Policy Trade-Offs in Building Resilience to Natural Disasters: The Case of St. Lucia

Abstract

Resilience to climate change and natural disasters hinges on two fundamental elements: financial protection-insurance and self-insurance-and structural protection-investment in adaptation. Using a dynamic general equilibrium model calibrated to the St. Lucia's economy, this paper shows that both strategies considerably reduce the output loss from natural disasters and studies the conditions under which each of the two strategies provides the best protection. While structural protection normally delivers a larger payoff because of its direct dampening effect on the cost of disasters, financial protection is superior when liquidity constraints limit the ability of the government to rebuild public capital promptly. The estimated trade-off is very sensitive to the efficiency of public investment.

Adapting to Climate Change in Vietnam: Insights from a Structural Model

“…Public Financial Management (PFM) reforms are modeled as a higher return and efficiency of public investment. Similar results are reported in Cantelmo et al (2019). The results suggest that gains to growth and debt dynamics increase gradually and are fully realized over time.…”

“…As argued in Marto et al (2018) and IMF (2018) natural disasters can influence the economy through permanent damages to public and private infrastructure, temporary losses of productivity; and increased inefficiencies in public investment during the reconstruction process. 3 Cantelmo, Leo, Giovanni, and Gonzalo (2019) extend Marto et al (2018) framework to model natural disasters as continuous shocks rather than one-time events.…”

“…The scenarios for illustrative purposes are: (i) a "baseline" no change scenario where public infrastructure is not increased beyond its initial starting point; (ii) a "standard" scenario with gradual 4 scaling up of additional standard infrastructure of 0.2 percent of GDP a year for five years; and (iii) an "adaptation" scenario with similar gradual spending profile over five years, but 30 percent more expensive (an average of additional costs of upgrading and retrofitting adaptation projects which can be 15 and 50 percent more costly, respectively, as in IMF (2020b)). 5 Cantelmo et al (2019) also assume that investing in resilient infrastructure is more expensive. The impact of additional investments on growth critically depends on both the marginal product of effective public capital and public investment efficiency.…”

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“…Article IV reports which show at least ten references to 'climate change', 'climatic', 'climate risk' and/or 'climate-related' or provide at least one whole paragraph, box or section on the topic are categorised as making "substantial reference" to climate change. All others are categorised as making "some reference" to 5 A few country studies on climate-related risks were conducted outside of Article IV consultations, including an analysis of enhancing resilience to natural disasters in St. Lucia (Cantelmo et al 2019) and an analysis of transition risks in Norway (Grippa and Mann 2020). Some reference Substantial reference climate change.…”

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“…However, users are encouraged to evaluate the realism of the assumptions used in this framework. See for an application of the DIGNAD modelCantelmo et al (2019).©International Monetary Fund. Not for Redistribution…”