Are Disaster Funds Enough to Smooth Consumption?

Natural disasters worldwide have increased considerably as a consequence of climate change, and empirical evidence has found that individuals decrease their levels of consumption when facing a natural disaster. While... [ view full abstract ]

Natural disasters worldwide have increased considerably as a consequence of climate change, and empirical evidence has found that individuals decrease their levels of consumption when facing a natural disaster. While countries can rely on loans and aid from international community when facing a natural disaster, one alternative is to use disaster funds and catastrophe bonds. Mexico was the first developing country to use disaster funds and catastrophe bonds through the Fund for Natural Disasters (FONDEN). The FONDEN provides food and resources for the reconstruction of infrastructure. De Janvry, Del Valle, and Sadoulet (2016) find evidence that this program increases local economic activity between 2 and 4 percent in the year following the disaster. Yet, can FONDEN smooth the consumption of the families affected? To answer this question, we analyze data for Hurricane Earl in Puebla, Mexico, where FONDEN resources were implemented. Using a difference-in-differences strategy, we find a decrease in consumption, including beans, which is an essential staple good for Mexican families. It is possible that the consumption of families would have been more affected without the FONDEN; yet, the resources of FONDEN were not enough to smooth families’ consumption.