Earthquakes and the wealth of nations: The cases of Chile and New Zealand

Abstract

The consequences of natural disasters, such as earthquakes, are evident: death, coordination problems, destruction of infrastructure, and displacement of population. However, according to empirical research, the impact of a natural disaster on economic activity is mixed. Natural disasters could have significant economic effects, especially in developing economies. This is particularly important for highly seismic countries such as Chile and New Zealand. This paper contributes to the literature on natural disasters and economic development by analyzing the cases of two affected regions within these countries in the wake of major earthquakes experienced during 2010-2011: Maule (Chile) and Canterbury (New Zealand). We examine the impact of natural disasters on GDP per capita by applying the synthetic control method. Using the synthetic approach, we assess the effects of these two earthquakes by building counterfactuals to compare their recovery trajectories. We find that Chile and New Zealand experienced opposite economic effects. The Canterbury region grew 10% more in three years than its synthetic counterfactual without the earthquake, while the Maule region declined by 5%. We build synthetic controls at a regional and economic-sector level, looking at aggregated and sectoral effects. The difference in institutions, such as property rights and the large amount of government spending given for reconstruction after the New Zealand earthquake relative to Chile's, help to explain the difference in outcomes.