Document Type

Honors Project - Open Access

Abstract

This paper compares the long-term effects on real per-capita GDP of two hurricanes in 1992, hurricane Andrew in Florida and hurricane Iniki in Hawaii. The literature suggests that the long-term effect on GDP of a natural disaster for a region with good pre-disaster institutional quality may be positive (i.e., GDP levels exceed those which would have materialized without the disaster) because the destruction of capital induces firms to investment in more technologically advanced structures and machines. In contrast, a region with bad pre-disaster institutional quality should experience a negative impact because it face severe limits in the amount it can borrow in international markets to replace the destroyed capital. If this claim holds, Florida, a state with poorer institutional quality, should not have performed as well as Hawaii, a state with stronger institutions, after each was hit by a hurricane in 1992. By analyzing twenty years of data for the two states using the synthetic control method, this paper shows that the pre-disaster institutional quality was not a powerful determinant of the long-term GDP growth in these two states. That is, Hawaii’s observed per-capita GDP values remained significantly lower than what Hawaii would have experienced without hurricane Iniki, while the gap between the observed values and the expected values was smaller for Florida. I speculate that other differences between these two economies, such as their size or proximity to the U.S. mainland, might explain why Hawaii was more adversely affected by hurricane Iniki.

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