Natural Disasters and Economic Growth: The Mitigating Role of Microfinance Institutions

John Sseruyange,Jeroen Klomp

doi:10.3390/su13095055

Abstract

In this study, we explore whether microfinance institutions (MFIs) can mitigate the adverse macroeconomic consequences of natural disasters. The provision of capital immediately following a natural event is recognized as one of the necessary conditions for a fast economic recovery. However, one concern is that a large majority of natural disasters occur in developing countries where households and the private sector have only limited access to the formal banking system. As an alternative, MFIs may fill up this gap in providing liquidity in the form of microcredit. The existing evidence on how MFIs respond to disaster effects is foremost based on case and micro-level evidence. In turn, the focus of this study is more on the macro impact of MFI activities after a natural disaster. Based on the finding obtained from an OLS-FE model using an unbalanced panel considering more than 80 developing countries and emerging economies, we can conclude that natural disasters harm macroeconomic performance primarily through their effect on the agricultural sector. However, access to lending facilities from MFIs mitigates a large part of this negative effect. Moreover, the extent to which MFIs are able to mitigate these effects depends to a great extent on their nature, i.e., their organizational structure, profitability, legal status, age, and the number of clients they serve.

Highlights

This study deals with the question of whether participating in microfinance activities in the aftermath of a natural disaster can mitigate the adverse macroeconomic consequences in the short run
There exists vast literature on the potential micro effects of credit constraints, arguing that access to microfinance institutions (MFIs) credit can ease the adverse economic effects caused by a natural disaster [23,24,25,26]
The evidence so far is mainly based on micro-level studies of a single event. Using these case studies makes it difficult to draw general conclusions since, based on their physical magnitude, natural disasters differ in their economic effect, the activities employed by MFIs are likely to vary between MFIs, and the socio-economic context of the disaster location differs

Summary

Introduction

This study deals with the question of whether participating in microfinance activities in the aftermath of a natural disaster can mitigate the adverse macroeconomic consequences in the short run. Since the 1970s, the frequency and severity of natural disasters have risen dramatically. A devastating earthquake hit Haiti in 2010, causing over. 6300 deaths, nearly 17 million people were affected, and the estimated damage exceeded. These are only two examples of extreme events caused by forces of nature that have occurred in the last years. More worrying is that the situation may become even worse in the coming decades since natural disasters are often linked to the ongoing process of climate change [1]

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Conclusion