Do Natural Disasters Cause Economic Growth? An ARDL Bound Testing Approach

Abstract

This article strives to work out the causal relationship between natural disasters and economic growth in Pakistan. The study empirically tests the linkage using econometric techniques autoregressive distributed lag bound model by Pesaran (2001) and Granger causality test. We develop a proxy for the loss of natural disasters by a similar method as Noy (2009) and Bergholt et.al, (2012) did. The results of ARDL bounds testing approach evidence a negative long run relationship between the proxies of natural disasters and economic growth. The results of Granger Causality depict the uni-directional causality from natural disasters to economic growth both in short-run and long-run. Overall, the study determines that natural disasters deteriorate economic growth in Pakistan. This is the first study in Pakistan to assess the causal relationship among natural disasters and economic growth. So, further empirical evidence may link natural disasters to microeconomics and financial indicators. In future, researchers might control the impact of foreign development aid, remittances, political stability and country’s corruption rating. Natural disasters are an alarming issue and, addressing the questions related to their impacts on welfare of human being and economic growth of the countries contain significant importance in order to attract the attention of global development agencies and policymakers. As per INFORM (2015) risk index, Pakistan has the highest vulnerability towards natural disasters after Afghanistan. So, the study contains more significant value in context of Pakistan.

Natural Disasters and Economic Growth in Indonesia

“…The presence of unidirectional causality running from natural disasters to economic growth in this study is supported by similar findings in other countries prone to natural disasters, such as Pakistan [31], Philippines [32], and India [33]. Furthermore, previous studies conducted in developing countries have found unidirectional causality from natural disasters to GDP per capita, while this relationship is not observed in developed countries [34].…”

Do natural disasters affect economic growth? The role of human capital, foreign direct investment, and infrastructure dynamics

“…For example, Shabnam [ 39 ] reported 0.005% decline in GDP/capita for one thousand out of one million population disturbed by floods in 187 countries. The economic damage is also reported in 171 countries [ 118 ], 21 Caribbean countries [ 42 ], and Pakistan [ 41 ]. Another study [ 25 ] reported that severe natural disasters showed an adverse impact on economic growth (−0.016), fiscal balance (−0.011), and FDI (−0.0271) in the B&RIC.…”

“…Pakistan is located in an extreme risk zone in terms of natural disasters. Due to this, Baig et al [ 41 ] explained the causality between economic growth and natural disasters in Pakistan. The results confirmed an inverse link between economic growth and natural disaster loss.…”

Climate Change and Water Crisis, Consequences on Agriculture and Hydrological Justice: Case Study of Pakistan

“…Nearly 1800 people lost their lives in the recent disaster, and there were tens of billions of dollars in financial losses. Between independence in 1947 and the 2010 flooding, nearly 8000 people perished, and economic damages totaled $10 billion, according to the most recent official statistics (Baig, et al, 2018). These estimates are made at the local administrative level, and it is unknown how accurate they are.…”