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 Elements at risk Physical vulnerability
Floods, drought, etc Capital stock, population Susceptibility to physical
damage

Risk Financial vulnerability /potential financing

Potential direct losses gaps
STEP 1 Ability to finance reconstruction of lost
stocks and provide assistance to households
and private sector
STEP 2
Ex-ante instruments
•Mitigation
•Insurance
•Reserve fund Macro economic impacts
•Contingent credit Effects of losing capital stock and
diverting funds for financing losses
STEP 3
 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
Pre-disaster risk-transfer
Post-disaster financing
Decreasing government
expenditures
Raising government revenues
Deficit financing
Domestic
Deficit financing
External
Source
•Reserve /contingent fund
•Insurance
•Bonds
•Contingent credit
Diversion from budget
Taxation
Central Bank credit
Foreign reserves
Domestic bonds and credit
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.
 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