The Causal Effect of Environmental Catastrophe on Long-Run Economic Growth

Do natural disasters  have a causal effect on economic development? Reconstructing every country's  physical exposure to the universe of tropical cyclones during 1950-2008, we  exploit year-to-year variation in cyclone strikes to identify the effect of  disasters on long-run growth. The data reject long-standing hypotheses that  disasters stimulate growth via "creative destruction" or that short-run losses  disappear following migrations or transfers of wealth. Instead, we find robust  evidence that national incomes decline, relative to their pre-disaster trend, and  do not recover within twenty years. This result is consistent across income  sources and regions, as well as countries of different geographic size and  income level. Global patterns of climate-based adaptation, in addition to  similar long-run changes in consumption, investment, trade and international  aid, further corroborate this finding. Consistent with the idea that long-term  loans finance the replacement of lost capital, national income loss arises from  a small reduction of annual growth rates spread across the fifteen years  following disaster. The cumulative effect of this persistently suppressed  growth is both significant and large: a 90th percentile event reduces per  capita incomes by 7.4% two decades later. The gradual nature of these losses  render them inconspicuous to a casual observer, however simulations indicate  that they have dramatic influence over the long-run development of countries  that are endowed with regular or continuous exposure to disaster.

Speaker: Sol Hsiang, Princeton University