Natural disasters and the effects of reconstruction expenditure on output

Using a panel of 116 advanced, emerging market, and developing economies over 1990–2022, we examine the immediate impact of natural disasters on economic activity and public finances, and the medium-term effects of post-disaster reconstruction through public spending. Natural disasters significantly reduce output and worsen fiscal balances, with extreme events causing larger losses than major disasters. Employing a panel local-projection approach combined with instrumental variables and robustness checks, we find that reconstruction spending can effectively promote medium-term growth. Specifically, a 1 % increase in real cyclically adjusted government expenditure after an extreme disaster raises real output by about 2.5 % five years later. The positive effects are stronger in countries with lower public debt, lower trade openness, higher financial development, fixed exchange-rate regimes, and in emerging markets rather than advanced or least developed economies. Effects are also larger in countries with higher old-age dependency ratios and lower reliance on agriculture or tourism.