Global Environmental Change 36 (2016) 67–88

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Global Environmental Change

journal homepage: www.elsevier.com/locate/gloenvcha

Economic development and natural disasters: A satellite data analysis

Jeroen Klomp
Wageningen University, Development Economics Group, P.O. Box 8130, 6700 EW Wageningen, The Netherlands

A R T I C L E I N F O A B S T R A C T

Article history: In this study we examine the impact of large-scale natural disasters on economic development. A major
Received 4 March 2015 obstacle in exploring this relationship is the poor data quality on GDP per capita in low-income countries,
Received in revised form 26 October 2015 while at the same time more than 90% of all disasters that happen worldwide occur in these particular
Accepted 2 November 2015
countries. To overcome this problem, we use data based on satellite images of the night-time light
Available online xxx
intensity in a specific country or region which is shown to be highly correlated with income per capita.
After testing for the sensitivity of the results, our main findings suggest that natural disasters reduce the
JEL classification:
amount of lights visible from outer space significantly in the short run. To be more precise, we
Q54
O44
demonstrate that climatic and hydrological disasters cause a large drop in the luminosity in developing
O47 and emerging market countries, while geophysical and meteorological disasters decrease light intensity
more in industrialized countries. It turns out that using reported real GDP per capita figures
Keywords: underestimates the true impact. Besides, a large part of the economic consequences of the natural events
Economic growth is explained by their regional impact. However, in the long run most of the disaster effect has
Natural disasters disappeared. Finally, the impact of a disaster depends partly on the size and scope of the natural
Satellite data catastrophe, the geographical location, the degree of financial development of a country and the quality
of the political institutions present.
ã 2015 Elsevier Ltd. All rights reserved.

1. Introduction measurement errors in economic data, the majority of African

One of the main challenges the world faces today is how to cope
and limit the economic impact of large-scale natural disasters as
their frequency and severity rose dramatically since the 1970s.
Though, an important obstacle in this challenge is how to measure
or estimate the economic costs related to these catastrophes. The
last decade, numerous studies have looked into this debate from a
macroeconomic perspective by exploring how disasters affect real
GDP per capita (i.e., Skidmore and Toya, 2002; Raddatz, 2009; Noy,
2009; Loayza et al., 2012; Fomby et al., 2011; Felbermayr and
Gröschl, 2014). Nevertheless, the general picture that emerges in
this literature remains rather unclear. A great difficulty with the
existing studies is that the majority of natural disasters happen in
developing countries where macroeconomic research is hampered
due to unreliable economic data. Many countries of tropical Africa
and Asia, particularly those war-torn and disaster prone countries,
have no reliable or only rudimentary economic statistics. For
instance, all sub-Saharan Africa countries included in the Penn
World Tables (PWT) receive the lowest data quality ratings. Even
worse, Jerven (2010, 2013) claims that due to the presence of large
E-mail address: jeroen.klomp@wur.nl (J. Klomp).
countries should be considered to have the same income level.
Only, it is exactly these particular countries with poor statistical
systems that are the most exposed to large-scale natural disasters.
According to figures reported by EM-DAT, about 50% of the least
developed nations face a high risk of natural disasters. At least a
quarter of them have been hit by between two to eight major
disasters per year in the last two decades (EM-DAT, 2013).
Besides, using officially reported GDP figures creates a selection
bias in the country sample used as the availability and reliability of
the data is positively related to the level of income. It is therefore
possible that the empirical estimates reported in the existing
studies so far partly suffer from a sample selection bias since most
studies include only up to 100 countries in their estimations,
creating an over-representation of industrialized countries
(see Noy, 2009; Loayza et al., 2012; Skidmore and Toya, 2002).
A related problem is the underestimation of the size of the
shadow economy in many developing countries that causes a
downward pressure on the official GDP figures (Loayza, 1996). The
shadow economy is not only associated with illegal transactions
related to the black market, but also to many legal value-adding
activities such as subsistence farming. This latter activity is in turn
again extremely vulnerable for droughts and floods (Sivakumar
et al., 2005; Loayza et al., 2012; Fomby et al., 2011). Additionally, in

http://dx.doi.org/10.1016/j.gloenvcha.2015.11.001
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68 J. Klomp / Global Environmental Change 36 (2016) 67–88
developing countries many goods and services are traded on
informal markets. These activities do not enter the calculations of
the officially reported GDP figures. According to estimates
provided by Schneider and Enste (2000) the shadow economy is
above 40% of GDP in many developing countries, while it is only a
small part of the total economy in most industrialized countries.
The poor data quality together with the underestimation of the
informal sector hinders the attempts to understand the true
relationship between economic development and the exposure to
natural disasters in these countries. In response to overcome the
problems of measuring GDP per capita, there is a long tradition in
the economics literature of considering various proxies that cover
periods or countries for which GDP data are not available at all or
not available in a timely fashion. Recently, a number of studies
demonstrated that light intensity and economic activity are
closely related (see also Chen and Nordhaus, 2011; Ghosh et al.,
2010, Kulkarni et al., 2011; Croft, 1978; Elvidge et al., 1997; Sutton
and Costanza, 2002; Ebener et al., 2005; Doll et al., 2006; Sutton
et al., 2007; Hodler and Raschky, 2014; Michalopoulos and
Papaioannou, 2013a,b). The basic idea behind using light intensity
as a proxy for GDP per capita is that when income rises, so does
light usage per person as nearly all consumption and investment
activities in the evening require lights. In addition, there is also a
strong association between luminosity and public-goods provi-
sion, especially across low-income countries (Min, 2008). Thus,
like GDP per capita, night-time light is presumably to reflect some
private consumption and investment, some production and some
government expenditures. Henderson et al. (2012) conclude,
based on a broad set of countries, that the elasticity of the growth
of lights emanating into space with respect to income growth is
close to one. Consequently, satellite images on light intensity can
be used as a suitable proxy for economic activity, especially for
countries or regions with the poorest statistical systems. For
instance, Bertinelli and Strobl (2013) use luminosity data to reveal
the link between regional economic development and hurricanes
in the Caribbean. They claim that the light intensity is reduced by
more than three-percent in the year of the strike, which is about
twice as large as by using officially reported real GDP per capita
figures. In addition, a number of older event studies already point
out that light intensity data is a good measure to explore the
short-run physical damage created by floods (Wiesnet et al., 1974;
Imhoff et al., 1987; Tanaka et al., 2000), forest fires (Tanaka et al.,
1983; Robinson, 1991), volcano eruptions (Rothery et al., 1988;
Holasek and Rose, 1991; Chorowicz et al., 1997) or earthquakes
and landslides (Massonnet et al., 1993; Saraf, 2000; Kimura and
Yamaguchi, 2000; Kohiyama et al., 2004; Yonezawa and Takeuchi,
2001).
Our contribution to the empirical literature is to explore how
large-scale natural disasters affect economic development mea-
sured by night-time light intensity. For this purpose, we use a
dynamic panel model including more than 1000 large-scale
natural disasters in about 140 countries between 1992 and
2008. Our data on the night-time light intensity in a particular
country-year is taking from NOAA. In addition, we construct
several measures on the frequency and intensity of natural
disasters using information provided by EM-DAT. The endogeneity
problems related to the economic consequences of natural
disasters are addressed by estimating a system-GMM model.
After extensive testing for the sensitivity of the results, our
main findings suggest that natural disasters reduce the amount of
lights visible from outer space significantly in the short run. To be
more precise, we demonstrate that climatic and hydrological
disasters cause a large drop in the luminosity in developing and
emerging market countries, while geophysical and meteorological
disasters decrease light intensity the most in industrialized
countries. It turns out that using reported real GDP per capita
figures underestimates the true impact. Besides, a large part of the
economic consequences of the natural events is explained by their
regional impact. However, in the long run most of the disaster
effect has disappeared. Finally, the impact of a disaster depends
partly on the size and scope of the natural catastrophe, the
geographical location, the degree of financial development of a
country and the quality of the political institutions present.
The remainder of the paper is organized as follows. In the next
section, we discuss our theoretical foundation underlying our
hypothesis. In section three, we describe our data and methodolo-
gy used. In section four, we present our estimation results on the
relationship between large-scale natural disasters and economic
development. Finally, we end in section five with our conclusion
and discussion.
2. Theoretical considerations
Numerous studies have tried to estimate the direct impact of
natural disasters on economic development (i.e., Skidmore and
Toya, 2002; Raddatz, 2009; Noy, 2009; Loayza et al., 2012; Fomby
et al., 2011; Felbermayr and Gröschl, 2014). In total, there are about
30 comparable studies on this issue, providing more than 600
estimates (Klomp and Valckx, 2014). Nonetheless, the general
picture that emerges in this empirical literature is rather
inconclusive. Only about 40% of the estimates reported is
significant at the 10% level. To be precise, about a quarter of the
estimates point out that disasters reduce real GDP per capita, while
in 15% of the cases a significant positive effect is found. These
mixed findings should not necessarily come as a complete surprise,
as theory already suggested that different types of disasters can
have diverse, even opposite, effects on growth. In more detail,
more traditional neo-classical growth models, like the Solow
model, predict that the reduction of the capital-labor ratio drives
countries temporarily away from their long run growth path, while
the endogenous growth models provide less clear-cut predictions.
For example, models based on Schumpeters’ creative destruction
theory may even predict higher growth rates as a result of natural
disasters since these shocks can work as an accelerator for
upgrading the destroyed capital stock (Klomp and Valckx, 2014;
Loayza et al., 2012; Cavallo et al., 2013).
Thus, as emphasized by Cavallo et al. (2013), the question of
whether natural disasters affect economic growth is ultimately an
empirical one. Klomp and Valckx (2014) try to explain the
differences across the empirical results reported using a quantita-
tive literature review. Their meta-analysis provides two clear
conclusions. First, after controlling for a large number of differ-
ences among studies and estimates, related to disaster character-
istics, sample composition and estimation method, only a weak
significant negative short run effect remains. Second, a large part of
the statistical significance in studies that find a significant effect
can be attributed to a so-called publication bias where significant
results are more easily published.
The fact remains that the majority of the reported estimates is
found to be insignificant. One possible explanation for these
disappointing empirical results so far might be that previous
empirical results suffer from data quality problems in developing
countries, where about 90% of the natural disasters occur, making
the results potentially spurious due to false positives or negatives.
As already mentioned in the introduction, data on GDP per capita
in developing countries is often measured with large errors or do
not even exist at all. To overcome these problems, a number of
studies have demonstrated that there is a strong within-country
correlation between light intensity at night and GDP levels (see
also Chen and Nordhaus, 2011; Kulkarni et al., 2011; Croft, 1978;
Elvidge et al., 1997; Sutton and Costanza, 2002; Ebener et al., 2005;
Doll et al., 2006; Ghosh et al., 2010; Sutton et al., 2007). Most of
 J. Klomp / Global Environmental Change 36 (2016) 67–88 69

these studies emphasize that, although there are some hurdles to
take before using satellite image data, luminosity can be quite
useful for an economic analysis in war and disaster prone countries
with no recent national census. For instance, recently Henderson
et al. (2012) estimated the growth rate of real GDP per capita with a
combination of light per area and national account statistics at
national and regional level. They claim that this approximation
contains little added value for countries with high-quality income
data, but even more so for countries with low-quality income
information.
As the predictions are not directly clear with respect to the
macroeconomic impacts of large-scale natural disasters, we try to
illustrate this theoretical relationship using a simple scenario
analysis based on the scenarios outlined by Chhibber and Laajaj
(2008). These authors present four possible scenarios for the
evolution of the long run real GDP per capita after the occurrence
of a disaster (see Fig. 1). Using the same four scenarios we can test
which of them is supported by our empirical evidence later on and
whether the results in previous studies are affected by the
measurement errors in GDP per capita data. In all scenarios

Fig. 1. Natural disasters and economic development.

Source: Chhibber and Laajaj (2008)
70 J. Klomp / Global Environmental Change 36 (2016) 67–88
outlined there is a drop in GDP per capita immediately following a
disaster due to the massive destruction of the capital stock. The
main differences among the scenarios take place in the interme-
diate to long run. The table below Fig. 1 describes the various
scenarios. In short, scenarios A and B assume that there is only a
temporary impact of natural disasters as in the long run the capital
ratio is returning to it's initial balanced growth path. Conversely,
scenario C argues that there is a long run negative impact of natural
disasters on GDP per capita caused mainly by financial constraints
faced by affected households and the private sector, while scenario
D assumes a positive impact of natural catastrophes through large-
scale recovery investments which embed newer technologies.
As Klomp and Valckx (2014) already noted, the impact of
disasters might also differ considerably among the different types
of catastrophes and the country it strikes. For instance an
earthquake or hurricane in an industrialized country is more
likely to be associated with scenario B or D due to the considerable
reconstruction efforts that may trigger an expansion. Conversely,
scenario A corresponds more to a drought in a low-income country
because the loss caused by this disaster is usually restricted to the
annual agricultural production. Only when the drought leads to
forced liquidation of livestock at depressed prices, this will harm
the economic perspectives in the long run and we end up in
scenario C. Especially since climatic disasters may create spillover
effects to other economic sectors i.e., through higher primary
Fig. 2. Number of large-scale natural disasters.
This figure reports the number of large-scale natural disasters between 1990 and 2010. On average there are about 52 large-scale natural disasters annually.
commodity prices. In turn, it is unlikely that a drought creates a
greater production potential unless it results in major investments
in irrigation or other drought-reducing technologies (Chhibber and
Laajaj, 2008).
3. Data and methodology
3.1. Data
As our aim is to estimate the impact of natural disasters on
economic development, we have to quantify them both. The data on
natural disasters and theirimpact are documented in the “Emergency
Events Database” (EM-DAT, 2013) with data collected by the Centre
for Research on the Epidemiology of Disasters (CRED). The EM-DAT
database has worldwide coverage, and contains more than 8000
natural disasters between 1990 and 2010. A natural disaster is
recognized when a natural situation or event which overwhelms
local capacity, necessitating a request for external assistance. For a
disaster to be entered into the EM-DAT database at least one of the
following criteria must be fulfilled: (1) 10 or more people reported
killed; (2) 100 people reported affected; (3) declaration of a state of
emergency; or (4) call for international assistance.
However, many of the disasters recorded in the EM-DAT dataset
seemed to have caused few casualties or damages (see also
Gassebner et al., 2010). For example, only 10% of the disasters
 J. Klomp / Global Environmental Change 36 (2016) 67–88
involve deaths of more than a hundred people. A similarly small
proportion of disasters involve injuries to more than a hundred
people. Given this distribution of the disaster data, it is conceivable
that many of the disasters included in EM-DAT will not have any
impact on economic development. For a disaster to have an
empirically impact, it should be of a magnitude that can directly
cause damage to the national production capacity, public
infrastructure or affect a substantial number of people.
For this reason, in accordance with Gassebner et al., (2010), we
adopt a decision rule which filters the disasters included in EM-
DAT and only includes them in the estimation if they satisfy the
rule. We decided to confine our empirical analysis to disasters
which meet any of the following criteria which represent an
adaptation of Munich Re’s great natural catastrophe category: (i)
number of killed is no less than a thousand; (ii) the number of
injured is no less than a thousand; (iii) number of affected is no less
than a hundred thousand; or (iv) the amount of damages is no less
than $1 billion. In order to make estimates of damage comparable
over time, we have converted dollar values into constant dollars
using the US GDP deflator. The adoption of this decision rule
reduces the number of natural disasters for our analysis to about
1100 disasters between 1990 and 2010.
We distinguish between four different groups of natural
disasters: (1) hydrological disasters including floods and wet
mass movements; (2) meteorological disasters including hurri-
canes and tornados; (3) geophysical disasters including earth-
quakes, tsunamis and volcanic eruptions; and (4) climatic disasters
including extreme temperatures, droughts and wildfires. Fig. 2
shows the distribution of disasters between 1990 and 2010. The
graph illustrates that hydrological disasters are the most common
natural disaster (41%), while less than 10% of the major natural
disasters is classified as a geophysical disaster. On average, there
are about 50 major natural disasters annually.
To determine the impact of a natural disaster on the economic
development of country i, we construct for each country-year the
following disaster count variable, suggested by Noy (2009) and
Klomp (2014), that takes the timing of a disaster in the course of a
year into account. This allows disasters occurring early in the year
to have a different impact than those that happen near the end of
the year.
8P P takes place in the shadow economy. When people are engaged in
< ðð12  Mkt Þ=12Þ þ ðMnt1 =12Þ
ðpostÞdisaster year
Disasterit ¼ ri
: standard of living by for instance having access to electricity and
0 otherwise
ð1Þ
Since we consider the contemporaneous impact of a disaster
within one year, our annual disaster measure is calculated as the
weighted sum of the disasters k that happened in the current year t
and the disasters n that occurred in the previous year t  1. We
weighted this sum by the month the respective disaster happened
M. That is, we assign the value (12  M)/12 to a disaster year and M/
12 to the post-disaster year. In all other years its value is set to zero.
Using a count variable, a country that is hit more than once by a
major disaster in the same year will suffer a sharper reduction in
economic development than a country which suffers only a single
incident.
We normalize the number of disaster events by the land area in
1000 km2, represented by ri. Obviously, larger countries have a
higher probability of experiencing a natural event. In particular
small island states are extremely vulnerable because of the higher
frequency of natural disasters that have a disproportionately large
impact on their economy (Skidmore and Toya, 2002; Gassebner
et al., 2010). The concern that two episodes may have completely
different impact because of their intensity and location is partially
controlled by imposing that disasters affect a minimum number of
71
people and cause a minimum damage to capital and wealth. Thus,
disasters that occur in the middle of the desert are not considered
as disasters under our measure.
One concern regarding studies exploring the economic impact
of natural disasters is the potential endogeneity of the disaster
criteria with respect to economic development. First, consequen-
ces of disaster events, in terms of the number of people affected or
physical damage, depend to some extent on the socio-economic
situation (Kellenberg & Mobarak, 2008; Neumayer et al., 2014).
For instance, the total damage may be positively related to the
level of income, while the number of people affected could be
negatively affected by the level of income. Second, GDP figures
may be affected by disasters in the preceding years. Third, as
already motivated above, many countries have no reliable or only
rudimentary economic and population statistics which may affect
the true intensity of a natural disaster. It may therefore be
questionable to assume the exogeneity of the intensity of
disasters with respect to economic development. Even after
recognizing these drawbacks most studies still use the damage to
GDP or the share of population affected as their main disaster
indicator. In contrast, the use of the number of natural disasters
per squared kilometre partly reduces, but not completely solves,
the potential influence of endogeneity on our results as land area
is less subject to measurement errors compared to GDP and
population figures and is more exogenous. Later on, we try to
reduce this endogeneity problem some further by using system-
GMM as our estimation approach and by experimenting with
different disaster thresholds.
As our dependent variable, we use an indicator on economic
development based on the night-time light intensity in a country-
year. In general, there are three important advantages of using
light intensity as indicator of economic development. First, the
light intensity data is available globally at national and regional
levels even for countries with poor statistical systems. For
instance, for some countries, such as Myanmar, that do not appear
in the PWT, we have new data on economic activity. Second, data
based on satellite data considers also the economic activity in the
informal sector or shadow economy. One of the main criticisms of
GDP as a measure of economic development is that it does not
take into account the informal transactions in the economy.
However, in developing countries a large part of the production
informal economic activities, the income earned improves their
hence lights. In turn, the distribution of lights then can be used as
an proxy of economic development. Thus, with the official
measures accounting for the recorded formal activities, we
assume that the surplus of economic activity measured from the
spatial patterns of night-time lights can be attributed to the
informal economy (Ghosh et al., 2009, 2010; Tanaka and Keola,
2015; Harati and Hardy, 2013; Brock et al., 2014). Finally, light
intensity data is less influenced by real exchange rate movements,
while real GDP figures are usually converted in constant US
dollars.
The satellite data on night-time light reflections stems from
NOAA. NOAA-NGDC processes raw satellite data from the United
States Air Force Defense Meteorological Satellite Program’s
Operational Linescan System (DMSP-OLS). The DMSP-OLS’s
satellites collect data at every location on a daily basis between
7 pm and 9 pm local time. The existing literature identifies a
number of obstacles of using lights visible from space to measure
income. In general, these hurdles fall into three main categories
(Chen and Nordhaus, 2011; Henderson et al., 2012). First, the
relationship between economic activity and the true amount of
light emanating from the Earth’s surface is not constant across time
and space since light visible from space is a by-product of
72 J. Klomp / Global Environmental Change 36 (2016) 67–88

consumption and production activities and it is hardly produced in reported GDP figures does not take into account the shadow
a fixed ratio to output. For instance, some productive activities economy. Combining Eqs. (2) and (3) and taking logarithms, we
produce a lot of light (manufacturing), while others produce can express observed lights as follows
relative little (agriculture). Countries or regions may differ in the
fraction of their economic activity that takes place after dark. lnlightOit ¼ mlnGDPOit þ lt þ mei þ eit ð4Þ
Likewise, patterns of settlement may affect how much light is Eq. (4) shows that the observed light intensity depends on the
visible from space for a given level of income (Zhang and Seto, observed GDP, the time-varying scaling factor, country specific
2013). Second, true light is imperfectly measured by the satellites effects and a measurement error. Additionally, the country fixed
as humidity, sunlight, moonlight, and cloud cover contamination effects control also for two other effects. First, a latitude effect since
all distort the reflection and differ across the globe. Third, sensor observable night-time light may be strongly influenced by the data
scale for recording lights in practice varies across satellites and as cleaning process. For instance, light intensity in countries located
satellites age over time. Besides, the satellites have no on-board partly in the northern Arctic zone might be affected by auroral
calibration for the visible band. Each sensor has different detection activity and midnight sun in summer months (Tanaka and Keola,
limits and saturation radiances and degrades at a different rate 2015). Second, country fixed effects control for cross-country
through time (Elvidge et al., 2009). differences in the use of night lights versus day time activities.
To overcome these problems and obtain primarily man-made The aim of this first analysis is to estimate the magnitude of the
night-time light, NOAA includes only readings from the dark half of time-varying scaling factor needed to compute true light from
the lunar cycle in seasons when the sun sets early and drops observed light. Specifically, we approximate the scaling factor by a
readings affected by northern or southern lights, forest fires, series of year-dummies. We then normalize country-year light
lightning and cloud cover. Additionally, we have to remove gas- intensity according to the base value, implying that true and
flares as these do not representative of human settlement. observed light data are set equally in the reference year. Table 1
Following Elvidge et al. (2009), the removal of gas-flares is done reports the estimation results of Eq. (4) using the OLS-FE estimator.
using a set of ESRI shapefiles from NOAA-NGDC which contain the Column (1) presents a set of individual year effects, except for the
geographical location of gas flares for each particular country. The benchmark year. These coefficients can be interpreted as discount
remaining observations are used to obtain annual composite
images of time-stable lights by overlaying all images captured
during a calendar year. This overcomes problems related to Table 1
temporary shocks in light intensity. The original night-time light Intercalibration of light intensity data.
data is available from 1992 to 2010 in about 215 countries on a scale
(1) (2)
from 0 to 63, with larger values implying higher light intensity.
As the de facto sensor settings vary over time across satellites Coefficient Light factor
and with the age of a satellite making the comparison of the raw GDP 0.807**
digital numbers over years rather problematic. For instance, an (0.175)
1992 Reference
improvement in sensor readings of a new satellite may overesti-
1993 0.145** 0.754
mate the intensity of night-time light since that composite has a (0.023)
different reference point. On the other hand, sensor degradation of 1994 0.112* 0.779
a satellite would underestimate the true night-time light. The (0.020)
former should lead to an upward bias in predicted economic 1995 0.283** 0.657
(0.035)
activity whereas the latter suggests a downward bias (Tanaka and 1996 0.237* 0.688
Keola, 2015). Thus we need to standardize the values across (0.126)
composites to overcome the limited comparability of the satellite 1997 0.207** 0.709
data and allow for a cross-year analysis. For this purpose, we use (0.031)
1998 0.294** 0.650
the approach based on Henderson et al. (2012), Wu et al. (2013)
(0.025)
and Chen and Nordhaus (2011). In short, this approach uses an 1999 0.222** 0.698
empirical specification were the year fixed effects effectively (0.025)
control for any changes in sensor settings over time. There are a 2000 0.356** 0.610
number of advantages using this approach compared to other (0.021)
2001 0.265* 0.669
methods. First, this method does not rely on any arbitrary chosen (0.139)
reference satellite composite. Second, it is the most readily 2002 0.267** 0.667
interpretable and intuitive approach (Wu et al., 2013). In more (0.038)
detail, our approach starts with the assumption that the observed 2003 0.024 0.851
(0.023)
light intensity lightO for country i at year t is related to the true light
2004 0.105** 0.968
lightT with the scaling factor of the satellite sensor lt and a (0.029)
measurement error et. In addition, we presume that true lights are 2005 0.185** 1.048
related to true GDP through a conversion factor mi (0.036)
2006 0.201** 1.066
(0.024)
lightOit ¼ ðlightTit Þlt þet ð2Þ 2007 0.130** 0.992
(0.038)
2008 0.138** 1.000
(0.036)
lightTit ¼ ðGDPTit Þmi ¼ ððGDPOit Þei Þmi ð3Þ Country fixed effects YES
O F-test year-dummies (p-value) 0.001
As already indicated above observed GDP (GDP ) is an
imperfect measure of the true GDP (GDPT) due to a country- Notes: We report robust standard errors clustered by country; light factor is
calculated by computing 1/exp(li) for the estimated coefficients of the year-
specific measurement error ei as there are serious concerns with dummies and normalizing the values by the values of the year 2008. **/* Indicating
the reliability of the GDP data of many countries. Besides, the significance levels of respectively 5 and 10%. Bootstrapped standard errors are
shown between brackets.
 J. Klomp / Global Environmental Change 36 (2016) 67–88
factors. The results of a F-test indicate that the time fixed effects are
jointly significant at the 5% level demonstrating that scaling factors
of satellite sensors significantly differ across years. Applying these
discount factors, we normalize in column (2) the computed values
by the base year value. To explore the sensitivity of our results on
the relationship between natural disasters and economic devel-
opment to the intercalibration method applied, we present in the
robustness section the results when using the intercalibration
method suggested by Elvidge et al. (2009) instead.
The pairwise correlation between real GDP per capita reported
in the PWT and adjusted light intensity (both taken in logarithms),
as shown in Fig. 3, is rather high, about 0.8. Not surprisingly, the
correlation is weaker for developing countries (about 0.4) due to
the large measurement error in their official GDP per capita data
caused for instance by neglecting the shadow economy. In contrast,
in industrialized countries, the correlation is much larger, above
0.9. This close relationship supports the view that night-time light
data contains only limited added value for countries with high-
quality statistics, while for developing countries light data is an
useful alternative for economic development data (Chen and
Nordhaus, 2011; Zhang and Seto, 2013). Alternatively, the weak
correlation between night-time lights and real GDP in developing
countries might also partly be explained by saturation problems.
For instance, Zhang and Seto (2013) indicate that data on night-
time lights are more accurate in developed countries and are less
accurate in developing countries. Their results suggest that we
need to be careful when interpreting studies based on night-time
lights in developing countries. To correct for this the use of
radiance night-time lights might be considered. Yet, that data is
only available after 2006 leaving us with a rather small dataset and
unable to explore the long run impact of natural disasters. There is
an annual national trend growth of about 2.9% in the light intensity
between 1992 and 2008.
One concern that remains is whether night-time light intensity
reflects all economic activities present within a country. For
instance, some studies argue that light intensity primarily reflects
non-agricultural or urban economic development (Ebener et al.,
Real GDP per capita (taken in logarithms)
Fig. 3. GDP per capita and light intensity.
This figure illustrates the pairwise correlation between light intensity and real GDP per capita (both taken in logarithms). The pairwise correlation coefficient is about 0.8 and
statistical significant at the 1% significance level.
73
2005; Ghosh et al., 2010). Other studies are more nuanced and
claim that night-time lights implicitly reflect activities in all
economic sectors including agriculture (Doll et al., 2006). For
example, Henderson et al. (2012) find that exogenous agricultural
productivity shocks have substantial effects on local economic
activities in Sub-Saharan Africa since night-time light intensity
represents besides production also consumption. That means that
both agricultural and non-agricultural production are reflected in
night-time light intensity though to some extent indirectly.
Besides, agricultural output is often used as an intermediate input
in the industrial sector. Using a broad sample of about 169
countries, Wu et al. (2013) estimated that agriculture, on average,
is responsible for a quarter of total light consumption.To explore if
our light intensity data reflects all economic activities taking place
within a country, we perform two nonparametric tests. We start by
comparing the pairwise correlation between the contribution of
the different economic sectors present to economic development
represented by both the officially reported GDP figures and our
light intensity data. We measure the size of each sector by their
employment shares. The results in columns (1) and (3) of Table 2
show that the general correlation pattern does not differ much
between using real GDP per capita and light intensity. To be more
specific, while the industrial and service sector have a positive
correlation with economic development, agriculture has a negative
relation. Additionally, we calculate in columns (2) and (4) of Table 2
the percentage of the variance explained of economic development
by the respective employment shares. The findings demonstrate
that the variation explained by the economic sectors does not
differ much between the two development measures for
industrialized countries, while it significantly differs in developing
countries, especially for the agricultural and service sector.
Surprisingly, the agricultural employment share is even better
able to explain variation in light intensity than the variation in real
GDP per capita. This strengthens our view that official GDP
statistics in low-income countries may be plagued by measure-
ment errors which partly can be attributed to unreliable statistics
and the underestimation of the informal markets.
74 J. Klomp / Global Environmental Change 36 (2016) 67–88

Table 2
Sector contribution and economic development.

GDP per capita Light intensity

Correlation % of the variation explained Correlation % of the variation explained

(1) (2) (3) (4)
Agriculture Total 0.57** 32.49 0.61** 37.21
Low-income 0.55** 30.25 0.69** 47.61
High-income 0.37** 13.69 0.33** 10.89

Industry Total 0.25** 6.25 0.47** 22.09

Low-income 0.43** 18.49 0.47** 22.09
High-income 0.26** 6.76 0.29** 8.41

Service Total 0.59** 34.81 0.49** 24.01

Low-income 0.32** 10.24 0.44** 19.36
High-income 0.46** 21.16 0.48** 23.04

In columns (1) and (3) we report the pairwise correlation between the sector shares in employment and economic development. **/* Indicating significance levels of
respectively 5 and 10%. Columns (2) and (4) give the percentage of the variation in economic development explained by the respective sectors. We classified a country as a
high-income country when the reported GDP per capita is larger than 5000 US Dollars (in constant US dollars from 2005).

As the datasets on disasters and light intensity are both
available on the national and regional level, we have to decide on
the appropriate observation level. When using a regional analysis,
we are confronted with two serious obstacles. First, there exist
spillover effects of disasters from one region to another. These
spillovers could be direct, for instance, a flood started in one region
running through to other regions or indirect as government
spending may go up in one region by providing disaster relief and
go down in another region in order to meet a national fiscal
constraint. Second, many control variables used in our econometric
specification later on, are only available at the national level. When
we fail to incorporate control variables, we end up with an omitted
variable bias. Conversely, when we include only countries for
which we have regional data on the covariates available, we are
confronted with a sample selection bias. Due to these serious
concerns, we confine ourselves to a cross-national analysis in the
main analysis. Though, as emphasized by Bertinelli and Strobl
Growth rate of night-time light density
(2013) using an aggregated level may induce an underestimation
of the true economic impact of a natural catastrophe as part of the
effect may be averaged out within a country. That is, the impact
found using country averages should be interpreted as a lower
bound of the actual impact. Therefore as a robustness analysis, we
re-estimate our main models using regional data for a limited set of
countries.
As a first preliminary statistical test on the impact of large-scale
natural disasters on economic development, we compare the
growth rate of the light intensity before and after the occurrence of
a large-scale natural disaster. The growth rate is 3.1 before a natural
disaster has happened and 2.6 afterwards. According to a Chi-
squared test, this difference is significant at the 5% level. This result
is confirmed in Fig. 4 where we report the pairwise correlation
between light intensity and the number of natural disasters in a
particular country-year. The results show that there exists a
negative relationship that is significant at the 10% confidence level.

Fig. 4. Large-scale natural disasters and light growth.

This figure plots the pairwise correlation between the change in light intensity and the number of large-scale natural disasters in a particular country-year. The pairwise
correlation coefficients is about 0.2 and statistical significant at the 10% significance level.
 J. Klomp / Global Environmental Change 36 (2016) 67–88
However, these nonparametric tests are only suggestive, as
unobserved country heterogeneity, as well as other confounding
variables are not taken into account.
3.2. Empirical model
In this section we present the model used to estimate the
relationship between large-scale natural disasters and economic
development. We use a dynamic model based on an unbalanced
panel including more than 140 countries between 1992 and 2008
(Table A1 in the appendix lists the countries covered in this study).
The model is given as follows
k
lnlightit ¼ ai þ ht þ mlnlightit1 þ b xkit1q
Xn
þ g q disasteritq þ eit
q¼0
where lightit is our economic development indicator based on the
predicted light intensity in country i at time t (taken in logarithms)
from Eq. (4). We include the lagged dependent variable to control
for auto-regressive tendencies; xk is a vector of (lagged) control
variables containing k elements, while disaster is our constructed
disaster variable outlined above, measuring the exposure of a
country to large-scale natural events. We enter this variable with
q-lags to explore the difference between the short and long run
impact. The parameter ai is a country-specific intercept to control
for time-invariant characteristics such as geographical factors. By
using country-specific intercepts, we place the emphasis of our
analysis on the identification of the within country variation over
time. This approach reduces the influence of any potential
selection bias that might arise, for example, if poorer countries
were over-represented in the disaster data due to the likelihood
that disasters would affect a greater proportion of the population
in these countries (McDermott et al., 2014). Moreover, the time-
fixed effects control for the technological progress that makes, for
instance, the physical damage estimates more accurate in later
years. The final term eit is the error term.An alternative way of
writing the previous equation is
Dlnlightit ¼ ai þ ht þ ðm  1Þlnlightit1 þ bk xkit1q
X
n
þ g q disasteritq þ eit
q¼0
In this model, the dependent variable is the growth rate of light
intensity. Using this specification we are able to estimate the
parameter g q by a difference-in-difference methodology, where
countries struck by a large-scale natural disaster are the “treated”,
and those that are not are the “controls”. Our hypothesis is that the
light intensity is affected by the consequences of large-scale
natural disasters (Sg q 6¼ 0). Though, the direction of the effect is
not a priori directly clear since the impact can either be negative
when the capital-labour ratio is reduced in the aftermath (Sg q < 0)
or positive when the destruction of capital leads to enhanced
investments in more advanced technologies (Sg q > 0). In about 22%
of the country-years at least one large-scale natural disaster is
recorded.
The vector of control variables xk includes variables suggested in
earlier studies on explaining income disparities across countries
(see also Mankiw et al., 1992; Burnside and Dollar, 2000; Barro,
1992; Levine and Renelt, 1992; Sala-i-Martin and Barro, 1995).
These variables are required to capture the role of structural
policies and institutions, and help to avoid an omitted variable bias.
First, we control for the macroeconomic stability of a country
measured by the inflation rate. Bad macroeconomic policies and
management will result in lower growth rates. Furthermore,
according to the augmented Solow model one of the key drivers of
75
economic progress is the accumulation of (human and physical)
capital (Sala-i-Martin and Barro, 1995; Mankiw et al., 1992).
Likewise, according to the endogenous growth theory, accumula-
tion of physical capital and knowledge may increase the amount of
innovative ideas in the economy which enhances technological
progress (Barro, 1996b; Romer, 1990). To take this notion into
account, we include the gross fixed capital formation rate and the
secondary school enrolment rate into our econometric specifica-
tion as proxies for respectively investments in physical and human
capital. Also an improvement of a country's international trade
competitiveness may boost economic development as the
economic situation of many developing and emerging market
countries relies on primary commodity prices. To control for that,
we add the terms-of-trade, current account balance and changes in
the real exchange rate to our model specification.
ð5Þ
Next, we include a number of measures to capture to which
extent economic liberalization has progressed. Economic reforms
in the financial and trade sector are typically taken to spur
economic growth. To account for this, we first consider financial
development by including private credit per capita (Levine, 2005).
A low level of credit supplied to the private sector may induce that
the population is facing credit constraints because savings and
loans are not efficiently matched. Second, trade openness is
captured by exports plus imports per capita. More open economies
are usually better able to absorb negative shocks through their
trade balance and have earlier access to new technologies. In
addition, we add total government spending per capita as an
indicator of the influence of the government on the market process
and their attempt to stabilize the economy using fiscal policy.
From the earlier economic growth literature it is known that
economic growth is higher in countries with stronger political
institutions, especially those related to democratic accountability,
property rights and political stability (Barro, 1996a; Burnside and
Dollar, 2000). To represent the political environment in a particular
country, we include two political measures. First, the level of
democracy measured by the Polity IV score taken from Marshall
and Jaggers (2012). Second, political instability proxied by a
dummy that takes the value one in a year when there is a regime
change recorded in the Polity IV dataset. Finally, we include a
number of socio-economic variables that influence economic
ð6Þ progress through the living conditions in place: population growth,
population density, urbanization rate and life expectancy. Table A2
in the appendix provides a detailed description of all data used as
well as their sources.
4. Estimation results
4.1. Short run impact of disasters
Let us now first turn to the short run macroeconomic impact of
large-scale natural disasters, so when q = 0 in Eq. (6). In Table 3 we
start by estimating the econometric specification of the augment-
ed Solow model suggested by Mankiw et al. (1992) and Islam
(1995) including lagged light intensity, population growth, the
investment rate in physical capital and the secondary school
enrolment rate as control variables. In view of the unequal
distribution of the natural disasters across countries, we cluster the
standard errors on country level. For instance, about 50% of the
disasters occur in only 10% of the countries. Moreover, to reduce
this sample selection problem further and because our light
intensity measure is based on the predicted values from an
empirical estimation, we use the bootstrap procedure with
1000 replicators to obtain robust standard errors. Not surprisingly,
the results in column (1) indicate that larger investments in
physical capital increase night-time light intensity. Besides, we
find support for the so-called convergence hypothesis, suggesting
76 J. Klomp / Global Environmental Change 36 (2016) 67–88

Table 3
Short run economic impact of large-scale natural disasters on economic development.

Dependent variable: D in light

(1) (2) (3) (4) (5) (6) (7) (8)

All large-scale natural disasters 1.312** 1.615** 1.303** 2.047**
(0.470) (0.484) (0.414) (0.512)
Meteorological disasters 0.652* -0.497* 0.703* 1.151**
(0.375) (0.278) (0.405) (0.498)
Hydrological disasters 2.386* -3.109* 2.398* 2.981**
(1.430) (1.820) (1.361) (1.120)
Climatic disasters 1.408 -1.040 1.306 1.452
(0.890) (1.200) (0.909) (0.942)
Geophysical disasters 3.871** 4.145** 3.898** 5.998**
(1.152) (1.828) (1.291) (1.458)
Lagged lights 0.119** 0.120** 0.213** 0.226** 0.142** 0.147** 0.212** 0.293**
(0.032) (0.032) (0.038) (0.038) (0.020) (0.021) (0.051) (0.067)
Gross fixed Investment per capita 0.027** 0.029** 0.017* 0.018* 0.023** 0.022** 0.035** 0.030**
(0.009) (0.009) (0.009) (0.010) (0.008) (0.008) (0.009) (0.007)
Secondary school enrolment rate 0.017 0.015 0.015 0.019
(0.022) (0.022) (0.032) (0.031)
Population growth 0.004 0.005 0.002 0.002
(0.004) (0.004) (0.004) (0.004)
Government spending per capita 0.015 0.013
(0.021) (0.021)
Trade per capita 0.029** 0.029** 0.026** 0.027** 0.032** 0.031**
(0.011) (0.011) (0.012) (0.013) (0.011) (0.013)
Current account balance per capita 0.017 0.014
(0.012) (0.012)
Terms of trade 0.032* 0.033**
(0.016) (0.016)
Exchange rate changes 0.029 0.0307
(0.021) (0.020)
Inflation rate 0.102** -0.103** 0.021* 0.022* 0.017* 0.017**
(0.042) (0.041) (0.012) (0.012) (0.010) (0.004)
Credit per capita 0.010 -0.009
(0.070) (0.011)
Urbanization rate 0.001 0.001
(0.001) (0.001)
Population density 0.034 0.036
(0.054) (0.538)
Life expectancy 0.0805 -0.065
(0.066) (0.669)
Democracy 0.001 0.001
(0.001) (0.001)
Political instability 0.013 0.013
(0.013) (0.013)

Country fixed effects YES YES YES YES YES YES YES YES
Time fixed effects YES YES YES YES YES YES YES YES
Countries 131 131 113 113 147 147 142 142
Observations 1696 1696 1108 1108 1755 1755 1698 1698
Estimation technique OLS-FE OLS-FE OLS-FE OLS-FE OLS-FE OLS-FE System-GMM System-GMM
Sargan test (p-value) – – – – – – 0.412 0.397
Arellano-Bond AR(1) (p-value) – – – – – – 0.000 0.000
Arellano-Bond AR(2) (p-value) – – – – – – 0.771 0.781
F-test (p-value) 0.000 0.000 0.000 0.000 0.000 0.000 – –
R-squared 0.017 0.017 0.023 0.023 0.024 0.024 – –

**/* Indicating significance levels of respectively 5 and 10%. Bootstrapped standard errors are shown between brackets.

that countries that start out with a lower level of economic
development have higher growth rates to catch up in later years.
Employing our broad natural disaster variable, we find that
there is a significant negative impact of large-scale natural
catastrophes on economic development at the 5% statistically
significance level. To assess the economic significance of this
outcome, we need to interpret this result. Using the average
country size of about 600,000 km2, one additional large-scale
natural disaster reduces light intensity by about 0.2% in the same-
year. In more detail, when a disaster strikes it explains about 10% of
the average annual change in light intensity. This latter figure
increases substantially when we focus only on the top 10% of the
most disaster prone countries. In these particular countries, about
a quarter of the yearly change in light intensity is explained by their
exposure to natural disasters.
However, our large-scale disaster measure embeds different
types of disasters that can arguably have different or even opposite
consequences for economic progress, as already illustrated
above (Jaramillo, 2009). Broadly speaking, disasters differ in at
least seven respects as indicated in the table below Fig. 2.
Therefore, in column (2) we split our complete set of large-scale
disasters into four more homogenous groups: hydrological,
meteorological, geophysical and climatic disasters. As some
natural disasters such as storms and floods often occur in tandem,
simultaneous inclusion allows isolation of the effects of each
disaster (Loayza et al., 2012; Klomp, 2014). The results indicate that
 J. Klomp / Global Environmental Change 36 (2016) 67–88 77

the general negative impact of natural disasters found in column
(1) on the same-year growth rate of light intensity is mainly
attributed by the effect of geophysical and hydro-meteorological
disasters.
One can argue that up so far our results may be driven by an
omitted variable bias as we consider only the four control variables
suggested by the augmented Solow specification. Though, as
outlined in the previous section, there are many more variables
suggested in the existing literature which all may affect economic
progress. To account for this, we estimate in columns (3) and (4) of
Table 3 a model including the remaining covariates. Surprisingly, it
turns out that, other than the lagged level of light intensity and
investments in physical capital, only the inflation rate, terms of
trade changes and trade openness affect economic development. In
addition, we find no impact of the urbanization rate on light
intensity. This makes the concerns about the censorship of our
development measure towards non-agricultural production slight-
ly less. Nevertheless, the results on the natural disaster variables
point in the same direction as before. We find a significant adverse
short run impact of natural catastrophes on light intensity which is
again mainly driven by the impact of geophysical and hydro-
meteorological disasters.
However, one important consequence of using all suggested
control variables in one econometric specification is that it reduces
our dataset dramatically due to data availability. To be more
precise, we are left with only 113 countries, which increases the
potential of a sample selection bias due to the exclusion of many
developing countries, while the majority of the damage caused by
natural disasters occurs in these countries (Freeman et al., 2003).
To overcome this problem, we estimate in columns (5) and (6) of
Table 3 our model by applying the general-to-specific method. This
method does not rely on economic theory, but is a widely used
method in applied econometrics to decide on the model
specification (see Hendry, 1993). We first estimate a model
including all control variables. Next, we drop the least significant
variable and estimate the model again. We repeat this procedure
until only variables that are significant at a 10% level remain. As a
result, the number of countries included increases again by about
30% compared to the specification reported in columns (3) and (4).
However, the results on the disaster variables still confirm our
previous findings.
In the regressions so far, we assumed that the number of large-
scale natural disasters striking a country are exogenous. However,
the criteria on which we base the definition of a large-scale
natural disaster are more endogenous. First, as already mentioned
above, the total damage caused by a natural event may be positive
related to the level of income, while the number of people
affected could be negatively affected by the level of income.
Secondly, in countries characterized by rapid population growth
and an increasing population density, there is more demand for
fertile land which is usually the most at risk for a natural disaster.
This is especially true for low-income countries were large parts
of the poor population are priced out of safer areas and therefore
live in more disaster-prone areas. Both these factors make it more
likely that a particular disaster satisfies the criteria set for a large-
scale natural event.
When we fail to explicitly control for these factors, our results
might be spurious. Addressing the potential endogeneity problem
formally, we use the system-GMM estimator developed by
Arellano and Bond (1991). In this approach, the lagged differences
of the explanatory variables and of the dependent variable may be
valid instruments for the equation specified in levels. To be precise,
the estimation then combines the set of moment conditions
available for the first-differenced equations with the additional
moment conditions implied for the levels equation (Blundell and
Bond, 1998; Durlauf et al., 2005; Bond et al., 2001). As long as the
model is over-identified, validity of the assumptions underlying
both the difference and the system estimators can be tested
through Sargan tests of orthogonality between the instruments
and the residuals and through tests of second- or higher order
residual autocorrelation.
Turning to the results in columns (7) and (8) of Table 3. The
Sargan test provides no evidence of misspecification, while the
serial correlation tests point to first- but no second-order
autocorrelation of the residuals, which is in accordance with the
assumptions underlying the selection of instruments. The results
on the disaster measures are nearly identical as using the OLS-FE
estimator and reveal the same disaster pattern. Thus, the results in

Table 4
Long run economic impact of large-scale natural disasters on economic development.

All large-scale Meteorological Hydrological Climatic Geophysical

(1) (2) (3) (4) (5)
Lagged impact
t=0 -1.143** 0.450* -2.732* -1.965** -4.482*
(0.454) (0.257)* (1.545) (0.946) (3.421)
t=1 0.142 0.388 1.130 0.624 0.365*
(0.570) (0.202) (0.816) (0.448) (0.211)
t=2 0.509 1.440** 1.371 -2.637 4.648**
(0.587) (0.653) (1.303) (1.818) (1.796)
t=3 0.92 0.4139 0.807 -2.561 3.741
(0.614) (1.005) (1.122) (2.143) (8.397)
t=4 0.233 1.138 1.677 -0.153 2.550
(0.756) (0.963) (1.267) (1.358) (10.010)
t=5 0.463 0.155 0.265 1.114 1.665
(0.616) (1.232) (0.808) (1.338) (9.222)

T = 10 0.103 0.164 0.303 0.147 3.457**

(0.129) (0.162) (0.200) (0.206) (0.852)

Cross-sectional impact
Large-scale natural disasters 0.047 0.341 0.185 0.073 1.851*
(0.214) (0.217) (0.451) (0.098) (1.001)

**/* Indicating significance levels of respectively 5 and 10%. Bootstrapped standard errors are shown between brackets. Estimated using the OLS-FE estimator and including
the control variables from column (5) of Table 3.
78 J. Klomp / Global Environmental Change 36 (2016) 67–88

Table 3 illustrate that the model specification chosen or estimation
technique used hardly affects our conclusions.
4.2. Long run impact of disasters
The results presented so far indicate that natural disasters
reduce economic progress in the short run. Though, the various
scenarios outlined in Section 2 try to explain the macroeconomic
consequences of a natural disaster in the long run as there is an
initial drop in GDP per capita in the short run in all scenarios. To
examine this long run impact of disasters in more detail, we
estimate our main model including our disaster variable up to ten
lags using an impulse response function (see also Melecky and
Raddatz, 2014; Noy and Nualsri, 2011; Raddatz, 2009; Von Peter
et al., 2012). The results in Table 4 report the impact on the first five
lags and the accumulated impact after ten years. The findings in
column (1) indicate that the impact of our broad measure of
natural disasters has disappeared after one year. However, this
result may be attributed by adding the various kinds of disasters
together. As already mentioned above, the disasters considered are
rather diverse and likely to have different or even opposite effects
on the economic perspectives in the long run. While some natural
catastrophes may have a negative impact in the long run, other
may have no effect or even enhance economic growth. Combining
all these catastrophes together may average out the effect in the
long run. Therefore, in columns (2)–(5), we separate the various
disasters and explore the long run impact of each individual type of
disaster. The results in a disaster year are rather similar to the
findings reported in Table 3, except that when we consider a lagged
impact, climatic disasters appear also to have a short run negative
impact. This strengthens our idea that the light intensity measure
is also able to capture production and consumption of the
agricultural sector as this sector is the most vulnerable to droughts
(Loayza et al., 2012; Fomby et al., 2011).
In addition, we find for meteorological and geophysical
disasters a significant negative impact on economic growth in
the year following the disaster that is likely to be caused by
their widespread damage. Nonetheless, after two years, the
economy is starting to recover again as suggested by the
positive impact of these kinds of disasters on the change in
light intensity. Moreover, if we look at the complete impact
after ten years, we find even a significant positive impact of
geophysical disasters of about 0.06 percentage-points on the
annual economic growth rate during this period. This positive
effect is assumedly due to the large-scale replacement invest-
ments that trigger technological progress (Hallegatte et al.,
2007). In contrast, for meteorological disasters we do not find
such significant long run impact.

Table 5
Disaster scale thresholds.

All disasters Large-scale disasters Small-scale disasters Extreme disasters Other disasters

(1) (2) (3) (4) (5)

All large-scale disasters
t=0 0.318 0.949** 0.182 1.904** 0.218
(0.47) (0.37) (0.25) (0.71) (0.31)
T=5 0.097 0.449** 0.059 0.781** 0.087
(0.69) (0.23) (0.42) (0.27) (0.43)
T = 10 0.020 0.086 0.012 0.198 0.013
(0.13) (0.12) (0.07) (0.13) (0.09)

Meteorological disaster
t=0 0.102 0.379** 0.060 1.111** 0.087
(0.29) (0.19) (0.16) (0.31) (0.17)
T=5 0.042 0.266* 0.024 0.422 0.030
(1.29) (0.16) (0.77) (0.28) (0.87)
T = 10 0.046 0.144 0.024 0.174 0.037
(0.17) (0.11) (0.10) (0.22) (0.14)

Hydrological disaster
t=0 -0.554 2.360* 0.305 6.753** 0.411
(1.68) (1.35) (0.97) (2.25) (1.26)
T=5 0.077 1.131 0.039 1.846 0.045
(0.95) (0.72) (0.60) (1.14) (0.86)
T = 10 0.071 0.269 0.049 0.566 0.067
(0.24) (0.18) (0.16) (0.41) (0.17)

Climatic disaster
t=0 0.251 1.818** 0.137 4.830** 0.190
(0.98) (0.80) (0.64) (1.45) (0.85)
T=5 0.319 0.870* 0.173 0.983 0.237
(1.35) (0.48) (0.72) (0.94) (0.79)
T = 10 0.021 0.121 0.011 0.212 0.013
(0.23) (0.18) (0.14) (0.24) (0.18)

Geophysical disaster
t=0 0.950 6.011** 0.544 8.994* 0.646
(3.71) (2.45) (2.15) (4.60) (3.16)
T=5 1.303 1.379* 0.892 1.678** 1.006
(9.29) (0.80) (4.85) (0.69) (7.01)
T = 10 0.725 2.065** 0.414 2.449** 0.577
(0.88) (0.63) (0.59) (1.07) (0.87)

This table presents the results of using different disaster thresholds. We report the impact in the disaster year and the accumulated impact after five and ten year. **/*
Indicating significance levels of respectively 5 and 10%. Bootstrapped standard errors are shown between brackets. Estimated using OLS-FE including the control variables
from column (5) of Table 3.
 J. Klomp / Global Environmental Change 36 (2016) 67–88
Furthermore, climatic and hydrological disasters have only a
significant temporary adverse impact. Within two years the impact
has disappeared and the accumulated impact after ten year is zero.
The results so far point out that for some disasters there exist a
‘within country effect’ of large-scale natural disasters. Nonetheless,
natural disasters may not only explain income disparities within a
country over time, but also between countries (Skidmore and Toya,
2002). As a further robustness analysis on the long run impact of
natural disasters, we estimate our model using a cross-sectional
specification where we use the average growth rate of the light
intensity in country i between 1992 and 2008 as our dependent
variable. So our model is given by
lnlighti2008  lnlighti1992
¼ di þ mlnlighti1992
16
þ b x ki19751992 þ g disaster^ı 19931998 þ ei
k where lightjit represents the light intensity in region j of country
ð7Þ
In this specification, we take the control variables as an average
over the period 1975–1992 to reduce simultaneity with our
disaster variable. Moreover, we include continent specific inter-
cepts di to account for geographical factors. The results in the
bottom part of Table 4 confirm our earlier findings on the impulse
response functions. We find that there exists only a statistical
significant long run impact of geophysical disasters at common
confidence levels that is in the upward direction.
4.3. Disaster scale effects
One can argue that our results so far are driven by an
endogenous selection bias as we have included only a selected
number of large-scale disasters based on their damage created. To
explore if our results are affected by this endogenous selection, we
re-estimated the models from Table 4 using alternative disaster
thresholds. First, we create a disaster measure including all
disasters reported in the EM-DAT dataset disregarding their size.
The results in column (1) of Table 5 show that our previous results
may partially be driven by the used decision rule, as we are not able
to find any significant effect for any of the natural disasters
measures including also small-scale disasters. One explanation is
that more than 90% of the disasters affect less than 100 persons.
Therefore, as a second test, in columns (2) and (3) we re-estimate
the main model including our large-scale natural disaster indicator
together with a small-scale natural disaster measure composed in
a similar way to Eq. (1). The EM-DAT dataset recognizes about
9000 small-scale natural disasters in our period of analysis. The
distribution of the small-scale disasters is quite similar to the
distribution of the large-scale events. Still, the most common
disasters are hydrological disasters (46%), while geophysical
disasters occur the least frequent (8%). The results clearly indicate
that small-scale disasters have no impact on economic develop-
ment. This latter result is strengthened when we focus on only the
one-percent largest natural disasters based on their damage
created or number of people affected. We find that these extreme
disasters have a larger impact than our standard large-scale
disasters measures. Therefore, our results point out that there is
actually a threshold effect in the impact of natural disasters on
economic development. This confirms the findings by Hallegatte
and Dumas (2009) and Azariadis and Drazen (1990) arguing that
only more severe disasters are likely to put countries on lower
growth paths.
4.4. Regional analysis
As emphasized by Bertinelli and Strobl (2013) using develop-
ment data on the national level may induce an underestimation of
79
the true economic impact of a natural catastrophe as part of the
effect may be averaged out within a country. To explore whether
our results are sensitive to the observation level used we re-
estimated the models from Table 4 using regional data. Due to
technical concerns we cannot include the complete sample, but we
have a limited sample of countries, thereby including more than
450 regional districts. To capture the regional impact, we estimate
the following model (Table A1 in the appendix lists the countries
included in this regional analysis).
Dlnlightjit ¼ aji þ ht þ ðm  1Þlnlightjit1 þ bk zkjit1q
X
n X
n
þ g q disasternat
itq þ ’q disasterreg
jitq
þ ejit ð8Þ
q¼0 q¼0
i at time t, while zk is a vector of reginal control variables. This
vector includes the average number of years of schooling, asset
index, access to clean water and electricity and employment in
the non-agricultural sector. As the available data on the control
variables is limited, it is possible that there is still an omitted
variable bias present. We try to reduce this bias some further by
including country-region fixed effects aji. Moreover, to take into
account the spillover effects of disasters between regions, we
split up our disaster variable into two parts. First, disasternat are
the total number of disasters emerging within a country at time
t (excluding the disasters occurring in region j), while disasterreg
are the total number of natural events striking region j at time t.
Thus, the first variable captures the spillover effects of disasters
from other regions, while the second variable measures the
direct impact of a disaster within a particular region.
We can draw a number of clear conclusions from the results
presented in Table 6. First, the largest part of the complete
impact of disasters is caused by a direct effect. To be more
precise, 75% of the economic impact of large-scale natural
disasters takes place on the regional level. Second, we again
find the similar disaster pattern as before. Thus, disregarding if
the consequences are measured on a national or regional level,
hydro-meteorological and geophysical disasters reduce eco-
nomic development. Finally, geophysical and hydrological
disasters cause significantly more spillover effects as the
national disaster variable for these events is significantly
higher. Combining the national and regional effect together,
we find a higher total impact of disasters compared to the main
results reported in Table 4. Though, this latter outcome may be
created by a sample selection bias as our regional dataset
mainly consists out of low- and middle-income countries,
leaving out high income countries. Besides, for a large number
of disasters we arbitrary assign them to be a complete national
event. We should therefore be careful in interpreting the size
effect of the two disasters variables and only look at the
direction of the effect.
4.5. Economic mechanisms
The effect found so far shows that, on average, hydro-
meteorological and geophysical large-scale natural disasters affect
economic development in a significant way, at least in the short
run. Still, several country characteristics may lead to cross-country
differences in this pattern (Felbermayr and Gröschl, 2014). To
explore whether the disaster impact is conditional on the country
specific context related to the economic and political situation, we
estimate the following equation.
80 J. Klomp / Global Environmental Change 36 (2016) 67–88

Dlnlightit ¼ ai þ ht þ ðm  1Þlnlightit1 þ bk xkit1q Earlier studies already argued that although natural disasters
X
n take a massive economic toll on virtually all countries, their impact
þ g 1q disasteritq tend to be higher when the degree of economic development is
q¼0 rather low (Freeman et al., 2003; Borensztein et al., 2009).
X
n X
n Conversely, one can also argue that, although wealthier countries
þ g 2q mechanismitq g 3q ðdisasteritq  mechanismitq Þ þ eit spend clearly more money on safety in terms of building codes,
q¼0 q¼0
engineering and other safety precautions, these countries have far
ð9Þ more physical capital at risk during a disaster (Skidmore and Toya,
where mechanism is a vector containing various conditioning 2002). According to EM-DAT (2013) up to 80% of the total damages
factors which are represented by a series of dummies. The other from natural disasters are concentrated in low-income countries.
variables have the same meaning as in Eq. (6). Since it is hard to To explore this issue in more detail, we create a dummy variable
interpret the economic significance based on these outcomes, the indicating whether a country is classified as a low- or high-income
conditional effect of the mediating factor on the effect of natural country by the World Bank (based on the real GDP per capita of
disasters is calculated by the derivation of Eq. (9) with respect to 5000 US dollars). The marginal effects in columns (1) and (2) of
disaster. Table 6 show that, on average, natural disasters have a larger
impact on economic progress in developing countries. However,
@Dlnlight the pattern differs among the two country groups. In the short run,
¼ g 1q þ g 3q mechanism ð10Þ
@disaster geophysical and meteorological disasters have a significant
The statistical significance of the interaction effects cannot be negative impact on economic development in industrialized
tested with a simple t-test on the coefficient of the interaction countries, while climatic and hydrological disasters have an
terms but must be based on the estimated cross-partial derivative. adverse impact in developing countries. This latter finding can
The standard error of interest is be explained by a combination of three features that are the most
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
present in developing countries: a higher physical exposure in
s^ @Dlnlight ¼ 2
varðg 1q Þ þ mechanism  varðg 3q Þ þ 2  mechanism  covðg 1q ; g 3q Þ many areas (e.g. proximity to temperature thresholds), a higher
@disaster
economic vulnerability to climate events (e.g. heavier reliance on
ð11Þ
agriculture) and a lower adaptive capacity (i.e., a lower ability to

Table 6
Regional impact of large-scale natural disasters on economic development.

All disasters Meteorological Hydrological Climatic Geophysical

(1) (2) (3) (4) (5)

Regional impact disasterreg
t=0 1.053** 0.320* 3.222** 2.022** 5.100**
(0.528) (0.190) (1.525) (0.531) (1.594)
t=1 1.182** 0.398** 1.544* -0.326 0.519**
(0.426) (0.203) (0.918) (0.393) (0.149)
t=2 0.599 1.345** 1.201 2.846 2.280**
(0.417) (0.467) (1.695) (2.310) (1.065)
t=3 1.359 0.511 0.647 2.481 2.198*
(1.618) (0.762) (1.501) (1.582) (1.150)
t=4 0.190 0.947 1.846 0.158 7.853
(0.904) (1.402) (2.052) (0.994) (11.480)
t=5 0.631 0.118 0.332 1.469 6.986
(0.597) (1.771) (0.573) (1.053) (9.073)
T = 10 0.080 0.183* 0.182 0.161 2.717**
(0.140) (0.095) (0.269) (0.231) (0.450)

Spillovers through national impact disasternat

t=0 0.358** 0.106* 0.819** 0.255 1.710*
(0.158) (0.057) (0.339) (0.341) (1.013)
t=1 0.041 0.097 0.338* 0.163 0.132*
(0.124) (0.070) (0.191) (0.171) (0.079)
t=2 0.157 0.531 0.393 0.565 1.265**
(0.229) (1.229) (0.377) (0.562) (0.619)
t=3 0.206 0.127 0.250 0.892 1.337
(0.169) (0.212) (0.411) (0.638) (2.851)
t=4 0.086 0.259 0.619 0.049 3.705
(0.153) (0.303) (0.438) (0.446) (3.758)
t=5 0.133 0.034 0.062 0.326 2.396
(0.173) (0.358) (0.170) (0.475) (2.876)

T = 10 0.040 0.041 0.117 0.033 1.122**

(0.028) (0.036) (0.077) (0.082) (0.198)

Countries 53 53 53 53 53
Regions 438 438 438 438 438
Observations 3712 3712 3712 3712 3712

**/* Indicating significance levels of respectively 5 and 10%. Bootstrapped standard errors are shown between brackets. Estimated using the OLS-FE estimator and including
the control variables from column (5) of Table 3.
 J. Klomp / Global Environmental Change 36 (2016) 67–88 81

deal with climate stress). One can therefore argue that developing
countries are more affected by the frequency effect of disasters
caused by hydrological disasters, while economic development in
industrialized countries reacts more strongly on the scale effects of
geological and meteorological disasters.
These outcomes indicate that the differences in results between
low- and high-income countries might be attributed to a number
of economic particularities present in these country groups. For
instance, low-income countries are often characterized by a lower
degree of financial development and are often ruled by less
democratic governments. To reveal the economic mechanisms that
may aggravate or reduce the economic impact of a disaster, we
include a series of dummies in our vector of mechanisms that may
affect the impact of large-scale natural disasters on economic
development. As these mechanisms might be correlated, we
include all conditional variables in one specification.
First, economic and financial development are rather closely
related as economic progress may be spurred by more liberalized
financial markets (Levine, 2005). Melecky and Raddatz (2014) and
McDermott et al. (2014) argue that the degree of financial
development is an important factor in restraining the economic
consequences of a disaster by lifting the financial constraint faced
by households and the private sector in the aftermath. When credit
and insurance markets are missing or incomplete, as in many rural
areas in developing countries, households may further be forced to
dispose their productive assets, thereby jeopardizing future
growth prospects and trapping them into poverty. According to
Von Peter et al. (2012) it is mainly the uninsured losses that drive
the subsequent long run macroeconomic costs. We create a
dummy to indicate whether a country is financially developed or
financially constraint. We base this threshold on the median value
of credit per capita, which is around 600 US dollars. The results in
columns (3) and (4) of Table 7 indicate that in more financially
developed countries, the impact of natural disasters is less severe.
Also, the duration of the negative impact of a natural catastrophe is
shorter in financially developed countries (i.e., Hallegatte et al.,
2007).
Second, as already mentioned above, the openness of an
economy may affect the growth potential of a country as it
influences the ability to smooth shocks. When a disaster strikes
it is widely documented that the trade balance deteriorates due
to a surge in exports and increase of imports (Gassebner et al.,
2010; Oh and Reuveny, 2010; Felbermayr and Gröschl, 2014).
Yet, more open economies may also recover faster from a

Table 7
Economic mechanisms.

Low-income High-income Financially Financially Closed Open Autocracies Democracies Aid Non-aid
countries countries constraint developed economy economy dependent dependent

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
All large-scale disasters
t=0 1.075** 0.618 1.513** -0.880** 1.231** 0.631** 1.800** 0.901** 1.361** -1.172**
(0.22) (0.39) (0.34) (0.33) (0.39) (0.29) (0.54) (0.31) (0.49) (0.48)
T = 5 0.630** 0.169 -0.669** 0.223 0.693** 0.209 0.666* 0.018 0.167 0.197
(0.29) (0.14) (0.33) (0.26) (0.31) (0.15) (0.35) (0.15) (0.62) (0.59)
T = 10 0.280 0.017 0.284 0.235 0.297 0.144 0.293 0.048 0.106 0.100
(0.32) (0.06) (0.25) (0.19) (0.21) (0.19) (0.37) (0.07) (0.14) (0.11)

Meteorological disaster
t=0 0.414 1.012** 1.385** 0.416** 1.218** 0.405** 1.257 1.585** 0.426* 0.446*
(0.89) (0.29) (0.66) (0.20) (0.52) (0.17) (2.57) (0.47) (0.26) (0.26)
T = 5 0.393 0.205* 0.526** 0.275** -0.427 0.246** -0.887 0.272** 0.006 0.006
(0.39) (0.12) (0.26) (0.13) (0.27) (0.12) (0.68) (0.11) (0.68) (0.72)
T = 10 -0.537 0.047 0.303 0.179 0.359 0.157 0.717 0.018 0.168 0.163
(0.40) (0.08) (0.19) (0.13) (0.37) (0.19) (0.51) (0.11) (0.15) (0.17)

Hydrological disaster
t=0 3.056** 1.517 5.289** 1.169 5.883** 1.034 3.453** 1.211 2.486* 2.759*
(1.52) (2.16) (1.76) (2.66) (1.32) (2.16) (1.54) (1.83) (1.45) (1.56)
T = 5 1.751* 0.089 0.601 0.207 0.686 0.223 0.944** -0.176 0.043 0.043
(0.93) (0.19) (0.51) (0.38) (0.52) (0.31) (0.35) (0.18) (1.26) (1.23)
T = 10 0.704 0.011 0.622 0.369 0.746 -0.258 -0.722 0.078 0.282 0.330
(0.52) (0.07) (0.44) (0.29) (0.53) (0.25) (0.52) (0.08) (0.23) (0.29)

Climatic disaster
t=0 1.606** 0.599 3.272** 0.132 3.161** 0.090 0.998* 0.500 1.821* 1.906**
(0.70) (2.49) (0.99) (2.00) (0.92) (1.35) (0.52) (1.58) (0.94) (0.80)
T = 5 0.739* 0.855 1.034* 0.261 0.998 0.162 0.886* 0.920 1.126 1.317
(0.44) (3.49) (0.63) (0.45) (0.77) (0.38) (0.49) (0.64) (1.23) (1.20)
T = 10 0.238 1.125 0.100 0.692 0.114 0.693 0.262 0.012 -0.148 -0.154
(0.19) (1.21) (0.17) (0.41) (0.19) (0.35) (0.25) (0.21) (0.20) (0.23)

Geophysical disaster
t=0 -4.147 8.850** 5.156** 9.597** 5.433** 7.609** 2.402* 7.099** 6.242* 6.915**
(6.49) (3.92) (2.28) (3.90) (2.23) (3.54) (1.37) (3.64) (3.47) (3.39)
T = 5 5.923 2.885** 0.977 1.924** 1.172 1.745** 0.419 2.748** 3.872* 4.034**
(5.03) (0.62) (2.78) (0.97) (3.08) (0.64) (4.68) (1.25) (2.17) (1.70)
T = 10 0.156 3.859** 1.776 1.114* 2.915 2.009* 1.173 5.251** 2.049** 2.898**
(0.38) (1.57) (3.25) (0.46) (2.68) (1.08) (0.93) (1.69) (0.88) (0.86)

This table presents the marginal effects of the various economic and political mechanisms identified that affect the impact of large-scale natural disasters on economic
development. We report the impact in the disaster year and the accumulated impact after five and ten year. **/* Indicating significance levels of respectively 5 and 10 percent.
Bootstrapped standard errors are shown between brackets. Estimated using OLS-FE including the control variables from column (5) of Table 3.
82 J. Klomp / Global Environmental Change 36 (2016) 67–88

disaster shock as they have earlier access to new technologies.
In column (5) and (6) we report the marginal effects of
countries with a relative open economy and countries with a
more closed economy using an economic openness dummy. We
base the threshold value of this dummy upon the median of the
sum of exports and imports, which is about 1.500 US dollars per
capita. The results show that although disasters have a negative
impact on economic development in both samples, more open
economies suffer less.
Third, the magnitude of natural catastrophes might be less
severe in countries with an efficient and accountable government.
National governments may influence the impact of disasters by
providing the necessary pre- and post-disaster policies. Demo-
cratic governments have the incentive to invest in these disaster
policies. When governments fail to provide these disaster
measures, the affected voters may replace them in the next
elections, as they may be hold accountable for the adverse human
and economic consequences (i.e., Cole et al., 2012; Healy and
Malhotra, 2009). Thus, we expect that natural disasters are likely to
have a less severe impact in countries with better institutions
(Anbarci et al., 2005; Kahn, 2005). To accommodate this notion, we
create a dummy to indicate if a certain country is an established
democracy or autocratic country based on the Polity IV. According
to the definition of Polity IV, countries with a score higher than six
are regarded as democratic. The marginal effects in columns (7)
and (8) of Table 7 confirm that the economic impact of natural
disasters is larger in countries with weaker institutions.
Finally, as already mentioned above, some of the most urgent
needs can be alleviated by the inflow of foreign aid which may ease
the economic impact of a natural disaster. To explore this notion in
more detail, we create a dummy to divide our sample into aid
dependent and non-aid dependent countries. We base this split on
the average amount of aid received per capita, which is about
700 US dollars annually. The results in columns (9) and (10) of
Table 7 indicate that there are actually no structural differences in
the impact of any of the natural disasters considered between aid
dependent and non-aid dependent countries. One rational
explanation is that aid is often provided to alleviate humanitarian
misery instead of promoting economic progress. This is especially
the case when aid is given immediately following a large-scale
natural disaster.
In Table 8 we perform a number of sample splits based on some
geographical characteristics of a particular country as some natural
disasters happen only in certain locations or are clustered in
particular regions around the globe. We can derive a number of
conclusions from this table. First, we support the view that

Table 8
Geographical location.

Land locked countries Non-land locked countries Africa Asia Latin and Central America Frequently
hit

(1) (2) (3) (4) (5) (6)

All large-scale disasters
t=0 1.217** 1.177** 1.948** 1.459** 1.653** 1.414**
(0.435) (0.463) (0.468) (0.481) (0.473) (0.410)
T=5 0.203 0.202 0.263 0.273 0.217 0.185
(0.615) (0.554) (0.597) (0.546) (0.578) (0.610)
T = 10 0.112 0.098 0.141 0.132 0.111 0.102
(0.122) (0.138) (0.140) (0.131) (0.140) (0.116)

Meteorological disasters
t=0 0.301* 0.653** 0.418 0.621** 0.491** 0.492**
(0.163) (0.161) (0.265) (0.246) (0.248) (0.183)
T=5 0.104 -0.207 0.006 0.010 0.006 0.004
(0.623) (0.625) (0.698) (0.782) (0.681) (0.602)
T = 10 0.130 -0.213 0.180 0.294 0.170 0.136
(0.135) (0.209) (0.149) (0.375) (0.175) (0.132)

Hydrological disasters
t=0 2.763* 2.580** 2.910* 4.837** 2.474 4.868**
(1.514) (1.273) (1.518) (1.508) (1.564) (1.525)
T=5 0.046 0.040 0.045 0.072 0.045 2.150*
(1.087) (1.184) (1.176) (1.116) (1.009) (1.182)
T = 10 0.288 0.312 0.296 0.505 0.298 0.262
(0.210) (0.198) (0.216) (0.405) (0.194) (0.192)

Climatic disasters
t=0 2.140** 2.088 2.811** 1.984 1.884** 1.802**
(0.955) (1.949) (1.011) (1.334) (0.856) (0.633)
T=5 1.108 1.226 1.731 1.105 1.249 1.076
(1.337) (1.424) (1.397) (1.333) (1.235) (1.423)
T = 10 0.137 -0.134 0.212 0.154 0.143 0.125
(0.185) (0.214) (0.213) (0.205) (0.193) (0.198)

Geophysical disasters
t=0 6.091* 6.648** 5.932* 10.825** 7.913** 6.545**
(3.329) (3.380) (3.522) (3.540) (1.649) (3.284)
T=5 3.825** 3.324* 3.619 5.114** 3.985** 4.206*
(1.886) (1.845) (5.394) (1.408) (1.819) (2.936)
T = 10 3.221** 3.659** 3.540 4.248** 3.251** 3.302**
(0.825) (0.873) (4.772) (0.892) (0.917) (0.751)

The table shows the results in the disaster year and the accumulated impact after five and ten year. **/* Indicating significance levels of respectively 5 and 10 percent.
Bootstrapped standard errors are shown between brackets. Estimated including the control variables from column (5) of Table 3.
 J. Klomp / Global Environmental Change 36 (2016) 67–88 83

countries that are not located near to the ocean are less subject to growth rate of real GDP per capita. Applying both models to the
meteorological disasters (Sachs and Warner, 1997; Loayza et al., same sample of 98 countries, the results in Table 9 indicate that
2012). Second, we find that climatic disasters have the largest using the reported real GDP per capita figures from the PWT
impact on economic growth in Africa, while hydro-meteorological underestimates the true impact of natural catastrophes on
disasters have the most severe effect in Asia. This outcome can be economic development. That is, the absolute coefficients are
explained by a frequency effect as droughts are the most common systemically lower in the model using official GDP data which is
in Africa, while floods and cyclones occur more often in Asia. This presumably due to the larger measurement error in this data.
latter point is strengthened since we find a more severe impact of This underestimation becomes even more visible when we include
hydrological disasters in countries that are regularly hit by a large- only developing countries (detailed results are available upon
scale disaster compared to our main model presented in Table 3. request).
We classified a country as being regularly hit when they have been However, one can argue that the intensity of lights visible from
struck at least five times by a large-scale natural disaster during our outer space is not only affected by the use of lights, but also by the
period of analysis. infrastructure in place needed to produce and distribute lights. In
order to rule out that we are not estimating the impact of disasters
4.6. Sensitivity analysis on the availability of this infrastructure rather than on economic
development, we re-estimate the model reported in columns (5)
One question that still remains is to what extent our results are and (6) of Table 3 using the percentage of lit cells within a country.
affected by using light intensity data instead of the commonly used The percentage of lit cells is related to the availability of lights and
reported figures on real GDP per capita. To examine this issue more not necessarily with its intensity. The results in column (3) of
thoroughly, we compare the results obtained using the change in Table 9 demonstrate that we do not find any evidence that natural
light intensity as our dependent variable with the results of an disasters affect the percentage of lit cells within a country.
econometric specification that explains the differences in the Therefore our results demonstrate that disasters affect only the
intensity of light and not the presence of infrastructure needed to
produce and distribute lights.
Up so far we did not take into account the scope or intensity of a
disaster. As an additional robustness test, we normalize our
Table 9
Indicators of development—Light vs. GDP growth. disaster measure by the magnitude of the disaster relative to the
size of the economy. In accordance with Noy (2009) and Loayza
Light growth GDP per capital growth % lit cells et al. (2012), we use two different measures for the intensity of a
(1) (2) (3) disaster: (1) the number of people affected divided by last year's
All large-scale disasters total population (since the current year's population has been
t=0 -1.310** -0.388** -0.812 affected by the disaster itself) and (2) the amount of direct damage
(0.415) (0.170) (1.110) per affected. For each natural disaster we compute the following
T=5 -0.176 0.098 -0.110
variable
(0.168) (0.394) (0.312)
T = 10 0.215 0.401 0.047
(0.253) (0.602) (0.225)  P P
ln½ ðGkit  ð12  Mkit Þ=12Þ þ Gnit1  ðMnit1 =12ÞðpostÞdisaster year
disasterGit ¼ lne otherwise
Meteorological disasters
t=0 -0.736** -0.430* -0.425
ð12Þ
(0.359) (0.243) (0.571)
where G measures the magnitude of a disaster. Consequently, the
T=5 -0.140 -0.556 -0.154
(0.273) (0.641) (0.551) log is taken to avoid that the empirical results are driven by
T = 10 -0.222 -0.160 -0.022 extreme values. In order to retain as much observations as possible,
(0.164) (0.625) (0.155) we follow Loayza et al. (2012) by assigning country-years for which
no event occurred a low number e that is just below the lowest
Hydrological disasters
t=0 2.341** 0.851 1.541
disaster measure for which an event was reported since the log of
(1.042) (0.671) (1.222) zero is undefined. As the consequences of disaster events depend
T=5 0.568 0.556 -0.541 to some extent on endogenous factors like the socio-economic
(0.382) (0.640) (0.885) situation, we use the system-GMM approach outlined above
T = 10 0.641 0.171 -0.128
(Neumayer et al., 2014).The estimation results are in the first part
(0.425) (0.931) (0.225)
of Table 10. As the disaster measures are taken in logarithms, we
Climatic disasters can interpret the coefficients as elasticities. The results indicate
t=0 1.301 0.227 0.098 that besides the frequency of disasters also the intensity of a
(0.903) (0.303) (0.107) catastrophe matters for the impact. An increase of 1% in the share
T=5 0.665 0.232 0.045
(0.556) (0.231) (0.088)
of population affected reduces light intensity by 0.14%, while an
T = 10 0.150 0.431 0.005 increase of 1% in the share of physical damage per affected lowers
(0.159) (1.598) (0.052) the light intensity by 0.09% in the year of the disaster. The last
thirty years the number of affected people increased with about 5%
Geophysical disasters
annually, while the physical damage per affected increased by 8%
t=0 -3.499** 2.179** 1.998
(1.541) (0.851) (1.512) each year. When we interpret this finding, the light intensity is
T=5 4.297** 2.098 -0.551 about 0.7% lower in a disaster year than it would have been in the
(1.927) (5.602) (0.458) absence of natural disasters.
T = 10 2.965** 0.113 0.043 One can still argue that there are also measurement errors in
(1.401) (0.575) (0.154)
our light intensity measure. These errors come mainly from pre-
The table shows the results in the disaster year and the accumulated impact after processing and intercalibrating the raw data. This is then also one
five and ten year. **/* Indicating significance levels of respectively 5 and 10 percent.
of the reasons why Chen and Nordhaus (2011) argue that satellite
Bootstrapped standard errors are shown between brackets. Estimated using OLS-FE
including the control variables from column (5) of Table 3. based economic data has only benefits for countries where there is
84 J. Klomp / Global Environmental Change 36 (2016) 67–88

Table 10
Alternative indicators.

Share of population affected Physical damage per affected Alternative intercalibration Outlier correction Composed
measure

System-GMM System-GMM OLS-FE OLS-FE OLS-FE

(1) (2) (3) (4) (5)

All large-scale disasters
t=0 0.143** 0.088** 1.160** 1.359** 1.278**
(0.008) (0.044) (0.556) (0.509) (0.531)
T=5 0.018 0.031* 0.472 0.508 0.553
(0.017) (0.018) (0.631) (0.600) (0.599)
T = 10 0.002 0.000 0.082 0.081 0.091
(0.033) (0.043) (0.143) (0.148) (0.147)

Sargan test (p-value) 0.347 0.412

Arellano-Bond AR(1) (p-value) 0.000 0.000
Arellano-Bond AR(2) (p-value) 0.712 0.693

Meteorological disasters
t=0 0.439** 0.288** 0.538** 0.515* 0.520*
(0.008) (0.043) (0.255) (0.290) (0.280)
T=5 0.037 0.089 0.138 0.148 0.156
(0.026) (0.119) (1.016) (1.058) (1.031)
T = 10 0.003 0.001 0.190 0.167 0.184
(0.033) (0.040) (0.157) (0.143) (0.159)

Hydrological disasters
t=0 0.141** 0.087 2.617* 3.354** 2.985**
(0.011) (0.079) (1.584) (1.471) (1.450)
T=5 0.014 0.030 0.260 0.247 0.265
(0.028) (0.026) (0.901) (0.988) (0.938)
T = 10 0.002 0.000 0.222 0.225 0.260
(0.033) (0.044) (0.223) (0.241) (0.220)

Climatic disasters
t=0 0.134** 0.071 1.857** 1.686* 1.785*
(0.013) (0.080) (0.897) (0.872) (0.935)
T=5 0.022 0.033 1.532 1.540 1.384
(0.016) (0.036) (1.307) (1.201) (1.202)
T = 10 0.002 0.000 0.121 -0.104 0.114
(0.045) (0.081) (0.254) (0.211) (0.234)

Geophysical disasters
t=0 0.303** 0.191** 7.459** 7.235** 6.752**
(0.004) (0.060) (3.275) (3.176) (3.207)
T=5 0.051 0.074** 7.427** 7.396** 8.154**
(0.112) (0.020) (3.768) (3.385) (3.457)
T = 10 0.004 0.001 4.653** 3.803** 4.303**
(0.029) (0.060) (0.813) (0.851) (0.774)

Sargan test (p-value) 0.467 0.317

Arellano-Bond AR(1) (p-value) 0.000 0.000
Arellano-Bond AR(2) (p-value) 0.498 0.518

The table shows the results in the disaster year and the accumulated impact after five and ten year. **/*Indicating significance levels of respectively 5 and 10 percent.
Bootstrapped standard errors are shown between brackets. Estimated including the control variables from column (5) of Table 3.

a poor statistical system present. To explore whether our results
are affected by these measurement errors in our light intensity
data, we perform a number of sensitivity tests. First, we re-
estimate our main models using the intercalibration method from
Elvidge et al. (2009) as an alternative to the previous approach. To
overcome the limited comparability of the satellite data over time
this approach calibrates each composite against one base
composite using an empirical model. One major drawback of this
methodology is that it is only valid under the strict assumption that
the lighting intensity levels in a reference area have remained
relatively stable over time. In our case, F162007 was chosen as this
reference composite because it contained the highest digital
number values overall. The data from all other satellite years are
adjusted to match this composite by estimating a second order
regression model for each composite. This model is given by
light ¼ a þ b1 dn þ b2 dn2 þ e ð13Þ
Table A3 in the appendix shows the resulting calibration
coefficients. These coefficients were applied to each composite so
that a new predicted value (light) was calculated based on the
original value (dn). Any values over 63 were truncated so that the
range of the values remained between 0 and 63. Using this new
light variable we re-estimate the main models from Table 4. The
results presented in column (3) of Table 10 on the impact of large-
scale natural disasters are allmost identical to the previous results.
 J. Klomp / Global Environmental Change 36 (2016) 67–88
Again we find that natural disasters cause a drop in economic
development in the short run. This effect is mainly attributed by
the impact of hydro-meteorological and geophysical disasters As a
second test we check whether extreme changes in light density
affect our results by removing the outlier observations in the
change of light variable. An outlier is defined as: [D ln light] < Q
(25)-3IQR or [D ln light] > Q(75) + 3IQR, where Q is the quantile and
IQR the interquantile range given by 75th percentile–25th
percentile. This leaves us with more than 95% of the observations.
The results in column (4) of Table 10 demonstrate that our results
are stable and not affected by outliers in the change of light
intensity. Finally, the measurement errors in official GDP statistics
and the errors in light intensity data come from different sources.
Data obtained using satellite images are less subject to observation
errors as all data are obtained in the same consistent way, but they
are more affected by processing and interpretation errors. In turn,
official real GDP data is influenced by the reporting practices in a
specific country. That is, for some countries the reported figures are
more reliable than for others. These errors not necessarily correlate
and both indicators can be seen as imperfect measures of
development. In the next sensitivity test we combine the data
on real GDP per capita and light intensity data by using the first-
principle component (PCA). PCA is a statistical data reduction
technique used to explain variability among observed random
variables in terms of fewer unobserved random variables called
factors. The factor loadings are respectively 0.89 and 0.63 for light
intensity and real GDP per capita. In column (5) we use this
measure as our dependent variable. The results on this composed
indicator show a similar pattern as before. In more detail, we find
that hydro-meteorological and geophysical disasters reduce the
lights visible from outer space in the short run, while in the long
run geophysical disasters may even enhance economic develop-
ment.
5. Conclusion
From a macroeconomic theory point of view, it is not directly
clear whether, and if so in which direction, natural disasters
should affect economic development. One main concern with
the existing studies is that the majority of all natural disasters
happen in developing countries, where macroeconomic re-
search is hampered due to unreliable economic data. In
response to overcome the problems related to measuring
GDP per capita, there is a long tradition in the economics
literature of considering various proxies that cover periods or
countries for which GDP data are not available at all or not
available in a timely fashion. Recently, a number of studies
demonstrate that light intensity and economic activity are
closely related. Our contribution to the empirical literature is to
explore how large-scale natural disasters adversely affect
economic development measured by night-time light intensity.
We use a dynamic panel model including more than 1000 large-
scale natural disasters between 1992 and 2008.
After testing for the sensitivity of the results, our main findings
suggest that natural disasters reduce the amount of lights visible
from outer space significantly in the short run. To be more precise,
we demonstrate that climatic and hydrological disasters cause a
drop in the luminosity in developing and emerging market
85
countries, while geophysical and meteorological disasters de-
crease light intensity in industrialized countries. These results can
first be explained by the intensity effect as geophysical and
meteorological disasters cause the majority of the reported
estimated damage per affected worldwide. To be precise, based
on the estimates of EM-DAT (2013) the amount of damage caused
by a single meteorological or geophysical event is on average
about 2.5 times larger than for a flood or major drought. This
intensity effect may have long lasting adverse impacts thereby
reducing the economic perspective in the future. Second,
hydrological disasters affect economic growth through a frequen-
cy effect as more than 40% of the disasters included are
considered in this category. This reduces the time between two
independent disasters, and hence, the opportunities to cope with
the negative consequences of these shocks by households, firms
and the government. This frequency effect might be aggravated in
developing countries since recovery investments after a major
disaster often take long to implement due to financial and
capacity constraints present in these countries.
When we try to match our results with the scenarios
outlined in Section 2, we find some empirical evidence for
scenario A in the case of hydro-meteorological and climatic
disasters. Meaning, disasters cause a drop in economic
development immediately following a disaster. However, in
the long run most of the disaster effect has disappeared as the
complete impact after ten years is zero. Thus, countries
experiencing these kind of disasters only temporarily deviate
from it's original long run balanced growth path. In turn, we
find support for scenario D for geophysical disasters. These
disasters increase the economic growth rate by about 0.06 per-
centage-points annually in the following ten years after a
disaster. This positive impact can be attributed to the
large-scale recovery investments that trigger technological
progress and therefore a country reaches a higher growth path
as before.
We find two mechanisms that restrain the impact of large-scale
natural disasters, at least in the short run. First, government
accountability. When a government would like to make their
economy more resilient to large-scale natural catastrophes, they
can, for instance, enforce strict building codes, increase the quality
of the public infrastructure or invest more in early warning
systems. Second, financial development. Our results point out that
countries that have more developed financial markets, suffer less
from the consequences of a disaster. That is, governments may
facilitate the necessary policies that open up the financial markets
and enhance a well-functioning private (re-)insurance or cata-
strophic bond market to ease the adverse economic consequences.
Alternatively, the government might set up a credible public
disaster fund in the pre-disaster period to absorb the negative
shocks when they happen.
However, interpreting our results, one needs to be carefully as
there are also some concerns by using night-time lights data in an
economic analysis. As indicated by a number of studies. these
concerns are mostly related to the calibration of the night-time
light data and the saturation problem mainly in developing
countries. Consequently, the night-time light data may over- or
underestimate the true intensity of the economic activities that
take place within a country.
86 J. Klomp / Global Environmental Change 36 (2016) 67–88

Table A1
Countries included.

Afghanistan Dominican Republic# Latvia Rwanda#

Albania Ecuador Lesotho# Saudi Arabia
Algeria Egypt, Arab Rep.# Liberia# Senegal#
Argentina El Salvador Libya Serbia
Armenia# Estonia Lithuania Sierra Leone#
Australia Fiji Luxembourg Singapore
Austria Finland Malawi# Slovak Republic
Bahrain France Malaysia Slovenia
Bangladesh# Gabon# Maldives South Africa#
Barbados Gambia, The Mali# Spain
Belgium Germany Malta Sri Lanka
Belize Ghana# Mauritania Sudan
Benin# Greece Mauritius Swaziland#
Bolivia# Guatemala# Mexico Sweden
Botswana Guyana# Mongolia Switzerland
Brazil# Haiti# Morocco# Syrian Arab Republic
Brunei Darussalam Honduras# Mozambique# Tajikistan
Bulgaria Hungary Namibia# Tanzania#
Burundi# Iceland Nepal# Thailand
Cambodia# India# Netherlands Togo#
Cameroon# Indonesia# New Zealand Tonga
Canada Iran, Islamic Rep. Nicaragua# Trinidad and Tobago
Central African Republic# Iraq Niger# Tunisia
Chile Ireland Norway Turkey#
China Israel Pakistan# Uganda#
Colombia# Italy Panama Ukraine#
Congo, Dem. Rep.# Jamaica Papua New Guinea United Arab Emirates
Congo, Rep. # Japan Paraguay United Kingdom
Costa Rica Jordan# Peru# United States
Cote d’Ivoire# Kazakhstan# Philippines# Uruguay
Croatia Kenya# Poland Venezuela, RB
Cuba Korea, Rep. Portugal Vietnam#
Cyprus Kuwait Qatar Yemen, Rep.
Czech Republic Kyrgyz Republic Romania Zambia#
Denmark Lao PDR Russian Federation Zimbabwe#

# Denotes whether a country is included in the regional analysis of Section 4.3.

Table A2
Data sources used.

Variable Description Source

Gross fixed capital Gross fixed capital formation per capita, including land improvements, equipment purchases and the World Development
formation per capita construction of infrastructure, and commercial and industrial buildings. Indicators (2012)
Secondary school Secondary school attainment rate of the population above 15. By interpolating the data we obtained annual Barro and Lee (2013)
enrolment observations.
Population growth Growth rate of the total population. Penn World
Tables (2012)
Government spending per Central government spending divided by the population size. Penn World
capita Tables (2012)
Trade per capita Sum of import and export per capita. Penn World
Tables (2012)
Current account balance Export minus import per capita Penn World
per capita Tables (2012)
Terms-of-trade Export prices divided by import prices. World Development
Indicators (2012)
Exchange rate changes Annual change in the real exchange rate. Penn World
Tables (2012)
Inflation rate Annual change in the GDP deflator. World Development
Indicators (2012)
Credit per capita Loans and credit supplied to the private sector. Taken per capita. World Development
Indicators (2012)
Population density The number of people per square kilometre of land area. World Development
Indicators (2012)
Life expectancy Life expectancy at birth in years World Development
Indicators (2012)
Urbanization rate Share of the total population living in the urban areas. World Development
Indicators (2012)
Democracy Polity IV score. Marshall and Jaggers
(2012)
Political instability A dummy that takes a value of 1 in a year when there is a regime change as recorded in the Polity IV dataset. A Marshall and Jaggers
regime change is defined as a three-unit change in the Polity IV score. (2012)
 J. Klomp / Global Environmental Change 36 (2016) 67–88 87

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1996 0.08 1.26 0.01 ters: challenges and options. IMF Working paper WP/03/197, Washington:
1997 0.02 1.15 0.01 Interna-tional Monetary Fund.
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