Natural disasters and human capital accumulation

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<ul><li><p>Policy ReseaRch WoRking PaPeR 4862</p><p>Natural Disasters and Human Capital Accumulation</p><p>Jesus Crespo Cuaresma</p><p>The World BankSustainable Development Network Vice PresidencyGlobal Facility for Disaster Reduction and Recovery UnitMarch 2009</p><p>WPS4862P</p><p>ublic</p><p> Dis</p><p>clos</p><p>ure </p><p>Aut</p><p>horiz</p><p>edP</p><p>ublic</p><p> Dis</p><p>clos</p><p>ure </p><p>Aut</p><p>horiz</p><p>edP</p><p>ublic</p><p> Dis</p><p>clos</p><p>ure </p><p>Aut</p><p>horiz</p><p>edP</p><p>ublic</p><p> Dis</p><p>clos</p><p>ure </p><p>Aut</p><p>horiz</p><p>ed</p></li><li><p>Produced by the Research Support Team</p><p>Abstract</p><p>The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.</p><p>Policy ReseaRch WoRking PaPeR 4862</p><p>The author assesses empirically the relationship between natural disaster risk and investment in education. Although the results in the empirical literature tend to be inconclusive, using model averaging methods in the framework of cross-country and panel regressions, this paper finds an extremely robust negative partial correlation between secondary school enrollment and </p><p>This papera product of the Global Facility for Disaster Reduction and Recovery Unit, Sustainable Development Network Vice Presidencyis part of a larger effort in the department to disseminate the emerging findings of the forthcoming joint World Bank-UN Assessment of the Economics of Disaster Risk Reduction. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The task manager may be contacted at asanghi@worldbank.org, and the author of this paper at Jesus.Crespo-Cuaresma@uibk.ac.at. </p><p>natural disaster risk. This result is exclusively driven by geological disasters. Natural disaster risk exposure is a robust determinant of differences in secondary school enrollment between countries, but not within countries, which implies that the effect can be interpreted as a long-run phenomenon.</p></li><li><p>Naturaldisastersandhumancapitalaccumulation1 </p><p>JesusCrespoCuaresma2 </p><p>Keywords:Naturaldisasters,humancapital,education,schoolenrollment,Bayesianmodelaveraging. JELClassifications:Q54,I20,E24,C11. </p><p>1This study was prepared as a background paper to the joint World Bank - UN Assessment on the Economics of Disaster Risk Reduction. Funding from the Global Facility for Disaster Reduction and Recovery is gratefully acknowledged. The author would like to thank Apurva Sanghi, the coordinator of the assessment, for many intellectually challenging discussions that helped shape the form of the paper. The paper has also profited from very helpful comments by Jos Miguel Albala-Bertrand, Jed Friedman, Samir KC, Norman Loayza, Reinhard Mechler, Paul Raschky, Gallina Vincelette and participants at the Brown Bag Lunch Seminar at the World Bank. All remaining errors should be exclusively attributed to the author. 2Department of Economics, University of Innsbruck; World Population Program, International Institute of Applied Systems Analysis (IIASA) and Austrian Institute for Economic Research (WIFO). Postal address: Universittstrasse 15, 6020 Innsbruck, Austria. E-mail address: jesus.crespo-cuaresma@uibk.ac.at </p></li><li><p>1Introduction </p><p>Inthisstudyweaimatquantifyingtheeffectofnaturaldisasterriskoninvestmentsineducationby exploiting both crosscountry and time differences in school enrollment rates.Given thelarge number of theories explaining differences in the rate of human capital accumulationacross countries, we explicitly take into account model uncertainty by the use of modelaveragingtechniquesinordertoextracttheeffectofcatastrophicriskonschoolenrollment. Traditionally,theempiricalliteratureontheeconomiceffectsofnaturaldisastersconcentratedon the shortruneffectsof catastrophicevents (seee.g.DacyandKunreuther,1969).AlbalaBertrand (1993a, 1993b), Tol and Leek (1999), Rasmussen (2004) or Noy (2009) are somemodern examples of research aimed at measuring the short and mediumrun impacts ofdisasters.On theotherhand,SkidmoreandToya (2002)andCrespoCuaresmaetal. (2008a)concentrateon longruneffectsofdisaster riskon themacroeconomy.3To theknowledgeoftheauthor,withtheexceptionofsomeresultsinSkidmoreandToya(2002),therehasbeennofullyfledged empirical investigation on the effects of natural disasters on human capitalaccumulationhitherto.Thisispreciselytheholethatthispieceofresearchaimstofill. Fromatheoreticalpointofview,theeffectofnaturaldisasterriskoneducationalinvestmentsisnotunambiguous.SkidmoreandToya(2002)arguethattotheextentthatnaturalcatastrophesreducetheexpectedreturntophysicalcapital,rationalindividualswouldshifttheirinvestmenttowardshumancapital.4Althoughthisargumenthighlightsapossiblechannelofimpact,thisisjustoneofthepossibleeffectsofnaturaldisastersonhumancapital.Inprinciple,onecouldalsoargue that, in the framework ofmodels of agentswith finite lives, the potential effect thatnaturaldisasterriskhasonmortalitywould leadtoa lower levelofeducational investment indisasterprone countries. Checchi and GarcaPealosa (2004) present a simple theoreticalmodelwhich assesses the effect of production risk on education. In theirmodel, aggregateproduction riskdetermines theaverage levelofeducation,aswellas itsdistribution.ChecchiandGarcaPealosa(2004)showboththeoreticallyandempiricallythathigheroutputvolatilityleads to lower educational attainment. Interpreting natural disaster risk as a component ofaggregate production risk in the economy, countries which aremore affected by disastersshouldalsopresentlowerlevelsofhumancapitalaccumulation,ceterisparibus. </p><p>The typeofargumentsput forwardabovestem from theoreticalmodelsandaimatunveilingthe role of natural disaster risk as a determinant of crosscountry differences. In this sense,thesetheoreticalexplanationsrefertothe longruneffectsofnaturaldisastersoneducationalinvestments. Shortrun effects on human capital accumulation associated to the actualoccurrenceofthedisastercouldbeextremely importantaswell.Asarepresentativeexample,</p><p>3See Okuyama (2009) for a thorough review of the literature on the assessment and measurement of the economic effects of natural disasters. 4Skidmore (2001) studies investment decisions under catastrophic risk. Unfortunately, the empirical results in Skidmore (2001) are based on a dataset of very reduced size. </p></li><li><p>consider the2005earthquake inPakistan.TheAsianDevelopmentBankand theWorldBank(2005),whenassessing the impactof theearthquake,estimate that853 teachersand18,095studentshadlosttheirlivesasaconsequenceofthedisaster.Theyalsoreportthatthehighestreconstruction costs in termsofmaterial replacement requirements corresponded to schoolsfromprimarytohighersecondarylevel.Over7500schoolswereaffectedbytheearthquakeandthe estimated reconstruction costs for the education sector after the earthquakewere thesecondhighestbysector,afterprivatehousing. Ultimately,thequestionofthehumancapitalacummulationeffectsofnaturaldisasterriskisanempirical one. The fact that we cannot rely on a single theoretical framework for theexplanationofthe linkcallsforanexplicitassessmentofthe issueofmodeluncertaintywhenquantifyingtheeffectofnaturaldisastersoneducational investments. In thiscontributionweuse BayesianModel Averaging (BMA, see Raftery, 1995, and Clyde and George, 2004, forgeneral discussions on BMA and Fernndez et al., 2001b, SalaiMartin et al., 2004, amongothers, forapplications to the issueof the identificationof robustdeterminantsofeconomicgrowth)toobtainrobustestimatesoftheeffectofdisasterriskonsecondaryschoolenrollmentrates. The application of BMA ensures that our results are not specific to the choice of aparticularmodel,and take into theaccountnotonlyuncertaintyof theestimates foragivenmodel,butalsouncertaintyinthechoiceofaspecification. Our results indicate that geological disaster risk is a very robust variable for explainingdifferencesinsecondaryschoolenrollmentratesacrosscountries.Theeffectissizeableandwellestimated. It implies that the school enrollment effect corresponding to themean geologicdisasterriskisaround1.65percentagepointsinsecondaryschoolenrollmentascomparedtoacountrywithzerodisasterrisk.Themaximumdisasterriskdriveneffect inourdataset impliesapproximatelya20percentagepointsdecreaseinsecondaryschoolenrollment. This contribution is structured as follows. Section 2 presents a first descriptive look at theempirical relationship between disaster risk and educational attainment. In section 3 weperform different BMA exercises to assess the robust effect of natural disaster risk as adeterminantofdifferences inschoolenrollmentratesbothbetweenandwithincountries.Wealsoevaluatepotentialdifferences inthenatureoftheeffect intheshortversusthe longrun,andassesstheissueofsubsampleheterogeneityintheresponseofhumancapitalaccumulationtodisasterrisk.Section4concludes. </p><p> 2Afirstlookateducationanddisasters </p><p> In this section we present a first exploratory analysis of the relationship between naturaldisastersandhumancapitalaccumulation.Figure1presentsscatterplotsofaveragesecondaryschoolenrollment in theperiod19802000againstdifferentmeasuresofnaturaldisaster riskevaluatedinthesameperiodfor170countries.AsinSkidmoreandToya(2002),weconcentrateforthisgraphonasimplemeasureofnaturaldisasterriskbasedonaveragedisasteroccurrenceby squared kilometer, so that disaster risk is measured as</p></li><li><p>))]/([1log= icountryofAreaicountryindisastersofNumberdi .5Weavoidusingtheexisting</p><p>dataonquantifiedlossesandreceivedaid,sincethesetypeofmeasuresareusuallyclaimedtobeplaguedwithendogeneityandothermeasurementproblems.Ontheonehand,totheextentthatdisasteraiddecisionsare influencedby reported lossesoraffectedpeople,governmentswouldhavean incentivetooverreportthesefigures.Ontheotherhand,the income levelofacountry(which ishighlycorrelatedwithhumancapitalaccumulation) isabasicdeterminantofthe effectiveness of natural disaster risk management. Since successful risk managementmechanisms will reduce the negative macroeconomic effects of disasters, using estimatedlossescouldspuriouslyleadtoanegativecorrelationbetweendisasterriskandeducationwhichisactuallycausedbytheeffectofeducationonthereductionofnaturaldisasterloss.Skidmoreand Toya (2007), for instance, show that higher levels of education reduce the losses fromnaturaldisasters.We therefore concentratehereonmeasuresbasedondisasteroccurrencefrequency,whichdoesnotcontaininformationonthemagnitudeofthedisaster,butfulfillsthenecessaryconditionofexogeneityfortheanalysis. </p><p> a) </p><p> b)</p><p>5The source of disaster data is EM-DAT: The OFDA/CRED International Disaster Database (www.em-dat.net), Universit Catholique de Louvain, Brussels (Belgium), where catastrophic events are reported which fulfill at least one of the following criteria: a) ten or more people reported killed, b) 100 people reported affected, c) a call for international assistance was issued or d) a state of emergency was declared. </p></li><li><p> c) </p><p> Figure1:Naturaldisasterriskandsecondaryschoolenrollment:totaldisasters(a),</p><p>geologicdisasters(b)andclimaticdisasters(c) </p><p>In Figure 1 we show the raw correlation between disaster risk and education, withoutcontrollingforotherfactorsthatmayaffectschoolenrollment.Wepresentscatterplotsforallcombineddisasters, aswell as for geologic and climaticdisasters.We consider the followingdisastersaspartofthegroupofclimaticcatastrophes:floods,cyclones,hurricanes,icestorms,snowstorms,tornadoes,typhoons,storms,wildfire,drought,andcoldwave,whilethegroupofgeologic disasters includes volcanic eruptions, natural explosions, avalanches, landslides,earthquakesandwave/surge.Sinceatthisstageweexploitexclusivelycrosscountrydifferencesinthesevariables,weaimat interpretingtheresultsas longruneffectsofdisastersonhumancapital accumulation. The results in Figure 1 indicate aweak positive relationship betweendisaster risk and the educational variable,which practically disappears for the subgroup ofgeologicdisasters.Although the relationship isnot statistically significant inanyof the threecasesreported inFigure1,this firstglimpseattherelationshipweare interested inseemstolendsomesupporttotheconclusionsinSkidmoreandToya(2002). Inordertoextractthepureeffectofdisasterriskoneducationalinvestment,however,weneedto control for a series of other variableswhich independently affect educational attainment</p></li><li><p>differences across countries.Alternatively, amore precise picture of the relationship can becapturedbyconcentratingonamorehomogeneousgroupofgeographicalunits.Althoughourstudy aims at a crosscountry analysis, data at the regional level can deliver an interestinginsightintothelinkbetweendisasterriskandhumancapitalaccumulation.Figure2presentsascatterplot where the number of floods (as a roughmeasure of climatic disaster risk, logtransformed) isshownagainstthemeanyearsofschoolingofthepopulationbetween15and29yearsofagefor75districtsinNepalintheyear2001.6Therelationshipbetweeneducationalattainmentanddisaster riskwithin thisgroupofmorehomogeneous regionsappears slightlynegative,butnotstatisticallysignificant. </p><p> Figure2:Floodsversusmeanyearsofschooling(agegroup1529)inNepalesedistricts </p><p>Assessingthe inmpactofnaturaldisastersoneducation impliesformulatingapotentially largemodel,whereahuman capitalaccumulationmeasure ishypothesized todependona setofdeterminantsandnaturaldisaster risk.Obviously, thechoiceofextracontrols to include inamodel linkingdisaster risk tohuman capitalaccumulationdependson the theoretical settingassumed. When assessing empirically the issue of the determinants of human capitalaccumulation,wehavemanycompetingtheoriesandeffectsthathavebeenputforwardintheliteraturetoexplaincrosscountrydifferencesineducationalattainment.Soasnottomakeourempirical results depend on a specific theoretical (and thus econometric) specification ,weinvestigate the issue of the robustness of disaster risk as a determinant of educationalattainmentintheframeworkofmodeluncertaintyusingBMAmethods. </p><p> 3Anempiricalanalysisoftheeffectofdisasterriskonhumancapitalaccumulation </p><p>6The data stems from KC and Lutz (2009). </p></li><li><p>3.1Modeluncertainty </p><p>Theestimationoftheeffectofcatastrophicriskonhumancapitalaccumulation iscarriedoutusinglineareconometricmodelsofthistype, </p><p> (1) ,=1=</p><p>ijj</p><p>k</p><p>jii xde </p><p>where isaproxyofeducationalattainment, is thedisaster riskvariable, </p><p>areotherexplanatoryvariablesandie id )(= 1 KxxX </p><p> isazeromeanerrortermwithvarianceequalto .InSkidmoreandToya (2002), for instance, the initial levelof theeducationalvariableaswellasincome per capita are the only variables in the X set. Since there are numerous variablesaffectingeducationalattainment,weaimatobtainingameasurewhichsummarizestheeffectofnaturaldisasterriskonhumancapitalaccumulationaftertaking intoaccountthedegreeo...</p></li></ul>