Contrasting landscapes of New Zealand and Chile symbolize divergent economic recoveries after earthquakes.

Aftershocks of Fortune: How Earthquakes Impact National Wealth—Chile vs. New Zealand

Mira Elwood in Business & Economy December 2025 • 4 min read.

"Discover why some nations thrive after natural disasters, while others struggle, through the lens of Chile and New Zealand's contrasting recoveries."

Natural disasters, earthquakes in particular, leave an undeniable trail of destruction—lives lost, infrastructure crumbled, and communities displaced. Yet, the long-term economic repercussions are far from uniform. Some nations emerge stronger, while others grapple with lasting setbacks. This dichotomy is strikingly illustrated by Chile and New Zealand, two seismically active countries that experienced major earthquakes in 2010 and 2011, respectively.

While both nations faced significant challenges, their economic trajectories diverged sharply in the aftermath. Using advanced analytical techniques, a recent study delves into these contrasting outcomes, seeking to understand why one nation thrived while the other faltered. This article explores the key findings of that research, offering insights into the factors that shape a nation's resilience in the face of natural disaster.

This comparative analysis isn't just an academic exercise; it provides valuable lessons for policymakers and communities worldwide. By understanding the drivers of post-disaster economic recovery, nations can better prepare for future events, mitigate potential damage, and build more resilient societies.

Why Did New Zealand's Economy Grow While Chile's Declined After Their Earthquakes?

Contrasting landscapes of New Zealand and Chile symbolize divergent economic recoveries after earthquakes.

A groundbreaking study applied the synthetic control method (SCM) to analyze the economic impacts of the 2010 earthquake in Chile's Maule region and the 2011 earthquake in New Zealand's Canterbury region. This method creates a 'synthetic' counterfactual—a hypothetical scenario of what would have happened without the earthquake—allowing researchers to isolate the disaster's true impact.

The results were striking: Canterbury, New Zealand, experienced approximately 10% more economic growth over three years compared to its synthetic counterfactual, while Maule, Chile, saw a 5% decline. This divergence begs the question: what factors drove these contrasting outcomes?

Institutional Strength: New Zealand boasts stronger institutions, including well-defined property rights and lower levels of corruption, creating a more stable environment for recovery and investment.
Government Spending: New Zealand's government committed a significantly larger proportion of its GDP to reconstruction efforts compared to Chile, injecting vital resources into the economy.
Productivity Boost: The 'productivity effect,' where disasters accelerate the replacement of outdated capital with newer, more efficient technologies, may have played a role in New Zealand's recovery.

These factors highlight the critical role of proactive governance, robust institutions, and strategic investment in fostering economic resilience after a major natural disaster. Let’s dive deeper into each factor and look at how it affects the economy.

Lessons for a Disaster-Prone World

The contrasting experiences of Chile and New Zealand offer valuable lessons for nations facing the increasing threat of natural disasters. Investing in strong institutions, prioritizing reconstruction spending, and fostering a culture of innovation can significantly enhance a nation's ability to rebound from catastrophe. By learning from these examples, countries can build more resilient economies and safeguard the well-being of their citizens in an uncertain world.

About this Article -

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This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2405.12041,

Title: Earthquakes And The Wealth Of Nations: The Cases Of Chile And New Zealand

Subject: econ.gn q-fin.ec

Authors: Diego Díaz, Pablo Paniagua, Cristián Larroulet

Published: 20-05-2024

Everything You Need To Know

What is the synthetic control method (SCM) and how did it help in comparing the economic impacts of the earthquakes in Chile and New Zealand?

The synthetic control method (SCM) is an analytical technique used to assess the economic impact of the 2010 earthquake in Chile's Maule region and the 2011 earthquake in New Zealand's Canterbury region. SCM creates a 'synthetic' counterfactual, a hypothetical scenario representing what would have happened to each region's economy if the earthquake hadn't occurred. By comparing the actual economic performance with this synthetic scenario, researchers can isolate the true impact of the disasters, which helped to reveal that Canterbury experienced economic growth, while Maule saw a decline.

How did institutional strength contribute to the divergent economic outcomes of Chile and New Zealand following their respective earthquakes?

Institutional strength was a critical factor in the differing recovery paths of Chile and New Zealand. New Zealand, with its stronger institutions, including well-defined property rights and lower corruption levels, provided a more stable environment for recovery and investment. This stability attracted both domestic and foreign investment, which played a crucial role in stimulating economic activity after the earthquake. Conversely, Chile's institutional weaknesses likely hindered its recovery efforts to some degree, as they may have increased uncertainty and reduced investor confidence. The stability in New Zealand helped them overcome the damage caused by the earthquake faster.

In what ways did government spending influence the economic recovery of New Zealand compared to Chile following the earthquakes?

Government spending played a significant role in the economic recovery of New Zealand. The government committed a larger proportion of its GDP to reconstruction efforts compared to Chile. This injection of resources into the economy helped to stimulate economic activity, create jobs, and facilitate the rebuilding of infrastructure. In contrast, Chile's more limited government spending on reconstruction may have slowed its recovery, as it didn't provide the same level of fiscal stimulus. The amount of government spending was directly linked to the economic performance of both nations after the earthquakes.

What is the 'productivity effect' and how might it have influenced the economic recovery in New Zealand?

The 'productivity effect' refers to the potential for disasters to accelerate the replacement of outdated capital with newer, more efficient technologies. In New Zealand, the earthquake in Canterbury may have prompted businesses to replace damaged infrastructure with more advanced technologies, leading to a boost in productivity. This technological upgrade can enhance efficiency, reduce costs, and improve competitiveness, all of which contribute to economic growth. It is one of the key reasons why the recovery in New Zealand was faster and more efficient.

What are the key takeaways from the contrasting experiences of Chile and New Zealand that can help disaster-prone nations build economic resilience?

The experiences of Chile and New Zealand provide valuable insights for nations facing the increasing threat of natural disasters. Investing in strong institutions, such as well-defined property rights and low corruption, is crucial for fostering stability and attracting investment. Prioritizing significant reconstruction spending, as demonstrated by New Zealand, can inject vital resources into the economy and accelerate recovery. Moreover, fostering a culture of innovation and embracing the 'productivity effect' can lead to the adoption of more efficient technologies and enhance economic resilience. These steps help nations better prepare for and rebound from catastrophes, safeguarding the well-being of their citizens.