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Suman K Sharma, Ph.D. Singapore Economic Review Conference August 6-8, 2009 Singapore Presentation Outline I. II. III. IV. V. Present Study Disaster Impacts and Socio-economic Aspects: existing Data & Methodologies Socio-economic Aspects of Disaster Impacts: Empirical Findings Concluding Remarks Areas for Further Research 2 Present Study Objective: to further our understanding of disasters and their implications for a country’s devlopment - primarily based on review of literature: what are the existing knowledge on socio-economic aspects of disaster impacts? - focus on natural disaster alone although findings can be largely generalized - considers events and activities at the national level 3 Existing Databases on Disaster Events and Impacts Fundamental requirement in understanding disaste impacts Various sources: NatCat database; Sigma; ADRC; national …. EM Dat(CRED):(i) causes 10 or more fatalities (ii) 100 or more affected (iii) emergency; or (iv) call for int assistanc Data Issues: Complexity arises due to differerences in defn, effects, methodologies, sources, data points collected, and constraints in time and funding Lack of std method raises issue of transparency/comparison How to classify disaster types/sub-types & primary/sec effects How to locate larger scale disaster that cross borders Lack of int consensus re best practice for dis data collection! 4 Existing Methodologies to Estimate Disaster Impacts a. UN-ECLAC Model (now universally accepted) Direct impacts: damage to physical assets, human K, infrast Indirect impacts: related w/ changes in ‘flows’ of eco activity; Clower ‘05: (i) loss of business activity due to reduced activities at damaged firms; (ii) loss of income in secondary & tertiary empt; (iii) business disruptions not directly rel to damage Secondary effects: combined effects leading to imbalances in macroeco variables (govt revenues /exp, BOPs, growth) Sectoral Impacts: social, economic, infrastructure Cross-sectoral Imp: emp, environmental, gender, governance 5 Existing Methodologies to Estimate Disaster Impacts b. Economic / Econometric Models: Multi-country framework; Country case studies; growth models; specific disaster incidents c. Catastrophe Models: estimate direct losses to physical assets; primarily used by insurance/reinsurance co to estimate portfolio losses d. Other Models (detail in Clower 2005) - IIASA-WB-Swiss Re Model integrates hazard loss frequency data into macroeconomic projection model -Inputoutput Model; CGE Model; Eco Accounting Model 6 Impact of Disaster on Development?: empirical findings a. Disaster Impact in SR: a positive contributor to devt Early literature- no adverse effect possibly through intro and adoption of new technology (Dacy and Kunreuther ‘69) Disasters benefit eco thru destroying pre-existing (obsolete) physical K and introducing new tech (technological leapfrogging) – as countries respond by showing greater incentive to replace those K thru improved ones -leading to higher TFP & GDP (Cuaresma et al. 2004) Most damages occur in existing K (stock), so replaced w/ improved K leading to +ve productivity shock to economy 7 Impact of Disaster on Development?: empirical findings a. Disaster Impact in Short-Run: positive effect on devt Albala-Bertrand 1993: disasters don’t normally cause adverse consequences on macroeco indicators as they increase GDP, K formation, agr & construction output, reserves (based on before-after statistical analysis of 26 countries) Similar findings based on specific incidents - Kobe earthquake (Horwich ‘00), pandemic flu of 1918-1919 (Becker ‘05), Hurricane Katrina (Balls and Swann ‘05), US case studies (Mileti ‘99) Okuyama (‘03): modern Solow framework- introd of new tech lead to slower recovery & new, higher, stable, equilm 8 Disaster Impact: empirical findings b.Disaster Impact in LR: inconclusive effect on growth Very Few studies examine impact on L-R growth -Toy & Skidmore (02): only study to conclude disaster can lead to higher growth in LR: provide substantial evidence count dis freq (normalized by land size) & compute corr w/ avg growth, K (physical / human) accumulation & TFP Attribute increased gr after climatic dis to increase in human K & increase in tech; & decrease in gr after geological dis to decrease in physical K & loss of human K from loss of life -Rasmussen (04): Dis either hurt or don’t harm LR growth -Cuaresma (04): pos rel bet dis & tech absorption of foreign K 9 Disaster Impacts: empirical findings b. Disaster Imp in LR : inconclusive effect (cont’d) -Popp (06): 4 macroeco vars have +ve effect on LR growth: Natural resources, physical K acc, human K acc, technology -net effect depends on relative strengths; Disaster usually i) have SR negative effects on natural resources; ii) negative effect on physical capital accumulation, iii) affects Human Capital in several ways depending on magnitude of loss of lives, damage to education system,… iv) increase or at least don’t decrease level of technology Ultimate impact depends on effectiveness of institutions, preparedness measures, recovery patterns and quality 10 Disaster Impacts: empirical findings c. Disaster Impact: adverse effect on development Adverse effect on SR growth observed by several w/ less ambiguities; immediate effect thru damage in K, thus will help understand the output effect Rasmussen (04): significant impact on macroeco vars plus large effects on fiscal & external bal Benson and Clay (04): major nat disasters can have severe negative SR eco impacts & also can have adverse LR consequences for eco growth, devt, poverty reduction plus budgetary pressure (Dominican Rep, Bangladesh and Malawi) 11 Disaster Impacts: empirical findings c) Disaster Impact: adverse effect on devt (cont’d) Noy (07): focus on natural disasters’ ex-post impact on macro-economy - uses a comprehensive multi-country macroeco panel dataset for 1970-2003 - Disasters do have SR adverse impact - Strong indication that amount of property damage caused by disaster is a negative determinant of GDP growth 12 Disaster Impacts: empirical findings d. Disaster Impacts & influence of other factors i) Eco Structure: relative importance of sectors / subsectors, ownership pattern, intersect linkage, role of productiv K Agri-based economy suffer more in damages; less diversified econo suffer more (export based, tourism-based) ii) Stage of Devt: measured in degree of sectoral, geographic and financial integration, levels of eco specialization & govt’s revenue raising capabilities (Benson & Clay 2004) complex relationship; depends on infrastructure, economic specialization, degree of integration/openness, fiscal/fin system, governance 13 Disaster Impacts: empirical findings ii) Stage of Devt (cont’d): Developing countries: more vulnerable; greatest direct losses/GDP Rasmussen (04): dis costs in relative terms much higher (in terms of no of people affected & value of damage Developed countries: massive losses in physical assets (Kobe earthquake, Hurricane Katrina); socio-eco impacts are less due to improved mitigation, planning & recovery; greater access to fin resource & K mkt; improved pvt sector/env management; Wealth key! Dem for safety rises w/ income! Higher devt is associated with fewer disaster related deaths and less damages (in terms of GDP)(Albala-Bertrand 93; Kahn 03; Toy & Skidmore ‘04) 14 Disaster Impacts: empirical findings iii) Institutional and social aspects Studies estimate rel bet socio-eco dev & disasters & observe that losses (human & eco) are less in countries w/ higher level of education, more open & competitive economies, more complete financial system and smaller govt size institutions & other forces interact with disaster impact & influence the net effect on development Countries w/ better education/institutions, greater openness for trade, smaller govt size experience less damage & better able to withstand disaster shocks & prevent subsequent adverse impact on eco (Kahn ‘03; Popp ‘06; Noy ’07; Toy & Skidmore ‘07) Comparative analysis of institutional quality indicates countries w/ better institutions experience lower damages (in terms of eco costs and no people affected) (Raschky 08) 15 Concluding Remarks Disaster issue is a Development issue! Disasters’ impacts on a nation’s development not clear! A multiplicity of factors - underlying social, eco, inst structure interact w/ disasters’ impact on development A multidisciplinary issue; joint effort of all stakeholders ; collaboration across various disciplines; e.g., pvt investment in risk management can promote competitiveness & trade How can Economists/soc scientists help? – they can contribute to quant modeling /estimating techs; provide qualitative insights; help improve accuracy of impact models; provide timely information to all Requires extensive knowledge/information to understand full nature of disaster impacts 16 Areas for Further Research: Comprehensive Database feasible only w/ substantial, more extensive/precise disaster datasets to examine disaster impacts & empirically investigate interrelationship w/ devt - Assessment of existing databases, their relevance & adequacy to undertake impact assessments - Explore possibilities of creating/maintaining comprehensive database w/ common methodology w/ appropriate standardizaton (popn, inflation, incomes, asset, other aspects) Collaboration across all (DRM, GIS sp, hum org…) 17 Areas for Further Research: Standard Methodology of estimation One research area could involve (i) Assessment of existing methodology of estimating dis impact & (ii) exploring possibilities of creating Standard Methodology Cross-country, cross-sectoral comparison requires common methodology; including approaches – quant/qualitative Assessment should begin w/ examining following questions: What kind(s) of disaster impact(s) is/are modelled? How are the disaster damages classified? How are intangible damages valued? How applicable to developing countries? Adequate to isolate disaster imp from other determinants? 18 Areas for Further Research: Comprehensive Research on DI What are the channels thru which disasters affect a nation’s growth rate? Are those different depending on the shortrun vs long-run growth? What are other influences that interact with disasters and growth rates? Do disasters consistently exhibit varying impacts on development depending on its socio-economic and political structure? Do impacts depend on country’s stage of development? If so, how consistent are those on developing country vis-àvis developed? What are the impacts of ex-post policy changes following a disaster? 19 Areas for Further Research: Empirical Study on Disaster Financing in SEA Examine recent disasters and role undertaken by govts & other agencies in disaster financing e.g., undertake case studies focused on SEA & and examine the following questions: How are governments in these countries financing their disaster related risks in recent years? How have the needs been met, Where have shortfalls arisen and How have these governments addressed these shortfalls? 20 Areas for Further Research: Role of Microinsurance and Microfinance Evidences: Dis have differential impacts on poor, disadvantag Microfinance instns largely handling issue of low access to fin But disaster financing not handled in most cases; Some of the possible questions to examine are: What are possible ways to make insurance & related instruments available to poor w/ particular attention to the role of microinsurance and microfinance institutions? What’re possible means for creating a ‘social approach to disaster financing’ w/ greater inv in social infra-community capacity building, strengthening of institutions within civil societies, increased partnership w/ pvt sector, …. 21