Insuring Growth: The Impact of Disaster Funds on Economic Development

While a recent stream of papers has shown that natural disasters in developing economies have negative and persistent effects on economic development, it is still unclear whether ex ante budgeting allocations for post-disaster reconstruction provide a cost effective way of mitigating these losses. By taking advantage of the sharp rules that govern the municipal level eligibility to infrastructure reconstruction funds in Mexico, this paper provides some of the first estimates of the impact of disaster funds on local economic activity. Our main finding is that access to disaster funding increases local economic activity by as much as 2.57% one year after damage from heavy rainfall has occurred. We also find that the average benefit cost ratio of Mexico’s disaster fund is 1.3.