Brussels, November 22, 2011 - When
natural disasters, such as earthquakes, storms and hurricanes, are
reported in the media, they are often accompanied by an assessment
of the cost of the disaster.
While such information can be useful to help governments
and international organisations target aid and recovery efforts,
the details of what is included in the assessment, and the methods
used, are often unclear.
Now, researchers have attempted to provide a robust
definition of the total economic cost of a disaster. In particular,
the researchers explored the challenges of assessing the loss of
economic welfare from a disaster, from the point of view of
governments and international organisations seeking to make
decisions about future financial aid and prevention measures in the
affected region.
The analysis focused on costs from an economic perspective
and did not consider some of the other major costs of a natural
disaster, such as loss of life.
They demonstrate that the definition must include the
indirect costs of disasters, such as interruption of economic
activity and reduced output from industry, as well as direct costs,
such as the damage caused to buildings, goods and
services.
It should also specify the purpose of the assessment, as
this determines which cost elements are included, and include a
baseline from which economic losses can be measured.
In particular, the loss of economic activity and output
should also include the cost of reconstruction. Even when an
economy can rapidly adapt its remaining production capabilities to
compensate for lost output in the aftermath of the disaster, some
of that effort has to be put in to rebuilding, so 'normal' output
still falls.
Determining output losses also brings with it a number of
other complications: after a disaster, the local economy might not
be running as productive as before, meaning some standard economic
assumptions may no longer apply.
A disaster can also affect a region's entire economic
system, and this in turn can affect output losses. Analyses will
need to take account of effects, such as the unpredictable effect
of price inflation in the region, the risk of poverty traps for
local people, the impact of interrupted services, such as
electricity or water on unaffected businesses, and the length of
the reconstruction phase.
Positive effects may also occur, such as increased demand
leading to an economic stimulus, or the opportunity for
individuals, businesses and governments to adopt more productive
processes during reconstruction; these could even reduce output
losses.
The researchers also review the methods that could be used
to carry out such assessments. These include survey data from
affected households or businesses, although the researchers urge
caution when combining data from several sources.
Econometrics analyses, which look at average indirect
costs across several events, sometimes reach contradictory
conclusions, which the researchers ascribe to different impacts
from large and small disasters. While large disasters can have a
negative impact on growth, sometimes smaller disasters can enhance
growth.
Finally, the researchers identified four areas where
further research would help reduce the uncertainties in the
assessment. These included: how the economic system responds to
disasters, and how markets behave outside equilibrium; interactions
between economic cycles such as business cycles and financial
crises and external events such as disasters; the role of networks,
including sectors like water, transport and the electricity system;
and how financial factors affect disaster recovery - a particular
problem for developing countries.
Source: Hallegatte, S. & Przyluski, V. (2010). The
Economics of Natural Disasters: Concepts and Methods. Policy
Research Working Paper 5507. The World Bank, Washington D.C. This
report can be downloaded from:
http://go.worldbank.org/ZHXFEOU560 Source:
Science for Environment Policy 17 November 2011,
Issue 262