Macroeconomic implications of natural disasters in the Caribbean

This paper compares the incidence of natural disasters across countries along several dimensions and finds that the relative costs tend to be far higher in developing countries than in advanced economies. The analysis shows that small island states are especially vulnerable, with the countries of the Eastern Caribbean Currency Union (ECCU) standing out as among the most disaster-prone in the world. Natural disasters are found to have marked macroeconomic impact, including large effects on fiscal and external balances, which suggests an important role for precautionary measures.

The paper finds that:

• given the high and increasing cost of disasters, there is a need for polices to better mitigate the impact of damaging natural events
• natural disasters are typically associated with an immediate contraction in economic output, a worsening of external and fiscal balances, and an increase in poverty
• despite the vulnerability to natural disasters, insurance plays a limited role in developing countries. Although the insurance market is more advanced in the ECCU than in many other developing countries, property insurance is still not very widespread, especially among low-income households. Overall, the ECCU insurance market suffers from a high expense ratio, high fragmentation, high volatility, and a small capital base
• modest investments in preventive measures can often substantially mitigate the impact of natural hazards. A tighter fiscal policy during good times would leave more room for expenditure increases in emergencies.