High Consumption Volatility : The Impact of Natural Disasters?

A history of repeated external and domestic shocks has made economic insecurity a major concern across the Caribbean region. Of particular concern to all households, especially the poorest segments of the population, is the exposure to shocks that are generated by catastrophic events or natural disasters. The author shows that despite high consumption growth, the Caribbean region suffers from a high volatility of consumption that decreases household welfare. After presenting some empirical evidence that consumption volatility is higher in the Caribbean region than in the rest of the world, he makes some empirically testable inferences that help explain consumption volatility. The author develops a conceptual framework for analyzing the effects of catastrophic events on household and aggregate welfare. According to this framework, the volatility of consumption comes from production shocks that are transformed into consumption shocks mostly because of underdeveloped or ineffective risk-management mechanisms. Auffret conducts an empirical analysis of the impact of catastrophic events on 16 countries (6 from the Caribbean region and 10 from Latin America) from 1970-99 and shows that catastrophic events lead to: 1) A substantial decline in the growth of output. 2) A substantial decline in the growth of investment. 3) A more moderate decline in consumption growth (most of the decline is in private consumption, while public consumption declines moderately. 4) A worsening of the current account of the balance of payments.

Bibliographic Details

Main Author:	Auffret, Philippe
Language:	English en_US
Published:	World Bank, Washington, DC 2003-01
Subjects:	AGRICULTURAL PRODUCTION, AGRICULTURE, ARABLE LAND, AVERAGE CONSUMPTION, AVERAGE GROWTH, BALANCE OF PAYMENTS, CONCEPTUAL FRAMEWORK, CONSUMPTION GROWTH, CONSUMPTION PER CAPITA, CONSUMPTION SMOOTHING, CONSUMPTION VOLATILITY, COUNTRY SIZE, DAMAGES, DEPENDENT VARIABLE, DEVELOPED COUNTRIES, DEVELOPED ECONOMIES, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, ECONOMIC LOSS, ECONOMIC POLICY, ECONOMIC SECTORS, ECONOMIC THEORY, ECONOMIC WELFARE, ECONOMIES OF SCALE, EMPIRICAL EVIDENCE, EQUILIBRIUM, EXOGENOUS VARIABLES, EXPECTED UTILITY, EXPLANATORY VARIABLE, EXPLANATORY VARIABLES, EXPORTS, EXTERNAL SHOCKS, FARMS, FINANCIAL DEPTH, FINANCIAL MARKETS, FISCAL POLICY, FOOD CONSUMPTION, GDP, GENERAL EQUILIBRIUM MODEL, GROWTH RATES, HISTORICAL DATA, HUMAN CAPITAL, IMPORTS, INCOME, INDUSTRIAL ECONOMIES, INFLATION, INFLATION RATE, INSURANCE, INSURANCE MARKETS, INSURANCE PREMIUMS, INVERSE RELATIONSHIP, M2, MACROECONOMIC POLICIES, MACROECONOMIC VARIABLES, NEGATIVE EFFECT, NEGATIVE IMPACT, NET EXPORTS, NORMAL DISTRIBUTION, 0 HYPOTHESIS, PER CAPITA CONSUMPTION, PER CAPITA CONSUMPTION GROWTH, PER CAPITA INCOME, POLICY RESEARCH, POSITIVE ROLE, PRECIPITATION, PRIVATE CONSUMPTION, PUBLIC CONSUMPTION, PUBLIC EXPENDITURES, PUBLIC GOODS, PUBLIC INVESTMENT, PUBLIC SECTOR, RISK AVERSION, RISK MANAGEMENT, SMALL BUSINESS, TAX REVENUES, TERMS OF TRADE, TOTAL CONSUMPTION, TRADE SHOCKS, UTILITY FUNCTION,
Online Access:	http://documents.worldbank.org/curated/en/2003/01/2128868/high-consumption-volatility-impact-natural-disasters https://hdl.handle.net/10986/19169
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