The winds of inequalities: How hurricanes affect inequalities at the macro level

Abstract

While the consequences of natural disasters are relatively well studied, little is known about their macroeconomic impact on inequality. Following Yang (2008), we use an exogenous hurricane index, considering the average “affectedness” of individuals, based on meteorological data. Our empirical approach uses local projection (Jordà, 2005) to measure the cumulative impact of hurricanes on pre- and post-transfer Gini indices (Solt, 2020) five years after the hurricane event for a sample of 114 countries from 1995 to 2014. We find that the impact of hurricanes on inequality, is conditional on the level of a country’s per capita GDP. In particular, the poorest countries tend to experience a reduction in disposable inequality following a hurricane. This study highlights the possible presence of a Schumpeterian effect in high income countries, where they experience a decline in the pre-redistribution Gini in the first few years as capital at the top of the income distribution is destroyed. Subsequently, the pre-tax and transfer Gini rises, reflecting a possible “build-back-better” mechanism as individuals at the top of the income distribution increase their income from capital via reconstruction. In the case of the post-redistribution Gini, we observe a decrease in the first years after a hurricane, underlining the positive impact of redistribution. We identify potential channels such as ODA, remittances and subsidies through which hurricanes may reduce inequality in these countries.