Thomas K.J. McDermott

The Effects of Natural Disasters on Human Capital Accumulation

In this paper I investigate the effects of disasters on human capital accumulation using an extensive panel dataset on natural disasters, covering 170 countries over a 25 year period (1980-2004). My analysis shows that disasters have both a direct, contemporaneous effect and a long-term, indirect effect on human capital. While the direct effects - primarily related to injury, illness and death suffered as a result of the disaster - are relatively straightforward, the indirect effects will depend on household decision-making in the aftermath of the disaster. Treating human capital as a long-term investment decision, it is clear that access to finance is likely to be a crucial factor in household decisions about whether or not to invest in childrens health and education. Indeed, my results show that aid flows are effective in mitigating the long-term impacts of disasters on health outcomes. However, for school enrollment rates, the longer-term effects of disasters are dependent on the availability of credit. These findings could have important policy implications. The indirect effects are unlikely to have been identified in previous analyses that focus on the short-term impacts of natural disasters. Given the importance of human capital in the process of economic development, the results presented here suggest that natural disasters represent a significant threat to the development prospects of relatively poor countries.

Geography, institutions and development: a review of the long-run impacts of climate change

The links among climate change, economic growth and economic development have gained increasing attention over recent years in both the academic and policy literature. However, most of the existing literature has tended to focus on direct, short-run effects of climate change on the economy, for example, due to extreme weather events and changes in agricultural growing conditions. In this paper, we review potential effects of climate change on the prospects for long-run economic development. These effects might operate directly, via the role of geography (including climate) as a fundamental determinant of relative prosperity, or indirectly by modifying the environmental context in which political and economic institutions evolve. We consider potential mechanisms from climate change to long-run economic development that have been relatively neglected to date, including, for instance, effects on the distribution of income and political power. We conclude with some suggestions for areas of future research.

The Economics of Climate-Resilient Development

Some climate change is now inevitable and strategies to adapt to these changes are quickly developing. The question is particularly paramount for low-income countries, which are likely to be most affected. This timely and unique book takes an integrated look at the twin challenges of climate change and development. The book treats adaptation to climate change as an issue of climate-resilient development, rather than as a bespoke set of activities (flood defences, drought plans, and so on), combining climate and development challenges into a single strategy. It asks how the standard approaches to development need to change, and what socio-economic trends and urbanisation mean for the vulnerability of developing countries to climate risks. Combining conceptual thinking with practical policy prescriptions and experience the contributors argue that, to address these questions, climate risk has to be embedded fully into wider development strategies

Financial Turmoil and Safe Haven Assets

We study two different safe haven assets, US government bonds and gold, and examine how the price changes of these assets can be used to infer investor behaviour under uncertainty. We find that investors are ambiguity-averse, that is they buy gold when faced with extreme uncertainty about the state of the economy or thefinancial system and when they receive ambiguous signals. In contrast, investors buyUS government bonds when faced with extreme but unambiguous signals. We also show that there is overreaction to ambiguous signals.Financial crises and contagion have highlighted the need for safe haven assets. However, their existence, role and interactions are not well understood. We analyze the two most prominent yet fundamentally different safe haven assets, US government bonds and gold. Our econometric analysis explicitly models the dynamic interaction between these assets and the global stock market. While both assets appear to act as safe havens, we find that gold, in contrast to US government bonds, becomes increasingly sensitive to large negative shocks in the stock market. Gold therefore appears to be a stronger safe haven in extreme conditions despite the fact that it is more risky and less liquid than bonds. We offer a behavioral interpretation to explain our findings.

Climate-resilient development: an introduction

This book is about the link between economic development and adaptation to climate change from an economics perspective. Stern (2015) has called climate change and poverty alleviation the two biggest societal challenges of the twentyfirst century. They are linked, Stern observes, and failing in one means failing in the other. The notion of climateresilient development acknowledges this complementarity. Lowincome countries will be among the most affected by climate change, to the point where development progress might be at risk. At the same time, the rapid development these countries are undergoing – in terms of economic growth, capital accumulation and demographics – is changing fundamentally their vulnerability to climate change, for better or for ill. The combination of rapid population growth with ongoing urbanization, for example, is expected to lead to a largescale expansion of urban areas, a trend that is most pronounced in locations that are vulnerable to climate extremes. The pace and scale of changes underway means that the greatest opportunities for achieving climate resilience lie in guiding current development trends. This is reinforced by the danger – if climate risks are ignored – of locking in longterm risks, for example, through haphazard urban development in risky locations. There is a window of opportunity to act now to reduce future vulnerability. The dynamic interaction of development trends with climate exposure and vulnerability is at the heart of climateresilient development, and in contrast to traditional adaptation analysis. Much of the economic literature still treats adaptation to climate change as a set of selfstanding activities that are assessed at the microlevel, for example, through costbenefit analyses of specific response options. This often includes a fairly sophisticated treatment of climate scenarios and uncertainties, but little discussion of macrolevel trends such as urbanization, economic diversification and openness to trade.

The impact of flooding disruption on the spatial distribution of commuter's income

ABSTRACT Flooding already imposes substantial costs to the economy. Costs are expected to rise in future, both as a result of changing weather patterns due to climate change, but also because of changes in exposure to flood risk resulting from socio-economic trends such as economic growth and urbanisation. Existing cost estimates tend to focus on direct damages, excluding potentially important indirect effects such as disruptions to transport and other essential services. This paper estimates the costs to commuters as a result of travel disruptions caused by a flooding event. Using Galway, Ireland as a case study, the commuting travel times under the status quo and during the period of the floods and estimated additional costs imposed, are simulated for every commuter. Results show those already facing large commuting costs are burdened with extra costs with those in rural areas particularly vulnerable. In areas badly affected, extra costs amount to 39% of earnings (during the period of disruption), while those on lower incomes suffer proportionately greater losses. Commuting is found to have a regressive impact on the income distribution, increasing the Gini coefficient from 0.32 to 0.38.

Why is Gold a Safe Haven? (Presentation Slides)

Gold is a prominent safe haven asset but risky compared to other safe haven assets such as US government bonds. We identify unique features of gold that explain why investors under stress buy the riskier alternative gold. We argue that the decision to buy gold is rooted in behavioral biases associated with gold’s history as a currency, a store of value and a safe haven. The empirical analysis shows that gold was a particularly strong safe haven in the aftermath of September 11, 2001 and the Lehman bankruptcy in September 2008. The Global Financial Crisis also exemplifies the role of the US dollar as a safe haven currency and how it can mask the safe haven effect of gold. Finally, we find that safe haven assets do not exacerbate crises via a negative feedback effect.

Reconciling Conflicting Evidence on the Origins of Comparative Development: A Finite Mixture Model Approach

In this paper, I revisit the controversy over the fundamental sources of comparative development. In contrast to much of the previous literature, my focus is on the appropriate specification of the empirical strategy. Using a finite mixture model approach and Monte Carlo simulations, I demonstrate that the standard linear estimation strategy may be mis-specified and as a result is likely to obscure the true effects of the variables used to explain cross-country income differences. My findings could potentially reconcile apparently conflicting results from the existing literature on the role of geography and institutions in comparative development.

The Luck of the Development Draw: Environmental Volatility and the Takeoff to Modern Economic Growth

This paper tests the implications of the model developed by Acemoglu and Zilibotti [Daron Acemoglu and Fabrizio Zilibotti, 1997. Was Prometheus unbound by chance? Risk, diversification and growth. Journal of Political Economy 41, 709-51.] which demonstrated a central role for luck - in the form of good vs bad draws - in determining which countries or regions developed first, and which have lagged behind. An obvious potential source of “good vs bad draws” is environmental volatility, particularly in the context of developing economies that - in addition to being undiversified - tend to be heavily dependent on agricultural output.We use climate data and a finite mixture model - taking account of the bi-modality of the world income distribution - to test the effect of environmental volatility on comparative economic development. Using this approach, we find that climate variables exert a direct influence on income, even when institutions have been controlled for. Our results show that poorer countries are vulnerable to environmental volatility, which appears to delay their “takeoff” to modern economic growth. The paper also includes a revised definition of the “takeoff” concept.