Coping with adversity: The macroeconomic management of natural disasters

Although the scientific evidence on whether natural disasters are becoming more frequent and more violent remains disputed, there is much less disagreement that the economic damage they inflict, in terms of the lost output and the forced migration this promotes, is large and rising. Using macroeconomic policy measures to mitigate these costs is therefore an increasingly important task in disasters-prone economies. The fundamental objective of post-disaster macroeconomic policy is to set key policy levers to return the economy to its pre-disaster path as quickly as possible without generating undue distortions elsewhere in the economy. We do not yet have a comprehensive and robust evaluation of the efficacy of macroeconomic policy responses to extreme events around the world. In the absence of such evidence, this paper draws on basic principles of macroeconomic management and evidence of best-practice experiences from the management of ‘conventional’ trade shocks, to outline key elements of a normative framework for the efficient macroeconomic response to devastating natural disasters. Given the relative scale of extreme events to the size of their economies and given their underlying vulnerability, these lessons are primarily of relevance to low-income countries.

► Increased concentration of human settlement and rising wealth increases the costs of natural disasters, in terms of the lost output and the forced migration.
► We draw lessons from economic theory and evidence for effective post-disaster macroeconomic policy, particularly for low-income countries.
► The central objective of policy is to return the economy to its pre-disaster path as quickly as possible at the lowest cost to the rest of the economy.
► The emergence of market-based insurance and mitigation instruments is an important development in disaster-preparedness.
► For low-income countries, quick-disbursing external finance will nonetheless continue to play a central role in efficient economic recovery.