Institute of Public Finance, University of Innsbruck alps-centre for Natural Hazard Management supported by DRAFT August 17, 2006
Agenda 1 Situation 2 Literature overview Theortical model 3 Data Results 4
Background Situation Natural Hazards=f(Natural Process, Human behaviour) Human "economic" behaviour determined by institutional framework
Background Situation Natural Hazards=f(Natural Process, Human behaviour) Human "economic" behaviour determined by institutional framework Analysis of "societal exposure" or "institutional resilience"
Background Situation Natural Hazards=f(Natural Process, Human behaviour) Human "economic" behaviour determined by institutional framework Analysis of "societal exposure" or "institutional resilience"
Objective Situation "Institutions matter" in Natural Hazard Management Provision of a theoretical and empirical framework
Objective Situation "Institutions matter" in Natural Hazard Management Provision of a theoretical and empirical framework Application to economic growth:
Objective Situation "Institutions matter" in Natural Hazard Management Provision of a theoretical and empirical framework Application to economic growth: 1 Regional level (NUTSII) - spatial boundaries 2 Dynamic panel data - time effects 3 Institutional variable: risk transfer mechanism
Objective Situation "Institutions matter" in Natural Hazard Management Provision of a theoretical and empirical framework Application to economic growth: 1 Regional level (NUTSII) - spatial boundaries 2 Dynamic panel data - time effects 3 Institutional variable: risk transfer mechanism Empirical tool: 1 International institutional comparison 2 Evaluation 3 Forcasts
Objective Situation "Institutions matter" in Natural Hazard Management Provision of a theoretical and empirical framework Application to economic growth: 1 Regional level (NUTSII) - spatial boundaries 2 Dynamic panel data - time effects 3 Institutional variable: risk transfer mechanism Empirical tool: 1 International institutional comparison 2 Evaluation 3 Forcasts
Literature overview Theortical model Disaster and Economic Growth - Theoretical work Climate change and economic growth (Fankhauser & Tol 2005, Greiner 2005) Upper and lower level impact (Albala-Bertrand 1993) Economics of disaster management (Tol & Leek 1999) Pollution, changes in disaster probability and growth (Ikefuji & Horii 2006)
Literature overview Theortical model Disaster and Economic Growth - Empirical studies Capital loss and respone expenditure (Albala-Bertrand 1993) Effects on input factors (K+, L ) and total factor productivity (+) (Skidmore & Toya 2002) Disasters and institutional quality (Kahn 2005, Tavares 2004)
Theoretical model Literature overview Theortical model Starting point: 1 Solow growth model (Mankiw, Romer & Weil 1992) and 2 Economics of disaster management (Tol & Leek 1999) Cobb-Douglas production function at time t: Y t = Kt α (A t L t ) 1 α (1)
Theoretical model Literature overview Theortical model Starting point: 1 Solow growth model (Mankiw et al. 1992) and 2 Economics of disaster management (Tol & Leek 1999) Cobb-Douglas production function at time t: Y t aggregate production K t capital input A t level of technology L t labour input Y t = K α t (A t L t ) 1 α (1) 0 < α < 1
Theoretical model Literature overview Theortical model Starting point: 1 Solow growth model (Mankiw et al. 1992) and 2 Economics of disaster management (Tol & Leek 1999) Cobb-Douglas production function at time t: Y t aggregate production K t capital input A t level of technology L t labour input Y t = K α t (A t L t ) 1 α (1) 0 < α < 1
Dynamics of capital Literature overview Theortical model 1 Introducing natural hazards D in the model 2 Assumption: Number of effective labour, A t L t, grows at exogenously rate (n + g) k = sy t (n + g + δ) k t D (F t, φ t ) k t (2)
Dynamics of capital Literature overview Theortical model 1 Introducing natural hazards D in the model 2 Assumption: Number of effective labour, A t L t, grows at exogenously rate (n + g) k = sy t (n + g + δ) k t D (F t, φ t ) k t (2) k stock of capital per unit of labour, K/AL s constant rate of saving δ constant rate of depreciation D damage function from natural hazards F t magnitude φ t institutional resilience e.g. insured assets
Dynamics of capital Literature overview Theortical model 1 Introducing natural hazards D in the model 2 Assumption: Number of effective labour, A t L t, grows at exogenously rate (n + g) k = sy t (n + g + δ) k t D (F t, φ t ) k t (2) k stock of capital per unit of labour, K/AL s constant rate of saving δ constant rate of depreciation D damage function from natural hazards F t magnitude φ t institutional resilience e.g. insured assets
Dynamics of capital Literature overview Theortical model Effects of D on the development of k: 1 F t denotes the size damage in D t - negative 2 φ t amount of insured losses - mitigation effects on D t 3 φ t designated savings and reserves - negative
Data Results Econometric equation - Panel data model ln (y it ) = β it + β 1 ln (y it 1 ) + β 2 ln (s it ) +β 3 ln (n it + g + δ) + β 4 D it + µ i + η t + ɛ it (3) y it GDP per capita s it Investment per capita (n it + g + δ) population growth, technology growth and depreciation 1 D it hazard vector (hazard dummy, interaction term) µ i regional fixed effects η t time specific effects (year) ɛ it error term 1 (g + δ = 0.05)
Empirical strategy Data Results 1 Data overview 2 Cross-section analysis - long term effects 3 Dynamic panel estimates (System-GMM) Arellano & Bond (1991) Base estimates and flood events Effects of floods over time Effects of flood events and national risk transfer mechanisms
Data Data Results 20 European countries EU 15 + CZ, H, N, PL & CH NUTSII-level 202 regions Yearly data 1980-2005 - GDP - Investment European Regional Database - Population Cambridge Econometrics - Area Historical flood events EM-DAT, CRED Brussels National risk transfer Von Ungern-Sternberg (2004)
Data Results Effects of flood events on growth - OLS, 1990-2004 Dependent Variable ln(y it) 1.1 1.2 1.3 ln(y it 1 ) 0.7200*** 0.7160*** 0.7123*** (0.0724) (0.0689) (0.0671) ln( s i) 0.2451*** 0.2482*** 0.2463*** (0.0866) (0.0824) (0.0798) ln(n it + g + δ) 0.6819*** 0.6702*** 0.6712*** P Floodi (0.2606) (0.2578) (0.2539) 0.0259* 0.0368** P (0.0176) Floodi Ins i 0.0312** (0.0153) Constant 1.0747 1.006 0.0492 Number of obs. 191 191 191 Prob>F 0.000 0.000 0.000 R 2 0.9014 0.9032 0.9040
Data Results Effects of flood events on growth - Dynamic Panel (System-GMM) Dependent Variable ln(y it ) 2.1 2.2 2.3 2.4 2.5 ln(y it 1 ) 0.9707*** 0.9675*** 0.9692*** 0.9732*** 0.9832*** (0.0071) (0.0072) (0.0072) (0.0068) (0.0072) ln(s it ) 0.0399*** 0.0392*** 0.0416*** 0.0264*** 0.0139* (0.0076) (0.0074) (0.0076) (0.0071) (0.0076) ln (n it + g + δ) 0.2032*** 0.2087*** 0.2000*** 0.2006*** 0.2036*** (0.0115) (0.0111) (0.0119) (0.0108) (0.0109) Flood it 0.0039 (0.0128) Flood it 1 0.0375*** (0.0139) Flood it 2 0.0257*** (0.0114) Flood it 3 0.0197** (0.0100) Year specific effects Yes Yes Yes Yes Yes Region specific effects Yes Yes Yes Yes Yes Constant 0.6305 0.6139 0.6199 0.5317 0.5148 Number of obs. 4,608 4,608 4,608 4,408 4,208 Prob>chi 0.000 0.000 0.000 0.000 0.000 Hansen test 0.739 0.744 0.716 0.723 0.682 AR(1) 0.000 0.000 0.000 0.000 0.000 AR(2) 0.394 0.398 0.445 0.328 0.458
Data Results Effects of flood events on growth - Dynamic Panel (System-GMM) Dependent Variable ln(y it ) 3.1 3.2 3.3 ln(y it 1 ) 0.9692*** 0.9694*** 0.9723*** (0.0073) (0.0072) (0.0068) ln(s it ) 0.0399*** 0.0411*** 0.0269*** (0.0077) (0.0076) (0.0071) ln (n it + g + δ) 0.2045*** 0.2000*** 0.1994*** (0.0111) (0.0117) (0.0108) F it 0.0238* (0.0130) F it Ins it 0.0445*** (0.0169) F it 1 0.0340** (0.0156) F it 1 Ins it 1 0.0344** (0.0153) F it 2 0.0323*** (0.0114) F it 2 Ins it 2 0.0344** (0.0153) Number of obs. 4,608 4,608 4,408 Prob>chi 0.000 0.000 0.000 Hansen test 0.701 0.751 0.729 AR(1) 0.000 0.000 0.000 AR(2) 0.455 0.455 0.317
Discussion 1 Significant negative impact of floods on economic growth Cross-section, long term Panel-data: short and medium term 2 Mitigating effects of mandatory insurance systems 3 Effects of institutional variables on flood and investment variables 4 Limitations: No variable for costs of disaster management Risk transfer vs. Country group
"Institutions matter" Promising approach/tool Future research: Simulation (e.g. increase in flood frequency) Forecasts: Future costs of flood events Institutional resilience More institutional variables: Variation over time Variation between countries (regions)
Albala-Bertrand, J. M. (1993), Natural disaster situations and growth: A macroeconomic model for sudden disaster impacts, World Development 21(9), 1417 1434. Arellano, M. & Bond, S. (1991), Some tests of specification for panel data: Monte carlo evidence and an application to employment equaations, Review of Economic Studies 58, 277 297. Fankhauser, S. & Tol, R. S. J. (2005), On climate change and economic growth, Resource and Energy Economics 27, 1 17. Greiner, A. (2005), Anthropogenic climate change and abatement in a multi-region world with endogenous growth, Ecological Economics 55(2), 224 234. Ikefuji, M. & Horii, R. (2006), Natural disasters in a two-sector model of endogenous growth, mimeo, Graduate School of Economics, Osaka University.
Kahn, M. E. (2005), The death toll from natural disasters: The role of income, geography, and institutions, The Review of Economics and Statistics 87(2), 271 284. Mankiw, G. N., Romer, D. & Weil, D. N. (1992), A contribution to the empirics of economic growth, The Quarterly Journal of Economics 107(2), 407 437. Skidmore, M. & Toya, H. (2002), Do natural disasters promote long-run growth?, Economic Inquiry 40(4), 664 687. Tavares, J. (2004), The open society assesses its enemies: shocks, disasters and terrorist attacks, Journal of Monetary Economics 51, 1039 1070. Tol, R. S. J. & Leek, F. P. M. (1999), Economic analysis of natural disasters, in T. E. Downing, A. A. Olsthoorn & S. J. Tol, Richard, eds, Climate, Change and Risk, Routledge, pp. 308 327.
Von Ungern-Sternberg, T. (2004), Efficient Monopolies: The Limits of Competition in the European Property Insurance Market, Oxford University Press.