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.