Structure of presentation Background Macro-economic impacts Public - - PowerPoint PPT Presentation

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

• 40
• 30
• 20
• 10

10 20 30 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Year-on-year % change

Total GDP Non-agricultural GDP Agricultural GDP

H David & H Frederick H Allen TS Klaus H Hugo TS Debbie 3 storms TS Hortense H Lenny

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

• 20
• 15
• 10
• 5

5 10 15 20 25

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

Year-on-year % change

GDP Agricultural sectoral product Non-agricultural sectoral product

Figure 2: Bangladesh - real annual fluctuations in GDP, agricultural and non-agricultural sector product 1966-2000

Floods '74 Floods '87 Floods '88 Floods '98 Cyclone '91 War

• f

Indep- endence and after- math Drought '79 Cyclone '70 Floods '84

Source: Benson and Clay, 2002

Floods '66 Drought '94

• 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
• f 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
• r 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