Climate-related Disaster and Human Capital Investment in the Global South — Household Heterogeneity and Growth

This study develops a dynamic model of climate-related disaster impacts, considering multidimensional household heterogeneity, for analyzing changes in growth and inequality in low-income countries. Focusing on human capital development, the study demonstrates the multiple impacts of disaster risk reduction (DRR) policies on human capital investment, including the effect of schooling opportunities for households constrained by the subsistence consumption constraint. Through numerical simulations performed for two economies that differ in terms of human capital, modeled after Madagascar and Fiji, it is illustrated that the possibilities of involuntary unemployment and the work-learning choice drive the diversity in macroeconomic impacts of a disaster. In an economy characterized by low levels of human capital, a disaster could cause an increase in labor supply in the immediate aftermath but interrupt human capital formation, impeding long-term growth and human capital formation. Such a result contradicts prevailing intuition by demonstrating that a disaster occurring in an economy under recession may not result in a large adverse GDP impact in the short run but may negatively impact growth in the long run. On such a path, a policy of development in DRR infrastructure with appropriate taxation could reduce human-capital gaps in the long run by supporting continued post-disaster human-capital-investment opportunities for the poor.