Building Resilience to Natural Disasters : An Application to Small Developing States

We present a dynamic small open economy model to explore the macroeconomic impact ofnatural disasters. In addition to permanent damages to public and private capital, the disastercauses temporary losses of productivity, inefficiencies during the reconstruction process, anddamages to the sovereign's creditworthiness. We use the model to study the debt sustainabilityconcerns that arise from the need to rebuild public infrastructure over the medium term andanalyze the feasibility of ex ante policies, such as building adaptation infrastructure and fiscalbuffers, and contrast these policies with the post-disaster support provided by donors. Investingin resilient infrastructure may prove useful, in particular if it is viewed as complementary tostandard infrastructure, because it raises the marginal product of private capital, crowding inprivate investment, while helping withstand the impact of the natural disaster. In an applicationto Vanuatu, we find that donors should provide an additional 50% of pre-cyclone GDP in grantsto be spent over the following 15 years to ensure public debt remains sustainable followingCyclone Pam. Helping the government build resilience on the other hand, reduces the risk ofdebt distress and at lower cost for donors