Do Disasters Affect Growth? Five Macro Model-Based Insights on the Empirical Debate

A growing body of empirical work has sought to quantify the impacts of natural disasters on economic growth. To date, this literature has found seemingly contradictory results, ranging from positive effects in cross-sectional analyses (e.g., Skidmore and Toya, 2002) to extremely large negative impacts in panel regressions (e.g., Hsiang and Jina, 2015). This paper brings a novel macroeconomic model-based perspective to the data in order to reconcile and build upon these findings. We present a stochastic endogenous growth model where individual regions face uninsurable cyclone risks to human and entrepreneurial capital. The central results are as follows: (1) The model can reconcile key divergent results from prior empirical studies as they measure different elements of the overall impact of natural disasters on growth. For example, higher hurricane risk can increase growth by increasing human capital investment (and/or overall savings), whereas hurricane strikes induce (potentially persistent) output losses. (2) We empirically confirm the importance of these structural differences across empirical approaches by re-estimating them on a comprehensive, common dataset. (3) While competing empirical approaches estimate different aspects of the growth question, we find that neither cross-sectional nor panel fixed-effects specifications may be individually sufficient to capture the overall effect of disasters on growth. We explore a modified approach motivated by the model, and highlight this as an important challenge for future empirical work. (4) We note that hurricane risk variance and covariance variables are both theoretically predicted to be critical determinants of growth impacts, but seldom included in empirical studies. (5) Finally, we show that hurricane risk can have opposite effects on growth and welfare. That is, changes in disaster risk can increase (decrease) growth while decreasing (increasing) welfare.

Speaker: Lint Barrage, Brown University