Public Investment Profile for Climate Risk Reduction in Barbados: A Macroeconomic Cost-Benefit Analysis for Reducing the Socio-Economic Risk of Coastal Erosion

Inter-American Development Bank (2021). Public Investment Profile for Climate Risk Reduction in Barbados: A Macroeconomic Cost-Benefit Analysis for Reducing the Socio-Economic Risk of Coastal Erosion. Inter-American Development Bank (IDB) , Technical Note No. IDB-TN-2393. 10.18235/0003915.

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Abstract

Through the Inter-American Development Bank (IDB) sponsored “Study on Disaster Risk Management – A macro perspective cost-benefit analysis for reducing vulnerability”, a dynamic modelling approach was developed to quantify the macroeconomic costs and benefits of investment in disaster risk reduction. The goal of the developed tool was multifaceted, with emphasis on assessing mixes of disaster risk reduction and financial protection instruments, and with a focus on addressing shortfalls in current disaster risk modelling methods. This work serves as the final report of the project and presents the results of an application of the developed Dynamic Model of Multi-hazard Mitigation Co-benefits (DYNAMMICs) framework to the country case of Barbados, demonstrating the applicability of the approach through empirical assessment of DRR investment options to combat coastal hazards facing the island country.
The DYNAMMICs model allows for estimating the long-run benefits of DRR in macroeconomic terms and disentangles the benefits of risk reduction into three pathways (i) the avoidance of direct impacts; (ii) the increased economic potential due to reduction of risk to investments; and (iii) the co-benefits of DRR projects which can provide positive economic effects to the community beyond reduction of risk. With this context, this report aims to address three main policy questions to be addressed by the DYNAMMICs framework. The first relates to the level of public investment needed to reach a desired level of disaster risk reduction. Following this, the model is used to examine the potential optimal mix of resource allocation between DRR investment and risk transfer instruments. Lastly, the report seeks to identify the optimal balance of resources between disaster risk management instruments and other investments, to balance a desire for development with increased resilience.
This report examines a number of possible policy pathways for Barbados following calibration of the model using country-specific data, including DRR and hazard mitigation, risk financing, and combinations of such policies, as compared to a reference business-as-usual case. In all scenarios, long-run GDP is higher than in the reference case, and year-on-year changes in GDP are smoothed, compared to more volatile reference cases. However, decomposition of the effects of risk reduction measures find that some policy pathways lead to more positive outcomes than others, and that policies which include a significant fiscal component could lead to reduced total growth effects in the long term as compared to DRR pathways, due to increasing insurance premiums. However, the report emphasizes that these results are reliant on the quality of input data, and there is a strong need for improved national macroeconomic information and hazard modelling.

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