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The Economic Impacts of Natural Disasters on Developing Countries Authors: J. L. Bayer and R. Mechler 2.1 The Economic Impacts of Natural Disasters on Developing Countries Direct Loss of capital stock Economic Disaster Impacts Humanitarian Ecological Macroeconomic e.g. loss of GDP Indirect e.g. business interruption Global losses are increasing Source: Munich Re 2004 Global Direct Losses (1985-1999) Economic Losses (USD 896 billion) Austral. 2% N. America 38% Asia 45% S. America 1% Europe 13% Africa 1% Source: Munich Re (2000) Developing countries with over 1 billion USD natural disaster losses over the period 1980-2000 IIASA chart by L. Martin 2001 Data sources: Munich Re 1998; Munich Re 1999 Impacts of disasters in developed and developing countries Fatalities per event Major natural disasters 1985-1999 200 180 160 140 120 100 80 60 40 20 - 187 Direct economic losses as % GDP Major natural disasters 1985-1999 13.3% 14.0% 12.0% 10.0% 8.0% 5.0% 6.0% 45 4.0% 5 2.5% 2.0% High income Middle income Low income Per capita income country groups 0.0% High income Middle income Low income Per capita income country groups Source: Munich Re 2000 Macroeconomic consequences of disasters Real GDP 8000 7500 million USD 7000 6500 6000 5500 5000 4500 4000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 year Original projection Projection incorporating catastrophic exposure Source: IIASA (Freeman, Martin, Mechler, Warner with Hausmann 2002) Who bears the losses? Estimated Direct Losses by Sector in Percent 100% 90% 80% Agriculture 70% Residential 60% 50% Public 40% Commercial/Industrial 30% 20% 10% 0% e idg r h rt No '94 97 P ' nd a l o 8 s '9 a r u nd o H Sources: IIASA (Linneroth-Bayer et al. 2003) Public infrastructure losses • Can be a significant proportion of losses; • Without timely reconstruction can cause long-term reductions in economic growth; • Need improved financial planning for assuring postevent funds • Financial hedging instruments available Kobe (Source: EQE) Importance of mitigation Mitigation can bring about large benefits in terms of saving lives and preventing economic losses. Scattered evidence exists in • The Philippines • Jamaica and the Dominican Republic • China • Worldwide Loss sharing and risk transfer Victims Households Businesses Agriculture Public Sector Informal sector Family, neighbors Government Collective loss sharing Private Market Risk Transfer Donors and Lenders Domestic and International assistance International Financial Institutions Global insured losses (1985-1999) Insured Losses (USD 170 billion) Asia 10% Austral. 3% Europe 18% N. America 69% Africa 0% S. America 0% Source: Munich Re (2000) Government assistance Government financed housing reconstruction after the 2001 floods in Hungary Source: IIASA, Linnerooth-Bayer and Vari, 2003 Family, friends and donors 00 20 99 19 98 19 97 19 96 19 95 19 94 19 93 19 92 19 91 19 90 80 70 60 50 40 30 20 10 0 19 [billion constant 2000 USD] Official Development Assistance (ODA) Year Source: Mechler 2003 Macroeconomic management issues • How can catastrophe risk management be part of general macroeconomic management? • How can sufficient domestic and foreign financial resources be mobilized? • How can relief and reconstruction needs be combined with prudent macroeconomic management (inflation, reserves, deficit, indebtedness)? From the standpoint of macroeconomic policy, the key question is how much and how rapidly can the government afford to borrow to finance the reconstruction costs, while keeping fiscal policy on a sustainable path. (IMF & WB staff assessment of the macroeconomic effects of the earthquakes in El Salvador 2001) Microeconomic management issues Who should bear the responsibility for disaster risks facing households and businesses? Efficiency argument: Disaster risks should be mainly the responsibility of those who are located in high-risk areas to discourage settlement in these areas and to encourage individual mitigation measures. Equity argument: Many persons living or working in high-risk areas are poor and unable to take loss-reduction measures, purchase insurance or relocate to safer areas. There is a need for social solidarity with disaster victims. Woman who lost her home in the 2001 Hungarian flood