The ‘new weather-economy literature’ applies panel methods to examine how weather-related events such as temperature, precipitation and windstorms affect economic outcomes such as output, labor productivity and conflict. By capturing exogenous variation in weather related events over time within a given spatial unit, the literature helps inform classic issues of economic development and especially the role of geographic features in influencing development paths. This in turn contributes to the debate over the competing explanations of institutions and geography in explaining economic development. Overall, this literature establishes that temperature, precipitation and extreme weather events exert economically meaningful and statistically significant influences on a variety of economic outcomes. A key finding is that panel estimates tend to predict economically and statistically significant negative impacts of hotter temperatures on per-capita income but only for poor countries.
A branch of this literature examines the effects of natural disasters on economic growth. In a technical sense, natural disasters have the same appeal as other weather related shocks in that they are exogenous. Natural disasters are distinguished from other weather related shocks in that they are more destructive. This feature provides a reasonably straightforward connection to the predictions of growth theory in that the destruction of capital leads initially to an inward shift of the production possibility frontier and so a sharp contraction of growth, but then a recovery process during which the growth rate may be higher than that in the steady state. Yet there are many subtleties that are amenable to econometric testing. For example, models based on Schumpeter’s creative destruction process may even ascribe higher growth as a result of negative shocks, as these shocks can be catalysts for reinvesting and upgrading of capital goods. On the other hand, endogenous growth models that exploit increasing returns to scale in production generally predict that a destruction of part of the physical or human capital stock result in a lower growth path and, consequently, a permanent deviation from the previous growth trajectory. Also, economic openness that allows for an inflow of capital from abroad and good institutions that can be used effectively to defend property rights should all speed up the recovery process. Here a consensus appears to be emerging that the initial impact of a shock on growth is indeed negative and that this is followed by a recovery phase during which growth accelerates. Moreover, better institutional quality, greater openness to trade, and greater financial openness all help support faster recovery. In future research, the new datasets on weather related shocks and natural disasters could be fruitfully applied to many other questions, including the relation between disasters and trade patterns, migration patterns, poverty and inequality.
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