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IDB study suggests large natural disasters unlikely to affect long-term growth

Large natural disasters are unlikely to affect long-term economic growth unless they are followed by a radical disruption in the institutional organization of society, a new study by the Inter-American Development Bank (IDB) suggests.

The study, which analyses the impact of large natural disasters, sheds new light on whether these occurrences hurt long run economic growth. Current economic theories do not offer a clear answer.

The study looked into a set of empirical data on natural disasters and economic indicators for over 100 countries between 1970 and 2000.  The research considered a large disaster when the death toll exceeded at least 7 people per million inhabitants. This is approximately the mortality rate of Hurricane Katrina that struck the United States in 2005. Many recent large events exceed this rate. For example, the 2004 Indian Ocean Tsunami killed 772 people per million inhabitants in Indonesia, and almost 2000 per million inhabitants in Sri Lanka. Moreover, the 2010 earthquake in Haiti killed over 20,000 people per million inhabitants and the earthquake in Chile approximately 17.

The study produced different samples of countries that meet the criteria and had enough economic data available to measure the economic impact after its occurrence. And for all countries in each group, researchers compared the economic performance of these countries with what would have happened in the absence of a large natural disaster. For that, they created comparator groups based on data from countries unaffected by natural disasters.

The study shows that only very catastrophic events, with mortality rates in excess of 230 people per million inhabitants seem to have a lasting impact on product per capita. There are only four events in the sample that meet this criterion and had enough data available for the analysis: Nicaragua 1972 (earthquake), Honduras 1974 (hurricane), Iran 1978 (earthquake) and the Dominican Republic 1979 (hurricane and floods).

At first look, the effects seem sizeable. Ten years after the disaster, the average gross domestic product per capita of the four countries in this group was 10 percent lower than it was at the time of the disaster. In the comparator, product per capita would be 18 percent higher than it was at the time the disaster occurred. Overall, this implies that ten years after the disaster the GDP per capita of the affected country is roughly 30 percentage points below the level it would have been without the natural disaster.

However, when researchers looked at individual cases, they found that the results are only statistically significant for both Iran and Nicaragua, countries that suffered radical political revolutions following the disaster. 

“This study tries to establish the causal effect between natural disasters and economic growth,’’ said Eduardo Cavallo, the IDB economist leading the study.  “It shows that the economies usually recover from the shock, unless the natural disaster increases the likelihood of a radical political revolution that disrupts the institutional organization. “

The findings, however, do not rule out the necessity for international assistance following a large natural disaster. Countries need support from the international community to cope with social and financial problems that arise from the destruction.  The humanitarian needs are huge, and few countries have the deep pockets needed to absorb the immediate consequences of the disasters and repair the damaged infrastructure, Cavallo said.

“Natural disasters can be a very traumatic experience for countries and assistance is key to alleviate human suffering and build confidence in the country’s ability to recover,” Cavallo said.