The final section investigates the macroeconomic and poverty implications of Nicaragua being unable to obtain enough external funding post-catastrophe to immediately replace lost capital stock and provide income support for the poor. Please contact the project for a copy of the full report. Over the past two decades, natural catastrophes in developing countries have caused increasing damage to infrastructure. Little research has been done on the relationship between infrastructure privatization and infrastructure vulnerability to natural catastrophes in developing countries. A framework for analyzing government investment decisions under uncertainty, however, does illuminate how a government might choose to address extreme shocks such as a catastrophe and bears important implications for the privatization process.
Governments make a series of investment decisions with uncertain outcomes.
Public investment in infrastructure projects, for example, are vulnerable to damage from natural catastrophes. Government response to extreme shocks that affect public investments depends on the country's relative ability to absorb those shocks. Appropriate responses to extreme shocks such as natural catastrophes that destroy infrastructure should be related to a country's available resources to address those losses. The attitude towards risk adverse or neutral affects how a country deals with investment decisions under uncertainty. If a country has a low capacity to respond to an extreme event, then it will be risk averse and willing to pay more than the expected value of the outcome.