Calamities, Debt, and Growth in Developing Countries

Public debt in developing economies rose at a fast clip during 2020–21, at least partly due tothe onset of the global Covid-19 pandemic. Nobel laureate Paul Krugman opined in early 2021 that “fighting covid islike fighting a war.” This paper argues that the Covid-19 pandemic shares many traits with natural disasters, exceptfor the global nature of the pandemic shock. This paper empirically examines trends in debt and economic growtharound the onset of three types of calamities, namely natural disasters, armed conflicts, and external-debtdistress in developing countries. The estimations provide quantitative estimates of differences in growth and debttrends in economies suffering episodes of calamities relative to the trends observed in economies notexperiencing calamities. The paper finds that debt and growth evolve quite differently depending on the type ofcalamity. The evidence indicates that public debt and output growth tend to rise faster after natural disasters than inthe counterfactual scenario without disasters, thus illustrating how debt-financed fiscal expansions can helpeconomic reconstruction. The findings are different for episodes of debt distress defined as periods of debtrestructuring, however. Economies experiencing debt distress are associated with growth trends that are on average belowthe growth rates of unaffected economies prior to and after the beginning of an episode of debt restructuring.