Joanne Stevenson, Ilan Noy, Garry McDonald, Erica Seville, and John Vargo
The economics of disasters is a relatively new and emerging branch of economics. Advances made in analysis, including modeling the spatial economic impacts of disasters, is increasing our ability to project disaster outcomes and explore how to reduce their negative impacts. This work is supported by a growing body of case studies on the organizational and economic impacts of disasters, such as Chang’s in-depth analysis of the Port of Kobe’s decline following the 1995 Great Hanshin earthquake, and the evolving studies of the workforce trends during the ongoing recovery of Christchurch, New Zealand, following a series of earthquakes in 2010 and 2011.
The typical view of post-disaster economies depicts a pattern of destruction, renewal, and improvement. Evidence shows, however, that this pattern does not occur in all cases. The degree of economic disruption and the time it takes for different economies to recover varies significantly depending on characteristics such as literacy rates, institutional competency, per capita income, and government spending.
If the impacts are large relative to the national economy, a disaster can negatively affect the country or sub-national region’s fiscal position. Similarly, disasters may have significant implications for the national trade balance. If, for example, productive capacity is reduced by disaster damage, exports decrease, the trade balance may weaken, and localized inflation may increase.
Studies of individual, household, industry, and business responses to disasters (i.e., microeconomic analyses) cover a broad range of topics relevant to the choices actors make and their interactions with markets. Both household consumption and labor markets face expansion and contraction in areas affected by disasters, with increased consumption and employment often happening in reconstruction related industries.
Additionally, the ability of businesses to absorb, respond, and recover in the face of disasters varies widely. Characteristics such as size, number of locations, and pre-disaster financial health are positively correlated with successful business recovery. Businesses can minimize productivity disruptions and recapture lost productivity by conserving scarce inputs, utilizing inventories, and rescheduling production.
Assessing the progress of economic recovery and predicting future outcomes are important and complex challenges. Researchers use various methodologies to evaluate the effects of natural disasters at different scales of the economy. Surveys, microeconomic models, econometric models, input-output models, and computable general equilibrium models each offer different insights into the effect of disasters on economies.
The study of disaster economics still faces issues with consistency, comprehensiveness, and comparability. Yet, as the science continues to advance there is a growing cross-disciplinary accumulation of knowledge with real implications for policy and the private sector.
Ilan Noy and William duPont
This is an advance summary of a forthcoming article in the Oxford Research Encyclopedia of Natural Hazard Science. Please check back later for the full article.
What are the long-term economic and demographic impacts of disasters? Do disasters caused by natural hazards lead to long-term declines in economic activity, or do they stimulate the local economy because of the added investment and the upgrading of infrastructure? What are the main facets of the economy that are impacted in the long term—population, incomes, employment, other parameters, or none at all? Are the long-term impacts of disasters caused by natural hazards different from those caused by man-made shocks, such as civil wars or terrorist attacks?
The type and severity of the natural hazard surely have an effect on the kinds of dynamics experienced after a disaster, but so do the levels of exposure of people and wealth (in the form of man-made infrastructure), and the social and economic vulnerabilities that characterize the affected area. Additionally, one needs to differentiate, when examining long-term impacts, between direct and indirect damage, and whether this distinction assists us in explaining different trajectories. The role of policy in shaping long-term outcomes is potentially very important. While it is difficult to claim significant agreement on any one topic, some intriguing insights have been emerging in recent research.
To discuss the long-term economic impact of natural disasters, one must first define impact. A common way to determine this impact is to compare the economy post-disaster to its state prior to the disaster. Some argue that an economy has recovered when it returns to pre-disaster levels. This approach can be misleading as the evidence suggests that, in some cases, economies that were severely impacted by disasters may experience a brief return to pre-disaster levels, occasioned by the boom in reconstruction spending, but then decline back to experience long-term decline associated with the disaster event itself or the fear it has created of future events.
It is clear from the above example that the appropriate comparison is to a counterfactual scenario without event. Of course, even more challenging is to identify, or predict, what would have happened had the disaster not occurred. Not surprisingly, the ways in which this counterfactual, disaster-free state is identified may determine the conclusions reached.
A minority of observers argue that it is common to see economies and communities reconstructed to a better state than they were pre-disaster (a “build-back-better” scenario), and others conclude that disasters occasioned by natural hazards are benign in the long term, at least at a large enough scale (potentially at the country level). On the other hand, very poor countries, very small countries, or regional economies within countries can all experience significant and very prolonged declines in economic activity in the aftermath of catastrophic natural hazard events. These adverse developments can be experienced as long-term declines in populations (e.g., New Orleans, post-2005), long-term declines in incomes and employment (e.g., Kobe, post-1995), very long-term declines in asset prices (the Dust-Bowl midwestern United States, post-1930s), or shifts in the sectors of economic activity (San Francisco, post-1906).