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

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Listed author(s):
  • Eduardo Borensztein
  • Eduardo A. Cavallo

    ()

  • Patricio Valenzuela

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 Belize’s 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 Belize’s 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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Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 2011.

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Date of creation: Aug 2008
Handle: RePEc:idb:wpaper:2011
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Find related papers by JEL classification:
  • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
  • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
  • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
  • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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  1. Matteo Bobba & Andrew Powell, 2006. "Multilateral Intermediation of Foreign Aid: What is the Trade-Off for Donor Countries?," IDB Publications (Working Papers) 1602, Inter-American Development Bank.
  2. Eduardo Borensztein & Olivier D Jeanne & Paolo Mauro & Jeronimo Zettelmeyer & Marcos d Chamon, 2005. "Sovereign Debt Structure for Crisis Prevention," IMF Occasional Papers 237, International Monetary Fund.
  3. Oya Celasun & Xavier Debrun & Jonathan D. Ostry, 2006. "Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A "Fan-Chart" Approach," IMF Staff Papers, Palgrave Macmillan, vol. 53(3), pages 1-3.
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  9. Hausmann, Ricardo & Klinger, Bailey, 2006. "Structural Transformation and Patterns of Comparative Advantage in the Product Space," Working Paper Series rwp06-041, Harvard University, John F. Kennedy School of Government.
  10. Arnott, Richard & Stiglitz, Joseph E, 1991. "Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring?," American Economic Review, American Economic Association, vol. 81(1), pages 179-190, March.
  11. 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.
  12. Robert J. Barro, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," The Quarterly Journal of Economics, Oxford University Press, vol. 121(3), pages 823-866.
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  14. Tobias N. Rasmussen, 2004. "Macroeconomic Implications of Natural Disasters in the Caribbean," IMF Working Papers 04/224, International Monetary Fund.
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  16. 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.
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Cited by:

  1. Céline Grislain-Letremy, 2013. "Natural Disters : Exposure and Underinsurance," Working Papers 2013-15, Centre de Recherche en Economie et Statistique.
  2. Ilan Noy & Christopher Edmonds, 2016. "The Economic and Fiscal Burdens of Disasters in the Pacific," CESifo Working Paper Series 6237, CESifo Group Munich.
  3. repec:kap:enreec:v:67:y:2017:i:1:d:10.1007_s10640-015-9977-y is not listed on IDEAS
  4. Noy, Ilan, 2012. "Natural disasters and economic policy for the Pacific Rim," Working Paper Series 2088, Victoria University of Wellington, School of Economics and Finance.
  5. Mohan, Preeya, 2017. "The economic impact of hurricanes on bananas: A case study of Dominica using synthetic control methods," Food Policy, Elsevier, vol. 68(C), pages 21-30.
  6. Eduardo Cavallo & Ilan Noy, 2009. "The Economics of Natural Disasters: A Survey," Research Department Publications 4649, Inter-American Development Bank, Research Department.
  7. repec:rss:jnljee:v3i2p5 is not listed on IDEAS
  8. Noy, Ilan & Vu, Tam Bang, 2010. "The economics of natural disasters in a developing country: The case of Vietnam," Journal of Asian Economics, Elsevier, vol. 21(4), pages 345-354, August.
  9. Rafael Novella & Claire Zanuso, 2015. "Reallocating Children’s Time: Coping Strategies after the 2010 Haiti Earthquake," Working Papers DT/2015/13, DIAL (Développement, Institutions et Mondialisation).
  10. C. Grislain-Letrémy, 2013. "Natural Disasters: Exposure and Underinsurance," Documents de Travail de la DESE - Working Papers of the DESE g2013-12, Institut National de la Statistique et des Etudes Economiques, DESE.
  11. Makena Coffman & Ilan Noy, 2009. "In the Eye of the Storm: Coping with Future Natural Disasters in Hawaii," Working Papers 200904, University of Hawaii at Manoa, Department of Economics.
  12. repec:dau:papers:123456789/13276 is not listed on IDEAS
  13. Eduardo Cavallo & Ilan Noy, 2010. "The Aftermath of Natural Disasters: Beyond Destruction," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(2), pages 25-35, 07.
  14. Makena Coffman & Ilan Noy, 2009. "A Hurricane’s Long-Term Economic Impact: the Case of Hawaii’s Iniki," Working Papers 200905, University of Hawaii at Manoa, Department of Economics.
  15. Klomp, Jeroen, 2017. "Flooded with debt," Journal of International Money and Finance, Elsevier, vol. 73(PA), pages 93-103.
  16. Leppänen, Simo & Solanko, Laura & Kosonen, Riitta, 2015. "Could climate change affect government expenditures? Early evidence from the Russian regions," BOFIT Discussion Papers 27/2015, Bank of Finland, Institute for Economies in Transition.
  17. Karim, Azreen & Noy, Ilan, 2015. "The (mis) allocation of public spending in a low income country: Evidence from disaster risk reduction spending in Bangladesh," Working Paper Series 4194, Victoria University of Wellington, School of Economics and Finance.
  18. Eduardo Cavallo & Ilan Noy, 2009. "The Economics of Natural Disasters: A Survey," Research Department Publications 4649, Inter-American Development Bank, Research Department.
  19. 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.
  20. 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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