Natural Disasters and Human Development in Asia-Pacific: The Role of External Debt

The average country in Asia-Pacific experiences more natural disasters than the average country of other developing regions. This paper presents stylized facts on natural disasters, human development, and external debt in Asia-Pacific. The paper also contains estimates of the effects that natural disasters have on human development. Controlling for country and time fixed effects, dynamic panel model estimates show that external debt has a mitigating effect on the adverse impacts that natural disasters have on human development: In countries with low external debt-to-GDP ratios, natural disasters significantly decrease the human development index; but not so in countries with high external debt-to-GDP ratios. External debt (i.e. borrowing from abroad) is a financial contract for obtaining resources from abroad (i.e. imports of goods and services). When a country experiencing a natural disaster borrows from abroad to increase imports of goods and services, the population suffers less when a natural disaster strikes. Natural disasters destroy goods and capital (e.g. food, machinery, buildings, and roads) in the country in which they occur. If imports of goods and services do not increase, then the population has less goods and services to consume following a natural disaster. By increasing imports, which are mirrored on the financial side by an increase in external debt, the population of a country that was struck by a natural disaster can smooth consumption. As the incidence of natural disasters increases globally, a policy recommendation for disaster-prone countries, supported by the empirical results of this paper, is the need for deeper and innovative mechanisms of access to international financing, including reforms in both domestic and international financial systems.