1 DISASTER RISK REDUCTION INVESTMENTS ACCOUNTS FOR DEVELOPMENT (DR2AD MODEL) Muneta Yokomatsu, Kyoto University The 7 th GEOSS Asia-Pacific Symposium Tokyo, Japan, 26-28 May 2014
2 What is the macroeconomic benefit of the investment on disaster risk reduction (DRR) that mitigates negative impact on national economy? Wide recognition in general public of the necessity of DRR Lack of quantitative assessment of economic value of the investment in DRR
Hyogo Framework for Action (2005) • The United Nations World Conference on Disaster Reduction 1 st conference at Yokohama in 1994 2 nd conference at Kobe (Hyogo) in 2005 3 rd conference at Sendai (in Tohoku) in 2015 • Hyogo Framework for Action (2005) 1. Making disaster risk reduction a priority; 2. Improving risk information and early warning; 3. Building a culture of safety and resilience; 4. Reducing the risks in key sectors; 5. Strengthening preparedness for response. Leading to awareness, emphasis on communities’ mutual help, etc…
4 Post-Hyogo Framework from 2015 • “Mainstreaming of Disaster Risk Reduction (DRR)” Initiative taken by Japan International Cooperation Agency (JICA), Japan Institute of Country-ology and Engineering (JICE), Pacific Consultants Co., Ltd, etc. Whereas Millennium Development Goals (MDG) does not provide an explicit perspective for DRR, in the Mainstreaming, DRR should be placed a high value in every process of development policies, poverty reduction, countermeasures for climate change, etc.
5 Divergent views on economic impact of natural disasters • Macroeconomic research on natural disasters and their consequences is limited. • Some consensus is reached that natural disasters have a negative impact on the short- term economic growth. (e.g. Albara-Bertrand, 1993; Raddatz, 2007; Noy, 2009; Hochrainer, 2009)
6 Divergent views on economic impact of natural disasters • The literature on the long-run effects of natural disasters is scant and inconclusive. The expansionary disaster effects caused by Schumpeterian “creative destruction” (e.g. Skidmore and Toya, 2002; Cuaresma et al., 2008) The limited effect of creative destruction in developing countries (Cuaresma et al., 2008)
Reference: Earlier studies on disasters effect on economic growth • Okuyama, Y. (2003) “Productivity Effect”: Destructions can foster a more rapid turn-over of capital, which could yield positive outcomes through the more rapid embodiment of new technologies. • Stewart and Fitzgerald (2001) , Benson and Clay(2004) The increase in GDP growth is due to a catching-up effect and to the reconstruction-led Keynesian boom. • Hallegatte S. and Dumas, P. (2009) Productivity Effect can introduce a bifurcation that includes poverty trap.
8 Divergent views on economic impact of natural disasters Negative long-term impact (e.g. Noy and Nualsri, 2007; Raddatz, 2009) Greater magnitude of damage in the long term in developing countries (UNISDR, 2009) The long-term effect of the DRR investments is a question that remains unanswered. We develop the DR2AD model!
9 Disaster Risk Reduction Investments Accounts for Development: DR2AD Model • Macroeconomic growth model : national or regional • Quantitative valuation of the effect of a large-scale disaster and DRR investments on the dynamic processes of the economy that is consistent with the rational behavior of representative households with an infinite time horizon (Framework of Real Business Cycle model of Neo-classical economics) • Comparison of DRR benefits among income classes, which finally implies the effect of DRR on the socio-economic equality of the society
Sketch of the model: economic growth without disaster With DRR Investment （ with disaster ） Effect of DRR GDP Gap expanding! Disaster Event Without DRR Investment （ with disaster ） Time
Sketch of the model: growth and distribution Evaluation on Evaluation on Multiple aspects of each income entire economy effects of DRR class Income Effect of DRR on Effect of DRR on consumption development process of each of GDP, GRP, class, change of capital stock, poverty rate, Gini etc. coefficient, etc. Demographic composition - Ramsey-type macroeconomic growth model with subsistence constraint and income distribution
12 Disaster, poverty, and inequality A disaster-triggered poverty trap and human capital investment • Decreased income after disaster The consumption of households of the lowest income class dropping to the subsistence level. Decrease in saving and investment in human capital Deceleration of income increase and economic growth: Disaster-triggered “Poverty Trap”:
13 Disaster and human capital formation • Knowledge and skills stay undamaged. • Provision of labor is temporally decreased because of morbidity and mortality. • Negative impact on the educational investments by destroying school buildings and access roads (e.g. Baez et al., 2010; Petal, 2008), increasing child work participation rates that results in the removal of children from schools (e.g. Jacoby et al., 1997; Baez et al., 2007; de Janvry et al., 2006), causing nutritional deficiencies that interrupt continuous learning (e.g. Alderman et al., 2006; Alderman et al., 2009).
14 Potentiality of redistributive effect of DRR • Disasters bring more severe damage to lower income households, resulting in expansion of disparity. Larger benefit of disaster prevention for lower-income people DRR has the potential to achieve both GDP growth and equality improvement by ensuring educational opportunities (unlike financial vehicles that often attain regressive distribution).
15 Characteristics as an economic model • Unique in different disaster responses of the two capital stocks: physical and human • Simulation model for a practical use (Cf. IIASA’s CATSIM) based on macroeconomic equilibrium • General equilibrium framework with rational expectations that is associated with Pareto efficiency (unlike EnBC models of Hallegatte et al. (2007, 2008) etc.) , implying that further improvements can only be attained through public provisions for DRR infrastructure DR2AD model figures out the optimal growth path and evaluates the value of DRR investments that is consistent with the normative solution of the economy and therefore regarded as the indicator of significance.
16 Model: definition of disaster 𝑚 , 𝜒 𝑘 𝑚 , 𝜔 𝑚 , 𝜐 𝑚 𝜕 𝑘 Vector of the damage rates: 𝑘 : household group (classified by income level) 𝑀 𝑚 : disaster scale 𝑚 = 0,1, ⋯ , 𝑀 � 𝜈 𝑚 = 1 𝜈 𝑚 : probability of occurrence of scale- l -disaster 𝑚=0 𝑚 : the damage rates of labor 𝜕 𝑘 𝑚 : physical (household) assets 𝜒 𝑘 𝜔 𝑚 : physical (production) capital 𝜐 𝑚 : land (as a factor production) Identification of disaster is possible by collaboration with meteorologists and hydrologists!
17 Event Sequence Period 𝑢 Period 𝑢 + 1 1) Identification 1) Identification of stocks ̂ of stocks 3) Arrival of disaster 𝑚 Human capital ℎ ( 𝑢 ) , ℎ ( 𝑢 + 1) , Financial assets 𝑐 − ( 𝑢 ) , ( 𝑚 =0,1, ･･･ ,L) 𝑐 − ( 𝑢 + 1) , Physical assets 𝑨 − ( 𝑢 ) . 𝑨 − ( 𝑢 + 1) . Time 5) Update of stocks 2) Physical assets 3) Damage of stocks ̂ ∙ 𝑐 , ℎ ( 𝑢 + 1) , investment Financial assets −𝜔 𝑚 ̂ ∙ 𝑨 , 𝑐 − ( 𝑢 + 1) , Physical assets −𝜒 𝑚 Financial assets 𝑐 ( 𝑢 ) , ̂ ∙ ℎ , 𝑨 − ( 𝑢 + 1) . Human capital −𝜕 𝑚 Physical assets 𝑨 ( 𝑢 ) . ̂ ∙ 𝛶 . Land area −𝜐 𝑚 4) Determination of product volume 4) Ex-post decision of households ̂ �𝐼 , � 1 − 𝜔 𝑚 ̂ �𝐿 , (1 − 𝜐 𝑚 ̂ ) 𝑈 �� . 𝐺�𝐶 , � 1 − 𝜕 𝑚 ̂ , Consumption 𝑑 𝑚 ̂ , Human capital investment 𝑛 𝑚 Savings. 4) Depreciation of stock ̂ �𝑙 , Production capital −𝜀 𝑙 ∙ � 1 − 𝜔 𝑚 ̂ �𝑨 . Physical assets −𝜀 𝑨 ∙ � 1 − 𝜒 𝑚
18 Households’ assets and capital • Financial assets, b j (t) : Provided to firms b t+ 1 =w ( t ) ℎ 𝑚 ( t ) +r ( t ) 𝑐 𝑚 ( t ) + 𝜌 𝑚 𝑢 𝑈 𝑚 + 1 － 𝜀 𝑙 － 𝜔 𝑚 b t − 𝑑 𝑚 － ξ − 𝜃 𝑚 𝑛 𝑚 depreciation labor capital rent loss by disaster income income consumption physical asset investment cost of human capital investment • Physical assets, z j (t) : Durable household goods 𝑨 𝑢 + 1 = 1 − 𝜀 𝑨 − 𝜒 𝑚 𝑨 𝑢 + 𝜊 depreciation loss by disaster physical asset investment
19 Households’ assets and capital 𝑏 𝑘 𝑢 : = 𝑐 𝑘 ( 𝑢 ) + 𝑨 𝑘 ( 𝑢 ) • Total household asset, • Human capital, ℎ 𝑘 (t) ℎ 𝑢 + 1 = (1 − 𝜀 ℎ ) ∙ ℎ ( 𝑢 ) + 𝜅 ∙ 𝑛 𝑚 ( 𝑢 ) human capital formation in terms of time Depreciation: obsolescence of knowledge and skill, retirement of workers
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