This article examines the impact of the 1995 Kobe earthquake on the survival of factories and their economic performance after the earthquake. The evidence from macroeconomic studies on the impact of natural disasters on economic growth is mixed, with some papers finding a small negative effect, while others often find a positive effect. In this article, we conduct a detailed investigation of the local effects of the Kobe earthquake.
Therefore, the motivation for this paper is to provide a missing piece in the natural disasters literature by being one of the first papers to take a microeconomic approach to examine the impact of natural disasters on plant survival and subsequent economic performance at the local level . Given the relatively favorable long-term macroeconomic effects of the Kobe earthquake (in terms of growth, inflation and interest rates), the Kobe event provides an ideal experiment to examine the short- and medium-term effects of natural disasters on plant survival. In this section, we provide a brief overview of the Kobe earthquake with special attention to the damage to infrastructure and economic activity against a background of a stagnant Japanese economy.
Firestorms were a particular problem in the narrow streets of the older districts, where traditional wooden houses still dominated. Before proceeding with the analysis, it is useful to provide some basic statistics on earthquake magnitude.
Data
Plant level damage
As companies also took on substantial loans after the earthquake, they also came under financial pressure due to the relatively slow growth of the Japanese economy. We depict an example of a part of the original tiles and the extracted building polygons in Figures 2 and 3, respectively. Throughout our analysis, we also experimented with using the lower and upper threshold of the percentage loss values of each damage category in the creating what is essentially a step function.11.
One should note that in order to confirm the accuracy of our geo-referencing of buildings and their damage type, we overlaid our building shapefile with a shapefile of Chomes, calculated the number of buildings themselves and per damage category per Chome and compared this with the official aggregate data available. This helps to address some of the potential endogeneity problems, which we now discuss in more detail. As a next step, we also proxied damage at the building level using a tremor map of the earthquake.
Data descriptives
If we overlay this with the building damage map data we show in Figure 5, what is immediately noticeable is the extreme heterogeneity of the damage, even in shake map cells. Another alternative could be to use the factual information on construction damage available at the Chome level. Therefore, we plot the distribution of our index from our Chome damage equation in Figure 6.
Again, however, a closer look at individual Chomes, as shown in Figure 7, reveals the wide heterogeneity of damage even within a Chome. The immediate observation is that, perhaps unsurprisingly, the greater the damage to a plant, the more likely the plant was to close in the years following the earthquake. In the next phase, we investigate the impact of the earthquake on plant survival using different econometric approaches.
Methodology 1 Survival Analysis
The Impact of Damage on Employment, Value Added and Productivity
After examining the effect of earthquake damage on plant survival more generally, we then look specifically at how such damage affects levels of employment, value added and productivity. Where Eit denotes employment, value added, or productivity in plant i, year t, X is a vector of explanatory variables, including earthquake damage, and α and γ are plant and year fixed effects, respectively.
Results
TFP consistently exhibits a risk ratio of less than 1, indicating that more productive firms are more likely to survive. Finally, our measure of the degree of plant agglomeration (ClusterFirms), which measures the number of factories from the same two-digit industry in a given Chome, has a risk ratio greater than 1. Our variable to capture whether a factory is in one of the eight special reconstruction zones is not significant.
Surprisingly, the hazard ratio is greater than one, suggesting that the further away from the epicenter the greater the chance of plant closure. This result can be explained by the earthquake damage model which was centered on a narrow strip of land extending away from the epicenter, as shown in Figure 1. This aims to capture the fact that the influence of the damage function can decay over time .
In each of these three models, the sign and significance of the other control variables remain very similar to those in Table 5. The risk ratios on the cluster variables remain greater than one, with three of the four being statistically significant. For the two clusters, measured in terms of the number of nearby farms, the interaction with clusters has a negative effect on plant mortality, indicating that damaged farms belonging to a cluster were less likely to die.
In Table 8, we estimate a panel fixed effects model to examine the impact of the earthquake on employment, value added, TFP and labor productivity. It is important to note that this is only for the firms that survived to the end of the period. In terms of the other controls, AGE, MULTI and ClusterFirms all increase employment levels, while LONE decreases employment.
Regarding the other controls, living in a renewal area, higher wages, and an older plant increase value added, while belonging to a multiplant firm decreases value added.
Conclusions
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