The European Commission has recently published its Trade and Development Communication, which underlines trade as one of the key drivers to support development, stimulate growth, and lift people out of poverty. In addressing the issues, it also recognises the disruptive potential of natural disasters.1
Indeed, whether it is an earthquake in Japan or Turkey, or floods in Pakistan or Thailand, natural disasters regularly hit the news with compelling images of shattered lives. It goes without saying that natural disasters also have at times systemic trade and development implications. The latest figures on Thailand’s floods point to more than 500 casualties. Striking as they are, these figures are only the most visible side of a disaster that affected many more people, including the tens of thousands who were evacuated from many of Bangkok’s districts. Thailand’s economy suffered in the process. In addition to disruptions to the workforce, the country has had to cope with ruined farmland and damaged commercial and industrial property. Estimates were put forward of around 10,000 factories and 660,000 jobs affected by the disaster.
Costs expected to triple by end of century
During the recent APEC meeting, US Secretary of State Hillary Clinton said that in 2011 alone the economic losses from natural disasters in the Asia-Pacific region will probably exceed €150 billion. And according to the latest Annual Disaster Statistical Review, there were a total of 385 natural disasters in 2010 alone, with associated casualties surpassing 297,000 people and costs estimated at around €95 billion. Moreover, going forward, many specialists predict an increase in the regularity and costs of such type of natural disasters, including as a result of climate change. Recent work from the World Bank and the United Nations estimates costs to triple by the end of the century.
The case of small countries
These developments have led to growing interest in the impact of natural disasters on trade and economic activity. The volatility in the data and the multitude of factors influencing trade flows makes it difficult, however, to use descriptive statistics to identify how exports from disaster-hit countries are affected by such extreme events.
In this column, we isolate the effects of natural disasters on exports of developing countries with the help of a gravity model. We single out for special attention the effect on the smaller countries. We often see that smaller countries are hit from both sides: they are the hardest hit and the least able to cope. We can easily imagine how, for example, a small island state with (reduced) seaport infrastructure (or a small landlocked country with limited number of roads) can be disproportionately affected by a calamity when compared to a bigger country with more seaports (or roads).
This would suggest that, in spite of the devastating effects reported above for Thailand, similar disasters could have had far worse consequences for small countries, particularly so in those with a primarily export-led growth strategy. Indeed, natural disasters could lead to balance of payments difficulties, jeopardising long-term development efforts in these countries.
An econometric approach
Our methodology is based on a simple Ordinary Least Squares gravity model, using quarterly data for developing exporter countries and 13 developed importer countries, between 1988 and 2010. Data for natural disasters includes earthquakes, floods, and volcanic eruptions and is taken from the EM-DAT database.
We find that exports of disaster-hit small developing countries decline by 22% as a consequence of the disaster. Moreover, the observed impact tends to last for about three years (see appendix for results). On the other hand, we find no evidence of a significant impact on exports of large developing countries.2
Given that small developing countries seem to be at higher risk of having their exports negatively affected by natural disasters, such countries could be the focus of measures dedicated to either reducing their export vulnerability to disasters in the first place, or minimising the negative export impact of disasters when they occur. In the upcoming Trade and Development Communication, the European Commission proposes a number of ways to improve the effectiveness of the EU in regards to the preparedness and mitigation of natural disasters.
Disclaimer: The views expressed in this document are the authors' and do not necessarily reflect those of the European Commission.
European Commission (2012), "Communication from the European Commission to the European Parliament, the Council and the European Economic and Social Committee; Trade, growth and development".
CRED (2011), "Annual Disaster Statistical Review 2010", Centre for Research on the Epidemiology of Disasters, Université catholique de Louvain.
Escaith, H, A Keck, C Nee, R The (2011), “Japan's earthquake and tsunami: International trade and global supply chain impacts”, VoxEU.org, 28 April.
Gassebner, K, A Keck and R Teh (2006), "The impact of disasters on international trade", WTO Staff Working Paper ERSD-2006-04, March
Lee, H and K Logez (2005), “Trade Interests of the Tsunami Affected Countries”, OECD Trade Policy Working Papers, No. 23, OECD Publishing
Peduzzi, P, H Dao, C Herold, and F Mouton (2009), "Assessing global exposure and vulnerability towards natural hazards: the Disaster Risk Index", Natural Hazards and Earth System Sciences, 9, 1149-1159
UN (2004), "World Population Prospects, The 2004 Revision, Volume III, Analytical Report", Department of Economic and Social Affairs, Population Division.
UNEP (2005), "Environmental Management and Disaster Reduction", Concept Paper for the World Conference on Disaster Reduction, Japan.
1 See also the Vox column by Escaith et al 2011 on the effects of Japan’s earthquake and tsunami on trade.
2 The results from this Ordinary Least Squares panel regression were checked for robustness in several ways, including with variations in the definition of the disaster variable. Results also showed, however, less robustness when certain variations of the Poisson estimator were employed, in alternative to Ordinary Least Squares.