economics of disaster
DESCRIPTION
Presentation made at GWP-C's Disaster Mitigation workshop held in Guyana in December 2009.TRANSCRIPT
Economics of disaster
Training Course on Factoring Hydro-Climatic Disasters in IWRM
GOAL AND LEARNING OBJECTIVES
Goal The goal of this module is to establish the implications of
hydro-climatic disasters on economic development and the necessary disaster risk investment for mitigation.
Learning Objectives
Participants are expected to be able to: Appreciate disaster risk reduction (DRR) as a national and
local priority; Elaborate the significance of disasters in economic
development; and Discuss possible ways for disaster risk transfer and financing.
INTRODUCTION
Over the last 50 years, there has been a 14-fold increase in the global cost of natural disasters. In 2007, the cost of the world’s natural disasters was estimated at US$62.5 billion
Weather-related natural disasters accounting for two-thirds of all losses.
OCCURRENCE BY DISASTER TYPEOCCURRENCE BY DISASTER TYPE
HUMAN IMPACT BY DISASTER TYPESHUMAN IMPACT BY DISASTER TYPES
IMPACTS OF DISASTER
Direct impacts.: Occur immediately during or after disaster phenomenon– damage to human and physical assets
impacts on assets infrastructure capital stocks loss of life
INDIRECT IMPACTS
Are perceived after the phenomenon, for a time period that can last from weeks to months, till recuperation occurs
loss of investment loss of earnings & unemployment, Increased expenses both private and public loss of productivity due to death, illness and
injuries, increase in operational cost cost of alternative provision good and services
SECONDARY IMPACTS
Include macroeconomic impacts and longer-term impacts
Repercussions on the economic performance after disaster
May persist for a number of years after the disaster, depending on the characteristics and magnitude
SECONDARY IMPACTS
Gross Domestic Product growth State of public finance e.g. decline in
tax revenueIncreases of prices and inflation Balance of payments, trade deficits
and raise in level of indebtedness
IMPACTS OF DISASTER
All of these impacts have significant adverse effects on the social and economic development Employment, housing, factors of production
and income Reallocation of expenditure that occurs
following a disaster. The losses are particularly damaging when
depriving countries of resources, which could otherwise be used for economic and social development.
Why is Disaster a Development Issue?
Disasters can also cause potential declines in revenue Disaster proneness may act as a disincentive to new
investorsDisasters reduce government’s ability to invest in
developmental projectsSerious threats to long-term development result from
the reallocation of expenditure that occurs following a disaster
Responding to disasters also undermines budgetary planning, investment confidence and interrupts ongoing projects and reduces the abilities of communities and governments to pursue long term development goals.
IMPACTS OF DISASTER ON CAPITAL FORMATION
Risk Reduction Investments
Opportunities for changing levels and forms of vulnerability
Involves the private sector as well as the public sector
Sufficient funding for post disaster reconstruction
Development of appropriate ex-ante risk funding instruments, including reinsurance
Benefits that reduce vulnerability but also support economic growth and development
Risk Reduction InvestmentHazard
Floods, drought, etc Elements at risk
Capital stock, population Physical vulnerability
Susceptibility to physical damage
RiskPotential direct losses
STEP 1
Financial vulnerability /potential financing gaps
Ability to finance reconstruction of lost stocks and provide assistance to households and
private sector STEP 2
Macro economic impactsEffects of losing capital stock and
diverting funds for financing lossesSTEP 3
Ex-ante instruments
MitigationInsurance Reserve fundContingent credit
Disaster Risk Transfer
Risk transfer mechanisms shift financial risk from one party to another
The two basic tools for catastrophic risk are; Insurance Instruments for spreading risk directly to the
capital marketAn insurance policy provides cash payouts in
the aftermath of a disaster in return of premiums
Insurance companies, in turn, redistribute their risk to global reinsurers
Post- and Pre- Disaster Financial Instruments
Type SourcePre-disaster risk-transfer
•Reserve /contingent fund•Insurance•Bonds•Contingent credit
Post-disaster financingDecreasing government expenditures
Diversion from budget
Raising government revenues TaxationDeficit financingDomestic
Central Bank creditForeign reservesDomestic bonds and credit
Deficit financingExternal
Multilateral borrowingInternational borrowingAssistance
Risk Transfer – Insurance
Increase in public insurance, stimulate more extensive and fuller private coverage.
In developing countries - poor state of domestic insurance markets and a resultant inability to transfer risk to international reinsurance markets.
Undercapitalisation of domestic insurance market developing - minimal capacity to retain exposure to the risk of natural disasters.
Risk Transfer – Insurance
Limited catastrophic risk coverage largely reinsured through international markets that raise the cost of insurance
Less than 1% of total direct losses from natural disasters are insured in developing countries
Insurance coverage tends to be limited to major commercial properties in urban areas
Risk Transfer – Insurance
Low-income consumers have less discretionary income, fewer assets to insure, and are expensive for commercial insurers to reach and service.
Obstacles to coverage of disaster risk include affordability, demand, determination of insurance parameters for verification of loss, and the structure of the insurance industry
Water and disaster management
Investment for mitigation of water related disasters double as investments for WRM
Measures include improved basin management, river flow regulation and regular maintenance of water storage facilities and sources
Can be managed as normal part of water resources management and development
Cost of disaster management covered and sustained within the water use charges
Discussion Question
How can government help create a reserve fund, insure, or purchase other pre-disaster risk-transfer instruments?
Lessons Learnt
Cost of disaster make up a growing burden to the poor
Disasters have an adverse effects on development but often overlooked in development programming
Development of disaster insurance provide liquidity immediately following natural disasters
Water resources development investment may reduce disaster risk and offer socio-economic benefits as well