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New research co-authored by  Professor Vasco Carvalho, uncovers the role complex and lengthening supply chains play in increasing the impact of disruptions brought about by local disturbances such as natural disasters, terrorist attacks or localized shutdowns. 

It is the 10 year anniversary of the Fukushima earthquake. While the subsequent tsunami destroyed coastal towns and triggered a nuclear meltdown in the city of Fukushima, it is not so much the local devastation that caused problems for the Japanese economy, but rather the disruption to nationwide supply chains that ensued.

"As it turns out, supply chains acted as a conduit for generalised economic disruption, with large aggregate effects."

“Initially it appeared, that although the economy had slowed down, the effect could be rather modest,” says Professor Carvalho. “There was plenty of fishing in the impacted area, some manufacturing and a nuclear plant, but the area just didn’t account for a huge amount of GDP. It simply didn’t justify the slowdown we saw in Japan as a whole. Unless, of course this local disaster also disrupted economic activity elsewhere in areas of Japan that were not hit by the earthquake. As it turns out, supply chains acted as a conduit for generalised economic disruption, with large aggregate effects.”

Vasco Carvalho is Professor of Macroeconomics in the Faculty of Economics, a Fellow of �������ϲʿ����ӿ� and the Alan Turing Institute of Artificial Intelligence and Data Science.

He is a co-author of the paper , forthcoming in The Quarterly Journal of Economics, which shows how the disruption caused by the disaster propagated all the way up and down supply chains, illustrating just how fragile and complex today’s business networks can be.

"[The quake] shaved off bits of activity throughout the Japanese economy; it wasn’t that a few firms got very severely affected, rather it just made every supply chain in Japan less efficient."

“We initially investigated whether the impact we saw could be due to something else, maybe global conditions or poor economic policies that could have been enacted at the same time,” he says. “However, what we saw was that the quake disrupted supply chains. It shaved off bits of activity throughout the Japanese economy; it wasn’t that a few firms got very severely affected, rather it just made every supply chain in Japan less efficient. It affected suppliers and customers of disaster-stricken firms, and then continued cascading through the economy, disrupting firms that had no direct business link to the affected area.”

The coastal areas that suffered the heaviest damage, including Aomori, Fukushima, Iwate, and Miyagi, produce a not that large share of Japan’s aggregate output. However this research suggests that supply chains can magnify the disruption of natural disasters three to four-fold and have a much broader indirect effect on the country’s macro economy.

While natural disasters can send powerful shocks rippling through the global economy, economists had previously struggled to determine just how far they can travel. “Now, we had a lot of live data to illustrate this. We could see all the connections, and we could trace the supply chains, and we could start seeing just what an impact it had, and quantify them,” says Professor Carvalho.

“It is a reminder of the interconnected nature of the economy, and the need for multifaceted disaster recovery plans. A disaster doesn’t just disrupt the area impacted. It has a wider economic effects. The current pandemic can be seen as disrupting the economy in much the same way: local lockdowns, limitations on the activity of particular sectors and disruptions to certain global supply chains, all send shock waves through the economy and affect the performance of economic activity. Even those firms that are not directly affected see their supply chains disrupted.”

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