Development Traps and Failure: The Negative Consequences of Disasters on an Economy

Subject: Economics
Pages: 12
Words: 3630
Reading time:
14 min
Study level: PhD

The increasing number of natural disasters all over the world is truly mesmerizing and scary at the same time. Humanity repeatedly addresses the issue because the number mentioned above increased nearly by 400% where various storms, hurricanes, and floods contribute to 70% of the dreadful events. The regions that are currently affected by these disasters the most are Asia and the Pacific (Benson & Clay, 2004). One of the problems, nonetheless, consists in the fact that the majority of organizations only tend to respond to disasters when they finally occur. Therefore, it can be reasonable to assume that disasters may serve as blockers to the overall progress unless they are perceived as one of the central factors influencing organizations worldwide. Even so, the very first thing we have to start with is we have to scrutinize the factors behind the occurrence of disasters such as storms and floods (Scanlon, 1988).

We have to realize that currently, populations are exposed to more hazards than ever before. This may be explained by the growing number of organizations and individuals within the Asian and the Pacific areas that live along shorelines and low-lying areas. It is also critical to understand that such areas are pretty vulnerable to the risks of being exposed to natural disasters due to a high-level population density (Chang & Rose, 2012). The majority of organizations that are susceptible to the influence of floods, storms, and hurricanes are located in Bangkok, Manila, and several other Asian cities. The devastating impact of climate change also has to be taken into account because almost every significant indicator is on the rise today (precipitation levels, sea level temperatures, the amount of greenhouse gasses, and much more). It is interesting how the influence that was considered to be completely natural turned into something that is artificially imposed on nature by humans (Todaro & Smith, 2006). This is why organizations have to be aware of the consequences of such events and develop a set of preventive measures that can be helpful within the framework of battling devastation (for instance, location decisions, environmental control, early warning). The decisions that are made in terms of climate action have to be included in the disaster prevention plan as well.

All the organizations have to find a way not only to mitigate the consequences of disasters but also reduce the emission of greenhouse gasses and preserve the atmosphere. The problem is, numerous organizations disregard the development of a disaster prevention plan thinking that they will not be impacted by a hurricane, flood, or any other natural calamity. It is safe to say that preventing issues is much better than reconstructing the organization from scratch, but the benefits of preventive measures are usually realized over time. The development of a prevention plan, nevertheless, should also be in line with the political sequence and calculus. On a bit more positive note, the increasing occurrence of natural disasters became a political motivation to come up with a relevant and efficient prevention plan. The total costs of being exposed to natural calamities is one of the questions that are recurrently addressed by numerous governments all over the world. For instance, Thailand floods caused a nearly $47 billion damage (which equals approximately 15% of Thailand’s GDP). On an even bigger scale, the overall cost of natural calamities in the Asian and the Pacific regions is $275 billion (Chang & Rose, 2012).

Evaluation and Analysis

The concept of economic recovery can be described as an organization’s ability to return to the stable condition after being exposed to the effects of a natural disaster. Within the framework of this paper, the author is going to address the risk reduction strategies and evaluate the complexity of the issues inherent in the process of mitigating the outcomes of natural calamities. The existing knowledge gaps are expected to be closed by means of extensive research on the topic of economic recovery. The author of the paper is interested in reviewing the short- and long-term implications for the process of disaster recovery and is going to address the discrepancies that are characteristic of different types of businesses.

The concept of disaster research heavily depends on the contributions of economics in the processes of mitigation and prevention (Chang & Rose, 2012). One of the dimensions that are covered by the concept mentioned above is the existence of specific methodologies related to the evaluation of disaster impact and a number of theories of development that can be used by both small and big businesses (Benson & Clay, 2004). The fact is, political economics is closely interconnected with the process of disaster planning, and the latter can be helpful in terms of assessing vulnerabilities and gaining policy insights. There are also indirect economic costs and influences that derivate from the methodologies mentioned above (Benson & Clay, 2004). An unbiased appraisal of the strengths and weaknesses of each policy can be beneficial in terms of addressing the effectiveness of theories of development. One of the most widely applied theories is the theory of linear-stages (Todaro & Smith, 2006). It was elaborated after the Second World War so as to help developing countries manage their resources. Structural-change theory, in stark contrast with the linear-stages one, was focused on industrializing the country, transferring labor, and improving performance (here, Lewis’ theory of development could serve as a perfect example due to its high productivity within the framework of economic sectors of developing countries) (Todaro & Smith, 2006). The concept of self-sustaining growth can be perceived as the basis of the structural-change theory. According to the reviewed models, economic dimensions of a country are limited by a series of domestic and international factors that cannot be ignored due to the real-world value of implementing a development theory in practice (Todaro & Smith, 2006).

In their research, Kusumasari, Alam, and Siddiqui (2010) addressed the issue of governmental actions designed to prevent, react to, or mitigate the impact of natural disasters. This was a guide for the independent agencies and researchers intended to help organizations manage the outcomes of disasters. Within the framework of this research, the investigators scrutinized the problem of involvement of the local government in decision-making activities associated with the disaster management. Kusumasari et al. (2010) stated that local governments tend to have the most significant influence on preventive procedures and should be perceived as the key party that is able to protect the community from the drastic effects of natural calamities. The findings of the study suggested that there were numerous requirements that had to be taken into consideration when addressing the problems inherent in disaster management. They included the evaluation of risks, the dissemination of duties, and the development of an all-inclusive preparedness stage dedicated to activity planning and training.

Kousky (2012), on the other hand, reviewed the existing evidence regarding the impact of natural disasters on the economy. The researcher also included a thorough discussion of different policies that were known to influence the climate and the adaptation process in general. The author of the paper also addressed potential threats inherent in natural disasters and evaluated the long-term effects of calamities. Kousky (2012) tried to find ways to reduce the risk and develop a methodology intended to help organizations adapt to the extreme events and predict possible changes in the environment.

Cohen and Werker (2008) believed that natural disasters are inextricably linked to political dealings. In their research, they dwelled on the question of whether government preparedness played one of the critical roles in the process of mitigating the outcomes of a natural disaster. They found that the response of the government heavily influenced the population as well. Within the framework of this research, Cohen and Werker (2008) used a political economy model in order to explain the differences between different countries in terms of disaster prevention. According to the researchers, the availability of international help commonly reduces the amount of governmental investments dedicated to disaster prevention activities. Cohen and Werker (2008) went even further and came up with several suggestions that could be translated into policies that might improve the situation.

In their research, Cavallo, Galiani, Noy, and Pantano (2010) reviewed the impact of natural disasters on economic growth and addressed their short- and long-term implications for an organization on the basis of several case studies. In order to synthesize the findings, the researchers created some control groups and took into consideration the unpredictability of natural calamities. Cavallo et al. (2010) were able to validate that organizational output is heavily influenced only when serious disasters occur (this related to both short- and long-term consequences). It is also interesting how natural disasters were aligned with the occurrence of political revolutions despite the randomness of the former. It was concluded that economic growth did actually depend on political changes and not the outcomes of natural disasters. Smaller calamities were not found to have a significant impact on the economic output either.

Wilkinson (2012) discussed the influence of disaster risk management and how different types (technological and geophysical in particular) could be mitigated within the existing environment. The low level of probability was found to be one of the biggest contributors to the issue of natural disasters due to certain political interests that are not usually revolving around mitigating the hazards at hand. At the same time, a high level of impact and intensity of natural calamities require strict preventive and post-disaster steps. According to Wilkinson (2012), one of the ways to address this issue was to come up with an adaptation policy and take climate variability into account when making decisions. To conclude, the author discussed theoretical implications of the proposed policy change and stressed the importance of being flexible in terms of responding differently to various types of risks associated with disasters.

Skoufias (2003) dwelled on the issues related to poverty characteristic of Brazil, Mexico, Jamaica, and Bangladesh. The author of the research reviewed the ways in which these governments tried to alleviate joblessness and other aspects of poverty by means of cash transfer programs. These investments were directed at children, education, and nutritional needs of the populations of these countries. Skoufias’ (2003) findings suggested that social safety could be improved significantly if cash transfer programs were implemented during the times of crises. With the use of these programs, governments were able to allocate budget more concisely.

In their research project, Neumayer, Plumper, and Barthel (2013) tried to answer the question of whether the efforts undertaken in developing countries were enough to prevent the impact of natural disasters on their economies. They took into account the costs of prevention and extensively discussed the mitigation efforts that were available to those developing countries. The researchers found that the disaster damage costs did not correlate to any of the existing variables. It was concluded that the procedures of mitigation and prevention were dependent on government failures and peculiarities of the local market, but Neumayer et al. (2013) were not able to present any empirical evidence regarding that matter.

In order to develop their research, Vorhies (2012) collected an extensive set of reliable data regarding economic and strategic decisions that were made throughout the periods when different organizations were impacted by natural disasters. Within the framework of this study, it was found that such economic evaluations are rather pricey. It was concluded that developing countries could make their decisions based on the economic assessments performed by neighboring (or richer) countries. Vorhies (2012) successfully outlined a guide for the successful economic assessment and applied the empirical results of this research to the process of a cost-effective economic evaluation.

Peter, Dahlen, and Saxena (2012) discussed the problems associated with the consequences of natural disasters and their implications for the macroeconomic state of a country. The researchers also paid special attention to the risks that transpired throughout the process of economic recovery. The findings of the study suggested that the effects of natural disasters were rather negative and could be detrimental on both short- and long-term scales. Peter et al. (2012) discovered that the macroeconomic costs of natural disasters were intensified by the uninsured losses due to their inconsequentiality. This helped the researchers to concentrate on the development of several risk transfer methodologies intended to mitigate the outcomes of natural disasters. Additionally, their findings were in line with the results of Toya and Skidmore’s (2007) research. The latter believed that the data concerning the damage inflicted by a disastrous event could be used to evaluate the approximate economic losses. They also identified that richer countries had better chances to recover from disasters than their developing counterparts because their financial systems were more complete and the overall level of income was much higher.

In his research, Vigdor (2008) investigated the case study of New Orleans. This city is rightfully considered to be one of the most culturally developed cities in the United States. On a bigger scale, the city’s ability to preserve its heritage led to numerous economic failures. For example, the Big Apple lost all of its Dutch colonial origins throughout the process of major development and numerous innovations. Even though New Orleans is perceived as an important cultural artifact, natural disasters hint at the fact that maybe the former shape (economically and physically speaking) has to be restored. Vigdor (2008) identified that there is no economic pressure so this strategy should be implemented by the government.

At the same time, Dahlhamer and Tierney (1998) emphasized the importance of paying more attention to the long-term impact of natural calamities and their influence on businesses all over the world. In other words, the researchers attempted to explore the private sector in terms of the key factors that contributed to the successful recovery. In order to develop their own model of disaster recovery, the researchers addressed the concept of organizational survival and scrutinized the existing literature on the subject. Dahlhamer and Tierney (1998) were able to validate that the size of the business and characteristic features of the calamity (for instance, the intensity of an earthquake) could be perceived as predictors of either positive or negative business recovery.

The research project conducted by Marshall and Schrank (2014) supported the findings of other authors presented in this paper and certified that it was much harder for smaller businesses to recover after the occurrence of a disaster when compared to larger businesses. The authors of the research claimed that it was critically important to evaluate the impact of a disaster on the community and gain more insight into the premises of economic losses and how they could be mitigated by small businesses. Marshall and Schrank (2014) proposed a new recovery model that was intended to become a guideline for small businesses and walk them through the stages of recovery with regard to the characteristics of the business, available resources, and social assistance.

Carter, Little, Mogues, and Negatu (2007) stressed the fact of how vulnerable were the people who live in developing countries and were recurrently exposed to the environmental disasters. The question that was reviewed within the framework of this study was whether the long-term effects of natural calamities were as devastating as their direct impact. The researchers were also interested in investigating the extent to which developing countries were dependent on external assistance. Carter et al. (2007) analyzed the dynamic sides of the economies of Ethiopia and Honduras during and after the occurrence of a natural disaster. The findings of the study validated the fact that risk adoption strategies cannot be implemented in the developing countries due to the cost of these programs. It was also identified that developing countries were more exposed to the risk of experiencing short- and long-term consequences of the low quality of life.

Guimaraes, Hefner, and Woodward (1993) also discussed the devastating impact of natural disasters on the economic state of any given region. They were able to identify that insurance claims suggestively impacted economic activity in the region and reviewed the case of Hugo in the State of South Carolina. This hurricane was picked in order to help the researchers to build an econometric model that would display the non-hurricane outcomes alongside the actual consequences of the disaster. The simulation revealed that there were almost no differences between the results. The overall outcomes of both events were found to have negative connotations in terms of economic gains.

In his research, Stehr (2006) addressed the ways in which the government could reply to the natural disasters and how the negative outcomes could be prevented. The considerations regarding the political and economic considerations are commonly overlooked so it is important to discuss the actions that can be taken to preserve urban regions. The researcher emphasized the fact that the existing policies interfere with the hazard prevention plan due to numerous competing priorities. According to Stehr (2006), the biggest challenge as of today is to find the balance between the dynamic political and economic factors and design a more disaster-resilient community.

Within the framework of their research, Garrett and Sobel (2007) discussed the implications of presidential and congressional policies for the process of emergency management performed by FEMA (Federal Emergency Management Agency). The findings of the study explicitly validated the fact that politically important states were supported by the President while the states backed by the Congress were more successful in terms of receiving more disaster-related resources. The majority of the decisions that were made in terms of disaster management were seen to have a political connotation. To conclude, Garrett and Sobel (2007) believed that FEMA was not altruistic when it came to disaster assistance and the overall effectiveness of governmental actions.

To conclude, we may consider Nakagawa and Shaw’s (2004) findings regarding the post-disaster recovery process to be the evidence for the fact that it is an opportunity for development and not a merely negative factor. Post-disaster mitigation strategies can help to stimulate the local economy and improve the well-being of the local community. According to Nakagawa and Shaw (2004), it is important to take social norms and the willingness to participate in the process of recovery into account. The researchers concluded by stating that the more social capital is available to the government, the faster the process of recovery will finish.


The economic fallout triggered by natural calamities can be perceived as a factor that is heavily interconnected with other financial issues and the geographical area in which the organization is located. The fact is, even if the disaster takes place in a remote area, the outcomes can impact the organization on a worldwide scale. It can be safely claimed that the most important type of damage that is experienced by organizations exposed to natural disasters is infrastructure destruction. Nonetheless, it is also evident that not a lot of organizations perceive natural calamities as anything else but the costs of rebuilding the infrastructure. According to the findings of the study, we can also consider business disruption as one of the most significant issues related to natural disasters. It is a rather common situation when businesses are shut down until the damage done to the building and communication infrastructure is mitigated. Especially, this is characteristic of local small businesses. Here, we can take into account the examples of Japanese manufacturers such as Toyota and Sony that close their factories in the case of earthquakes or any other disasters. Back in 2005, Hurricane Katrina triggered appalling losses that left numerous employees jobless in several states. It added more complications to the existing state of affairs where poverty was an icing on the cake. The cutbacks that have to be addressed in the case of a natural disaster include not only unemployment but consumer spending as well. The tax revenues had to be spent on rebuilding the businesses, and this led to a critical impact on other sectors.

Even on a worldwide scale, natural disasters can be dangerous in terms of damaging the energy sector and increasing fuel prices. Some organizations may be impacted by natural disasters so much that they cannot function any further without receiving help from their foreign partners. Their tax revenue is fragmented, and creditworthiness declines. Investment portfolios are impacted so much that it becomes too hard to evaluate the true effect a natural disaster has on any given organization. One of the ways to mitigate the complexity of procedures connected to rebuilding the organization is the ability to own shares abroad. This method became rather popular worldwide throughout the last ten years. By doing this, the organization may spark the investors’ interest in refining the location that was exposed to the consequences of a natural disaster. According to the findings of the current research, we should also pay close attention to the commodity prices (even though the influence of this outcome is not as obvious as its physical counterparts). The impact of Katrina, for example, consisted in the fact that it destroyed nearly half of the gasoline that was intended to be used by the United States. Therefore, we can conclude that the impact of natural disasters is immediate and has to be dealt with in the same manner. In perspective, we should always keep in mind the potential impact of natural disasters on the price of consumer goods after the disaster strikes and the costs of transportation that will be unquestionably affected by the calamity. Here, we can use the earthquakes in Chile as an example and see that the prices can get inflated easily if more than one country depends on the given resource. It is also safe to say that market-exported merchandises are not the only variables that are impacted by natural disasters. The economic implications of calamities should be preventively addressed at all times in order to ensure that the business is safe and all the necessary measures are in place.


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