of developed countries' gross domestic product could be directly threatened by crises, especially in the manufacturing and tourism sectors, according to the think-tank.

It is estimated that the 2003 outbreak of severe acute respiratory syndrome (SARS) in Asia cost businesses $60 billion, or about 2 percent of east Asian GDP, the report said.

After the Japanese tsunami and nuclear crisis in March last year, global industrial production declined by 1.1 percent the following month, according to the World Bank.

The 2010 volcanic ash cloud cost the European Union 5-10 billion euros and pushed some airlines and travel companies to the verge of bankruptcy.

"I would like to think we can learn from those experiences and be more resilient for longer but it won't happen unless governments and businesses are better prepared and put in place different supply chains which can be relied on when disasters strike," said Alyson Warhurst, chief executive of UK-based risk analysis company Maplecroft.

'BE PREPARED'

Costs can escalate quickly when transport or major production hubs are disrupted for more than a few days, which can in turn threaten food and water supplies and energy and communication networks, the report said.

In the event of prolonged disruption, some businesses would be forced to cut investment and jobs or consider closing down, leading to a permanent reduction in countries' growth.

In general, governments and businesses are under-prepared to respond to high-impact, unpredictable events, with worst-case scenarios rarely factored into their contingency plans.

"Contingency and business planning often assumes the return of status quo ante post-crisis. But this approach will be inadequate in a world of complex economic and social risks, when there is no return to business-as-usual practices," said Bernice Lee, the report's lead author.

"Industries - especially high-value manufacturing - may need to re-consider their just-in-time business model in an interdependent world," she added.

Climate change and water scarcity will only add to risks, putting even more pressure on infrastructure and resources.

Experts have been warning governments over the past few years that they are not properly prepared to deal with national crises.

The UK government came under fire in 2007 for its lack of preparation and response to severe floods, which cost the economy 3.2 billion pounds.

The think-tank recommended various ways to improve responses from governments and businesses to extreme events.

It particularly highlighted social media networks as a useful "one-stop shop" for information in the event of a crisis. In the London riots last year, social networks such as Twitter proved invaluable for many people to track the rioters' movements across the UK capital and take precautions.

The full report is available at www.chathamhouse.org

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