Recurring Natural Disasters and Macroeconomic Scarring: A Risk Adjusted DIGNAD Framework

Recurring climate-related natural disasters pose significant macroeconomic and fiscal risks for highly exposed countries. We extend the Debt, Investment, Growth, and Natural Disasters (DIGNAD) model to incorporate Annual Average Loss (AAL) metrics, capturing the cumulative macro-fiscal effects of repeated natural disaster shocks. The augmented DIGNAD framework introduces recurring annual capital losses and negative productivity shocks, yielding more realistic growth and public debt trajectories under persistent disaster risk. We quantify the GDP losses from recurrent natural disasters and examine the trade-offs between higher adaptation investment (leading to higher recovered growth) and public debt accumulation. Using cross-country simulations for 33 disaster-prone economies and case studies (the Philippines, Mauritania, and Barbados), we find substantial heterogeneity in disaster impacts and adaptation effectiveness. Comparing risk-adjusted baseline projections with scenarios of scaled-up resilient vs. standard infrastructure investment, we find that investing in resilient public capital can significantly mitigate output losses in the long-term, albeit at the cost of higher public debt.