Natural Disasters Help Growth
November 6, 2002
While natural disasters are great calamities that cause huge amounts of destruction, they can provide the opportunity to reinvest and build a stronger community. Recent research suggests natural disasters can have benefits for an economy.
Researchers measured climatic and geological disasters over the past 190 years, from 1800 through 1990. They conclude that the disasters reduce the value of capital, because it has a shortened life span -- building and machines are destroyed before they are used up. However, they also find that these disasters cause firms to invest more in human capital -- schooling and training. Consequently, firms invest in human beings what they would otherwise have invested in buildings and machines. The added productivity of these people increases the total productivity of the community.
Moreover, researchers find that the destruction of physical capital has benefits as well. The replacement buildings and machinery are almost always more efficient and cheaper. By offering a chance to replace older machinery, disaster-prone areas can rebuild with the best money can buy.
The authors find that climatic disasters have benefits:
- An increase of one standard deviation in climatic disasters over the average results in a 22.4 percent increase in the average annual rate of economic growth.
- This results in a real increase of 0.47 in the average rate of annual growth.
In contrast, they find that geological disasters like earthquakes are not a benefit to long-run economic growth, but are a detriment.
Source: Mark Skidmore and Hideki Toya, "Do Natural Disasters Promote Long-Run Growth," Economic Inquiry, Vol. 40, No. 4, October 2002.
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