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May 2015

Financial development can boost fiscal response after disasters: insurance more efficient than debt market development

Martin Melecky's picture

The frequency of natural hazards has increased over time. From 1970 to 2010, approximately 3.3 million people were killed (on average, 82,500 deaths per year), and the property damages exceeded US$2,300 billion, or 0.23% of the cumulative world output. After a disaster, governments should be able to respond fast with robust emergency relief aid as well as reconstruction. In fact, they should rebuild better. However, the average fiscal response after disasters across countries and time is close to zero (Melecky and Raddatz 2008, table 2). [1] This result can stem from very heterogeneous responses of countries, including due to the varying available fiscal space and ability of the private sector to respond alongside the government. In addition to good preparation, having available resources to respond after disasters is key, and financial development could help.