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The Long-run Economic Consequences of Environmental Catastrophe

Super Typhoon Haiyan – the strongest recorded storm at landfall, and unofficially the strongest typhoon ever measured in terms of wind speed – rattled into the Philippines and Southeast Asia in November of last year. Haiyan was unprecedented, with the highest sustained gusts measuring in at 315 km/h (195 mph). For a country in this region, typhoons are a regular occurrence, but usually they are of a much smaller intensity.

Such storms pose huge challenges for developing countries. Physical capital and existing infrastructure are devastated. Crops and other sources of livelihood for rural inhabitants are ruined. On top of all this, there is the social cost: disrupted and lost lives, missed schooling, and psychological damage.

Successive reports by the Intergovernmental Panel on Climate Change, the world’s largest consortium of climate scientists, have left little doubt on the role of anthropogenic or human-induced climate change on extreme weather events. While no single weather event can be directly attributed to humans, it is clear that warmer ocean surface temperatures make extreme or rare weather events like Typhoon Haiyan more likely. Ocean heat provides energy to tropical storms, enabling them to survive longer and grow in intensity. Upon landfall, rising sea levels increase the areas at risk of storm surges and flooding. According to the literature, the link between human activities – namely, the release of large volumes of greenhouse gases into the atmosphere – and global warming is unequivocal.

The immediate impact of a tropical storm is akin to a negative shock to the economy. The long-run trajectory an economy takes after a disaster, however, is less clear. The varying success of recovery and reconstruction efforts have spawned several theories about how such events affect long-term income, usually measured as GDP per capita.

On one side of the spectrum lies a permanent fall in the economic output of a country. The destruction in the wake of a disaster might be so high that even a substantial mobilisation of resources cannot prompt recovery back to the previous state on a reasonable time scale.

On the other side, disaster may cause a permanent rise in incomes and economic activity through ‘creative destruction’. A large disruption to an economy might create room for new institutions and innovations. On a more tangible level, storms might wipe-out old and unsalvageable infrastructure, to be replaced by new, more productive forms.

Hsiang & Jina (2014)

To determine which effect dominates, Solomon Hsiang at UC Berkeley and Amir Jina at Columbia used meteorological data to reconstruct the exposure of each country to tropical cyclones from 1950 to 2008. Accounting for cyclones in previous periods, the authors analyse growth rates in the years immediately before and after a storm. Their results show that extreme events – those which occur at very low frequencies – have long-lasting negative effects on economic growth. A tropical cyclone which falls into the 99th percentile, similar to Super Typhoon Haiyan, reduces cumulative per capita incomes by almost 15% two decades later. This is equivalent to eroding away nearly one decade of income growth.

Whether a country will be more frequently exposed to tropical storms as a result of climate change is contested. However, climate change in effect ‘loads the dice’, making stronger storms more common. The economic cost of a storm grows exponentially, not linearly, with intensity. For countries most at risk, such as the Philippines, there is a growing concern over future development prospects.

Such is the harsh reality of climate change. Vulnerable countries and remote areas often do not have the necessary infrastructure in place to be resilient against large storms. Factoring in long-run economic consequences, which most current projections of the total cost of climate change do not, creates an even larger gap between necessary and actual expenditure on climate change adaptation and resilience.

Pinning down the costs associated with future risks is tricky. There is bound to be uncertainty. Uncertainty, however, should not be a cause for inaction. Integrating the findings of climate science into economics will help public and private bodies to make necessary investments and changes to both mitigate and adapt to climate change. If economics is to truly call itself a science, perhaps this is one place to start.


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