Natural disasters and regional industrial production efficiency: evidence from pre-war Japan

Abstract

ABSTRACT In this paper we investigate whether destruction due to natural disasters induces industries to increase their regional production efficiency using the case of pre-war Japan, a setting of frequent disasters and technological upgrading. To this end we compile a regional sectoral dataset of natural disaster destruction and production for machinery and textiles. We then employ a stochastic frontier analysis (SFA) approach to estimate the role of disaster events on changes in production efficiency. Our results show that earthquakes led to increases in efficiency for both machinery and textiles, although they were substantially greater for textiles due to the recovery persisting longer. Overall earthquakes contributed 6.8% of efficiency gains in textiles and 3.1% in machinery. However, allowing events to compound in their impact showed that such gains were dampened when there were damaging earthquakes in subsequent years. In contrast, for climate-related natural disaster events there is only weak, if any, evidence that these played a significant role in determining productive efficiency.