Monday, March 25, 2013

Natural disasters and economic growth

Recently, I discussed how being in a disaster-prone area may have consequences for economic growth and the ensuing costs from calamities. This discussion was largely theoretical, but there are some empirical papers out there that can provide some good insights.

Pelle Ahlerup is the author of the latest one, and he finds that natural disasters have a positive impact on growth, and this result is largely driven by humanitarian aid. Does this mean we should wish for more disasters? Of course not, because just looking at economic growth is the wrong welfare measure. After all, a disaster leads to the destruction of life or goods, and the ensuing economic effort is replacing this loss. That effort could have been used for better purposes without the disaster. What is more interesting in the paper is that the impact on growth lasts well into the long run, beyond repairing the damage. This is where humanitarian aid comes in, as it may have helped give the economy the spark it needed to get back on rails. One can imagine that this could be associated with some foreign direct investment, or positive experience for foreign investors, or some long-term development project to prevent the consequences of such disasters in the future. Haiti comes to mind here. The fact that disaster have no impact on growth in developed economies reinforces my hpothesis.

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