Natural disasters and Malaysian economic growth: policy reforms for disasters management

Abstract

The natural catastrophic events largely damage the country’s sustainability agenda through massive human fatalities and infrastructure destruction. Although it is partially supported the economic growth through the channel of “Schumpeter creative destruction” hypothesis, however, it may not be sustained in the long-run. This study examined the long-run and causal relationships between natural disasters (i.e., floods, storm, and epidemic) and per capita income by controlling FDI inflows and foreign aid in the context of Malaysia, during the period of 1965–2016. The study employed time series cointegration technique, i.e., autoregressive distributed lag (ARDL)-bounds testing approach for robust inferences. The results show that flood, storm, and epidemic disasters substantially decrease the country’s per capita income, while FDI inflows and foreign aid largely supported the country’s economic growth in the short-run. These results are disappeared in the long-run, where flood and storm disasters exhibit the positive association with the economic growth to support the Schumpeter creative destruction hypothesis. The foreign aid decreases the per capita income and does not maintain the “aid-effectiveness” hypotheses in a given country. The causality estimates confirmed the disaster-led growth hypothesis, as the causality estimates running from (i) storm to per capita income, (ii) epidemic to per capita income, and (iii) storm to foreign aid. The results emphasized for making disaster action plans to reduce human fatalities and infrastructure for sustainable development.