Natural Disaster and Economic Growth - Essay Example

?Natural disaster and economic growth Literature review Natural disasters are detrimental to the economic growth of the countries that face the disaster. Although there is a rich literature on the natural disasters that have occurred in the world since the beginning of history, studies on this phenomenon with respect to the economic development path of the country that faces it, are being made since the past few decades (Benson and Clay, 2004). According to research results, it can be said that the extent and severity of the effect of natural disasters vary across countries, but, the basic impact “is not erratically heterogeneous” (Fomby, Ikeda and Loayza, 2011, p. 3). The level of economic development of the country in which the disaster has occurred determines how hard the disaster would hit the macroeconomic growth of the economy (Skidmore and Toya, 2007; Noy 2009). The great Hanshin-Awaji (Kobe) earthquake hit Japan in the year in 1995 and it had brought tremendous damage to the country in terms of economic growth of the economy and the social structure (Christian, 2007). The city of Kobe was the worst sufferer in this disaster. Japan was already a developed nation when the disaster had stricken the country. Research by scholars acknowledges that the disaster had caused “devastating damage to the economic landscape of southern-central Japan” (Yamamura, 2013, p. 1). But, at the same time the results of investigation show that the earthquake made people realize the fact that capital formation is an important element of economic growth in the country. In the long run, level of well being of the survivors of the disaster depends on the rate at which capital is accumulated in the economy. Research results show that the impact of the disaster fades with time and the rate of development of the economy plays a major role in the standard of living of its people (Raddatz, 2007). Yamamura (2012) has made a research on the level of happiness of the victims of the Hanshin-Awaji earthquake (after controlling for the characteristics of the individuals participating in the study), and found that after the passing of more than one decade, victims of the disaster have reflected greater levels of happiness than non victims. The emotional impact of the disaster has been erased with time. Victims show the tendency to adapt with the new circumstances with the passage of time. A subsequent research shows the result of investigation into “the extent to which the earthquake enhanced the investment in social capital through participation in community activity” (Yamamura, 2013, p. 1). After facing the huge loss to life and property as a result of the earthquake, the people of Japan expressed greater consciousness regarding the importance of social capital. Comparing the data collected between the years 1991 and 1996, it has been found that people were more inclined to make investment in social capital in 1996 than they were in 1991 (Skidmore and Toya, 2002). This significantly increased the rate of investment in social capital by the residents of Kobe. However, rate of investment by the people living in the cities near Kobe did not show any noteworthy change. From this phenomenon the author has inferred that the impact of the disaster decreases with distance; the effect of the disaster is lesser in the minds of the people that stay far away from the origin of disaster (Yamamura, 2010). Although natural disasters are occurring with increasing frequency and are creating potentially devastating impact on the economies that face it, the economic cause of the disaster has not yet been accurately deciphered. There have been several studies on the medium and long term impact of the disasters on the prospects of development of the countries. According to the works by Cavallo, Powell and Becerra (2010) long term effects of natural disasters from the economic point of view are not understood well. In general, literature existing in this sphere of research shows lack of theory and empirical evaluation of the mechanisms that might create impact on the economic growth of the countries. However, it has been agreed by scholars that economic development is dependent on the rate of savings in the economy and the investment decisions made by the investors. According to Fomby, Ikeda and Loayza (2011), it is important to make an analysis of the economic activities in the country according to the sectors in the economy and the form of natural disaster faced by the economy. Such an analysis would help economists to measure the complex effects of natural disaster on the economy and also interpret these effects in economic terms (Loayza et al., 2009). An important finding from recent research that draws attention of economists and policymakers is that, earthquakes shocks on the growth path of an economy are found to have weaker impact in terms of statistical significance than the impacts cast by floods or droughts. Economic impact of earthquakes Some scholars claim that earthquakes do not cast momentous effect on the overall growth in national output of the disaster-stricken countries. However, some others have shown noteworthy consequences of earthquakes on the pattern of sectoral growth in the economy, particularly in developing countries. These results have been validated by studies made on the sectoral pattern of growth in the Indian subcontinent after the earthquake in Bhuj district of Gujarat in 2001 (Vatsa, 2001). Researchers have classified the contributors to the country’s GDP in terms of the agricultural sector and non agricultural sector (Levin, Lin and Chu, 2002; Im, Pesaran and Shin, 2003). Earthquakes seem to cast negative cumulative impact on the growth of agricultural sector (Cuaresma, Hlouskova and Obersteiner, 2008). The negative impact on the sector is not the result of a sharp downfall in productivity in any particular year. Rather, it is the result of cumulative effect of a period of consecutive years after the occurrence of the disaster (Hallegatte and Ghil, 2007). The most likely channels that drive the negative growth in the sector have been identified to be the disorder in transport and communication facilities and disruption of the infrastructure services in the economy. Earthquakes cause harm to property and infrastructure, such as, roads and bridges. Transportation supports distribution of the inputs and outputs in the agricultural sector. Disruption of transportation harms the smooth flow of the raw materials to the farmers and the final agricultural products to the markets (Rasmussen, 2004). The agricultural sector also faces lack of public funding in the years succeeding the earthquake. This is because resources are often directed to the construction industry for reconstruction of the roads, buildings and other infrastructure that have been harmed in the disaster (Becker and Mauro, 2006.). The urban areas in the developing economy reflect higher levels of growth than the rural areas. Funding mostly flows into the urban areas for reconstruction efforts, thereby, neglecting the agricultural sectors in the rural areas (Fomby, Ikeda and Loayza, 2011). Discussion According to results of cross-country data analysis carried out by some researchers, rate of economic growth in the countries that experience natural disasters at higher frequency have been found to be low than the countries that experience lesser disasters. In these countries the basic level of infrastructure remains low since the economy frequently faces a property loss due to destructive calamities, such as floods or earthquakes. The regions that are located in the earthquake prone zone are mostly found to have low levels of infrastructural development, and therefore, low levels of economic growth (Hallegatte and Dumas, 2009). Such constraints cast serious hindrances in the development path of the economy in the short run. However, in the long run, the impact of the natural calamities tends to show a declining trend. It is argued that the disasters cast positive thrust on the investment initiative in the economy, which enhances capital accumulation in the economy and therefore boost economic growth in the long run. Reference List Becker, T. and Mauro, P., 2006. Output Drops and the Shocks That Matter. [pdf] Available at: < http://www.imf.org/external/pubs/ft/wp/2006/wp06172.pdf > [Accessed 30 August 2013]. Benson, C. and Clay, E., 2004. Understanding the Economic and Financial Impact of Natural Disasters. [pdf] Available at: < http://ipcc-wg2.gov/njlite_download.php?id=5753 > [Accessed 30 August 2013]. Cavallo, E., Powell, A. and Becerra,O., 2010. Estimating the direct economic damages of the earthquake in Haiti. Economic Journal, 120 (546), pp. 298-312. Christian, R. J. H., 2007. Natural Disasters and Growth: Evidence Using A Wide Panel Of Countries. [pdf] Available at: < http://economia.uniandes.edu.co/content/download/2179/13088/file/ba3fd2007-14.pdf > [Accessed 30 August 2013]. Cuaresma, J. 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