Comments on ‘The Impact of Manmade and

Natural Disasters on Household Welfare’

by Yasuyuki Sawada

Chandra Athukorala

Arndt-Corden Division of Economics

Research School of Pacific and Asian Studies
Australian National University
Prema-chandra.athukorala@anu.edu.au
1
• A very informative paper on an important
subject

• A nice blend of theory and empirics

• Well informed by the relevant literature and

the contemporary policy debate on disaster
management
 An Overview
Two objectives

To provide an interpretative survey of evidence on the

impact of manmade and natural disasters on
household welfare and

To discuss policy options for designing strategies for

mitigating risk arising from natural disasters
1)Introduction
A succulent typology of disasters, distinguishing between,

• Manmade and natural disasters

• idiosyncratic shocks (which affects specific individuals)

and aggregate or convergence shocks (which affect a
community/region as a whole)

(My query: Can we treat shocks to households from a

manmade economic disaster as an ‘aggregate’ shock.
Not all households are equally affected; some even
benefits (ed cocoa/coffee producers in Indonesia in the
context of the 1997/98 financial crisis.)
2) Risk management and coping against disasters
- an interpretative survey of the theory of ex ante risk management
strategies and ex post coping behavior supplemented by empirical
evidence from:
Asian financial crisis, 1997-98
Hanshin-Awaji (Kobe) earthquake
Indian ocean tsunami

Key inferences (my take)

• Risk management against natural disasters is a difficult task
because they are typically large aggregate shocks, and they are
rare, unforeseen shock
• Coping strategies of affected household is largely determined by
the stage of development of the given society/country (eg.
Contrasts in behaviour of affected households in Hanshin-Awaji
and Kobe and Nagapattinam)
4) The role of market and non-market institutions
mechanics and limitations of,
• self-insurance
• Formal (institutional) insurance, focusing (focusing on
index insurance (insurance; insurance contracts written against
specific events)

Key inferences

• Self-insurance (mutual risk sharing) is rather ineffective in the

context of the big natural disaster (because they are aggregate
(covariate) shock.
• Formal insurance is a luxury: in low- and middle-
income countries households are characteristically risk
averse
(My query: You have found that (Section 2) only
3% of the property in Hyogo Prefecture (Kobe) had
been covered by earth quake insurance!)

• In any case, it is difficult to design actuarially fair

insurance contracts against natural disasters because
they are rare events
4) Policy implications
• Ex post public supports
• Ex ante risk management policies
• Managing the ‘emergency rescue face – how to
match emergency demand and aid flows under
imperfect information and uncertainties.
 My Comments
The focus/coverage
- Too broad (inferences suffer form some over generalisation)

Preferable the paper should have focused solely on natural disasters

(1) Fundamental differences between manmade disaster (in particular

economic crises) and natural disasters
Compared to natural disasters,
• Economic crises are not necessarily unforeseen events (they are an
amplified version of regular macroeconomic fluctuations
experienced by an economy).
• Institutional infrasrture requirements (both international and
national) are not very binding in managing the crisis
• In a strict sense, the shock to households is not ‘aggregate
(covariate)’ but idiosyncratic.
Athukorala, Prema-chandra (2001) Crisis and Recovery in
Malaysia: The Role of Capital Controls, Cheltenham:
Edward Elgar.

Athukorala, Prema-chandra and Peter Warr (2002)

‘Vulnerability to a Currency Crisis: Lessons from the
Asian Experience’, World Economy, Vol..25, No. 1, pp.
33-57.
• The challenge of natural disaster management in
developing countries need to treated separately from
those in developed countries
- low income levels which make self-insurance rather
ineffective
- Institutional and governance issues

(Remember (from Section 2 of the paper) contrasting

household responses to the shock in Kobe and
Nagapattanam)
Discussion on policy options
- Too short compared to the rest

Some additional points based on

Athukorala, P and Budy Resosudarmo (2005), ‘The

Indian Ocean Tsunami: Economic Impact, Disaster
Management and Lessons’, Asian Economic Papers,
4(1), 1-39)
• Environmental regulation
- The devastation caused by tsunami in Indonesia, South
India and Sri Lanka reveled a close relationship between
the magnitude of the damage cause by the killer waves
and the extent that environmental regulations had been
violated (ed. destruction of corral reefs and mangroves
and unplanned/illegal costal construction)
• The need to educate the public about simple precautions
in the event of natural disasters

• Crisis prone countries (such as Indonesia) should

develop institutional mechanisms and procedures,
backed by a central disaster management fund, with the
capacity to engage swiftly in rescue and initial
rehabilitation operations (with effective institutional
links with national and international NGOs and various
international organizations involved in disaster
management)
• Important to place emphasis on challenges of aid
management in the aftermaths of a disaster.
The availability of funds does not necessarily
guarantee speedy rescue/reconstruction
Massive/unplanned aid flows can have a damaging
effect on the economy