Disasters That Affect Economy

Subject: Economics
Pages: 14
Words: 3961
Reading time:
16 min
Study level: PhD

The majority of the natural disasters have a serious impact on the economy. These include hurricanes, earthquakes, floods, and many other natural calamities. For any given corporation, the damage is rather evident – natural disasters destroy equipment and buildings. Moreover, it can also influence human capital and worsen production capacity of the latter. It may happen that disasters become the key reason for a firm to close down (West & Lenze, 1994). Nonetheless, one of the ways in which natural disasters may enhance the existing state of affairs is their influence on the productivity of those organizations that survived the disasters by means of novel technologies and updates inherent in the capital stock. This process is also known as creative destruction (Skoufias, 2003). Despite the positive connotation behind the concept of creative destruction, there is not enough evidence proving that the change brought by the natural disasters is actually positive. For instance, a tsunami in Sri Lanka caused major damage to organizational assets and reduced overall profits and the size of capital stock (Skoufias, 2003). The same happened in 1995 when an earthquake in Kobe seriously impacted the employment and value-added development within the most devastated districts (Skidmore & Toya, 2002).

There is also another way in which natural disasters can impact the corporate sector in terms of the firms that survived the calamities. There were only two possible options – the firm either fell behind and disappeared over time or managed to come back after the disaster and improve the existing state of affairs (Noy, 2009). One of the positive things connected to natural disasters is that the latter may expel the organizations that do not perform well enough to keep up with the rest of their rivals (also known as the concept of natural selection). In this case, the average organizational efficiently increases. In case if even the high-performing organizations are forced to quit, the outcomes of natural disasters and their ultimate impact are unclear (this is also known as unnatural selection). It is safe to say that the evidence regarding the impact of natural disasters on surviving organizations that currently exists is rather limited. The topic of natural disasters is important for economic development because natural calamities can lead to bankruptcy and other adverse outcomes (Neumayer, Plumper, & Barthel, 2013). This paper is going to dwell on the types of disasters and how they can impact economy on both short- and long-scale. The problem with natural disasters consists in the fact that they may trigger a series of voluntary closures that are only typical of the damaged areas. On the other hand, the positive connotation of natural disasters (in terms of reduction of the number of bankruptcies and defaults in the damaged areas) is overlapped by the difficulties that transpire throughout the post-disaster period (McEntire & Myers, 2004). The majority of the organizations that were exposed to this kind of circumstances were forced to close down. It is also important to conduct research on the topic of the connection between natural disasters and economic development because the average age of employees in the area also has an inimitable impact on the outcomes. On a long-term scale, the issues with succession and local economic decline are to be addressed by the organizations. The author of the paper expects to provide answers to a number of empirical questions that are inextricably linked to the concepts of economic development and voluntary/ involuntary withdrawal from business (Loayza, Olaberria, Rigolini, & Christiaensen, 2012). Two of the administrative concepts that are believed to have an impact on the number of organizations that are eliminated by natural disasters are policymaking and the primary economic environment.

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Literature Review

In his research, Kousky (2012) addressed the costs of disasters and provided the readers with their average annual costs. It was identified that the costs ranged from $932 million to $12 billion (Kousky, 2012). These approximations are not based on systematic data regarding disaster losses on a national level (this is one of the limitations of the study). Another aspect that is also important within the framework of Kousky’s (2012) research is that the indirect losses are not counted in the available data sets. The informal sectors of the economy are also recurrently disregarded. The author of the research came to the conclusion that the true cost of disasters is even higher that the estimates mentioned above (Kousky, 2012). The ultimate costs of the disaster also vary depending on the type of the latter and all the climate-related events that transpire throughout the period of disastrous activity. The researcher claims that floods may be perceived as one of the most dangerous natural calamities due to its inclination to cause serious damage to both the environment and local businesses (Kousky, 2012). In terms of fatalities and the loss of human resources, developing countries are exposed to a bigger number of risks than their developed counterparts. Nonetheless, it was found that natural disasters do not have a lot to do with the impact on such business aspects as performance, growth, and output. Kousky (2012) claimed that the most robust influence was made by devastating disasters where the overall outcomes of the calamities were characterized as long-term, negative, and severe. Another finding of the study consisted in the fact that smaller countries and their developing counterparts were much more exposed to the macroeconomic issues triggered by natural disasters (Kousky, 2012). The countries where the level of income was higher were not influenced negatively. Instead, the impact of natural calamities of high-income countries can be described as distributional because some of these countries have to go through the process of reconstruction after the disaster and some of them benefit from being hit by a natural calamity (Kousky, 2012). Even though these findings do not correlate to the concept of creative destruction, it is actually validated that the organizations that are located within the affected area are open to more financial investments than their outside counterparts. It is interesting how in 2000, a number of European firms critically improved their output and overall performance due to a major flood (Skoufias, 2003). The most important part is that the firms that were unaffected by the flood did not show any sign of substantial growth. Despite the fact that there is vivid evidence regarding the short-term increase in output of the Japanese plants after the earthquake, the effect of increased output disappeared over time (Otero & Marti, 1994).

The research project that was conducted by Benson and Clay (2004) emphasized the impact of natural disasters on any given country. The researchers took into consideration a number of short- and long-term factors related to economics and finance. Benson and Clay (2004) paid close attention to the issue of natural hazards in Dominica, addressed the question of public finance in Bangladesh, and reviewed the impact of climatic variability on the countries located in the southern part of Africa. One of the strengths of the study consists in the fact that the researchers came up with a number of policy implications and proposed several recommendations intended to solve those problems (Benson & Clay, 2004). The authors of the study also identified a number of areas where further research was necessary. Benson and Clay (2004) claimed that the impact of major natural disasters was absolutely unpredictable. The overall connotation of natural calamities was identified as negative, and numerous long-term consequences were found to be inherent in the concept of natural disasters. The researchers recommended re-evaluating the economy of the country every two years so as to prevent any major failures and foresee the potential financial impact of the calamity. The government should also take into account the short-term goals that may help the country to implement an assistance strategy. Benson and Clay (2004) came to the conclusion that there was a number of dynamic variables that had a substantial impact on the state of economy damaged by a natural disaster. These included the policy-making initiatives, economic structure of the country, and the existing economic conditions. The researchers believed that there were numerous issues worth considering in terms of their complex impact on a country’s economy and came up with several suggestions regarding the mitigation of extreme hazard events (Benson & Clay, 2004).

In their research, Cavallo, Galiani, Noy, and Pantano (2010) addressed the question of the overall impact of disasters on economy by means of obtaining relevant information from numerous case studies. They were interested in dwelling on the idea of long-term causal impact of natural disasters on economic development. The exogenous nature of the unpredictability of natural disasters was considered by Cavallo et al. (2010) for the reason that the latter used synthetic control groups to synthesize the findings of the study. The main conclusion of the study consists in the fact that only extreme disasters may influence the average level of output (this relates to both short- and long-term outcomes). The researchers also stated that the results of the study were impacted by two political revolutions that transpired right after the reviewed natural disasters (Cavallo et al., 2010). They were able to validate the hypothesis that extreme disasters were influential only when there were political changes implemented within the country. It was also proven that natural disasters alone did not have a substantial impact on output. The research project conducted by Toya and Skidmore (2007) is also valuable within the framework of the current investigation due to the fact that despite the type of natural disaster, the level of income should not be a sole measure of the country’s level of development. The researchers claimed that it was important to maintain high educational attainment in order to reduce the impact of damages caused by disasters (Toya & Skidmore, 2007). The government was recommended to develop a stronger financial sector in order to be able to reply to the consequences of destructive natural calamities. One of the biggest motivations of the policymakers was the number of people who were saved owing to the development of the country. Toya and Skidmore (2007) also came to the conclusion that policymakers were partially responsible for controlling a number of the existing economic development factors. The researchers believed that improving education and developing financial markets might be beneficial when mitigating the impact of natural disasters on economy.

Guimaraes, Hefner, and Woodward (1993) also discovered that natural disasters had a considerable impact on the financial state of any given country. They found that there were several short-term income sources that affected the country’s economic activity and increased the number of insurance claims. Within the framework of their research, Guimaraes et al. (1993) addressed the impact of the Hurricane Hugo on the State of South Carolina. So as to perform the evaluation of the impact, the researchers utilized a regional econometric model that allowed them to assess the probable outcomes of the event if there was no storm and compare it to the real-life outcomes (Guimaraes et al., 1993). In order to be able to do this, the researchers collected the data for the pre-storm period and then ran a simulation on the basis of the values of economic variables that were identical to the real values of the state’s economy. Ultimately, it was found that the differences between the two events (simulation vs. real-life outcomes) were rather trivial. Despite the overall negative connotation of the Hurricane Hugo, the economic gain remained at the same level, and wealth losses were identified as inconsequential. This research was further expanded by Noy’s (2007) findings who observed a serious impact on macro-economy as well (even on a short-term scale). The key conclusion of the study consisted in the fact that the costs of natural disasters were directly linked to the production slowdowns. This was also validated for developing countries that were exposed to an even more significant decline in performance than their developed counterparts (Noy, 2007). Throughout the process of research, Noy (2007) found that there were several macroeconomic patterns that might be considered influential in times of natural disasters. The post-disaster shock was better handled by the countries where the educational level and the level of per capita income were higher. In this array of countries, the governments were more inclined to spending money on the prevention and mitigation of natural disasters and maintaining a healthy macroeconomy (Noy, 2007). The findings of this author suggest that the post-calamity reconstruction requires an advanced ability to assemble and allocate available resources. The concept of domestic production is also involved in the discussion because an increase in foreign exchange reserves may be seen as positive in terms of the financial conditions of the country. Moreover, it is important to understand that reports on economic damage and human losses cannot be considered adequate projected coefficients. The most vivid impact of the variety of natural disasters is suffered by the organizations that operate in the agricultural sector. At the same time, it was found that the impact of natural calamities on the growth of the service and industrial sectors is insignificant.

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. 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. At the same time, 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. Baade, Baumann, and Matheson’s (2007) research preceded Vigdor’s (2008) similar investigation project, but the overall message of these academics is relatively identical – the process of economic recovery in New Orleans should be promoted. The core goal of the city’s government, according to Baade et al. (2007), should be the creation of barriers that would save the city from future disasters. Some of the areas of the city have to be supported by public money and not insurance settlements or other types of investments, so it is critical to address this issue. The authors of the research believe that the only way to stimulate the growth of New Orleans is to target several federal transfers that will help poorer areas of the city to perform reconstruction faster. These efforts do not depend on the type of natural disaster that affects New Orleans because the aftermath of hurricanes, floods, and other calamities cannot be estimated through personal income or payable sales (Baade et al., 2007). Consequently, the core objective of any location impacted by a natural disaster should extend beyond simply fixing the physical infrastructure.

Evaluation and Analysis

It is evident that natural disasters have an immense impact on economy (short- and long-term). Some of the negative outcomes of natural calamities are poor economic growth, slow post-disaster development, and an increased level of poverty. Nonetheless, the literature that was reviewed within the framework of the current paper suggests that there are ways to predict and mitigate these adverse influences. A number of vulnerabilities are currently inherent in the countries that are on the path of economic transformation (Kahn, 2005). This also includes social changes and technological improvements in addition to urbanization. It was found that a number of countries in the Caribbean were able to become more resilient to tropical floods and storms that were characteristic of that area. This happened because those countries underwent a serious economic transformation over the last decade and implemented several policies aimed at mitigating negative outcomes. According to the reviewed literature, the most vulnerable areas can be located in Africa (near the Sahara Desert) (Hallegatte & Przyluski, 2010). On the basis of the information from the literature review, it can be concluded that geophysical threats have to be treated with special attention to detail in urban areas. This is important because potential costs of a natural disaster may go up drastically because of the county’s economic development. The pressure that natural disasters cause on organizational budgets is enormous. This is why it is critical to consider reallocation to be one of the key short-term fiscal options when it comes to natural disasters due to the fact that the overall trends in aid flows are not influenced by natural calamities.

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Moreover, of the key conclusions that can be made on the basis of the reviewed information is that a complete re-evaluation of the impact (from both financial and economic perspectives) caused by natural disasters should be obligatory (Hallegatte & Dumas, 2009). In this case, the government is responsible for developing a risk management strategy that is going to take into account all the economic peculiarities of the country and come up with a financial plan for the next five to ten years. Also, so as to overcome the obstacles created by a variety of economic and environmental factors, the sources of funding should be expanded. Due to the critical impact of natural disasters on economy, it is advised to include risk management procedures in the long-term national policies concerning investments. The reallocation of financial resources will be beneficial in terms of renewed disaster response strategies. The only probable limitation of this approach is that the government will depend on specific scientific information when developing the proposed risk management strategy (Felbermayr & Groschl, 2014). Undoubtedly, this particular area of risk management should be scrutinized by the international community in a recurrent manner. By doing this, the government will be able to introduce monitoring programs designed to evaluate the risks inherent in different geophysical hazards and take into consideration the existing climatic variability and its possible influence on the country’s economy.

The author of this paper believes that there is a set of complex influences that either increase or decrease the level of vulnerability to natural disasters. Due to its dynamic nature, we have also to take into account certain policy conditions and the economic structure of the country. The impact of natural disasters on economy is displayed by numerous consequences that are supported by geophysical hazards and climate-related risks. The choice is either to ignore or to adapt to the changes that currently transpire. Within the framework of the current study, the researcher was able to review the existing literature on the subject and identify areas that still require attention.

Conclusion

The existing paper provided an extensive discussion on the topic of the connection between natural disasters and economic development. It can be stated that the overall impact of natural calamities on economy can be characterized as negative. It may be necessary to divide economic development into several groups (including industrial, agricultural, and other types of growth). In order to evaluate the impact of natural disasters on economic development, we will have to introduce more variables and a bigger sample. The way in which the organization replies to a disaster ultimately displays its survival ability. The literature that was reviewed within the framework of the current study can help us to make a rather important conclusion – natural disasters have a cumulative effect on GDP growth (especially, its short-term derivations) that can be characterized as negative (Chang, 1984). Another conclusion that can be made on the basis of the reviewed information is that drought is one of the most dangerous natural disasters ever. At the same time, storms can be seen as one of the biggest contributors to the decrease in economic growth. Once again, the agricultural sector is impacted by storms way more than GDP growth. The human resource is directly linked to the effects of earthquakes as the latter have an adverse impact on the overall number of victims (both injured and killed). Again, the agricultural sector is the most vulnerable to this type of natural disasters (Cavallo, Powell, & Becerra, 2010). The third conclusion of the study suggests that there is not enough evidence in the existing literature that can support the hypothesis that natural disasters have solely negative influence on economic development. The only natural disaster that was found to cause exclusively negative damage to economic growth was drought. The last conclusion that can be made within the framework of the current paper is that there are relationships among the concepts of economic development, natural disasters, and institutional features of certain countries. It is safe to say that the level of GDP is one of the best mitigators of natural disasters. Therefore, the smaller the GDP is, the fewer chances the country has to get out of the disaster slump and undo the influence of natural calamities on the economy.

From the policymaking point of view, this research helps us to understand better the impact of natural disasters on economic development. In other words, we have to realize that new ways to reduce and mitigate the risk of disasters have to be found (Cavallo & Noy, 2010). This issue cannot be overlooked because climate change and other related concepts positively affect the increase in the annual number of natural disasters. One of the key goals nowadays should be the elaboration of protective measures that are going to preserve agricultural-based economies from becoming a victim to an unpredicted natural disaster. The impact of droughts can be described as the most devastating of all disasters (Africa is one the most vigorous examples here) (Akao & Sakamoto, 2013). Another evident outcome of the study in terms of policymaking is the supposition that aid inflows coming from the UN and charity organizations are rather relevant within a post-disaster environment. Despite conducting an extensive literature review, the author of the paper believes that there is a need to investigate some of the topics further. For instance, there is a necessity to come up with certain measures intended to protect the agricultural sector from the negative effects of natural disasters. Another important question is the effect of the coverage density in countries that are recurrently impacted by natural disasters (for example, Philippines). The author of the study believes that it is safe to say that economic growth should only be studied on a long-term scale (for more than one year) in order to estimate the growth effects correctly.

References

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