Building Resilience in the Caribbean to Climate Change and Natural Disasters
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- Authors: INCI OTKER, KRISHNA SRINIVASAN
- Published: March 1, 2018
High vulnerability and historical losses
- Since 1950, 511 disasters worldwide have hit small states (developing economies with populations of less than 1.5 million); of these, 324 were in the Caribbean.
- Human impact: 250,000 people killed and more than 24 million affected through injury and loss of homes and livelihoods.
- Disaster-damage ratios:
- Average estimated disaster damage as a ratio to GDP was 4.5 times greater for small states than for larger ones.
- Six times higher for countries in the Caribbean (relative to larger states).
- Likelihood of disasters:
- The region is seven times more likely to be hit by natural disasters than larger states.
- Twice as likely as other small states to be hit by natural disasters.
- Aggregate economic cost for the Caribbean: exceeding $22 billion (in constant 2009 dollars) between 1950 and 2016, compared with $58 billion for similar disasters globally.
- Country-level impacts:
- Hurricane Maria estimated to have cost Dominica 225 percent of its GDP.
- Hurricane damage for Grenada in 2004 was 200 percent of GDP.
Economic channels and macroeconomic consequences
- Disasters destroy physical and human capital, infrastructure, and property; rebuilding provides a temporary boost but indirect effects can undermine investment, growth, and macroeconomic performance.
- Fiscal and external impacts (analysis of 12 Caribbean countries with the largest damage costs relative to GDP since 1950):
- Most countries experienced reduced growth in the year of a disaster, with recovery in the subsequent year.
- Fiscal deficits increased in 7 of 12 countries.
- Current accounts deteriorated in affected episodes.
- Debt-to-GDP ratios surged; in some countries debt continued to rise, interrupting efforts to sustain growth and improve public finances.
- Climate change will likely increase frequency and severity of disasters, exacerbate threats to agriculture and coastal areas, and increase risks of water and food insecurity and migration.
Prevention, preparedness, and risk management tools
- Prevention and preparedness are generally more cost-effective than post-disaster response; recommended measures include:
- Assess likelihood and potential impact of disaster and climate-change risks and integrate them into policy frameworks.
- Initiate information campaigns and early warning systems.
- Invest in disaster-resilient infrastructure and enforce land-use, zoning, and building standards.
- Risk-financing instruments to reduce fiscal exposure and improve response capacity:
- Self-insurance: build fiscal cushions and use fiscal rules to sustain buffers.
- Insurance and hedging: pool risk for moderate disasters to protect public and private sectors and expand access to financing for resilience infrastructure.
- Innovative risk-sharing:
- Parametric insurance: payouts based on disaster nature to bypass on-site loss assessment and provide quick relief.
- Risk pooling: share insurance costs regionally (example cited: Caribbean Catastrophe Risk Insurance Facility).
- Catastrophe bonds (cat bonds): transfer risk to markets in exchange for regular coupon payments; allow issuer to forgo principal repayment after a major disaster.
- Contingent lines of credit: prearranged financing (examples: World Bank Catastrophe Draw-Down Option) for immediate access after a state of emergency.
Constraints and gaps in implementation
- Chronic underinvestment in risk reduction and prevention due to:
- Limited funds and complex eligibility and disbursement criteria.
- Information gaps and low administrative capacity to design coherent access plans.
- Low insurance coverage driven by high cost, shallow financial markets, limited competition, or contractual exclusions.
- Example: In Belize and Grenada, insurance covered only 4.5 percent of the total damage in a recent large disaster.
- Limited payouts from existing pooled instruments because countries cannot afford higher coverage.
- Small and shallow cat bond market, making cat bonds expensive for single countries.
- Low uptake of contingent credit lines in the Caribbean (cited reasons: cost and stigma associated with borrowing).
- Middle- and high-income status of many Caribbean countries limits eligibility for concessional financing; financing facility limits are typically low relative to massive damages.
Policy recommendations and international support
- Priorities for national policymakers:
- Explicitly assess and integrate disaster and climate-change risks into policy frameworks.
- Invest in preparedness: early warning systems, resilient infrastructure, land-use and building standards.
- Build fiscal buffers and adopt fiscal rules to support self-insurance.
- Deepen and develop financial markets to enable risk pooling, insurance expansion, and access to infrastructure financing.
- Regional and international measures:
- Strengthen the Caribbean Catastrophe Risk Insurance Facility to broaden its capital base and membership and lower insurance premiums.
- Link insurance premiums to preparedness actions (reward countries that invest in risk reduction).
- Expand technical assistance to build capacity for risk assessment, market development for insurance and hedging, access to financing for preparation, and economic diversification.
- Guiding principle: Disaster financing should reduce vulnerability and build resilience while rewarding efforts to prepare and reduce risk, avoiding exacerbation of the cycle of high debt and low growth.
Building Resilience in the Caribbean to Climate Change and Natural Disasters — F&D Magazine, March 2018. Authors: İnci Ötker and Krishna Srinivasan.
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