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

This paper is available at: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1055.pdf

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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