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Patricia Brukoff was in the IMF’s Policy Development and Review Department when work on this paper began; she is now with Merrill Lynch. We thank Mark Allen, Matthew Fisher, and Mauro Mecagni for their helpful comments and suggestions. We are also indebted to Srikant Seshadri and the various departmental reviewers who commented on an earlier version of this paper. Ivetta Hakobyan, Cecilia Lon, and Neri Gomes provided valuable technical support. Any remaining errors or omissions are, of course, our own.
To illustrate: when the Category-3-strength Hurricane Katrina hit the United States Gulf Coast in 2005—despite its catastrophic effects on the affected areas—it caused damage of less than 2 percent of national GDP and had only small effects on overall growth and public finances. By contrast, damage to tiny Grenada from Hurricane Ivan (also a Category-3 storm) amounted to 200 percent of GDP in 2004, causing GDP to fall by 3 percent that year, and forcing the government into default.
Yang (2005) provides systematic evidence for the response of international financial flows to the destructive impact of hurricanes, and finds that four years after a hurricane, such flows (including remittances, official development assistance, foreign lending, and foreign direct investment) tend to have covered about 85 percent of the costs of the natural disaster.
Insured losses amounted to an already record-breaking US$49 billion in 2004, but this figure was subsequently topped by losses to the tune of US$94 billion in 2005, about half of which were associated with Hurricane Katrina—the single most expensive natural disaster in history.