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Disasters and Development: Natural Disasters, Credit Constraints and Economic Growth

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  • Thomas K.J. McDermott

    ()

  • Frank Barry

    ()

  • Richard S.J. Tol

    ()

Abstract

Using a simple two-period model of the economy, we demonstrate the potential effects of natural disasters on economic growth over the medium to long-term. In particular, we focus on the effect of such shocks on investment. We examine two polar cases; an economy in which agents have unconstrained access to capital markets, versus a credit-constrained version, where the economy is assumed to operate in financial autarky. Considering these extreme cases allows us to highlight the interaction of disasters and economic underdevelopment, manifested through poorly developed financial markets. The predictions of our theoretical model are tested using panel data on natural disaster events at the country-year level, for the period 1979-2007. We find that for countries with low levels of financial sector development, natural disasters have persistent negative effects on economic growth over the medium-term. The results are robust to various checks.

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Bibliographic Info

Paper provided by Centre for Economic Development and Institutions(CEDI), Brunel University in its series CEDI Discussion Paper Series with number 13-03.

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Length: 40 pages
Date of creation: May 2013
Date of revision:
Handle: RePEc:edb:cedidp:13-03

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Cited by:
  1. Samuel Fankhauser & Thomas K.J. McDermott, 2013. "Understanding the adaptation deficit: why are poor countries more vulnerable to climate events than rich countries?," Grantham Research Institute on Climate Change and the Environment Working Papers 134, Grantham Research Institute on Climate Change and the Environment.
  2. Thomas K.J. McDermott, 2011. "The Effects of Natural Disasters on Human Capital Accumulation," The Institute for International Integration Studies Discussion Paper Series iiisdp391, IIIS, revised Feb 2012.

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