Natural Disasters as Creative Destruction? Evidence from Developing Countries

Article excerpt

I. INTRODUCTION

The literature on the economic effects of natural disasters has concentrated traditionally on the short-run response of economic variables to catastrophic events. Most of the research carried out on this topic, starting with Dacy and Kunreuther (1969), tends to find that gross domestic product (GDP) increases after the occurrence of a natural disaster. Albala-Bertrand (1993a, 1993b) showed that even for large disasters (as measured by the loss-to-GDP ratio), the reconstruction effort needed to keep the level of output from falling is relatively small. Tol and Leek (1999) also provided evidence of positive effects of natural disasters on macroeconomic variables in the short run.

While the predominant view usually stated in official statements of international organizations and governments is that natural disasters are an enormous barrier to economic development (see, e.g., United Nations Development Programme 2004), the quantification of long-run economic effects of natural disasters was an empty field of research until very recently. To our knowledge, the article by Skidmore and Toya (2002) is the only piece of empirical research that assesses directly the long-run economic impact of natural disasters. Using a cross-section of developed and developing countries, Skidmore and Toya (2002) showed that after conditioning on other determinants, the frequency of climatic disasters is positively correlated with human capital accumulation, total factor productivity (TFP) growth, and GDP per capita growth.

One of the explanations put forward in support of the existence of a positive partial correlation between the frequency of natural disasters and both TFP and GDP per capita growth is related to the absorption of new technologies. A country whose capital stock is reduced by a natural disaster may have an incentive to replace it with capital that embodies newer technology than that which was destroyed. (1) This would lead to higher rates of TFP and GDP per capita growth and would render natural disasters an example of Schumpeterian "creative destruction," a concept that, embedded in the theory of endogenous growth, has recently become a key explanation of long-run economic growth patterns (see, e.g., Aghion and Howitt 1998). The same idea was put forward in Okuyama (2003) and Okuyama, Hewings, and Sonis (2004), where it was argued that older equipment is more exposed to damage when a disaster hits the capital stock; thus, the replacement of these facilities would constitute a positive productivity shock, which may have permanent consequences in the growth rate of the whole economy. Skidmore and Toya (2002) found a positive partial correlation between the frequency of climatic disasters and TFP growth for a cross-section of 89 developed and developing countries. The results for geologic disasters indicate no significant effect of these on TFP growth. Although their conclusion is that "disasters provide opportunities to update the capital stock and adopt new technologies" (Skidmore and Toya 2002, p. 681), the measure of TFP used in order to arrive at this conclusion contains information on many other (observable and unobservable) institutional, political, and economic variables. Furthermore, given that the method used in computing TFP, based on Coe and Helpman (1995), does not account for human capital as a factor of production, the correlation found between TFP growth and climatic disasters may just be picking up the substitution of physical for human capital in disaster-prone countries.

It should be explicitly stated that there are basic differences between the Schumpeterian concept of creative destruction and the effect that natural disasters are hypothesized to have as mentioned in the studies given above and in the analysis performed in this article. Schumpeter's view on creative destruction emphasized competition dynamics as the engine behind technological progress (Schumpeter 1950), while the term in this article refers to a more literal interpretation with similar ex-post effects, namely, technology replacement after a catastrophic event. …