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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.

Suggested Citation

  • Thomas K.J. McDermott & Frank Barry & Richard S.J. Tol, 2013. "Disasters and Development: Natural Disasters, Credit Constraints and Economic Growth," CEDI Discussion Paper Series 13-03, Centre for Economic Development and Institutions(CEDI), Brunel University.
  • Handle: RePEc:edb:cedidp:13-03
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    More about this item

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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