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Research papers natural disasters and the economy

More on the agenda Natural disasters such as earthquakes, floods, typhoons, and hurricanes inflict serious damage and so seem to be bad for the economy. For firms, natural disasters destroy tangible assets such as buildings and equipment — as well as human capital — and thereby deteriorate their production capacity.

These adverse impacts may sometimes be fatal to the firms and result in them being forced to close down. But the academic evidence on the economic impact of natural disasters is mixed. As reviewed in surveys such as Noy and Vu and Loayza et al.

But because these studies use aggregate data, they cannot answer why and how corporate productivity improves due to natural disasters. Natural disasters and corporate productivity: This mechanism is often called creative destruction.

There is some evidence for this hypothesis, although mixed.

How do natural disasters affect the economy?

De Mel et al find that the firms that suffered more damage to their assets because of the devastating tsunami in Sri Lanka in exhibited smaller profits, sales, and capital stock. These findings are inconsistent with creative destruction.

How do natural disasters affect the economy?

On the other hand, Hosono et al. Also consistent with this hypothesis, Leiter et al find that European firms located in regions affected by a major flood in had higher asset and employment growth as compared with non-affected firms, although they also find that the firms in the affected regions exhibited smaller value-added.

However, to the extent that efficient firms are also forced to exit, or an unnatural selection is at work, then the overall impact is unclear. In the subsequent sections, we report our findings from this study. Empirical approach on firm bankruptcy after the Tohoku Earthquake In Uchida et al a we use a sample of firms located in the Tohoku area of Japan that we obtain from the database of Teikoku Databank ltd.

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The TDB is a leading private credit bureau in Japan that covers a sufficient fraction of the firms in Japan. We focus on bankruptcy as the type of firm exit, which is one of the most commonly observed types. Evidence for natural selection Table 1. Bankruptcy probability and firm score: Regression results Excerpt Note: Uchida et al a Figure 1.

Damaged versus undamaged firms Source: The black and the gray lines respectively indicate the results for firms inside and outside the affected areas. These findings suggests that natural selection is at work both inside and outside the affected areas. Second, the estimated marginal effects in Table 1 are comparable between the firms in damaged Column A and undamaged Column B areas, and the curvatures of the two lines in Figure 1 are comparable although the levels of the two lines differ, which will be discussed below.

This finding means that the Tohoku Earthquake neither promotes nor demotes the natural selection of firms. In reality, it is evident that the firms in the affected area do suffer substantial damage, especially from tsunamis or the serious accident at the nuclear plant in Fukushima.

Hence, the finding of a smaller probability of bankruptcy in the affected area is seemingly counterintuitive. However, there is one potential reason for the lower probability in the affected area — the enormous amount of public aid to firms. These firms may have voluntarily closed down.

  1. Natural disasters and corporate productivity.
  2. For firms, natural disasters destroy tangible assets such as buildings and equipment — as well as human capital — and thereby deteriorate their production capacity. Regression results Excerpt Note.
  3. These firms may have voluntarily closed down. We focus on bankruptcy as the type of firm exit, which is one of the most commonly observed types.

This story is convincing because the Tohoku area is the epitome of a shrinking Japan due to its aging population. Therefore, the firms in this area would have sooner or later faced long-run problems such as difficulty in business succession and a decline in the local economy. Indeed, we have little evidence to support these conjectures, and there remain many empirical questions to resolve.

  • Second, the estimated marginal effects in Table 1 are comparable between the firms in damaged Column A and undamaged Column B areas, and the curvatures of the two lines in Figure 1 are comparable although the levels of the two lines differ, which will be discussed below;
  • Hence, the finding of a smaller probability of bankruptcy in the affected area is seemingly counterintuitive.

As the above discussion suggests, the exit of firms — or more generally their dynamics and the recovery of the local economy after natural disasters — is closely intertwined with the policy measures taken and the underlying economic conditions. Thus we should have a broader and long-run perspective in examining their economic impact and the policy measures needed to deal with them — beyond just focusing on the direct and devastating damage that attracts much of our attention.

For the mechanism through which the market eliminates inefficient firms during the recession period, see e. Using very detailed plant-level information for the amount of damage, this study finds that plants with more damage are more likely to exit.

Ono et al examine the relocations of firms after the Tohoku Earthquake and find that damage by the earthquake increased the likelihood of relocations.

The Macroeconomic Impacts of Natural Disasters: The Case of Floods

Using this budget, the government has implemented a variety of measures, such as different forms of subsidies, public credit guarantees by credit guarantee corporations, and loans by public financial institutions.

Saito et al inspect from an economics viewpoint the policy-making process behind this huge budget and conclude that the budget was excessive. This article is published in collaboration with VoxEU. Publication does not imply endorsement of views by the World Economic Forum. To keep up with Agenda subscribe to our weekly newsletter.