The longstanding dispute among economists over the impact of natural disasters on economic growth is as compelling as it is eye-opening. It may appear to be obvious to anyone you may ask that the immediate impact of a natural disaster could not have any sort of economic benefit for the community that was impacted. In fact, most economists would agree with this. The main divide in the debate comes down to differences towards the beliefs oh what happens after the immediate effects. Some economists argue that the positive economic effects of a natural disaster outweigh the negative effects in the long-term. This paper will identify the differences of short-term and long-term effects in regard to national disasters. explore in depth the reasoning behind both of these schools of thought will be explored in depth as well as an analysis on the difference between first-world and third-world countries and whether or not these same economic theories would apply.
There is little disagreement on the immediate effects a natural disaster has on the economy of a given community. Immediate, or short-term in this instance would be defined as a period from when the disaster is occurring to roughly 36 months after the incident. According to the Public Entity Risk Institute, small businesses and Not-for-Profits are known to experience phenomenal loss. “Every year, large numbers of small businesses and not-for-profit organizations across the United States suffer major losses as a direct consequence of earthquakes, severe storms, and flooding. Small business and not-for-profit failures are significant losses for communities of all sizes. When even one of them must close, much is lost both to the individual and the community (Risk Institute).” Unlike a big organization such as Walmart or McDonalds, destruction of one these small businesses or organizations could end the livelihood of an entire family, if not more. The report by the Risk Institute goes on to theorize the reasoning behind this. “A business or not for-profit need not suffer damage in a natural hazard event to find itself in peril following the event. One reason manufacturing firms recover more quickly than many kinds of retail firms are that their customer base tends to be geographically diverse (Risk Institute).” When it comes to economic growth, it is clear that natural disasters in the short term tend to put a halt on production in communities, specifically in regard to smaller business that rely on members of the community it resides in.
Furthermore, it does not even matter if a small businesses location is physically untouched by the disaster itself, they will still experience short term negative effects. “Retail and service organizations that serve a customer base that is geographically concentrated suffer badly when the area is damaged or destroyed, even if the firm itself receives no damage at all (Risk Institute).” While at first thought it may seem strange to think a business could be harshly effected by a tornado or flood that missed the stores location. However when you put the buying power of the community into consideration, It makes perfect sense that a business would struggle when a community is diminished by a natural disaster. It is essentially a ripple effect from a natural disaster in a communities economy, harm done by the natural disaster in the second-degree in a sense. If one owned an electronics store in a community that happened to experience a large hurricane there is a high chance this business will suffer in the short term even if the store itself incurs no physical damage from the storm itself. The damage done to the community will bring down the buying power of the members in it as consumers would be leaving the community or using their income and savings on essentials such as housing repairs or medical bills. With less buying power in the average community members hand, there is less capital circulating around the community.
As one would expect, the effects on a communities economy are negative in the short term. For one, a natural disaster could cause physical damage to a stores location or merchandise. This would cause immediate loss and sometimes closure. Businesses closing in a community can also close business near by that relied on them for their production. Even if a small business were to avoid being physically damaged by a natural disaster, economically the business would still take a negative hit. Natural disasters bring down the buying power of the average member of a community meaning less consumers to keep stores and business in production.
While there seems to be a lot of agreeance on short term effects of a natural disaster, there are varying schools of thought when it comes to the long term. “Major natural disasters can have severe negative short-run economic and budgetary impacts. Disasters also appear to have adverse longer-term consequences for economic growth, development and poverty reduction (Benson and Clay).” When it comes to the effects of a natural disaster on a community in the long term, economists are not in as much agreeance. There are many different theories with varying conclusions.
The main argument that economists point to when compiling evidence to support a theory that natural disasters benefit the economy is the notable rise in GDP. While it is not incorrect to claim that there is a rise in GDP in wealthy countries after a natural disaster, it is important to note that it is not necessarily a measure of the strength of an economy (Noir). In fact, a rising GDP in a wealthy country is to be expected after a natural disaster in the same way it is expected when a country like the United States when it goes to war. When there is production going on inside a countries border GDP will rise. This applies to communities that are hit by natural disasters (Noir). When a community has it’s infrastructure destroyed, it has no choice but to reconstruct. This will be done whether it is from the community budget, government funding from agencies, or donations. While there are certain scenarios, like home repair, that could possibly create production organically in the economy, a lot of the production is coming from money that is funneled in. A lot of times this money is just government funding or money being used from a community’s budget, which of course is derived from the tax payers. GDP is essentially considered an inflated statistic in this school of thought.
On the topic of GDP as evidence of natural disasters being beneficial for the economy there is another point to remember, the rise in GDP does not take into account the cost that the natural disaster inflicted on the community. GDP does not account for this as it only shows the amount of domestic production. “Natural disasters can affect long-term outcomes through a number of channels, including environmental damage to agriculture, fishing, and forestry. The destruction of schools could have a long-lasting negative impact on the stock of human capital; reconstruction efforts could crowd out productive capital expenditure; increased indebtedness could raise the rate of interest and reduce investment; and a worsening of fiscal and external balances could trigger inflation and/or financial crises (Rasmussen).” If a community took a hard economic hit on their infrastructures that would take 20 years to repair, it may look like the economy is on the rise when looking at GDP, but in reality they are making up lost infrastructure.
The argument that natural disasters are beneficial to a counties economy only extends to countries that are wealthy. “Though richer nations do not experience fewer natural disasters than poorer nations, richer nations do suffer less death from disaster. Economic development provides implicit insurance against nature’s shocks. Democracies and nations with higher-quality institutions suffer less death from natural disaster (Khan).” Even economists who argue that natural disasters can be beneficial to a country in the long term will concede that this does not apply to countries that do not have the capital to aid in the rebuild. This could be seen as evidence enough to the contrary; if natural disasters are good for an economy why do they not help countries with a poor economy? The answer appears to be because it requires a country to already be wealthy before they can inflate their GDP when repairing after a natural disaster.
Of course, the size of the natural disaster that occurred is a factor as well. “In a medium-term analysis (up to 5 years after the disaster event), comparing counterfactual with observed gross domestic product, the authors find that natural disasters on average can lead to negative consequences. Although the negative effects may be small, they can become more pronounced depending mainly on the size of the shock (Hockrainer)”.
The impact of natural disasters on economic growth is a topic that is highly debated among economists. While there is much agreeance that all natural disasters will negatively effect the economies of communities in the short term, there is much less agreeance when it comes to the effects natural disasters have long term. The main argument that goes along with theorizing that natural disasters are beneficial for the economy is the notable rise in GDP. However other economists argue this stat is misleading and point to the effect natural disasters have on developing countries as evidence that the GDP after a natural disaster is only rising because the government can afford to funnel money back into rebuilding.