López, Ramón2012-03-192012-03-192009-03-01https://hdl.handle.net/10986/4069Empirical evidence suggests that the higher-order effects of natural disasters, which affect intangible assets, may be even more important than the material inter-industry effects. However, most existing general equilibrium models ignore higher order effects concerning human capital. Moreover, it is recognized that natural resource dependence increases vulnerability to natural disasters. Recent studies have indeed shown the potential importance of subsistence traps caused by asset losses in low-income economies from a partial equilibrium perspective. This paper presents an analysis that allows for endogenous investments in real assets (physical capital) as well as in human capital, explicitly considering the potential for subsistence traps arising from minimum consumption and minimum natural resource irreversibility thresholds. The general equilibrium ramifications of subsistence traps are developed. The main issue is that the economy may be subject to hysteresis: A temporary shock such as a natural disaster may leave permanent consequences for the economy. An obvious permanent effect of a one-time disaster shock is that physical man-made and natural assets owned especially by poor households may end up completely wiped out. The disaster may not be the direct cause; it may be that poor households would have to obtain minimum subsistence consumption out of depleted assets. However, not all permanent effects of a one-time shock are negative. Under certain conditions, the destruction of man-made physical and natural capital may have general equilibrium effects that increase the incentives to invest in human capital and may even propel a formerly stagnating economy into a virtuous path of continuing growth.CC BY 3.0 IGOACCESS TO MARKETSACCOUNTINGAGRICULTUREASSET RATIOASSET RECONSTRUCTIONASSETSBIASESBONDSBORROWINGBUDGET CONSTRAINTBUDGET CONSTRAINTSCAPITA INCOME GROWTHCAPITAL ACCUMULATIONCAPITAL ASSETSCAPITAL FLOWSCAPITAL GROWTHCAPITAL GROWTH RATECAPITAL INVESTMENTCAPITAL INVESTMENTSCAPITAL LOSSESCAPITAL MARKETCAPITAL MARKET LIBERALIZATIONCAPITAL MARKETSCAPITAL STOCKCAPITAL STOCKSCOMMODITY PRICESCONSTANT RATECONSTANT RETURNSCONSTANT RETURNS TO SCALECONSUMPTION EXPENDITURECONSUMPTION EXPENDITURESCONSUMPTION LEVELSCREDIT RATIONINGDAMAGESDERIVATIVESDEVELOPING COUNTRIESDISCOUNT RATEECONOMIC GROWTHECONOMIC INEFFICIENCYECONOMICSELASTICITYELASTICITY OF SUBSTITUTIONEMPLOYMENTENDOGENOUS VARIABLEENDOWMENTSENROLLMENTENVIRONMENTAL PROTECTIONEQUALITYEQUILIBRIUMEQUILIBRIUM LEVELEQUIPMENTEQUIPMENTSEXCESS DEMANDEXPECTED PRESENT VALUEEXPENDITUREFACTORS OF PRODUCTIONFINANCIAL ASSETSFINANCIAL INSTRUMENTSFINANCIAL INTERMEDIARIESFINANCIAL RESOURCESFINANCIAL SERVICESGDPGENERAL EQUILIBRIUMGENERAL EQUILIBRIUM MODELSGOVERNMENT BUDGETSGOVERNMENT EXPENDITUREGOVERNMENT EXPENDITURESGOVERNMENT REVENUESGOVERNMENT SPENDINGGOVERNMENT SUBSIDIESGROWTH ACCOUNTINGGROWTH MODELSGROWTH PROCESSGROWTH RATEGROWTH RATESGROWTH THEORYHIGH WAGESHOUSEHOLD INCOMEHOUSEHOLD INCOMESHOUSEHOLD INVESTMENTHOUSEHOLD SAVINGSHOUSEHOLDSHUMAN CAPITALHUMAN CAPITALSINCOMEINCOME GROWTHINEQUALITYINPUT PRICESINTANGIBLEINTANGIBLE ASSETINTANGIBLE ASSETSINTERMEDIATE GOODSINTERMEDIATE INPUTINTERNATIONAL BANKINTERNATIONAL TRADEINVESTINGINVESTMENT DECISIONSINVESTMENT RATELABOR DEMANDLABOR EFFICIENCYLABOR FORCELABOR MARKETLABOR MARKETSLABOR MIGRATIONLABOR SUPPLYLEVEL OF CAPITALLEVEL OF OUTPUTLOCAL INFRASTRUCTURELOW ELASTICITY OF SUBSTITUTIONMANPOWERMARGINAL COSTMARGINAL RATE OF RETURNMARGINAL UTILITYMARGINAL VALUEMARKET CONDITIONMARKET EQUILIBRIUMMARKET FAILUREMARKET FAILURESMARKET IMPERFECTIONSMARKET WAGEMIDDLE INCOME COUNTRIESNATURAL CAPITALNATURAL CAPITALSNATURAL DISASTERNATURAL DISASTERSNATURAL RESOURCESNEGATIVITY CONSTRAINTNET INVESTMENTOPEN ECONOMIESOPEN ECONOMYOPPORTUNITY COSTOPTIMAL INVESTMENTOPTIMIZATIONOUTPUTSPER CAPITA INCOMEPHYSICAL ASSETSPHYSICAL CAPITALPOTENTIAL INVESTORSPRIVATE ENTERPRISESPRODUCTION FUNCTIONPRODUCTION FUNCTIONSPRODUCTIVE ASSETSPRODUCTIVE CAPITALPROFITABILITYPROPERTY RIGHTSPUBLIC POLICYPUBLIC SPENDINGRATE OF RETURN TO CAPITALRATES OF RETURNREAL WAGESRESOURCE ALLOCATIONRETURNSSAVINGSSTATE EQUILIBRIUMSUBSISTENCE HOUSEHOLDSUBSISTENCE HOUSEHOLDSTANGIBLE ASSETTAXTAX RATETAX REVENUESTOTAL CAPITAL STOCKTOTAL FACTOR PRODUCTIVITYTOTAL LABOR FORCETOTAL REVENUEUNIT OF CAPITALUPWARD SHIFTUTILITY FUNCTIONWAGE INCREASESWAGE RATESWAGESWEALTHWorld Bank10.1596/1813-9450-4874