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Objectives of My Presentation ! To present the conceptual framework of the impact of disasters on individual and HH behavior: Risk management and coping ! To provide selective evidence ! To discuss innovative (policy) instruments: Index insurance Be ef fo or re e B ts su un na am mi i A Af ft te er r t ts su un na am mi i t 2
1. Introduction: Definitions and Overview 3
1. Background ! Our life is full of risks! ! A disaster: An unforeseen large negative event which overwhelms local capacity. There are three types: " The natural disasters 1) Hydro-meteorological disasters: Floods, storms (typhoons), and droughts 2) Geophysical disasters: Earthquakes, tsunamis and volcanic eruptions 3) Biological disasters: Epidemics and insect infestations. " The technological disasters 1) Industrial accidents: Chemical spills, collapses of industrial infrastructures 2) Transport accidents: By air, rail, road or water means of transport. " Manmade disasters 1) Economic crises: Growth collapse, hyperinflation, and currency crisis 2) Violence: Terrorism, civil strife, riots, and war. 4
! Feature 1: Increasing trend of natural disasters ! Feature 2: Natural disasters do not select location ! Feature 3: The number of complex economic crisis has been increasing Table 2 Frequency of Economic Crises Over Time 1970-79 1980-1995 Type of crisis Total Average per year Total Average per year Balance-of-payments 26 2.6 50 3.13 Twin 1 0.10 18 1.13 Single 25 2.50 32 2.00 Banking 3 0.30 23 1.44 Source: Table 1 of Kaminsky and Reinhart (1999) AER ! Feature 4: The number of conflicts is not necessarily declining. 5
2. “Ex ante risk management” and “ex post risk-coping”: Framework and evidence 6
2. Risk Management (Mitigation) and Risk Coping Strategies ! Household risk management strategies: Activities for mitigating risk and reducing income instability before the resolution of uncertainties (Walker and Jodha, 1986; Alderman and Paxson, 1992). " Ex ante management is cost effective against disasters: ! Investments in earthquake-proof house, insurance contracts, and access to the early-warning system " Yet, such strategies are often difficult by nature because (natural) disasters are typically unforeseen and rare events. 7
2. Risk Management and Risk Coping Strategies ! Household risk-coping strategies: Ex post strategies to maintain consumption (livelihood) [Alderman and Paxson (1992)]. !" To use market mechanisms: ! Credit markets to reallocate future resources to today’s consumption ! Insurance market transactions (need ex ante contract though) ! Ex post labor market participation o use returns to human capital #" Self-insurance mechanisms ! To reduce consumption expenditure with maintaining total calorie intakes. ! To use accumulated financial and physical assets (precautionary saving). $" Non-market insurance mechanisms ! To receive public and private transfers. ! Against unexpected natural disasters, ex post risk-coping will be indispensable 8
Case Studies I. Financial Crisis in Korea II. Two Earthquakes in Japan (Chuetsu and Kobe) III. Indian Ocean Tsunami Disaster (TN, India) IV. Avian Influenza in Vietnam V. Sichuan Earthquake VI. Typhoon Milenyo in the Philippines 9
2. Risk Coping Strategies I: The Asian Financial Crisis ! During the currency crisis in Indonesia, Korea, Thailand and Mexico, consumption reallocation was an important coping strategy ! In Korea, extended credit was also important but not enough. The likelihood of facing credit constraints increased significantly [Kang and Sawada (2003); around 2,000 panel households] Changes in per capital consumption in Korea Aug 1996 – Aug 1997 – Change rate ( % ) July 97 July 98 mean mean (std. error) (std. error) Expenditures for luxuries (cultural & activities, 147.25 53.98 -63.3 entertainment, dining out, and durable goods) (333.75) (86.36) Sales of assets (land, real estate, securities, and 195.01 203.62 4.4 withdrawal of time deposits) (1305.44) (1089.94) Outstanding debt (formal banks, informal banks, 842.02 1074.34 27.6 and personal) (2177.78) (5252.27) Source: Kang and Sawada (2008) 10
2. Risk Coping Strategies II: Chuetsu and Kobe Earthquakes 11
2. Risk Coping Strategies II: Chuetsu Earthquake ! The Chuetsu earthquake " October 23, 2004 " In April/May 2006, we conducted surveys with all the dwellers of Yamakoshi village. ! Data " Ichimura, Sawada, and Shimizutani (2008): A unique survey was completed by 597 HHs out of the total of 663 registered households in the village (response rate = 90%) " Carefully designed structured questionnaires 12
Per Yen Effect of the House Damages on Different Coping Strategies by Different Groups ! " ! E ( Y | Z z ) E ( Y | Z z ' ) ! " ! E ( D | Z z ) E ( D | Z z ' ) From From Minor Half-Collapsed ( z ) Damages ( z ) to Y to Collapsed ( z’ ) Half-Collapsed ( z’ ) Reallocated Amount of donation Total amount 0.3441 0.0484 Amount of the government’s livelihood recovery transfers received 70% 40% Total amount 0.2446 0 Insurance indemnity payments received Total amount 0.1096 0.3766 ! Effective donations, government transfers, and insurance payments: " Large donations with relatively small number of victims " Well-designed public safety net program " Unusually high participation in earthquake insurance programs: effective market 13
2. Risk Coping Strategies II: Kobe Earthquake ! The Kobe earthquake " January 17, 1995 ! Sawada and Shimizutani (2008) JMCB: " Data: “Survey on Changes in Livelihood and Consumption Behavior After the Earthquake” conducted by Hyogo Prefecture " Respondents: 1,589 women aged above 30, randomly selected from the area. ! Importance of credit market; Ineffective private and public transfers; ineffective self-insurance. " Large donations with large number of victims " Lack of public safety net program " Low participation in earthquake insurance programs ! Contrasting results with the Chuetsu earthquake 14
2. Risk Coping Strategies III: Indian Ocean Tsunami Disaster ! UT-TNAU Survey (400 households in 8 villages in Jan-Apr 2006) ! In India, the number of deaths caused by tsunami was the highest in TN State, especially in the Nagapattinum district, where 6,065 people perished. 15
2. Risk Coping Strategies IV: Highly Pathogenic Avian Influenza in Vietnam ! HPAI hit since Dec 2003. A unique household panel data from a commune in Yen Bai province [Tamura and Sawada (2009)]. " Randomly chosen two villages from a commune that was hit by AI. " The data covers 136 panel households in 2004, 2005, and 2006. 16
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2. Risk Coping Strategies V: Sichuan Earthquake ! On May 12, 2008, the Great Sichuan Earthquake occurred, with the epicenter Wenchuan County at Sichuan Province of China. " 69,197 people dead, 18,222 missing, and left about 4.8 million people homeless " In March 2009, we conducted a survey with 2,000 respondents out of around 30,000 people in a temporary housing district at Mianzhu County [Sawada and Li, 2010]. 18
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2. Risk Coping Strategies VI: Super Tyhoon Milenyo ! On September 25, 2006, super typhoon Milenyo hit Luzon Island. " 496,325 homes were totally or partially destroyed. " 127 deaths, 323 injured, and 45 missing. " In January-April 2007, we conducted our own survey of 400 households in a village by the (East) Laguna Lake near Los Banos (Sawada et al., 2009) 20
Summary of empirical results on ex post risk coping stragtegies Study Disaster type Damages Risk Coping Strategies Reallocation of Borrowing Dissaving Labor Income Other consumption adjustments transfers Ichimura, Sawada, and Chuetsu Houses Ineffective (Effective) Ineffective ‐ Donation Formal Shimizutani (2006) earthquake and public insurance transfers effective very effective Sawada and Shimizutani Hanshin Awaji Houses Effective Ineffective ‐ Limited ‐ (2005, 2008) Earthquake Assets Ineffective Effective Ineffective ‐ ‐ Sawada (2009) Indian tsunami Houses Effective Limited Ineffective ‐ ‐ in Tamil Nadu, India Assets Effective Ineffective ‐ Ineffective ‐ Unemployment ‐ Ineffective Effective Emigration Ineffective Tamura and Sawada (2009) Avian influenza Livestock Informal Ineffective ‐ Ineffective ‐ in Vietnam losses credit effective Sawada and Li (2010) Sichuan Productive Effective Effective - Emigration Effective Earthquake assets, (if not employment, constrained) health Sawada et al. (2009) Typhoon Orchard trees Effective Effective Ineffective Effective Effective Milenyo Paddy Houses 21
3. Role of Market and Non-Market Mechanisms Against Disasters 22
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