Abstract
The long-run effects of disasters on economic growth have been studied since the pioneering work of Dacy and Kunreuther (The economics of natural disasters: implications for federal policy. The Free Press, New York, 1969). The recent empirical studies on this subject presented mixed results about whether or not disasters affect economic growth. Some studies that employed socio-economic indicators for disaster intensity, such as the number of casualties and/or the value of economic damages, to analyze the effects on growth found inconsistent or inconclusive results among them. Some more recent studies that utilized physical intensity indices, such as the Richter scale for earthquakes and the maximum wind speed for storms, revealed statistically significant negative effects on economic growth. In order to improve our understanding of disaster’s effects on economic growth and to evaluate these empirical results, this chapter examines a set of theoretical growth models from both the neoclassical perspective and the Keynesian perspective. The insights gained from the analysis include: the speed of recovery depends on the changes in saving rate, which can be raised through more patient preference toward future (lower rate of time preference and higher intertemporal elasticity of substitution); and cumulative changes (either growth or decline) of a damaged region can be caused by the changes in economic structure through either elasticities of demand for imports or of demand for exports from the damaged region. The latter result supports the findings in the recent empirical studies that evaluated the structural changes caused by a disaster and the subsequent reconstruction process.
This chapter is a significantly extended and revised version of Okuyama (2003).
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Notes
- 1.
The excellent summary and discussions on this endogeneity problem in regression analysis on climate change-related literatures are found in Dell et al. (2014). Much of the recent research in that field has applied panel methods for the analysis.
- 2.
While Felbermayr and Gröschl (2014) found the decline in per capita output by disasters, they did not find the faster growth after the disaster that the neoclassical model foresees toward the convergence to a steady state.
- 3.
This assumption of ‘no technological progress’ will be relaxed and discussed later in this section.
- 4.
Even if an economy is not at the steady state, the results of the following analysis still apply.
- 5.
- 6.
The detailed formation of the model and the derivation of its solution can be found, for example, in Barro and Sala-i-Martin (2004).
- 7.
More detailed discussion about behavior of saving rate in general can be found at pages 106–110 in Barro and Sala-i-Martin (2004).
- 8.
The term regions, used for the discussion in this and following sections, implies sub-national areas, rather than regional blocs consisting of multiple countries. Therefore, the effects of currency exchange rate, trade restrictions, and so on can be neglected in the analysis below.
- 9.
This depends on the availability of production factors in other regions, as well as on interregional trade patterns. Examining such trade relationships requires a multi-sectoral model, but it is out of the scope of this chapter. Interested readers can consult with such literatures, for recent example, Koks et al. (2016) and Koks and Thissen (2016).
- 10.
This interregional adjustment model is refereed as the ‘one-sector’ neoclassical model of factor allocation and migration (McCann 2013).
- 11.
The analysis of long-run changes in migration pattern becomes important if a disaster leads to a negative net migration rate in the damaged region. Such cases include widespread terrorist attacks in a region, the surrounding areas in a nuclear accident case, and so forth.
- 12.
Short-run analysis of disaster impact has been performed with demand-side changes using a multi-sector model, such as input-output and computable general equilibrium (CGE) models. For example, Rose et al. (2017) utilized a CGE model with a ‘Keynesian closure rule’ with the account balance constraint, allowing for unemployment equilibrium to examine the impact of terrorist attacks on U.S. air travel target.
- 13.
- 14.
McCann (2013) elucidated the reasons for this assumption, including the one that transportation costs and spatial competition over regions suggest that differences in nominal prices among regions remain relatively stable in the long-run.
- 15.
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Okuyama, Y. (2019). Disaster and Economic Growth: Theoretical Perspectives. In: Okuyama, Y., Rose, A. (eds) Advances in Spatial and Economic Modeling of Disaster Impacts. Advances in Spatial Science. Springer, Cham. https://doi.org/10.1007/978-3-030-16237-5_4
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