The impact of tropical storms on the accumulation and composition of government debt
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The impact of tropical storms on the accumulation and composition of government debt Preeya Mohan1 · Eric Strobl2
© The Author(s) 2020
Abstract This paper investigates the impact of tropical storms on government debt accumulation and decomposition. To this end, we combine quarterly debt data and tropical storm loss data for the period 1993–2013 for the Eastern Caribbean. Our econometric results show that damaging storms cause debt to increase up to three quarters after the event, where this increase can be considerable for damaging enough storms. Much of this increase in debt is due to borrowing from foreign lenders by the central government. At the same time, there is also some shifting of the share of debt toward public corporations, although these tend to react more by financing from domestic sources. Keywords Tropical storms · Debt JEL Classification O17 · O44 · Q54
1 Introduction In the aftermath of a natural disaster, governments need immediate funds for reconstruction, cleanup, and emergency relief and aid in order to ensure a quick recovery. The political pressure to succeed in this regard may be even higher because governments are typically held accountable for any poor post-disaster management (Koetsier 2017; Cavallo and Noy 2009). However, the accompanying likely fall in production in the economy after such an event also induces reductions in government revenues (Melecky and Raddatz 2011), making even less funds available for * Eric Strobl [email protected] Preeya Mohan [email protected] 1
SALISES, University of the West Indies, St. Augustine, Trinidad and Tobago
2
Department of Economics, Oeschger Centre for Climate Change Research, University of Bern, Bern, Switzerland
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government expenditure. Although in the case of developing countries, which generally have little government savings and catastrophe risk insurance coverage, international aid often can help finance recovery activities. This money is, however, usually disbursed slowly, there is great uncertainty on the amount to be received, and the actual amount received is generally much lower than what is required (Melecky and Raddatz 2011; Borensztein et al. 2009). Many developing countries are thus forced to finance their increases in expenditure through domestic or foreign borrowing (Borensztein et al. 2009). The subsequent higher levels of debt and higher interest rates tend to lead to lower credit scores, resulting in higher budget deficits and causing debt to further increase, creating a vicious cycle which threatens debt sustainability (Koetsier 2017; Borensztein et al. 2009). Importantly in this regard, there is emerging evidence that high levels of debt negatively affect economic growth (Greenidge et al. 2010).1 The likelihood that government debt increases in developing countries after natural disasters is generally also supported by the empirical literature.2 For example, in a study of the macroeconomic impact of major natural disasters across 26 countries Albala-Bertrand
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