By Tao Zhang
Small states are far more vulnerable than other countries to natural disasters and climate change. On average, the annual cost of disasters for small states (economies with a population of less than 1.5 million) is more than four times that for larger countries, in relation to GDP. These countries—whether landlocked nations or small island states—need a range of approaches to deal with catastrophe, including not only better disaster response but also more focus on risk reduction and preparedness.
In a new study, we look at the special challenges of small countries and show what countries and the international community can do to help prepare for disasters and cope once they strike.
Exposed to the elements
Visiting Fiji and Vanuatu on a recent trip to Asia, I was struck by the enormous size of the destruction the storms had caused, and the huge impact on their economies. What makes them so exposed?
Many small states are located in high risk locations—zones subject to hurricanes, cyclones, and earthquakes. For example, in the Pacific, Vanuatu, which I just visited, experienced a devastating cyclone in 2015, while Samoa was similarly affected in 2013. And the Caribbean, Dominica, St. Lucia, and St. Vincent and the Grenadines have all seen major storm damage since 2010.
For a country with a large land area, a disaster can severely impact one region, but leave large parts of the economy untouched.
But, when a small island is hit by a cyclone, virtually all of its crops, housing, and other infrastructure can be destroyed. This magnifies the size of the disaster relative to the size of the economy and its resources. Administrative capacity is also an issue in small countries, which tend to have less income and fewer public employees for risk management programs.
Moreover, three out of four small states are islands or widely dispersed multi-island states. These small island economies are highly vulnerable to the rising sea levels associated with climate change.
These vulnerabilities entail significant costs, our analysis finds.
Nearly one in ten disasters causes damage amounting to more than 30 percent of GDP, compared to fewer than one in a hundred for larger states. The average annual cost of disasters for small states is nearly 2 percent of GDP. This greater exposure to natural disasters inevitably worsens public finances, reduces investment and growth prospects, and increases poverty.
To make matters worse, one-third of small states will be highly vulnerable to climate change within a generation. And these countries typically do not have the resources to invest in the costly projects needed to help them adapt to climate change.
How can governments mitigate the effects of natural disasters?
Countries can take a number of proactive steps to reduce the human and economic cost of natural disasters. These include identifying and quantifying key aspects that make them vulnerable, and then investing in risk reduction infrastructure and projects. They should develop contingency action plans and financing arrangements for risks they cannot avoid.
The IMF can help countries with the economic aspects of disaster risk management. For example, to design frameworks for managing the budget, public investments, and public borrowing. We can also share best practices and build policymakers’ capacity in these areas. I saw firsthand in Suva, Fiji, the work our Pacific Financial Technical Assistance Center is already doing in this area.
But it is impossible to avoid risk entirely, so when disaster strikes, countries have recourse to IMF financing. Our Rapid Credit Facility and Rapid Financing Instrument, which small states have already used, provide quick access to financing following disasters. Vanuatu tapped these funds in 2015 following Cyclone Pam, for example, and Samoa borrowed from both (in 2009 after an earthquake and tsunami and in 2013 after a cyclone). Other small states, such as Dominica, have done so on multiple occasions (four times over the period 2008-2015).
We are looking to further strengthen our support to small states through these financing instruments. But current annual borrowing limits for these facilities are small in relation to the disasters these countries can potentially face. That’s why our Executive Board recently indicated that it would consider higher access limits for countries subject to particularly large disasters starting in early 2017.
We can also work with small states as they contribute to confronting climate change under the Paris Agreement. Macroeconomic policies can play an important role in national plans for mitigating carbon emissions through carbon taxation and energy subsidy reforms. They can also help the process of adjusting to climate change by efficiently managing costly public risk reduction investments. On a pilot basis, the IMF is ready to conduct assessments of the macroeconomic aspects of climate change policies of small states. These assessments could help showcase small states’ policy efforts and improve their access to global climate funding.
We also will continue to communicate and collaborate closely with the World Bank and other organizations with critical expertise on natural disasters and climate change that can complement our macroeconomic engagement.
Given the utter unpredictability of natural disasters, the IMF is committed to be agile in its response to the members’ changing needs.
Filed under: climate change, developing countries, Economic research, Financing, IMF, International Monetary Fund, Investment, natural disasters, Public debt | Tagged: Climate change, developing countries, IMF, IMF lending, iMFdirect blog, natural disasters, Paris agreement, public spending, small states, technical assistance |