Poorly targeted aid and a lack of access to capital hinder the recovery of small businesses devastated by natural disasters in developing countries. That is the central finding of research by Professor Christopher Woodruff and colleagues, published in the March 2012 issue of the Economic Journal.
The prevailing wisdom has long been that economies recover quickly from natural disasters, but their research, conducted in the wake of the devastating December 2004 tsunami in Sri Lanka, undercuts this view. The findings show that business recovery is much slower than commonly assumed and underscore the crucial role of capital in hastening small businesses’ return to profitability in the wake of disasters.
The researchers followed the progress of small businesses as they attempted to recover from the tsunami’s aftermath. They conducted a field experiment, providing grants to randomly selected businesses and comparing them with a control group that did not receive grants. The results were that:
- Firms that got grants recovered profit levels almost two years before other damaged firms. Indeed, the grants appear to have allowed an immediate recovery of the firms relative to the comparison firms.
- The access to capital proved significantly more effective in the retail sector. But they had very little effect among enterprises in manufacturing and services.
- This is consistent with the view that other constraints come into play. The role of capital in recovery for manufacturing and services seems to be limited because disruptions in supply chains and other disaster-induced changes also wreak havoc on the business environment.
- More than $2 billion went to Sri Lanka in relief and recovery funds, equivalent to roughly 10% of GDP. But aid was both uncorrelated with the extent of businesses losses and insufficient for the needs of firms. Aid to businesses covered only about 10% of reported losses.
- At the same time, loans did not appear to be an option. Fewer than 4% of microenterprise owners reported receiving a loan in the tsunami’s aftermath, and these covered less than 1% of losses.
Professor Woodruff comments on the findings:
‘Our research demonstrates the need to expand avenues that provide access to credit for small businesses and to improve the targeting of aid.
‘Addressing these two issues should speed the recovery of small enterprises facing the devastating aftermath of natural disasters.’
‘Enterprise Recovery Following Natural Disasters’ by Suresh De Mel, David McKenzie and Christopher Woodruff is published in the March 2012 issue of the Economic Journal.
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