Fiscal impact of future earthquakes and country's economic resilience evaluation using the disaster deficit index

Abstract

The Disaster Deficit Index (DDI) measures disaster country risk from a macroeconomic and financial perspective, according to possible future catastrophic events. The DDI captures the relationship between the demand for contingent resources to cover the maximum probable losses and the public sector’s economic resilience; that is, the availability of internal and external funds for restoring affected inventories. For calculating potential losses, the model follows the insurance industry in establishing a probable loss, based on the critical impacts during a given period of exposure, and for the economic resilience the model computes the country’s financial ability to cope with the situation taking into account: the insurance and reinsurance payments; the reserve funds for disasters; the funds that may be received as aid and donations; the possible value of new taxes; the margin for budgetary reallocations; the feasible value of external credit; and the internal credit the country may obtain. Access to these resources has limitations and costs that must be taken into account as feasible values according to the macroeconomic and financial conditions. This paper presents the model of DDI and the results for fourteen countries of the Americas to design appropriate risk evaluation tools to guide the governmental decision making.