The Most Effect Types of Disasters on the Economy

Subject: Economics
Pages: 14
Words: 3957
Reading time:
15 min
Study level: PhD

Natural disasters pose numerous threats to the normal functioning of the society. Aside from the more obvious physical destruction they are associated with, these events often create long-term negative impacts on the economic development of the region (Benson & Clay, 2004). In the areas that are more prone to the occurrence of the disasters, interventions have been devised by the dedicated organizations intended to minimize the said negative influence. Nevertheless, the said interventions often lack consistency and at least in some scenarios demonstrate unsatisfactory performance, effectively nullifying the efficiency of funds invested in them. The two probable reasons for such underperformance are the skewed perspective in the evaluation of the relevant factors that need to be addressed and the failure to prioritize the responses based on their efficiency.

An intuitive approach to mitigation of disaster effects on the economy is sufficient investment in disaster management organizations. Unfortunately, such approach does not necessarily yield positive results since the governments and other entities responsible for funding are not familiar with the priorities necessary for the application of the available resources. In some cases, the external funding sources provide directives areas of resource implementation that does not necessarily correspond to the needs of the involved community (Cohen & Werker, 2008). As a result, the resources are applied inappropriately and are basically wasted. In other cases, the governments themselves lack understanding of the relationships between certain factors, such as the types of disasters and the areas of the industry that are dominant in the region (Loayza, Olaberria, Rigolini, & Christiaensen, 2012). In the end, the effectiveness of the resource distribution is compromised. Most importantly, however, some of the factors remain overlooked entirely, and while some of these factors are not universally important, the significance of others is supported by compelling evidence. The easiest example is poverty – despite being positively and conclusively linked to the rate of economic recovery after the disaster as well as the long-term economic growth in the impacted areas, it remains unaddressed by the majority of the policymakers (Neumayer, Plümper, & Barthel, 2014). Finally, on at least some occasions the mitigating efforts of the government are being driven not only by the altruistic intentions and the objective assessment of the possible outcomes but also by the political interests (Garrett & Sobel, 2003). Obviously, such perspective is less likely to ensure equal benefits for all actors and needs to be addressed.

The combination of the said factors often creates a vicious circle where the gradual decline of the population’s welfare increases gaps between different strata and creates the so-called “poverty traps” – scenarios where financially unstable individuals are unable to pass the threshold of poverty without external support (Cavallo & Noy, 2009). For some countries, where the proportion of poor households is significant, it creates nationwide issues that could have been avoided if timely addressed. Finally, even for the regions where such scenario is not a threat, the majority of disaster’s long-term effects on the economy can be prevented or, according to some suggestions, reverted completely (Hallegatte & Dumas, 2009).

The following paper has several objectives. First, it overviews the common effects most disasters have on the economy in order to classify them according to these criteria. Second, it explains the mechanisms behind the influence of various types of disasters on the economy of the region. Third, it highlights the most viable actions the governments should take to ensure that the negative economic effects of the disasters are minimized. The inquiry is supported by the evidence from the empirical studies. The findings can be used as guidelines for disaster management policy adjustments as well as directions for further research on the matter.

Types of Disasters by Effect

The fact that disasters adversely affect the economy is a relatively well-established fact. Despite the fact that some evidence suggests that under certain circumstances a disaster can produce a long-term economic improvement, in most cases, the negative effect is overwhelming, apparent, and quantifiable (Benson & Clay, 2004). However, currently, no approach is available that would allow categorizing the disasters by a level of their effect on the economy, for which reason the researchers use different frameworks that are not necessarily compatible with each other.

One of the most intuitive approaches is the division by the magnitude of the event. In the broadest sense, larger disasters have a greater effect on the economy. However, such classification creates several controversial points to consider. First, it is unclear what constitutes a large disaster. It is possible, for example, to determine the average magnitude of a common disaster within an area. This, however, would restrict the measurements to specific geographical or geopolitical setting. In the case where the inquiry would approach the issue from a global perspective, such metric would be useless (a locally large event could not qualify as such on the global scale) (Cavallo, Galiani, Noy, & Pantano, 2013). Alternatively, calculating a worldwide mean could create a disproportionately large effect on a local study and result in irrelevant data. Thus, such classification should be used responsibly.

Another perspective sometimes utilized in the empirical studies is the division into natural and quasi-natural types. The former includes virtually all types of naturally occurring events and environmental conditions (e.g. droughts) while the latter describes a category of events either induced or aggravated by human participation, such as environmental events (e.g. desertification), civil wars, large-scale accidents, and urban catastrophes (Otero & Marti, 1995). Since the second category is defined broadly enough to include a wide variety of disasters, it is difficult to determine whether they have a greater effect on the economy on average. However, at least some of them, such as the environmental disasters, have profound long-term effects that are nearly impossible to mitigate, while others are not sufficiently studied to allow for a conclusive assessment.

It is also possible to divide the disasters into historical – large probabilistic events which are rare and have tremendous destructive potential, and periodic – less damaging and relatively more frequent (Akao & Sakamoto, 2013). By this classification, historical impact the economy stronger, both because of their size and less predictable occurrence.

However, the most common and frequently used approach disaggregates the disasters by the involved natural forces. While such classification still involves magnitude as an important factor, it is possible to see a certain pattern and estimate the relative impact of different types on the economy. According to this classification, disasters are divided into two types: meteorological and geophysical. Storms, hurricanes, and droughts belong to the meteorological disasters. For instance, the 1989 Hurricane Hugo had a major impact on the economy of South Carolina, with some experts considering it one of the most devastating events in the history of the United States (Guimaraes, Hefner, & Woodward, 1993). Due to its rapid and mobile nature, the hurricane was able to damage a large area in the relatively short period of time. Te total economic damage estimated at losses of $5.3 billion in structural damage, households, and crops, with possible indirect effect overlooked by the report. It should also be mentioned that the effect of hurricanes can extend the direct damage dealt by the destruction of physical property and potential sources of profit such as crops but also through the disruption of the infrastructure and social institution that are expected to play the central role in providing post-disaster services, thus significantly decreasing the capacity of organizations to address the problem (Baade, Baumann, & Matheson, 2007).

Hydro-meteorological hazard is another type of disaster that is associated with significant economic losses. The two most common subtypes of such event are droughts and excessive rainfalls. However, it is important to mention that while abnormally high rainfall can have a detrimental effect in certain scenarios, its economic impact in most occasions is limited to the disruption of the planned economic activities (Benson & Clay, 2004). The drought, on the other hand, poses a serious threat to the well-being of the population and the economic viability of the region and necessitates significant investment to be mitigated.

While there is no conclusive evidence that either type of disasters has a greater impact on the economy, attempts have been made to compare their effects. A study by Cavallo, Powell, and Becerra (2010) provided a technique for estimating the direct impact of natural disasters on local economies. When applied to data on different catastrophes, the model allowed for a comparative assessment, which revealed that earthquakes are less destructive than storms but more destructive than floods. Of the three, only the earthquakes are geophysical in nature, which suggests that meteorological type of disasters has a greater effect on the economy. It should be noted, however, that the results depend strongly on the data involved and can only be considered experimental in nature. Besides, the results are inconsistent with those of Felbermayr and Gröschl (2014), who suggest that earthquakes generate the majority of data on economic effects, followed by meteorological disasters. Interestingly, the economic damage seems to depend strongly on the country’s wealth, with poorer regions being more vulnerable to geophysical events while richer ones are experiencing greater impact from meteorological ones (Felbermayr & Gröschl, 2014).

Reasons behind Disasters’ Effects on Economy

To understand the reasons behind the lack of agreement on the effect of disasters on the economy, it would be necessary to explore the principles responsible for the disasters’ influence on economic development. Any given occurrence has numerous factors that combine into its total economic impact. One of the more apparent causes is the mortality rate associated with the event. Deaths from the disaster serve a noticeable source of expenses and create significant shortages of resources necessary for a successful mitigation of the catastrophe. In line with the tendencies mentioned above, poorer countries and communities are more prone to high death toll than wealthier ones, even in the scenario where the rate of injuries is greater in the latter (Kahn, 2005). Another important factor common to the disasters is the presence of the indirect effects associated with it. While the direct effects such as structural damage, are relatively well-understood and can be assessed using the widely available techniques, the indirect effects, such as the decrease in the quality of life, are more encompassing and at the same time less well-understood. It is possible, however, that they are also more significant in terms of economic impact (Cavallo & Noy, 2009).

However, the most important aspect of the disasters’ influence on the economy of the region is through the numerous effects collectively known as indirect impact. As was mentioned above, the lack of a concrete definition does not allow for the development of a definitive list of these factors. Nevertheless, empirical studies contain several plausible options whose influence has been confirmed. For instance, the increase in the rapidity of capital replacement has been cited as a reason behind the alleged economic growth observed in the areas impacted by the disasters (Hallegatte & Dumas, 2009). More specifically, the reconstruction that occurs after the disaster has a noticeable impact on the total losses associated with the mitigation efforts. For instance, sacrificing quality of the construction in favor of timeliness will produce a more effective short-term improvement but will compromise the long-term mitigation effectiveness. Interestingly, such approach suggests that the technical change process can decrease the costs of disaster mitigation but is insufficient for facilitation of positive economic impact. In other words, when viewed from this perspective, disaster’s influence is limited to production and does not affect growth.

Another factor through which disasters impact economy is the accumulation of human capital. There is evidence that the losses associated with climatic disasters emerge from the fact that the rate of return to physical capital is decreased immediately after the event. However, there is a simultaneous countermovement in the human capital area, where the relative rate of return is increased. In this way, the disasters can be viewed as major detriments to the physical capital investment but at the same time provide the substitution in the form of human capital investment, which, by extension, increases economic growth and total factor productivity (Skidmore & Toya, 2002). However, it is important to note that the effect is not necessarily sufficient for covering the damages created by the disaster.

The effects on the population are not limited to casualties and injuries. Preparation for the disaster usually includes evacuation of the population, which is costly and has long-term implications. The population levels are slow to recover after the catastrophe and in most occasions impact labor market (Vigdor, 2008). The loss of workers following the evacuation usually result in the closure of many businesses, which remain impacted long after the return of the majority of the population. Another outcome of the evacuation is the massive damage to the housing market. The latest Hurricane Katrina data has resulted in the loss of two-thirds of the region’s stock in several years after the disaster (Vigdor, 2008).

Besides, many researchers point out that the loss in the quality of life as an important indirect factor. According to Kousky (2012), this effect creates a host of problems, including the increased stress put on the citizens, the emotional strain, the decreased involvement, and, by extension, the decline in productivity both in the disaster mitigation efforts and in the organizational activities overall. Logistical issues, such as difficulties created by the structural damage, add up to the said effects and further disrupt the coping capacity of the impacted population.

Some theorists go as far as to include the inequality and poverty in the list. Both factors are known to increase after the occurrence of the catastrophic events and can be conclusively tied to the disaster. In addition, both are more easily aggravated in the regions that are already characterized by the low level of population’s well-being (Hallegatte & Przyluski, 2010). A term “poverty trap” was suggested to explain the effect in the disaster management setting, which describes the state of well-being that is hard to impossible to recover from.

Finally, it should be understood that most of the disaster differ in impact across the industry segments. For instance, hydrometeorological events have the most impact on the agricultural sector and only a minor level of influence on the industry in the developing countries, whereas earthquakes deal more damage to infrastructure and are thus more dangerous for the industrial segment. The magnitude also determines the level of economic impact, to the point where the moderate disasters have a relatively low long-term effect while larger ones are invariably disruptive regardless of the country’s initial economic state (Loayza et al., 2012).

Consequence Minimization Actions

Because of the well-established understanding of the dangers of the disasters for the economy, significant efforts are made to prevent and mitigate the known adverse effects. Currently, the government remains the most active player in the disaster management field, both directly and through numerous organizational entities (Chang, 1984). However, despite the continuous improvements, the quality of results remains inconsistent (McEntire & Myers, 2004). Various suggestions have been put forward to determine the actions that would ensure the effective minimization of the disasters. Toya & Skidmore (2007) argue that the regions characterized by higher education attainment, higher income level, and greater openness of the governmental operations are associated with lower mortality in the aftermath of the disaster. Based on these findings, the authors suggest that the government should invest into education and provide better opportunities for the development of the business sector to ensure greater diversification of the industry and economic sustainability of the population in order to prevent high death toll possible during the event. Noy (2009) expands the list by including literacy rate, high per capita income, and greater readiness of the government to invest into the development of the region as successful predictors of the capacity to withstand the consequences of the disasters. Therefore, investing in the development of the identified areas is expected to produce a more robust society that would be more suitable for the reconstruction actions. It is also worth pointing out that countries with higher level of domestic credit and more foreign exchange reserves display better resistance to adverse economic effects of the disasters, which can also be incorporated into the country’s economic strategy (Noy, 2009). However, it should be mentioned that investment in itself must be carefully considered before it can be applied successfully. While the financial support to organizations responsible for the mitigation of the disasters can decrease the adverse economic effect, sufficient prevention is considered a more viable investment. In addition, the overreliance on international aid decreases the involvement of the domestic governments and promotes the possibility of under-investment (Cohen & Werker, 2008). Furthermore, such aid introduces limitations to the application of funds and thus prevents the possibility of adjustments.

For the developing countries, the recommended focus is shifted towards the satisfaction of more basic needs. More specifically, it appears that providing access to quality health services and adequate nutrition for the population prior to the disaster increases the chances of the individuals to survive and retain the possibility to participate in the reconstruction process (Skoufias, 2003). While the importance of education in such setting is also recognized, the evidence of this relationship is less solid. Therefore, the government can focus on the two former points and simultaneously ensure the necessary level of understanding of the importance of collective reconstruction effort.

Finally, the government must be aware of the conflict of interests that exists due to the political issues involved in the decision-making process. The failure to acknowledge and address the bias caused by the political importance of certain regions leads to the situations where some local governments receive better funding and earlier declaration rate, which gives them an advantage in terms of disaster relief (Garrett & Sobel, 2003). The government is thus required to seek balance between the political interests, altruism, and efficiency concerns to ensure the optimal economic outcome.

Evaluation and Analysis

The information presented above provides several insights and allows for formulating a range of implications. First, it is evident that while the type of disaster is a useful predictor of the event’s impact on economy, it is secondary in the overall assessment of the necessary scope of actions and resource allocation. Several other factors must be considered in order to form a conclusive picture that would characterize the expected economic impact. For instance, different combinations of dominant industry sectors with different types of disasters can dramatically alter the results, so the failure to acknowledge them will render the prediction models irrelevant (Loayza et al., 2012). The magnitude of the expected disaster is also likely more important than its type since the prevention and mitigation possibilities are determined by it to the point where on some occasions relatively moderate disasters combined with adequate disaster management strategies produce positive economic growth in the long term (Hallegatte & Dumas, 2009). However, at this point, it is important to remember that the positive economic outcome is still a debatable concept and does not have sufficient support in the academic community. Despite its apparent attractiveness as a concept, it should be remembered that the effect is not frequent, inconsistent, and not sufficiently understood to be trusted as an established and confirmed phenomenon. Nevertheless, even if we discard the possibility of economic growth or any other positive economic effect of the natural catastrophes, it is still reasonable to expect the decrease of the expected negative outcomes associated with the smaller scope of the event, so this metric is not to be ignored.

Finally, the welfare of the impacted population is among the most significant metrics that can be used to predict the economic impact of a disaster. When included in the assessment, it provides explanation for the majority of the long-term outcomes of the event and displays a significant level of correlation with the decline in economy of the region. Importantly, welfare does not necessitate postponing the intervention and disaster aid until after the occurrence – in fact, investing in it prior to the events ensures greater resilience to the adverse effects of the catastrophe and improves the overall effectiveness of mitigation campaign (West & Lenze, 1994). Therefore, it would be reasonable to expect a focused effort on the part of disaster management entities, both government-based and independent, on the economic state of the population as an intrinsic component of the preventive and mitigation actions. Since the former are also known to exert a certain level of bias in management of disasters based on political significance of certain regions, they are also advised to exercise an additional degree of caution in the decision-making process to ensure optimal positive outcome rather than preferential resource allocation based on political partisanship (Garrett & Sobel, 2003).


Natural disasters remain a viable threat to the well-being of the populations on a large scale. Despite their apparent relevance, the efforts aimed at decreasing their impact remain insufficient. In addition to the more intuitive effect of physical damage to the infrastructure and property as well as risks to human population, disasters are associated with significant financial losses and, by extension, the disruption of the economy in the region. However, the mentioned disruption cannot be attributed solely to the expenses associated with the mitigation of the disaster’s aftermath. In fact, according to the academic consensus, they comprise a relatively modest share of the total economic losses experienced by the country (Kousky, 2012). Aside from the disruption of the local businesses and the logistical constraints associated with the decline of the infrastructure, disasters cause major population relocation that is not reversed proportionally once the incident is over (Vigdor, 2008). Next, the labor and housing markets suffer tremendous setback, further complicating the functioning of local small and medium businesses. Finally, numerous factors can be identified that are not directly connected to the disastrous event yet decline significantly after its onset, compromising the economic performance.

Population’s welfare is the most often cited factor since it not only declines noticeably after the catastrophe but also serves a reliable metric that can be used to predict future performance of the region’s economy in the long run. Simply put, more financially stable communities usually perform better after the disaster and sometimes end up in a better situation compared to their pre-disaster state (Loayza et al., 2012). This may happen due to the increased intensity of financing to certain areas as well as the initial predisposition to economic growth. Nevertheless, despite the attractive concept of stimulating effect provided by the disaster, it currently cannot be reliably included in the modeling procedure of the disaster’s effects on economy. Poverty, on the other hand, can be included as it demonstrates a more robust direct relationship to the long-term economic performance in the areas impacted by the catastrophes. Importantly, its significance is not limited to the modeling capabilities of the disaster management organizations and can be used to achieve the desired level of resilience to future events. Investment in population’s welfare is considered a viable approach to strengthening the preventive capacity of the region and can thus be recommended for the governments as a way of ensuring economic stability in the high-risk environments. Since prevention produces better results than mitigation both in financial terms and considering a wider social perspective, such move can be viewed as the least risky way of investing in the country’s future. For the policymakers, these conclusions can serve as an overview of the general direction recommended for achieving optimal result as well as a warning against more risk-prone solutions. For the theorists, the outlined factors and recommendations based on them can be used to identify potential areas of research to further improve the understanding of the mechanisms of disasters’ impact on economy and the areas offering the greatest leverage for improving long-term performance.


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