Digital Disasters: The Macroeconomic Costs of Submarine Cable Breaks

While productivity gains from digital technology diffusion have materialized only gradually, the macroeconomic costs of abrupt losses in cross-border digital connectivity may be much starker and remain far less understood. In this paper, I estimate the growth costs of accidental disruptions to submarine cables—the international backbone of cross-border data traffic—using a new dataset covering a large panel of high-, middle-, and low-income countries from 2008 to 2020. Exploiting plausibly random variation in the timing and duration of disruptions, I use a dynamic staggered difference-in-differences design to quantify both direct losses for disrupted countries and spillovers to regional non-disrupted peers. I find robust, large, and persistent growth losses, alongside synchronized contractions in private consumption and trade. Disruptions create within-region reallocation in favor of non-disrupted economies. Accounting for spatial spillovers, the total effect is negative and substantial, implying a cumulated 7 percentage points drop in GDP per capita growth in the medium run. Evidence on bandwidth-intensive services trade, foreign investment, and labor productivity points to reallocation forces, accompanied by a tightening of credit to domestic actors and a weakening of cross-border banking relationships. Overall, submarine cable failures act as systemic connectivity shocks with sizable and long-lasting consequences for affected and nearby economies.