The Effects of Natural Disasters on the Economy

1. 
   Natural disasters have varying economic effects beyond the affected region.
   Earthquakes, floods, hurricanes, tornadoes, droughts and other natural disasters affect infrastructure and physical capital, employment, farm production, energy and other aspects of an economy. The severity of these effects on the larger economy depends on various factors, including the disaster itself, the affected area and the capacity of national and regional institutions to provide relief and begin efforts to rebuild.

Physical Capital Effects

2. Earthquakes, tornadoes, hurricanes and other natural disasters devastate physical capital, such as homes, business properties and transportation infrastructure, including roads and airports. This often disrupts economic activity in the affected region. However, as government disaster aid reaches the affected areas and rebuilding begins, the aftermath of a natural disaster often presents an opportunity for improved infrastructure. Michigan State University economist Mark Skidmore told The New York Times: "When something is destroyed you don't necessarily rebuild the same thing that you had. You might use updated technology. You might do things more efficiently."

Higher Employment Levels

3. Many times, an area hit by a natural disaster will experience a jump in employment levels. An increase in construction jobs, as residents and business owners in affected areas rebuild their properties, accounts for much of the increase in jobs. The New York Times reported that a year after Hurricane Andrew struck southern Florida in 1992, that area experienced a jump in the number of people working, largely because of new construction jobs as rebuilding began.

Reduced Agricultural Production

4. Floods, droughts and other natural disasters can affect agricultural production, leading to higher food prices for consumers. The extent of the economic impact depends in part on the type of disaster and its severity. Hurricanes and floods, for example, can wash away rich soil, affecting crop yields in the short run. A long-term drought, meanwhile, can destroy an entire harvest and lead to livestock deaths, affecting produce and meat prices.

Higher Energy Prices

5. Natural disasters that affect important energy production centers can lead to sudden increases in energy, such as higher oil prices. An example is a hurricane or other natural disaster affecting the U.S. Gulf Coast, a major producer of oil for much of the nation. Hurricane Katrina in 2005 shut down major oil refineries and pipelines along the Gulf Coast, resulting in higher oil prices. High energy costs affect the entire economy because energy represents a key element in production of goods and services. The Congressional Research Service points out that the long-term impact of higher energy costs depends on how quickly refineries, pipelines and other energy facilities undergo repairs and resume production.

Reduced Trade

6. Disasters affecting key trade centers, such as coastal areas that host major ports, can impact the level of imports and exports. The Congressional Research Service notes that Hurricane Katrina affected several of the nation's major ports. The effects may be only short-term, depending on how soon affected ports resume operations, receiving and shipping goods.

Reference:

"The Effects of Natural Disasters on the Economy," Shane Hall, accessed on November 7,2010,