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Debt Sustainability under Catastrophic Risk: The Case for Government Budget Insurance

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  • Eduardo A. Cavallo
  • Patricio Valenzuela
  • Eduardo Borensztein

Abstract

Natural disasters are an important source of vulnerability in the Caribbean region. Despite being one of the more disaster-prone areas of the world, it has the lowest levels of insurance coverage. This paper examines the vulnerability of Belizes public finance to the occurrence of hurricanes and the potential impact of insurance instruments in reducing that vulnerability. The paper finds that catastrophic risk insurance significantly improves Belizes debt sustainability. In addition, the methodology employed makes it possible to estimate the appropriate level of insurance, which for the case of Belize is a maximum coverage of US$120 million per year. International organizations can play a role in assisting countries to overcome distortions in insurance markets, as well as in helping to relax internal political resistance to the purchase of insurance policies.

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Bibliographic Info

Paper provided by Inter-American Development Bank in its series IDB Publications with number 6847.

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Date of creation: Jun 2007
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Handle: RePEc:idb:brikps:6847

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Keywords: Disasters; Economics; WP-607;

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  1. Ricardo Hausmann & Jason Hwang & Dani Rodrik, 2005. "What You Export Matters," NBER Working Papers 11905, National Bureau of Economic Research, Inc.
  2. Eduardo Borensztein & Olivier Jeanne & Paolo Mauro & Jeromin Zettelmeyer & Marcos Chamon, 2005. "Sovereign Debt Structure for Crisis Prevention," IMF Occasional Papers 237, International Monetary Fund.
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  6. Oya Celasun & Xavier Debrun & Jonathan David Ostry, 2006. "Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries," IMF Working Papers 06/67, International Monetary Fund.
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  10. Arnott, Richard & Stiglitz, Joseph E, 1991. "Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring?," American Economic Review, American Economic Association, American Economic Association, vol. 81(1), pages 179-90, March.
  11. Hausmann, Ricardo & Klinger, Bailey, 2006. "Structural Transformation and Patterns of Comparative Advantage in the Product Space," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp06-041, Harvard University, John F. Kennedy School of Government.
  12. Michael Keen & Paul K. Freeman & Muthukumara Mani, 2003. "Dealing with Increased Risk of Natural Disasters," IMF Working Papers 03/197, International Monetary Fund.
  13. Matteo Bobba & Andrew Powell, 2006. "Multilateral Intermediation of Foreign Aid: What is the Trade-Off for Donor Countries?," IDB Publications 6728, Inter-American Development Bank.
  14. Marcio Garcia & Roberto Rigobon, 2004. "A Risk Management Approach to Emerging Market's Sovereign Debt Sustainability with an Application to Brazilian Data," NBER Working Papers 10336, National Bureau of Economic Research, Inc.
  15. Patrinos, Harry Anthony & Ridao-Cano, Cris & Sakellariou, Chris, 2006. "Estimating the returns to education : accounting for heterogeneity in ability," Policy Research Working Paper Series 4040, The World Bank.
  16. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
  17. Tobias N. Rasmussen, 2004. "Macroeconomic Implications of Natural Disasters in the Caribbean," IMF Working Papers 04/224, International Monetary Fund.
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Citations

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Cited by:
  1. Eduardo Cavallo & Ilan Noy, 2009. "The Economics of Natural Disasters - A Survey," Working Papers, University of Hawaii at Manoa, Department of Economics 200919, University of Hawaii at Manoa, Department of Economics.
  2. Makena Coffman & Ilan Noy, 2009. "A Hurricane’s Long-Term Economic Impact: the Case of Hawaii’s Iniki," Working Papers, University of Hawaii at Manoa, Department of Economics 200905, University of Hawaii at Manoa, Department of Economics.
  3. Ilan Noy, 2012. "Natural Disasters and Economic Policy for the Pacific Rim," Working Papers, University of Hawaii at Manoa, Department of Economics 201201, University of Hawaii at Manoa, Department of Economics.
  4. Noy, Ilan & Vu, Tam Bang, 2010. "The economics of natural disasters in a developing country: The case of Vietnam," Journal of Asian Economics, Elsevier, Elsevier, vol. 21(4), pages 345-354, August.
  5. Céline Grislain-Letremy, 2013. "Natural Disters : Exposure and Underinsurance," Working Papers, Centre de Recherche en Economie et Statistique 2013-15, Centre de Recherche en Economie et Statistique.
  6. Makena Coffman & Ilan Noy, 2009. "In the Eye of the Storm: Coping with Future Natural Disasters in Hawaii," Working Papers, University of Hawaii at Manoa, Department of Economics 200904, University of Hawaii at Manoa, Department of Economics.
  7. C. Grislain-Letrémy, 2013. "Natural Disasters: Exposure and Underinsurance," Documents de Travail de la DESE - Working Papers of the DESE, Institut National de la Statistique et des Etudes Economiques, DESE g2013-12, Institut National de la Statistique et des Etudes Economiques, DESE.
  8. John Pollner, 2012. "Financial and Fiscal Instruments for Catastrophe Risk Management : Addressing Losses from Flood Hazards in Central Europe," World Bank Publications, The World Bank, number 9381, August.
  9. Grislain-Letrémy, Céline, 2013. "Natural Disasters: Exposure and Underinsurance," Economics Papers from University Paris Dauphine 123456789/13276, Paris Dauphine University.
  10. Eduardo Cavallo & Ilan Noy, 2010. "The Aftermath of Natural Disasters: Beyond Destruction," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 11(2), pages 25-35, 07.
  11. Ugo Panizza, 2008. "The External Debt Contentious Six Years after the Monterrey Consensus," G-24 Discussion Papers 51, United Nations Conference on Trade and Development.

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