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Building Resilience in Developing Countries Vulnerable to Large Natural Disasters

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EXECUTIVE SUMMARY

Focus and Motivation: Many developing countries are vulnerable to natural disasters that can have large human and economic costs: disaster risk management for these countries is a macro-critical challenge. In recent years, the IMF has been underscoring the macroeconomic risks of climate change and natural disasters for many countries (typically either small or poor), including their limited capacity to develop, finance, and implement a full disaster risk-management strategy. This paper discusses the components of such a strategy—drawing on consultations with other international organizations and on discussions at recent high-level conferences on building disaster resilience in the Caribbean and in the Pacific regions—and looks at how support for national resilience-building from international financial institutions (IFIs) and other development partners might be better coordinated.

A Roadmap for Resilience: The paper views disaster risk management through the lens of a three-pillar strategy for building structural, financial, and post-disaster resilience. Enhancing structural resilience requires infrastructure and other investments to limit the impact of disasters (Pillar I); building financial resilience involves creating fiscal buffers and using pre-arranged financial instruments to protect fiscal sustainability and manage recovery costs (Pillar II); and post-disaster (including social) resilience requires contingency planning and related investments ensuring a speedy response to a disaster (Pillar III). A full national disaster resilience strategy (DRS) requires actions on all three pillars, grounded on a clear diagnostic.

In many small or low-income countries, there is substantial underinvestment in building structural resilience, reflecting sizable up-front costs and limited fiscal space, as well as limited use of ex-ante financing instruments such as insurance, reflecting both cost concerns and underdeveloped markets. While steps are being taken in many countries to facilitate speedy recovery and reconstruction following a disaster, there is still substantial room to strengthen response mechanisms to improve post-disaster resilience. The benefits of investing in resilience building include lower expected losses from disasters, higher returns to private investment, improved employment and output performance, and better continuity in public services after a disaster.

International financial institutions and other development partners offer various forms of support to disaster-vulnerable countries, but many countries have limited capacity to take full advantage of such support, which can be fragmented and poorly coordinated across providers. This paper argues that a fleshed out nationally-owned DRS could act as the anchor or platform for coordinated support from development partners, which would be needed both to develop and implement the DRS. Such a strategy, if endorsed by the various stakeholders, including Fund endorsement of the associated macroeconomic framework, could also have a strong catalytic effect in mobilizing concessional donor support.

IMF Role: Within its mandate, the Fund can play a valuable role in supporting resilience building in disaster-vulnerable countries. In particular, Fund surveillance can analyze the macroeconomic impact of disasters and of resilience-building; Fund arrangements could be used to support implementation of a DRS, including providing financing to address associated balance of payments problems; and targeted capacity-building support in areas of Fund expertise can help strengthen national capacity. The Fund, collaborating with the World Bank and others, can also bring together stakeholders—private insurers, governments, donors, climate funds—to tackle issues such as impediments to market-based risk transfer (e.g., exploring the financial viability of debt instruments with disaster clauses) or better connecting small states with the climate funds.