Financial development, natural disasters, and economics of the Pacific small island states

Abstract

Natural disasters have become more frequent and devastating as a result of global climate change in recent years. The economic impacts of natural disasters are significant and more relevant to small island states, given their location and size of economy. This paper studies Pacific small island states and investigates how natural disasters affect sustainable development in these states, with a highlight on the role of financial development in alleviating the negative impacts of natural disasters on the local economic growth. We empirically estimate the direct and indirect roles of financial development on these states and explicitly distinguish the economic effects from a battery of measures of financial development. A more important role played by internal financing factors than by external financing sources is found, which suggest that enhancing internal financing capabilities can help these states better use financial resources and build disaster resilience more effectively. Relevant policy suggestions are proposed based on these findings.