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Article Excerpt
I. INTRODUCTION
The literature on the economic effects of natural disasters has concentrated traditionally on the short-run response of economic variables to catastrophic events. Most of the research carried out on this topic, starting with Dacy and Kunreuther (1969), tends to find that gross domestic product (GDP) increases after the occurrence of a natural disaster. Albala-Bertrand (1993a, 1993b) showed that even for large disasters (as measured by the loss-to-GDP ratio), the reconstruction effort needed to keep the level of output from falling is relatively small. Tol and Leek (1999) also provided evidence of positive effects of natural disasters on macroeconomic variables in the short run.
While the predominant view usually stated in official statements of international organizations and governments is that natural disasters are an enormous barrier to economic development (see, e.g., United Nations Development Programme 2004), the quantification of long-run economic effects of natural disasters was an empty field of research until very recently. To our knowledge, the article by Skidmore and Toya (2002) is the only piece of empirical research that assesses directly the long-run economic impact of natural disasters. Using a cross-section of developed and developing countries, Skidmore and Toya (2002) showed that after conditioning on other determinants, the frequency of climatic disasters is positively correlated with human capital accumulation, total factor productivity (TFP) growth, and GDP per capita growth.
One of the explanations put forward in support of the existence of a positive partial correlation between the frequency of natural disasters and both TFP and GDP per capita growth is related to the absorption of new technologies. A country whose capital stock is reduced by a natural disaster may have an incentive to replace it with capital that embodies newer technology than that which was destroyed. (1) This would lead to higher rates of TFP and GDP per capita growth and would render natural disasters an example of Schumpeterian "creative destruction," a concept that, embedded in the theory of endogenous growth, has recently become a key explanation of long-run economic growth patterns (see, e.g., Aghion and Howitt 1998). The same idea was put forward in Okuyama (2003) and Okuyama, Hewings, and Sonis (2004), where it was argued that older equipment is more exposed to damage when a disaster hits the capital stock; thus, the replacement of these facilities would constitute a positive productivity shock, which may have permanent consequences in the growth rate of the whole economy. Skidmore and Toya (2002) found a positive partial correlation between the frequency of climatic disasters and TFP growth for a cross-section of 89 developed and developing countries. The results for geologic disasters indicate no significant effect of these on TFP growth. Although their conclusion is that "disasters provide opportunities to update the capital stock and adopt new technologies" (Skidmore and Toya 2002, p. 681), the measure of TFP used in order to arrive at this conclusion contains information on many other (observable and unobservable) institutional, political, and economic variables. Furthermore, given that the method used in computing TFP, based on Coe and Helpman (1995), does not account for human capital as a factor of production, the correlation found between TFP growth and climatic disasters may just be picking up the substitution of physical for human capital in disaster-prone countries.
It should be explicitly stated that there are basic differences between the Schumpeterian concept of creative destruction and the effect that natural disasters are hypothesized to have as mentioned in the studies given above and in the analysis performed in this article. Schumpeter's view on creative destruction emphasized competition dynamics as the engine behind technological progress (Schumpeter 1950), while the term in this article refers to a more literal interpretation with similar ex-post effects, namely, technology replacement after a catastrophic event. (2) The greater exposure of old vintage capital stock to catastrophic phenomena, together with the fact that natural disasters tend to be rare events, may give the affected economy the opportunity to upgrade obsolete equipment with the leading edge technology after the older stock is destroyed. Similar arguments have been raised in order to explain the economic performance of countries defeated in major wars (see, e.g., Koubi 2005; Organski and Kugler 1977).
This article contributes to the literature on the economic effects of natural disasters by assessing directly the relationship between foreign technology absorption and catastrophic events. We use an estimate of the R&D stock embodied in the imports of developing economies from the G-5 countries in order to investigate the relationship between foreign knowledge spillovers and catastrophic risk. In principle, concentrating on developing countries, which can be assumed to have relatively more obsolete capital stock, may give some insight as to whether the impact of natural disasters triggers technological upgrading. After conditioning upon the usual determinants of trade implied by gravity equations, we do not find systematic evidence of a positive partial correlation between the frequency of natural disasters and the R&D content of imports for our cross-section of developing countries in the period 19761990. If an interaction with the level of development of the receptor country is included in the regression, the results indicate that natural disasters tend to affect technology absorption positively only in countries with relatively high levels of GDP per capita. The results are reinforced if the time dimension of the data is exploited, and we present results for a panel obtained by pooling different subperiods of the available sample.
This article is structured as follows. Section II presents details on the computation of the foreign R&D stock variable, together with some preliminary results on its relationship with the different proxies for catastrophic risk. Section III reports the results of the estimation of different gravity equations augmented with variables accounting for the frequency and intensity of natural disasters. Section IV concludes.
II. R&D STOCKS, FOREIGN KNOWLEDGE ABSORPTION, AND NATURAL DISASTERS
Starting with the seminal contribution by Romer (1986), endogenous growth theory has provided a sound theoretical framework for the empirical examination of the effect of knowledge spillovers on economic growth (see, e.g., Aghion and Howitt 1992; Grossman and Helpman 1991). The main focus of this empirical literature has been the measurement of trade-related R&D spillovers. The underlying idea is that countries gain access to foreign technologies through trade; thus, those economies benefiting from imports from nations with a higher level of technological knowledge will experience higher growth rates of income per capita than those whose trade partners possess a lower technological level. Evidence on the existence and size of such knowledge spillovers is given in Coe and Helpman (1995): Coe, Helpman, and Hoffmaister (1997); and Eaton and Kortum (1996), to name some of the most relevant pieces of research in...
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