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A climate resilience strategy for the Caribbean (commentary)

By Alejandro Werner and Krishna Srinivasan

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An aerial view of the damage caused by Hurricane Maria in Dominica (File Photo)

WASHINGTON, Feb 9, CMC – The back-to-back category 5 hurricanes that led to heart wrenching human suffering and damages is clear evidence that the Caribbean is becoming increasingly vulnerable to natural disasters.

The economic impact of disasters in the Caribbean is magnified by the small size of these island economies. Take, for example, the devastation caused by Hurricane Katrina in the United States in 2004. With damages and losses estimated at US$160 billion, it accounted for only about one per cent of the United States’ gross domestic product (GDP). By contrast, the damages inflicted on Dominica by Hurricane Maria in 2017 exceeded 200 per cent of the island’s GDP.

With the frequency and intensity of disasters only expected to rise, time is of the essence for countries in the Caribbean to build resilience to natural disasters and climate change.

What do we mean by resilience? Building resilience is essentially based on three pillars: (i) structural resilience, including through resilient physical and social infrastructure; (ii) financial resilience, including through insurance; and (iii) emergency response.

Caribbean countries have made important efforts in building capacity to undertake emergency response following disasters. Similarly, the creation of the Caribbean Catastrophe Risk Insurance Facility in 2007 has improved their ability to protect themselves financially at a reasonable cost, although Caribbean countries still remain significantly underinsured against the risks of natural disasters.

But where these countries fall significantly short is with regard to structural resilience, also referred to as “climate change adaptation”, notably the resilience of public infrastructure (such as stronger bridges) and key economic sectors to natural disasters and climate change.

Investment in adaptation and early warning systems, which increase preparedness and help reduce damages, has taken a back seat to other urgent social and development needs. The economics is, however, crystal clear. Not only is a resilient economy less affected by natural disasters, it is also more dynamic, as it incentivizes greater private investment, reduces outward migration, increases output, and, eventually, lowers the need for financial protection and the costs associated with it.

What prevents Caribbean countries from investing more in resilience? Most countries in the region have inadequate fiscal resources and high public debt, while private financing is constrained by low profitability. At the same time, financing by the international community has focused largely on mitigation and recovery from disasters, with resources for adaptation to climate change falling well short of the needs.

Further, demanding administrative requirements and low capacity pose formidable obstacles in the ability of small island economies to secure financing from climate funds for resilient investment.

Finally, political economy angle also poses a challenge as upfront costs for resilience investment are met typically with long-term payoffs. All these factors combine to create a vicious cycle in which inadequate preparedness for natural disasters and weak fiscal performance reinforce each other.

It is against this backdrop that, in the context of a recent high-level conference on building resilience in the Caribbean hosted by the International Monetary Fund (IMF), World Bank, and the Inter-American Development Bank, the Managing Director of the IMF, Christine Lagarde, called for a “shift in paradigm”, aimed at placing greater emphasis on investing in ex-ante resilience to natural disasters, supported by an alliance of key stakeholders.

How would this approach work in practice? At the center of this approach is a Climate Resilience Strategy, elaborated by Caribbean countries, with inputs from stakeholders. Countries would be expected to develop well-designed and fully costed strategies to build disaster resilience, involving priority projects for investment in adaptation and appropriate insurance and self-insurance.

The strategy would be based on a sustainable medium-term macroeconomic framework, with countries doing their part to get their fiscal houses in order. Explicitly integrating both the upfront costs of investment in ex ante resilience and its longer-term benefits in a sustainable macroeconomic framework should help catalyze financing from the international community.

Multilateral institutions, including the IMF, and regional development banks could support such an initiative by helping countries design resilience strategies and assess the consistency of these plans with macroeconomic stability and fiscal sustainability, provide financing, in line with their respective mandates, and help to build capacity specifically targeting areas critical for resilience building.

Strong resilience strategies and credible macroeconomic frameworks should, in turn, help gain the support of donors. And finally, this should also catalyze financing from climate funds, as the endorsement provided by international financial institutions on resilience building and macroeconomic policies could be used by them as a screening device to simplify some of their administrative requirements.

The Caribbean’s vulnerability to natural disasters shows that preparedness is key and no longer a matter of choice. Action is needed now. The strategy elaborated above can go a long way in helping the Caribbean countries build resilience and address a key obstacle that continues to undermine their growth and development prospects.

The IMF remains, as always, an important partner in helping Caribbean countries address the challenge of building resilience.

* Alejandro Werner is the Director of the IMF Western Hemisphere Department, and his deputy is Krishna Srinavasan.

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