Risks to life and property exist, in varying degrees, in every country of the world. Numerous studies on the relationship between risk and expected losses and economic decisions are available and generally widely known, (1) but to our knowledge there are no empirical studies that evaluate the effects of natural hazards on long-run economic growth in a macroeconomic framework. (2) Despite the vast empirical literature that examines the linkages between long-run average growth rates, economic policies, and political and institutional factors, the relationship between disaster risk and long-run growth has not been empirically examined.
There is, however, a body of research that has examined the effects of natural disasters on economic variables in the short run. Tol and Leek (1999) provide a summary of the recent studies that assess the immediate repercussions of natural disasters on economic activity. The empirical findings in this literature (Albala-Bertrand, 1993; Dacy and Kunreuther, 1969; Otero and Marti, 1995) report that gross domestic product (GDP) is generally found to increase in the periods immediately following a natural disaster. This result is due to the fact that most of the damage caused by disasters is reflected in the loss of capital and durable goods. Because stocks of capital are not measured in GDP and replacing them is, GDP increases in periods immediately following a natural disaster.
Our article extends the short-run analysis by examining the possible linkages among disasters, investment decisions, total factor productivity, and long-run economic growth. Because disaster risks differ substantially from country to country, it is reasonable to question whether there exists some relationship between disasters and long-run macroeconomic activity. On cursory examination, one might conclude that a higher probability of capital destruction due to natural disasters reduces physical capital investment and therefore curtails long-mn growth. However, such analysis is only partial and may be misleading. Disaster risk may reduce physical capital investment, but disasters also provide an opportunity to update the capital stock, thus encouraging the adoption of new technologies.
Furthermore, an endogenous growth framework also suggests that disaster risk could potentially lead to higher rates of growth. In this type of model individuals invest in physical and human capital, but there is a positive externality associated with human capital accumulation. If disasters reduce the expected return to physical capital, then there is a correspondingly higher relative return to human capital. The higher relative return to human capital may lead to an increased emphasis on human capital investment, which may have a positive effect on growth.
We present some initial evidence regarding the relationship between disasters and economic growth in Figures 1 through 4. These figures show the simple relationship between the number of natural disasters and long-run economic growth using a sample of 89 countries. The vertical axis represents the average annual growth rate of per capita GDP over the 1960-90 period. Data on per capita GDP are taken from Summers and Heston (1994). Along the horizontal axes are four different measures of the propensity for natural disasters. The disaster data in Figures 1 and 3 are historical information from Davis (1992) covering 190 years of the world's worst recorded natural disasters. Figures 2 and 4 represent more current and detailed information on natural disasters events for the period 1960 through 1990 from the Center for Research on the Epidemiology of Disasters (CRED) (EMDAT, 2000). Figures 1 and 2 show the natural log of one plus the total number of disaster events from Davis and CRED, respectively. (3) However, bec ause larger countries may be subject to more disasters, we present the natural log of one plus the number of disasters normalized by land area from Davis and CRED in Figures 3 and 4. …