Disaster and Economic Growth: Theoretical Perspectives

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.