can mobilize for reconstruction activities. In this case, the economic response is able to damp the lasting costs of the disaster.<sup>6</sup> Conversely, a disaster occurring during an ascending phase of the cycle exacerbates pre-existing supply shortages. First, the inventories are below their equilibrium value and cannot compensate for reduced production. Second, employment is at a high level and hiring more employees to help reconstruct induces wage inflation. Finally, because capital markets are tight, producers may lack financial resources to increase investments.

This vulnerability paradox, in which a healthy economy with high growth appears to be more vulnerable to disasters than a depressed economy, boils down to a Keynesian mechanism whereby reconstruction boosts an economy in which some resources were previously unused.<sup>7</sup> It is not much different to increase demand through fiscal or budgetary policies than through the destruction of houses and productive capital, which then need to be replaced as rapidly as possible. In the latter situation, agents increase their consumption and reduce their savings, thus leading to a rise in demand.<sup>8</sup> It is also well known that such an increase in demand is counterproductive and only lead to inflation if the supply is constrained, for instance during the expansion phase of the business cycle.

This paradox does not mean that a fragile economy will adapt more easily than a robust one; it only explains why the ultimate impact of a shock is cycle-dependent. This analysis assumes, however, that the shock does not undermine the underlying growth engine. This is why we must take one further step and examine whether this engine can be threatened by climate shocks.

# _3.3. Hysteresis effects of repeated climatic shocks_

One primary factor that may undermine the long-term resilience of the economy and magnify climate change damages is the constraints on reconstruction capacity due to institutional and technological factors in case of a series of disasters and extreme events. Again, this is linked to the fact that reconstruction is constrained by inertia in the production system, which cannot modify its structure rapidly to increase the production in the sectors involved in reconstruction (e.g., construction, manufacturing).

Hallegatte et al. (2007b) and Hallegatte and Dumas (2008) show why the long-term GDP losses due to series of natural disasters are small, provided that the reconstruction capacity of the economy is large enough, and/or the frequency and intensity of the disasters that impact it are low enough (see Figure 3 “below the red line”). If reconstruction capacity is high, even very large disasters remain short-term events that perturb the economy over a few months or years, but do not have long-run consequences.

But, if reconstruction capacity is too limited in light of the incidence and intensity of disasters, which is more likely in poor developing countries or regions, then natural disasters are not just short-term events. They will have long-term consequences on an economy’s longrun growth if its reconstruction capacity is not sufficient to reconstruct entirely between two events. In this case, the economy remains in a state of perpetual reconstruction, making it impossible to accumulate the capital and infrastructure stock needed for economic development. As an example, Guatemala experienced an impressive series of weather

> 6 This effect is cited as a damping effect after the Marmara earthquake in Turkey in 1999 (World Bank, 1999). 7 This conclusion, however, applies only to a given economy and does not extend to the comparison of two distinct economies: an overall flourishing economy is clearly more robust than an economy that is weak overall.

> 8 The shift in savings ratio can be carried out either directly by the agents, or through the intermediary of insurance companies that sell assets to pay claims.

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