Fiscal decentralization, natural disasters, and economic growth

Literature on natural disasters and growth has established that disasters affect economic growth through changes to human capital and physical capital. Disasters affect countries through the number of deaths and injuries, and damages to the country's infrastructure and property, such as roads, houses, buildings, generators, etc. Generally, studies have found that natural disasters hurt economic growth because of the toll it takes on a country to recover from its effects.;However, there is a branch of literature that theoretically and empirically argues that disasters can have positive effects on growth in the long run. In the aftermath of a disaster, the recovery process for countries will replace outdated and damaged equipment with updated capital and technology. With new, updated physical capital and appropriate technology introduced to disaster stricken areas, new skills are learned by the labor force to use and maintain the capital, thus increasing human capital. With increases in both physical capital and human capital, countries are likely to experience economic growth.;This paper attempts to investigate how fiscal decentralization affects the relationship between natural disasters and economic growth. Cross-country data from 1990 to 2005 on 58 countries is used to estimate the relationship between natural disasters and economic growth. This study provides evidence that low decentralized countries, as measured by the ratio of subnational to total government expenditures, experience growth in GDP by at least .34%. This growth increases to .48% for low decentralized, developing countries. In high decentralized countries, disasters were found to not significantly affect economic growth, due to offsetting benefits and costs of decentralization.