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Jose Watson
Jose Watson

The Impact Of Natural Disasters On Economic Growth WORK


They also wreck communities and, sometimes, even entire countries. Sudden cataclysmic disasters such as earthquakes, tsunamis, hurricanes and floods cause devastation on impact. Slow-onset disasters such as droughts inflict persistent damage over time.




the impact of natural disasters on economic growth



The destructive effects of natural disasters are felt more in poorer countries than in more prosperous ones. While both rich and poor nations are subject to natural hazards, most of the 3.3 million disaster-related deaths over the last 40 years occurred in poor countries. For instance, the magnitude 7.0 earthquake in Haiti in 2010 resulted in an estimated 140,000 deaths and ruinous economic losses, while the magnitude 9.1 earthquake in Chile in the same year killed 500 people and had a relatively small negative impact on the national economy.


The poor are the hardest hit by natural disasters. Mortality rates are typically highest among those with the lowest incomes. They are more likely to live in hazard-prone areas or to have fragile housing. When Cyclone Nargis struck the Irrawaddy Delta in Myanmar in 2008, one in two families had their homes completely destroyed by wind and flooding. In Haiti, mortality from the earthquake of 2010 was highest among the urban poor of Port-au-Prince, who lived in poorly constructed, crowded housing.


Devising and implementing policy and action for economic recovery in the wake of a natural disaster is messy and complicated. Destroyed assets need to be rebuilt and replaced. Lost livelihoods must be revived or new ones created. Swift and effective measures are needed, both to sustain economic growth and general welfare in disaster-struck countries, and to ease the suffering of individuals and communities directly affected by these terrible events.


At the root of all economic research is the question of how to best eliminate human wants. The fundamental rationale of studying economics is to know why some individuals are rich while others remain poor. In a macroeconomic context, this extends to why some countries have grown rich while others remain poor. Some economists (Ramsey 1928; Solow 1956; Swan 1956; Koopmans 1963; Cass 1966; Kuznets 1973; Romer 1986; Lucas 1988, Lucas Jr. 1990; Barro 1991; Mankiw et al. 1992; Hansen and Prescott 2002; Durlauf et al. 2005; Galor 2005) have answered this question in a way that has facilitated the emergence of new branches of macroeconomics referred to as growth theory. Nonetheless, macroeconomists have not explored the deep-determinants that are responsible for delineating the rich and the poor. Temple (1999) pointed out that the study of economic growth has been given very little importance and often added as a brief last chapter in macroeconomic textbooks, and rarely studied outside of development economics.


Given the critical relationship between natural disasters and economic growth, this article provides a literature review and some empirical findings and identifies the implications of economic growth theories for addressing the potential impacts of natural disasters. Section 2 reviews literature about the effects of natural disasters on economic growth. Section 3 considers the empirics of growth theories and natural disasters highlighting different empirical methods and problems associated with growth econometrics in general. Section 4 describes an example dataset and variables and presents the econometric modeling technique used to estimate the effects of flood disasters on economic growth. Section 5 outlines the empirical findings and their associated inferences.


Do natural disasters have effects on economic growth? Much has been published in the field of growth theories as well as about the impacts of natural disasters. However, some studies have analyzed the effects of natural disasters on economic growth. Natural disasters receive little attention in growth literature. Zenklusen (2007) pointed out that the literature on the topic is diverse: a variety of academic disciplines propagates a spectrum of perspectives that fundamentally differ in both analytical approaches and findings. Given this scenario, this article reviews the existing literature related to growth theories that contributes towards explaining the causal relationship between natural disasters and economic growth and identifies both positive and negative consequences of natural disasters on economic growth through scientific empirical investigation.


Cavallo et al. (2013) mentioned that the growth empirics do not provide a definite answer on the relationship between natural disasters and economic growth. According to the traditional neoclassical growth models, the destruction of capital stock due to natural disasters is unlikely to affect the rate of technological progress; however it may boost short-run economic growth, possibly because it moves countries away from their steady-state levels of macroeconomic objectives. Unlike the neoclassical growth models, the endogenous growth models pose a radical view that natural disasters may lead to a higher economic growth, as the shocks of natural disasters can act as catalysts for reinvestment and improve the productivity of capital stock (see, for example, Caballero and Hammour 1994; Schumpeter 1942).


Both Skidmore and Toya (2002) and Loayza et al. (2009) found that climatic disasters have a positive impact on economic growth whereas geological events (such as earthquakes) do not have any significant impact. Using a cross-section of 89 developed and developing countries, Skidmore and Toya (2002) found partially a direct relationship between the frequency of climatic disasters and total factor productivity growth. The results for geological disasters indicate no significant effect on the growth of total factor productivity (TFP). The primal contribution of Skidmore and Toya (2002) to the literature on the economics of natural disasters is that they directly assessed the relationship between foreign technology absorption and catastrophic events. Their study shows that natural disasters update capital stock and encourage the adoption of new technologies, which lead to improved TFP and the growth of the gross domestic product (GDP). After controlling for relevant determinants, it is shown that the frequency of climatic disasters is positively associated with TFP growth, human capital accumulation, and GDP per capita growth. One of the reasons behind this association may be explained by the adoption of new technologies. Once natural disasters destroy the capital stock of a country, the economic incentives to replace it with a more improved technology are higher. In other words, natural disasters may provide opportunities to upgrade capital stock that may lead to higher rates of TFP and GDP per capita growth. Such explanations can be regarded as a good example of Schumpeterian creative destruction (see Schumpeter 1942). To the best of my knowledge, Skidmore and Toya (2002) offer arguably the most comprehensive piece of empirical research of measuring the direct long-run impacts of natural disasters on economies.


Cuaresma et al. (2008) examined the correlation between the frequency of natural disasters and long-run economic growth and found that the degree of catastrophic risk has a positive effect on the volume of knowledge spillovers that take place between industrialized or developed countries and agro-based or developing countries. They identified natural disasters as creative destruction.


Okuyama (2003) presented a significant link between mainstream growth research and empirical studies on macroeconomic disaster effects. He argued that older capital stock is more vulnerable to natural disasters, and thus the upgradation of these obsolete capital equipments may trigger a positive productivity shock that may reshape the whole economy with better efficiencies in producing goods and services. These may lead to a permanent increase in the growth rate of GDP per capita of a country.


Dacy and Kunreuther (1969) proposed a theoretical framework suggesting that disasters have visible negative impacts on economic growth. Ellson et al. (1984) built a regional econometric model and estimated that disasters incur both damages and losses towards aggregate economic activities. Yezer and Rubin (1987) conducted a study showing that disasters affect local economies negatively, which may play an insignificant role at the aggregate level. Gourio (2008) found an unstable relationship between the prices of capital stocks and natural disasters. Nakamura et al. (2010) concluded that disasters increase uncertainty in consumption growth; more specifically, on an average consumption falls by 30 % in the short run, and by 15 % in the long run. Loayza et al. (2009) explained that disasters do not always affect economic growth negatively, but differently across disasters and different sectors of the economy.


Because few growth economists have related growth theories to natural disasters, the empirics regarding natural disasters are still in their beginnings. This article aims to contribute to understanding the effects of natural disasters on economic growth in terms of some significant economic indicators and to supporting policy makers who are engaged in disaster risk reduction process of a country.


Irrespective of different empirical frameworks, there are in general substantial problems in estimating growth-related econometric equations. One of the prime problems associated with empirical work on economic growth is the parameter heterogeneity. Harberger (1987) raised the question of what do Thailand, the Dominican Republic, Zimbabwe, Greece, and Bolivia have in common that can convince one to put them in the same regression model? For instance, the investment return is likely to be lower in war-torn and unstable countries than in peaceful ones. This feature of slope variance across countries would render conventional estimates inconsistent. To address this problem, Durlauf et al. (2005) employed a unique country grouping, and as a result, the parameters differ widely in the model. They also suggested that the economic growth does not follow a linear trend across countries, and hence, it is not appropriate to analyze new growth theories using linear regression models. Some imaginative methods for detecting heterogeneity are now being utilized that include interaction terms, regression trees, robust estimation, dummy variables, and sample splits. 041b061a72


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