The cost of disasters

Counting the cost

This trend looks set to continue: before 1987 there was only one case where the insured losses from a natural disaster exceeded $1 billion; by 1995 there had been 14 instances.

Such figures are dramatic. Yet they are typically based on only the direct, visible, financial impacts of a disaster such as damage to homes, hospitals, schools, factories, infrastructure and crops.

The true costs of disasters, taking into account less quantifiable effects such as the loss of personal belongings or jobs, widening trade or government budget deficits, or the increasing scale and depth of poverty, are even higher.

However, many of these indirect and secondary effects cannot be captured in a single monetary figure. Instead, most assessments focus on the cost of direct physical losses alone. This implies that the costs of disasters may be considerably under-estimated, creating problems in alerting policy makers and funders of development projects to the potentially serious consequences of natural hazards.

Nearly 10,000 people were killed and 150,000 were made homeless by the earthquake at Latur in India in 1993. (Click on picture to see enlarged version).

Economic vulnerability

Looking at hazard types, we see that droughts do not damage buildings or physical structures but their lengthy duration creates other problems: for example, agricultural households may be forced into considerable debt following the loss of crops and livestock. In contrast, sudden-onset disasters such as floods or earthquakes have a direct impact on infrastructure and productive facilities and resources, as well as on social resources and infrastructure, especially housing.

The size of the economy is also relevant. The macro-economic consequences of disasters can be particularly dramatic in small island states (as the example of Fiji, illustrated in the figure below, shows) and in the case of droughts affecting large geographical areas.

Fiji's gross domestic product (GDP) 1982-1994 (annual growth rates). (Click on picture to see enlarged version).

Some sectors of the economy are more vulnerable to hazards than others.

Most obviously, the agricultural sector is potentially vulnerable, implying that countries which rely heavily on agriculture may be particularly threatened by hazards. However, even here, the types of crops cultivated and techniques for growing them play a role in determining the scale of vulnerability. As the Philippines has learnt to its expense, new hybrid varieties of coconut trees, while giving high yields, are much more vulnerable to typhoons than traditional varieties which have longer root systems and so are better able to withstand very strong winds. Many traditional root crops and coarse grains, such as millet and sorghum which are grown in parts of Africa, are more drought-tolerant than newer crop varieties. In terms of growing techniques, intercropping (mixing of different crops in the same plot) can give shorter plants better protection against high winds.

At the other extreme, some sectors or sub-sectors are largely immune to natural hazards. Mining operations in sub-Saharan Africa are typically unaffected by droughts. Namibia and Botswana have continued to maintain high levels of mineral exports even during years of severe drought.

The big picture The economic costs of disasters can be broken down into three types. Direct costs - relate to the capital cost of assets (such as buildings, other physical infrastructure, raw materials and the like) destroyed or damaged in a disaster. Crop losses are often included in such calculations. Indirect costs - refer to the damage to the flow of goods and services. They include, for example, lower output from factories that have been destroyed or damaged; loss of sales income due to damaged infrastructure such as roads and ports; and the costs associated with having to purchase more expensive materials or other inputs where normal - cheaper - sources of supply are affected. They also include the costs of medical expenses and lost productivity arising from increased disease, injury and death. Secondary effects - concern the short- and long-term impacts of a disaster on overall economic performance. These may include a deterioration in external trade and government budget balances, the reallocation of planned government spending and increased indebtedness. Disasters can also affect the pattern of income distribution or the scale and incidence of poverty.

Disaster-related damage in one sector can have implications for other sectors. Industries making food products depend on agricultural production, for instance, so that a drop in farm output could lead to reduced manufacturing output too. Droughts can also have severe implications for industries that supply agriculture, such as fertiliser manufacturers.

Economic performance in the period before a disaster, the international economic climate, the frequency and magnitude of other recent disasters, and government economic policy, can also be important in determining the impact of a disaster.

For example, a number of developing countries still rely on basic commodity exports, such as coffee or minerals, for a significant share of their foreign exchange earnings. Favourable world prices here can help offset the impact of a disaster, as in the case of Kenya in 1984 where high international tea and coffee prices helped sustain the country's export earnings and the value of its agricultural output at a time of severe drought.

The state of the environment also plays some role in determining the scale of a natural hazard's impact. There is clear evidence that a number of countries are becoming increasingly vulnerable to natural hazards as a result of environmental degradation, and the increased cultivation and occupation of marginal lands. Deforestation, for instance, is contributing to the increased incidence of droughts, flash floods and landslides in many parts of the world.

Global warming could also contribute to a rise in the number of disasters, although scientists are still debating its precise impact on the frequency and intensity of climatic hazards such as cyclones.

Developed and developing countries

Traditional African crop varieties, such as these sorghum plants, are often more drought-resistant than newly introduced varieties. (Click on picture to see enlarged version).

For example, Hurricane Andrew struck Florida and Louisiana in the USA in 1992. Within a few hours it had caused damage estimated at $22 billion - equivalent to 0.3 per cent of gross domestic product (GDP) - but only 14 people lost their lives.

In contrast, a super-typhoon, Typhoon Angela, which struck one of the more densely populated parts of the Philippines in late 1995, caused damage of $63 million - equivalent to 0.1 per cent of GDP but only 0.3 per cent of the damage caused by Hurricane Andrew - and resulted in 916 deaths. In the microstate of Niue in the South Pacific, the cost of repairing damage to government-owned buildings alone as a consequence of Cyclone Ofa, which struck the island in February 1990, was estimated at $4 million - equivalent to a massive 40 per cent of GDP.

The rise in the cost of disasters reflects increases in the quality and quantity of property and infrastructure. Wealthier countries can also afford increasingly sophisticated early warning and communications systems, allowing people more time to move to safe places and resulting in fewer deaths and injuries.

Disasters and Third World economies ¥ Recurring natural disasters may cost Bangladesh more than 5 per cent of its annual GDP. ¥ Losses from the Mexico City earthquake in 1985 added up to 3 per cent of Mexico's GDP; losses from the San Salvador earthquake in 1986 amounted to 24 per cent of El Salvador's GDP; and losses from the Nicaraguan hurricane in 1988 were 40 per cent of national GDP.

Poverty and disasters

Natural disasters can have profound impacts on households resulting in the death or injury of family members and the loss of housing, possessions, food stores, crops and productive assets such as agricultural implements. Poorer families may be forced into increased debt in order to rebuild their homes, replace assets and meet basic needs until they are able to recommence income-generating activities. Yet poorer groups have also traditionally found it hardest to borrow from banks and other formal lending institutions: they lack collateral and are often regarded as a bad lending risk. They are forced instead to rely on money lenders who charge considerably higher rates of interest.

Life on the 'Freedom Island' squatter settlement in Manila. Poor communities are particularly vulnerable to disasters - in this case to typhoons. (Click on pictures to see enlarged versions).

The Kobe earthquake in Japan in January 1995 caused billions of dollars worth of damage. (Click on picture to see enlarged version).

As long as much of a population remains highly vulnerable to disasters - for example, by virtue of the quality and location of its housing or sources of income - poverty will remain a problem. However, although many governments, as well as the international community, have attached particular importance to the alleviation of poverty, natural disasters have received relatively scant consideration in these policies.

More general developmental and social changes also alter the nature and degree of individual households' vulnerability to disasters.

Thanks to her new sweet-making business, this Bangladeshi woman can afford to make her house more flood-proof and save some money against the threat of future disasters. (Click on picture to see enlarged version).

It has been suggested on a number of occasions that increased provision of relief assistance to disaster victims over a number of decades has resulted in the development of a dependency syndrome and a decline in self-help efforts.

However, such comments may ignore the changing capacity of individual households to support themselves during and in the aftermath of disasters. For example, shifts from traditional to modern housing designs and materials may increase the vulnerability of poorer households, who may only be able to afford lower-quality building materials and who may mix traditional and modern building methods in a way that renders them more liable to damage.

Similarly, a tendency in a number of countries away from multi-crop farming and towards cultivation of just a few crops may, by reducing production of some traditional hazard-resistant species, increase the risk to agricultural communities.

A stitch in time saves nine ¥ The World Bank and United States Geological Survey calculated that economic losses worldwide from natural disasters in the 1990s could be reduced by $280 billion if $40 billion were invested in preparedness, mitigation and prevention strategies. ¥ In China, $3.15 billion has been invested over the past 40 years in measures to control floods: this is believed to have averted potential losses of $12 billion. ¥ The Thames Barrier project to protect London from floods cost £730 million but this was considered a wise investment because the potential loss of property to a Thames flood was £3.5 billion - the flood was considered inevitable even though it might not take place for many years. ¥ The Anheuser-Busch company spent $30 million on preparations to protect its brewery in the San Fernando Valley in California against earthquakes, which included making plans for alternative water supplies. When an earthquake hit the area, the company saved more than $300 million because these measures enabled it to carry on production with only minimal interruption. ¥ The owner of a sweetshop in India, interviewed in 1994, said he had paid 25 Rupees to put stepping stones around his shop so that customers would not have to stand in flood water. Not to have done so would, he reckoned, have cost him 100-200 Rupees in lost business.

Disaster mitigation

Structural interventions include - to take floods as an example - the construction of dykes to provide protection against river or sea floods. In Viet Nam, they have been building and maintaining such structures for some 2,000 years.

Traditional buildings are often designed with natural hazards in mind: this bamboo house is braced against cyclones. (Click on picture to see enlarged version).

Non-structural measures are more wide ranging and comprise mainly non-engineered activities. Again, in the case of floods, they include reforestation of hillsides upstream to prevent rainwater running off so quickly, the application of regulations on land use to minimize the danger to people and property in areas most at risk, and the construction of houses and grain stores on stilts. In other contexts, non-structural approaches encompass water conservation measures (against drought), improved forecasting and warning systems (against cyclones, floods or drought) and promotion of appropriate economic activities.

Such efforts do not lie in the domain of disaster prevention and mitigation projects alone. Long-term development projects could easily be amended to incorporate disaster-proofing features. For example, following repeated appeals for disaster assistance in the wake of typhoons in Viet Nam, the United Nations Scientific and Cultural Organization (UNESCO) organized a workshop and training course on the construction of disaster-proof school buildings, and mobilized a limited amount of resources to support further research and development of typhoon-resistant buildings for schools.

In practice, however, disaster prevention and mitigation measures have been largely concerned with costly technical solutions - such as forecasting methods and engineering structures. Meanwhile, the broader economic aspects of disasters, or even the threat they pose to individual development projects, have largely been ignored, sometimes resulting in heavy damage to such projects as a result of subsequent disasters. This reflects the incomplete and biased nature of most economic assessments of disasters' impact.

In addition, even in more hazard-prone countries, natural hazards are often not specifically identified in national economic plans as an obstacle to sustainable development. Efforts to minimize the economic consequences of disasters urgently need to be further investigated and stepped up.