Institute at Brown for Environment and SocietyIBES

The Economics of Natural Disasters: Storms and risk impact economic growth in important ways

Each year, hurricanes and tropical cyclones pose a looming threat to countries all over the world—not only for fear of life and limb, but also for their catastrophic effects on regional economies.

Assistant Professor of Economics Lint Barrage studies the consequences of such disasters through a macroeconomic lens, with a goal of determining how economists can best conceptualize the risk these storms pose for different nations.

Heavily hit: According to Barrage and colleagues, the Philippines is one of the most severely cyclone-impacted countries in the world. The nation faces a very large negative impact on both growth & welfare, despite increased savings among its people. Photo: kuroboshiHeavily hit: According to Barrage and colleagues, the Philippines is one of the most severely cyclone-impacted countries in the world. The nation faces a very large negative impact on both growth & welfare, despite increased savings among its people. Photo: kuroboshi

Historically, many similar studies have published conflicting results. Some have found that natural disasters enhance economic growth, while others have found that they depress it. Barrage and her colleague, University of Arizona economist Laura Bakkensen, have highlighted one particular source of this conflict: the economic consequences of storm strikes differ from those that occur when there is a perceived risk of such strikes.

As Barrage explains, when a hurricane or tropical cyclone strikes, countries often must divert large amounts of otherwise productive money toward rebuilding losses and repairing damages. These costs can take a significant toll on afflicted economies in the short run, and may never be fully recovered.

Conversely, when people believe that they are at risk for experiencing a natural disaster, they generally invest more in safer ventures such as human capital and education, helping economies grow. At the same time, citizens may also become less likely to invest in high-return but risky ventures, such as small-scale businesses that cannot insure against cyclone risks. On net, however, Barrage and her colleague find that the threat of cyclone risk typically increases savings and investments to the point where it drives economic growth upwards in the long run.

However, as Barrage notes, although “economic growth” tends to be a positive buzzword, it is not always an accurate barometer for the well-being of a nation’s people.

“If people are scared because they face a larger risk from natural disasters, they may save more and that may increase growth—but they're not better off,” she says. “They're just guarding themselves more against risk.”

Barrage and her colleague have found similar macroeconomic effects across 190 countries, based upon data logging storm strikes and storm risk over the last 60 years. She is careful to note, however, that developing countries are still hit far harder by both risks and strikes than are developed nations.

“One of the things that makes natural disasters much more damaging for developing countries is the fact that they don't have as well-developed of a financial market as the U.S.,” Barrage explains. “In the U.S., there's insurance, you can hedge on financial markets, the government implicitly insures people through FEMA, and things like that. Even if your house is affected by a natural disaster, that doesn't necessarily mean you lose everything.”

“In poor countries, those kinds of mechanisms are a lot less available,” she continues. “For people to avoid being truly wiped out by a natural disaster, they have to take more precautionary measures and protect themselves more on their own against these disasters.”

Barrage explains that even small disasters can have a whopping impact over time, especially in the most vulnerable areas of the world: “Every year that you're missing out on even just a tenth of a percentage point of economic growth—over time, that adds up to huge amount of wealth that's permanently missing from countries that could be better off if they could deal better with natural disasters.”

Understanding the subtle differences between the economic effects of perceived storm risk and those of true storm strikes will not only promote the financial well-being of a nation’s people, but also serve to protect them effectively in a world where severe weather events are becoming more frequent and more intense.

As Barrage explains, one key way to ensure that natural disaster policies are both effective and sustainable is to base them on sound macroeconomic analysis.

“The most important insight,” she says, “is that the mechanisms through which natural processes affect the economy really matter.”

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