How Natural Disasters Affect Public Finances

As the world faces more natural catastrophes, such as droughts, earthquakes and wild fires, a new working paper by Martin Melecky and Claudio Raddatz systematically gauges their impact on the global gross domestic product and government expenditures and revenues. 

Drawing on data covering annual government finances in high- and middle-income countries from 1975 to 2008, the authors find that natural disasters drive down output and increase deficits, especially in the poorest middle-income countries. Indeed, while on average government deficits go up only after climate-related disasters, all events push up deficits in these countries. 

A country's debt level at the onset of disaster doesn't appear to affect the fiscal impact of the disaster. Rather, it seems to indicate good access to credit. Countries with higher financial development suffer less from disasters, but their deficits expand further. 

By contrast, the availability of private insurance reduces the impact of natural disasters on GDP without causing an increase in government spending. Thus, insurance penetration seems to offer the best ex-post mitigation approach against real and fiscal consequences of disasters, although a complete evaluation should also consider the costs associated with different alternatives.

By World Bank Organization