How do International Financial Flows to Developing Countries Respond to Natural Disasters?

Abstract

This paper uses multivariate dynamic panel analysis to examine the response of international financial flows to natural disasters. The models estimated for a large sample of developing countries point to differentiated responses of specific types of financial flows. The results show that remittance inflows increase significantly in response to shocks to both climatic and geological disasters. The models suggest a nuanced role for foreign aid. While the responses of aid flows to natural disaster shocks in general tend not to be statistically significant, international assistance to low income countries increases following geological disaster shocks. Furthermore, the results show that typically, other private capital flows (bank lending and equity) do not attenuate the effects of disasters and in some specifications, even amplify the negative economic effects of these events. The conclusions of the paper have implications for capital/financial account management policies. In particular, countries should take their vulnerability to natural disasters into account when considering the costs and benefits of the liberalization of private capital flows. This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. JEL Classification Numbers: F30, O11, O16.

Remittances as aid following major sudden‐onset natural disasters

“…First, the macroeconomic studies used data from 1970 to the early 2000s, usually stopping short of the period of exponential growth in remittances in the twenty-first century. It is possible that replication of the Yang (2008), David (2010), and Mohapatra, Joseph, and Ratha (2012) analyses over the same time period as the present study might generate different results. Second, the macroeconomic studies gauged the impact of the disaster on the economy of the country, notably remittances as a share of GDP.…”

Do remittances dampen the effect of natural disasters on output growth volatility in developing countries?

“…Mohapatra et al (2009) using a large panel dataset of developing countries, highlighted that countries with high migrants abroad receive a large amount of remittances during natural events. Finally, David (2010) using a sample of 78 developing countries observed over the period from 1975 to 2005, pointed out differentiated responses of various types of financial flows in the aftermath of natural disasters. The results show that remittance inflows increase significantly in response to shocks to both climatic and geological disastersnatural disasters can account for up to 53% of the forecast error variance of remittance inflows to low-income countries where a nuanced role for foreign aid inflows was observed.…”

“…Furthermore we expect 3 4 1 . This happens because natural disasters can generate countercyclical remittance inflows (Yang, 2008b;Mohapatra et al, 2009;David, 2010). Controlling for remittances ensures that the impact of natural disasters does not include a stabilizing component due to a surge of countercyclical remittance inflows.…”

“…According to some recent evidence in developing countries (Pakistan, Haiti) and existing papers, natural disasters tend to significantly increase remittances, whereas foreign aid seems less sensitive to disaster shocks (Yang, 2008b;Mohapatra et al, 2009;David, 2010). If the altruistic response of migrants in the aftermath of natural disasters is generally observed, little is known about the effectiveness of remittances in the macroeconomic stabilization in this context.…”

Risk sharing in the Middle East and North Africa

“…This finding challenges the notion, prevalent among the GCC countries, that surplus oil revenues invested in foreign assets (particularly financial assets) contribute to larger future flows of goods and services. The higher amount of smoothing through international transfers in the non‐oil MENA countries suggests that transfers respond to shocks with a higher lag (see the discussion in David, 2010).…”