Economic Impacts of Natural Disasters on Pacific Island Countries

Introduction

Natural disaster frequently disrupts economic and social development in Pacific Island countries (PICs). Over two decades, there has been an increase in the number as well as the intensity of such occurrences and it is the developing states that are bearing the full brunt of these events. Consequently, after a natural disaster, the developing states suffer economically, socially and environmentally thus enhancing the apparent inequality amongst the ‘rich’ and the ‘poor’.

The Pacific Islands are classified as Small Islands Developing States (SIDS)[1]. The island nations are also known as Small Islands Developing States (SIDS) and are located on the southern hemisphere surrounded by the Pacific Ocean. The Island nations have unique social, economic and environmental attributes. The remoteness of the Island states combined with their size, limited resources and geographic spread provides a narrow economic base imposing additional outlays to trade and transportation. The Pacific Island nations are exposed to external shocks and this has been compounded significantly by recent natural disaster events. Excessive exposure to disasters has eminent macroeconomic impacts on small island nations. (Lee, Zhang and Nguyen 2018) revealed that SIDS suffer from a lower level of investments, and lower Gross Domestic Product (GDP) per capita after a natural disaster. In addition, the study argued that disasters also result in a higher debt to GDP ratio, elevated poverty, and an unstable revenue base.

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While there are many forms of natural disaster that occur in the Pacific, this paper will discuss the economic impacts of a tropical cyclone (TC) and explore findings of past models that focused on the economic analyses of these naturally occurring events. This paper is based on analyses from Vanuatu, Fiji, and Tonga. All three island nations were struck with a category 5 tropical cyclones between 2015 and 2018.

Impacts of a Tropical Cyclone on;

1.0 Gross Domestic Product

Damages caused by a category 5 tropical cyclone are in the form of strong winds, flooding and storm surges. The strong winds can directly cause extensive damages to infrastructures and agricultural produce. In addition, cyclones are associated with heavy rains which results in widespread flooding, especially to low lying areas. Ultimately, the strong winds can also result in storm surges in coastal areas resulting in inland flooding of waves that rise as high as 10 feet.

The three island economies were experiencing robust economic growth before the cyclone with an average of 2 to 3 percent growth in the past 5 years. The TCs made landfall in Vanuatu, Fiji, and Tonga in 2015, 2016 and 2018 respectively causing widespread destruction in the urban, rural and maritime areas. For Vanuatu, the estimated economic value of the damages caused by TC Pam was around US$449.4 million and this accounted for approximately 64.1 percent of Vanuatu’s GDP (Vanuatu 2015). For Fiji, the estimated economic value of the destruction was around US$0.9 billion and is around 29.1 percent of GDP (Fiji 2016). The estimated value of damages in Tonga was approximately US$164.1 million and is estimated to be 29.1 percent of GDP (Tonga 2018). The indicator above is self-explanatory, and it is an indication of the scale of the impacts. During the years of the tropical cyclones, Vanuatu and Fiji’s economic growth were -0.8 percent and 0.4 respectively compared to a more robust growth of 2.4 percent and 3.8 in the preceding year. Tonga’s expected growth is projected to slow from around 3.0 percent in 2017 to a mere 0.3 percent for 2018[2].

(McKenzie, Prasad and Kaloumaira 2005) conducted a study on the effects of natural disasters in the Pacific. The analysis stated that natural disasters are the main “exogenous shocks to the Fiji economy” which disrupts economic growth. A similar study by (Benson 1997) who also posits that natural disasters actually lowers economic growth. The study used multiple regression analysis to evaluate the impacts of natural disasters on economic growth.

2.0 Trade Balance and Productivity

Trade balance and productivity are additional economic attributes that deteriorate after an event of a natural disaster. Agricultural-based exports are usually affected causing disruption to exports. The pre-disaster outlook for Fiji’s export market was anticipating a 17 percent growth however in the aftermath of TC Winston, exports declined by 1.2 percent (Fiji 2016) driven by the weakening agricultural produce namely sugar, kava, coconut oil, and taro exports. On the other hand, there was an expected upsurge in imports. Growth in imports was driven by the procurement of construction materials from abroad to meet the urgent needs for reconstruction and maintenance efforts. The high level of imports elevated the trade deficit as a percentage of GDP from 27.3 percent to around 32.4 percent (Fiji 2016).

For Tonga, in the short to medium term, imports of reconstruction needs are expected to be on the rise as well including food products due to the shortages of locally produced agricultural goods. In addition, outlays of foreign aid in the form of grants and loans can be used to acquire resources to restore economic progress. Given that it is a small economy, the level of foreign currency needed into the economy was not met by the remittance flow and increased foreign aid thus, imposed added pressure on the balance of payments for the economy.

For Vanuatu, (Marto, Papageorgiou and Klyuev 2017) introduced a small dynamic open economy model to study the macroeconomic shocks caused by natural disasters. The study showed that loss of productivity inevitably followed in the aftermath of a natural disaster. The paper further contends that due to the inefficiency in the reconstruction phase, the Vanuatu Government and the private sector was expected to continue to enhance the reconstruction budget. The findings of the paper reiterate the importance of foreign aid (grant and concessional loans) and disaster-resilient investment to small island developing states.

3.0 Fiscal Balance

In addition to the slowdown in economic growth, natural disasters do have direct shocks on an economy’s fiscal balance. In the aftermath of natural disasters, authorities tend to increase government spending to promote a quick recovery. The government is anticipated to encounter a decline in revenue due to the lower level of growth. An IMF study on the impacts of natural disasters revealed that in the short run, natural disasters reduce economic growth along with the weakening fiscal position (Cabezon, et al. 2015). Despite the negative effect, the fiscal position is usually offset by grants received from the international community through bilateral and multilateral partners.

Conclusion

The PICs have become resilient to natural disasters given the regularity of its occurrences. A profound factor that the PICs need to develop is the fiscal buoyancy to natural disasters. This paper has discussed the extent of damages caused by recent natural disasters and how it has negatively impacted growth for all the understudied economies. Therefore, in the effort to minimise the impact of natural disasters, Governments in the Pacific must develop a harmonised and integrated approach to carrying out damage assessment and data collection related to natural disasters. (McKenzie, Prasad and Kaloumaira 2005) highlighted that there has been slow progress in evaluating the impacts of natural disasters in the Pacific. It was suggested that all Pacific Island Countries needed to improve in the capacity and the depth of assessing damages. Impact assessments were to comprise of direct, indirect and long-term effects. This would enable each PICs to have a disaster risk profile and enable planning for a natural disaster. Availability of data will enable the usage of a tool introduced by the Asian Development Bank, the “Tool Kit for Financial Resilience” (Noy, Velasco-Rosenheim and Veve 2018). The tool provides an outline of vital instruments that PICs can use to transfer risk and ease the economic impacts of natural disasters.

References

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[1] The Multilateral Fund’s Executive Committee of the United Nations inaugurated the regional network for Pacific Island Countries in 2008.

[2] Actual GDP for Vanuatu and Fiji were attained from the respective countries Bureau of Statistics while the forecasted figures of Tonga were attained from the Post Disaster Rapid assessment report