The Impact of Local Financial Capability on Damage from Natural Disasters

Abstract

Social vulnerability is regarded as a critical factor influencing damage from natural disasters. The local financial capability is one of the social vulnerability factors which is important to all of the disaster management phases: mitigation, preparedness, response, and recovery. The purpose of this study is to examine the impact of local financial capability on the damage of natural disasters by using the two-stage least squares (2SLS) regression model. The 2SLS model removes the endogeneity between a financial capability variable and disaster loss variable. The endogeneity, which may underestimate the impact of the financial capability variable on the disaster loss variable in a an OLS model. The result of the study shows that local financial capability can reduce losses from natural disasters. The study also shows that applying a 2SLS model can fix the bias from endogeneity between a dependent variable and independent variable which underestimates the impact of the independent one. Proactive subsidies from the central government and diversification of financial resources are suggested as solutions for reducing disaster losses in localities which have the lower financial capability. Keywords: Damage from Natural Disasters, Local Financial Capability, Social Vulnerability, Two-stage Least Squares Method (2SLS), Endogeneity