Climate disasters in Latin America and the Caribbean - the role of resilient infrastructure investments and adaptation policy

The objective of this article is to analyze the impact of climate events in Latin America and the Caribbean on people and the economy from a historical and prospective perspective. First, the region experienced at least 2,225 climate-related disasters that caused damages and losses of 0.2% of the annual GDP and affected 1% of the region’s population on average per year in the past 4 decades. However, these events affected twice as many people in Central America and three times in the Caribbean compared to the regional average. Second, the article explores the effects of increased exposure to disasters compared to policy alternatives to reduce vulnerability. We used a quantitative general equilibrium model with climate shocks applied to four of the most vulnerable economies to climate-related disasters in the region (Honduras, Dominican Republic, Barbados, and Paraguay) for the analysis. The results suggest that investing in resilient infrastructure and creating contingency funds significantly reduces the impact of these events on GDP and improves public debt dynamics in the medium and long term. Nonetheless, both investment in resilient infrastructure and the inception of emergency funds erode debt dynamics in the short term. Consequently, mobilizing resources and concessional financing will be important for facilitating investments in adaptation. Financing on favorable terms would be particularly useful for preventing suboptimal levels of investment for both highly indebted countries that face restrictions on access to financing and for mitigating inter-temporal inconsistency problems.