The Governance Gap in Disaster Risk Financing: Understanding Indonesia's Reactive Response to Earthquake Shocks

Earthquakes represent low-frequency but high-severity risks that pose persistent challenges for public disaster risk financing, particularly in disaster-prone countries with constrained fiscal space. Unlike recurrent hazards, seismic events generate sudden and spatially concentrated losses that can overwhelm routine budgetary mechanisms and disrupt medium-term fiscal planning. In Indonesia, repeated major earthquakes have generated significant fiscal pressures, with ex post disaster financing through budget reallocations and discretionary mechanisms remaining the predominant response. This paper analyses Indonesia's approach to financing earthquake-related losses through a governance-oriented public economics perspective. It argues that the persistence of ex post disaster financing reflects institutional and political economy constraints rather than the absence of financial instruments. Drawing on qualitative policy analysis and comparative institutional evidence, the study examines how fiscal institutions, intergovernmental arrangements, and political incentives shape disaster financing decisions in a decentralised fiscal system. By conceptualising earthquakes as contingent fiscal liabilities, the analysis highlights how decentralisation complicates the practical implementation of risk layering strategies for lowfrequency, high-severity hazards. The paper further provides a critical assessment of parametric insurance, showing that its effectiveness depends on governance readiness, budgetary integration, and intergovernmental coordination rather than on instrument design alone. The findings suggest that strengthening disaster risk financing for earthquakes requires greater institutional coherence rather than further instrument proliferation. For disaster-prone middleincome countries such as Indonesia, fiscal resilience to catastrophic risks is shaped primarily by the alignment of financing instruments with fiscal governance structures and incentive frameworks.