The Impact of extreme Weather events on Budget Balances and ImplicatIons for fiscal polIcy
بِسمِ اللَّهِ الرَّحمٰنِ الرَّحيمِ
DISCUSSION of A WORKING PAPER
The ImpacT of exTreme WeaTher evenTs on BudgeT Balances and ImplIcaTIons for fIscal polIcy
SUMMARY OF THE PAPER (Chapter I) Part 1/2
A.
A Brief Overview
This paper conducts
an analytical research on implications of climate change for fiscal policy by
assessing the impact of large scale extreme weather events on changes in public
budgets. The writers were possibly inspired by the conflict between
neo-classical model and endogenous growth model in defining natural disaster
impacts on output growth. Neo-classical models predict an increase in output
growth following a natural disaster since the losses due to the disaster
provide opportunities to update the capital stock and adopt new technologies;
in contrast, endogenous growth models may ascribe negative growth due to a
disaster, in particular, as a result of destruction in human capital and
technology.
In short, the
writers has revealed that developing countries face a much larger effect on
changes in budget balances following an extreme weather event than do advanced
economies.
B.
Extreme weather: definition and limitation
Extreme weather
events are a special type of natural disasters, so called ”hydrometeorological”
ones, caused by storm and precipitation, including floods, as well as intense
heat; moreover, they include the following disasters: drought, extreme
temperature, flood, mass movement dry, mass movement wet, storm, and wildfire.
The writers
implement a decision rule which allows us to consider only large scale extreme
weather events in the empirical analysis by applying the following criteria:
(i)
the number of
persons affected is no less than one hundred thousand,
(ii)
the estimated
damage costs of the extreme weather events are no less than 1 billion US
dollars (in constant 2000 dollars),
(iii)
the number of
persons killed is no less than one thousand or
(iv)
the estimated
damage costs are above two percent of GDP.
At least one of the
criteria has to be satisfied in order to count as a large-scale extreme weather
event and to be included in our estimations.
Additionally, most
of the corroborated “external” researches acknowledge that the macroeconomic
impact will be compounded further if climate change precipitates extreme
weather events.
C.
Hypotheses
For an extreme
weather event to exert a substantial effect on the change in budget balances,
it should be sufficiently large causing damage to infrastructure, human capital
and production facilities. This would imply that extreme weather events could
affect fiscal policies in two ways:
v
First, a direct
fiscal impact is related to the relief payments and the financing of public
disaster response.
v
Second, a drop in
output and the negative wealth effect caused by the disaster can be seen to
cause some indirect fiscal impact through various transmission channels
in the economy causing lower tax revenues, increasing public outlays on social
payments etc.
D.
Data
The data on extreme
weather events applied in the paper are derived from the Emergency Events
database (EM-DAT) maintained by the Centre for Research and the Epidemiology of
Disasters (CRED) of the Universit´e Catholique de Louvain. The database
includes the number of persons killed, the number of persons affected, the
number of persons injured as well as the estimated economic damage costs given
in thousands of USD.
The sample period
from 1985 until 2007 covers 138 countries including 4,671 extreme weather
events. Due to the adoption of the decision rule, the number of extreme weather
events is reduced from 4,671 to 1,044 events as describe on following table:
Table 1: Extreme Weather Events Satisfying
Decision Rule
|
|||||
Number of
persons
killed more
than 1,000
|
Number of
affected
persons more
than 100,000
|
Estimated
damage costs
more than
1 billion US dollars
|
Estimated
damage costs
higher than
2 percent of GDP
|
Number of
disasters
satisfying
decision rule
|
|
Extreme
weather
|
48
|
794
|
188
|
129
|
1044
|
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