Economic impact of natural disasters: a myth or mismeasurement?

ABSTRACT

This study sheds light on possible spatial aggregation bias and mismeasurement in natural disaster impacts on economic growth when adopting the synthetic control method. Using the impacted US areas of Hurricane Katrina in 2005 as a case study, we compared trends of real GRDP per capita, population, and GRDP at New Orleans-Metairie metropolitan statistical area and Louisiana State, 1992–2017. This study empirically demonstrates that improper spatial units of analysis could distort the causal inference in the synthetic control method. Additionally, per capita growth as indicators of recovery from natural disasters is likely to misinterpret economic growth when affected regions experience a sharp decrease in population. These biased results arouse special attention to possible underestimation of natural disaster impacts, particularly when analysing economically lagging regions. Also, seemingly increasing per capita indicators do not always support evidence of creative destruction after natural disasters.

KEYWORDS:

• Natural disaster
• economic growth
• synthetic control method
• aggregation bias

JEL CLASSIFICATION:

• Q54
• O40
• C52

Acknowledgments

This publication was supported by the Mississippi Agriculture and Forestry Experiment Station (MAFES), Mississippi State University.

Disclosure statement

We authors disclose that there are no relevant financial or non-financial competing interests to report.

Data availability statement

Some variables used in this manuscript are from commercial data provided by Woods & Poole Economics Inc. We do not have permission to release them. All the other data are publicly available from the sources mentioned in the manuscript.

Supplementary material

Supplemental data for this article can be accessed here.

Notes

¹ See https://www2.census.gov/geo/pdfs/reference/GARM/Ch13GARM.pdf (Retrieved 25 June 2020).