International Market Interactions, Institutions and the Costs of Natural Disasters

Tasks

Natural hazards can result in severe economic shocks that impact human and economic development. Moreover, anthropogenic climate change could increase the frequency and severity of such events. Studying how past natural disasters shaped economic outcomes and how these had been conditioned by institutional setups or by trade openness, migration, and capital flows, can therefore provide key insights into how to cope with the effects of climate change in the future.

Empirical studies suggest that similar hazards have different effects throughout the world and that countries' institutions, as well as their embeddedness in international markets, are important in adapting to natural disasters. However, most of the empirical literature on this topic suffers from a number of problems. Firstly, studies usually use information on the incidence of natural disasters from databases that draw on insurance records or news. This introduces severe reporting and endogeneity biases, as both insurance penetration and damage caused are correlated with development. To tackle this issue, Felbermayr and Gröschl (2014) have proposed a database, ifo GAME, which collects information on geological and meteorological events from primary sources. Secondly, disasters are often local events; so mapping them to countries of heterogeneous size can result in measurement error and attenuation bias. This problem can be resolved by matching recently available global data at the grid-level to the ifo GAME database.

This project aims to develop such an extended database and to exploit it to answer a number of research questions situated at the cross-roads of environmental economics, development economics and international trade. Given the seminal features of the underlying disaster and climate data, the results obtained will significantly support evidence-based policy making for climate action in the context of sustainable development. More precisely, an empirical analysis of the consequences of natural hazards and disasters at the regional- and country-level makes it possible to study how openness to trade, access to financial markets, institutional features, and development affect economic resilience.

Methods

The research strategy follows three steps: firstly, the impact of natural hazards and disasters on international transactions and the pattern of economic specialization is investigated. Secondly, welfare losses due to natural disasters at the local level and the nexus between hazard risks and the determinants of disaster resilience are analysed using unique grid-cell level data. Thirdly, the project aims to identify how trade openness and internal geography shape the macroeconomic impact of natural disasters at the local level by conducting a spatial analysis on China, and to examine how firm behaviour is affected by natural disasters looking at Chinese firms.

Data and other Sources

ifo GAME, DoTS, Worldmrio, UN COMTRADE, SEDAC-CIESIN, PRIO-Grid, Nighttime luminosity data, Chinese Customs data, Annual Survey of Industrial Firms