Economics

Recent catastrophic natural disasters, such as the Indian Ocean tsunami of 2004, and the Haitian earthquake of 2010, have received more international attention than previous disasters, yet our rapidly evolving understanding regarding their relevance to economic development and growth is still in its infancy. Much research in the social sciences, and even more in the natural sciences, has been devoted to increasing our ability to predict disasters and prepare for them. Interestingly, however, the economic research on natural disasters and their consequences is fairly limited.

We examine the average causal impact of catastrophic natural disasters on economic growth by combining information from comparative case studies. For each country affected by a large disaster, we compute the counterfactual by constructing synthetic controls. We find that only extremely large disasters have a negative effect on output in both the short and the long runs. However, we also show that this results from two events where radical political revolutions followed the disasters.

Macroeconomics models, such as the input-output model, the social accounting matrix, and the computable general equilibrium model, have been used for impact analysis of catastrophic disasters for some time. While the use of such models to disaster situation, which may quite differ from the ordinary economic setting, has been critiqued (for recent example, see Albala-Bertrand, 2013), there are still valuable reasons for the use of such models.

Despite the tremendous human suffering caused by natural disasters, their effects on economic growth remain unclear, with some studies reporting negative, and others indicating no or even positive effects. To reconcile these seemingly contradictory findings reported in the literature, this study explores the effects of natural disasters on growth separately by disaster and economic sector. Applying a dynamic generalized method of moments panel estimator to a 1961-2005 cross-country panel dataset, three major insights emerge.

There is an unresolved debate as to whether natural disasters present true obstacles to a country's economic growth and development, given that the empirical evidence is rather heterogeneous. In this paper we explore whether aggregate analyses are likely to mask different responses of the components (export and import, government consumption, investment and private consumption) of Gross Domestic Product (GDP). To this end, we assembled a panel data set of hurricane strikes and national income accounting data for 21 Caribbean countries for the period 1970–2011.

Using a simple two-period model of the economy, we demonstrate the potential effects of natural disasters on economic growth over the medium to long term. In particular, we focus on the effect of such shocks on investment. We examine two polar cases: an economy in which agents have unconstrained access to capital markets, versus a credit-constrained version, where the economy is assumed to operate in financial autarky.