metadata: authors: 0: author: Markandya,Anil
1: author: Pedroso-Galinato, Suzette
count: World
docna: 0: docna: Economic modeling of income, different types
            of capital and natural disasters
docty: Policy Research Working Paper
subtopic: Energy Demand,Energy and Environment,Energy and Mining,Natural Disasters
teratopic: Environment,Conflict and Development,Macroeconomics and Economic Growth,Urban Development,Health, Nutrition and Population
abstracts: cdata!: This paper provides empirical estimates
            of the impacts of natural disasters on different forms of
            capital (with a focus on human and intangible capital and
            natural capital), and on real gross domestic product per
            capita. The types of disaster considered are droughts,
            earthquakes, floods, and storms and their impacts are
            measured in terms of the number of people affected or people
            affected per capita. The authors find statistically
            significant reductions on the values of human and intangible
            capital and land capital as a consequence of the disasters,
            and these reductions are greater when the impacts last for
            longer periods. Based on the assumption that natural
            disasters indirectly affect the level of income via losses
            in capital, the authors estimate a Cobb-Douglas production
            function using the different forms of capital as inputs. The
            losses in income are found to vary across different
            countries and the type of natural disaster studied. However,
            a common finding is that the losses in income depend
            generally on two factors: the relative magnitude of impacts
            of a natural disaster and the values of different forms of
            capital. The estimates in this paper are national level
            figures and cannot be useful in predicting the cost of
            damages at the local level, where much larger amounts can be
            experienced per capita. Nevertheless, the estimates provide
            some indication of magnitudes for different disasters and
            for different groups of countries. More work and more data
            are needed to get a dynamic profile for the losses of
            capital and income. But given the study's results, the
            time profile is estimated to range typically between two and
            five years.
repnme: repnme: Economic modeling of income, different
            types of capital and natural disasters
display_title: Economic modeling of income,
            different types of capital and natural disasters
listing_relative_url: /research/2009/03/10377098/economic-modeling-income-different-types-capital-natural-disasters
topicv3: Energy and Extractives m1326595 507,Earthquake m1503308 3154,Drought m1503313 3162,Flood m1503315 3216,Natural Disaster m1503325 3138
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Environment,Conflict and Development,Macroeconomics and Economic Growth,Urban Development,Health, Nutrition and Population
no_of_pages: 33
author_keys: 0: author_key: 321136
model_extractions: WPS4875 Policy ReseaRch WoRking PaPeR 4875 Economic Modeling of Income, Different Types of Capital and Natural Disasters _Anil Markandya Suzette Pedroso-Galinato_ The World Bank Sustainable Development Network Global Facility for Disaster Reduction and Recovery Unit March 2009
Policy ReseaRch WoRking PaPeR 4875

# **Abstract**

This paper provides empirical estimates of the impacts of natural disasters on different forms of capital (with a focus on human and intangible capital and natural capital), and on real gross domestic product per capita. The types of disaster considered are droughts, earthquakes, floods, and storms and their impacts are measured in terms of the number of people affected or people affected per capita. The authors find statistically significant reductions on the values of human and intangible capital and land capital as a consequence of the disasters, and these reductions are greater when the impacts last for longer periods. Based on the assumption that natural disasters indirectly affect the level of income via losses in capital, the authors estimate a CobbDouglas production function using the different forms of capital as inputs. The losses in income are found to vary across different countries and the type of natural disaster studied. However, a common finding is that the losses in income depend generally on two factors: the relative magnitude of impacts of a natural disaster and the values of different forms of capital. The estimates in this paper are national level figures and cannot be useful in predicting the cost of damages at the local level, where much larger amounts can be experienced per capita. Nevertheless, the estimates provide some indication of magnitudes for different disasters and for different groups of countries. More work and more data are needed to get a dynamic profile for the losses of capital and income. But given the study’s results, the time profile is estimated to range typically between two and five years.

This paper—a product of the Global Facility for Disaster Reduction and Recovery Unit, ustainable Development Network Vice Presidency—is part of a larger effort in the department to to disseminate the emerging findings of the forth coming joint World Bank-UN Assessment of the Economics of Disaster Risk Reduction. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The team leader—Apruva Sanghi—can be contacted at asanghi@ worldbank.org, and the author of this paper at anil.markandya@bc3research.org. We thank Apurva Sanghi and participants at the World Bank for useful comments.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Economic Modeling of Income, Different Types of Capital and Natural Disasters**<sup></sup>

**Anil Markandya and Suzette Pedroso-Galinato**<sup></sup>

Key words: Natural disaster, capital, income JEL classification: C51, E22, E23, Q54  This paper –a product of the Global Facility for Disaster Reduction and Recovery Unit, Sustainable Development Network Vice Presidency- is part of a larger effort in the department to disseminate the emerging findings of the forth coming joint World Bank-UN Assessment of the Economics of Disaster Risk Reduction. The team leader for the Assessment – Apurva Sanghi – can be contacted at “asanghi@worldbank.org”. We thank Apurva Sanghi for his useful comments and sharing reference materials; and members of his team for their generous help with data gathering. Thanks also to Kirk Hamilton and Giovanni Ruta (World Bank-ENV) for providing us updated data on the wealth estimates of nations. We are also grateful to the participants during the BBL Seminar at the World Bank for their useful and constructive suggestions on the earlier draft, and to Gregmar Galinato (Washington State University) for his expert guidance on econometric modeling and computing issues, which all helped improve the final version of this paper.

 Anil Markandya, University of Bath, UK and Basque Centre for Climate Change, Spain (Corresponding author, Email address: anil.markandya@bc3research.org); Suzette Pedroso-Galinato, International Marketing Program for Agricultural Commodities and Trade (IMPACT) Center, School of Economic Sciences, Washington State University, USA.
# **I. Introduction**

Recent work at the World Bank and elsewhere has emphasized the importance of different types of capital in determining a country’s productive potential (World Bank, 2006). In particular it distinguishes physical (produced) capital from human, natural and social capital. Each is an important component of wealth and over time, as development takes place, the relative roles of different types of capital change (natural capital as a share of the total declines for example).

One of the issues that arises in understanding the impacts of disasters is how these different types of capital are affected, how they recover after the disaster and how each of them has an impact on output at the national and regional levels.

We postulate that the impact of natural disasters on output is indirect, that is, the natural disasters affect output through their impacts on the different forms of capital (inputs) that make up output. In this regard, the aim of this study is to see how disasters affect the measures of each type of capital and how these changes in capital then impact on output. As expected these impacts will have some dynamic profile and we seek to understand this as much as possible.

# **II. Four types of capital and data description**

In Markandya and Pedroso-Galinato (2007), the production function at the national level was based on four types of capital:

- a. Produced or physical capital (PK) – an aggregate of the value of equipments, machinery, structures (including infrastructure) and urban land;

- b. Human capital (H) – there are two alternative measures: human capital related to educational attainment (HS), and human capital as part of the intangible capital residual (HR). The _intangible capital residual_ consists of human capital and the quality of formal and informal institutions. It is measured as the difference between total wealth and the produced and natural capital (World Bank, 2006).

- c. Production and net imports of non-renewable energy resources (E) – sum of the values of oil, natural gas, hard coal and lignite.

- d. Land resources (L) – aggregated value of cropland, pastureland and protected areas.

Markandya and Pedroso-Galinato (2007) dealt with cross-sectional data of 208 countries for 2000. The underlying production function was assumed to take a nested CES form. The results indicated a relatively high elasticity of substitutability between different types of capital; for example, loss of natural capital could be made up relatively easily by increases in human and physical capital. In addition, the paper also showed that the efficiency of all capital is significantly influenced by changes in economic indicators (trade openness and private sector investment).

For this study, data on the four types of capital are obtained for three periods – 1995, 2000 and 2005 and for 210 countries, from an updated database underpinning the wealth estimates of nations (World Bank, 2006; G. Ruta and K. Hamilton, personal communication, 2009). The data are measured in per capita values at 2005 constant prices. An econometric analysis is conducted for a panel data of capital, along with the data on the magnitude of natural disasters for the same 2
periods. Because of limitations in the data on human capital related to education (HS), the intangible capital residual (HR) is used as a proxy measure of human capital in this study. Henceforth, HR would be referred in this paper as human and intangible capital. The different types of capital are determined by a number of factors, such as household income, community infrastructures and strength of institutions (see Appendix 1). In addition, we include the magnitude of natural disasters as a determinant in order to examine its impacts on capital. The number of occurrences of natural disasters and the extent of damages are described below.

# **III. Natural disasters**

Four types of natural disasters are considered in the study: droughts, earthquakes, floods, and hurricanes/storms. Data on the number of natural disasters are obtained for 196 countries from the Emergency Events Database (EM-DAT)<sup>1</sup> . _Drought_ is characterized by a shortage in a region's water supply as a result of constantly below average precipitation. _Earthquake_ is characterized by the shaking and displacement of ground due to seismic waves. This variable refers to the occurrences of earthquakes only without secondary effects. _Flood_ is defined by a significant rise of water level in a stream, lake, reservoir or coastal region. _Storm_ is represented by wind with a speed between 48 and 55 knots.

Table 1 shows a maximum of 196 countries for which data are available, with a total of 55 events of drought, 82 events of earthquake, 447 events of flood and 303 events of storm that started during the three given periods. A natural disaster, such as drought, may last for several years but the data presented here refer explicitly on the tally of events in a single year, i.e., the year that a natural disaster started. Table 2 presents the countries with more than 3 reported events of a natural disaster in a given year. The highest number of drought events is recorded in China in 2000 (3 incidences). Over the given time periods, China was hit with the most incidences of natural disasters: a total of 5 drought events<sup>2</sup> , 8 earthquakes, 23 events of flood and 30 events of storm.

_<u>Table 1: Summary statistics of events of natural disasters, by type, 1995-2005.</u>_

|Natural|Year|No. of||No. o|fevents||
|---|---|---|---|---|---|---|
|disaster||observations|Total|Minimum|Maximum|Standard<br>deviation|
|Drought|1995|196|6|0|1|0.17|
||2000|196|27|0|3|0.40|
||2005|196|22|0|2|0.33|
|Earthquake|1995|196|26|0|3|0.52|
||2000|196|31|0|5|0.62|
||2005|196|25|0|4|0.51|
|Flood|1995|196|95|0|6|1.05|
||2000|196|158|0|9|1.54|
||2005|196|194|0|17|1.95|
|Storm|1995|196|76|0|10|1.19|
||2000|196|101|0|12|1.50|
||2005|196|126|0|14|1.51|

> 1 http://www.emdat.be/

> 2 China had three events of drought in 1995 and two events in 2005.

3
_<u>Table 2: Countries with more than 2 events of a natural disaster per year, 1995, 2000, 2005</u>_

|Naturaldisaster|1995|2000|2005|
|---|---|---|---|
|Drought|None|China–3|None|
|Earthquake|China, Colombia, Indonesia,<br>Mexico–3 each|China, Indonesia – 5 each|Turkey – 3<br>Iran – 4|
|Flood|Azerbaijan, Brazil, China,<br>India, Iran, Morocco,<br>Pakistan – 3 each<br>Bangladesh – 4<br>Indonesia, Philippines,<br>United States – 5|Bangladesh, Colombia,<br>Iran, Mexico, Philippines,<br>Solomon Islands, Somalia,<br>Thailand, United Kingdom<br>– 3 each<br>Algeria, Angola,<br>Argentina, Brazil,<br>Indonesia, Italy – 4 each<br>Russia, United States – 5<br>each<br>China – 9|Bangladesh, Colombia,<br>Haiti, Indonesia,<br>Kenya, Mexico – 3<br>each<br>Ethiopia, Iran,<br>Venezuela – 4 each<br>Bulgaria, Pakistan,<br>Russia, Vietnam – 5<br>each<br>United States – 6<br>Romania – 8<br>Afghanistan – 9<br>China – 11<br>India– 17|
|Storm|Russia – 3<br>Australia, Bangladesh – 4<br>each<br>Mexico – 5<br>China – 6<br>Philippines – 7<br>United States – 10|Australia, Japan, Ukraine<br>– 3 each<br>Mozambique – 4<br>Philippines – 6<br>Bangladesh, Vietnam – 7<br>each<br>China – 10<br>United States – 12|Jamaica, Japan, Korea<br>Republic – 3 each<br>Honduras, India,<br>Taiwan, Vietnam – 4<br>each<br>Haiti – 5<br>Bangladesh – 7<br>United States – 8<br>China– 14|

One of the approaches in determining the impacts of natural disasters is by looking at the magnitude of impacts in terms of the number of casualties, injuries, people affected and people left homeless as a result of a particular disaster. The relative magnitude of impacts is calculated with respect to a country’s total population in a particular year. Table 3 shows the magnitude of impacts _per 1,000 people_ . In 1995, the drought events in Zambia affected about 138 for every 1,000 people; while in 2000 and 2005, droughts affected 486 per 1,000 people in Tajikistan and 386 per 1,000 people in Malawi, respectively. Earthquakes caused the largest impacts per thousand of population in Cyprus (2.63), China (1.44) and Chile (1.69) during 1995, 2000 and 2005, respectively. Over the same periods and across the entire sample of countries, floods affected the most number of people in Azerbaijan (196 per 1,000 people), Cambodia (270 per 1,000 people) and Guyana (372 per 1,000 people). Finally the biggest impacts of storm events in terms of people affected occurred in Antigua and Barbuda (956 per 1,000 people) in 1995, Moldova (627 per 1,000 people) in 2000 and Albania (127 per 1,000 people) in 2005. The most number of injuries during the three periods was caused by storm events in 1995, with a total of 3 for every 1,000 people.

4
_<u>Table 3: Number of deaths, injured, homeless and affected people caused by natural disasters per 1,000 people, 1995-2005.</u>_

|Disaster|Type of<br>||199|5|||2|000|||20|05||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|type|Impact|All Count<br>|ries (n=196)<br>|Country<br>rep|with highest<br>orted impact<br>|Al<br>|l Countries<br>(n=196)<br>|Country<br>rep|with highest<br>orted impact<br>|Al<br>|l Countries<br>(n=196)<br>|Country w<br>repo|ith highest<br>rted impact<br>|
|||Total<br>No.|Stdev|No.|Country|Total<br>No.|Stdev|No.|Country|Total<br>No.|Stdev|No.|Country|
|Drought|Death|0|0|0||5.02E-04|3.5E-05|4.82E-04|Moldova|1.12E-03|6.2E-05|7.58E-04|Kenya|
||Injured|0|0|0||0|0|0||0|0|0||
||Affected|258.55|12.56|137.51|Zambia|1,114.99|40.63|486.00|Tajikistan|1,547.98|42.98|385.60|Malawi|
||Homeless|0|0|0||0|0|0||0|0|0||
|Earthquake|Death|0.07|3.31E-03|0.04|Japan|0.01|3.5E-04|3.85E-03|Azerbaijan|0.49|0.03|0.47|Pakistan|
||Injured|0.34|0.02|0.28|Japan|0.11|5.6E-03|0.07|Azerbaijan|0.89|0.06|0.82|Pakistan|
||Affected|10.94|0.33|2.63|Cyprus|5.19|0.16|1.44|China|4.71|0.18|1.69|Chile|
||Homeless|3.99|0.16|2.00|Japan|2.93|0.11|1.11|Nicaragua|32.68|2.39|32.10|Pakistan|
|Flood|Death|0.12|2.74E-03|0.03|Morocco|0.50|2.7E-02|0.36|Bhutan|0.11|3.5E-03|0.05|Guyana|
||Injured|0.07|4.36E-03|0.06|China|0.03|8.4E-04|0.01|Thailand|0.02|6.6E-04|0.01|Colombi<br>a|
||Affected|867.80|21.96|195.55|Azerbaijan|1,195.53|34.27|269.81|Cambodia|562.70|27.95|371.58|Guyana|
||Homeless|72.24|2.21|20.30|Azerbaijan|29.59|1.42|18.51|Botswana|13.57|0.50|5.68|Central<br>Africa|
||||||||||||||Rep|
|Storm|Death<br>Injured<br>Affected<br>Homeless|0.11<br>2.51<br>1,144.72<br>339.63|3.40E-03<br>0.18044<br>71.23<br>17.03|0.03<br>2.43<br>956.35<br>213.11|Antigua &<br>Barbuda<br>Antigua &<br>Barbuda<br>Antigua &<br>Barbuda<br>Lao PDR|0.10<br>2.37<br>1,502.62<br>3.07|4.3E-03<br>0.17<br>59.60<br>0.13|0.06<br>2.28<br>627.20<br>1.57|Belize<br>Belize<br>Moldova<br>Philippines|0.25<br>1.35<br>282.57<br>4.94|9.6E-03<br>0.08<br>10.36<br>0.23|0.12<br>1.06<br>126.83<br>2.91|Guatema<br>la<br>Nicaragu<br>a<br>Albania<br>Mexico|

_Source_ : EM-DAT (2008) _Notes_ : Figures greater than 1,000 such as the total number affected by storm in 1995 (  1,145 affected per 1,000 people) are possible due to instances where there are multiple occurrences of a particular disaster in one country in a given year. “Total no.” refers to the sum across the entire sample (196 countries). _Definition_ : Death – Persons confirmed as dead and persons missing and presumed dead; Injured – People suffering from physical injuries, trauma or an illness requiring medical treatment as a direct result of a disaster; Homeless – People needing immediate assistance in the form of shelter; Affected people – People requiring immediate assistance during a period of emergency, i.e., requiring basic survival needs, such as food, water, shelter, sanitation and immediate medical assistance. Appearance of a significant number of cases of an infectious disease introduced in a region or a population that is usually free from that disease.

5
# **IV. Panel estimation of the losses in capital and income after a natural disaster**

The panel data estimation technique is employed to account for the inter-country heterogeneity in the analysis. The expected losses in income as well as capital (natural or human and intangible capital) after a natural disaster are estimated by, first, running regressions with each type of capital as a dependent variable: _Capitalit_  _f_ ( _X jit_ , _Magnitude of Natural Disasterkit_ , _Lagged Magnitude of Natural Disasterkit_  _n_ ) (1) For a given country _i_ and time period _t_ , _Capital_ denotes the per capita values of human and intangible capital (HR) or natural capital measured by land resources (L).<sup>3</sup> _Xj_ is a vector of independent variables that influence the dependent variable. Identification of _Xj_ is based on relevant literature, which is described in Appendix 1. _Natural Disasterk_ refers to the _kth_ type of natural disaster — i.e., either drought, earthquake, flood or hurricane/storm, while the _magnitude_ refers to the number of deaths, injuries, homeless, and affected by a natural disaster. _Lagged Magnitude of Disasterk_ aims to capture any lingering impacts of natural disaster _k_ on the dependent variable after it has occurred.

There are two models for panel data estimation: fixed effects and random effects. The _fixed effects_ model allows the intercept to differ across the cross-section units by estimating a different intercept for each cross-section, i.e., each country. This is captured by the introduction of dummy variables for the countries (equations 2 and 3). The _random effects_ model, on the other hand, assumes that intercepts may be taken as random and hence treated as if they were part of the error term. Also, cross-sectional observations are assumed to be randomly drawn from a sampling distribution; hence, there is no need to include dummy variables to capture the heterogeneity across countries. As a result, the model has an overall intercept, a set of explanatory variables and a composite error term (equations 4 and 5). The composite error term has two parts: a random intercept term and the traditional random error (Kennedy, 2003).

# **_Estimation of the impacts of natural disasters on human and intangible capital and natural capital_**

The fixed and random effects models for estimating a type of capital are shown below. A logarithmic functional form is used instead of a functional form in levels because it yields more statistically significant results. Other independent variables were initially included in the models and the regression results were compared, particularly the statistical significance of parameter estimates and whether they have the correct signs, and R-squared values. Different measures of impact have also been tried – deaths and injuries, affected and total affected<sup>4</sup> and those that

> 3 Estimations were also done initially for produced/physical capital and energy capital.  However, they were later dropped because the measure of physical capital is not affected by the presence of disasters. This does not mean that disasters do not impact on the amount of capital. It does mean that given available data, with only three periods on disasters, one cannot pick up the effects and hence their magnitude is likely to be small compared to other factors that determine differences in the amounts of physical capital between countries. On the other hand, energy capital was found to be very sensitive to natural disasters but the results were not robust and not credible.

> 4 _Total Affected_ variable is the sum of people who were injured, homeless and affected by a natural disaster.

6
produce the most robust and credible results have been chosen. The specifications below were selected because they gave relatively robust results and best diagnostic tests, i.e., relatively high R-squared and statistically significant estimates with correct signs: ln _HRit_     _CSi_   ln _RHHFCEPCit_   _AFFECTEDit by Natural Disaster k_ (2)   _AFFECTEDit_  _n by Natural Disaster k_   _T_ 1995   _T_ 2000   _it_ ln _Lit_     _CSi_  ln _POPDEN_  ln _AGVAPC_  _CCORRUP_  ln _ROADTOT_   _AFFECTEDit by Natural Disaster k_   _AFFECTEDit_  _n by Natural Disaster k_ (3)   _T_ 1995   _T_ 2000   _it_ ln _HRit_     ln _RHHFCEPCit_   _AFFECTEDit by Natural Disaster k_ (4)   _AFFECTEDit_  _n by Natural Disaster k_   _T_ 1995   _T_ 2000  _it_   _it_ ln _Lit_    ln _POPDEN_  ln _AGVAPC_  _CCORRUP_  ln _ROADTOT_   _AFFECTEDit by Natural Disaster k_   _AFFECTEDit_  _n by Natural Disaster k_ (5)   _T_ 1995   _T_ 2000   _it_   _it_ where _CS_ represents a dummy variable for country _i;RHHFCEPC_ is real household final consumption expenditure per capita; _POPDEN_ refers to population density; AGVAPC is real agriculture value added per capita; CCORRUP, control of corruption index; ROADTOT, total road network; and _AFFECTED_ refers to the number of people requiring immediate assistance during a period of emergency, such as food and water.

Alternatively, in place of _AFFECTED_ , we also use the impacts of a natural disaster expressed in per capita terms, i.e., affected people per capita (AFFECTEDPC). Different model specifications are presented in the Appendix 2. Natural disaster _k_ refers to a type of natural disaster, i.e., drought, earthquake, flood and storm. _T1995_ and _T2000_ are time dummy variables where 2005 is the base year,  _it_ is the random intercept term and  _it_ is the traditional error term.

Different _n_ lengths of lag (t-1, t-2, t-3, t-n) were included in the model until the coefficient estimate of the last lagged variable (individually or jointly with other time variables) is statistically insignificant. Statistical insignificance implies that the natural disaster has no more impact on the dependent variable.<sup>5</sup> For example, if the coefficient estimate of t-2 is statistically insignificant, it infers that the natural disaster has no more impact on capital by year 2. A joint statistical significance of parameter estimates at _t_ and _t-n_ imply that the joint or total impacts of a natural disaster on capital are significant during the said periods.

In order to see the impacts of a disaster, we take the aggregate effect of the impacts on the relevant form of capital during different periods (t, t-1, ..., t-n). With the regression results from

> 5 A study by Gourio (2008) found that GDP bounces back just after the end of a natural disaster. Disaster was measured by the total decline in GDP from peak to trough, where the trough marks the end of the disaster.  We assume that capital depicts the same response after a disaster.

7
the above equations 2 to 5, we will be able to predict the average value of capital with and without the natural disaster. To illustrate using the general model (equation 1), ˆ ˆ _With disaster_  _Capital d_ , _t_  _a_  _bX j_ , _t_  _c_ ˆ _Magnitude of Disaster k_ , _t_ (6)  _d_<sup>ˆ</sup> _Magnitude of Disaster k_ , _t_  1<sup></sup> _e_ ˆ _Magnitude of Disaster k_ , _t_  _n_ ˆ ˆ _Without disaster_  _Capital_ 0, _t_  _a_  _bX j_ , _t_ since _Magnitude of Disaster k_ , _t_ and _t_  _n_  0 (7) where _X j_ , _t_<sup>is the average value of a</sup><sup>_jth_independent variable and</sup> _Magnitude of Disaster k_ , _t_ and _t_  _n_ is the average value of the impacts of a _k_<sup>_th_</sup> type of natural disaster.

# **_Estimation of the impacts of natural disasters on income through impacts of the disasters on capital_**

We also examine the impacts of natural disasters on the level of output or income, where income is a function of the four types of capital described in section 2. The relationship of output and inputs follows a classical Cobb-Douglas production function: where income is measured by real GDP per capita (RGDPPC), _A_ is the efficiency parameter, _HR_ is the human capital, _PK_ refers to produced or physical capital, _L_ denotes land resources and _E_ refers to energy resources. In Markandya and Pedroso-Galinato (2007), the efficiency parameter of the nested CES production function is assumed to be a function of the economic indicators (trade openness and private sector investment) and institutional indicators. In this study, _A_ is assumed to be a function of _trade openness_ (TOPEN) and an _intercept_ that accounts for other variables not included.<sup>6</sup> Hence, the production function is specified as follows: _RGDPPCit_  _e Intercept_  _TOPEN HRit_  _PK it_  _Lit_  _Eit_  By taking logs we have, for the fixed effects model: and for the random effects model, ln( _RGDPPCit_ )  _Intercept_   _TOPEN_   ln( _HRit_ )   ln( _PK it_ )  ln( _Lit_ )   ln( _Eit_ ) (11)   _it_  _it_

> 6 Private sector investment and institutional indicators (voice and accountability, political stability and absence of violence, government effectiveness, rule of law and control of corruption) were initially included as determinants of _A_ but doing so did not yield sensible regression results.

8
In equation 10, _CS_ denotes the dummy variable of country _i_ . In equation 11,  _it_  _it_  is the composite error term of the random effect model. The latter two equations also give us the output elasticity estimates, which measure the responsiveness of income to a change in the levels of human capital, produced capital, land resources or energy resources, _ceteris paribus_ . The choice between equation 10 and equation 11 will be based on the Hausman test for random effects.

To estimate the income level _with_ the impacts of natural disasters (RGDPPCd), we use the estimated coefficients of equation 10 or 11 and estimated mean values of _HR d_ and _L d_ from equation 6. To simulate the level of income _without_ the natural disasters (RGDPPC0), the estimated coefficients of equation 10 or 11 are also used, together with the mean values of _HR_ 0 and _L_ 0 from equation 7 _._ Also, the _expected loss of income_ (  RGDPPC) after the natural disasters can be estimated by obtaining the difference in RGDPPC0 and RGDPPCd.

# **V. Model specification tests and regression results**

Several diagnostic tests were performed on equations 2-5 to determine the appropriate estimation method given available information. First, an F-test was performed on the country dummy variables to verify whether a pooled OLS or panel regression is appropriate. **The F-test rejected the null hypothesis of homogeneity across countries (i.e., all dummy parameters except one = zero). This implies that OLS is not applicable and panel data estimation should be used, either through fixed effects or random effects.** Next, the Hausman specification test was employed to test the null hypothesis of no correlation between the explanatory variables and composite error, i.e., whether the random effects model is appropriate or not. **The Hausman test rejects the null hypothesis, which means that there is correlation and using random effects would yield biased estimators; thus, a fixed effects model is preferred.** Results of the postestimation tests of different models are summarized in Appendix 2.

# **_Elasticity estimates of impacts of natural disasters on human and intangible capital_**

We employ the fixed effects model to examine how human capital and natural capital values are affected by the natural disasters, which are measured in terms of the magnitude of impacts.<sup>7</sup> With a semi-log relationship between capital and the impacts of natural disasters, as specified in ˆ equations 2-5, the elasticity estimate (  ) with respect to the average extent of impacts is given by:  ln _Capital_ ˆ ˆ ˆ  _Affected k_  _Affected kt_    _Affected kt_  _n_   (12)

> 7 Magnitude of disasters has two measures: _Number of People Affected and Number of People Affected Per Capita. “Affected”_ refers to people requiring immediate assistance during a period of emergency, i.e., requiring basic survival needs, such as food, water, shelter, sanitation and immediate and medical assistance; and population affected by an infectious disease introduced in their region that is usually free from that disease.

9
where _Affected kt_ and _Affected kt_  _n_<sup>denote the average number of people affected by a</sup><sup>_kth_type of</sup> natural disaster during period _t_ and _t-n_ , respectively, across the entire sample. Note that the addition of _t-n_ depends on whether or not we find that the joint impacts of the time variables are statistically significant.

Tables 4 and 5 show the elasticity estimates given the _percentage fall_ in the value of human and intangible capital per capita (HR) resulting from a one percent increase in the average number of people affected by a specific type of disaster. Two general models have been estimated. In the first model, the elasticity is with respect to the average number of people affected by a disaster (Table 4), while in the second it is with respect to the average number of people affected _per capita_ by the disaster, i.e., impacts are normalized for the national population (Table 5). Results from different specifications are presented here because we estimated a number of equations with different combinations of independent variables for sensitivity analyses.

The main points to note about the above results are the following:

- Storms and earthquakes consistently show a significant impact on HR levels.  Droughts and floods appear to be significant in the case where the impact is measured by the average number of persons affected but more significant results for both these disasters are found when the impact is measured in per capita terms.

- Given impacts of 2 years duration, the average elasticity of HR with respect to persons affected by storms is 0.018, while that for earthquakes is 0.013.  On the other hand, with respect to persons affected per capita, the average elasticities are: 0.006 (earthquakes), 0.006 (storms), and 0.019 (droughts).

- As expected, the reductions in HR are greater when the impacts of a disaster are felt at longer periods.  For instance, from Table 5, a percentage increase in the number of people affected per capita by earthquakes with a 2-year duration of impacts leads to a 0.006 percent reduction in HR over the given period.  Given impacts of earthquakes for five years, however, there is a 0.09 percent decline in HR for every percentage increase in the number of people affected per capita.  This figure is 15 times higher than when the duration of impacts is two years.

ˆ _Table 4: Elasticity estimates_ (  ) _between HR and a disaster type, with respect to the average number of_ _<u>people affected.</u>_

|Specific<br>-ation|Eart|hquakes|S|torms||Dr|oughts||Floods|
|---|---|---|---|---|---|---|---|---|---|
||ˆ|# of<br>Years|ˆ||# of<br>Years|ˆ|# of<br>Years|ˆ|# of<br>Years|
|1|0.011|**<br>2|0.012|**|2|--||--||
|2|0.014|*<br>2|0.012|**|2|--||--||
|3|0.013|*<br>2|0.012|**|2|--||--||
|4|--||0.026|**|2|0.020|***<br>1|--||
|5|--||0.025|*|2|--||0.466|***<br>2|
|_Average el_|_asticity gi_|_ven duration o_|_f statistic_|_ally s_|_ignifican_|_t impacts_||||
|1 year||||||0.020||||
|2years|0.013||0.018|||||0.466||

10
ˆ _Table 5: Elasticity estimates (_  ) _between HR and a disaster type, with respect to the average number of_ _<u>people affected per capita.</u>_

|Specific|Ea|rthqua|kes||Storm|s|D|rough|ts||Flood|s|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|-tion|ˆ||# of<br>Years|ˆ||# of<br>Years|ˆ||# of<br>Years|ˆ||# of<br>Years|
|1|0.005|**|2|--|||--|||--|||
|2|0.007|**|2|--|||--|||--|||
|3|0.004|**|2|--|||--|||--|||
|4|0.008|***|2|0.006|*|2|0.019|**|2|0.006|**|1|
|5|0.038|**|3|0.007|*|1|0.022|**|3|0.005|***|1|
|6|0.088|**|4|0.020|**|4|0.018|**|4||||
|7|0.092|***|5|0.031|**|5||||0.060|**|5|
|<br>_Average_<br>|<br>_elasticity_|<br>_given_|<br>_duration_|<br>_of statis_<br>|<br>_tically_<br>|_significant_|_impacts_|||<br>|<br>||
|1 year||||0.007||||||0.006|||
|2 years|0.006|||0.006|||0.019||||||
|3 years|0.038||||||0.022||||||
|4 years|0.088|||0.020|||0.018||||||
|5 years|0.092|||0.031||||||0.060|||

Notes for Table 4 and Table 5: Numbers are rounded off to the nearest thousandth. All reported elasticities are significantly different from zero at the one (*), five (**) or ten percent (***) level of confidence. . “# of Years” refers to the duration that the impacts of a disaster are felt. For example, 2 years represent periods _t_ and _t-1_ . Elasticities corresponding to more than a year of duration mean that the total impacts of periods _t_ and _t-n_ are statistically significant _._ “--" means elasticity estimate is statistically insignificant, hence it is not reported. The different model specifications are provided in Appendix 2.

# **_Elasticity estimates of impacts of natural disasters on land resource values_**

We also estimated the _percentage reduction_ in the value of land resources resulting from a one percent increase in the average number of people affected by a natural disaster. Table 6 and Table 7 present the elasticity estimates with respect to the average number of people affected, and as regards the average number of people affected per capita, respectively.

ˆ _Table 6: Elasticity estimates (_  ) _between land resource values and a disaster type, with respect to the_ _<u>average number of people affected.</u>_

|Model|Ear|thqua|kes|S|torms||Droughts||Floods||
|---|---|---|---|---|---|---|---|---|---|---|
||ˆ||# of<br>Years|ˆ||# of<br>Years|ˆ<br># of<br>Years|ˆ||# of<br>Years|
|1|0.110|*|5|0.110|***|5||0.372|***|5|
|2|0.110|*|5|0.112|***|5||0.377|***|5|
|3|0.093|*|2|0.067|***|2|||||
|4|0.098|*|2|0.073|**|2|||||
|5|0.093|*|2|0.057|***|2|||||
|_Average_|_elasticity_|_give_|_n duration_|_of statis_|_tically_|_significan_|_t impacts_||||
|2 years|0.095|||0.066|||||||
|5 years|0.110|||0.111||||0.375|||

11
ˆ _Table 7: Elasticity estimates (_  ) _between land resource values and a disaster type, with respect to the_ _<u>average number of people affected per capita.</u>_

|Model|Ear|thquak|es|St|orms|Dro|ughts||Floods||
|---|---|---|---|---|---|---|---|---|---|---|
||ˆ||# of<br>Years|ˆ|# of<br>Years|ˆ|Years|ˆ||# of<br>Years|
|1|0.033|**|2|--||--||--|||
|2|0.084|***|2|0.015|*<br>1|--||0.044|***|2|
|3|0.063|***|2|0.023|*<br>1|--||0.040|***|2|
|4|0.040|**|2|0.017|*<br>1|--||0.064|**|2|
|_Average_|_elasticity_|_given_|_duration_|_of impacts_|||||||
|1 year||||0.019|||||||
|2years|0.055|||||||0.049|||

Notes for Table 6 and Table 7: Numbers are rounded off to the nearest thousandth. All reported elasticities are significantly different from zero at the one (*), five (**) or ten percent (***) level of confidence. “# of Years” refer to the duration that the impacts of a disaster is felt. Elasticities corresponding to more than a year of duration mean that there is joint statistical significance in the elasticities of impacts at periods _t_ and _t-n._ “--" means elasticity estimate is statistically insignificant, hence it is not reported. The specifications of the different models are provided Appendix 2.

The results show that:

- Earthquakes consistently show a significant impact on the values of land resources, followed by storms then floods.  Droughts are not significant.

- When the duration of impacts is two years, the average elasticity of land resource values with respect to persons affected by earthquakes is approximately 0.10, while that for storms is about 0.07.  It can also be observed that the average elasticities are higher when the duration of impacts is higher, such as 0.11 for earthquakes and 0.111 for storms if there is a five-year duration of impacts.

- With respect to persons affected per capita, the average elasticity of storms is about 0.02, which is associated with a one-year impact. The average elasticity given a two-year duration of impacts for earthquakes is 0.06 and for floods it is 0.05.

# **_Estimates of losses in human and intangible capital and natural capital following a disaster_**<sup>**_8_**</sup>

The average amount of losses in the values of human and intangible capital or land resources of country _i_ due to natural disasters can be estimated using the following equation:

> 8 Gaddis, _et al._ (2007) recommends a full-cost accounting of natural disasters and frames their approach on the coastal disasters in the United States, particularly Hurricane Katrina in the Gulf Coast as a case study. The full cost includes the losses to built, human, natural and social capital due to the natural disaster, and costs of services provided by the four types of capital during disaster relief and recovery.  The approach takes into account variables that are not included in typical cost accounting such as: pecuniary effects of natural disaster, indirect effects of disaster at the regional, national or international scale, and effects of the disaster on intangible assets (e.g., nonmarket goods and services).  While this approach can be useful in providing a more complete picture of the various impacts of a natural disaster, the limitation of available data on the national level does not enable us to conduct a micro-level analysis similar to this study.  However, the study did not perform an actual full-cost accounting of the hurricane event.  Our study, on the other hand, provided an empirical estimation of the losses in capital values.

12
where _Capital i_ refers to the average _HR_ or _L_ of country _i_ during the three years —1995, 2000 and 2005 _;_ and  ˆ is the estimated average elasticity associated with the _k kth_ disaster (from Tables 4-7).<sup>9</sup> _Affected i_ , _kt_ and _Affectedi_ , _kt_  _n_ denote the average number of people affected by a _kth_ disaster in country _i_ at time _t_ and _t-n_ , respectively. _Affected All_ , _kt_<sup>refers to the average number of affected</sup> people across the entire sample at time _t_ ; while _Affected All_ , _kt_  _n_ is similarly defined although it corresponds to time _t-n_ . These four latter variables are also expressed in per capita terms for sensitivity analyses.

# <u>Human and Intangible Capital (HR)</u>

As an example, we estimate equation 13 using the human and intangible capital (HR) and total impacts of earthquakes events lasting _two years_ . Table 8 and Table 9 present the estimated losses in HR of selected countries due to earthquakes, with respect to the number of people affected and people affected per capita, respectively.

Equation (13) shows that the losses in capital are dependent on two factors ― the relative magnitude of impacts of a natural disaster (in terms of people affected) and the value of capital. Hence, a relatively higher number of people affected does not necessarily translate to greater losses in the value of human and intangible capital. For instance, in Table 8, the HR losses of Japan (US$246 per capita) are higher compared to that of China ($82 per capita) even though China has a greater number of people affected. Similarly, in Table 9, Japan has higher losses of HR (US$138 per capita) relative to the losses in Turkey (US$34 per capita) and Colombia (US$24 per capita) although Japan has a lower number of affected people per capita.

The upper and lower limits of HR losses can be obtained by calculating the value of losses _plus or minus_ the standard error. For example, in Table 8, the HR losses in Mexico ranges between US$19.07 and US$42.11 per capita (i.e., US$30.59 per capita  US$11.52); while in Table 9, the lower and upper bounds of HR losses are, respectively, US$2.88 and US$10.04 per capita (i.e., US$6.46 per capita  US$3.58).

> 9 We divide this by 100 because the elasticity is expressed as percentage.

13
_Table 8: Estimated losses in human and intangible capital value per capita (HR) due to earthquakes, with_ _<u>respect to number of people affected.</u>_

|No.|Country|Ave. HR<br>(2005|Affected<br>People in|Average<br>Affected|Estimated<br>Elasticity<sup>a</sup>|Losses in<br>con|HR (2005<br>stant US$)|
|---|---|---|---|---|---|---|---|
|||constant|Country_i_|People||||
|||US$)|(t+t-n)|(t+t-n)||US$|Std error|
|1|Australia*|361,092|1,667|20,964|0.013|3.66|1.379|
|2|Bangladesh****|3,497|333|20,964|0.013|0.01|0.003|
|3|Chile**|61,922|9,554|20,964|0.013|3.60|1.356|
|4|China***|5,995|2,256,960|20,964|0.013|82.35|31.005|
|5|Colombia***|31,351|260,196|20,964|0.013|49.64|18.693|
|6|India****|3,964|339,866|20,964|0.013|8.20|3.087|
|7|Indonesia***|6,401|256,522|20,964|0.013|9.99|3.763|
|8|Japan*|370,999|108,927|20,964|0.013|245.94|92.603|
|9|Mexico**|78,429|64,078|20,964|0.013|30.59|11.516|
|10|Pakistan****|5,869|3,588|20,964|0.013|0.13|0.048|
|11|Turkey**|52,195|354,595|20,964|0.013|112.64|42.411|
|12|United States*|551,193|8,408|20,964|0.013|28.21|10.620|

_Table 9: Estimated losses in human and intangible capital value per capita (HR) due to earthquakes, with_ _<u>respect to number of people affected per capita.</u>_

|No.|Country|Ave. HR<br>(2005<br>constant|Affected<br>People Per<br>Capita in|Average<br>Affected<br>People Per|Estimated<br>Elasticity<sup>b</sup>|Losses i<br>co|n HR (2005<br>nstant US$)|
|---|---|---|---|---|---|---|---|
|||US$)|Country_i_|Capita||||
||||(t + t-n)|(t + t-n)||US$|Std error|
|1|Australia*|361,092|9.33E-05|4.98E-04|0.006|4.12|2.28|
|2|Bangladesh****|3,497|2.39E-06|4.98E-04|0.006|0.001|0.0006|
|3|Chile**|61,922|5.90E-04|4.98E-04|0.006|4.46|2.47|
|4|China***|5,995|1.80E-03|4.98E-04|0.006|1.32|0.73|
|5|Colombia***|31,351|6.36E-03|4.98E-04|0.006|24.35|13.50|
|6|India****|3,964|3.24E-04|4.98E-04|0.006|0.16|0.09|
|7|Indonesia***|6,401|1.26E-03|4.98E-04|0.006|0.99|0.55|
|8|Japan*|370,999|8.65E-04|4.98E-04|0.006|39.21|21.73|
|9|Mexico**|78,429|6.75E-04|4.98E-04|0.006|6.46|3.58|
|10|Pakistan****|5,869|2.36E-05|4.98E-04|0.006|0.02|0.01|
|11|Turkey**|52,195|5.38E-03|4.98E-04|0.006|34.29|19.01|
|12|United States*|551,193|2.98E-05|4.98E-04|0.006|2.01|1.11|

Notes for Tables 8 and 9: Countries considered are those with non-zero figures for affected people during periods _t_ and _t-1_ . Also, countries in the table represent four income groups: *,**,***, and **** refer to high income, upper middle income, lower middle income and low income, respectively. _Ave. HR_ refers to the average value of HR in country _i_ during three years - 1995, 2000 and 2005. “a” and “b” means that the elasticity estimates are from Table 4 and Table 5, respectively.

The results with respect to other disasters will be similar since they will also be a function of the relative elasticity of human and intangible capital, and the relative number of people affected. We can see the impact in terms of _people affected per capita_ by simply comparing the relative elasticities. This is done in Figure 1 (we have chosen the per capita specification because in 14
general it performs better in the econometric equations). The figure shows that the impact of an earthquake is the same as that of a storm, while that of a drought is about three times as great<sup>10</sup> .

<!-- Start of picture text --> Figure 1:<br>Elasticity of Human and Intangible Capital w.r.t.<br>Different Disaters<br>0.02<br>0.015<br>0.01<br>0.005<br>0<br>Earthquakes Storms Droughts<br>No Affected Per Capita<br><!-- End of picture text -->

# <u>Land Capital</u>

We also estimate equation 13 using the land capital (L) and total impacts of earthquakes for _two years_ . Table 10 gives the estimated losses in L of the same countries listed above, using the number of people affected. Table 11 presents the estimated capital losses, using affected people per capita. In Table 10, the amount of losses in land capital is estimated to be highest in Turkey (US$88 per capita  US$12), followed by Indonesia (US$63 per capita  US$8) and Colombia (US$48 per capita  US$6). In terms of affected people per capita (Table 11), a similar observation can be made — the countries with the most amount of losses in natural capital are Turkey with US$33 per capita  US$7, Colombia with US$29 per capita  US$7 and Indonesia with US$8 per capita  US$2.

> 10 The elasticities used in Figure 1 are the ones estimated with a two-year lag. Different lags can give different relative values, although the orders of magnitude are not that different.

15
_Table 10: Losses in land resource values per capita (L) due to earthquakes, with respect to number of_ _<u>people affected.</u>_

|No.|Country|Ave. L (2005<br>constant<br>|Affected<br>People in|Average<br>Affected|Estimated<br>Elasticity<sup>a</sup>|Losses<br>con|in L (2005<br>stant US$)|
|---|---|---|---|---|---|---|---|
|||US$)|Country_i_|People||||
||||(t+t-n)|(t+t-n)||US$|Std error|
|1|Australia*|13,606|1,667|20,964|0.095|1.02|0.136|
|2|Bangladesh****|1,696|333|20,964|0.095|0.03|0.003|
|3|Chile**|2,429|9,554|20,964|0.095|1.05|0.139|
|4|China***|260|2,256,960|20,964|0.095|26.47|3.519|
|5|Colombia***|4,104|260,196|20,964|0.095|48.25|6.415|
|6|India****|2,288|339,866|20,964|0.095|35.13|4.671|
|7|Indonesia***|5,472|256,522|20,964|0.095|63.41|8.432|
|8|Japan*|1,653|108,927|20,964|0.095|8.13|1.082|
|9|Mexico**|7,816|64,078|20,964|0.095|22.63|3.009|
|10|Pakistan****|3,411|3,588|20,964|0.095|0.55|0.074|
|11|Turkey**|5,478|354,595|20,964|0.095|87.75|11.668|
|12|United States*|9,533|8,408|20,964|0.095|3.62|0.482|

_Table 11: Losses in land resource values per capita (L) due to earthquakes, with respect to number of_ _<u>people affected per capita.</u>_

|No.|Country|Ave. L (2005<br>constant<br>US$)|Affected<br>People Per<br>Capita in<br>Country_i_|Average<br>Affected<br>People Per<br>Capita|Estimated<br>Elasticity<sup>b</sup>|Losses<br>con|in L (2005<br>stant US$)|
|---|---|---|---|---|---|---|---|
||||(t + t-n)|(t + t-n)||US$|Std error|
|1|Australia*|13,606|9.33E-05|4.98E-04|0.055|1.40|0.319|
|2|Bangladesh****|1,696|2.39E-06|4.98E-04|0.055|0.00|0.001|
|3|Chile**|2,429|5.90E-04|4.98E-04|0.055|1.58|0.360|
|4|China***|260|1.80E-03|4.98E-04|0.055|0.52|0.117|
|5|Colombia***|4,104|6.36E-03|4.98E-04|0.055|28.87|6.551|
|6|India****|2,288|3.24E-04|4.98E-04|0.055|0.82|0.186|
|7|Indonesia***|5,472|1.26E-03|4.98E-04|0.055|7.64|1.730|
|8|Japan*|1,653|8.65E-04|4.98E-04|0.055|1.58|0.358|
|9|Mexico**|7,816|6.75E-04|4.98E-04|0.055|5.83|1.326|
|10|Pakistan****|3,411|2.36E-05|4.98E-04|0.055|0.09|0.020|
|11|Turkey**|5,478|5.38E-03|4.98E-04|0.055|32.59|7.389|
|12|United States*|9,533|2.98E-05|4.98E-04|0.055|0.31|0.071|

Notes for Tables 10 and 11: *,**,***, and *** refer to high income, upper middle income, lower middle income and low income, respectively. _Ave. L_ refers to the average value of L in country _i_ during three years - 1995, 2000 and 2005. “a” and “b” mean that the elasticity estimates are obtained from Table 6 and Table 7, respectively.

As in the case of human and intangible capital, the results with respect to other disasters will also be a function of the relative elasticities of land capital, and the relative numbers of people affected. Figure 2 shows a comparison of the elasticities of natural disasters in terms of _people affected per capita_ . This is done for the two-year lag specification (again we have chosen the per capita specification because in general it performs better in the econometric equations). The figure shows that the impact of an earthquake is very similar to that of a flood. No impact is 16
expected from a drought, while a storm only has an impact over one year and although not shown in the figure the elasticity is about 40 percent that of the reported ones for earthquakes and floods.

<!-- Start of picture text --> Figure 2: Elasticity of Natural Capital w.r.t Different<br>Disasters<br>0.056<br>0.054<br>0.052<br>0.05<br>0.048<br>0.046<br>Earthquakes Floods<br>No Affected Per Capita<br><!-- End of picture text -->

# **_Impacts of natural disasters on income_**

First, we estimated a Cobb-Douglas production function relating income with four capital inputs (equations 10 and 11). Table 12 provides a comparison of the results from the fixed effects and random effects. The F-test rejects the null hypothesis that all dummy parameters except one are zero, thus implying that a fixed effect model is better than a pooled OLS model. On the other hand, the Hausman specification test rejects the null hypothesis that individual effects are uncorrelated with other regressors in the model (i.e., that random effects is the appropriate method), thereby supporting the use of fixed effects.

_<u>Table 12: Fixed and random effects, regression results</u>_

|Variables|Fixed e|ffects||Random|effects|
|---|---|---|---|---|---|
||Coeff.Estimate|Std error||Coeff.Estimate|Std error|
|TOPEN|0.17|0.01|***|3.94E-04|1.13E-03|
|ln(HR)|0.40|0.23|***|0.23|0.10 **|
|ln(PK)|1.17|0.50|**|0.74|0.13 *|
|ln(L)|0.07|0.04|***|0.13|0.02|
|ln(E)|0.10|0.04|**|0.07|0.04 ***|
|Intercept|-9.76|4.17|**|-2.11|0.46*|

Number of observations: 257; F test (99, 152) = 1.94, Prob>F = 0.0001 Hausman test, Ho: individual effects are uncorrelated with other regressors in the model, i.e., random effect model is appropriate. Chi2(5) = 55.97, Prob>chi2 = 0.0000 Notes: *, ** and *** mean statistically significant at 1%, 5% and 10% levels, respectively. TOPEN – trade openness, HR – human capital, PK – produced capital, L – land resources, E – energy resources.

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Results of the fixed effect model show that a 10 percent increase in human and intangible capital leads to a 4 percent increase in real GDP per capita, holding other things constant. Also, a 10 percent increase in physical capital, land capital and energy capital results in an increase in real GDP per capita by 12 percent, 0.7 percent and 1 percent, respectively, _ceteris paribus_ .

Second, we evaluate the impacts of natural disasters on income by: obtaining the predicted mean values of the two types of capital (human and intangible capital and land capital) _with and without_ the impacts of a particular disaster in terms of the average number of people affected per capita<sup>11</sup> ; and using these values along with the parameter estimates in Table 12 to estimate equation 10. These impacts are expected to differ in countries due to their strengths of institutions, size of the economy and other characteristics. A comparison of selected countries and groups of countries is therefore presented here. Tables 13 and 14 present the estimated losses in real GDP per capita due to the impact of a particular natural disaster, _ceteris paribus_ . In particular, we focus on earthquakes and storms because they consistently show significant impacts on capital across the different models that we estimated, as compared to floods and droughts.

<u>Earthquakes: In Table 13, the expected loss in income due to the impacts of earthquakes, holding</u> other variables constant, is estimated in the range of about US$0.32 to US$1,022 per capita in 1995, US$0.39 to US$127 per capita in 2000 and US$0.31 to US$81 per capita in 2005. The largest losses in income are estimated to be highest in Japan during 1995 and 2005, and in China during 2000. The 1995 and 2005 earthquakes in Japan affected about 205 per 100,000 people and 3 per 100,000 people, respectively; while the earthquake in China during 2000 affected about 144 per 100,000 people.

_Table 13. Estimates losses in real GDP (RGDP) per capita with and without_ _<u>the impacts of earthquakes, in 2005 constant US$, selected countries, 1995-2005.</u>_

|SelectedCountries|1995|2000|2005|
|---|---|---|---|
|Average country*|5.95|8.48|12.46|
|High Income Non-OECD**|16.94|20.62|0.31|
|High Income OECD**|16.64|19.52|0.40|
|Low Income**|0.32|0.39|0.51|
|Low Middle Income**|3.36|4.12|22.25|
|Upper Middle Income**|6.70|8.17|23.64|
|Good Governance***|12.03|3.74|1.476|
|Average Governance***|6.79|15.01|6.32|
|Poor Governance***|0.35|6.31|1.40|
|Japan|1,022.23|35.43|80.70|
|China|55.22|127.43|57.82|
|Philippines|36.03|0.02|0.00|
|Australia|12.65|0.00|0.00|
|Thailand|0.00|0.00|18.01|

> 11 See Appendix 2. In particular, we use Model 2 in Table A2.2 for human and intangible capital (HR), and Model 3 in Table A2.4 for land capital (L).

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<u>Storms.</u> The estimated losses in income caused by storm events are given in Table 14. In general, the impacts of storms result in a general decrease in income between US$0.04 and US$32 per capita in 1995, US$0.03 and US$47 per capita in 2000, and US$0.02 and US$15 per capita in 2005. The highest amount of losses in income due to storm events is estimated for Australia in 1995, for the Philippines in 2000 and for China in 2005.

_Table 14. Differences in the value of real GDP (RGDP) per capita with and_ _<u>without the impacts of storm, in 2005 constant US$, selected countries, 1995-2005</u>_

|Selected Countries|1995|2000|2005|
|---|---|---|---|
|Average country*|2.69|3.72|2.17|
|High Income Non-OECD**|24.27|29.54|0.02|
|High Income OECD**|1.44|1.69|0.28|
|Low Income**|0.91|1.13|0.38|
|Low Middle Income**|0.73|0.90|4.05|
|Upper Middle Income**|0.47|0.57|3.34|
|Good Governance***|0.83|0.67|0.05|
|Average Governance***|0.74|10.57|1.02|
|Poor Governance***|0.95|0.03|0.43|
|Japan|0.01|3.96|14.31|
|China|2.99|0.67|14.56|
|Philippines|24.13|46.65|14.66|
|Australia|175.90|0.70|0.38|
|Thailand|0.04|0.36|0.10|

Notes for Table 13 and Table 14: *Calculated by using the average values of independent variables. **The income groups of countries were based on the World Bank grouping. ***Countries were classified into three levels of governance based on their scores and rankings with respect to the following indicators: Rule of Law, Control of Corruption, Voice and Accountability, Political Stability, Regulatory Quality and Government Effectiveness. “Good Governance” group includes countries whose ranking in the aforementioned indicators falls in the Top 60; “Average Governance” group consists of countries ranked between 61 and 120, and “Poor Governance” group is comprised of countries with ranking of 121 and above. Note that if a country’s income loss in a given year is equal to zero, it implies that there is no reported disaster in that country during that year, e.g., Thailand in 1995 and 2000.

# **VI. Conclusions**

This paper presents a set of estimates of the impacts of natural disasters on different forms of capital (physical, human, natural and energy), and thereby on real GDP per capita. The capital database is compiled by the World Bank for three periods – 1995, 2000 and 2005 and for 210 countries. This was combined with data on four types of natural disasters – droughts earthquakes, floods, and hurricanes/storms – for 196 countries, taken from the Emergency Events Database (EM-DAT). The disasters database lists a total of 55 events of drought, 82 events of earthquake, 447 events of flood and 303 events of storm that started during the three years of 1995, 2000 and 2005.

An analysis of the panel data for four forms of capital was carried out using fixed and random effects panel data estimation methods. For each capital, different explanatory variables were 19
used based on the extensive literature on the determinants of these forms of capital. In addition different disasters were included to see how and to what extent they impact on the levels of capital.

At an early stage, we concluded that the measures of physical capital are not affected by the presence of natural disasters. This does not mean that such disasters do not have impacts on the amounts of such capital. It does mean that given available data and with only three years of data on disasters, one cannot pick up such effects and hence their magnitude is likely to be small compared to other factors that determine differences in the amounts of physical capital between countries. On the other hand, energy capital was found to be very sensitive to natural disasters but the results were not robust and not credible. Hence we decided not to include that form of capital in any further analysis.

That left two forms of capital: human and intangible capital (HR) and natural capital (L). The former had to be analyzed as an aggregate of human and intangible taken together because separate estimates of human capital based on education (which is available for some years) was not available for the panel of three years. Since it was felt important to look at the panel so that impacts of disasters could be examined over time, we decided to restrict ourselves to this aggregate, which of course includes social capital and is a complex construct derived as a residual and covering all assets that are not separately identified ― i.e., physical and natural capital.

The results of the analysis can be summarized as follows:

1. The values of human and intangible capital are affected by disasters.  The measure of disasters is defined in two ways – the numbers affected and the numbers affected per capita.  The estimated equations show that storms and earthquakes have a significant impact on HR levels for a wide range of specifications of the underlying model. Variations in the specification include lagged effects of disasters, with the lags varying from one to five years.  Droughts and floods appear to be significant in one specification where the impact is measured by the average number of persons affected but more significant results for both these disasters are found when the impact is measured in per capita terms.

2. We quantify these impacts in terms of elasticities, giving the percent reduction in capital as a consequence of a disaster that causes a 1 percent increase in the number of persons affected. When the lags on the disaster variable are limited to two periods the average elasticity of HR with respect to persons affected by storms is 0.018, while that for earthquakes is 0.013. On the other hand, with respect to persons affected per capita, the average elasticities are: 0.006 (earthquakes), 0.006 (storms), and 0.019 (droughts).

3. As expected, the reductions in HR are greater when the impacts of a disaster are felt at longer periods. Unfortunately we are unable to determine the ‘right’ lag from the estimated equations. The greatest number of significant estimates is obtained with lags of two years, but there are also equations we would consider satisfactory with lags of one to five years. Hence the actual impact of a disaster could be as short as one year or as long as five.

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4. The value of land capital is also affected by some disasters. Earthquakes consistently show a significant impact on the values of land resources, followed by storms then floods. Droughts, however, are not found to be significant.

5. When the duration of impacts is two years, the average elasticity of land resource values with respect to persons affected by earthquakes is approximately 0.10, while that for storms is about 0.07. As with HR we observe that the average elasticities are higher when the duration of impacts is higher, such as 0.11 for earthquakes and 0.111 for storms if there is a five-year duration of impacts. With respect to persons affected per capita, the average elasticity of storms is about 0.02, which is associated with a one-year impact. The average elasticity given a two-year duration of impacts for earthquakes is 0.06 and for floods it is 0.05.

6. We used these estimated elasticities to see how much a disaster would reduce the amount of HR and land capital for a ‘typical’ disaster in selected countries. The loss of capital depends, of course, on the elasticity, but also on the numbers affected in a given country by a typical disaster relative to the number affected across the whole sample of countries. For earthquakes losses of HR per capita from earthquakes ranged from as little as US$0.01 for Bangladesh to as much as US$245.9 for Japan when using the average affected people as the disaster variable; and from as little as US$.001 for Bangladesh to US$39.2 for Japan when using average affected persons per capita as the disaster variable.

7. Similar calculations can be made for other disasters. We do not report detailed figures but we note that they will differ from those for earthquakes in proportion to the elasticities, as well as the relative data on number affected in a typical disaster. Earthquakes and storms have similar elasticities, while droughts have one that is about three times as great.

8. For land capital the losses per capita also range widely: from US$0.03 for Bangladesh to US$87.8 for Turkey when using the average affected people as the disaster variable; and from as little as US$0.0 for Bangladesh to US$32.6 for Turkey when using average affected persons per capita as the disaster variable. In the case of land capital, we would expect a slightly smaller impact in the case of floods. We cannot predict any impact from a drought, while a storm that is about 40 percent that of the reported ones for earthquakes and floods.

9. The losses of land capital and human and intangible capital feed through to losses of income and these, too, have been measured. This supports our assumption that the natural disasters have an indirect impact on income. A Cobb Douglas production function has been estimated using the four capitals and based on that losses from earthquakes are reported in the paper. They amount to US$12.5 per capita in 2005 for an average country, with the highest losses occurring in Japan (US$80.7 per capita) and in China (US$57.8 per capita). A typical low-income country can expect a loss of per capita income of US$0.5 in 2005. For storms the comparable losses of income per capita are: US$2.2 (average country); US$14.3 (Japan); US$14.6 (China); US$14.7 (Philippines); and US$0.4 (typical low-income country).

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10. As noted earlier, these estimates are national level figures and cannot be useful in predicting losses at the local level, where much bigger amounts can be experienced per capita. Nevertheless, they do provide some indication of magnitudes for different disasters and for different groups of countries. More work and more data are needed to get a dynamic profile for the losses of capital and income; the best we can say is that the time profile is typically between 2 and five years.

11. Broadly, quantitative analysis shows that the impacts of natural disasters on a nation’s income or output come through their indirect effects on capital, i.e., human and intangible capital and natural capital. This has some important policy implications, one of which is that, when considering which recovery measures to implement, attention needs to be paid to re-building these forms of capital.

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