Natural Hazard-Induced Disasters and Production Efficiency: Moving Closer to or Further from the Frontier?

Production efficiency is a key determinant of economic growth and demonstrates how a country uses its resources by relating the quantity of its inputs to its outputs. When a natural hazard-induced disaster strikes, it has a devastating impact on capital and labor, but at the same time provides an opportunity to upgrade capital and increase labor demand and training opportunities, thereby potentially boosting production efficiency. We studied the impact of natural hazard-induced disasters on countries’ production efficiency, using the case study of hurricanes in the Caribbean. To this end we built a country-specific, time-varying data set of hurricane damage and national output and input indicators for 17 Caribbean countries for the period 1940–2014. Our results, using a stochastic frontier approach, show that there is a short-lived production efficiency boost, and that this can be large for very damaging storms.