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

IMF Working Papers, March 8, 2019

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

Resilience 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 St. Lucia’s economy, the paper shows that both strategies considerably reduce the output loss from natural disasters and studies the conditions under which each strategy provides the best protection.
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.

Both financial protection and structural protection considerably reduce output loss from natural disasters.
Structural protection typically yields a larger payoff due to its direct effect in reducing disaster costs.
Financial protection outperforms structural protection under binding liquidity constraints that delay rebuilding of public capital.
The trade-off between the two strategies is very sensitive to the efficiency of public investment.

A dynamic general equilibrium model calibrated to St. Lucia’s economy is used to evaluate outcomes.
The model compares policy strategies emphasizing:
- Financial protection (insurance and self-insurance).
- Structural protection (investment in adaptation and public capital).
Scenarios examine the presence and absence of liquidity constraints affecting the government’s capacity to promptly rebuild public capital.

Prioritize structural protection (investment in adaptation) when public investment can be executed efficiently, given its typically larger payoff in reducing disaster costs.
Pursue financial protection (insurance and self-insurance) when liquidity constraints impede rapid reconstruction of public capital, as financial instruments can provide superior immediate protection in such circumstances.
Strengthen the efficiency of public investment to shift the trade-off in favor of structural protection and enhance the overall resilience strategy.

adaptation capital, Caribbean, Climate Change, debt data, ECCU debt target, Government Policy, investment, Natural disasters, Natural Disasters and Their Management, public capital, Public investment and public-private partnerships (PPP), Public investment spending, resilient capital, risk premium, Stocks, targeted debt reduction, WP

Policy Trade-Offs in Building Resilience to Natural Disasters: The Case of St. Lucia (IMF Working Paper No. 2019/054, March 8, 2019).