Natural disasters in a two-sector model of endogenous growth

Climate change may intensify tropical cyclone activities and amplify their negative economic effects. We simulated the direct economic impact of tropical cyclones enhanced by climate change with the integrated assessment model Climate Framework for Uncertainty, Negotiation and Distribution (FUND), Version 3.4. The results show that in the basic case (parameter levels based on intermediate estimates), the direct economic damage caused by tropical cyclones ascribed to the effect of climate change would amount to US$19 billion globally in the year 2100 (almost the same level as the baseline, i.e. current global damage of tropical cyclones), while the ratio to world gross domestic product (GDP) would be 0.006%. The USA and China account for much of the absolute damage, whereas Small Island States incur the largest damage if evaluated as the proportion of GDP. Model results were sensitive to the choice of baseline and of the wind-speed elasticity of storm damage.

Natural disasters have a statistically observable adverse impact on the macro-economy in the short-run and costlier events lead to more pronounced slowdowns in production. Yet, interestingly, developing countries, and smaller economies, face much larger output declines following a disaster of similar relative magnitude than do developed countries or bigger economies. A close study of the determinants of these adverse macroeconomic output costs reveals several interesting patterns. Countries with a higher literacy rate, better institutions, higher per capita income, higher degree of openness to trade, and higher levels of government spending are better able to withstand the initial disaster shock and prevent further spillovers into the macro-economy. These all suggest an increased ability to mobilize resources for reconstruction. Financial conditions also seem to be of importance; countries with more foreign exchange reserves, and higher levels of domestic credit, but with less-open capital accounts appear more robust and better able to endure natural disasters, with less adverse spillover into domestic production.

A simple theoretical model of pollution is developed that generates an inverted U-shape relationship between per capita income and environmental quality. This model is then used to study long-run growth. The same inverted U-shape is shown to appear in time series and the prospects for sustained growth are shown to hinge on whether increasingly strict environmental regulation is compatible with a constant rate of return on capital. Implementation is also studied. Tax and voucher schemes are shown to have an advantage over direct regulation because they provide the correct incentives for capital accumulation. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Abstract We introduce a renewable resource sector into an endogenous growth model of a small economy, deriving the transitional dynamic equilibrium. The model generates a long-run equilibrium in which a resource sector of limited size can coexist with constant ongoing growth elsewhere. The key feature of the model is the allocation of labor between harvesting the resource and its use in the final output sector. This naturally generates the empirically observed negative relationship between resource abundance and growth. We examine both the dynamic and long-run responses of the economy to various shocks pertaining to technological production conditions and resource sector parameters.

The effects of increased environmental care on optimal technology choice and long-term growth are studied for an economy in which pollution is a side-product of physical capital used in production. First, it is shown that in case of a standard neoclassical production structure, the result is a less capital-intensive production process whereas the long-run growth rate is not affected. Next, we introduce assumptions of the endogenous growth literature. When there are constant returns to physical capital, an increase in abatement activities crowds out investment and lowers the endogenous growth rate. When human capital accumulation is the engine of growth, physical capital intensity declines and the endogenous optimal growth rate is unaffected by increased environmental care or is even higher, depending on whether or not pollution influences agents' ability to learn.

Three difficulties confront researchers in the resilience arena. At the conceptual level, there is the need to identify resilient actions, including those that may seem to violate established norms, such as rational behavior. At the operational level, it may be difficult to model individual, group, and community behavior in a single framework. At the empirical level, it is especially difficult to gather data on resilience to specify models. The purpose of this paper is to summarize progress on all three planes. First, defines several important dimensions of economic resilience to disasters. Second, shows how computable general equilibrium modeling represents a useful framework for analyzing the behavior of individuals, businesses, and markets. Third, summarizes recent progress in the conceptual and empirical modeling of resilience, including the incorporation of disequilibria and the recalibration of key behavioral parameters on the basis of empirical data. Fourth, uses the results of a case study to illustrate some important issues relating to the subject.

Abstract This paper develops an endogenous growth model with pollution and both human and physical capital. Human capital is produced cleanly and physical capital can be used for pollution control. Economic growth is sustainable. In the long run it is optimal for human capital to grow more rapidly than physical capital, output, and consumption, while pollution declines for realistic parameter values. Our results differ sharply from Stokey's result for an AK technology that sustained economic growth is not optimal. The model can generate an environmental Kuznets curve. A pollution tax or a voucher system can implement the Pareto efficiency solution.

Abstract We contrast effects of taxing non-renewable resources with the effects of traditional capital taxes and investment subsidies in an endogenous growth model. In a simple framework we demonstrate that when non-renewable resources are a necessary input in the sector where growth is ultimately generated, interest income taxes and investment subsidies can no longer affect the long-run growth rate, whereas resource tax instruments are decisive for growth. The results stand out both against observations in the literature from the 1970's on non-renewable resources and taxation—observations which were not based on general equilibrium considerations—and against the general view in the newer literature on taxes and endogenous growth which ignores the role of non-renewable resources in the “growth engine”.

Abstract We consider a Schumpeterian model of endogenous growth with creative destruction in which we introduce a non-renewable natural resource. We characterize the optimum and the equilibrium paths, and we derive the precise levels of economic policy instruments that allow the implementation of the optimum. Moreover, we study the effects of these policies on the relevant steady-state variables, in particular the rate of extraction of the resource.

I. INTRODUCTION Risks to life and property exist, in varying degrees, in every country of the world. Numerous studies on the relationship between risk and expected losses and economic decisions are available and generally widely known, (1) but to our knowledge there are no empirical studies that evaluate the effects of natural hazards on long-run economic growth in a macroeconomic framework. (2) Despite the vast empirical literature that examines the linkages between long-run average growth rates, economic policies, and political and institutional factors, the relationship between disaster risk and long-run growth has not been empirically examined. There is, however, a body of research that has examined the effects of natural disasters on economic variables in the short run. Tol and Leek (1999) provide a summary of the recent studies that assess the immediate repercussions of natural disasters on economic activity. The empirical findings in this literature (Albala-Bertrand, 1993; Dacy and Kunreuther, 1969; Otero and Marti, 1995) report that gross domestic product (GDP) is generally found to increase in the periods immediately following a natural disaster. This result is due to the fact that most of the damage caused by disasters is reflected in the loss of capital and durable goods. Because stocks of capital are not measured in GDP and replacing them is, GDP increases in periods immediately following a natural disaster. Our article extends the short-run analysis by examining the possible linkages among disasters, investment decisions, total factor productivity, and long-run economic growth. Because disaster risks differ substantially from country to country, it is reasonable to question whether there exists some relationship between disasters and long-run macroeconomic activity. On cursory examination, one might conclude that a higher probability of capital destruction due to natural disasters reduces physical capital investment and therefore curtails long-mn growth. However, such analysis is only partial and may be misleading. Disaster risk may reduce physical capital investment, but disasters also provide an opportunity to update the capital stock, thus encouraging the adoption of new technologies. Furthermore, an endogenous growth framework also suggests that disaster risk could potentially lead to higher rates of growth. In this type of model individuals invest in physical and human capital, but there is a positive externality associated with human capital accumulation. If disasters reduce the expected return to physical capital, then there is a correspondingly higher relative return to human capital. The higher relative return to human capital may lead to an increased emphasis on human capital investment, which may have a positive effect on growth. We present some initial evidence regarding the relationship between disasters and economic growth in Figures 1 through 4. These figures show the simple relationship between the number of natural disasters and long-run economic growth using a sample of 89 countries. The vertical axis represents the average annual growth rate of per capita GDP over the 1960-90 period. Data on per capita GDP are taken from Summers and Heston (1994). Along the horizontal axes are four different measures of the propensity for natural disasters. The disaster data in Figures 1 and 3 are historical information from Davis (1992) covering 190 years of the world's worst recorded natural disasters. Figures 2 and 4 represent more current and detailed information on natural disasters events for the period 1960 through 1990 from the Center for Research on the Epidemiology of Disasters (CRED) (EMDAT, 2000). Figures 1 and 2 show the natural log of one plus the total number of disaster events from Davis and CRED, respectively. (3) However, bec ause larger countries may be subject to more disasters, we present the natural log of one plus the number of disasters normalized by land area from Davis and CRED in Figures 3 and 4. …

It has been suggested that disasters might have positive economic consequences, through the accelerated replacement of capital. This possibility is referred to as the productivity effect. This effect is investigated using a model with embodied technical change. in this framework, disasters can influence the production level but cannot influence the growth rate, in the same way than the saving ratio in a Solow-like model. Depending on reconstruction quality, indeed, accounting for embodied technical change can either decrease or increase disaster costs, but is never able to turn disasters into positive events. Moreover, a better but slower reconstruction amplifies the short-term consequences of disasters, but pays off over the long-term. Regardless, the productivity effect cannot prevent the existence of a bifurcation when disaster damages exceed the reconstruction capacity, potentially leading to poverty traps. (C) 2008 Elsevier B.V. All rights reserved.

This chapter analyses the potential conflict between economic growth and the maintenance of environmental quality in an overlapping generations model. Since environmental damage may outlive its perpetrators, overlapping generations’ models provide an appropriate demographic structure for analysis of environmental externalities. In general, environmental externalities could arise from production or consumption and could affect welfare or productivity. The chapter identifies interior equilibrium without external increasing returns and considers equilibrium with external increasing returns. Increased saving benefits generations through the external increasing returns, and hurts generations through reduced maintenance and greater consumption; higher saving is desirable if the first effect dominates. The dynamics of the economy therefore imply a negative correlation between environmental quality and growth under zero maintenance, in contrast to the positive correlation at interior equilibrium. Agents in economies with little capital or with high environmental quality may choose not to engage in maintenance of the environment.

We integrate life cycle precautionary saving and human capital investment by modeling both activities in a single general equilibrium setting. Allowing human capital investment to respond to earnings uncertainty significantly increases precautionary saving but not enough for simulated saving rates to reach historical levels in the U.S. In contrast to recent deterministic analyses, we show income taxation may actually stimulate human capital due to the insurance effect of taxing uncertain returns. The same insurance effect helps explain why conversion to a wage tax base may lead to reduced savings, in contrast to some recent claims.

Abstract The limits to economic growth due to resource scarcity can be alleviated only by the development of backstop substitutes. This paper combines resource-based economic growth with R&D to reduce the cost of backstop technologies. Characterizing the entire dynamics of optimal growth and R&D processes, we find that an economy's growth prospects depend on its type, as determined by its production technology and learning ability, and by its knowledge–capital endowment. A wide variety of growth patterns emerges, ranging from cases in which an economy that without R&D eventually stagnates (converges to a steady state) is diverted by R&D onto a path of sustained growth, to cases in which R&D is not warranted. Resource scarcity is shown to encourage R&D due to the increased reliance on the backstop technology.

In The Costs of Economic Growth [8], Dr. Mishan criticizes the importance attached to economic growth by politicians, businessmen, and economists. He contends that these groups generally overlook the spillover effect of the growth process-such as environmental pollution. This is nowhere more apparent than in the modem theories of economic growth (see for example [2]). These theories implicitly assume no wastes are produced by the economic process, or, alternatively (and more likely), that if any wastes are generated they can be disposed of at no cost to the community. It is naive to think that no wastes are produced and fairly obvious that the free disposal assumption of the neoclassical growth model is not satisfied in the real world. Accordingly, any theory of optimal economic growth that does not take into account these spillover effects cannot claim to be complete. This paper will investigate the effects of introducing pollution explicitly into the neoclassical growth model. The model is formulated in Section I. Section II contains the solution, while Section III summarizes the discussion.

Abstract As coastal disasters become more frequent and costly, a full assessment of costs becomes more important. This paper aims to identify costs of coastal disasters to human, social, built and natural capital and their associated services at the local site of a disaster and in the regions and nations that respond for relief and recovery. The spatial and temporal magnitude and scale of costs is captured differently in typical cost accounting and a more comprehensive approach, full-cost accounting. The difference between these approaches will be demonstrated using Hurricane Katrina (2005) as a case study, though we do not attempt to perform a full-cost accounting of this actual event. We examine how disaster planning and preparedness becomes more cost effective when the full cost of disasters is calculated. A full-cost accounting of coastal disasters sets the stage for rigorous comparisons of strategies for post-disaster development. The rudimentary analysis of this paper indicates that continued population development as well as the maintenance of current settlements in particular regions along the coasts may not be in the national interest. In this way, full-cost accounting could help reduce vulnerability to future disasters.

The authors characterize the class of dynamic models that allow for the most commonly used types of sustained economic growth (balanced and asymptotically balanced). They show that, under a constant returns to scale technology, (asymptotically) constant discount rate and (asymptotically) constant elasticity of marginal felicity are not only necessary but also sufficient conditions for the existence of a(n) (asymptotically) balanced growth equilibrium path. The authors provide examples of recursive utility models that accept a(n) (asymptotically) balanced growth equilibrium and discuss their implications on cross-country differences in growth rates as well as on savings behavior and wealth distribution. Copyright 1997 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

After more than two decades of relatively little Atlantic hurricane activity, the past decade saw heightened hurricane activity and more than $150 billion in damage in 2004 and 2005. This paper normalizes mainland U.S. hurricane damage from 1900-2005 to 2005 values using two methodologies. A normalization provides an estimate of the damage that would occur if storms from the past made landfall under another year's societal conditions. Our methods use changes in inflation and wealth at the national level and changes in population and housing units at the coastal county level. Across both normalization methods, there is no remaining trend of increasing absolute damage in the data set, which follows the lack of trends in landfall frequency or intensity observed over the twentieth century. The 1970s and 1980s were notable because of the extremely low amounts of damage compared to other decades. The decade 1996-2005 has the second most damage among the past 11 decades, with only the decade 1926-1935 surpassing its costs. Over the 106 years of record, the average annual normalized damage in the continental United States is about $10 billion under both methods. The most damaging single storm is the 1926 Great Miami storm, with $140-157 billion of normalized damage: the most damaging years are 1926 and 2005. Of the total damage, about 85% is accounted for by the intense hurricanes Saffir-Simpson Categories 3, 4, and 5, yet these have comprised only 24% of the U.S. landfalling tropical cyclones. Unless action is taken to address the growing concentration of people and properties in coastal areas where hurricanes strike, damage will increase, and by a great deal, as more and wealthier people increasingly inhabit these coastal locations.

In this paper, we consider a decision-maker facing a financial risk flanked by a non-financial background risk such as health or environmental risk. A decision has to be made about the amount of an investment (in the financial dimension) resulting in a future benefit either in the same dimension (savings) or in the other dimension (environmental quality or health improvement. In this framework, we study the impact of the correlation between the two risks on optimal choices. In the saving problem, we find conditions ensuring that positive correlation between the two risks implies that the optimal amount of savings increases. These conditions involve specific requirements on the direct and cross derivatives of the two-argument utility function. Similarly, we find a different and specific set of conditions ensuring that the same conclusion on optimal investment for health (environmental) improvement is reached. The two sets of conditions determined support the conclusion that the signs of the derivatives of the two-argument utility function should alternate.

Extreme events are one of the main channels through which climate and socioeconomic systems interact, and it is likely that climate change will modify the probability distribution of the losses they generate. The long-term growth models used in climate change assessments, however, cannot capture the eects of such shortterm shocks. To investigate this issue, a non-equilibrium dynamic model (NEDyM) is used to assess the macroeconomic consequences of extreme events. This exercise allowed us to dene the economic amplic ation ratio, as the ratio of the overall production loss due to an event to its direct costs. This ratio could be used to improve the cost-benet analysis of prevention measures. We found also that, unlike a Solow-like model, NEDyM exhibits a bifurcation in GDP losses: for each value of the capacity to fund reconstruction, GDP losses remain moderate if the intensity and frequency of extremes remain under a threshold value, beyond which GDP losses increase sharply. This bifurcation may partly explain why some poor countries that experience repeated natural disasters cannot develop. Applied to the specic issue of climate change, this model suggests that changes in the distribution of extremes may entail signican t GDP losses in absence of specic adaptation. It suggests, therefore, that to avoid inaccurately low assessments of damages, researchers must take into account the distribution of extremes instead of their average cost and make explicit assumptions on the organization of future economies.

Abstract This paper explores the link between environmental quality and economic growth in an endogenous growth model that incorporates pollution-augmenting technological change. It examines the conditions under which sustainable growth is both feasible and optimal. We explore also how the government should intervene to ensure the optimal levels of natural and knowledge capital, which share a public-goods character. We establish the conditions for a more ambitious environmental policy to raise long-run growth.

Thls paper considers the prospects for constructing a neoclassical theory of growth and international trade that is consistent with some of the main features of economic development. Three models are considered and compared to evidence: a model emphasizing physical capital accumulation and technological change, a model emphasizing human capital accumulation through schooling, and a model emphasizing specialized human capital accumulation through learning-by-doing.

External shocks, such as commodity price fluctuations, natural disasters, and the role of the international economy, are often blamed for the poor economic performance of low-income countries. The author quantifies the impact of these different external shocks using a panel vector autoregression (VAR) approach and compares their relative contributions to output volatility in low-income countries vis-a-vis internal factors. He finds that external shocks can only explain a small fraction of the output variance of a typical low-income country. Internal factors are the main source of fluctuations. From a quantitative perspective, the output effect of external shocks is typically small in absolute terms, but significant relative to the historic performance of these countries.