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

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  • McDermott, Thomas K. J.
  • Barry, Frank
  • Tol, Richard S. J.

Abstract

We demonstrate, using a simple two-period equilibrium model of the economy, the potential effects of extreme event occurrences - such as natural or humanitarian 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 theoretical analysis shows that the shock of a disaster occurrence could have lasting effects on economic growth only if agents face borrowing constraints. The predictions of our theoretical model are then tested using a panel of data on natural disaster events at the country-year level, covering the period 1979-2007. We find that for countries with low levels of financial sector development, natural disaster events exert a significant negative impact on economic growth. In particular, where access to credit is problematic, the negative effects of disasters on growth are persistent over the medium-term. These results are robust to various checks. Our findings suggest that natural disasters do represent significant threats to economic development in poor countries.

Suggested Citation

  • McDermott, Thomas K. J. & Barry, Frank & Tol, Richard S. J., 2011. "Disasters and Development: Natural Disasters, Credit Constraints and Economic Growth," Papers WP411, Economic and Social Research Institute (ESRI).
  • Handle: RePEc:esr:wpaper:wp411
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    Cited by:

    1. Lopez-Uribe, Maria del Pilar & Castells-Quintana, David & McDermott, Thomas K. J., 2017. "Geography, institutions and development: a review ofthe long-run impacts of climate change," LSE Research Online Documents on Economics 65147, London School of Economics and Political Science, LSE Library.
    2. Klomp, Jeroen, 2017. "Flooded with debt," Journal of International Money and Finance, Elsevier, vol. 73(PA), pages 93-103.
    3. 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.
    4. Lazzaroni, Sara & van Bergeijk, Peter A.G., 2014. "Natural disasters' impact, factors of resilience and development: A meta-analysis of the macroeconomic literature," Ecological Economics, Elsevier, vol. 107(C), pages 333-346.
    5. Matthew Ranson & Lisa Tarquinio & Audrey Lew, 2016. "Modeling the Impact of Climate Change on Extreme Weather Losses," NCEE Working Paper Series 201602, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised May 2016.
    6. Koetter, Michael & Noth, Felix & Rehbein, Oliver, 2016. "Borrowers under water! Rare disasters, regional banks, and recovery lending," IWH Discussion Papers 31/2016, Halle Institute for Economic Research (IWH).
    7. Samuel Fankhauser & Thomas K.J. McDermott, 2013. "Understanding the adaptation deficit: why are poor countries more vulnerable to climate events than rich countries?," GRI Working Papers 134, Grantham Research Institute on Climate Change and the Environment.
    8. repec:eco:journ2:2017-03-42 is not listed on IDEAS
    9. Breckner, Miriam & Englmaier, Florian & Stowasser, Till & Sunde, Uwe, 2016. "Resilience to natural disasters — Insurance penetration, institutions, and disaster types," Economics Letters, Elsevier, vol. 148(C), pages 106-110.
    10. Subhani Keerthiratne & Richard S.J. Tol, 2017. "Impact of Natural Disasters on Income Inequality in Sri Lanka," Working Paper Series 0817, Department of Economics, University of Sussex.
    11. Fankhauser, Samuel & McDermott, Thomas K. J., 2014. "Understanding the adaptation deficit: why are poor countries more vulnerable to climate events than rich countries?," LSE Research Online Documents on Economics 57620, London School of Economics and Political Science, LSE Library.
    12. Matthew A. COLE & Robert J R ELLIOTT & OKUBO Toshihiro & Eric STROBL, 2015. "The Effectiveness of Pre-Disaster Planning and Post-Disaster Aid: Examining the impact on plants of the Great East Japan Earthquake," Discussion papers 15097, Research Institute of Economy, Trade and Industry (RIETI).
    13. David Castells-Quintana & Maria del Pilar Lopez-Uribe & Tom McDermott, 2015. "Climate change and the geographical and institutional drivers of economic development," GRI Working Papers 198, Grantham Research Institute on Climate Change and the Environment.
    14. George Halkos & Shunsuke Managi & Nickolaos Tzeremes, 2015. "The effect of natural and man-made disasters on countries’ production efficiency," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 4(1), pages 1-13, December.
    15. repec:spr:gjofsm:v:18:y:2017:i:4:d:10.1007_s40171-017-0169-1 is not listed on IDEAS

    More about this item

    Keywords

    natural disasters; financial development; credit constraints; economic growth/growth/investment/US/data;

    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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