Impact of Tsunami on Heterogeneous Economic Sectors: The Case of Sri Lanka

Abstract

Although natural disasters can cause enormous destruction to a country’s economy, there remains an unsettled debate on whether disasters bring similarly large negative impacts throughout heterogeneous sectors of an economy. The literature indicates that the consequences for the economy differ according to the magnitude of the disaster, although such findings are inconclusive when other variables such as the scope, scale, type of disaster, the type of economy, etc., are taken into account. On the one hand, natural disasters—such as a tsunami—may destroy a large number of human lives and much physical capital including R&D facilities and therefore have a negative impact on an economy’s growth rate. On the other hand, such disasters may have a positive effect through rebuilding a superior infrastructure and the use of more advanced technology. In this paper, we explore whether the 2004 tsunami caused, in the three major sectors of Sri Lanka’s economy—agriculture, industry and services—a similar negative impact in both the short and long run. We employed panel fixed effect, difference-in-difference (DID) and panel vector auto regression (exogenous) (PVARX) estimation methods. The results suggest that the effect on each economic sector differed widely. Although the impact was highly negative on all three economic sectors in the first year following the tsunami, the impact on the agricultural sector was comparatively greater and the recovery process was longer than the other sectors. Moreover, the results suggest that industrial and services sectors have actually experienced positive impacts over the long term as indicated by the increase in demand for reconstruction and “building back better” infrastructure after the disaster as well as the considerable inflow of aid and grants that were received for advancement of the industrial and services sectors.