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Infrastructure in developing and transition countries: risk and protection.

Paul K Freeman1, Georg Ch Pflug

  • 1IIASA, Laxenburg, Austria. pkfree@dimensional.com

Risk Analysis : an Official Publication of the Society for Risk Analysis
|July 3, 2003
PubMed
Summary

Developing countries face a choice between ex ante risk transfer and ex post borrowing for disaster infrastructure recovery. Ex ante financing boosts stability but may slow growth, requiring a careful cost-benefit analysis.

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Area of Science:

  • Economics
  • Development Studies
  • Disaster Management

Background:

  • Developing and transition countries face significant challenges in financing post-disaster infrastructure rehabilitation.
  • Limited access to credit and capital markets post-disaster necessitates strategic financial planning.

Purpose of the Study:

  • To examine and model the tradeoff between ex ante financing instruments and ex post borrowing for disaster recovery.
  • To provide a framework for evaluating financing strategies based on national objectives for growth, solvency, and stability.

Main Methods:

  • Development of an economic model viewing national infrastructure as a nondiversifiable portfolio.
  • Analysis of the cost-benefit tradeoff between economic growth and financial stability.

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Main Results:

  • Ex ante financing (e.g., insurance, catastrophe bonds) enhances national stability, particularly when post-disaster borrowing is difficult.
  • These ex ante instruments incur an opportunity cost, potentially limiting economic growth due to reduced infrastructure investment.

Conclusions:

  • The optimal financing strategy depends on a country's specific priorities regarding economic growth versus financial solvency and stability.
  • The model offers a quantitative basis for decision-making in post-disaster infrastructure finance for developing economies.