Economics of Disaster

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 TYPE

HUMAN 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 revenue
Increases 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 investors
Disasters reduce government’s ability to invest in developmental projects
Serious 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 Investment Hazard Floods, drought, etc Elements at risk Capital stock, population Physical vulnerability Susceptibility to physical damage Risk Potential 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 impacts Effects of losing capital stock and diverting funds for financing losses STEP 3
Ex-ante instruments
Mitigation
Insurance
Reserve fund
Contingent 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 market
An 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 Source Pre-disaster risk-transfer
Reserve /contingent fund
Insurance
Bonds
Contingent credit
Post-disaster financing Decreasing government expenditures Diversion from budget Raising government revenues Taxation Deficit financing Domestic Central Bank credit Foreign reserves Domestic bonds and credit Deficit financing External Multilateral borrowing International borrowing Assistance

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.

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

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

Economics of Disaster

by Global Water Partnership-Caribbean (GWP-C) on Oct 31, 2011

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