|M.Sc Thesis||Department of Industrial Engineering and Management|
|Supervisor:||Dr. Yishay Maoz|
|Full Thesis text - in Hebrew|
In this work we discuss the effect of natural disasters on long run growth. We show that while a natural disaster damages the standard of living in the short run, it is still possible - because of the disaster - for the economy to get on a growth course which is actually faster than the one that it occupied if it weren't for the disaster. We show a simple model such that the rate of product growth might actually increase as a result of the disaster.
The model is a variation on Sollow's model of economic growth. The resources in our model are: capital and ground. The amount of capital in the economy changes with time, while the amount of ground is constant. Two kinds of capital exist: the "old" and the "advanced" capital. The producing function is composed of two producer sectors: the traditional sector uses the traditional technology and the "old" kind of capital; the modern sector uses the modern technology and the "advanced" kind of capital. The modern technology is more efficient for this economy, however, transfer of ground from the traditional to the modern sector involves switching costs. We show how these costs might limit the expansion of the modern sector in the economy. As a result, in the steady state, some amount of capital and ground remain in the traditional sector.
We use this model to analyze a situation where a disaster damages mostly the traditional sector, and in this way causes the economy to get out of the steady state. We show that such a disaster causes a change in the model parameters and reduces the level of production in the short run. On the other hand, we assume that the modern sector is damaged by the disaster in a lesser measure than the traditional sector. Therefore the value of the ground in the traditional sector might decrease sufficiently to accelerate the transfer of additional parts of it to the modern sector. In this way, the disaster accelerates the resource transfer from the traditional to the modern sector and extends the use of the modern technology. Thus, the disaster brings about new steady state equilibrium, different from the original one, and with higher product level.
Thus, paradoxically, economy ascends towards an economic growth course, which is faster than the one that it would have occupied had there been no disaster.