Beyond the damage: probing the economic and financial consequences of natural disasters Presentation at ODI, 11 May 2004 By Edward Clay and Charlotte Benson
Structure of presentation • Background • Macro-economic impacts • Public finance and disasters: working towards a more explicit strategy • Where from here?
Background • Globally the costs of natural disasters are increasing. • But there is limited understanding of their short-term macroeconomic significance, implications for long-term development or appropriate risk management strategies from an economic perspective.
Previous research • Study draws and builds on earlier research by the authors, including: - – 3 regional studies of drought in sub- Saharan Africa – 5 country case studies (Zimbabwe, Fiji, Philippines, Vietnam, Montserrat)
Objectives • To increase understanding of the wider economic and financial impacts of natural disasters • To establish factors determining vulnerability • To identify opportunities for improving the management of risk
Country case studies Study focused around three country studies, each exploring a particular theme • Dominica – natural disasters & economic development in a small island state • Bangladesh – natural disasters & public finance • Malawi – climatic variability, economic forecasting & the use of climatic forecasting • www/proventionconsortium.org/files/
Methodology • Eclectic approach, combining quantitative and qualitative partial analyses • Facilitates exploration of the many complex and dynamic pathways through which specific hazards can influence an economy, informing strategies for reducing sensitivity as well as for financing ex post costs
Disasters and the macro-economy Economic impacts • Natural disasters can have severe short and long-term macro-economic impacts • Short-term (6-18 month) impacts are often most easily discernible in the case of small island economies and the rural/agricultural sectors
Figure 1: Dominica - real annual fluctuations in agricultural, non-agricultural and total GDP 1978-1999 H David & TS Klaus H Hugo H Frederick H Lenny H Allen TS Debbie 3 storms TS Hortense 30 1 20 10 Year-on-year % change 0 -10 -20 -30 -40 0 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Total GDP Non-agricultural GDP Agricultural GDP Source: Benson and Clay, 2001
• In spatially larger countries experiencing localised disasters on an annual basis, short- term impacts can be more difficult to discern • Longer-term impacts are more difficult to determine empirically but may be significant • Negative impacts are not inevitable at an economy wide level
Figure 2: Bangladesh - real annual fluctuations in GDP, agricultural and non-agricultural sector product 1966-2000 Floods '88 Floods '66 Cyclone '70 Floods '74 Drought '79 Floods '84 Floods '87 Cyclone '91 Drought '94 Floods '98 25 1 20 War of 15 Indep- Year-on-year % change endence 10 and after- 5 math 0 -5 -10 -15 -20 0 1965/66 1966/67 1967/68 1986/69 1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 1978/89 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 GDP Agricultural sectoral product Non-agricultural sectoral product Source: Benson and Clay, 2002
• However, there may be severe distributional impacts, with gainers and losers, even where impacts on macroeconomic aggregates are minimal.
Policy implications • Natural hazards require more serious consideration in economic policies and strategies • Particular effort is needed to minimise impacts of disasters on priority areas of policy (e.g. poverty reduction and key sectors)
Type of hazard • Patterns and forms of economic vulnerability are distinct for the two broad categories of hazard – hydro-meteorological hazards – higher probability, predictable events, associated with adaptation in economic and social activity; incidence of occurrence probably being altered by human actions – geophysical hazards - mostly low probability, seemingly random events with associated risks widely almost wholly discounted
Policy implications • Risks emanating from different types of hazard need to be examined separately and a cohesive management strategy then developed • Risks from geophysical hazards need to be better recognised
Determinants of vulnerability • Factors determining vulnerability from a macroeconomic perspective are complex and dynamic • Vulnerability can shift quickly (negatively or positively) in countries experiencing rapid growth and socio-economic change
• Where vulnerability has declined , this can be linked to factors such as – appropriate investments in mitigation – favourable developments in economic structure – favourable production technologies – favourable changes in the domestic and external economic environment • Where vulnerability has increased , there is a similar combination of influences. Rapid changes may be insidious, unapparent until there is a shock
In Malawi there are multiple influences contributing to increased vulnerability: • non-sustainable agricultural practice; • poorly supported structural changes in agriculture; • institutional weaknesses in the agricultural sector, including deteriorating statistics; • de-industrialisation, with the reintegration of South Africa into the regional economy; • political instability and problems of governance; • the short-term behaviour of aid donors, contributing to volatility of public finances; and • the effects of HIV/AIDS on human resources.
Policy implications • Regular re-assessments of risk, exploring areas both of sensitivity and resilience, are required – to understand factors determining vulnerability and – to ensure that risk management strategies remain appropriate
Public finance and disasters: working towards a more explicit strategy Overall impacts • Major natural disasters are likely to create significant budgetary pressures • Impacts on broad fiscal aggregates are often largely non-transparent, however, as governments strive to respond within existing budgetary envelopes by reallocating resources
• It can be difficult to ascertain total levels of expenditure on either post-disaster response or mitigation and preparedness, except • Climatic disasters have major budgetary impacts on low-income SSA countries that typically have a weak revenue basis and high aid dependence
Common features of reallocations • The brunt of financial reallocations appears to fall primarily on capital expenditure and social sectors • There may be considerable in-kind reallocation under recurrent expenditure • Reallocations are typically poorly documented • Conditions under which decisions reallocations are made are typically far from ideal
External aid • Disasters appear to have little impact on trends in total aid flows • Many donors appear to respond to disaster crises by reallocating resources and bringing forward existing commitments to affected countries
Options for transferring risk • insurance • instruments for spreading catastrophic risk directly to the capital market • risk pooling • disaster reserves
Policy implications • Governments need to develop appropriate 10 year plans for financing disaster-related costs • Better information is required on the cost of disasters to facilitate development of risk management strategies, including investment in mitigation, and preparedness and ex ante financial planning • A full reassessment of the impacts of a disaster is needed 18-24 months after the event
• Reallocations of budgetary resources post- disaster should occur through a formal process, in the context of a careful strategic review • International community needs to be alert to the potential budgetary consequences of disasters in low-income countries • International community responsible for funding of hazard information as public good
Where from here? Agenda for further investigation and strengthening of analytic capacity • Improving damage assessment capabilities • Differentiating between different types of risk • Disaggregating impacts of hazards and exploring distributional consequences
• Stocktaking of different methodological approaches for analysing vulnerability and disasters • Strengthening multi-disciplinary cooperation between natural and social scientists on analysis and management of risks
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