D I S A S T E R R I S K M A N A G E M E N T S E R I E S N O . 3 Building Safer Cities The Future of Disaster Risk Edited by Alcira Kreimer, Margaret Arnold, and Anne Carlin The World Bank Disaster Risk Management Series Building Safer Cities: The Future of Disaster Risk Edited by Alcira Kreimer Margaret Arnold Anne Carlin The World Bank Disaster Management Facility 2003 Washington, D.C. © 2003 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone 202-473-1000 Internet www.worldbank.org E-mail feedback@worldbank.org All rights reserved. 1 2 3 4 06 05 04 03 The findings, interpretations, and conclusions expressed here are those of the author(s) and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank cannot guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail pubrights@worldbank.org. Photo Credits: Cover: submerged houses in Changsha, China, © Reuters NEWMEDIA INC./CORBIS; page 1: flooding after earthquake interrupts commercial activities in Turkey, © Alcira Kreimer, World Bank; page 90: flooded Manila Street, © Reuters NEWMEDIA INC./CORBIS; page 180: cleanup of church in Honduras after hurricane, © Bernard Bisson/CORBIS SYGMA; page 244: landslide destroys buildings in Venezuela, © PAHO. Library of Congress Cataloging-in-Publication Data has been applied for. ISBN 0-8213-5497-3 Contents Acknowledgments vii Abbreviations viii Contributors xi Editors' Note xiv Part I Globalization and the Economic Impacts of Disasters 1. Disasters, Vulnerability, and the Global Economy 3 Charlotte Benson and Edward Clay 2. Natural Hazard Risk and Privatization 33 Paul K. Freeman 3. Natural Disaster Risk and Cost-Benefit Analysis 45 Reinhard Mechler 4. Globalization and Natural Disasters: An Integrative Risk Management Approach 57 Torben Juul Andersen 5. Urban Disasters and Globalization 75 J. M. Albala-Bertrand 6. Interdependent Disaster Risks: The Need for Public-Private Partnerships 83 Howard Kunreuther Part II Environment, Climate Variability, and Adaptation 7. Cities and Climate Change 91 Anthony G. Bigio 8. The Resilience of Coastal Megacities to Weather-Related Hazards 101 Richard J. T. Klein, Robert J. Nicholls, and Frank Thomalla 9. Flood Management and Vulnerability of Dhaka City 121 Saleemul Huq and Mozaharul Alam iii iv Building Safer Cities: The Future of Disaster Risk 10. Flooding in the Pampean Region of Argentina: The Salado Basin 137 Hilda Herzer 11. Urbanization and Natural Disasters in the Mediterranean: Population Growth and Climate Change in the 21st Century 149 Hans Günter Brauch 12. Urban Land Markets and Disasters: Floods in Argentina's Cities 165 Nora Clichevsky Part III Social Vulnerability to Disaster Impacts 13. Disaster Risk Reduction in Megacities: Making the Most of Human and Social Capital 181 Ben Wisner 14. Living with Risk: Toward Effective Disaster Management Training in Africa 197 Prvoslav Marjanovic and Krisno Nimpuno 15. Urban Vulnerability to Disasters in Developing Countries: Managing Risks 211 E. L. Quarantelli 16. Natural Disasters and Urban Cultural Heritage: A Reassessment 233 June Taboroff Part IV Protecting Critical Infrastructure from Disaster Impacts 17. A New Structural Approach for the Study of Domino Effects between Life Support Networks 245 Benoît Robert, Jean-Pierre Sabourin, Mathias Glaus, Frédéric Petit, Marie-Hélène Senay 18. Mitigating the Vulnerability of Critical Infrastructure in Developing Countries 273 Lamine Mili 19. Damage to and Vulnerability of Industrial Facilities in the 1999 Kocaeli, Turkey, Earthquake 289 Mustafa Erdik and Eser Durukal 20. The Behavior of Retrofitted Buildings During Earthquakes: New Technologies 293 Mikayel Melkumyan Figures 1.1 Dominica--Annual fluctuations in agricultural, nonagricultural and total GDP, 1978­99 22 1.2 Bangladesh--real annual fluctuations in GDP, agricultural, and nonagricultural sector product, 1996­2000 23 1.3 Malawi--real annual fluctuations in GDP and agricultural, industrial, and services sector product, 1980­98 25 Contents v 2.1 Economic losses from natural catastrophes in the 20th century 34 2.2 Natural catastrophe trends in the 20th century 35 3.1 Impacts of natural disasters 45 3.2 Project analysis under risk 47 3.3 World Bank post-disaster reconstruction loans in relation to total World Bank lending, 1980­99 48 3.4 Risk management of natural disasters 49 3.5 Important indicators for ability to spread disaster risk for Honduras and the United States 52 3.6 Projection of GDP paths with and without insurance of public assets in Honduras 52 4.1 Development in reported and insured catastrophe losses, 1970­2001 (three-year moving averages) 58 4.2 The relationship between economic growth and catastrophe losses, 1990­2000 59 4.3 Economic growth and changes in tariff rates 61 4.4 Economic losses and export concentration 62 4.5 Commodity price developments, 1990­2000 65 4.6 Elements of the dynamic risk management process 66 9.1 Demarcation between Pre-Mughal and Mughal Dhaka 123 9.2 The buildup area of the Mughal capital 124 9.3 Flood and drainage infrastructure of Dhaka 128 9.4 Water level hydrographs for Turag, Tongi, Buriganga, and Balu Rivers and rainfall in Dhaka during 1998 131 9.5 Water level hydrographs for Turag, Tongi, Buriganga, and Balu Rivers and rainfall in Dhaka during 1988 132 9.6 Existing and proposed flood control and management infrastructure in Dhaka 134 11.1 Worldviews and environmental standpoints 150 11.2 Horizontal and vertical security dimensions 151 11.3 Causes and outcomes of environmental stress 151 17.1 Risk scenario: a linear process 249 17.2 Evaluation of the impacts of a natural hazard and use of the results 250 17.3 Summary of the psychological varieties of unsafe acts 251 17.4 Diagram of the characterization of a life support network 254 17.5 Consequence curve for a municipality 256 17.6 Diagram of the conditions for decreasing the efficiency of a mission 257 17.7 Vulnerability curve for a transformer station 258 17.8 Definition of links 260 17.9 Affected components as a function of the water level rise in the upstream storage basin 261 17.10 Example of a repercussion function: relationship between the water level in a storage basin and at a transformer substation 262 17.11 Schematization of a risk curve 263 18.1 Major regions and river basins in Brazil 281 Tables 2.1 Catastrophe exposure in case study countries 40 2.2 Government financing needs in case study countries 40 2.3 Resource gap in case study countries 41 vi Building Safer Cities: The Future of Disaster Risk 3.1 Qualifications to applicability of risk neutrality­theorem 51 3.2 Disaster losses and availability of resources for spreading risk for the United States and Honduras 51 3.3 Assessment of costs and benefits of insuring public assets in Honduras 53 6.1 Expected outcomes associated with investing and not investing in protection 83 6.2 Illustrative example: Expected costs associated with investing and not investing in protection 84 8.1 The world's largest cities, with projected populations in 2015 exceeding 8 million 103 8.2 Summary of the major weather-related hazards and the occurrence of subsidence during the 20th century for coastal megacities as forecast in 2015 104 8.3 Qualitative overview of direct socioeconomic impacts of weather-related hazards and climate change on a number of sectors in coastal zones 107 8.4 Generic approaches to hazard reduction based on purposeful adjustment 107 9.1 Area and population of Dhaka City, 1600­2001 126 9.2 Flood-affected people in Dhaka City by severity of the flood, 1998 129 9.3 Cost of rehabilitation and replacement of Dhaka Water Supply System (DWASA), March 1999 129 9.4 Flood characteristics of 1988 and 1998 floods in surrounding rivers of Dhaka City 133 10.1 Average rainfall for each region 138 11.1 Population growth of Mediterranean countries, 1850­2050 153 11.2 Changes in the urbanization rates of MENA countries (1950­2030) 154 11.3 Growth of urban centers in the Mediterranean, 1950­2015 (millions) 154 11.4 People reported killed by natural disasters by country, 1975 to 2001 (in thousands) 157 13.1 Megacities at Risk (UNU Study Cities in Italics) 182 13.2 Comparison of four megacities 185 13.3 Groups perceived by disaster management professionals to be highly vulnerable to disasters (Percent officials) 185 13.4 Knowledge of vulnerable groups and planning of programs to reduce vulnerability in Mexico City and Los Angeles (Percent officials) 186 13.5 Groups perceived by disaster management professionals to be highly vulnerable to disasters (Percent officials) 190 13.6 Knowledge of vulnerable groups and planning of programs to reduce vulnerability (Percent officials) 191 17.1 Cases of evaluation of consequences of natural events 250 17.2 Example of essential information relative to life support networks 267 20.1 Short form of the European Microseismic Scale EMS-98 295 20.2 Results of comparative analysis of seismic-(base)-isolated and fixed-base (conventionally designed) buildings 298 Boxes 1.1 Financial fallout from the Montserrat volcanic eruption 8 7.1 Coastal cities and small island states 92 7.2 Natural disasters: what percentage is due to climate change? 93 8.1 Responding to coastal flooding in London, United Kingdom 108 8.2 Responding to human-induced subsidence in Shanghai, China 108 Acknowledgments The papers in this volume were prepared as background Aysan, Tim Campbell, Robert Chen, William Cobbett, materials for the conference on The Future of Disaster Arnaud Guinard, Maritta Koch-Weser, Somik Lall, Risk: Building Safer Cities held at the World Bank from Rodney Lester, Ajay Mathur, Reinhard Mechler,Evavon December 4 to December 6, 2002. Additional presen- Oelreich, David Peppiatt, John Pollner, Jean-Luc Pon- tations and conference proceedings are available on celet, Christoph Pusch, John Redwood, Sergio Sal- the websites of the ProVention Consortium (http://www. daña, Rainer Steckhan, Pablo Suarez, Helena Molin proventionconsortium.org) and the Disaster Manage- Valdés, Koko Warner and Ricardo Zapata. ment Facility (http://www.worldbank.org/dmf). We We would also like to thank the staff of the Disaster would like to thank speakers and managers from the ManagementFacilityfortheirtremendouseffortsinorgan- World Bank who supported this effort: Nemat Talaat izing this conference: Jonathan Agwe, Maria Eugenia Shafik, Michael Klein, Ngozi Okonjo-Iweala, Frannie Quintero, and Zoe Trohanis. Additional advice and sup- Leautier, John Flora, Katherine Marshall and Orsalia port for preparations was provided by George Tharakan, Kalantzopoulos. We would also like to thank keynote Mirtha Araujo, and other staff of the Transport and Urban speaker Martin Palmer, Director of the Alliance for Reli- Development Department. gions and Conservation, and opening panel speakers We are grateful to the authors of the papers in this Cristobal Sequeira, First Executive Secretary for Disas- volume for their contributions and submitting to the ter Mitigation, Government of Nicaragua; and Margaret editorial changes required for publication. Shields, Chairperson, Wellington Regional Council, Support for the conference and publication was pro- New Zealand for their participation in the event. vided under the umbrella of the ProVention Consor- We are also grateful for the participation of and the tium. We would especially like to thank the World Bank, extra efforts made by World Bank staff and colleagues the United Kingdom's Department for International from other organizations working in the field of risk man- Development (DFID), and the Government of the agement who served as moderators, discussants, and Kingdom of Norway (The Royal Ministry of Foreign rapporteurs to make our conference a success: Yasemin Affairs) for their generous support. vii Abbreviations ACDS The African Centre for Disaster DWASA Dhaka Water Supply and Sewerage Studies Authority ADB Asian Development Bank ECLAC Economic Commission for Latin ADPC Asian Disaster Preparedness Center America and the Caribbean AIJ activities implemented jointly EIB European Investment Bank AIUF additional isolated upper floor ENLA Emergency Network Los Angeles ALOS Advanced Land Observing Satellite ENSO El Niño Southern Oscillation AMBA Buenos Aires metropolitan area EOS earth observation satellites ATC Applied Technology Council EPRI Electric Power Research Institute BWDB Bangladesh Water Development EUROMED European-Mediterranean Partnership Board FAO Food and Agriculture Organization CBA cost-benefit analysis of the United Nations CBO community-based organization FDI foreign direct investment CDM clean development mechanism FEMA Federal Emergency Management CENAPRED National Center for Disaster Agency (U.S.) Prevention GAGAN GPS and geo-augmented navigation CEOS Committee on Earth Observation system Satellites GATT General Agreement on Tariffs and CEPA-INDEC Comité Ejecutivo para el Estudio de Trade la Pobreza en Argentina GBM Ganges-Brahmaputr-Meghna CER carbon emission reduction GDIN Global Disaster Information Network CERT citizen emergency response training GDP gross domestic product CPACC Caribbean Planning for Adaptation GEF Global Environment Facility to Climate Change GEO geostationery-earth-orbit CRED Center for Research on the GHG greenhouse gas Epidemiology of Disasters GII global information infrastructure CRID Regional Disaster Information Center GPG Gauteng Provincial Government DMF Disaster Management Facility of the GPS global positioning systems World Bank GR greater Resistencia DERC Disaster and Emergency Reference GSF greater Santa Fe Centre (the Netherlands) IAS innovative anti-seismic DIFPP Dhaka Integrated Flood Protection ICBS International Committee of the Blue Project Shield DIMITRA International Network on Disaster ICCROM International Center for the Study of Management Training in Africa the Preservation and Conservation of DRC Disaster Research Center Monuments viii Abbreviations ix ICOMUS International Council on Monuments NAO North Atlantic Oscillation and Sites NASDA National Space Development Agency IDB Inter-American Development Bank of Japan IDNDR International Decade on Natural NASSCOM National Association of Software and Disaster Reduction Service Companies IDRC International Development Research NATO North Atlantic Treaty Organization Centre NDMC National Disaster Management IEEE Institute of Electrical and Electronics Centre (South Africa) Engineers NDPRC National Disaster Preparedness and INODEX Indian Ocean Experiment Relief Committee (Malawi) IFAD International Fund for Agricultural NERC North American Electric Reliability Development Council IFI international financial institutions NGO nongovernmental organization IFRC International Federation of the Red NOAA National Oceanic and Atmospheric Cross and Red Crescent Societies Administration IIASA International Institute for Applied OAS Organization of American States Systems Analysis OECD Organization for Economic IMF International Monetary Fund Cooperation and Development INDEC Instituto Nactional de Estadísticas y OFDA/USAID Office of Foreign Disaster Assistance Censos of the U.S. Agency for International INEGI National Institute of Statistics, Development Geography, and Information OP operational program INGC National Institute for Disaster OSCE Organization for Security and Management (Mozambique) Co-operation in Europe IOM International Organization for PCF Prototype Carbon Fund Migration PCUP Philippine Commission on Urban IPCC Intergovernmental Panel on Climate Poor Change PICCAP The Pacific Islands Climate Change IPCC CZMS Intergovernmental Panel on Climate Assistance Programme Change, Response Strategies PMU phasor measurement unit Working Group, Coastal Zone PSDS Private Sector Development Strategy Management Subgroup PSI Private Sector Development and IPEC Instituto Provincial de Estadística y Infrastructure Vice-Presidency of the Censos World Bank IRI International Research Institute for PUWC Pico Union Westgate Cluster Climate Prediction PWV Pretoria-Witwatersrand-Vereeninging ISRO Indian Space Research Organization RAJUK Capital Development Authority, JI joint implementation Dhaka JICA Japan International Cooperation RAT rational action theory Agency RMS Risk Management Solutions LDC least developed country RPG Rassemblement du Peuple Guineen LEO low-earth-orbit SADC Southern African Development LME London Metal Exchange Community MBS Montserrat Building Society SIFEM Sistema Federal de Emergencias MIC methyl isocyanate TMG Tokyo Metropolitan Government MFI micro-finance institution UBN unmet basic needs x Building Safer Cities: The Future of Disaster Risk UNCTAD United Nations Conference on Trade UNHCR United Nations High Commissioner and Development for Refugees UNCHS United Nations Human Settlements UN/ISDR United Nations International Programme Strategy for Disaster Reduction UN/DESA United Nations Department of UNOCHA United Nations Office of the Economic and Social Affairs Coordination of Humanitarian Affairs UNDP United Nations Development UNU United Nations University Programme USAID U.S. Agency for International UNDRO United Nations Disaster Relief Office Development UNEP United Nations Environment USGAO U.S. General Accounting Office Programme USGS U.S. Geological Survey UNESCAP United Nations Economic and Social USNRC U.S. National Resource Council Affairs Programme VAP Variability and Adaptation Facility UNESCO United Nations Educational, WCC World Coast Conference Scientific, and Cultural Organization WHO World Health Organization UNFCC United Nations Framework WMO World Meteorological Organization Convention on Climate Change WTO World Trade Organization UNFPA United Nations Population Fund WWF World Wildlife Fund Contributors J. M. Albala-Bertrand Hans G. Brauch Sr. Lecturer Chairman Department of Economics Peace Research and European Security Queen Mary & Westfield College Studies (AFES-PRESS) University of London Free University of Berlin Mile End Road Alte Bergsteige 47 London E1 4NS 74821 Mosbach UK Germany Mozaharul Alam Edward Clay Research Fellow Senior Research Associate Bangladesh Centre for Advanced Studies (BCAS) Overseas Development Institute House No. 23, Road No. 10 A 111 Westminster Bridge Road Dhanmondi R/A, Dhaka London, SE1 7JD Bangladesh UK Torben J. Andersen Nora Clichevsky Professor Urban Development Consultant George Mason University Soldado de la Independencia 1343, 3082 S. Woodrow Street piso 6° "A" Arlington, VA 22206, USA Buenos Aires, Argentina Charlotte Benson Eser Durukal Senior Research Associate Department of Earthquake Engineering Overseas Development Institute Kandilli Observatory and Earthquake 209 Jalan Ara Research Institute Bangsar Baru Department of Earthquake Engineering 59100 Kuala Lumpur 81220 Cengelkoy, Istanbul, Turkey Malaysia Mustafa Erdik Anthony Bigio Professor and Chairman Sr. Urban Specialist, Urban Unit Department of Earthquake Engineering The World Bank Bogazici University 1818 H Street, NW, 81220 Cengelkoy Washington DC 20433 Istanbul 81220 USA Turkey xi xii Building Safer Cities: The Future of Disaster Risk Paul Freeman Mikayel Melkumyan President President Cook Street Holdings Armenian Association for Earthquake Engineering 3402 E. Eastman Ave. 1 Lane of Nansen St., 6, Apt. 20 Denver, CO 80210 Yerevan-56, Armenia USA Lamine Mili Hilda Herzer Professor Professor Alexandria Research Institute Buenos Aires University Virginia Polytechnic Institute & State University Mendoza 3454 206 N. Washington St., Suite 400 (1430) Buenos Aires, Argentina Alexandria, VA 22314 USA Saleemul Huq Director Robert Nicholls International Institute for Environment Professor and Development Flood Hazard Research Center 3 Endsleigh Street Middlesex University London WC1H 0DD, UK Enfield, London EN3 4SF UK Richard Klein Potsdam Institute for Climate Impact Research Krisno Nimpuno P.O. Box 60 12 03 University of the Witwatersrand 14412 Potsdam, Germany P.O. Box 592 Wits 2050 Howard Kunreuther Johannesburg Professor South Africa Risk and Decision Processes Center The Wharton School Enrico Quarantelli University of Pennsylvania Emeritus Professor 1332 Steinberg Hall-Dietrich Hall Disaster Research Center Philadelphia, PA 19104 University of Delaware Newark, DE 19716 Prvoslav Marjanovic USA Professor University of the Witwatersrand Benoit Robert P.O. Box 592 Researcher Wits 2050, Johannesburg Ecole Polytechnique South Africa 2500, Chemin de Polytechnique Montreal, Canada Reinhard Mechler Research Scholar June Taboroff International Institute for Applied Cultural Resource Specialist Systems Analysis (IIASA) 526 Fulham Road Schlossplatz 1 London, SW6 5NR A-2361 Laxenburg, Austria UK Contributors xiii Frank Thomalla Ben Wisner Potsdam Institute for Climate Impact Research Research Fellow P.O. Box 601203 London School of Economics 14412 Potsdam 15 Riverfleet, Birkenhead Street Germany London WC1H 8BJ, England, UK Editors' Note Vulnerability to disaster impacts is one of the most under- Urban areas are particularly vulnerable to disruptions estimatedissuesinurbandevelopment.By2050,theworld from extreme events, especially in developing countries, population is expected to grow by 3 billion people. Most where the combination of structural poverty, decaying of this growth will take place in developing countries-- and substandard infrastructure, high population densi- andwithinthesecountries,incitiesandtowns--morethan ties, and the concentration of economic assets and com- doublingurbanpopulations.Largenumbersofpeoplewill mercial and industrial activities magnify the problem. beconcentratedinmegacitiesandonfragilelands,making reductionofvulnerabilitytodisastersinmetropolitanareas a critical challenge facing development. The Future of Disaster Risk: Building Safer Disaster impacts are increasing in severity. Annual Cities Conference direct losses for weather-related events have increased from $3.9 billion in the 1950s to $63 billion in the In order to increase the awareness of development agen- 1990s. Moreover, a number of ongoing trends have the cies regarding the urgency of addressing urban vulner- potential to cause even more severe and broader disas- ability to hazards, the World Bank's Disaster Management ter impacts than ever before. These include increased Facility and the ProVention Consortium--a coalition environmental degradation, the impacts of climate of international agencies, nongovernmental organiza- change, population growth in cities, and globalization. tions (NGOs), governments, the private sector, and Increasingly, disasters affect communities far beyond academics--hosted a conference from December 4 to the areas of geographic impact as regions are linked in December 6, 2002. new ways. During the 1999 earthquake in Turkey, numer- The conference explored a range of issues related to ous textile factories collapsed, bringing to a standstill disaster vulnerability and identified priorities for devel- Turkey's large demand for African cotton. While the Sep- opment and disaster prevention activities to ensure safer tember 11 terrorist strikes had devastating impacts in cities in the future. Papers to serve as conference back- the United States, the greatest economic and human ground materials were commissioned from experts, dis- impacts may be felt in Sub-Saharan Africa. The World aster management researchers, and development Bank estimates that the resulting global economic slow- practitioners. The papers were complemented by pre- down could kill 20,000­40,000 children, half of them sentations. Discussions revolved around a range of issues in Africa, as poverty worsens. facing urban areas, including: While industrialized countries may register higher · economic impacts and globalization; economic losses following a disaster, there are frequently · adaptation to climate extremes and climate change; systems in place to respond to the event to minimize loss · preventive strategies to reduce disaster risk; of life. Property is often covered by insurance. In devel- · social infrastructure and the vulnerability of the poor; oping countries, by contrast, disasters can cause major · social perception of risk; setbacks to economic and social development, inflict · the impacts of disasters on critical infrastructure link- massive casualties, and cause the diversion of funds ages; and, from development to emergency relief and recovery. · threats to megacities from new types of hazards. xiv Editor's Note xv Conference Volume to divert funding from development to disaster relief, stunting the country's growth even more. Furthermore, The papers in this volume are organized into four sec- Andersen argues, some countries do not take steps to tions: Globalization and the Economic Impacts of Dis- mitigate potential hazards since they expect the inter- asters; Environment, Climate Variability, and Adaptation; national community to bail them out in the event of a Social Vulnerability to Disaster Impacts; and Vulnerabil- large disaster. This bailout, however, results in a "moral ity of Critical Infrastructure to Disasters. Presentations hazard." Although helping a country following a dis- and related conference proceedings are available on the aster seems to be the right action to take, this action dis- websites of the ProVention Consortium (http://www. courages governments from adequately planning for proventionconsortium.org) and the Disaster Manage- disasters. Andersen also discusses the importance of ment Facility (http://www.worldbank.org/dmf ). There countries having diversified economic bases and expert is some divergence of views among authors selected concentrations to help withstand the common shocks for this publication, though we hope their differing view- that disasters can cause. points enrich the debate and highlight the myriad issues Additional positive and negative aspects of global- surrounding disaster management. ization on the economies and social development of developing countries are examined by José Miguel Albala- Bertrand. He suggests that globalization has given rise Globalization and Economic Impacts of Disasters to worldwide economic cycle synchronization that is linked to the performance of industrialized economies. In the first section, Charlotte Benson and Edward Clay This theory proposes that if industrialized countries are explore the relationship between integration in the global in recession, disaster recovery for developing countries economy and sensitivity to natural hazards. They take may take longer, since less assistance will be forthcoming a macroeconomic perspective illustrated by case stud- and a worldwide recession will make any sort of recov- ies on Bangladesh, Dominica, and Malawi--three coun- ery difficult. He focuses on urban disasters and argues tries with varying degrees of economic diversity and that their effect on the macroeconomy is often negligi- vulnerability to natural hazards. More generally they ble because reconstruction and business opportunities note that, with reduced barriers to international trade brought by a disaster provide opportunities and eco- and increased foreign direct investment (FDI), there has nomic stimulation. Disaster management activities, there- been a steady, accelerated movement toward globaliza- fore, should focus on communities and their resilience tion, especially since the late 1980s. They also point out since the economy will either recover on its own or be that this increased global economic activity is resulting subject to greater forces that cannot be controlled. in environmental degradation that in turn increases Several contributors to the volume address the deci- the frequency and intensity of natural disasters, making sionmaking process involved in financing and dealing their impacts more devastating. In the three case stud- with disaster risk. For example, Paul Freeman exam- ies, they explore the complex developmental, economic, ines the consideration of disaster risk in the privatiza- and societal factors that affect a country's vulnerability tion process. As part of a development agenda, countries to natural hazards. often privatize infrastructure, particularly telecommu- Torben Andersen also addresses globalization and nications, electricity distribution, and water pipeline notes that, while the frequency of disaster events has systems. As the provision of goods and services is trans- quadrupled over the past 30 years, reported economic ferred from governments to the private sector, associ- losses have increased by a factor of 2,000 to 3,000 and ated risk must also be allocated. Freeman's paper explores insurance losses have increased by a factor of 1,000. the role that privatization can play in shifting the risk of These economic losses have by far outweighed economic financing post­natural disaster reconstruction from the growth figures for the same period. Andersen notes that government to the private sector. Though governments these losses hit developing countries hardest and those have traditionally been seen as the entity best able to without post-disaster contingency plans were forced cope with risk, Freeman suggests that natural hazard xvi Building Safer Cities: The Future of Disaster Risk risk no longer be placed automatically with a govern- mitigation measures, therefore, he suggests greater public- ment and that this risk be allocated during the privati- private partnerships that encourage individuals to under- zation process. Freeman identifies several complex issues take loss reduction measures and governments to enforce surrounding risk identification and allocation and states regulations and building codes. that the risk should be placed with the entity most capa- ble to deal with it. The power of taxation has tradition- ally made governments best able to cope, but in politically Environment, Climate Variability, and Adaptation unstable countries and those subject to recurrent disas- ters, a resource gap may exist. This gap--identified by The 20th century ushered in a number of trends that studying the likelihood of an event, insurance coverage, affected the environment and altered its natural rhythms. and a country's ability to raise money through taxes-- The industrial revolution, ever-increasing technologi- may mean that a government is unable to sufficiently cal innovations, rapid urbanization resulting from the assume natural disaster risk, and losses might be more mechanization of agricultural production, and the birth efficiently handled by the private market. of megacities have put pressure on natural resources Reinhard Mechler also addresses how to account for and contributed to climate change. disaster risk when making development investment Six authors address urban vulnerability and envi- decisions. Mechler suggests that cost-benefit analysis ronmental issues through papers relating to climate (CBA), used in the economic and financial evaluation change, coastal megacities, flooding, urbanization, and of public investments, is an underutilized tool that could urban land markets. Anthony Bigio's work on climate be better used to account for disaster risk. According change promotes the idea that development-financing to Mechler, using CBA for investment and risk man- institutions such as the World Bank, which invest sig- agement projects in the context of natural disaster risk nificant amounts in urban areas affected by climate vari- improves decisionmaking and the allocation of scarce ability, should incorporate adaptation measures into resources to the most profitable undertakings. This leads project design. He notes that sea-level rise is the phe- to more careful project selection and designs that decrease nomenon exclusively linked with climate change, though vulnerability to hazards and secure project benefits. climate change also increases the risk of wildfires and Though cost-efficiency as measured by CBA should storms, impacts fisheries and agriculture upon which not be the sole criterion for assessing investment in urban areas depend, worsens air pollution, and enhances development and risk management projects, it provides urban heat islands. There are adaptation mechanisms important information for efforts aimed at reducing that include improving infrastructure and strengthen- potential economic impacts due to natural disasters, thus ing defenses, especially in response to sea-level rise, contributing to more robust economic development. though these changes may impact the environment in In a similar vein, Howard Kunreuther discusses such a way that local economic bases are changed. whether individuals and businesses have enough eco- Climate change in the context of coastal megacities nomic incentives to carry out socially appropriate levels is discussed by Richard Klein, Robert Nicholls, and of mitigation for reducing future disaster losses. He pro- Frank Thomalla, who note that much of the projected vides several scenarios of interdependent disaster risk growth in large cities is expected to take place in such illustrated by measures taken (or not taken) by fami- locations. Many of these cities have existed for centuries, lies in adjoining homes to reduce losses from an event though it was only during the 20th century that these such as an earthquake and the possibility of resulting cities expanded rapidly and began to critically impact fires, water leaks, or gas explosions that could spread. natural processes. While weather-related hazards have Kunreuther concludes that such interdependent risks always been greater for coastal locations, these haz- serve as a disincentive for undertaking mitigation meas- ards, combined with human activities and environ- ures since one or a handful of families will not invest mental degradation, lead to greater erosion, storm and in mitigation measures if their home will still be at risk wind damage, flooding, and salinization of surface waters. due to an unprotected neighbor's home. To encourage Though the threat is global, it is thought to be most Editor's Note xvii severe in South and Southeast Asia, Africa, the southern embankments, and pipes to control the flow of water. Mediterranean coasts, and to a lesser extent in East Asia. It is also trying to control the expansion of the city and The authors suggest that, to deal with climate change, has forbidden the filling in of wetlands. With an increas- desirable policy and management goals should include ing population of urban poor and unsuitable construction resiliency and adaptive capacity for weather-related haz- in floodplains, the city still faces numerous challenges. ards. This framework would have the benefits of link- The Río Salado Basin in Argentina covers half of the ing the analysis of present and future hazardous province of Buenos Aires and is subject to regular flood- conditions and enhancing the capacity for disaster pre- ing. Hilda Herzer writes that socioeconomically it is one vention and preparedness with disaster recovery. of the most important areas in Argentina. It comprises Hans Günter Brauch focuses more specifically on the 56 municipalities, and to support its growing popula- potential impacts of climate change in the Mediterranean tion a number of large public works have been carried region, an area of rapid urbanization. He notes that out, including hydraulic systems to modify the basin's disasters in the region have varying economic and social drainage. The basin's primary activities have also shifted impacts that have not been adequately addressed at a from cattle breeding to irrigated farming. As a result, regional level, since the Mediterranean encompasses flood and drought cycles now affect agricultural pro- diverse communities in Southern Europe, North Africa, duction. The farming and cattle breeding that take place and parts of the Middle East. Disasters impact each of in the basin form an important part of the provincial these areas differently, and while Southern Europe may and national economies. Therefore, the impacts of flood- be significantly affected by disasters, the preventive ing and drought cycles are not localized and affect the measures in place generally prevent extensive loss of entire country. life. By contrast, disasters in North Africa and Turkey Nora Clichevsky also looks at flooding in Argentina, often result in greater loss of life and property, which but studies the role of the state as land market regulator may be preventable. Many of these events appear to in urban areas vulnerable to flooding and the impacts of have greater impacts resulting from a combination of flooding and flood defenses on land markets. She dis- environmental degradation and climate change that cusses the competition for desirable urban space in the increases the frequency and severity of flooding, extreme country and the legal and illegal land markets that arise winter weather, and mudslides. Rapid urbanization in out of it. With the high rate of urbanization in Argentina the region also increases the potential for losses in heav- and the increase in populated land prone to flooding, this ily populated areas. is becoming an even greater issue. There is minimal reg- In addition to the rise in sea level, climate change is ulation of the legal land market in Argentina and little also thought to affect rainfall, which in turn could result control of new housing developments in areas prone to in flooding. Three authors examine flooding by study- flooding. Clichevsky points out, however, that despite ing causes in Dhaka City and the Río Salado Basin in flooding in neighborhoods of all income groups, this does Argentina, as well as the impact of flooding on urban not make a large impact on property values. Evidence of land markets in Argentina. flooding is masked to make property marketable, but Flooding in Dhaka is reviewed by Saleemul Huq the factors most affecting the value are location and neigh- and Mozaharul Alam in the context of historical processes. borhood rather than flood versus nonflood zone. Founded 400 years ago by the Mughal Emperor Jahana- gir, Dhaka is surrounded by two major rivers and has experienced flooding for years, including numerous Social Vulnerability to Disaster Impacts floods throughout the 20th century. Dhaka is now a city of more than 10 million people and recurrent flooding Of utmost concern in disaster management are the is a problem for residents. Most of the city's low-lying protection of human life and post-disaster recovery that areas and wetlands have been filled in, upsetting the allows individuals and communities to resume digni- natural water runoff process. The city has imple- fied lives. Industrialized countries often have the resources mented a flood protection program including canals, and the advance warning systems to evacuate thousands xviii Building Safer Cities: The Future of Disaster Risk of people and build disaster-resistant structures, all of It had initially been assumed that these two types of insti- which save lives. Florida, for example, can be hit by tutions could work together and would serve commu- hurricanes that claim few lives and have impacts that nities well. Wisner found it was not that easy. Though destroy only a fraction of local economic growth. Most municipalities had the mandate and some funding to developing countries are not as fortunate. Disasters assist vulnerable groups, they often lacked in-depth still claim tens of thousands of lives each year and destroy knowledge of social groups and did not have their trust. livelihoods in an instant. NGOs possessed detailed knowledge of vulnerable Katherine Marshall, World Bank Director of the Devel- groups and had their trust, but they lacked capacity or opment Dialogue on Values and Ethics, highlighted the a mandate to respond to disaster emergencies. The study importance of religion as an integral part of social infra- highlighted numerous obstacles to their collaboration structure. Conference keynote speaker Martin Palmer, and it was recommended that additional capacity build- Founder and Director of the Alliance of Religions and ing in both types of institutions continue. Conservation, explored this in detail, discussing the Enrico Quarantelli also states that risk is a socially con- unique role that faith-based organizations can play in structed concept that can vary vastly from one society implementing successful disaster risk reduction strate- to another, though he highlights the emergence of new gies. Palmer noted that the 11 major religions of the categories of vulnerables that are a direct result of urban- world control 7 percent of the earth's habitable surface ization and mobility. For example, college students and and operate 54 percent of the schools worldwide. With workers living alone or in quarters, but existing far from this wide reach, and thousands of years of experience families and traditional social support networks, are a in organizing and motivating people, religious organi- group infrequently accounted for in disaster management zations have the potential to influence how people think programs. Notions that slums and squatter communi- about risk. Palmer proposed that with the disaster ties are disorganized are also challenged, as Quarantelli management, development, and environmental con- notes that migrants to cities often live among people of servation challenges of the 21st century, these groups similar ethnic backgrounds and religious beliefs, and are should become more engaged and that the role of reli- able to organize more effectively than one may think. gion move from passive to active; to illustrate this Quarantelli also discusses the profound effects that urban- point, he cited initiatives in countries such as India and ization and the development of new technologies is Thailand that have successfully channeled traditional having on the environment, creating newer and more religious values to motivate communities to protect envi- hazardous technologies with impacts that sometimes are ronmental resources. Palmer concluded that harness- not known for years. Suggestions for dealing with such ing religious values and linking them to development risk include education programs that raise the con- and disaster risk reduction goals is an ancient yet sciousness of government officials and communities to inventivewaytoincreasecommunityinvolvement,reduce understand and mitigate risks. social vulnerability to disaster impacts, and shift per- During the conference, Africa was highlighted as a ceptions of natural disasters from fatalistic to preventive. region in serious need of disaster management initia- Ben Wisner details diversity in culture and risk per- tives. Many African countries are particularly vulnera- ception in two case studies involving four cities: ble when disasters strike urban areas because most Mexico City and Los Angeles; and Manila and Tokyo. countries have only one major city, and many of these He finds that even in cities that might share similarities, are already overburdened. Prvoslav Marjanovic and there are vast differences in perceptions of vulnerability Krisno Nimpuno submit that, while many African lead- and risk. In Mexico City, for example, squatters and chil- ers recognize that disasters pose a major obstacle to the dren were thought by other city dwellers to be the most continent's efforts to achieve sustainable development, vulnerable to disasters. In Los Angeles, by contrast, the a lack of resources and trained professionals hinders elderly and disabled were perceived to be the most managing disaster risk more effectively. Marjanovic and vulnerable. Wisner also looked at agencies providing Nimpuno state that in an attempt to address the shortage disaster assistance, mainly local governments and NGOs. of trained professionals, southern African countries have Editor's Note xix embarked on a number of training initiatives, includ- during an emergency plays an important role in reduc- ing three universities in South Africa now offering degree ing the number of casualties. programs in disaster management. South Africa also Benoit Robert and colleagues discuss critical life sup- adopted a new law in 2002, the National Disaster Man- port networks and the risks faced from various types agement Act, which highlights prevention over response, of failure including technical malfunctions, sabotage, shifting the focus of disaster management activities. and natural events. They also weigh the risk of system Cultural heritage is also an important component of failure against the level of risk acceptable to the com- social infrastructure and quality of life. June Taboroff munity served by that system. In the case of essential addresses the impact of disasters upon urban cultural services, they point out that the failure of one system heritage and cites efforts to save historic buildings and can cause several other critical systems to fail, result- precious works of art. In August 2002, flooding in East- ing in a domino effect. Realization of the interlinkages ern Europe was featured on the front pages of major and possible multisystem failures should be taken into newspapers worldwide. Highlighted were not death tolls account when identifying risks and attempting to mit- and injury statistics, but mourning for the loss of irre- igate them in the disaster management process. placeable treasures and elation at the salvation of Lamine Mili identifies similar issues with respect to others. During disasters in developing countries, cul- critical infrastructure, linkages, and possible failure. He tural heritage is often an afterthought to the emergency focuses on electricity and telecommunications systems response and rarely is it incorporated into disaster and cites examples of massive power failures and their management planning. Several international organiza- impacts in India, Brazil, North America, and Europe. tions, including UNESCO, are in the process of raising The power failures were the result of extreme events-- the profile of cultural heritage and working with coun- a heat surge in India, drought in Brazil, and severe weather tries to introduce legislation to protect it under a range in North America and Europe. He also looks at hidden ofcircumstances.Whilesomecountrieshavefewresources risks that cause system breakdowns, another factor that to devote to preserving cultural heritage, increased aware- must be accounted for in planning, since power failures ness is slowly spreading and governments and com- risk lives and negatively impact the economy. Mili empha- munities may begin to see value in finding ways to protect sizes that the implementation of fault detection, isola- cultural heritage for present and future generations. tion, restoration systems, and plans for survivability of electric power networks following major disturbances is critical to ensure continuously functioning systems. Vulnerability of Critical Infrastructure Mili also highlights advances in telecommunications and to Disasters satellite technologies already being used to monitor severe weather and cites examples of LANSAT-1 ground station Urbancommunitiesaredependentupontheinfrastructure linkages with Brazil, China, India, Iran, and Zaire that that supplies them with essential services such as clean are able to use this technology. water, waste management, electricity, transportation, and Mustafa Erdik highlights the devastating loss of life telecommunications. Basic services such as these are and property that can occur from building failure. The often the main assets of the urban poor, which assist 1999 earthquakes that struck Turkey's industrial belt them to pursue livelihoods and improve their quality of killed 18,000 and injured 50,000, mostly a result of col- life. Thus, it is essential to protect critical infrastructure lapsed buildings. Infrastructure and economic losses from failures in order to prevent families and entire com- ran into the billions of dollars. Erdik states that, munities from slipping further into poverty. though industry losses were better insured than pri- Several authors addressed the issue of critical infra- vate losses of life and property, the earthquake devas- structure, retrofitting existing infrastructure, and what tated tens of thousands of families and altered Turkey's happens when infrastructure fails. Hospitals, fire depart- industrial landscape. A significant number of skilled ments, and emergency service stations are also consid- workers were killed and many of those who survived ered essential infrastructure and their proper functioning would like to move from the area since another, possibly xx Building Safer Cities: The Future of Disaster Risk stronger, earthquake is predicted for the coming years. of developing countries to natural disasters. Natural dis- Unfortunately, the greatest lessons from Turkey's tragedy aster impacts often span geographic boundaries and revolved around the revelation of substandard build- must be understood in local, national, and global terms ing practices and corruption related to building code to ensure that appropriate disaster management pro- enforcement. While building codes had been written grams are in place to mitigate and, where possible, pre- and adherence to them could have saved lives, it is too vent major negative impacts on communities and the late for the victims of the 1999 earthquakes. environment. Armenia, situated in a seismically active zone, expe- This point was reaffirmed during presentations by rienced a similarly devastating earthquake in 1988 the concluding panelists: Maritta Koch-Weser, Presi- that killed 25,000 people and injured 15,000. Since dent, Earth 3000; Eva von Oelreich, Head of Disaster then, there have been improvements in earthquake- Preparedness and Response, International Red Cross resistant technologies, some of them developed locally. and Red Crescent Societies; Helena Molin Valdés, Inter- Mikayel Melkumyan, an Armenian researcher, devel- national Secretariat of Disaster Reduction; and, Jean Luc oped a system for retrofitting buildings using laminated Poncelet, Chief, Program on Emergency Preparedness, rubber bearings. Installation of the bearings does not Pan-American Health Organization. These panelists rec- require building evacuation and costs just 35 percent ommended areas for leadership and urged conference of traditional strengthening materials. The system has participants to rise to meet the challenge of preventing been tested over the past five years, and surveys of res- future disasters. The panelists also recommended risk idents living in retrofitted buildings have revealed that management techniques for moving forward, includ- they no longer feel minor earthquakes. ing: investing in improved data and indicators on dis- aster risk, developing community participation programs, creating new risk transfer and risk reduction mecha- The Way Forward nisms, and reinforcing partnerships among stakehold- ers to reduce communities' vulnerability to risk. In synthesizing the various research papers and discus- Parallel to these important issues, Ngozi Okonjo- sions that took place over the two days of the confer- Iweala, World Bank Vice President and Corporate Sec- ence, two main issues emerge: the urgency of addressing retary, in her opening remarks and conference discussions increasing disaster vulnerability; and the interdepend- iterated the importance of creating innovative approaches ence of systems at the global, regional, and local levels. to disaster risk management as being crucial to assist- Throughout the conference, speakers and participants ing developing countries cope with vulnerability. Sev- proposed priorities and solutions for moving forward. eral ideas were presented at the conference, including: Two common threads appear in the numerous approaches creative risk sharing and transfer mechanisms, low-cost discussed: developing innovative approaches to disaster ways of retrofitting buildings, and techniques for build- risk reduction and changing people's perception of risk. ing effective community participation programs. John Flora, World Bank Director of the Transport Other speakers discussed innovative uses of standard and Urban Development Department, and Orsalia tools, such as cost-benefit analysis, to integrate disas- Kalantzopoulos, World Bank Country Director and ter risk reduction into development planning. Regional Coordinator of Southeast Europe, noted that Along with innovation, a consensus emerged among as urban populations have continued to multiply, nat- conference participants that changing people's percep- ural disasters have become bearers of increasing misery, tion of risk is key to advancing disaster risk reduction. especially for the poor. Additional factors such as climate Frannie Leautier, World Bank Institute Vice President, change,thecreationofnewhazards,environmentaldegra- emphasized that communities must understand that dation, and rising poverty levels are contributing to the they are not helpless in the face of disasters. To empower increase in disaster risk. Furthermore, globalization-- such groups, education and training were detailed in the increasing interconnectedness of economies, cultures, conference discussions and papers as powerful tools and the environment--affects the level of vulnerability to raise awareness of the importance of preparedness Editor's Note xxi programs and natural disaster risk reduction. From and better able to protect their lives, homes, livelihoods, community-level awareness raising and involvement to and assets. We hope that, by bringing together differ- building a professional-level cadre at senior levels of ent stakeholders that do not traditionally interact on government and disaster management organizations, the topic of disaster management, this conference made learning activities were the most frequently cited solu- a contribution to advancing the agenda in disaster risk tion to creating capacity for disaster risk reduction. management and will precipitate future collaboration By applying innovative approaches to disaster risk and research among participants. By publishing this reduction and by empowering people through effec- volume, the editors hope the dialogue that was initi- tive disaster reduction strategies, communities and gov- ated at the conference is expanded and its impact ernments will be more resilient when disaster strikes broadened. Flooding after earthquake interrupts commercial activities in Turkey. PART I GLOBALIZATION AND THE ECONOMIC IMPACTS OF DISASTERS Chapter 1 Disasters, Vulnerability, and the Global Economy Charlotte Benson and Edward J. Clay Two worldwide trends in recent decades are com- environmental catastrophe, social unrest that is unprece- monly noted and sometimes linked in discussing dis- dented, economies of most countries in shambles, an asters. First, the reported global cost of natural disasters increase in poverty, hunger, landlessness, migration and has risen significantly, with a 14-fold increase between social dislocation. The experiment may now be called the 1950s and 1990s (Munich Re 1999). During the a failure."1 1990s, major natural catastrophes are reported to have But what does globalization imply for vulnerability resulted in economic losses averaging an estimated to natural hazards? Rising disaster losses have paralleled US$54 billion per annum (in 1999 prices) (Munich Re increasing globalization. But are the two trends related-- 1999). Record losses of some US$198 billion were and, if so, necessarily? Or are they coincidental but recorded in 1995, the year of the Kobe earthquake-- separate movements? And can differences in the inci- equivalent to 0.7 per cent of global gross domestic dence of occurrence and nature of natural hazards influ- product (GDP) (Munich Re 1999). ence the form and level of integration of a country into Second, there is an apparent steady movement toward the global economy? globalization, with an increasing share of economic activ- This paper seeks to explore the relationship between ity taking place across countries and regions as barriers integration in the global economy and sensitivity to to integration are reduced. Between 1987 and 1997, natural hazards--that is, to events caused by geophys- the share of international trade in total output (defined ical, hydrological, and atmospheric forces. It takes a as exports plus imports relative to GDP) rose from 27 macroeconomic perspective and draws on both the wider to 39 percent for developed countries and from 10 to literature and on evidence accumulated by the authors 17 percent for developing countries (World Bank 2000). in a series of studies of the economic impacts of natu- Global foreign direct investment (FDI) flows more than ral disasters. This research includes, most recently, an tripled between 1988 and 1998 to US$610 billion, and ongoing study on The Economic and Financial Impacts of foreign direct investment is now the largest form of pri- Natural Disasters: An Assessment of Their Effects and Options vate capital flow to developing countries (World Bank for Mitigation undertaken on behalf of the World Bank's 2000). Labor migration and financial remittances to Disaster Management Facility, with the financial support home countries have also been of increasing importance of the U.K.'s Department for International Development.2 to developing countries and poorer regions within them. The paper is organized as follows. First, definitions As the World Bank (2000: 1) comments, "globaliza- of the key concepts concerning disasters and global- tion is one of the most charged issues of the day.... ization employed in the paper are given. The next sec- Extreme opponents charge it with impoverishing the tion then considers the implications of various aspects world's poor, enriching the rich and devastating the and impacts of globalization for forms and nature of environment, while fervent supporters see it as a high- vulnerability to natural hazards. Various aspects of glob- speed elevator to universal peace and prosperity." Or, alization, covering international trade in goods and serv- in the words of the 1998 Siena Declaration, "rather than ices; international financial markets; international labor leading to economic benefits for all people, it (economic mobility; and international research and exchange of globalization) has brought the planet to the brink of information are considered. The domestic impacts of 3 4 Building Safer Cities: The Future of Disaster Risk globalization in certain specific areas--namely, rates of capital, and a reduction in economic activity, such as growth, poverty, food security, and environmental income and investment, consumption, production, and conditions--are also discussed. employment in the "real" economy. There may also be The potential impacts that risk and disasters, in turn, severe impacts in terms of financial flows, such as rev- can have on the pace and nature of globalization are enue and expenditure of public and private bodies then examined in a section on the implications of nat- (Benson and Clay 1998). The losses in stocks of capital ural hazards for globalization, focusing in particular and inventory and reductions in short-term economic on the issue of whether natural hazards can present a flows are sometimes confounded in reporting the costs fundamental obstacle to integration. of disaster impacts.3 These stock losses and short-term The next section presents evidence from three flow effects may be so extreme as to result in a modifi- countries--Dominica, Bangladesh, and Malawi-- cation in the medium- to longer-term trajectory or devel- illustrating a range of experience in terms of trends in opment path of an enterprise, region, or national economy vulnerability, forms that vulnerability can take, and the as well. role of varying external linkages and relations. The Vulnerability is the potential to suffer harm or loss in case studies also demonstrate that globalization is not terms of sensitivity, reliance, and reliability. Economic a new phenomenon; that it is possible for a country's behavior is sensitive to a disaster shock. This impact is level of integration into the global economy to decrease, reflected at a macro or sectoral level in the deviation of as well as increase, over time; and that the nature of economic aggregates from trends that were expected integration can change. The latter two factors, in turn, without taking into account the effects of this event. can have implications for an economy's sensitivity to Because economic activity is sensitive to many influ- natural hazards. ences, including other sources of shock, in practice it The paper concludes with some reflections on the can be difficult to isolate precisely the impacts of a spe- policy and research implications of the complex and cific disaster or disasters. The primary objective of our changing influences that determine an economy's sen- studies has been to seek to isolate and understand sitivity to natural hazards. these short- and long-term consequences of natural dis- The literature relating to both natural disasters and asters. Resilience is the speed of recovery in economic to globalization indicates some diversity in the use of activity, which may involve repair and replacement of basic terms. At the outset, therefore, it is useful to define lost and damaged capital. how key language is used in this paper: Disaster management literature commonly distin- A natural hazard is a geophysical, atmospheric, or guishes rapid-onset disasters, such as storm surges or hydrological event that has a potential to cause harm earthquakes, which cause immediate loss and disrup- or loss. Usually these are both uncommon and extreme tion, and slow-onset events, notably drought. In our events in terms of the range of natural phenomena empirical investigations of economic consequences, we such as rainfall, tropical storms, flooding, and so forth. have found it useful to distinguish climatic hazards Hence the need to determine risk, which is understood and related riverine and coastal hydrological hazards to be "a combination of the probability, or frequency, from geophysical hazards. of occurrence of a defined hazard and the magnitude Climate-related hazards present threats of varying of the consequences of the occurrence" (Royal Society intensity that are usually recognized at a local or national 1992: 4). level, and there is consequently some form of adapta- A natural disaster is the occurrence of an abnormal tion in terms of economic behavior and the technology or infrequent hazard that impacts vulnerable commu- in which capital--productive, housing and habitat, or nities or geographical areas, causing substantial damage, infrastructure--is embodied. The economic, and of disruption, and possible casualties, and leaving the affected course wider social, consequences of both individual communities unable to function normally. From an eco- events appear to be susceptible to investigation for most nomic perspective, a disaster implies some combina- lower- and middle-income developing countries. In con- tion of losses in terms of human, physical, and financial trast, potentially catastrophic geophysical hazards may Disasters, Vulnerability, and the Global Economy 5 be very rare in occurrence. Even in potentially high-risk under successive GATT negotiations, although negotia- geographical regions there may have been no extreme tions are currently underway in the WTO on a new agree- event in living memory or even within the historical ment on agriculture. Quotas have also remained on exports record. Consequently, such hazards pose quite different of textiles and clothing, discriminating by country. problems of risk perception and economic behavior. Indeed, both the World Bank (2002) and others are call- However, a global phenomenon--satellite television and ing for a "development round" of trade negotiations. linked media information--may be changing that as well. As a result of this broad process of liberalization as Globalization is the process through which there is well as increased FDI (see the following "External Trade" an increase in cross-border economic activities, in the section) and a relatively high rate of accumulation of form of international trade of goods and services, for- human and physical capital, many globalizing devel- eign direct investment (in turn comprising the financ- oping countries have shifted exports from agricultural ing of new investments, retained earnings of affiliates, to manufacturing products. In 1965, agricultural com- and cross-border mergers and acquisitions), capital modities accounted for about half of developing coun- market flows, and labor migration. It should be noted try exports and manufactures for only around 15 percent. that greater globalization is not necessarily synonymous By the late 1990s, around 80 percent of developing with a higher level of GDP, with increasing domestic or country exports were in the form of manufactured items, regional economic integration, or with market liberal- with agricultural products falling to around 10 percent ization, although these phenomena are commonly related. by 1998 (Martin 2001). Although there is considerable variation in the composition of exports between differ- ent developing countries, with some remaining as pri- Broader Implications of Globalization marily agricultural exporters, even many of these latter for Vulnerability countries have experienced some growth in manufac- turing exports. Exports of services from developing In this section major aspects of the globalization process countries have also increased significantly. are considered in terms of their implications for vul- Different productive activities are potentially differ- nerability to natural hazards. entially sensitive to natural hazards; thus, any change in the composition of production could be significant in terms of the level and nature of risk. Natural hazard International Trade events may reduce the availability of particular goods Reductions in trade barriers and transport and com- and services for export (either directly or via disruptions munications costs have resulted in a rapid growth in to transport and communications networks) while simul- openness since the mid-1950s, with increasing trade taneously increasing imports, to meet both disaster- in manufactures (involving more two-way trade) and a related domestic shortages and relief and rehabilitation fragmentation of the production process (Martin 2001). requirements. Ramifications throughout the economy Initially, developing countries typically liberalized trade can be significant. Depending on levels of foreign- more slowly, with a number favoring import substitu- exchange reserves and on government external borrow- tion policies instead, but since the mid-1980s devel- ing policy, a deterioration in the balance of trade could oping countries have also increasingly reduced barriers result in an increase in external borrowing, with impli- to trade, often unilaterally rather than under the aus- cations for future levels of debt servicing and, ultimately, pices of the World Trade Organization (WTO). Aver- economic growth. Any worsening of the balance-of- age tariff rates in developed countries are now low, payments position could also exert pressure on the although barriers remain in the two areas where devel- exchange rate and, thus, on international competitive- oping countries have a comparative advantage: agri- ness. There are also potential budgetary implications culture and labor-intensive manufactures (World Bank in so far as government revenue is derived from export 2002). In the case of agriculture, various exceptions and import duties and tariffs. Thus, it is important that have been made for domestic support price schemes a government be aware of the potential sensitivity of its 6 Building Safer Cities: The Future of Disaster Risk various exports to natural hazards and the possible con- and export decisions. In contrast, stockpiling agricultural sequences of any changes in both relative and absolute produce was often undertaken by public or quasi-public composition. As liberalization encourages trade, it also agencies, in part specifically to stabilize export earn- encourages shifts in the composition of an economy, ings. Governments need to recognize this change and with implications for livelihoods, their relative secu- consider whether new ways of managing balance-of- rity, and ultimately household vulnerability to natural payments risks--for example, encouraging international hazards, a theme explored in further detail below. financial risk transfer mechanisms or maintaining At first sight, diversification and the shift toward man- increased foreign exchange reserves--are required. ufacturing exports would seem a positive development The shift into manufacturing products also means from a natural hazards and balance-of-payments per- that many developing countries are now competing spective. Renewable natural resource commodities (agri- against developed countries for markets. Thus, when culture, forestry, fisheries) are often among the most disruptions to production occur--particularly where directly affected by natural hazards. The sector is par- just-in-time production practices are employed-- ticularly susceptible to climatic hazards such as droughts, contracts may be lost and future market shares lost. For excessive rainfall causing floods, and cyclones, although example, the shift from agricultural to manufacturing the extent and nature of impact depends in part on the exports and thus, at first sight, to an apparently less sen- timing of a hazard event relative to cropping cycles, and sitive form of economic activity, may not in fact have on the severity of the hazard itself. Moreover, it is often reduced the potential vulnerability of Bangladesh's export difficult to obtain insurance against crop losses. Natural earnings to natural hazards. Bangladesh faces severe hazards can also have indirect effects via their impact global competition in the export of ready-made garments. on agricultural equipment and infrastructure, such as In contrast, it was the world's primary jute producer drainage and irrigation systems, post-harvest and stor- and, as such, was a price-setter on the international market. age facilities, and boats, as well as generally on trans- Disruption to the production of ready-made garments port and marketing infrastructure. could result not only in the direct loss of export revenue Primary commodity exports, including metals, but also in the longer-term loss of markets overseas. minerals, and oil, as well as renewable natural resources, The concept of vulnerability also entails potential to are also vulnerable to commodity price shocks. Few recover. Again, in some instances agriculture can offer countries are price-setters in such markets and thus may certain advantages, as illustrated by banana cultivation experience coincidental contemporaneous fluctuations in Dominica (see below), but generally, manufacturing in international commodity prices, either offsetting or activitiescanoftenberestoredfaster.Intheeventofhazard- exacerbating balance-of-payments and inflationary related damage, however, there is a possibility that a impacts of disasters. particular productive activity will not be re-established That said, there is evidence that efforts have some- at all. Although there has been no research undertaken times been taken to dampen the impact of hazard-related in this area, it is plausible that manufacturing activi- falls in agricultural production. In Fiji, for instance, ties, which are less geographically tied than agricultural sugar reserves have been used to maintain export earn- ones, could simply be relocated elsewhere, with implied ings and prevent loss of export markets in the aftermath losses to the local economy and, where FDI is involved, of natural disasters (Benson 1997a). There is probably to the national economy. less scope for using stockpiles of manufactured items Despite these reservations, the broad shift in com- to manage risk in this way. Shifts in technology and fash- position of exports experienced by many developing ions make many manufactured items rapidly obsolete, countries in recent years is, on balance, almost certainly while modern management techniques often emphasize a positive development from the perspective of sensi- just-in-time production processes. Moreover, most man- tivity of exports to natural hazards. However, again from ufacturing production is in privately owned enterprises, a natural hazards perspective, the fiscal implications of with, by implication, little regard given to the stability of trade liberalization may be less beneficial, to the extent the broader external sector in undertaking production that liberalization reduces earnings from import duties. Disasters, Vulnerability, and the Global Economy 7 Revenue emanating from import duties is typically less horizontal but, relative to developed-country investment, sensitive to natural hazards. Import duties are also rel- much of the inflows to developing countries are verti- atively easy to collect--an important point where a cal (Shatz and Venables 2000). Both forms of FDI disaster results in administrative chaos and disruption. bring potential benefits in terms of increased supply of The precise implication of any reduction in import duties capital and access to technology, management expert- will depend on the precise structure of taxes in a coun- ise, and markets. Each can also alter the nature of sen- try, including not only the significance of import sitivity of an economy to natural hazards. duties but also the relative rates charged on different Horizontal integration, under which a firm supplies categories of imports (food, oil, inputs to industry, luxury a foreign market with its product by producing locally items, and so forth). rather than importing, implies that domestic availabil- Finally, over the over the past two to three decades, ity of a product may be reduced due to direct damage growth in various service industries linked into the to the operating plant, potentially placing additional international economy has offered another form of risk pressure on the balance of payments post-disaster. diversification as illustrated by the case of Dominica. Domestic production, rather than import, of a partic- International financial services and tourism are prob- ular item also changes the nature of demands on a coun- ably the most significant in this regard. International try's transport network; whether or not this is to the financial services can be structured in such a way that firm's advantage post-disaster remains unclear. Poten- performance is determined almost entirely by nondo- tial post-disaster slumps in an economy could also reduce mestic factors. The growth of tourism also offers some demand for a particular item, perhaps with implications opportunity to reduce an economy's overall sensitivity for demand for labor in the affected industry. to natural hazards. However, efforts are required to Vertical FDI involves shifting a stage of the produc- ensure that the transport, communications, and tourism tion process to low-cost locations, on the basis that "dif- infrastructure are hazard-proofed. Tourists them- ferent parts of the production process have different selves also need to be adequately protected in the event input requirements and, since input prices vary across of a disaster. It should also be borne in mind that demand countries, it may be profitable to split production" (Shatz is potentially highly sensitive to bad publicity. These and Venables 2000: 7). Vertical FDI offers the advantage are regionally and globally relatively footloose sectors that demand does not depend on domestic economic and so investment may cluster in perceived low-risk circumstances and thus is immune to the consequences locations. of any disaster-related slump, instead continuing to offer employment. However, it can be affected by tem- porary disruption to transportation and communica- Foreign Direct Investment tions networks. The globalization process has also involved increasing From a natural hazards perspective, both forms of flows of FDI, as already noted, in part stimulated by a FDI are also potentially significant in spreading risk, reduction in developing country restrictions on for- both from the perspective of individual producers, who eign investment (World Bank 2002). The majority of can hold assets in more than one country, and from FDI flows go from advanced industrial to advanced that of an economy, reducing relative levels of risk borne industrial countries. Advanced countries accounted domestically. Such benefits of foreign ownership were for 85.3 percent of total FDI outflows between 1993 apparent in the case of lime production in Dominica in and 1997; and for 71.5 percent of FDI inflows over the the past. Large multinational producers involved in period 1985 to 1997. However, the share of inflows to the production of primary commodities may be better developing and transition economies is increasing, jump- placed to transfer risk by taking advantage of commodity ing from 21.8 percent in 1988­92 to 39.8 percent in futures (offering the opportunity to buy and sell for- 1993­97 (Shatz and Venables 2000). ward or reserve the right to do so at a pre-agreed price) There are two basic forms of FDI: horizontal and ver- and reinsurance markets, by virtue of their greater knowl- tical. Much of the intra-industrial country investment is edge and experience.4 8 Building Safer Cities: The Future of Disaster Risk Foreign investors may also build factories and other technology, reducing the importance of geography, as buildings to companywide building standards which, well as by liberalization and privatization of public finan- where they exist, are often very high, reducing poten- cial institutions in developing countries. tial physical damage as a consequence of natural haz- From a natural hazard perspective, such instruments ards. This is not always the case, however. In Bangladesh, offer certain advantages. First, firms and households for instance, inward investment in garment manufac- may be able to smooth consumption and investment ture seeking low-cost sourcing that exploits potentially while meeting rehabilitation costs as they arise. Inter- temporary tariff loopholes may be associated with low- national banking also enables individuals to hold specification, poor safety designs in high-risk locations funds with institutions better able to diversify risks. An (see the following section on Bangladesh). extreme example of the need to diversify is the case of In summary, globalization in the form of increased the Montserrat Building Society during a volcanic emer- FDI flows will alter the nature of risk. The nature of gency (box 1.1). this change will depend on individual circumstances Increasing international financial integration could but, on balance, in many cases will probably play a also offer a future mechanism for the spread of risk by role in reducing broader economic sensitivity to natu- microfinance institutions (MFIs). MFIs provide finan- ral hazards. cial services to the poor, extending credit and provid- ing savings facilities. The loans they provide are typically very small, are mainly intended for productive purposes, International Financial Markets do not require conventional forms of collateral, and Financial globalization entails the integration of a coun- are extended on a nonprofit-making basis. MFIs are try's local financial system with international financial highly vulnerable to natural hazards because of tem- markets and institutions. It involves an increase in cross- porary liquidity difficulties as they try to support clients country capital movement, including the participation through difficult periods while also experiencing a tem- of local borrowers and lenders in international mar- porary drop in flows of debt repayments. Some MFIs kets and in widespread use of international financial are therefore beginning to explore options for disaster intermediaries (in part via their presence, largely in the insurance to protect themselves and enable themselves form of foreign banks, in local markets as well as in the to respond to the additional disaster-related needs of use of those located overseas) (Schmukler and Zoido- their clients. To date, the MFIs that have established Lobatón 2001). The process of financial globalization such schemes have basically opted for self-insurance, has been significantly aided by gains in information setting some resources aside into a calamity fund for Box 1.1 Financial fallout from the Montserrat volcanic eruption The volcanic eruption in Montserrat, which began in mid-1995, resulted in the displacement of 90 percent of the res- idents from their homes, with more than half eventually leaving the island. One of the financial casualties was the Montserrat Building Society (MBS), the country's only building society, which effectively collapsed. The MBS is largely dedicated to using savings to finance housing. The MBS estimated that, prior to 1995, it had accounted for approxi- mately 90 percent of mortgages on the island as well as for a high proportion of savings by residents and some non- resident migrants. However, following an escalation of the crisis in August 1997, most insurance policies were suddenly canceled by international companies that could easily give up business on an island that was a marginal part of their portfolio. The mortgaged assets held by the MBS immediately assumed a zero value, putting the Society into substantial deficit. Although the MBS remained open, following a temporary three-week closure, depositors were ini- tially only able to withdraw up to 35 percent of their savings while the Society remained in deficit. In early 1999, the MBS announced that savers could withdraw a further 35 percent of their savings. The contrasting behavior of inter- national insurers and a local financial institution illustrates the ambiguities of globalization that can alter but not nec- essarily reduce disaster risks (Clay and others 1999). Disasters, Vulnerability, and the Global Economy 9 use in the event of an emergency. In the event of a dis- developing countries. Although there is thus scope for aster seriously affecting a significant proportion of clients, benefits of greater financial integration to be reaped, however, such funds would be grossly inadequate. The there are also a number of practical obstacles that need alternative--placing the risk externally--would create to be overcome before coverage can be increased signif- additional overheads, making the cost of credit itself icantly. There is a need to reform the structure and legal more expensive. Instead, the solution could lie in and regulatory framework of the insurance industry in some sort of international syndicate of MFIs. Good prac- a number of countries, including removal of barriers to tice dictates that MFIs should not encourage a culture entry. The cost of insurance also needs to be affordable of default and that, instead, borrowers should ultimately and stable. At the same time, insurers need to remain repay any loans. Assuming this occurs and that default-- sufficiently capitalized to bear any losses, in turn requir- as opposed to deferment--rates are low (as evidenced ing detailed scientific information on current and future in, for instance, Bangladesh and Dominica), MFIs could risks. benefit significantly from temporary access to additional Despite the various potential benefits of financial inte- resources to smooth fluctuations in demand relative to gration from a natural hazard perspective, as discussed the availability of funds. Such resources could be pro- above, it should also be remembered that such inte- vided by other, unaffected, syndicate members. gration carries other, more general, risks. Although the Globalization has also brought with it increasing pos- World Bank generally favors greater openness to trade sibilities for the use of traditional and newer forms of and FDI because of its net beneficial implications for financial risk transfer. More traditional tools comprise economic development and poverty reduction, it is "more insurance and reinsurance. Newer instruments, devel- cautious about liberalization of other financial or capital oped over the past five years in response to dramatic market flows" (World Bank 2000: 2). As Schmukler and increases in more traditional ones, entail some form of Zoido-Lobatón (2001: 3) observe, "international market hedging transaction in capital markets. Weather deriv- imperfections, such as herding, panics and boom-bust atives involve automatic and immediate payouts (typ- cycles, and the fluctuating nature of capital flows can ically available within 72 hours) upon the occurrence lead to crises and contagion, even in countries with good of a predetermined trigger event, irrespective of the scale economic fundamentals." Banks and financial institu- or nature of damage. Catastrophe bonds provide attrac- tions can spread a crisis across countries, as demon- tive payments to investors unless the specified cata- strated by the emerging-market crises in East Asia and strophic event involves a reduction, and in some cases elsewhere in 1997­98. Natural hazards themselves could cancellation, of the principal and/or interest on a bond. even trigger such crises. The city of Tokyo, for instance, The potential advantages of these various mechanisms lies in a seismically active area. It experienced a major include the alleviation of post-disaster pressure on fiscal earthquake in 1923 and volcanologists warn that another and external balances; increased government control over major event is "long overdue." As early as 1995, finan- the financing of disasters, possibly including the imme- cial analysts were already forecasting that the next major diate and timely availability of funds; increased capacity Tokyo earthquake could result in bond and stock market for the relevant government to set its own priorities in crashes in the United States and a world recession, as the management of relief and rehabilitation; increased well as severe domestic economic difficulties (Hadfield transparency in the delivery of relief and reconstruction; 1995). There is clearly a need to balance risks from dif- and provision of a tool for promoting mitigation. ferent sources and, where possible, to seek to reduce In developed countries there are already well- them. The World Bank (2002), for instance, calls for established markets for insurance against a wide range building up supportive domestic institutions and poli- of natural hazards, including earthquakes, volcanic erup- cies to reduce the risks of a financial crisis before becom- tions, floods, droughts, and cyclones. Newer hedging ing involved. instruments are also gaining some popularity. However, Finally, as with FDI, private capital does not flow to insurance and capital market instruments have played all countries equally. Indeed, the share of flows to low- a relatively small role to date in the transfer of risk in and middle-income countries (excluding the top 12) 10 Building Safer Cities: The Future of Disaster Risk has increased over time (Schmukler and Zoido-Lobatón employment in certain southern African countries), 2001), implying that many hazard-prone developing which is relatively insensitive to water shortages. countries have yet to benefit from potential risk- spreading tools available via financial integration. Economic Growth Many of the countries that have grown fastest in recent Labor Mobility decades have also increased their participation in world Increased labor mobility, the third aspect of globaliza- trade most rapidly (e.g., Dollar and Kraay 2000; Martin tion, allows affected people a radical and socially ambigu- 2001). Although the direction of causality has yet to be ous way of coping with disasters. Mobility provides established, developing countries included in the latest a potential mechanism for spreading risk geographi- round of globalization, begun in the early 1980s, are expe- cally via the transfer of remittances across borders. As riencing rapid rates of growth and catching up with more the World Bank (2002:11) states, "geographic factors developed countries; this mirrors patterns of convergence make it unlikely that capital flows and trade will elim- between OECD countries during earlier waves of global- inate the economic rationale for migration. Too many ization (World Bank 2002). This pattern basically reflects parts of the developing world have poor institutions and improved resource allocation, in part driven by increased infrastructure that will not attract production; at the competition as well as the removal of distortive tariffs and same time, some of the existing production networks other barriers to trade that protect domestic production, in the North are too deeply rooted to move." Thus, labor and improved access to markets, with markets in turn mobility looks set to remain as a potentially significant expanding further as per capita incomes rise. way of reducing sensitivity to natural hazards. How- Economic growth is not necessarily synonymous with ever, there are potential costs in terms of loss of skills broader socioeconomic development, but higher per to the economy. capita countries also tend to be among those countries In the case of Bangladesh, for instance, flows of exter- classified as more developed. Certain broad general- nal remittances provide a significant source of foreign izations can, in turn, be made about the sensitivity of exchange and have played an important role post-dis- economies at different stages of development--as defined aster. A relaxation of restrictions on out-migration, in terms of complexity of intersectoral linkages, levels including professionals such as doctors in government of physical and human capital, the scale of secondary hospitals and medical colleges, was one of the meas- and tertiary sectors, and so forth--to natural hazards. ures adopted in Bangladesh in response to the economic In its earlier stages, development tends to alter, rather crisis associated with the 1974 floods and famine. Evi- than reduce, vulnerability. Socioeconomic change asso- dence from the 1998 flood again suggests that remit- ciated with development can lead to the breakdown of tances can increase sharply during times of crisis, traditional familial support, declines in traditional ways rising by 11.9 percent (in U.S. dollar terms) year-on- of life and associated coping measures, and the increased year in 1998­99 to US$1.7 billion. Most migration is occupation of more hazardous land, a process in part asso- temporary, with migrants eventually expecting to return ciated with urbanization. The increased provision of infra- to Bangladesh (Ahmed and Chowdhury 1998), imply- structure and services can also alter, even increase, ing that family ties are strong. vulnerability. The attempt to foster rapid growth may be The implications of migration for broad sensitivity to reflected in standards of construction unable to withstand natural hazards are extremely complex in Sub-Saharan extreme conditions. This appears to have happened in Africa, however, to the extent that migration is often to Dominica in the 20 years prior to independence. Simi- neighboring countries that may be simultaneously affected larly, private sector investment in conditions of rapid tech- by drought, a problem of co-variant risk. In such circum- nicalandmarketchangeoftensacrificessafetyanddurability stances, the impact depends on the nature of employment to short-term profitability. These are conditions in which of migrants--for instance, agriculture, which is highly there may be increased vulnerability to hazards, especially weather-sensitive, or mining (a major source of migrant those regarded as extremely unlikely to occur. Disasters, Vulnerability, and the Global Economy 11 At a macroeconomic level, greater domestic integra- Nevertheless, the typology serves as a reminder that tion increases the multiplier effects of adverse perform- economic development and growth are not necessarily ance in a particular sector or regional economy. For beneficial from a natural hazards perspective. Instead, example, droughts, floods, or hurricanes may impact natural hazards need to be taken into account in the the (larger) manufacturing as well as the agricultural and determination of priorities, policies, and strategies, includ- livestock sectors, particularly where initial growth of the ing those relating to integration into the global economy. manufacturing sector is based primarily around agro- processing. A notable exception is found in dual economies with largely self-contained extractive sectors that may Information Gathering and Exchange be relatively insensitive at a macroeconomic level to cli- matic shocks. Examples are Botswana and Namibia. Provision of various regional and global public goods-- As a country begins to develop, the structure of the that is, goods and services that are nonrival in con- financial sector is also likely to be more important in sumption (users do not reduce the supply available to shaping the impact of a natural disaster. Intermediate others) and nonexcludable--can clearly benefit from economies typically have more developed economywide improved transnational cooperation and integration. financial systems for the flow of funds, including small- From the perspective of natural hazards, the greatest scale private savings and transfers, which also diffuse benefit has almost certainly been felt in the area of sci- impacts more widely. For example, in Zimbabwe fol- entific monitoring and forecasting. This is most evi- lowing the 1991­92 drought, the transfer of remittances dent within meteorology and climatology (e.g. Lee and from urban to rural regions was facilitated by the well- Davis 1998; IRI 2001) articulated system for small savings. These transfers not There is a growth in regional and international coop- only mitigated the impact of the drought in rural areas eration in climatic forecasting for the three major cli- but also spread the effects more widely (Hicks 1993). matic regions in Sub-Saharan Africa, for instance. This In the later stages of development, evidence suggests cooperation links into and has been considerably that the relative scale of the economic impacts of disas- strengthened by research and monitoring of global cli- ters is likely to decline again. In part, this reflects the matic processes such as the El Niño Southern Oscilla- smaller role of the particularly hazard-vulnerable agri- tion phenomenon by international and industrialized cultural sector in GDP, as a source of employment, a country institutions such as WMO and NOAA, which source of inputs to other sectors, and an end user. have global monitoring networks and can draw on all Other factors also contribute to reduced sensitivity, includ- the power of remote sensing technologies. ing typically higher investment in structural mitigation Regional cooperation on water resources, which relies and proofing measures, generally higher building stan- more directly on the political cooperation of upper and dards and maintenance practices, greater use of finan- lower riperian states without global partners, is less cial risk transfer mechanisms (see the FDI section below), advanced. Recent disasters such as the devastating extreme fewer foreign exchange constraints, improved environ- 2000 floods in Mozambique and in southwestern mental management, and lower levels of poverty. Bangladesh have highlighted the considerable scope for This framework for relating vulnerability to natural progress on system modeling and flood forecasting.5 hazards to the growing complexity of the economy is a Another example of international cooperation is the very broad brush. As the three country cases presented global volcanology community. This is very close-knit, later suggest, a wide variety of other factors also deter- with a small team of international experts providing serv- mines sensitivity. For example, prevailing domestic ices around the world. The creation of this informal macroeconomic and sectoral policies, deliberate changes grouping has been greatly facilitated by improved com- in policy as a consequence of a disaster, the external munications and transportation. There are also major policy environment, contemporaneous fluctuations in research benefits in the sense that the close cooperation primary export and import prices, and the timing and has helped facilitate the building of a consolidated nature of other adverse shocks can all be significant. body of evidence from volcanoes around the world. 12 Building Safer Cities: The Future of Disaster Risk There are other areas where, from a natural hazard The Government of Bangladesh, for instance, identi- perspective, information gathering and exchange are fies natural hazards as one of the factors eroding the also advantageous; these include crop research, the income of the poor via crisis-related expenditure and development of building codes, the development of reductions in income-earning capabilities. Furthermore, strategies to control pollution, and the development of it recognizes that poverty alleviation cannot be achieved mechanisms for protecting the environment. For instance, simply by increasing income, but instead requires a range in the case of the latter, as the World Bank (2002:17) of other measures, including the strengthening of local notes, "some environmental issues, such as global warm- capacity to protect the poor against shocks (GoB 2002). ing, are intrinsically global. They require international Obviously, to the extent that globalization and related cooperation, and the habit of such cooperation is economic growth reduce poverty, they may help reduce easier in an integrated world." vulnerability. Globalization tends to encourage growth However, a constraint that is emerging as more infor- and creates new job opportunities, potentially allow- mation that could have important disaster reduction ing people to move to better jobs. According to the value is generated, is the capacity at country and regional World Bank (2002), in the long run workers gain from levels to interpret and utilize these data. National integration, with wages growing twice as fast in the more meteorological systems provided as a public good, for globalized developing countries than in the less glob- example, have to compete for recurrent expenditure alized ones and faster than in rich countries. However, with all other areas of public spending. In all of the a reduction in either poverty or vulnerability is not case studies undertaken by the authors, there was evi- inevitable. Indeed, the World Bank (2002:1) states that dence of insufficient spending. This was reflected, for although "global integration is already a powerful force instance, in inadequate operation and maintenance of for poverty reduction... it could be even more effective." monitoring systems.6 For example, skilled wages rise faster, implying that the education system needs to serve all levels of society in order to avoid increasing inequality. Poverty and Vulnerability In terms of vulnerability, economic growth and devel- Poor and socially disadvantaged groups are usually the opment may not solve problems of risk and vulnera- most vulnerable to and affected by natural hazards, bility, as already noted. The declining importance of reflecting their social, cultural, economic, and political agriculture--potentially one of the most hazard-sensitive environment. Disasters, in turn, are a source of tran- sectors--typically associated with globalization may sient hardship and distress and a factor contributing to reduce vulnerability, both directly and as those previ- persistent poverty. At the household level, poverty is ously dependent on agriculture take advantage of increas- the single most important factor determining vulnera- ing alternatives. Some 70 percent of the world's poor and bility, in part reflecting location of housing (e.g., on food-insecure people currently depend on agriculture floodplains, riverbanks, steep slopes, or contaminated for their incomes and food entitlements (FAO 2001). land previously occupied by industrial facilities), pri- Enhanced opportunities for diversification of household mary types of occupation, and level of access to finan- income can also help spread risk. However, traditional cial and other resources. The poverty-exacerbating nature coping mechanisms may be simultaneously disrupted. of vulnerability is attributable not only to post-disaster- Within the domestic economy, increased competition related damage, temporary loss of income-generating emanating from globalization can also imply increased opportunities, and increased indebtedness, but also to entry and exit of firms, at least in the shorter term, imply- deliberate risk-averting livelihood choices that poorer ing greater labor market turnover. This can increase sen- households may make. For example, poorer households sitivity to natural hazards and other shocks, requiring may choose to forgo the potential benefits of higher- efforts to ensure that adequate social protection pro- yielding crops in favor of more hazard-tolerant ones, grams are in place. As the World Bank (2002) notes, implying more stable and secure but, in most years, social protection may also be crucial in encouraging poor lower earnings. people to take the risks involved in entrepreneurship. Disasters, Vulnerability, and the Global Economy 13 Those facing higher levels of risk, such as those ema- private sector was allowed to cover a large part of the nating from natural hazards, may require particular deficit after the floods in 1998. Small open economies encouragement and support in recasting behavior from like Dominica, marginal to world and regional or global that of risk minimization to profit maximization. markets, face logistical but not access difficulties to Globalization and associated growth in the manu- food imports after a disaster. There are still important facturing sector as well as cuts in agricultural tariffs7 exceptions, however: countries like Malawi, which is cur- also fuel urbanization. This process is often rapid and rently experiencing a food crisis, that have difficulty in unplanned, by implication forcing poorer groups to live financing and organizing national food security. in more marginal and hazardous areas such as flood- It is well recognized within the considerable body plains, riverbanks, steep slopes, and reclaimed land of literature on food security that natural hazard events, (IFRC 2002). Sensitive and carefully designed meas- in particular droughts, are one of the principal triggers ures are required to help redress associated risks. of potential transitory food insecurity for particular seg- Meanwhile, the World Bank (2002) points out that ments of a population. In that light, it is relevant to con- in those countries left out of the globalization process-- sider the implications of globalization, particularly which contain some 2 billion people--many are facing agricultural trade liberalization, for sensitivity to chronic declining incomes and rising poverty. Whether this is and transitory food security. a direct consequence of the fact that they are not glob- Historically, agriculture has represented a special case, alizers is not clear. However, the fact remains that a sig- with various exceptions made for domestic support price nificant segment of the world's population, located in schemes under successive GATT negotiations, as already these countries, may remain poor and thus particu- noted. However, under the present WTO Agreement larly vulnerable to natural hazards, despite global trends on Agriculture, it was agreed that WTO member coun- toward increasing integration and growth. tries, other than LDCs, should reduce barriers to market access and market-distorting forms of domestic sup- port to agriculture. Developed countries have now imple- Food Security mented this agreement, while the implementation period Food security is "a situation that exists when all people, for developing countries will conclude in 2004. How- at all times, have physical, social and economic access ever, there are concerns that liberalization may not result to sufficient, safe and nutritious food that meets their in enhanced food security, as reflected, for instance, in dietary needs and food preferences for an active and "a common thread through many proposals by devel- healthy life" (FAO 2002a). oping countries that staple food crops should be exempted This emphasis on people's access as the key to food from limits on, or reductions in, support under WTO security is a measure of the considerable progress arrangements" (Roberts and others 2002: 40). made toward assuring food security at national and In theory, trade liberalization and associated move- international levels that is partly a consequence of the ments in relative prices of different crops should trig- liberalization of external trade and currency markets. ger a supply response, with more rational allocation of Most, but not all, developing countries are now able to resources. This may lead to an increase in aggregate acquire additional food imports to respond to tempo- agricultural production levels and net incomes. Such rary deficits. This is in stark contrast to the situation that responses would be more likely to reduce chronic, prevailed in the early 1970s. For example, Bangladesh, poverty-related food insecurity. Furthermore, the supply a low-income country with sometimes large, temporary response could be modified by various constraints relat- additional import requirements, was unable to finance ing to access to markets, agroclimatic factors, and the food imports in the famine crisis of 1974 and was fur- level and availability of assets (including land), skills, ther hampered by a U.S. embargo. Subsequently, its gov- and credit. As the 2001 IFAD Rural Poverty Report (IFAD ernment responded to major disasters with a combination 2001) states, "under globalization, market access becomes of making massive commercial purchases and seeking-- increasingly important as only those who have it can usually successfully--large-scale food aid. Finally, the exploit the new opportunities. Without market access, 14 Building Safer Cities: The Future of Disaster Risk the potential benefits of higher product prices and lower is mainly associated with poverty, and cheaper imports input prices are not transmitted to poor households. can be beneficial (Thompson 1999). This is most unam- Remoteness also restricts access to information about biguously so for the rapidly growing numbers of poor new technologies and changing prices, leaving the poor urban consumers dependent almost entirely on market unable to respond to changes in incentives." supply. If trade liberalization promotes economic growth Moreover, even if agricultural production does and this, in turn, reduces levels of poverty, then this, increase, this does not necessarily imply an improve- too, can improve food security, again by increasing access ment in food security. Any shifts between food and of the poor to food. nonfood cash crops and between tradable and non- In summary, the impact of trade liberalization on taxable can have implications for food security (FAO food security has been broadly positive at a global 2002b). Some people may lose their livelihoods as part level. But the short-term consequences of liberaliza- of the restructuring process associated with both tion are less clear. Food security continues to be a highly agricultural and broader liberalization, again with country-specific issue, in part depending on the nature potentially negative chronic food security and related and scale of agriculture and the significance of the sector poverty implications. Increased exposure to competi- as a form of employment. There will be both winners tion and world price fluctuations in countries where and losers, and impacts on food security are likely to agricultural industries were previously protected from vary between groups--for instance, between small-scale import competition could also expose some farmers and commercial farmers and between farmers, rural to transitory food insecurity. Oxfam (2000), for exam- nonfarm producers, and urban consumers. ple, asks whether small-scale farmers can compete in In terms of implications for sensitivity to natural haz- a liberalized environment and whether there is a ards, the impacts are, again, likely to vary between coun- need to retain some level of protection. Farmers in tries. From a consumer's perspective, increased access developing countries also typically have even more to world markets could dampen disaster-related food limited access to futures markets and other risk man- deficits resulting from reduced domestic production. agement tools (although globalization could help To the extent that globalization more generally facili- improve access--see section on FDI). In addition, tates the spread of risk associated with a decline in many have few financial reserves. The two factors com- production, it is also positive. bined leave farmers more exposed to sudden price fluctuations under more liberalized conditions, poten- tially restricting their productive capacity the follow- Environment ing season (Roberts and others 2002). Liberalization could cause increased short-run volatil- Finally, concerns have also been expressed about the ity in international grain markets, posing difficulties for impact of globalization on the environment. Environ- importing low-income countries. This possibility was mental degradation, both via greenhouse gas emis- highlighted by the severe price spike in international sions and physical destruction, has implications for wheat and coarse grain markets during 1995­96, the scale, frequency, and extent of the impact of natu- when there was a rapid reduction in U.S. and other stocks ral hazards. There is clear evidence that a number of to low levels. Food aid levels plummeted as well. They countries are becoming increasingly vulnerable to nat- also coincided and were thought to be associated with ural phenomena as a consequence of environmental the more liberal trade provisions of the 1995 U.S. Farm degradation, particularly deforestation, and increased Bill (Konandreas 2000). These developments signifi- cultivation and occupation of marginal lands. Defor- cantly increased, for example, the import costs for south- estation has disrupted watersheds, leading to more severe ern African countries of coping with the 1994­95 droughts and floods. It has also resulted in the siltation drought. of riverbeds, deltas, bays, and gulfs, again increasing From the perspective of consumers, food security is to the incidence of flooding. Meanwhile, impacts of changes a large degree an issue of affordability, food insecurity in the composition of the atmosphere on the frequency Disasters, Vulnerability, and the Global Economy 15 and intensity of climatic hazards are predicted to vary Implications of Natural Hazards for Globalization significantly between regions and subregions but there are expectations of more extreme weather variability, Risk in various forms can have potential implications with associated increases in the incidence of droughts for the pace and nature of globalization, whether related and floods, as well as sea level rises, in many parts of to such factors as exchange rate instability or natural the world. hazards. This section considers the role of the latter in Globalization is widely considered to be a cause of determining the extent to which countries are integrated environmental degradation, as illustrated in the quote into the global economy and, in addition, are able to from the Sienna Declaration cited earlier. In discussing reap the potential benefits of that integration. the impact of FDI more specifically, a recent WWF-UK It is beyond the scope of this paper to undertake an report states that "the past decade has ... seen all major empirical examination of factors determining differ- trends of environmental degradation accelerate--for ences in levels of global integration across countries or, example, greenhouse gas emissions, deforestation, loss in particular, to explore the linkages between disasters, of biodiversity. Such patterns of environmental damage growth, and patterns of globalization.8 Nevertheless, have been driven by increased economic activity, to natural hazards could be another factor preventing the which FDI is an increasingly significant contributor" growth benefits of globalization from being achieved (Mabey and McNally 1998:3). However, there is also a and, as discussed in further detailed below, in some cases counter argument that globalization does not neces- even inhibiting the pace of integration itself. As the sarily directly exacerbate this process. Regarding World Bank (2002: 5) states, "while the new globalizers deforestation, for instance, growth is often associated are beginning to catch up, much of the rest of the devel- with reductions in forest area, most obviously where oping world--with about 2 billion people--is becom- there is a timber export sector and land is being ing marginalized. Their aggregate growth rate was actually cleared for export-oriented production. However, the negative in the 1990s" (World Bank 2002: 5). World Bank (2002) argues that particularly high rates of deforestation in some countries may not be the direct Disasters, Growth, and Globalization result of globalization so much as they are domestic fac- tors. In discussing the more general argument that inten- The direction of causality between high growth and sification of competition creates a potential for a "race increasing participation in world trade has yet to be to the bottom" and "pollution havens," with govern- established. Nevertheless, it is widely observed that ments perhaps trying to attain a competitive advantage these two phenomena are correlated. More open, export- by lowering their environmental standards, the World oriented economies are also more successful in attract- Bank (2002) also argues that available evidence sug- ing FDI (see later discussion). Again, each affects the gests that this is not happening. Evidently, the costs other, but empirical analysis by Singh and Jun (1995) imposed by environmental regulation are small rela- suggests that, on balance, openness encourages FDI tive to other considerations, and so their impact upon rather than vice versa. location decisions between rich and poor countries is Increasing integration can occur without raising minimal. The WWF-UK report refutes this, however, growth, but this surely implies that some of the major arguing that studies on which such statements are based potential benefits of globalization--specifically, growth "have had serious flaws, and an excessive focus on site- and related rising per capita income and, hopefully, a specific environmental impacts and emissions of a few reduction in the level of poverty--will be lost. As Roberts industrial pollutants" (Mabey and McNally 1998:3). and others (2002: 36) comment, "whether such ready The report continues on to present "ample empirical movement does in fact occur depends on whether there evidence that resource and pollution-intensive indus- is sufficient growth in the economy and alternative activ- tries do have a locational preference for, and an influ- ities available to absorb resources displaced through ence in creating, areas of low environmental standards" trade liberalization," in turn requiring flexible economic (Mabey and McNally 1998:3). structures and sufficient demand for labor and other 16 Building Safer Cities: The Future of Disaster Risk resources to enable relatively rapid and substantial adjust- growth objectives, of various policy options in dealing ment between activities. with disasters. The study concluded that potential catas- Natural hazards could be another factor preventing trophes should be incorporated into economic projec- the growth benefits of globalization from being achieved tions for three reasons: high opportunity costs associated or, depending on the direction of causality, preventing with the diversion of scarce financial resources into post- increasing integration into the global economy by restrict- disaster relief and reconstruction efforts; the havoc ing growth. imposed by natural disasters on the already-complicated Theories of development place considerable empha- budgetary planning process; and the high demands that sis on the roles of capital and labor growth and pro- natural disasters place on international aid resources, ductivity (e.g., Solow 1956; Denison 1967). Yet capital diverting resources away from development uses. assets and other resources can be severely affected by There has been little empirical analysis of historical natural disasters while productivity of undamaged evidence on the impact of disasters on long-term growth, capital and labor can be reduced by associated disrup- however. Benson (forthcoming) attempts to address this tions to infrastructure and markets. There could be gap, examining comparative cross-sectional data on significant direct capital losses (except in the case of real GDP performance for 115 countries over a 34-year drought). All major types of disaster, including drought, period from 1960­93. The study involved regression can also disrupt longer-term investment plans, both in analysis and an analysis of relative movements in GDP.9 physical and human capital. Governments may divert Rather than attempting a ranking of countries accord- resources from planned investments to fund the relief ing to natural hazard risk, countries were simply divided and rehabilitation process. Disaster-related external assis- into two categories--higher and lower risk--based on tance may be extended, but this may not be entirely evidence on the incidence of disasters over the period additional, instead in part replacing development aid of analysis.10 Analysis was undertaken both including flows due to some combination of limited donor resources and excluding Sub-Saharan African countries. and local counterpart funding constraints. Other damage The results suggest that, over the past three decades, may be covered by insurance policies, but there are more hazard-prone low-income countries may have still opportunity costs relating to the payment of pre- experienced a relatively slower rate of economic growth miums. And some destroyed assets may not be replaced than their less hazard-prone counterparts who had sim- at all. In the shorter term, disasters and hazard risk can ilar levels of per capita income at the beginning of the also contribute to economic instability and an atmos- period. However, there are fundamental problems in phere of uncertainty. It is widely observed, for instance, undertaking such analysis, in particular, that less hazard- that disasters typically cause a short-term decline in prone countries were already typically among the set GDP (see, e.g., Benson and Clay 2000; Charvériat 2000). of more developed countries by the latter half of the Yet, research indicates that "macroeconomic stability is twentieth century. Thus, the results may simply reflect essential for high and sustainable rates of growth" (Ames Quah's (1993) broader finding of polarization toward and others 2001: 2). Thus, hazard risks combined a bi-modal distribution, with countries beginning at the with post-disaster related economic instability could be higher end of the income distribution likely to experi- a significant disincentive to potential new investment. ence further increases in income. Moreover, a wide range A recent research study undertaken by the Interna- of other factors also could determine rates of growth tional Institute for Applied Systems Analysis (IIASA), Nevertheless, the basic findings, if tentative, are in conjunction with the World Bank, confirms the poten- supported by anecdotal evidence from individual coun- tially adverse long-term impact of natural disasters. The tries, with poorer regions of a country also often more study sought to model the potential implications of nat- hazard-prone. Charvériat (2000), for instance, notes ural disasters for future longer-term growth in three that communities in the northeast part of Brazil and countries (Freeman and others 2001). The analysis coastal areas of Ecuador and Peru are typically poorer focused on their potential impact on capital accumu- than less hazard-prone parts of the same countries. In lation and quantified the implications, in particular for part, such patterns reflect differences in opportunities Disasters, Vulnerability, and the Global Economy 17 for growth and development as determined by the rel- structure. Natural disasters could, in fact, be viewed as ative risks faced by different communities. For exam- an aspect of adverse geography, although the literature ple, farmers in more hazard-prone regions of Vietnam on globalization and the role of geographical factors in have been less well placed to take advantage of higher- determining growth (e.g., Acemoglu and others 2000; yielding but less hazard-tolerant strains of rice, while Diamond 1998; Gallup and Sach 1999) tends to more hazard-prone regions of the country have also ignore them. received disproportionately small shares in private and In terms of the role of infrastructure, Limão and public investment and external assistance (Benson Venables (2001) argue that, now that recent liberaliza- 1997b). tions have reduced artificial trade barriers, the effective Disaster-related budgetary pressures can also affect rate of protection provided by transport costs is con- a country's ability to participate in the global economy siderably higher than that provided by tariffs for many in other ways. In the aftermath of a disaster, a govern- countries. They estimate the elasticity of trade flows ment will be obliged to meet potential budgetary pres- with respect to transport costs at approximately 2.5-- sures by increasing the money supply, drawing down that is, halving transport costs would increase the volume foreign-exchange reserves, or increasing levels of domes- of trade by a factor of five, or improving infrastructure tic and/or external borrowing. Foreign borrowing can from the 75th percentile to the 50th would increase result in an appreciation of the exchange rate, reduc- the volume of trade by 50 percent. Transport costs ing the price of imports and increasing that of exports. depend on various factors including distance, admin- In addition, it can place future strains on the economy istrative barriers, and the structure of the shipping indus- via higher debt-servicing costs.11 Natural disasters can try. However, Limão and Venables (2001) find that also trigger an increase in interest rates charged on infrastructure is also quantitatively important. For exam- new external loans by increasing the risk premia asso- ple, their results suggest that improving one's own and ciated with a country's assets. Another option, the run- transit countries' (that is, countries through which mer- down of foreign-exchange reserves, is limited by the chandise travels before reaching its destination) infra- size of those reserves and entails an appreciation in the structure from the 25th percentile to the 75th percentile exchange rate, with possible associated risks of capital would overcome approximately two-thirds of the dis- flight and a balance-of-payments crisis (Fischer and advantage associated with being landlocked. Easterly 1990). Natural hazard events can destroy transport and other infrastructure. Disasters can also result in the diversi- fication of resources away from new investment and External Trade into reconstruction, ultimately constraining efforts to Many of the nonglobalizers are Sub-Saharan African upgrade transportation systems. Efforts to improve the countries and former Soviet republics, with exports efficiency and economy of the Philippines' transporta- focused on a narrow range of primary commodities, tion systems, for instance, are reported to have been only making them highly vulnerable to commodity price moderately successful because most available resources shocks (World Bank 2002). Their failure to diversify were redirected in response to calamities, with knock- exports has been attributed to various factors, including on implications for the pace of improvement of rural poor policies (e.g., product standards and regulations, transport linkages (Philippine NLUC 1992). Moreover, health and safety regulations, labor and environmental disaster-related repairs can disrupt general maintenance regulations), weak institutions, poor access to infor- operations. In Dominica, unanticipated expenditure on mation, corrupt governance, limited technology, poor the repair of roads following landslides and storm damage infrastructure, adverse geography (e.g., being land- crowds out routine maintenance virtually every year. locked, greater proneness to disease), and climate Obviously, difficult tradeoffs often have to be made (Brahmbhatt 1998; World Bank 2002).12 between the quality and quantity of infrastructure. Natural disasters may certainly have contributed to Construction of less hazard-resistant roads could facil- some of these constraints, in particular poor infra- itate more rapid progress in improving market access. 18 Building Safer Cities: The Future of Disaster Risk However, the vulnerability implications of alternative They suggest that this reflects the fact that direct invest- levels of overall quality and strength (e.g., adequate ment is likely to be capital-intensive and so requires a drainage of roads) should also be explored, as hazards relatively more substantive and long-term commitment. could damage and disrupt transport networks. Disasters are another form of instability, also potentially As already noted, natural hazards can also affect threatening the long-term viability of an investment. patterns and levels of trade in terms of securing mar- Singh and Jun's analysis (1995) additionally indicates kets. If frequent occurrences affect reliability of supply, that work days lost in production, in turn affecting then exporting countries could face difficulties in secur- production efficiency, is more significant for low-FDI ing and maintaining trading partners. counties, presumably reflecting the fact that production in these countries is likely to be more labor-intensive. Frequent or extended natural hazard events (e.g., flood- FDI ing) could affect days worked. There is some evidence that FDI is spatially more The literature suggests that location and related inter- clustered than other forms of production, possibly due national transport costs, the cost of market access through to certain incentives to locate close to other firms, includ- exports, the quality of infrastructure, possession of ing spillovers created by research and development; the raw materials, labor costs, government incentives, polit- development of local networks of suppliers of special- ical risk, per capita income, the degree of industrial- ized goods and services; the development of local ization, and the size of domestic markets are all important labor markets with appropriate specialized skills; and in attracting FDI (Shatz and Venables 2000; Singh and confidence, and the possibility that firms "herd," with Jun 1995; Wheeler and Mody 199213). Generally, firms uncertain whether a particular country is a good more open, export-orientated economies are more location for FDI but willing to take the success of one successful in attracting FDI, as discussed above. Indeed, firm as a signal of underlying national characteristics the relative size of the export sector is the strongest (Shatz and Venables 2000). Again, this herding ten- explanatory variable for FDI flows according to Singh dency could discriminate against more hazard-prone and Jun's (1995) analysis. countries if potential investors are aware of the possi- There is little hard evidence reported in the literature bility of natural hazards, if perceived risk--whether or that natural hazards and related risk have influenced not correctly so--is high, and if few others have been decisions on FDI directly, although there is some anec- seen to invest there. dotal evidence that this may occur (see section on Dominica below). Again, however, natural hazards and risk may have had some indirect impact on factors Country Experiences in an Era of Globalization determining flows. One of the more interesting lines of investigation from a natural hazards perspective con- The general discussion presented earlier indicates that cerns the importance of a hospitable business environ- the linkages between globalization and vulnerability to ment. Singh and Jun (1995) examined this using an natural hazards are complex and that no easily sus- operation risk index based on a range of factors includ- tainable generalizations about impacts and effects can ing balance of payments performance, economic growth, be made. Our three most recent case studies suggest and infrastructure--all factors that natural disasters can that there are important, distinct country type situa- affect. Their results suggest that the business climate is tions. There are therefore likely to be country-specific important for high-FDI countries but not for low-FDI strategies for disaster reduction. These themes are countries. illustrated by a more detailed account of changing vul- Singh and Jun's (1995) analysis also suggests that, using nerability for the small, relatively less complex open a broad-based qualitative political risk index, political economy of Dominica. These developments are shown stability may be important for high-FDI countries, where to be country-specific by contrasting developments in the stakes are higher, but not for low-FDI countries.14 Bangladesh and Malawi. Disasters, Vulnerability, and the Global Economy 19 Dominica impact of three tropical storms in 1995, and Hurricane Lenny in 1999. Hurricane David, a Category 4 hurri- Dominica is an important case with which to begin to cane, directly hit the island and was extremely devas- explore forms of vulnerability and the role of a coun- tating, with severe environmental and demographic try's relationship with the global economy, as it exem- consequences.17 plifies the type of experience faced by many small island There are significant geophysical hazards, as the island economies. Such economies face a number of special is geologically extremely young and almost completely disadvantages associated with their size, insularity, and volcanic in origin. There was a volcanic alert in 1998­99, remoteness (Briguglio 1995), making them highly sen- the first since 1880, and scientists indicate a continu- sitive to economic shocks of any form, including nat- ing, significant risk of an extreme event in the twenty- ural hazards. They are often perceived as some of the first century with a related possibility of earthquakes. countries most vulnerable to natural hazards in the High rainfall in the mountainous, noncoastal areas world.15 Small island economies are typically very open, of the island also results in frequent localized flooding with relatively limited internal forward and backward and landslides, which are recurrent annual problems. linkages, instead relying on international trade to market Other potential hazards include drought, storm surges, their outputs and as a source of capital goods, inputs to bush fires, and tsunamis. domestic production, and consumables. Such countries often strive to find niche export markets, concentrat- Agricultural Exports ing the focus of economic activity accordingly. In so doing, many have secured some form of preferential Over time there have been significant shifts in the nature trade agreement; however, the WTO process is currently of Dominica's vulnerability to natural hazards relating to eroding the protected status of many such exports. changing levels of development and capital investment In the case of Dominica, the level of imports stood in the island and changes in economic activity. Shifts in at equivalent to 65 percent and exports to 25 percent the structure and composition of economic activity, in of GDP in 1997, making the economy very open. turn, have been closely tied to international political Since the 1950s the economy has been reliant on a single and economic interests and export market opportuni- export crop, bananas, for which it had preferential access ties. In the past, as a colonial plantation cum subsistence to E.U. markets. Agriculture and agro-processing com- economy, the impact of natural hazards was heavily bined continue to be the major productive sector, dependent on the sensitivity of the prevailing export crop although agriculture's share in GDP declined from an and the associated structure of production and market- average of 37 percent in 1977­78 to 20 percent in ing. In the first half of the 20th century, limes were the 1997­98. Other private sector activity remains small, dominant crop. Limes are relatively insensitive to high although experiencing some growth since the mid 1970s. winds. They were also grown on plantations owned by Dominica consistently runs a deficit on its external vis- U.K.-based companies able to absorb intermittent losses ible trade account, in part met through tourism earn- and associated recovery costs occurring in just one of ings. Tourism's contribution to GDP remains relatively their countries of operation. This production and mar- low, but by the late 1990s accounted for an estimated keting structure effectively acted as a geographical risk- 35 percent of external earnings (GoCD 2000). spreading mechanism. Meanwhile, small-scale farmers Dominica is susceptible to a wide range of natural produced much of the island's staple foods, roots and hazards. The most common, probable, and historically tubers, known locally as "ground provisions." significant are tropical storms and hurricanes. The major- From the 1950s banana exports, largely grown by ity of the population and infrastructure are located along smallholders, progressively displaced plantation agri- the coast, making Dominica particularly vulnerable to culture. Bananas were exported to the United Kingdom strong winds and high seas.16 There has been a sequence under a preferential access agreement that continued of disasters since 1978: Hurricanes David and Frederick after the United Kingdom joined the E.U. in 1974. This in 1979, Allen in 1980, Hugo in 1989, the cumulative (structural) change increased the overall vulnerability of 20 Building Safer Cities: The Future of Disaster Risk the agricultural sector to natural hazards. Bananas are economy, and it may be extremely difficult for agricul- highly sensitive to damage from winds of 40 or more ture to adjust to globalization and less assured markets miles per hour, so that even the fringe impacts of less of uncertain profitability. From the mid-1990s, how- severe tropical storms can cause serious damage. Small- ever, external factors resulted in declining banana pro- holders are also less able to bear heavy losses, because duction, with falling real prices and the loss of guaranteed of their lack of assets and access to credit. These preferential access to the European market. The WTO changes in the type and structure of production implied ruling against the E.U. is expected to eliminate prefer- increased vulnerability. ences on bananas within the decade (Schiff 2002; Roberts Hurricane David in 1979, followed rapidly the next and others 2002). year by Hurricanes Frederick and Allen, demonstrated Dominica's future, more diversified, agricultural sector that sensitivity, causing severe damage to banana plant- will be more sensitive to natural hazards and other risks. ings. However, this sequence of disasters also led to an Other subsectors lack the risk-spreading arrangements increase in the dominance of bananas, which offered a associated with bananas, namely, WINCROP, STABEX, fast, low-investment means of restoring agricultural liveli- and a protected export market. Some tree crops also hoods in an assured export market. Recovery only lack bananas' capacity for rapid post-disaster recovery. takes 9 to 12 months, even where plantings are totally Thus, a future disaster could be associated with a higher devastated. In contrast, production of copra, the other rate of default on agricultural loans, increased demand major commercial crop, took three to four years to recover. for credit, and slower post-disaster recovery. This dif- The rapid recovery in export production after Hur- ference in risks has been an obstacle in encouraging ricane Hugo in 1989 again demonstrated the resilience agricultural diversification, despite it being official policy of the banana economy. In this case, the compulsory throughout the twentieth century and despite the intense WINCROP banana crop insurance scheme, jointly intro- efforts of government and NGOs to foster a broader duced in 1987­88 by the banana marketing boards of economy. the four Windward Islands (Dominica, Grenada, St. In parallel with shifts within the agricultural sector, Lucia, and St. Vincent), also effectively encouraged replant- the wider economy's sensitivity to natural hazards has also ing of bananas by offering partial financial protection in changed over the past two decades as a consequence of the event of a disaster. The E.U., through STABEX, had changesinitscompositionacceleratedbytheWTOprocess. also provided the government of Dominica and other Agriculture's share of GDP halved to only 19 percent associate countries with a partial compensation mech- between 1977 and 1997, while manufacturing, tourism, anism for fluctuations in agricultural export earnings. and international financial services--the latter two by def- So public finances partially dependent on export earn- inition closely linked to the global economy--grew and ings were also buffered from the effects of disaster shock. increased their share of GDP. These latter service sectors The dominance of bananas in Dominica and similar are less sensitive to all except a catastrophic event, such as monocrop agricultural sectors in other small island Hurricane David. Indeed, if the country's recent expan- economies perhaps exemplifies a progressive adapta- sion into international financial services proves success- tion to a specific external economic environment, a ful, then a further decline in broad economic vulnerability process often accompanied by institutional innova- can be anticipated in the future. The international finan- tion. The structural change from estates to smaller com- cial services sector has little reliance on physical infra- mercial holdings in Dominica resulted in production structure and is not linked in any way to the domestic with relatively low overheads and fixed capital at risk. economy (including domestic financial markets). WINCROP--an outcome of regional cooperation-- helps to manage the risks associated with an extremely Infrastructure hazard-sensitive crop. Extension, credit, and market- ing arrangements are also closely tied to the specifics Development of the island's key infrastructure, in par- of this crop and its production structure. These insti- ticular harbors and the road system, provides another tutional arrangements become embedded within the example of changing long-term sensitivity to natural Disasters, Vulnerability, and the Global Economy 21 hazards, in this case linked to Dominica's broad level or among the general public of volcano-seismic hazard of development rather than the structure and compo- until the alert in 1998­99. Awareness was heightened by sition of economic activity. Until the 1950s, sea trans- mediacoverageoftheongoingeruptioninnearbyMontser- port was the primary form of intra-island movement, rat and the arrival of some Montserratian evacuees. implying rapid recovery of the transport network in Hurricane David in 1979 caused severe damage to the the aftermath of a storm. The more recent emergence whole of the island's capital stock. The population loss of roads as the major form of transport, coupled with from out-migration was not up for 20 years. There was a the mountainous terrain, which forces much of the road relatedunquantifiedlossofhumancapital.Tourism,largely network along the coastline, has effectively exacerbated uninsured and dependent on local finance, did not recover the direct and indirect impacts of storms. The scale of for almost a decade. Following this catastrophe and sub- physical damage to the transport network has become sequent severe storms, there has been piecemeal public far more severe and the pace of recovery much slower, investment in more hazard-proof infrastructure and pri- with knock-on implications for the movement of vate sector investment in industrial and service sector goods and people. Increasing vulnerability of this nature construction. Nevertheless, Hurricane Lenny in 1999 can have extreme consequences in a country like caused considerable temporary disruption and damage Dominica, with limited capital resources relative to to the infrastructure of ports and roads. The pattern of demand and thus a tendency to select least-cost solu- aggregate macroeconomic impacts of disasters in terms tions in meeting infrastructure needs; this vulnerabil- of GDP and sectoral product (as shown in figure 1.1) ity was exposed by the catastrophic Hurricane David. suggests that vulnerability to climatic hazards had peaked Similar issues relating to limited capital investment around independence, just prior to Hurricane David. Sub- resources have been encountered in constructing port sequently the impact of storms has become relatively less facilities. The expansion of external trade, including severe due to disaster-proofing and structural changes in highly bulky, refrigerated bananas, and the growth of the economy. Public finances were also in disarray and cruise ship tourism required more extensive port facil- there were problems of governance in 1979. ities. Funding such investment at apparently acceptable What were the longer-term development conse- rates of return, however, resulted in compromises in the quences? Dominica probably lost ground to other islands storm proofing of new facilities in the 1970s and 1980s, such as Barbados and St. Lucia on the post-independ- with costly consequences. The 1979 and 1989 hurri- ence tourist and financial services front. It also became canes created severe disruption and high repair costs. a source of less skilled labor to neighboring French and Anglophone islands. It is among the poorest of the smaller Caribbean economies. Changing Risks There are two important qualifications to the con- Gradual changes in the character of sensitivity of an clusion that vulnerability to natural hazards is declin- economy to natural hazards, such as those described ing. First, there are the uncertain consequences of climatic in the case of Dominica, can go unrecognized. Infor- change. Second, the scale of the threat posed by volcano- mants for the Dominica study suggested that the impact seismic hazard is increasing. Economic and popula- of Hurricane David in 1979 was in part so severe because tion growth have been increasingly concentrated in the the island had not experienced a hurricane for 40 years. capital, Roseau, which is in a relatively high-risk zone Thus everyone was caught unaware. Though Dominica in the event of a severe eruption. Scientific monitoring had not experienced a Category 4 hurricane since 1930, has indicated a significant risk of an extreme event in however, meteorological records show that there had, the twenty-first century. This is a real dilemma. Land- in fact, been a number of less severe storms. Instead, it use planning and regulation could reduce volcanic hazard would appear that the changing nature of and apparent risk. However, in a highly competitive regional econ- rise in the island's vulnerability to storms had not fully omy, with many islands seeking FDI in tourism and impinged on perceptions of risk. Similarly, there was little trying to develop financial services--Dominica's own awareness in government, in the business community, potential growth sectors--investors could easily be 22 Building Safer Cities: The Future of Disaster Risk Figure 1.1 Dominica--Annual fluctuations in agricultural, nonagricultural, and total GDP, 1978­99 H David & H Frederick H Allen TS Klaus H Hugo TS Debbie 3 storms TS Hortense H Lenny 30 20 10 change 0 centage per -10 -on-year earY-20 -30 -40 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Total GDP Nonagricultural GDP Agricultural GDP Source: Benson and Clay 2001. discouraged if attention is drawn to Dominica's hazard directly affected by the 1998 floods. Rapid-onset flash risks. flooding, tornadoes, and landslides are frequent causes of more localized but intense human suffering and loss. Severe earthquakes have been rare but are a potentially Bangladesh catastrophic hazard. Around 45 percent of Bangladesh's population is classified as poor and some 23 percent Bangladesh is one of the most disaster-prone countries live in absolute poverty. These people are typically living in the world. Most of its large, densely settled popula- and working in areas most at risk from natural hazards. tion of 130 million people is at significant risk to more At the household level, poverty is still the single most than one form of natural hazard, making it a test case important factor determining vulnerability. for international efforts in disaster reduction River flooding: there have been 4 extreme events in 30 years--1974, 1987, 1988, and 1998. Other very high floods in 1976 and 1984, though less severe when Hazards and Major Disasters measured in terms of height, maximum flow, and pro- In terms of area and number of people directly affected, portion of area inundated, caused widespread suffer- impact on economic activity, and damage and destruc- ing and losses and elicited an international emergency tion of assets, the types of hazard that have been most response. The implied annual risk of an extreme flood important since independence in 1971 are: exception- is a high 10­20 percent. ally widespread riverine flooding; severe tropical cyclones Over 100 years at least 14 very severe storms have and associated coastal storm surges; river bank erosion; impacted Bangladesh with an implied annual risk level anddrought.Accordingtoofficialestimates,139,000people of more than 10 percent. The worst storms accompanied were killed during the 1991 cyclone, and 31 million by storm surges have been catastrophic. The cyclone of Disasters, Vulnerability, and the Global Economy 23 November 1970 resulted in 300,000­500,000 fatali- of structural adjustment and trade liberalization along- ties; that of May 1991 caused 125,000 deaths. side more disciplined monetary management in the These events in particular have created a worldwide 1990s resulted in single-digit inflation and an annual perception of Bangladesh as one of the world's most dis- current account deficit below 2.5 percent of GDP. The aster-prone countries, described in the mid-1970s by reforms have also helped increase private sector devel- the U.S. Secretary of State as a nonviable "basket case." opment and foreign direct investment. Fiscal policy has not been so successful, however. There have been large fiscal deficits, a low tax-to-GDP-ratio, and relatively Economic Performance poor quality spending. Since independence, the Bangladesh economy has A simple assessment of the sensitivity of Bangladesh's achieved impressive rates of growth. It achieved rapid economic performance to major disasters in terms of recovery in the late 1970s following the devastating fluctuations in GDP and rates of growth in agricultural effects of natural hazards, war, and famine in 1970­75; and nonagricultural-sector product as shown in figure and an average real annual growth rate in GDP of 4.2 1.2 highlights some key issues: percent in the 1980s, rising to 5 percent during the · From 1965­75 there was extreme volatility in the 1990s. Average annual per capita GDP growth rose from largely agricultural economy, clearly linked to cata- an average of 1.7 percent in the 1980s to 3.3 percent strophic natural disasters. in the 1990s, reflecting higher GDP growth and declin- · With the notable exception of the most recent 1998 ing population growth. At the same time, there has been floods, major disasters have resulted in a downturn a change in the structural composition of the econ- in the agricultural sector's annual rate of growth. omy: agriculture's share of GDP has declined while the · The impact on the nonagricultural sector looks much industrial and service sectors have expanded, resulting less significant, but longer-term impacts of disasters in a sharp shift in the composition of the country's are not reflected in inter-yearly fluctuations: if resources exports. Exports also rose as a share of GDP from 4 are diverted from productive investment to disaster percent in 1980 to 14 percent in 2000, while imports response, the pace and nature of development will rose from 16 percent to 19 percent. A gradual process be adversely affected. Figure 1.2 Bangladesh--real annual fluctuations in GDP, agricultural, and nonagricultural sector product, 1965­2000 Floods '88 Floods '66 Cyclone '70 Floods '74 Drought '79 Floods '84 Floods '87 Cyclone '91 Drought '94 Floods '98 25 1 War of 20 Indep- endence 15 and change after- 10 math centage 5 per 0 -5 -on-year earY-10 -15 -20 0 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 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 GDP Agricultural sectoral product Nonagricultural sectoral product Source: Benson and Clay 2002. 24 Building Safer Cities: The Future of Disaster Risk · The sensitivity of agricultural and non-agricultural Chittagong is exposed to possible cyclones and storm components of GDP to natural hazards appears to surges, such as that of 1991. There are other risks such be declining over time, suggesting greater resilience. as fire, outside the scope of this study. Finally, building standards in facilities with a short life expectancy in this and most other new industrial developments largely Declining Vulnerability? ignore seismic hazard. Part of Bangladesh's greater resilience is attributable to The third major development has been in the finan- structural change in the agricultural sector. Following cial system, with some important innovations in financial the 1987 and 1988 floods, the relaxation of restrictions services. After the chaotic hyperinflation that contributed on private agricultural investment and imports of equip- to the famine of 1974, the government has managed to ment was associated with a rapid expansion of much- maintain relative financial stability through periods fol- lower-risk dry-winter-season rice and, to a much lesser lowing disasters. Labor migration has played an extent, wheat. Since then, highly flood-prone deep water important role in financing economic growth through rice and jute have gradually been displaced, and after the remittances of incomes. For example, remittances the 1998 floods, the main monsoon-season transplanted increased by 18 percent in the financial year that includes rice finally lost its primacy as the dominant crop. the 1998 floods. Bangladesh has been a leader in devel- As Bangladesh approached self-sufficiency in rice, oping microfinance for the rural and more recently urban the national staple, internal prices displayed reduced poor. Microfinance played a significant although lim- seasonal volatility and moved closer to import-parity ited role in enabling the poor to cope with the costs of price levels with liberalization of the grain import trade. the 1998 floods (del Ninno and others 2001). Impor- After the floods of 1998 large-scale private sector imports tantly, the (central) Bangladesh Bank was also able to covered the greater part of the temporary food gap, lim- protect this critically important financial sector through iting pressures on prices and the public finances (del massive refinancing. Ninno and others 2001). The economic impacts do not reflect or parallel the Urbanization is rapidly creating large urban and severity of disasters in terms of loss of life and human peri-urban zones, including the capital Dhaka, which tragedy. Large, unprotected rural and peri-urban pop- is quickly becoming a sprawling, minimally planned ulations, increasing rapidly due to unchecked popula- megacity with weak, overstretched infrastructure. Since tion growth, remain vulnerable to riverine flooding. The the severe floods of the late 1980s, there has been a de exploitation of ground water for irrigation and human facto shift in flood control investment and protections use has had its downside in the widespread problem of from rural and agricultural to urban and industrial. This arsenic poisoning. Urban flood protection on a flood seems to have been at least partially successful. The plain with high population densities poses severe drainage 1998 floods, of longer duration and with higher river and pollution problems that require unprecedented levels than those of 1987 or 1988, did not severely affect improvements in management of the urban environment, the greater Dhaka metropolitan area or the secondary requiring technical sophistication, investment and oper- towns that received enhanced protection. ational funds, and improvements in governance. Any Export-oriented garment manufacture has been the major failure in urban flood protection would have mas- primary motor of export growth as inward FDI, and sive costs in human and economic terms. some local industrialists exploited the trading niche Positively, the construction of a system of cyclone offered by the MFA. In 1998, there was some disrup- shelters and improvement in storm warnings appear to tion to supply and export chains, but the industry, largely have reduced the considerable risks to human life posed based in less-flood-affected urban zones, proved resilient. by tropical cyclones and accompanying storm surges However, for the future it appears that risks have altered from the Bay of Bengal. But this threat to large popula- rather than been reduced. The industries' markets are tions settled in high-risk coastal areas is by no means far from assured and could be lost if there were a major eliminated. There are still considerable institutional disaster-related disruption. Manufacturing in coastal problems concerning control and access to shelters Disasters, Vulnerability, and the Global Economy 25 and the maintenance of coastal embankments that could Malawi mitigate the impacts of storm surges (IFRC 2002). There are also two major sources of increased hazard Since 1990 Malawi and other countries in Southern vulnerability. First, the scale of the threat posed by Africa seem to have experienced increased economic seismic hazard is increasing. Rapid economic and pop- volatility that is linked with climatic variability (figure ulation growth has been increasingly concentrated in 1.3). This apparent increase in vulnerability has occurred the capital, Dhaka, and other urban centers that would during a period of many complex interacting devel- be devastated by a major earthquake. Bangladesh is part opments in the region--some positive, such as the of a high-risk region. Minor tremors are common and political reintegration of South Africa and the end to one of the most extreme events, the 1897 earthquake conflict in Mozambique, and others negative, such as (8.8 on the Richter scale), had its epicenter in the nearby the increasing problems of governance in Malawi, Zambia, Shillong Plateau of the Indian State of Megalaya. Local and Zimbabwe and the HIV/AIDS epidemic, which are assessments provide only highly tentative risk zoning undermining the capacity to cope with shocks. These within the country in map form because of the inade- developments are highlighted by what has happened in quacies of available data (Ali and Choudhury 2001). Malawi. Second, there are the uncertain consequences of envi- Malawi, small and landlocked, recorded a population ronmental change, some recorded and others only so of 10.8 million in 2000. It is one of the poorest countries far identified as possible consequences of global climatic in Africa, with per capita GDP of US$170 in 2000. Health change. Human activity in Bangladesh and the imme- and social indicators are also among the lowest and diate region may also be altering the likelihood of spe- declining: average life expectancy fell from 43 in 1996 cific events as well as the associated effects. to 37 in 2000 and Malawi is one of the countries most Figure 1.3 Malawi--real annual fluctuations in GDP and agricultural, industrial, and services sector product, 1980­98 Drought Drought 60 50 40 30 change 20 centage 10 per 0 -on-year earY-10 -20 -30 -40 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 GDP Agricultural sector product Industrial sector product Services sector product Source: Clay and others 2003. 26 Building Safer Cities: The Future of Disaster Risk severely affected by HIV/AIDS. The loss of human cap- These influences have included some relating to changes ital and ill health among the economically active pop- in the external economic environment. ulation are likely making the country more disaster-prone. Agricultural development has stalled. Demographic Malawi still has a largely rural economy, with 89 growth averaging 2.6 percent in the 1990s has placed percent of the economically active population classified increasing pressure on agricultural systems that are an as rural. Agriculture accounted for some 40 percent of adaptation of shifting cultivation. Declines in soil fer- GDP in 2000, compared with 44 percent in 1980. Its tility on holdings of shrinking size are barely compen- share in GDP was declining but rose again in the sated for by increased fertilizer use and other technical 1990s, with industrial stagnation and contraction in the improvements that could increase productivity. Liber- public service sectors. Export earnings are dominated alization of internal agricultural markets has been rel- by agricultural commodities, largely rainfed tobacco, atively unsuccessful. The private sector has been unable making the economy sensitive to climatic variability and to take on and efficiently handle functions that were commodity price shocks. previously the responsibility of parastatals, especially Although there has been internal liberalization and the agricultural marketing agency, ADMARC. a reduction in tariffs, the Malawi economy has become Conflict in neighboring Mozambique, and more relatively less open over time. Exports have declined recently, the process of reintegration of South Africa into as a proportion of GDP from 28 percent in 1980 to the regional polity and economy have contributed to 24 percent in 2000. Imports fell from 43 percent to the failure of industrialization or service subsectors such 40 percent. as tourism to provide alternative sources of economic The main source of natural hazard vulnerability in growth and employment. Malawi is climatic variability. The major food staple, The relative deindustrialization of Malawi shows rainfed maize, accounting for more than 70 percent of the need for caution in assuming that regional devel- energy intake, is extremely sensitive not only to drought opment will be consistent with broader global trends. or low rainfall, but to erratic rainfall within the grow- The disruption to external communication because of ing season and, as the 2001 season showed, to abnor- the war in Mozambique from the late 1970s increased mally high rainfall. There were only two clearly transport costs, reducing export parity and raising import defined droughts in the twentieth century: the drought parity prices. This favored low-input, self-provisioning that caused a famine in 1949 and another that reduced rather than export-oriented agriculture, encouraging maize production by 60 percent in 1991­92. How- the development of small-scale manufacturing enter- ever, relatively unfavorable conditions such as the widely prises, although growth was checked by limited domes- reduced and erratic rainfall of 1993­94, extremely high tic demand. However, the more recent progressive rainfall as in 2001, or locally erratic rainfall as in 2002 reintegration of South Africa into the regional econ- pose increased food security and wider economic threats omy has exposed small-scale manufacture and pro- to a more vulnerable, less resilient economy. cessing of tradables in Malawi and other "front line Riverine flooding is an annual, relatively predictable states" to a larger-scale, absolutely more efficient com- hazard in the lower-population-density southern dis- petitor. This adjustment effect amounts to de-industri- tricts. Even in 2001, flooding did not have a widespread, alization, making the economy more exposed to catastrophic impact. There are apparently no other sig- agricultural sector volatility. nificant forms of natural hazard. Malawi and some neighboring countries have been beset with problems of conflict, governance, and weak public financial management. These have amplified the Sources of Increasing Vulnerability difficulties caused by economic sensitivity to climatic A variety of influences has interacted to make the econ- variability. In 1991­92, the economic effects of drought omy and society increasingly sensitive to climatic vari- were intensified by the effects of an influx of displaced ability,notjusttheextreme"drought"eventsthatarewidely people from Mozambique and the halt of bilateral assis- but simplistically perceived to impact Southern Africa. tance other than emergency relief. In 1994, the effects Disasters, Vulnerability, and the Global Economy 27 of an agricultural-sector shock were compounded by the reaction of both domestic and international mar- weak fiscal and monetary management in a hyperin- kets, which can trigger fundamental-based or self-ful- flationary situation. In 2000­01, there was donor filling crises." However, they also note that, although pressure to reduce parastatal debt by reducing grain the evidence on the impact of globalization is still very stocks. Then, as the food security situation deteriorated scarce, any observed increase in volatility seems to occur after the 2001 harvest, there was donor reluctance to in the short run only, and that volatility decreases in respond to aid requests from the government, which the long term. Indeed, they conclude that there is could not account for revenues from its grain market- scope for much deeper globalization, given its poten- ing operations, including local currencies generated by tial benefits, but that efforts are also required to seek to the sale of aid commodities. It is debatable whether the minimize associated risks. food security crisis that emerged in Malawi during This paper draws upon a limited number of in-depth 2001­02 should be categorized as the consequence of country studies. As such, its findings should be con- a natural hazard. Rather, climatic variability over two sidered as hypotheses for wider testing. Nevertheless, years within a range that had not previously been regarded it is striking to note that most of the findings confirm as disastrously destabilizing contributed to a crisis in an and elaborate conclusions and policy presumptions in economy made more vulnerable by structural changes the wider globalization literature, which focuses on and other developments that had reduced resilience at market-related and financial risks rather than natural all levels. Unfortunately, the onset of an El Niño event hazards. in 2002, with its prospect of low and erratic rainfall, From a natural hazards perspective, an important objec- increases the risk of a third, disastrous year. tive is to seek ways of using global markets to improve risk management. There may be opportunities in the area of smaller enterprises and consumers, as well as in larger Conclusions corporations and government. The Montserrat case (box 1.1) and potentially similar risks to narrowly based, The sensitivity of an economy to natural hazards is deter- locally important, and highly successful financial institu- mined by a complex, dynamic set of developmental, tions in Dominica and other smaller, hazard-sensitive economic, and societal influences, including powerful economies imply an urgent need to spread risks. Increas- external factors. The evidence presented in this paper ing global integration may create opportunities for spread- suggests that increasing integration of economies around ing risks borne by micro-finance institutions as well. the world has significant implications for the nature of Exploiting such opportunities may require international sensitivity to natural hazards. In particular, globalization encouragement and support. has expanded opportunities for risk diversification and, In the context of the December 2002 ProVention con- for nations as a whole, it seems to be a positive trend. ference highlighting urban disaster reduction, the coun- However, the question of whether globalization ultimately try studies suggest that different types of natural hazard exacerbates or reduces sensitivity, both of particular risk have distinctive economic dynamics. Developing economies and individual households, is complicated countries responding more successfully to the oppor- and depends on specific country circumstances, includ- tunities and challenges of globalization are showing some ing public action to reduce vulnerability. reduction in relative sensitivity (measured as a propor- On the downside, globalization exposes countries to tion of GDP or sector product) to more predictable, rel- new forms of risk, possibly exacerbating the impact of atively frequent, climatic hazards such as tropical cyclones natural hazards when different risk events coincide. Writ- in Dominica and extreme riverine flooding in Bangladesh. ing about financial globalization specifically, Schmukler An important qualification to such trends is the highly and Zoido-Lobatón (2001:18) ask: "Is the link between uncertain implication of global climatic change for the globalization, crises, and contagion important enough frequency and severity of natural hazards. to outweigh the benefits of globalization?" They cau- In contrast, the exposure to geophysical hazards tion that "in open economies, countries are subject to appears to be rising. Rapid urbanization--a process 28 Building Safer Cities: The Future of Disaster Risk often associated with globalization--creates large con- Africa have been reinvestigated in a study focusing more specif- centrations of people and physical capital, mostly built ically on Malawi (Clay and others 2003). There have been three with little regard for natural hazards either in choice of studies of small island economies: Dominica (Benson and Clay location or design. These geophysical hazards typically 2001), Fiji (Benson 1997a) and Montserrat (Clay and others have relatively low but difficult-to-determine risks, 1999) as well as three studies for larger Asian economies, less than 1 percent annually for an extreme earthquake Bangladesh (Benson and Clay 2002), Philippines (Benson 1997c) in Bangladesh or a disastrous volcanic event in Dominica. and Vietnam (Benson 1997b). Globally, such increasing hazard exposure implies rising 3. For example, an official assessment of the costs of the 1998 disaster-related losses. Bangladesh floods aggregated capital losses, such as damage to The most worrying position is that of countries and infrastructure with rice crop losses. An assessment of Hurricane even regions that are apparently being marginalized in Lenny in 1999 in Dominica included costs of physical damage the process of globalization. In re-examining the con- and reductions in income from small-scale fisheries. sequences of climatic variability in Southern Africa after 4. International companies operating in the sugar sector are almost a decade, there is substantial evidence of attempting to take climatic forecasts into account in this way. greater vulnerability to natural hazards. Natural haz- Private communication from Dr. M. Evans. See also Bohn, ards, in turn, may well be at least indirect compound- forthcoming. ing factors limiting opportunities and potential for 5. In both these cases flows from outside the country contributed globalization for certain economies, although the pre- to the disaster, and these flows were influenced by the actions cise nature of their role is complicated and, again, of public agencies responsible for water management. There were often highly country-specific. inadequate warnings to those responsible for flood response in For those countries that are becoming more closely the affected areas. A contributory factor was insufficiently pre- integrated into the global economy, risks emanating cise understanding of system dynamics and links to exception- from all types of natural hazards should be considered ally high rainfall (Akteer Hossain 2001; Christie and Hanlon in assessing the impacts of reductions in trade barriers 2001). and related changes in the composition of economic 6. For example, there was underfunding of volcano-seismic mon- activity, security of livelihoods, and measures taken to itoring in Dominica in 1998 at the outset of a volcanic emer- help protect vulnerable groups. More broadly, risks ema- gency and no proper wave level monitoring even during Hurricane nating from natural hazards should be taken into account Lenny in 1999. Bangladesh has effectively been without a seis- in the determination of priorities, policies, and strate- mic monitoring system since the separation of Pakistan and India gies, with enhancement of resilience to natural hazards at Partition in 1947. The meteorological system in Malawi lost as one of the basic objectives of government in hazard- access in 1991 to its historical database of climatic information, prone countries. It should also be recognized that suc- impeding investigations for over a decade. cessful risk management requires not only technical, 7. However, Roberts and others (2002) note that the rural non- structural solutions, but also a broader awareness of farm sector has also been expanding and thus some labor released underlying socioeconomic causes and appropriate action. from farming may remain in rural areas. 8. Even had this analysis been undertaken, the literature on glob- alization indicates a number of analytical difficulties that arise Notes in comparing relative integration across countries, implying that 1. The Siena Declaration on the Crisis of Economic Globalization. any findings would have been very approximate at best. Statement prepared by the Board of Directors of the Interna- 9. After Quah (1993), ratios of per capita income relative to the tional Forum on Globalization Siena, Italy, September, 1998. global average were discretized into intervals at 1/4, 1/2, 1 and 2. www.twnside.org.sg/title/siena-cn.htm Annual one-step transition matrices were then estimated by aver- 2. Previous studies have included Benson and Clay (1998) on the aging the observed one-year transitions over every year from economic consequences of drought in Sub-Saharan Africa with 1960-61 to 1992-93. The one 33-step transition between 1960 a more detailed country study of Zimbabwe (Benson 1998). More and 1993 was also analyzed. Analysis was undertaken on the full recently the economic effects of climatic variability in southern data set and three subsets (more hazard-prone, more hazard-prone Disasters, Vulnerability, and the Global Economy 29 excluding Sub-Saharan African (SSA) and less hazard-prone Bibliography countries). Acemoglu, D., S. Johnson, and J. A. Robinson. 2000. "The 10. A more sensitive ranking according to disaster impact is Colonial Origins of Comparative Development: An Empiri- fraught with difficulties, relating in part to incomplete data. cal Investigation." Processed. Berkeley, California, Department 11. In the Philippines, for instance, the 1990 earthquake and of Political Science; University of California, Department of 1989­90 drought were reported to have contributed to a 6.7 Economics; Massachusetts Institute of Technology, Depart- percent increase in total external debt, and a 22.4 percent increase ment of Political Science, and Sloan School of Management, in debt from official creditors alone, in 1990 (Ernst and Young Massachusetts Institute of Technology. 1991). An examination of the impact of the mid-1980s drought Ahmed, K. U., and H. U. Chowdhury. 1998. "The Impact of on external borrowing in six countries in sub-Saharan Africa Migrant Workers" Remittances on Bangladesh Economy." Indian revealed that the growth rate in total debt stocks accelerated Journal of Economics 78 (311). during the year of most severe drought in five of the countries Akhter Hossain, A. N. H. 2001. "Late Monsoon Flood in the South- (Benson and Clay 1998). The one exception, Zimbabwe, had west Region of Bangladesh 2000." Engineering News 42. Dhaka. been pursuing a deliberate long-term policy of debt reduction. Ali Md. H., and J. R. Choudhury. 2001. "Assessment of Seismic Disasters can also create additional external debt pressures to Hazard in Bangladesh." In K. Nizamuddin, ed., Disaster in the extent that they also destroy infrastructure and other assets Bangladesh: selected readings. Dhaka: University of Dhaka, Dis- funded with still-outstanding external loans. aster Research Training and Management Centre. 12. Brahmbhatt (1998) also discusses the role of various struc- Ames, B., W. Brown, S. Devarajan, and A. Izquierdo. 2001. tural factors in determining levels of international trade, includ- "Macroeconomic Policy and Poverty Reduction." Poverty Reduc- ingcountrysize,factorendowmentstructure,geographicalisolation, tion Strategy Program. (Draft. April 2001). World Bank. Avail- and the stage of development. 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Cited in Shatz and Venables (2000). in Vietnam." ODI Working Paper No. 98. London: Overseas 14. Singh and Jun (1995) report that empirical evidence on the Development Institute. importance of political stability reported by others is inconclu- Benson, C. 1997c. "The Economic Impacts of Natural Disasters sive, in part depending on how political stability is defined. It in the Philippines." ODI Working Paper No. 99. London: has been variously defined as the number of changes in gov- Overseas Development Institute. ernment, internal armed attacks, riots and so forth. Benson, C. 1998. "Drought and the Zimbabwe Economy, 15. See, for example, Atkins and others 2000; UNDRO 1990; 1980­93." In H. O'Neill and J. Toye, eds., A World Without and the authors' case studies for Dominica (Benson and Clay Famine? London: MacMillan. 2001), Fiji (Benson 1997a) and Montserrat (Clay and others Benson, C., Forthcoming. "The Economy-Wide Impact of 1999). Natural Disasters in Developing Countries." 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Buetre, and F. Jotzo. 2002. "Agricultural Trade World Bank. 2002. Globalization, Growth, and Poverty: Building Reform in the WTO: Special Treatment for Developing an Inclusive World Economy. Washington, D.C.: Oxford. Countries." Abareconomics. Chapter 2 Natural Hazard Risk and Privatization Paul K. Freeman Increases in natural hazard losses intensify the need for allocation of risk are central themes of manuals designed financing dedicated to reconstruction. Multilateral insti- to assist in the privatization process.1 tutions are addressing this issue and establishing new This paper explores the role that privatization can play programs. For example, the World Bank recently imple- in shifting the risk of financing post-natural-disaster mented a Private Sector Development Strategy (PSDS) reconstruction from the government to the private sector. with the objective of increasing private participation in This topic has not been explored in detail in the exist- infrastructure. As noted by the Bank: ing literature. Current practice allocates risk of infra- structure loss from natural hazard events to governments. Most poor people in developing countries have little or Existing practice is predicated on the long-standing no access to efficient infrastructure services. Typically, gov- principle that governments are best able to cope with ernment policies aim at expanding access to infrastruc- large, uncertain risks--the types of risk that character- ture services and at rendering it affordable. Yet, progress has been slow in a number of the poorest countries. (PSDS ize natural hazard catastrophes. Through the power of 2002:10) taxation, governments can efficiently transfer these types of risk to taxpayers. The tool to expanding and accelerating access to infra- For a number of developing countries, the risk of loss structure services is the harnessing of the private market from natural hazards may be handled more efficiently to improve those services, particularly in telecommu- by the private market. The relative cost of transferring nications, electricity distribution, and water pipeline risk to taxpayers may be more expensive than that of systems. The PSDS focuses on activities that increase transferring risk to the private sector. For these coun- the use of the private market to provide essential serv- tries, considering natural hazard risk as a part of the ices, including infrastructure. bundle of risks transferred and a component of the pri- The process of privatization is complicated. For each vatization process may be warranted. project, establishing the macro conditions necessary for This paper will address natural hazard risk and pri- privatization and conducting a detailed cost/benefit vatization through discussion of the increasing costs of analysis are required at a national level. Privatization disasters to infrastructure, detailing the existing justifi- can be described as a process that transfers responsi- cation for allocating natural hazard risk to governments bility for the provision of goods and services from the in the privatization process; exploring circumstances government to the private sector. The process also in which existing practice may be inappropriate; and allocates risk for the provision of these goods and serv- discussing areas where additional research is needed. ices from the government to a private party. In exchange, the private party is provided revenue sources. A difficult task in the privatization process is allo- Natural Hazard Losses to Infrastructure cating risk to the participating parties. A key principle of risk allocation is the assignation of risk to the party The losses to infrastructure from natural hazards are best able to cope, though the risks associated with pri- significant and continue to escalate at an increasing rate. vatization are often complex. The identification and Research indicates two main factors that contribute to 33 34 Building Safer Cities: The Future of Disaster Risk these losses: increasing concentrations of people and Relationship between Increased Damage assets in hazard-prone regions of the world and increases and Climate Change in the intensity and frequency of severe weather-related Researchers have isolated several factors that contribute events. This section will briefly review these trends. to the rising trend in direct damage from catastrophes. One significant factor is the acceleration in weather- Rising Total Direct Damages from Extreme Events related natural hazard events such as hurricanes, cyclones, and flooding. They account for nearly two-thirds of all The ever-increasing losses from natural hazard events are losses from natural hazards, while earthquakes account an important issue for economic development and poverty for most of the remaining third. Figure 2.2 divides losses reduction. Over the last 10 years, economic losses from into specific types of events and shows that, while earth- natural disasters have averaged nearly $580 billion a year quake occurrences have remained relatively stable (figure 2.1). This is a 7.7-fold increase in losses from the over time, the incidence of weather-related events has decade of the 1960s (Munich Re 2002). Due to differ- accelerated. The economic costs of rainstorms, floods, ences in size of the economies in industrialized and devel- droughts, and other extreme weather events have oping countries, however, the economic losses per capita increased 14 times from the decade of the 1950s to the were 20 times greater in developing countries (Bendimerad decade of the 1990s (Munich Re 2002). 2000). From 1991 through 2000, 2.1 billion people were affected by natural disasters, an average of 211 million people annually. Of that number, 98 percent lived in Socioeconomic Factors and Increased Vulnerability medium- and low-development countries as classified by to Natural Hazards theUnitedNations(IFRC2002). Between 1990 and 1998, 94 percent of the world's major natural disasters and 97 While the increasing frequency and severity of extreme percent of all natural-disaster-related deaths occurred in weather events affect the cost of natural hazard risk, developing countries (World Bank 2001). the most important variable increasing damage is the Figure 2.1 Economic losses from natural catastrophes in the 20th century US$ 150 bn 80 70 60 50 40 30 20 10 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Economic losses (2000 values) of which insured losses (2000 values) Trend of economic losses Trend of insured losses (Amounts in US$ bn) Source: Munich Re 2002. Natural Hazard Risk and Privatization 35 Figure 2.2 Natural catastrophe trends in the 20th century 16 14 12 10 8 6 4 2 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Others Flood Windstorm Earthquake, volcanic eruption Source: Munich Re 2002. concentration of human populations and their assets though increases in population do not necessarily trans- in hazard-prone regions.2 late into increased vulnerability to natural hazards. It is estimated that natural disaster losses will increase Populations are concentrating in urban areas. The dramatically over the next 50 years. The global cost of movement of people toward cities has accelerated in the natural disasters is anticipated to top $300 billion annu- last 40 years, with 47 percent of the world's population ally by 2050 (UNISDR 2001). Two broad demographic now living in cities, compared to one-third in 1960. trends directly impact the increasing losses from natu- The growth of cities results from births and migration ral hazards in the developing world: population growth to the cities from rural areas. In developing countries, the and the concentration of populations in megacities. In proportion of people living in cities has doubled since 1999, the world's population surpassed 6 billion. This 1960, with more than 40 percent now living in urban represents a tripling of population since the beginning areas. This trend is expected to continue, and by 2030, of the twentieth century. According to U.S. Census nearly 57 percent of the population in less developed Bureau projections, the world's population will increase regions will live in urban areas. In Latin America and the to nearly 8 billion by the end of 2025 and reach 9.3 Caribbean, it is projected that more than 75 percent of billion by 2050--a 50 percent increase above current the population will reside in urban areas by 2030 (UNFPA levels (U.S. Bureau of the Census 1998). Ninety-nine 1999). Urban concentrations in Latin America are the percent of the global increase will occur in developing highest in the world (Charveriat 2000). countries. In 1960, 70 percent of the global popula- Increasing population concentrations in urban regions tion lived in less-developed regions. By 1999, that per- are primarily located in "megacities" with populations centage had increased to 80 percent (UNFPA 1999), of more than 10 million people. In 1960, only New York 36 Building Safer Cities: The Future of Disaster Risk and Tokyo had populations greater than 10 million. By upon the frequency and severity of weather-related events 1999, there were 17 cities of that size, 13 of which were in a given year. Based on historical data, infrastructure in less developed countries. It is projected that by 2015, losses in 1995 alone were $32.6 billion (Munich Re 2002). there will be 26 mega cities, 22 of which will be in less- Research suggests that different types of infrastruc- developed regions of the world. Nearly 10 percent of the ture are vulnerable to different types of natural hazard world's population will live in these cities, up from just events. Housing and roads are particularly vulnerable 1.7percentin1950(UNFPA1999).Urbanizationincreases to earthquake damage (Albala-Bertrand 1993). Droughts risk by concentrating people and investments in limited may have minor impacts on infrastructure and produc- geographic zones. As a result, natural hazards can inflict tive capacity, but can result in heavy crop and livestock substantial damage in a short period of time. Hurricane losses. Floods can cause extensive damage to infrastructure Andrew inflicted $20 billion in damage in a few hours and other production capacities, for example, wiping when it struck Miami in 1992 (Blaikie and others 1994). out agricultural yields (Benson and Clay 2000). Megacities are highly vulnerable to natural disas- In a manual for estimating the socioeconomic effects ters. Nearly half of the world's largest cities are situated of natural disasters, the United Nations Economic Com- along major earthquake zones or tropical cyclone tracks mission for Latin America and the Caribbean (ECLAC) (Bendimerad 2000). Floods, earthquakes, and tropical provides broad outlines of the most probable types of cyclones often strike the same geographic zones more infrastructure damage by type of disaster. For example, than once, and some of the highest risk areas are also the manual explains how floods can impact clean water the most populous. India, China, and Southeast Asia supplies; damage buried and semi-buried tanks and dam are at high risk of seismic activity and floods, hurri- structures; and harm pump equipment. Floods were con- canes, and cyclones. 3 Increasing population concen- sidered to cause damage in all infrastructure categories, trations in urban areas far outstrip the capacity of cities deteriorating or destroying integral structural compo- to absorb this growth. In the 1990s, 60 to 70 percent nents, deforming the land on which infrastructure rests, of urban growth was unplanned (UN/ISDR 2001). Since orrenderingituselesswhenwindandwaterhavedeposited governments in many developing countries already extraneousmaterialsuchasmud,ash,anddebris.Droughts struggle to provide basic services to burgeoning popu- tend to impact infrastructure more mildly, though high- lations, however, it is already difficult to find resources ways can buckle and railroad tracks can misalign when to decrease the vulnerability of poor residents of megac- soldered rails become distorted. Windstorms put addi- ities to natural disaster risk. The spiraling costs of nat- tional stress on buildings, affecting both structural and ural hazard events in developing countries are linked nonstructural elements, though only minimally affecting to the increasing number and intensity of events as foundations and underground elements (ECLAC 1999). well as to concentrations of urban poor in hazard-prone Because different types of infrastructure are differently regions. Losses from catastrophes will be reflected in affected by disasters, the impacts of climate change are increasing infrastructure losses. likely to affect critical infrastructure. Increases in flood- ing and windstorms will have implications for buildings, bridges, roads, and water systems, whereas droughts will Current Infrastructure Losses as a Component affect agriculture and some transportation systems. of Worldwide Direct Losses Since total direct damage increased dramatically world- wide over the past decades, it can be assumed that infra- Allocation of Natural Hazard Risk structure damage as a portion of overall losses increased in the Privatization Process as well. Data from World Development Indicators (World Bank 1999) show that 24 percent of invested capital stock The loss of infrastructure due to natural hazard events is public infrastructure. As of 2001, total direct losses is well known, though at issue--and the topic of this for infrastructure had reached $9.6 billion, though this paper--is finding the most appropriate entity to bear annual loss figure can vary significantly, depending the cost of post-disaster reconstruction. As a general Natural Hazard Risk and Privatization 37 proposition, the risk of loss to government-owned assets The risk-neutral status of governments has influenced is best borne by the government. The justification lies the behavior of industrialized countries in dealing in the ability of governments to use their power of tax- with natural catastrophe risk in the privatization process. ation to spread the cost of loss to their taxpayers. Gen- In examining opportunities to privatize energy activi- erally, the relative size of the loss to the capacity of the ties in the United States, the government explicitly retains government to spread the loss across taxpayers has made the risk of natural hazard losses in the privatization governments the most efficient instrument to manage process. Guidelines from the U.S. Department of Energy risk. "It is profitable for all concerned that risks should (referenced in footnote 1) state that the risk of loss be shifted to the agency best able to bear them through from natural hazards is less expensive in the hands of its wealth and its ability to pool risks. The government, the government than any other party. As a result, the above all other economic agencies, fits this description" government is presumed to be better off by retaining (Arrow 1992). The characteristic assumption that a gov- the risk of loss from natural hazards than by attempt- ernment is the most efficient entity to bear risk under- ing to transfer the risk as a component of the privati- pins decisionmaking about government investments. zation process. The same justification has been applied Most governments maintain a risk-neutral position: to privatization of government-owned facilities in devel- they ignore the risk in making public investment deci- oping countries (Lewis and Mody 1998). sions. Justification for this approach is found in the work While the theory of government risk-neutrality may of Kenneth Arrow (Arrow and Lind 1970). The critical be applicable to most industrialized countries, the use question for Arrow is: "What is the per capita cost of of this theory to justify the assumption of natural hazard public risk-bearing?" The answer lies in computing indi- risk by governments in all cases is limited. In regard to vidual costs and weighting them against the benefits of the privatization of infrastructure projects, the theoret- public risk bearing. As the cost of risk approaches zero ical limits of the policy have a particular application. in the hands of each individual, the risk also approaches Arrow recognized limitations on the general theory zero for the government. As the cost of risk per citizen of the risk-neutral status of governments (Arrow and or per person that can be taxed approaches zero, the Lind 1970). He was particularly interested in projects risk for a country's total wealth decreases. As Arrow where the loss would be felt by one specific group, as states, "when the government undertakes an investment in the case, for example, of a bridge that serviced a lim- it, in effect, spreads the risk among all the taxpayers." ited geographic region. In this case, it is appropriate that A second basis for government risk-neutrality is based the risk profile of the geographic region dictate how risk on portfolio theory. Since risk may be reduced by port- for that project should be managed. Another example folio diversification as well as by spreading risk over cited by Arrow concerns government projects directed large populations, the government as owner of a wide at a particular population group that receives the ben- variety of investments has the potential for the widest efits of a project and bears its risk of loss. An irrigation portfolio diversification. This theory underpins work project in a defined watershed region would be such by Paul Samuelson on capital investment decisions made an example. In this case, if the risk of loss were to be by governments, which arrives at conclusions similar borne by those dependent upon the project, Arrow to those in Arrow's analysis (Samuelson and Vickrey maintained that the risk profile of the directly impacted 1964; Arrow and Lind 1970). group, not the entire population, would be most rele- Because of the risk-neutral status of governments, they vant. Both of these examples highlight the same prin- arethenaturalentitiestowhichriskisoftenshiftedbysoci- ciple: if the risk of an investment is borne by a limited eties. In industrialized countries, the government sup- group, the risk-adversity of that group should domi- plies insurance for retirement. In many countries, medical nate the investment decision (Arrow and Lind 1970). care, particularly for the aged and indigent, is financed by As to the comparative advantage of the government the government (Priest 1996). In regard to natural hazard in diversifying risk through its portfolio strategy, a com- losses,thegovernmentisoftentheagenttoassumetherisk pelling argument can be made that this is a small advan- of loss for its citizens (Lewis and Murdock 1999). tage when dealing with correlated risk. The risk of loss 38 Building Safer Cities: The Future of Disaster Risk from catastrophes in smaller countries is correlated, since are weak (Ferranti and others 2000). The imperfections the catastrophe is likely to impact the entire country at of the financial markets severely limit their ability to the same time. The core of the portfolio strategy lies in diversify risk and reallocate financial resources during aggregating independent risks, whose error terms cancel times of distress. Another factor of economic recovery out increasing predictive ability. This does not occur is the political will of the country to reallocate costs of when aggregating highly variant risks (Priest 1996). adjustment programs within the domestic economy Several arguments emerge as to why developing coun- (Rodrik 1998). In a study examining differences in recov- tries should be risk-averse. For many, the large size of ery from the recent debt crises in East Asia and Latin the potential loss in absolute terms compared to their America, Rodrik found that countries with the ability to internal risk-spreading ability means that risk does not distribute the cost of risk with few political repercus- approach zero in the hands of the population. Honduras sions were able to recover relatively quickly. These coun- presents such an example: in 1998, Hurricane Mitch tries tended to be located in East Asia. However, countries caused total losses approaching $5 billion in a country that lacked the ability to allocate the cost of risk with- with a total population of 4 million. Seventy percent of out considerable political turmoil took long periods of the population earns less than $2 per day (World Bank time to recover from external shocks to their economies. 1999). The average per capita cost of $1,250 per person, These countries tended to be in Latin America. In the therefore, is not insignificant, and the cost of risk does meantime, economic growth within these slowly recov- not begin to approach zero for Honduras or countries ering countries was significantly curtailed (Ferranti and in similar circumstances. others 2000). The importance of this observation is The mere calculation of per capita cost does not reflect that risk aversion at a government level should be influ- the difficulty countries have in increasing internal tax enced as much by the capacity of the country to allo- revenues. Many have only a limited ability to spread the cate risk within society as by the relative size of the risk. cost of risk internally through taxation (Rodrik 1998). Since many countries have difficulty reallocating inter- Many countries rely on a system of indirect taxes, the nal resources, reliance on external debt is often the pre- increase of which has political implications for specific ferred tool to address the need for additional resources segments of society. For these countries, the budgetary (Cornelius 2000). Additional external debt may have adjustment process is difficult and politically costly the least internal political cost. (Lewis and Murdock 1999). As a result, the process of As described earlier, it is not clear that governments spreading even small dollar amounts of risk has high in smaller countries can efficiently spread highly corre- political costs (Meier 1995). In addition, shallow lated risk. Since natural disasters tend to recur within financial markets and weak financial systems limit the geographically defined regions and can impact signifi- capacity to access internal and commercial external sav- cant portions of smaller countries, no benefit arises from ings in times of catastrophes (Ferranti and others 2000). aggregation of risk at the country level (Priest 1996). Therefore, even if the cost of risk approached zero in the This analysis begins to define investment decisions where hands of each taxpayer, the barriers to transferring the the traditional assumption of government risk neutral- risk to each taxpayer could be high in many countries. ity should be challenged. The first group of decisions This raises a critical issue when examining risk spread- includes those for which the risk of loss relative to the ing. The issue for some governments is not only the capacity of the population to absorb the risk is high. absolute size of the risk; it is also the relative ability of Honduras is a good example of this problem: the risk a country to dedicate resources to dealing with the risk. of loss on a per capita basis is very high. In examining external shocks to economies, a growing Risk analysis is different for another group of coun- body of research is emerging to describe why some coun- tries that includes those where the cost of catastrophe tries recover from shocks better than others. These stud- losses per capita is small, but the ability to shift the ies relate primarily to credit and commodity price shocks cost of risk to the population is limited. These are coun- (Cornelius 2000). A core factor is that financial markets tries with fragile taxation systems and those with weak in many countries remain shallow, and financial systems democratic institutions that lack the power to impose Natural Hazard Risk and Privatization 39 costs on entrenched power elites within the country. for the Inter-American Development Bank, a technique As described earlier, Rodrik has identified a group of that measures the capacity of a government to finance countries that lacked the ability to institute required probabilistic losses from natural hazard events was devel- political change to adjust to noncatastrophe external oped. For the Dominican Republic, El Salvador, Bolivia, stocks, despite the considerable costs borne by these and Colombia a "resource gap" was developed. A resource countries due to a lack of economic growth. The coun- gap is a measurement of a country's ability to finance tries he identified, primarily in Latin America and Africa, its reconstruction obligations following a disaster. would likely lack the political will to allocate the risk Calculation of the resource gap requires the following of loss internally through taxation. The World Bank computations: has also developed an index that describes countries · Country risk from natural hazard losses. The risk is with imperfect financial markets that tend to magnify a function of the probability of hazards of different rather than absorb the cost of external shocks (Ferranti magnitudes impacting a country and the vulnera- and others 2000). A third situation arises when invest- bility to loss of the potentially exposed population ments target the poor. If a specific group benefits from and assets. government investment, the risk profile of that group · The financial responsibility of the government to should dictate how risk is handled. finance country losses. Primary losses from disas- Determining when the government should assume ters may be the responsibility of various parties in risk associated with past investment decisions has a addition to the government: industry, businesses, direct bearing on which risks should be assumed or homeowners, and individuals. For this analysis, we transferred by governments in the privatization process. are concerned about the portion of loss borne by As noted earlier, the risk-neutral status of governments the government. in industrialized countries leads them to retain natural · The capacity of the government to meet its financial hazard risk in the privatization process. The issue of obligations. To the extent that a government lacks concern for developing countries, particularly for those the resources to fund its obligations, there is a nat- with high catastrophe exposure, is whether the same ural-hazard-resource gap. The required resources theory holds true. may come from international aid, government rev- enues (taxes), reserves, insurance proceeds, bor- rowing, and the diversion of resources from other Capacity of Countries to Absorb Natural programs. Hazard Risk A natural-hazard-resource gap articulates the ability of a government to meet the needs of financing post-dis- Key principles in the privatization process are the aster reconstruction. For countries with a resource identification and allocation of risks to the parties best gap, it means that significant costs to meet the risk of able to cover them.4 With respect to infrastructure loss to natural hazard risk will be incurred. projects, a wide variety of risks, including risks during construction, projected use of new infrastructure, the Resource Gap willingness of people to pay to use the infrastructure, and the maintenance and ongoing operations required, A natural-hazard-resource gap is developed for each of must be addressed. As discussed earlier, another risk is the case study countries. The resource gap is a meas- the partial or complete destruction of a project by a urement of the inability of a country to finance its recon- natural hazard event. Since this risk may be large, and struction obligations after a disaster. The measurement such losses are often difficult to predict, it is a risk gen- of the resource gap requires the calculation of a catas- erally retained by governments. trophe exposure for each country. Catastrophe expo- Increasingly, research has measured the risk of loss sure is determined by combining hazard and vulnerability from natural hazards in developing countries and the estimates for each country. The calculated catastrophe capacity of countries to manage that risk. In a recent study exposure estimates are presented in table 2.1: 40 Building Safer Cities: The Future of Disaster Risk Table 2.1 Catastrophe exposure in case study countries These estimates represent government responsibility Country 20-year event 50-year event 100-year event for reconstruction of government-owned property, as Bolivia 200 600 1,000 well as the assumption of risk for private housing, agri- Colombia 2,000 5,000 8,000 culture, and programs targeting the poor during post- Dominican 1,250 3,000 6,000 disaster periods. Republic Once an estimate of future financing needs has been El Salvador 900 3,000 4,500 determined, the next question addressed is the ability All values in millions of U.S. dollars. of the government to meet those needs. Is there a gap between the probabilistically determined resources and For example, Bolivia can expect direct losses to cap- the ability of the government to fund the required ital stock of at least $200 million approximately every resources? The potential difference is a resource gap. A 20 years; more specifically, there is a 1-in-20 chance resource gap is calculated by comparing a government's every year that there will be a catastrophic event equal- probabilistic or contingent need for reconstruction funds ing or exceeding $200 million in losses. Likewise, in the current year with its anticipated access to inter- there is a 1-in-50 chance, or 2 percent probability, every nal and external funds. Table 2.3 shows the estimated year of at least $600 million in direct losses. The mag- resource gap for the four countries. nitude of that figure could double, however, if indirect The resource gap for each country depends on crit- losses from lost production, tourism, and other serv- ical assumptions regarding the ability to access inter- ices were included. nal and external resources. For example, the resource Because the capacity of governments to finance gap in Colombia is primarily affected by the ability to obligations after a disaster is often limited, it is essen- raise funds through taxation. Historically, Colombia has tial to know the responsibility of the government for a raised internal taxes as a major tool in financing natural country's catastrophe exposure. Generally, two broad disaster losses. It is assumed that Colombia could raise categories of governmental responsibility can be defined: taxes by an additional $1.5 billion, if necessary. If it has risk to government-owned property and the risk a the ability to raise taxes by $2 billion, the resource gap government assumes from others. In the former, the for the 100-year event would disappear. The resource risk of loss is to government buildings, schools, and gap also depends on a series of assumptions regarding hospitals, and infrastructure such as roads, bridges, and future financing sources. The report details all assump- airports. The second category is the risk that the gov- tions used and the source of the data. The chart raises ernment assumes from others. This generally includes this question: How are countries able to finance their the risk to homeowners, agriculture, local and provin- probabilistic losses from natural hazards? The resource cial governments, and the poor. gap provides the basis for evaluating whether a coun- It is estimated that the government will finance 50 try can efficiently absorb losses to infrastructure. In some percent of the losses in the four countries. Table 2.2 cases, transferring the risk of loss from natural hazards (which is 50 percent of table 2.1) shows the share of to the private market as a component of the privatiza- losses borne by the government: tion process might be the best option for countries with a high resource gap. Before addressing this option, however, the variations Table 2.2 Government financing needs in case study in the resource gap among countries must be understood. countries According to this analysis, Bolivia can anticipate no Country 20-year event 50-year event 100-year event resource gap over the range of 20-, 50-, and 100-year Bolivia 100 300 500 events, although Bolivia is the poorest country in South Colombia 1,000 2,500 4,000 America and would be expected to be the most vul- Dominican 625 1,500 3,000 Republic nerable. Its level of hazard risk, however, is so low that El Salvador 450 1,500 2,250 it should have sufficient resources (assuming substan- All values in millions of U.S. dollars. tially increased borrowing) to respond. Colombia, by Natural Hazard Risk and Privatization 41 Table 2.3 Resource gap in case study countries contrast, has a very high natural hazard risk, but per 20-year recurrence capita incomes are high and risks are geographically Bolivia Colombia Dom Rep El Salv diverse. The government should be able to absorb the cost of disasters until it reaches a 100-year event. Even Direct damages 200 2000 1250 900 Gov responsibility 1000 1000 625 450 then, its resource gap can be covered if the govern- Aid 2 17 11 8 ment is able to raise taxes. Alternatively, El Salvador Insurancce 5 50 31 23 and the Dominican Republic can anticipate resource Payments gaps, given their catastrophic risk exposure. Both coun- Budget realloc 250 1500 500 250 New taxes 0 500 0 90 tries are small and have limited geographic diversity Domestic credit 100 0 150 0 with respect to risk, a high exposure to large-scale nat- External credit 100 100 100 100 ural disasters, and limited financial resources. For these IDB/WB External credit 0 0 800 800 two countries, there is at least a 1-in-100 chance of being market struck by an event that outstrips their ability to raise Resource gap none none none none post-disaster reconstruction funds. Resource gap none none none none The calculation of a resource gap for countries is the w/o IDB/WB Additional debt 0 0 83 80 beginning of a process. The resource gap identifies possible sources of financing for losses from natural haz- 50-year recurrence ards, but the analysis does not quantify the cost of access- Bolivia Colombia Dom Rep El Salv ing those resources. As discussed earlier, accessing Direct damages 600 5000 3000 3000 available resources has a cost. There are political costs Gov responsibility 300 2500 1500 1500 Aid 5 43 26 26 to raising taxes and diverting budgetary allocations. The Insurancce 15 125 75 75 use of increased debt absorbs borrowing capacity that Payments may be better used for other purposes. The borrowing Budget realloc 250 1500 500 250 gap calculation frames the issue so that a determina- New taxes 0 1000 0 180 Domestic credit 100 0 150 0 tion of whether it is more efficient for a government to External credit 200 200 200 200 retain or transfer risk of natural hazard losses as a com- IDB/WB ponent of the privatization process can be made. External credit 0 0 800 800 market Resource gap none none none none Resource gap none none none 169 w/o IDB/WB Conclusions and Future Research Additional debt 30 0 899 969 100-year recurrence The need to expand the provision of infrastructure in Bolivia Colombia Dom Rep El Salv developing countries is clear. The use of privatization Direct damages 1000 8000 6000 4500 as a tool to assist in the extension of infrastructure to Gov responsibility 500 4000 3000 2250 the poor is a priority of the international financial Aid 9 69 52 39 community. While myriad issues are associated with Insurancce 25 200 150 113 Payments privatization, defining and allocating risk as a compo- Budget realloc 250 1500 500 250 nent of the privatization process to determine the most New taxes 0 1500 0 270 cost-effective allocation is especially difficult. If risks are Domestic credit 100 0 150 0 large and difficult to control, government retention of External credit 200 200 200 200 IDB/WB the risk might prove the best option. These risks External credit 0 0 800 800 would be extremely expensive to shift to the private market sector and, in the worst case, could prove to be a "deal Resource gap none 531 1148 579 killer." Justification for government assumption of risk Resource gap 116 731 1348 779 w/o IDB/WB is that governments are best able to handle unknown Additional debt 216 200 1150 1000 risk through their power of taxation. The ability to spread 42 Building Safer Cities: The Future of Disaster Risk risk to taxpayers is an enormous efficiency advantage Research on the proper allocation and financing of of governments. natural and man-made hazard risk for developing coun- Circumstances exist where it may be more efficient tries is in the early stages. For many countries, infor- for the risk of natural hazard losses be shifted to the mation about the level of risk to infrastructure has not market as a component of privatization. The main cir- been systematically developed, although techniques to cumstances are: make the necessary calculations are well understood. · The project benefits a limited geographic area. The concept of "risk aversion" for governments is not · The project assists a limited population group, such well understood, either. As globalization continues, it as the poor. may be that the market (including large international · The size of the risk is larger than the capacity of the corporations) is much more efficient in coping with nat- government to shift the risk efficiently to the popu- ural hazard risk. If so, it makes the most sense for that lation. For those countries with a resource gap, it risk to be assumed by the market as a component of may not be possible for them to finance the natural the privatization process. hazard risk. Specifically, the following issues need to be addressed: · Countries without a resource gap may have institu- · The exposure of an infrastructure project to natural tional barriers that prevent them from shifting risk hazard risk. to their populations. For countries lacking the abil- · The capacity of a country to absorb the risk. ity to develop institutional compromise, the political · An evaluation of infrastructure projects to determine costs of financing post-disaster reconstruction may their primary beneficiaries and an analysis of the risk make it more desirable to include risk as a compo- tolerance of that particular group. nent of the privatization process. This may be the · The cost of the assumption of the natural hazard case for a number of Latin American countries. risk by the market on a project-by-project basis. In these instances, the cost of transferring risk to the A number of these questions are novel in the con- market should be considered as a component of priva- text of developing countries. With increased losses to tization. It may be that the cost of assigning the risk to infrastructure from natural hazard events, the efficient the market is too high and the risk must be absorbed assumption of risk will be increasingly important. by the government, but natural hazard risk should not be placed automatically, as is currently done, in those categories of risk best left with the government. As the Notes losses to infrastructure continue to escalate, the ability 1. In 1998, the United States Department of Energy issued to shift natural hazard risk to the market will become two sets of guidelines for privatization projects that remain increasingly important. benchmarks for work in privatization. The first is a Program- The analysis presented in this paper also applies to Project Manager's Privatization Guide and the second is a Pri- other types of risk that may arise from the privatization vatization Cost Estimating Guide. These documents can be process. In Eastern Europe, for example, the privatiza- found on the website for the Department of Energy (http:// tion of state-owned manufacturing enterprises is ongo- www.em.doe.gov/ private/projmangu.html). The Organization ing. Manyofthesefacilitiesinvolvechemicalandhazardous of Economic Cooperation and Development (OECD) has a waste risk from prior operations. Mechanisms such as Working Group on Privatization and Governance of State- environmental insurance exist for market assumption owned Enterprises with a comprehensive list of documents of private enterprises and the risk associated with con- related to privatization (http://www.oecd.org/EN/document/0, tamination created from prior business operations, EN-document-80-3-no-20-19549-80,00.html). As relates to including chemical facilities (Freeman and Kunreuther work in developing and emerging economies, the Asian Devel- 1997). It may be that risks from prior hazardous opment Bank has a Public-Private Infrastructure Advisory Facil- chemical operations may also be more efficiently han- ity(http://www.adb.org/Documents/ADBBO/RETA/35078012.ASP) dled by the transfer of the risk as a component of the that has examined best practices for privatization in a number privatization process. of industries. Natural Hazard Risk and Privatization 43 2. Paul K. Freeman, "Natural Disasters in Developing Countries: Cornelius, Peter. K. 2000. "Reforming the Public Sector's Risk Vulnerability from Increasing Population Concentrations," in Management Emerging Markets." Development Discussion Encyclopedia of Population (forthcoming). Paper No. 751. Boston: Harvard Institute for International 3. Earthquake risk lies along well-defined seismic zones that incor- Development. porate a large number of developing countries. High-risk areas ECLAC (Economic Commission for Latin America and the include Turkey, Pakistan, Afghanistan, India, China, Indonesia, and Caribbean). 1999. Manual for Estimating Socio-economic Effects the west coasts of North, Central, and South America. The pattern of Natural Disasters. United Nations International Decade for of hurricanes in the Caribbean and typhoons in South Asia, Natural Disaster Reduction. New York: United Nations. Southeast Asia, and the South Pacific is well established. Floods Ferranti, D., and others. 2000. Securing Our Future in a Global occur on 1 percent of the worldwide landmass. (Swiss Re 1997). Economy. Washington, D.C.: World Bank. 4. The discussion in this section is based on work done for the Freeman, Paul K., and Howard Kunreuther. 1997. Managing Regional Policy Dialogue of the Inter-American Development Environmental Risk with Insurance. Boston: Kluwer Academic Bank on Natural Hazard Risk. The resource gap described in this Publishers. section is based on methodology prepared by Leslie Martin and Freeman, Paul K., Leslie A. Martin, Reinhard Mechler, Koko described in greater detail in Freeman and Martin, "National Sys- Warner, and Peter Hausmann. 2001. Catastrophes and Devel- tems for Comprehensive Disaster Management: Financing Recon- opment: Integrating Natural Catastrophes into Development struction," May 1, 2002. The paper and methodology can be Planning. Disaster Risk Management Working Papers Series found at the Regional Policy Dialogue website: (http://www.iadb. No. 4. The Disaster Management Facility, World Bank, org/int/drp/). Washington, D.C. IFRC (International Federation of Red Cross and Red Crescent Societies). 2002. World Disaster Report 2001: Focus on Recov- Bibliography ery. Bloomfield, CT: Kumarian Press Inc. accessed June 2002. asters with Special Reference to Developing Countries. Oxford, Lewis, C.M., and A. Mody. 1998. Contingent Liability for Infra- U.K.: Clarendon Press. structure Projects. Washington, D.C.: World Bank. Arrow, K. J. 1992. "Insurance, Risk and Resource Allocation." Lewis, C.M., and K.C. Murdock. 1999. "Alternative Means of In G. Dionne and S.E. Harrington, eds., Foundations of Insur- Redistributing Catastrophic Risk in a National Risk Man- ance Economics: Readings in Economics and Finance. Boston: agement System." In K.A. Froot, ed., The Financing of Cat- Kluwer. astrophic Risk. Chicago: National Bureau of Economic Arrow, K. J., and R.C. Lind. 1970. "Uncertainty and the Evalu- Research. ation of Public Investment Decisions." The American Eco- Meier, G.M. 1995. Leading Issues in Economic Development. New nomic Review Vol. 60: 364­378. York: Oxford. Bendimerad, Fouad. 2000. "Megacities, Megarisk." The Disaster Mitchell, James K., ed. 1999. Crucibles of Hazard: Mega-Cities and Management Facility, World Bank, Washington, D.C. Available DisastersinTransition.NewYork:UnitedNationsUniversityPress. from accessed June 2002. Review: Natural Catastrophes 2001. Munich: Munich Re. Benson, C. and E. Clay. 2000. "Developing Countries and the Priest, G.L. 1996. "The Government, the Market, and the Prob- Economic Impact of Natural Disasters." In Alcira Kreimer and lem of Catastrophic Loss." Journal of Risk and Uncertainty No. M. Arnold, eds., Managing Disaster Risk in Emerging Economies. 12: 219­237. Washington, D.C.: World Bank. PSDS (Private Sector Development Strategy). 2002. "Private Sector Blakie, Piers, Terry Cannon, Ian Davis, and Ben Wisner. 1994. Development." World Bank, Washington, D.C. Available from At Risk: Natural Hazards, People's Vulnerability, and Disasters. accessed June 2002. New York: Routledge. Rodrik, D. 1998. "Where Did all the Growth Go? External Shocks, Charveriat, Celine. 2000. Natural Disasters in Latin America and Social Conflict and Economic Growth." Available from the Caribbean: An Overview of Risk. Inter-American Develop- http://ksghome.harvard.edu/~.drodrik.academic.ksg/ ment Bank: Washington, D.C. publications.html. 44 Building Safer Cities: The Future of Disaster Risk Samuelson, Paul, and W. Vickrey. 1964. "Discussion." American from accessed June Economic Review Proceedings May(59):88­96. 2002. UNISDR (United Nations International Strategy for Disaster U.S. Bureau of the Census. 1998. "World Population Profile." Reduction). 2001. Natural Disasters and Sustainable Develop- U.S.CensusBureauOnline.Availablefrom accessed June 2002. ment and Natural Disasters. Working Paper No. 5. New York, World Bank.1999. World Development Indicators. Washington, N.Y.: Department of Economic and Social Affairs. D.C.: World Bank. UNFPA (United Nations Population Fund). 1999. "The State World Bank. 2001. World Development Report 2000/2001: Attack- of World Population 1999." UNFPA Online. Available ing Poverty. New York: Oxford. Chapter 3 Natural Disaster Risk and Cost-Benefit Analysis Reinhard Mechler Natural Disaster Risk and Development CBA and Natural Disaster Risk Natural disasters constitute a serious challenge, par- Natural Disaster Risk and Impacts of Disasters ticularly for a number of developing countries where Natural disaster risk can be defined as the following: the impacts of these disasters are substantially larger than they are in more developed countries, due to a The exposure or the chance of loss (of lives, persons injured, typically higher degree of vulnerability. Factors con- property damaged and economic activity disrupted) due tributing to increased vulnerability comprise wide- to a particular hazard for a given area and reference period. It may be expressed mathematically as the probability that spread poverty, high unemployment, distributional a hazard impact will occur multiplied by the consequences inequalities, high population growth, and lack of of that impact (ADPC 2000). strong national and local institutions for dealing with disasters (Smith 1996: 42­46; Anderson 1995: 45; In case of a disaster event, the following effects may ECLAC/IDB 2000: 1). However, natural disaster risk occur: humanitarian effects, including the loss of life is often insufficiently accounted for in decisionmak- and persons injured; ecological effects among other ing. A major decisionmaking tool commonly used in damage to ecosystems; and economic effects, the focus the economic and financial evaluation of public invest- of this paper, comprising different effects on the econ- ments is cost-benefit analysis (CBA). In the context of omy and grouped into three categories--direct, indi- natural disaster risk, CBA is not used sufficiently. rect, and macroeconomic costs (see figure 3.1). This risk is often neglected in CBA assessments of Direct losses describe physical impacts on capital investment projects, risk management measures to stock such as infrastructure, machinery, and buildings. reduce natural disaster risk are often not assessed by They can be caused by the disaster itself or by follow-on CBA, and risk is commonly represented by average values only. Figure 3.1 Impacts of natural disasters This paper will analyze these shortcomings and their consequences, focusing on the economic impacts of dis- asters. The next section discusses the impacts of natu- Direct Loss of capital stock ral disasters and the basic elements of CBA. Then the incorporation of natural disaster risk into CBA is Economic costs Indirect examined, followed by a review of the current short- e.g., business interruption comings in using CBA in the context of natural disas- ter risk and resulting consequences. A short case study Disaster Humanitarian effects Macroeconomic impacts illustrates some of the issues discussed. The final sec- e.g., loss of GDP tion summarizes the findings and provides recom- Ecological effects mendations for using cost-benefit analysis in assessing natural disaster risk. 45 46 Building Safer Cities: The Future of Disaster Risk physical destruction (e.g., through fires). Indirect losses generated by the project compared to the situation occur as a consequence of these direct stock losses and without the project. In relation to natural disaster risk, include production and wage losses due to business inter- additional benefits arise from the savings in terms of ruption. Macroeconomic or secondary impacts comprise avoided direct, indirect, and macroeconomic costs as the aggregate impacts on economic variables like gross well as the reduction in variability of project outcomes. domestic product (GDP), consumption, and inflation There are several limitations to CBA. One is the dif- due to the effects of disasters as well as to the realloca- ficulty of assessing nonmarket values. Although meth- tion of government resources to relief and reconstruc- ods exist, this involves making difficult ethical decisions, tion efforts. Because macroeconomic effects reflect indirect particularly regarding the value of human life: CBA damage as well as the relief and restoration effort, these should probably not be used for this purpose. Another effects cannot simply be added up without causing dupli- issue is the lack of accounting for the distribution of cation (Otero and Marti 1995: 16­18). A substantial benefits and costs in CBA.1 The general principle under- number of studies on the assessment of these costs exist. lying CBA is the Kaldor-Hicks-Criterion, which holds A useful source of information is a manual that assesses that those benefiting from a specific project should the various costs of natural disasters developed by the potentially be able to compensate those who are dis- Economic Commission for Latin America and the advantaged by it (Dasgupta and Pearce 1978: 57). Caribbean (ECLAC 1999). Whether compensation is done in practice, however, is often not of importance. Another issue is the ques- Elements of CBA tion of discounting. Applying high discount rates expresses a strong preference for the present while poten- Cost-benefit analysis (CBA) is an economic technique typ- tially shifting large burdens to future generations. ically used to organize data, present costs and benefits, However, when keeping these limitations in mind, and finally estimate the cost-efficiency of projects like CBA is a useful tool whose main strength is an explicit building new infrastructure, which are undertaken by gov- and rigorous accounting framework for systematic cost- ernments and public institutions to increase public wel- efficiency decisionmaking. CBA provides a common fare(Koppandothers1997:53).CBAmeasuresthechange yardstick with a money metric against which to meas- with and without the specific project. In essence, it com- ure projects for social improvement (Kopp and others pares the costs of a planned project with its benefits and 1997: 53). It is a fact that economic efficiency is recommends its adoption when benefits exceed costs. important to many (government) decisionmakers. For There are three steps to CBA. First, costs and bene- example the United States has "at times dominated the fits must be identified and estimated. If these are given policy debate on natural hazards" (Burby 1991: 154). in physical terms, monetary values need to be assigned However, CBA should not be the sole criterion for (there are several methods for doing this). Next, future evaluating policies, but should be complemented by costs and benefits need to be discounted to render cur- other, noneconomic considerations. rent and future effects comparable. Last, costs and benefits are compared under a decision criterion to assess whether benefits exceed costs. Several criteria exist: Incorporation of Natural Disaster Risk into CBA the main ones are the net present value, the cost-ben- efit ratio, and the internal rate of return (Zerbe and Cost-efficiency evaluations by means of CBA are under- Dively 1994: 177; Dasgupta and Pearce 1978: 165). taken in the context of uncertainty which, when it can The costs in a CBA are the specific costs of conducting be measured probabilistically, is called risk, or "meas- a project. First there are the financial costs, the mone- urable uncertainty," according to Knight (compare with tary amount that has to be spent for the project. How- Brent 1998: 206). ever, of greater interest are the opportunity costs of using A number of methods for CBA in the context of risk these funds--the benefits foregone from not being able have been suggested; these are well described in Kramer to dispose of these funds for other important objectives. (1995: 61­76). There are basically two ways to include Usually, the benefits in a CBA are the additional outcomes risk in project analysis: the limited-information approach Natural Disaster Risk and Cost-Benefit Analysis 47 and the probability-based approach. When no specific For a project evaluator, it may be important to exam- information or only partial information on natural haz- ine the probability of net benefits becoming negative, ards and their impacts is available, limited-information i.e., to determine how marginal a project is. Consequently, approaches are used. Among these, sensitivity analysis is if marginality is likely, a decision to abandon the project often used, where important variables are varied in an or site it elsewhere, where hazard exposure is lower, or ad-hoc fashion to study the sensitivity of outcomes to these include risk management components into the project variations. Although natural disasters are rare events may be necessary. and, thus, abundant information on them does not exist, These risk management measures, or "secondary proj- data and software tools that can conduct a fuller proba- ects," protect a primary project's outcomes (Brent 1998: bilistic analysis provide more insight than the limited- 220). Benefits of these projects are the savings in terms informationapproachesareincreasinglybecomingavailable. of damage avoided and the decrease in volatility in A probabilistic approach entails obtaining probabil- outcomes. Secondary projects may be mitigation proj- ity distributions on disaster events and linking them to ects that reduce risk, or risk transfer projects that cede major economic variables. With that information, a risk to other parties willing to accept it. probability distribution of the project outcomes (net benefits) can be generated (figure 3.2). Status of Application of CBA in the Context Assume that A is the projected net benefits (i.e., of Natural Disaster Risk benefits less costs) from a project before natural disas- ter risk has been included in the assessment. A is pos- Natural disaster risk is only one risk among several itive, so this project seems a worthwhile undertaking. (including, for example, exchange rate or commodity If a probabilistic project analysis is conducted and a price fluctuations) that must potentially be taken into probability distribution is estimated, the average out- account. When a risk is judged to be negligible, it may come--the expected value E--can be determined. In not have to be considered formally. In contrast, when the case of natural disaster risk, which is a purely down- a risk is found to be large, it needs to be accounted for side risk,2 the expected value will be lower than the properly, in order to allow an efficient allocation of originally projected deterministic value A that didn't resources to these projects. account for risk. However, the average outcome E rep- Natural disaster risk is often not considered suffi- resents only that value that over a certain time horizon ciently in CBA. When examining the relevant litera- will materialize on average. Actual outcomes may lie ture on CBA in the context of natural disaster risk, three along the whole range of A and B (here B is assumed to issues emerge: be the worst outcome); net benefits could be negative · Natural disaster risk is commonly not accounted for if a disaster destroys a significant part of the project in CBA for investments and primary projects. and only a few benefits materialize while project costs · Secondary (risk management) projects are rarely have accumulated already. assessed in a CBA framework. When this is done, the Figure 3.2 Project analysis under risk focus is on mitigation only. · Usually, risk is not included explicitly, but by averages. These issues are further analyzed in the following section. Probability Natural Disaster Risk Is Not Included in Evaluation of Investment Projects For a number of countries, natural disaster risk is a seri- B O E A ous risk. However, this source of risk usually is not - Net Benefits + sufficiently accounted for in developmental planning and appraisals of investment projects by governments 48 Building Safer Cities: The Future of Disaster Risk and multilateral finance institutions (MFIs) (Kramer causing large developmental impacts. Finally, if sufficient 1995: 62; OAS 1991: 8). Vermeiren and Stichter remark funds for reconstruction and relief are not available, in an assessment of the costs and benefits of mitigation serious negative long-term impacts on socioeconomic in the Caribbean: development may result (compare with Freeman and others 2002). Contributing to the precarious state of the infrastructure is the region's vulnerability to natural disasters--hurricanes Assistance by MFIs in their capacity as "reinsurers in particular --and the tendency of development decision- of last resort" is often sought post-disaster. These assis- makers, in the public as well as private sectors, to make tance needs are volatile and rising. For example, between decisions concerning major investment projects without 1980 and 1999, the World Bank, the world's largest due consideration of natural disaster risk (Vermeiren and multilateral lending institution, financed 102 post- Stichter 1998: 1). catastrophe reconstruction projects in 56 countries, As a consequence, the uncertainty in project bene- amounting to a total of about $7.5 billion (Gilbert and fits is thus not duly accounted for, which results in an Kreimer 1999: 1). In relation to World Bank lending, 3 inefficient allocation of resources. There is the possi- the total sum over this period amounted to 1.9 percent, bility that risky projects may be selected and that pro- with a range from 0.2 to 6.0 percent on an annual basis jected benefits and investment will be lost when a disaster (see figure 3.3). There was some recurrence: 22 countries occurs. Furthermore, investment funds often have to have had two or more lending operations over this period. be borrowed externally in developing countries if inter- These figures underestimate the World Bank's recon- nal resources are insufficient. In the case of a disaster, struction financing support, as they do not include funds this investment is lost and the capacity to service the reallocated from other operations. Over the course of recently accumulated debt in the future is not increased. the 1990s, the Inter-American Development Bank lent Also, funds for continuing these projects or rebuilding around $2 billion in post-disaster assistance, mainly lost assets often have to be diverted from other projects, to rebuild and rehabilitate damaged infrastructure Figure 3.3 World Bank post-disaster reconstruction loans in relation to total World Bank lending, 1980­99 7 6 5 lending Bank 4 orld W total 3 of centage 2 Per 1 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Year Note: Word Bank lending includes lending by the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). Sources: Gilbert and Kreimer 1999, World Bank 2001. Natural Disaster Risk and Cost-Benefit Analysis 49 (IDB 2000: 20). From 1996 to 2000 alone, it lent $1.5 Figure 3.4 Risk management of natural disasters billion to affected countries to help recover from disas- ters, which increased annual average disaster-related 1. Identification: lending by a factor of 10 compared to the average over catastrophe risk the previous 15 years (IDB 2000: 1). 2. Risk assessment: Also, the supply of donor assistance is becoming potential costs increasingly limited as the dwindling amounts of offi- 3. Risk control: cial development assistance (ODA) show.4 ODA assis- potential benefits Cycle tance (in constant 2000 U.S. dollar terms) decreased 4. Cost- Mitigation benefit from $69 billion in 1990 to $53 billion in 2000 analysis Residual risk (OECD 2000; 2001). Risk transfer Demand for the inclusion of natural disaster risk in project appraisal methodologies has increasingly been voiced (Kramer 1995: 62; OAS 1991: 53). Consider- ing natural disaster risk in project appraisal allows for measures should be considered. These may be mitiga- more careful selection and design of projects as well as tion measures that reduce risk (e.g., building a dam to the identification and development of secondary risk- prevent floods) or the transfer of risk to other parties management measures to protect the benefits of primary (most commonly by means of insurance). For the design projects. More careful project and development plan- and development of risk-control measures, cost-efficiency ning is called for when considering loss-increasing trends, considerations as conducted by means of CBA are (or such as increased urbanization and high population should be) an important element of such a risk man- growth in developing countries, which concentrate cru- agement process in light of the fact that resources for cial assets that may be at risk, and a possible increase risk management are generally in short supply. Thus, in the frequency and severity of natural disasters due it is crucial to optimally allocate available resources to to climate change. those measures where benefits are largest. Ideally, risk management measures are planned and assessed in con- junction with (main) investment projects and rou- CBA of Risk Management Projects Rarely Done tinely included in project appraisals, in the same manner Due to concerns of MFIs about increased spending for that environmental impact considerations are now reconstruction lending and disaster aid, ex-ante risk- included in such appraisals (Gilbert and Kreimer 1999: management measures--that is, measures planned and 44; Vermeiren and Stichter 1998: 8). undertaken before the occurrence of disaster events-- Since 1980, the World Bank has lent $6.5 billion for are increasingly being promoted: 96 projects that included at least one mitigation com- ponent (Gilbert and Kreimer 1999: 51­53). However, International aid and development funding agencies, as can be discerned from the fact that about half of the besides sharing consternation at delays, disruptions, and increased costs, have the strong view that wisely planned top clients for reconstruction borrowing from the World hazard and vulnerability reduction efforts and financing Bank do not appear among the main borrowers for measures taken before a catastrophe pay excellent dividends mitigation projects, ex-ante disaster risk management in reducing economic impacts. Mitigation expenditures measures cannot yet be said to have sufficiently per- are a tiny fraction of the funds spent on reconstruction in vaded development-planning activities. the aftermath of catastrophes (Pollner 2000: 44). In a similar vein, the necessity of estimating these Risk management can be broken down into four com- risk management dividends by means of CBA has only ponents (figure 3.4). been acknowledged in the past few years, and CBA is The first step is the identification of risks, followed by still not widely practiced for natural disaster risk man- an assessment of their potential impacts and magni- agement projects (Dedeurwaerdere 1998: 1ff.). When tudes. If a specific risk is considered large, risk control evaluating risk management measures by means of CBA, 50 Building Safer Cities: The Future of Disaster Risk in general the focus is only on mitigation (Kramer 1995; measured by average values in decisionmaking. The Dedeurwaerdere 1998). Also, indirect costs and bene- variability of outcomes is not considered of impor- fits are rarely included in a CBA (Tobin and Montz 1997: tance in this case, as governments are assumed to be 269), while secondary impacts are usually completely able to pool a large number of risks so that the aggre- neglected. As Gilbert and Kreimer (1999: 37) demand: gate cost of risk is negligible (diversification of risk) or "There is greater need for an explicit and transparent to spread risks over a large population base so that the estimate of all the costs and benefits of natural disaster cost of risk to the individual is negligible. management." Several assessments have demonstrated that risk man- [...] when the risks associated with a public investment agement measures can bring about significant benefits. are publicly borne, the total cost of risk-bearing is insignif- icant and, therefore, the government should ignore uncer- Dedeurwaerdere (1998) estimated the benefits of dif- tainty in evaluating public investments (Arrow and Lind ferent prevention measures undertaken against floods 1970: 366). and lahars in the Philippines and calculated benefits of 3.5 to 30 times the projects' costs.5 Vermeiren and Stichter Arrow and Lind do not argue in favor of completely (1998) calculated potential avoided losses of 2 to 4 times neglecting uncertainty; rather they argue for assessing mitigation costs had mitigation been undertaken when average/expected values only: "[...]the government should building infrastructure like ports and schools in Jamaica behave as an expected-value decision maker" (Arrow and Dominica. Both of these projects limited benefits and Lind 1970: 366) without accounting for volatility. to avoided direct losses in the appraisal; including However, there are a number of important qualifica- indirect benefits would have increased the efficiency of tions to this theorem, mostly applicable to developing these preventive investments. On a larger scale, it is esti- countries (table 3.1). mated that the $3.15 billion spent on flood control meas- The qualification of the narrow tax and financing ures in China over the last four decades of the twentieth resources base can be illustrated by looking at the impacts century have averted losses of about $12 billion. In addi- of the largest disasters in terms of direct economic losses tion, the World Bank and the U.S. Geological Survey that have occurred in the United States (Northridge have estimated that economic losses worldwide from Earthquake 1994) and Honduras (Hurricane Mitch natural disasters in the 1990s could have been reduced 1998) and comparing these losses to important eco- by $280 billion if $40 billion had been invested in pre- nomic indicators (table 3.2). ventive measures (Benson 1998: 12). For the United States, disaster risk on an aggregate level is not a significant risk. In absolute terms, the enor- mous loss of $45 billion from the Northridge earth- Risk Not Included Appropriately: Necessity quake amounted to only 0.6 percent of GDP and 2.9 of Accounting for Volatility of Natural percent of tax revenue. In Honduras, on the other hand, Disaster Impacts the losses due to Hurricane Mitch, the largest disaster In cases where probabilistic CBA assessments are con- so far, have had severe implications, and the resource ducted, risk is often not included appropriately since base for financing the losses was clearly overwhelmed. average values are used (cf. Kramer 1995: 61; Szekeres In terms of GDP, losses from this event amounted to 41 2000; Dedeurwaerdere 1998). The information about percent and, in terms of tax revenue, they amounted to costs and benefits contained in the probability distri- 292 percent (figure 3.5). Consequently, post-Mitch bution is compounded to the expected value measure. Honduras experienced significant aggregate economic Other information from probability distribution (as illus- impacts, with an economic recession in 1999 after years trated in figure 3.1) is not used. with a growing economy. Focusing only on averages can theoretically be jus- On the other hand, when examining only average tified by the Arrow and Lind theorem (Arrow and Lind annual losses in Honduras, the dimensions of this risk 1970), which postulates that governments are usually are concealed and the impression is provided that it risk-neutral, i.e., they can neglect risk other than that can be handled without major difficulties: the expected Natural Disaster Risk and Cost-Benefit Analysis 51 Table 3.1 Qualifications to applicability of risk neutrality­theorem Qualifications related to risk pooling Existence of few and large Usually, developing countries' governments undertake just a few large investment projects, a course of government projects action that will not result in a highly diversified portfolio of projects; thus risk pooling is not viable (Brent 1998: 217­218). Large local or regional Disaster risk is covariant risk: disasters usually will affect whole regions; thus there is loss correlation. consequences when assets are lost Qualifications related to risk spreading Narrow tax and financing In smaller developing countries, the tax base is often too narrow to spread risk sufficiently. Other resources base for financing potential government financing sources such as domestic credit or private sector lending used to losses of projects spread risk are generally very limited as well. Distributional impacts In developing countries, large distributional impacts may occur post-disaster when infrastructure projects whose prime goal is poverty reduction (e.g., through road or sanitation projects) are affected. The poor are the group most affected by a loss of infrastructure. Irreversibility If additional funds are not available to continue crucial projects or rebuild assets, there can be irreversible effects, such as on health service provision (Little and Mirrlees 1974: 320). shallow financial markets; and high indebtedness, Table 3.2 Disaster losses and availability of resources with little access to external finance. for spreading risk for the United States and Honduras · Small countries with few large infrastructural assets Honduras: and high geographical correlation between those U.S.: Honduras: Average Northridge Mitch annual loss assets. · Countries with concentrated economic activity cen- GDP (million $) 7,834,000 4,725 4,725 GDP/per capita $ 29,267 790 790 ters (e.g., large urban agglomerations) exposed to Aid/GDP -- 6.3% 6.3% natural hazards. Loss (million $) 45,181 1,946 45 When discussing the issue of risk-neutrality, the OAS Loss/per capita $ 168.8 325.3 7.5 (1991) argued more than a decade ago that: Loss/GDP 0.6% 41% 1.0% Loss/tax revenue 2.9% 292% 6.8% The reality of developing countries suggests otherwise. Loss/Gross Domestic 3.6% 189% 4.4% Savings Government decisions should be based on the opportu- Loss/Net domestic credit 0.7% 165% 3.8% nity costs to society of the resources invested in the proj- ect and on the loss of economic assets, functions and All values are in current 1997 U.S. dollars, and economic data refer to products. In view of the responsibility vested in the public 1997. Data sources: World Bank 2001; Freeman and others 2002; Münchener sector for the administration of scarce resources, and Rück 2000. considering issues such as fiscal debt, trade balances, income distribution, and a wide range of other economic and social and political concerns, governments should loss of $45 million constituted 1 percent of GDP and not act risk-neutral (OAS 1991: 40). 6.8 percent of tax revenue in 1997. Thus, it is neces- sary to look at the extremes rather than the averages, Adopting a risk-averse perspective and including the as disasters are by definition low-frequency, extreme- volatility of disaster risk in decisionmaking has important consequence events. Averages do not capture these char- implications for the evaluation of primary and risk man- acteristics well. agement projects. In the assessment of primary projects, The validity of the A&L theorem is generally restricted risk is more appropriately captured, and a more careful to more developed countries; a number of developing projectselectioncanbeconductedwhentheextreme-event countries should act in a risk-averse manner: characterofnaturaldisastersisproperlyaccountedfor.For · Countries subject to high natural-hazard exposure. secondary risk management measures there is increased · Countriessubjecttohigheconomicvulnerability--that benefitinconductingthoseevaluations,asbenefitsinterms is, those with low tax revenue; low domestic savings; of avoided impacts are higher. The latter point will be 52 Building Safer Cities: The Future of Disaster Risk Figure 3.5 Important indicators for ability to spread would be desirable to insure public assets against nat- disaster risk for Honduras and the United States ural disaster risk in Honduras (Mechler 2002). Hon- Natural disaster losses compared duras is one of the developing countries where insurance to economic indicators against natural disaster risk for public assets (infra- structure, schools, hospitals) has recently been proposed 300% (e.g., Pollner and Camara 2001) and is currently under 250% investigation. The author examined the cost-efficiency 200% of the government's purchasing insurance for the 150% entire portfolio of public assets from a foreign insurer. Costs in this analysis were the opportunity costs due 100% to the premium payment (less government funds 50% available for other important objectives). The benefits 0% arose due to receiving insurance indemnity payments USA-- Honduras-- Honduras-- post-disaster to be used for reconstructing critical public Loss/GDP revenue assets (roads, bridges) necessary for quick economic ax Savings credit Northridge M recovery. The desirability of this project was evaluated Loss/T average itch Domestic domestic oss with the change in GDP as the main indicator. Loss/Net loss Several strategies for insuring certain risk layers Loss/Gr (so-called excess of loss (XL) insurance) and their cost- illustrated by the following case study on the evalua- efficiency were studied while stochastically simulating tion of a risk transfer project in Honduras. the occurrence and the resulting economic impacts of storm, flood, and earthquake events, which are the major natural hazards in Honduras. Case Study on CBA of Risk Transfer in Honduras For example, when purchasing insurance in the form As discussed, the costs and benefits of transferring catas- of a risk layer stretching from the 50- to the 100-year trophe risk are rarely assessed, and existing analyses catastrophe events (i.e., all disaster events with a focus on mitigation; in addition, the macroeconomic return period between 50 and 100 years were insured), costs and benefits are usually not accounted for in CBA. projected GDP paths in Honduras over a time horizon To shed light on these issues, a recent prospective from 2002 to 2008 differed from the projections with- study undertaken by the author analyzed whether it out insurance, as illustrated in figure 3.6 and table 3.3. Figure 3.6 Projection of GDP paths with and without insurance of public assets in Honduras Insurance for public assets No Insurance 120,000 120,000 100,000 100,000 80,000 80,000 60,000 Lempira] 60,000 GDP Lempira] GDP 40,000 40,000 [Million [Million 20,000 20,000 - - 2002 2003 2004 2005 2006 2007 2008 2002 2003 2004 2005 2006 2007 2008 Year Year Note: Lempira is the currency unit in Honduras. One dollar is approximately 16.50 lempira. Natural Disaster Risk and Cost-Benefit Analysis 53 Table 3.3 Assessment of costs and benefits of insuring public assets in Honduras Difference GDP (million lempira) No insurance Insurance Difference: net benefit [% of no insurance case] Mean sum of GDP (2002­2008) 411,373 411,239 -134 -0.03% Standard deviation 18,378 13,999 -4,379 -23.83% Net benefits as measured by the change in the aver- If possible natural disaster risk should be incorpo- age sum of GDP over this period due to the insurance rated into CBA in a probabilistic manner (i.e., data on arrangement were slightly negative (134 million lem- probability distribution of disasters need to be obtained). pira, 0.03 percent of baseline GDP) compared to the Increasingly, the data and tools for such probabilistic no-insurance case (table 3.3).6 The fact that this aver- analyses are available. With these data at hand, proba- age outcome was negative (albeit only marginally) can bility distributions for important project outcomes can be explained by the fact that risk transfer--in contrast be assessed to study the impacts of the incorporation to mitigation--does not reduce risk but shifts risk to an of natural disaster risk on the viability of projects. insurer who in turn demands compensation in the form For new investment projects, accounting for risk in of an insurance premium payment every year.7 Due to CBA leads to more careful project selection and design, the large loss potentials characteristic of a disaster, decreasing potential losses when a disaster strikes. insurance premia for disaster risks generally exceed the Considering natural disaster risk also allows deter- annual average loss substantially (Pollner 2001: 21; Froot mination of the need for and efficiency of risk manage- 1999: 6­7); thus considerable opportunity costs accrue.8 ment (secondary) projects that secure the benefits of However, a major benefit of insurance in this analy- main investment projects. Benefits of these projects con- sis (and in general) was the reduction in volatility. The sist of savings in terms of disaster losses averted and a large volatility (vertical lines) around the expected values decrease in volatility of the primary project's outcomes. (horizontal lines) was reduced when undertaking insur- In principle, it would be desirable to integrate risk and ance. Volatility, as measured by the standard deviation, risk management measures into project evaluation, just decreased by about 24 percent. This is of importance as environmental impact analysis is nowadays routinely for risk-averse countries, where disaster impacts cannot conducted when appraising new investment projects. easily be absorbed and the stability of economic devel- Furthermore, a number of developing countries with opment is a major concern. When assessing such a risk high natural hazard exposure and a limited ability to transfer project, the benefits in terms of reduced volatil- cope with disaster impacts need to be risk-averse to nat- ity are important and need to be factored in, in addi- ural disaster risk. In these cases, natural disaster risk tion to the average outcomes. needs to be considered properly, and the volatility of projects' outcomes should be factored into the deci- Conclusions sion as to whether to conduct a proposed project. Par- ticularly for risk transfer measures, taking volatility of Although natural disaster risk is significant for a number project outcomes into account shows or increases the of developing countries, this risk is not sufficiently incor- desirability of such measures. porated into cost-efficiency evaluations as conducted by Cost-efficiency as measured by CBA should not be means of cost-benefit analysis. Keeping the limitations of the sole criterion when planning and assessing develop- CBA in mind (focusing on measurable, mostly economic ment and risk management projects, but it provides impor- project outcomes, distribution of costs and benefits not tant information for a more efficient, less risky allocation accounted for, discounting of future costs and benefits), of scarce funds and thus can aid in bringing about more undertaking CBA for investment and risk management robust development. CBA considerations should be an projects in the context of natural disaster risk improves integral element of decisionmaking in a "culture of pre- decisionmaking and the allocation of scarce resources to vention" and thus may contribute to creating more intan- the most profitable and least risky undertakings. gible, but probably even more important, benefits: 54 Building Safer Cities: The Future of Disaster Risk Prevention not only minimizes damage but promotes a Arrow, K. J., and R. C. Lind. 1970. "Uncertainty and the Eval- stable environment, incentives for investment and enter- uation of Public Investment Decisions." The American Eco- prises and the sense that people can control their own eco- nomic Review 60: 364­378. nomic destiny. These are crucial for sustainable long-term Benson, C. 1998. "The Cost of Disasters." In John Twigg, ed., development (Anderson 1991: 27). Development at Risk? Natural Disasters and the Third World. U.K. National Coordinated Committee for the International Decade Notes for Natural Disaster Reduction. Oxford: Oxford Centre for 1. Methods to account for the distribution of costs and benefits Disaster Studies: 8­13. have been proposed, but are not used in practice (Little and Brent, R. J. 1998. Cost-Benefit Analysis for Developing Countries. Mirrlees 1990: 358­62). Cheltenham: Edward Elgar. 2. As contrasted with speculative risk involving chances to gain Burby, R., ed. 1991. Sharing Environmental Risks. How to Control and lose at the same time. Governments' Losses in Natural Disasters. Boulder, CO: West- 3. All dollar amounts are U.S. dollars. The World Bank focuses view Press. on the financing of investment and productive assets for build- Dasgupta, A. K., and D. W. Pearce. 1978. Cost-Benefit Analysis: ing infrastructure and institutions fostering socioeconomic devel- Theory and Practice. London: Macmillan. opment rather than relief operations (Lester 1999: 179). Dedeurwaerdere, A. 1998. Cost-benefit Analysis for Natural Disas- 4. ODA encompasses all financial support given to developing ter Management - A Case-study in the Philippines. Brussels: CRED. countries in the form of loans and grants with a grant element Dinwiddy, C., and F. Teal. 1996. Principles of Cost-benefit Analysis of at least 25 percent in order to promote economic develop- forDevelopingCountries.Cambridge:CambridgeUniversityPress. ment and welfare. It is provided bilaterally by the more devel- ECLAC (Economic Commission for Latin America and the oped countries and by multilateral finance institutions. Caribbean). 1999. Manual for Estimating the Socio-economic 5. Lahars are volcanic mudflows. Effects of Natural Disasters. United Nations International Decade 6. GDP was discounted at a standard discount rate of 12 percent. for Natural Disaster Reduction. New York: United Nations. 7. Risk could also be transferred to the capital markets (e.g., by ECLAC/IDB. 2000. "A Matter of Development: How to Reduce means of catastrophe bonds). Vulnerability in the Face of Natural Disasters." Paper before 8. The insurance premium for catastrophe risk demanded by seminar: Confronting Natural Disasters: A Matter of Devel- an insurer is determined by the expected losses to the assets opment, New Orleans, March 25­26, 2000. insured (the average annual losses), a surcharge for expenses Freeman, P. K., L. Martin, R. Mechler, K. Warner, with P. Haus- and profit, and a risk-loading component accounting for the man. 2002. Catastrophes and Development, Integrating Natural high variability of catastrophe risk. Generally, the premium Catastrophes into Development Planning. Disaster Risk Man- charged is considerably higher than the expected losses. agement Working Paper Series No. 4. The Disaster Manage- ment Facility, World Bank, Washington, D.C. Froot, K., ed. 1999. The Financing of Catastrophe Risk. Chicago: Bibliography University of Chicago Press. ADPC (Asian Disaster Preparedness Centre). 2000. Workshop Gilbert, R. and A. Kreimer. 1999. Learning from the World Bank's on Urban Disaster Mitigation. University of Karlsruhe, Experience of Natural Disaster Related Assistance. Washington, 23­27 October 2000. D.C.: World Bank. Anderson, M. B. 1991. "Which Costs More: Prevention or Recov- Gramlich, E. M. 1981. Benefit-Cost Analysis of Government Pro- ery?" In Alcira Kreimer and M. Arnold, eds., Managing Nat- grams. Englewood Cliffs, New Jersey: Prentice-Hall. ural Disasters and the Environment. Washington, D.C.: World Hecker, G. 1995. "A Review of the Disaster-Related Activities of Bank: 17­27. the Asian Development Bank: An Economic Perspective." In Anderson, M. B. 1995. "Vulnerability to Disaster and Sustain- Mohan Munasinghe and C. Clarke, eds., Disaster Prevention able Development: A General Framework for Assessing Vul- for Sustainable Development: Economic and Policy Issues. Wash- nerability." In Mohan Munasinghe and C. Clarke, eds., Disaster ington, D.C.: World Bank: 77­85. Prevention for Sustainable Development: Economic and Policy IDB (Inter-American Development Bank). 2000. Facing the Chal- Issues. Washington, D.C.: World Bank: 41­59. lenge of Natural Disasters in Latin America and the Caribbean. Natural Disaster Risk and Cost-Benefit Analysis 55 An IDB Action Plan. Washington, D.C.: Inter-American OECD (Organization for Economic Cooperation and Develop- Development Bank. ment) and D. A. Committee 2000. Net ODA Flows in 2000. Kopp, R. J., A. Krupnick, and M. Toman. 1997. Cost-Benefit Paris: OECD. Available from http://webnet1.oecd.org/pdf/ Analysis and Regulatory Reform: An Assessment of the Science and M00005000/M00005137.pdf.Internet. the Art. Discussion Paper 97­19. Washington, D.C.: Resources OECD, and D. A. Committee 2001. Net ODA Flows from 1950 to for the Future. 1999. Paris: OECD. Available from http://webnet1.oecd.org/xls/ Kramer, R. A. 1995. "Advantages and Limitations of Benefit-Cost M00002000/M00002883.xls. Internet. Analysis for Evaluating Investments in Natural Disaster Mit- Otero, R. C., and R. Z. Marti 1995. "The Impacts of Natural igation." In Mohan Munasinghe and C. Clarke, eds., Disaster Disasters on Developing Economies: Implications for the Inter- Prevention for Sustainable Development: Economic and Policy national Development and Disaster Community." In Mohan Issues. Washington, D.C., World Bank: 61­76. Munasinghe and C. Clarke, eds., Disaster Prevention for Sus- Kreimer, A., and M. Arnold. 2000. "World Bank's Role in Reduc- tainable Development: Economic and Policy Issues. Washington, ing Impacts of Disasters." Natural Hazards Review 1 (February): D.C.: World Bank: 11­40. 37­42. Pollner, J. 2000. Managing Catastrophic Risks using Alternative Risk Lester, R. 1999. "The World Bank and Natural Catastrophe Financing and Insurance Pooling Mechanisms. Washington, D.C., Funding. The Changing Risk Landscape: Implications World Bank. for Insurance Risk Management." Proceedings of a confer- Pollner, J., and M. Camara. 2001. Honduras. Catastrophe Risk ence sponsored by Aon Group Australia Ltd., Sydney, Exposure of Public Assets. An Analysis of Financing Instruments Australia. for Smoothing Fiscal Volatility. Washington, D.C.: World Bank. Little, I. M. D., and J. A. Mirrlees. 1974. Project Appraisal and Reutlinger, S. 1970. Techniques for Project Appraisal under Planning for Developing Countries. London: Heinemann. Uncertainty. Washington, D.C.: World Bank. Little, I.M.D., and J. A. Mirrlees. 1990. "Project Appraisal and Smith, K. 1996. Environmental Hazards. Assessing Risk and Reduc- Planning Twenty Years On." In S. Fischer, ed. Proceedings of ing Disaster. London: Routledge. the World Bank Annual Conference on Development Economics. Szekeres, S. 2000. La consideracion de desastres naturales en la Washington, D.C.: 351­382. evaluacion de proyectos federales en Mexico. Analisis y recomen- Mechler, R. Forthcoming. Natural Disaster Risk Management daciones. Washington, D.C., World Bank. and Financing Disaster Losses in Developing Countries. Ph.D. Tobin, G., and B. Montz. 1997. Natural Hazards. Explanation and thesis. Karlsruhe: University of Karlsruhe. Integration. New York: The Guildford Press. Münchener Rück. 2000. Topics: Jahresrueckblick Naturkatas- Vermeiren, J., and S. Stichter. 1998. "Costs and Benefits of Hazard trophen 1999. Munich. Mitigation for Building and Infrastructure Development: A Munasinghe, M., and C. Clarke, eds. 1995. Disaster Prevention Case Study in Small Island Developing States." Paper before con- for Sustainable Development: Economic and Policy Issues. Yoko- ference of The International Emergency Management Society. hama: World Bank. World Bank. 2001. World Bank Development Indicators. Wash- OAS (Organization of American States). 1991. Primer on Nat- ington, D.C. ural Hazard Management in Integrated Regional Development Zerbe, R. O., and D. D. Dively. 1994. Benefit-Cost Analysis in Planning. Washington, D.C. Theory and Practice. New York: Harper Collins. Chapter 4 Globalization and Natural Disasters: An Integrative Risk Management Perspective Torben Juul Andersen The increased global exchange of merchandise, serv- economic impacts of natural disasters. While a com- ices, and capital is a key characteristic of the contem- prehensive analysis of all linkages is beyond the scope porary business environment. International firms position of this paper, three areas are explored: (1) the relation- themselves to gain competitive advantage from oppor- ship between natural catastrophes, economic develop- tunities offered in this larger and more open economic ment, and global competitiveness; (2) the relationship system. Similarly, governments reap rewards from firms between global trade and investment, economic growth, that establish operations within their borders. There are and sustainable competitive advantage; and (3) the strong arguments in favor of international trade, foreign role of proactive risk management and the potential direct investment, and globalization since they often benefits from global market access. promote economic growth. Though there can be sig- nificant variance in growth in developing countries, it is recognized that some economic trade and activities Natural Catastrophes, Economic Development, are more beneficial than others. Developing countries, and Global Competitiveness therefore, must position themselves to take advantage of opportunities in the global market. Natural catastrophes reflect the negative economic The frequency and severity of natural disasters have impacts on human settlements and productive assets increased markedly worldwide. Economic losses asso- from extreme natural phenomena such as windstorms, ciated with natural hazards are increasing exponentially flooding, and earthquakes. Direct economic losses from in developing countries, where local risk-transfer mar- natural catastrophes over the past decade exceeded $700 kets are generally weak. Hence, natural catastrophes billion1 (all amounts are in U.S. dollars). These losses have devastating socioeconomic consequences when are estimated to increase to a total amount of $6 to $10 they strike populated areas in less developed economies, trillion over the next 20 years, far beyond the growth where they are bound to have adverse impacts on the in aid and development programs (ICRC 2001). Over global competitiveness of exposed countries. Disasters the past ten years, natural catastrophes have caused have a negative impact on economic activity and the more than 800,000 deaths and affected the livelihoods associated economic uncertainties hamper investment of more than 2 billion people worldwide. Total reported in long-term commercial relationships. Conversely, par- losses from natural catastrophes, ranging from $30 to ticular types of economic activity and a truncated policy $190 billion annually, have averaged roughly $65 billion focus can increase a country's economic vulnerability annually.2 More than 60 percent of the reported eco- to natural disasters. These relationships need to be made nomic losses in recent years have related to events in more explicit and managed more effectively so devel- developing countries. Approximately half of the losses oping countries are not disadvantaged in the global in industrialized countries were covered by formal insur- market. ance contracts, while only some 5 percent of reported This paper incorporates perspectives from econom- damages in developing countries were covered.3 ics, finance, and strategic management and identifies Global catastrophic events seem to be occurring with several links between market globalization and the increased frequency. Over the past thirty years, the 57 58 Building Safer Cities: The Future of Disaster Risk number of reported catastrophes has quadrupled, and by a factor of 2,000-3,000 and total insured losses by several factors have resulted in increased economic expo- a factor of 1,000 (figure 4.1). The implied increase in sure to natural catastrophes. Climate patterns seem to economic losses associated with natural catastrophes be changing in ways that increase the frequency of cer- by far outweighs economic growth figures for the same tain natural events. For example, El Niño influences the period.4 The dramatic increase in direct economic losses intensity of storms, rainfall, floods, and landslides in much per hazard event points to the increasing significance of the world. At the same time, the population is grow- of catastrophe risks. If this trend continues unabated, ing and economic assets are being placed in areas more catastrophe risk exposure will seriously challenge the exposed to natural hazards (Kleindorfer and Kunreuther economic sustainability of developing countries that are 1999). This combination of higher hazard frequency exposed to natural catastrophes.5 and greater exposure of economic assets extends the The number of victims associated with natural catas- potential damage that can be inflicted by natural haz- trophes, as reflected in the numbers of dead and affected, ards. Though there is no indication that the frequency is heavily skewed toward developing countries. The of earthquakes is increasing, changing climatic condi- number of deaths, however, has fallen over the past 30 tions seem to be causing more frequent and severe wind- years, from 2 million during the 1970s to 800,000 during storm events. Hence, the combination of a burgeoning the 1990s. Hence, local risk mitigation and disaster relief world population, increasing urbanization, and an efforts may bear fruit, but the number of victims is still expanding economic asset base extend economic expo- large and most are related to events in developing coun- sure to natural catastrophes. tries. At the same time, the number of people affected Whereas event frequency has quadrupled over the by natural catastrophes has increased significantly from past thirty years, reported economic losses have increased 740 million in the 1970s to 2 billion in the 1990s. Figure 4.1 Development in reported and insured catastrophe losses, 1970­2001 (three-year moving averages) 3,500 3,000 2,500 2,000 1,500 1,000 500 1972 = 100 0 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Reported losses Insured losses Source: Centre for Research on the Epidemiology of Disasters (CRED) and natural catastrophe losses reported in various issues of Sigma (Swiss Re). Globalization and Natural Disasters: An Integrative Risk Management Perspective 59 Over the past decade, natural disasters have resulted affected by natural catastrophes and economic growth.9 in damage that has constituted 10 to15 percent of an This may appear counterintuitive, although in the absence exposed country's annual gross domestic product (GDP). of proactive risk management practices and effective These extreme situations usually apply to relatively small, risk-transfer markets, post-disaster financing is typi- vulnerable countries with less diversified economies. cally made available through emergency facilities Such effects can have a significant impact on economic extended by multilateral institutions and other foreign activity and the appropriation of public funds.6 Economic aid donors.10 International assistance is often prompted growth rates typically hover around 1 to 3 percent annu- when the number of victims is high. Since disaster- ally, so a direct-loss impact of 5 to10 percent of GDP related capital inflows have an economic impetus, they can have an abrupt effect on a country's economic devel- lead to a positive relationship between human devas- opment. Studies indicate that real GDP growth decreases tation and economic growth in exposed countries. in the year of the disaster and then increases the next This somewhat perverse relationship seems to indicate one to two years, as public and private reconstruction that the availability of international emergency sup- investment boost the growth rate (Charveriet 2000). In port and disaster financing shields the countries from many cases, post-disaster reconstruction efforts may actu- the adverse ex post economic impacts of natural disas- ally improve the quality of economic assets and lead to ters while too little is done to prevent the effects of the increased productivity (Albala-Bertrand 1993). There- catastrophes on an ex ante basis.11 Although unintended, fore, if exposed developing countries take precautionary the financing of catastrophe losses through international measures and establish disaster risk financing arrange- donations constitutes a powerful disincentive to imple- ments, they may be able to reinstate new, and hence more ment more proactive risk management practices that efficient, economic assets after major disasters. However, could help reduce the socioeconomic cost of natural dis- a sample of developing countries actively engaged in asters in exposed countries.12 Prevention is important global trade7 indicates that a high level of catastrophe in reducing human suffering from catastrophes, but losses is generally associated with lower economic growth8 political leadership often considers risk management (figure 4.2). efforts an unnecessary cost rather than an investment in Further analysis of the sample shows a positive rela- a better environment. Hence, there is a clear need to adopt tionship between the percentage of the population policy measures that effectively integrate risk assess- ment, risk mitigation, risk transfer, and emergency preparedness (Andersen and Masci 2001). Figure 4.2 The relationship between economic growth and catastrophe losses, 1990­2000 Since post-disaster economic recuperation in devel- oping countries is typically based on the availability of 9 China multilateral relief facilities and humanitarian aid, there 7 Argentina are few political incentives to adopt a more proactive 5 Malaysia risk management approach. This situation makes exposed Bangladesh 3 countries highly dependent on the international com- 1990­99 Zimbabwe munity as "lender-of-last-resort" to cope with the 1 worst economic impacts of natural disasters. This bailout Growth -1 Central Afr. Rep. hinders the development of disaster prevention and mit- Nicaragua Cameroon Jamaica GDP -3 igation measures, since leaders are not pressed to make Haiti -5 advance arrangements. By contrast, economic entities in Annual industrialized countries obtain insurance and alterna- -7 tive risk-transfer cover in financial markets to ease post- -9 disaster reconstruction efforts. This risk management 0 2 4 6 8 10 12 14 16 18 Losses/GDP 1990­99 approach would be beneficial to developing countries, Sources: Centre for Research on the Epidemiology of Disasters too. Risk management can reduce a country's vulnera- (CRED), World Factbook, and World Bank data. bility to catastrophe risks and secure reconstruction 60 Building Safer Cities: The Future of Disaster Risk funding that significantly lessens the economic sever- which constitutes an increasing share of economic activ- ity of natural catastrophes. ities, has been somewhat higher, at an annual rate of In the absence of an active risk management approach, 7.2 percent, while the volume of foreign direct invest- developing countries exposed to natural catastrophes ment has grown at the phenomenal rate of 17 percent are often forced to divert funds from existing develop- per year during the period.16 ment programs to fund temporary disaster relief efforts. The ability to exchange primary and manufactured This distorts commitments to longer-term economic goods as well as commercial services across borders investment. A country that has insufficient post-disaster has the potential to create economic net benefits because financing arrangements often faces delays in compen- it provides global market access for offerings that con- sating economic losses as governments await approval stitute comparative advantages.17 Increased global com- from multilateral credit facilities and other financing petition provides new opportunities for companies to sources. Furthermore, disaster relief in the form of bilat- improve customer service and increase economic effi- eral donations typically has conditions that limit the ciencies. The international mobility of capital can also uses of funds. Hence, a lack of risk management reduces funnel overseas financial resources to promising busi- the prospects for a more immediate economic recovery ness ventures and provide access to risk transfer arrange- after a disaster, particularly when a country's fiscal resources ments in the global financial markets. However, investors' are stretched and critical economic infrastructure has willingness to provide cross-border funding to economic been affected. Economic entities operating in economies activities in a country depends on the soundness and that are vulnerable to natural catastrophes have diffi- stability of a country's economic policies, since global culty establishing dependable, long-term business rela- investors are lured by promising returns with reason- tionships. If these essential stakeholder relationships able risk characteristics. are jeopardized by excessive catastrophe risk exposure, If the economic arguments for global trade have merit, a country may encounter difficulties in its attempts to the evidence should indicate that a higher level of support economic activities that have the potential to international trade is associated with economic devel- generate more sustainable competitive advantages.13 opment. For example, if a country is able to exploit Hence, effective management of catastrophe risk should comparative advantage in the global exchange of support competency-based economic activities, thereby goods and services, then a higher level of trade inter- increasing the potential economic benefits from inter- action should lead to higher economic growth in the national trade. The following section takes a closer look country. However, in a sample of developing countries at these relationships. with many international linkages, there seemed to be no clear relationship between the ratio of global trade and growth in GDP.18 Rather, the data seem to indicate Globalization, Economic Growth, and Sustainable a negative relationship between the level of trade and Competitive Advantage economic growth.19 These results do not fit with our simple international trade hypothesis. It is possible the As restrictions on cross-border transactions have eased discrepancy can be explained by the fact that large coun- in recent decades, the volume of global trade has tries with more diversified economic bases are better expanded faster than economic growth in the world hedged against the negative impacts, including natural economy.14 The annual compound growth rate in mer- disasters, of exogenous shocks to the economy. There chandise exports from industrialized countries has aver- seems to be a clear relationship between country size and aged 6 percent over the past 20 years.15 Certain countries, its concentration on specific export merchandise. Smaller including China, Thailand, Malaysia, Indonesia, and countries, for example, are generally more dependent the Philippines, have taken advantage of new global trade upon specific export products. This dependency may opportunities, while other developing economies, includ- make them more economically vulnerable to natural ing those in Sub-Saharan Africa, have displayed low catastrophes and other disasters. Hence, it does not seem growth rates. Overall growth in the export of services, to be trade volume in itself that matters, but rather the Globalization and Natural Disasters: An Integrative Risk Management Perspective 61 type and diversity of economic activities and global trade that have shown above-normal growth rates in global transactions a country pursues. demand.21 These product groups represent more skill It can also be argued that it is the trade policies pur- and technology-intensive merchandise with the poten- sued by developing countries that influence economic tial to achieve further productivity gains than relatively development. If a country has reduced its import tariffs, simple, labor-intensive manufactures and factor-based it reflects a general commitment to international trade primary goods. and global competition. When protective tariffs are Global capital flows can take place as investments in reduced, domestic economic entities are more exposed marketable financial assets or directly in productive to global competition, forcing these entities to improve assets through foreign direct investment (FDI). Invest- operational efficiencies to thrive and survive.20 An ment in domestic financial assets provides financial analysis of the country sample confirms that tariff poli- resources to local operators who maintain managerial cies in favor of global trade seem to be associated with control over the economic assets acquired. Since many higher economic growth. In other words, a reduction of these investments are placed in tradable securities in tariffs is associated with lower economic growth rates and syndicated facilities, they constitute relatively mobile (figure 4.3). capital that can change hands quickly if market senti- Hence, trade in and of itself provides little guaran- ments turn unfavorable. This may have repercussions tee for sustainable economic development, while eco- on foreign exchange rates when global market condi- nomic policy measures that favor a more global and tions change. By contrast, FDI gains managerial con- competitive business environment appear to induce eco- trol over business activities through direct corporate nomic growth. This suggests that it is the type of mer- acquisitions and investment in economic assets man- chandise a country exports that matters more than the aged by local affiliates. Since FDI constitutes investment actual trade volume. Developing countries as a whole in controlled economic assets, it is often considered a have increased their share of manufactured products from more stable source of trans-border financing. 25 percent of total exports to 70 percent over the past Whereas FDI commits financial resources in support two decades. However, the most successful developing of longer-term commercial activities, there are reserva- countries have had a higher emphasis on market-dynamic tions that this may not always be an advantage.22 Hence, product categories, including computer products, it is argued that developing countries should not actively electrical equipment, and manufactured garments, seek FDI at any price, but they should consider focus- ing policy efforts on improving economic conditions Figure 4.3 Economic growth and changes in tariff rates to attract capital to a country on the merits of under- lying business propositions and the expected returns 9 China from genuine economic activities. Developing countries 7 Argentina should attract investment that can build country-specific Malaysia 5 Uruguay skills and capabilities and create competitive advantages with the potential to drive more sustainable economic 3 1990­99 growth. FDI made primarily to exploit particular factor 1 endowments in a developing country does not repre- Growth Jordan -1 sent the most favorable type of investment. Instead, FDI GDP -3 in support of competency-based economic activities is Haiti much more attractive. Annual-5 The largest FDI amounts have accrued to economies -7 Rwanda focused on manufactured goods and with relatively low - 9-80 concentrations of particular merchandise exports. Brazil, -60 -40 -20 0 20 China, Mexico, and Thailand represent some of the Precentage change in tariffs, 1980s­1990s prime recipients of FDI.23 By contrast, developing coun- Source: World Bank data, Dollar and Kraay (2001). tries focused more narrowly on specific types of exports 62 Building Safer Cities: The Future of Disaster Risk have fared considerably worse. An analysis of the Figure 4.4 Economic losses and export concentration countries in the sample shows a significant negative 18 relationship between the degree of concentration on Nicaragua specific export products and economic growth. Over- 16 dependence on the export of specific product groups 14 Jamaica makes a country's foreign currency earnings vulnerable 12 to changes in global demand and the relative terms-of- trade. Prices for many primary commodities and labor- 1990­99 10 Zimbabwe intensive manufactures have decreased substantially 8 over the past decade, highlighting the risk of high export concentration.24 Losses/GDP 6 Bangladesh These revelations may guide developing countries Nepal 4 Costa Rica R. B. de in positioning themselves to take advantage of global Venezuela 2 market opportunities. Lower trade barriers and regu- China Mali latory restrictions make cross-border business transac- tions easier and provide greater flexibility in establishing 0 0.2 0.4 0.6 0.8 Export concentration index global corporate structures and networks. International Sources: Centre for Research on the Epidemiology of Disasters companies have taken advantage of the ability to inte- (CRED), United Nations Conference on Trade and grate national comparative advantages into their global Development (UNCTAD), and World Factbook. organization structures. Hence, various corporate func- tions may be located in countries that represent the highest potential value for the corporation and even- not only pursue stable and sound fiscal and monetary tually its customers. For example, labor-intensive oper- policies but also engage in risk management practices ations may be located where there are ample and qualified to stimulate economic activities that have the potential human resources, product development may be located to create more sustainable competitive advantages. around centers of research excellence, and global mar- Analysis of the countries sampled shows a positive keting may be coordinated from locations with high relationship between FDI and GDP growth.26 There concentrations of specialized sales agents. appears to be evidence of positive development effects Evidence from the sample countries supports the from FDI as a means to enhance national comparative contention that a relatively undiversified economic base advantage. However, that does not necessarily imply aggravates the adverse economic impact of natural dis- that FDI always supports production of competency- asters, since there is a positive relationship between based merchandise or enhances development of skills export concentration and the relative size of a coun- and capabilities. On the contrary, FDI is often made in try's catastrophe losses25 (figure 4.4). Countries with a pursuit of favorable factor cost conditions in host coun- high export concentration are typically more depend- tries. The challenge for developing countries is to min- ent upon factor endowments and developments in global imize dependence upon comparative advantage in one commodity prices than are countries that emphasize or a few fields and leverage it with the development of the export of competency-based merchandise. To reduce more competency-based manufacturing before the ini- economic vulnerability, these countries must find ways tial factor price advantages fade. Analysis of the coun- to diversify their economic bases. The ability to diver- tries sampled does not show that FDI has a positive sify the economic base and gear business activities in influence on the development of competency-based eco- support of more durable competitive advantage relies nomic activities, however. Rather, there is evidence of on an environment that is conducive to investment in a positive relationship between the level of FDI and export skills and capabilities-enhancing activities. Such an envi- concentration.27 This implies that FDI is positioned to ronment requires stable economic policies and man- take advantage of favorable factor costs in resource-rich aged exposure to catastrophe risk. Governments should developing countries. It could then be argued that FDI Globalization and Natural Disasters: An Integrative Risk Management Perspective 63 to a large extent supports commodity-based exports. From a strategic perspective, business entities are For example, exports from Venezuela, Mali, and Jamaica better off if they can establish advantages based on are highly focused on oil, cotton, and coffee. On the their organizations' inherent skills and capabilities.31 other hand, the largest FDI in absolute dollar terms Such advantages can provide value to customers through has been directed to countries like China, Brazil, Mexico, unique products, services, and delivery features and andThailand,whichhavemorediversifiedeconomicbases value to businesses through the development of eco- and a higher ratio of technology-intensive manufactures. nomic efficiencies in sourcing and internal processes. From a corporate perspective, the ability to place Both offer the company competitive advantages. To the functional entities at optimal locations around the globe extent that a competitive advantage is based on unique provides new opportunities for increasing efficiencies and firm-specific capabilities difficult for competitors and improving innovation by accessing specific skills, to imitate, a competitive advantage can become sus- capabilities, and knowledge and integrating them into tainable over time. Governments that establish economies organizational activities.28 From a country perspective, that support local companies and overseas investors and international corporations' investment dollars might be enable them to develop specialized skills and compe- attracted if special-factor endowments, skills, and capa- tencies provide countries with the ability to create sus- bilities can be used to reinforce economic activities.29 tainable competitive advantages. If local and multinational Companies headquartered in developing countries businesses are successful, a stronger economic base for may also invest overseas to exploit the same advan- more sustainable long-term economic development tages in the global markets, thereby attracting new skills will emerge. and resources to the economy. If local companies have Though government planning can provide support the ability to create their own global corporate struc- for increased economic activity, the development of tures, this may assist in attracting needed skilled work- essential skills and capabilities needed for companies ers to developing countries. Knowledge transfer and to succeed in the global economy often comes from capabilities-based commercial linkages arise not only innovations within a business. Policymakers can sup- from incoming FDI, but also from outgoing FDI, as local port increased commercial activity, however, by estab- companies learn through their global network rela- lishing a stable socioeconomic environment, improving tionships. However, many governments in emerging education, supporting research facilities, and main- markets are reluctant to ease restrictions on overseas taining a well-functioning public infrastructure.32 Fur- capital investment by domestic entities. This may not thermore, government investment programs can support be in a country's best interests, however, as this restric- the development of specific skills and capabilities that tion limits the ability of companies to expand and can shape future core competencies. To achieve this, learn from the global marketplace and puts them at a there is a need to reduce economic vulnerability to catas- competitive disadvantage. trophe risk and improve responsiveness to major exoge- Hence, governments should understand the compar- nous shocks to the economy. The next section takes a ative advantages that might drive an economy. It is less closer look at this issue. complicated to exploit existing factor endowments, includ- ing primary commodities such as metals, agricultural, raw materials, and labor. This approach is valid as long Risk Management and Global Market Access as the government also encourages the development of skills and capabilities that have the potential of creating The exponential growth in direct economic losses from longer-term comparative advantages to economic enti- natural catastrophes has an adverse impact on future ties operating in the economy. The difficulties with over- economic growth in an exposed developing country, reliance on cheap labor is that, once wage levels start to unless the impact is mitigated. Over-dependence on increase, simple comparative advantage erodes and com- international catastrophe funding and aid aggravates panies move manufacturing facilities to developing coun- the "moral hazard" (see endnote 16) problem reflected tries with even lower wage costs.30 in insufficient risk mitigation efforts and ineffective 64 Building Safer Cities: The Future of Disaster Risk post-disaster reconstruction. The uncertainty associ- factors can have at least three origins: catastrophe risk ated with uncontrollable catastrophe exposure and exposure, extreme price instability, and a deteriorating other exogenous economic shocks is detrimental to competitive position in global markets. Since these risk capabilities-based global linkages that could improve a factors are interrelated, risk management should inte- country's competitiveness. The development of more grate all factors into a country's aggregate risk exposure. knowledge-intensive competencies is hampered if eco- Countries with a high concentration of exports are nomic entities operating in developing countries are usually dependent upon specific commodities such as considered vulnerable counterparts. Hence, develop- food products, agricultural raw materials, and metals ing countries must become less vulnerable to natural (see figure 4.5). For example, countries such as Costa disasters and more responsive to changing economic Rica and Nicaragua are dependent upon world prices conditions. A proactive risk management approach for their coffee exports, so falling prices have a severe would help countries cope better with exogenous impact upon livelihoods.34 Similarly, Mali and to some environmental and economic shocks. extent Paraguay, depend upon the price of cotton, while Vulnerability to risk is a highly individualized phe- Zambia is highly dependent upon the price of copper. nomenon that depends upon the perceptions of a soci- When world prices drop, economic conditions in export- ety to risk. A society that fails to address the risks of ing countries are affected. Extreme dependency upon possible economic threats caused from such factors as primary commodities, therefore, provides little resilience price volatility, global competitive developments, and for an economy to withstand price declines and closely devastation from natural catastrophes assumes much links these commodity exports with poverty.35 higher risks than those that take steps toward preven- Whereas natural catastrophes have a direct economic tion and mitigation. It is in a country's self-interest to impact on exposed countries, business conditions can manage key risks in a proactive manner. International also be affected indirectly by climatic events in other businesses and financial institutions sensitive to high parts of the world that influence supply and demand levels of risk may avoid investing in such uncertain cir- conditions in commodities markets.36 When the prices cumstances. This avoidance further negatively impacts of primary agricultural products increase due to scarcity, a country's ability to create global linkages and attract this often provides a temporary economic bonanza for funds for new investment. producers. But when prices drop on the world market, A country that is able to maintain a relatively stable the decrease in export earnings results in an overall drop economic environment will attract significantly more in demand for all goods in export countries. Lower com- FDI than a country with a volatile economy. Economic modity prices should represent market opportunities entities operating in stable countries prove more reli- for countries to offer goods more cheaply; however, pri- able business partners for international firms and their mary producers are often unable to take advantage of better risk practices facilitate long-term, knowledge- such opportunities because they lack the skills to engage intensive partnerships that have a greater potential for in international product development and global sales receiving international funding for new ventures. Risk initiatives. Hence, successfully engaging national com- management facilitates long-term business activities and panies in global secondary market activities, including increases the potential of creating competitive advan- product development, packaging, sales, and distribu- tages and more sustainable growth. A number of con- tion, hedges the economy against the adverse effects of ditions must be satisfied in a stable socioeconomic deteriorating terms-of-trade. environment. There must be prudent fiscal and mone- Primary and secondary industries constitute a dimin- tary regimes as well as trade and foreign exchange ishing share of total factor income in the global econ- policies that assist foreign entities in establishing omy, though tertiary service-oriented economic activities skills-based linkages with local companies and sup- are increasing at a much faster rate than conventional porting domestic companies in their global expansion industries, particularly in industrialized countries. Thus, to overseas markets.33 There is also equal need to manage a developing country that focuses on the production of the major risk factors that expose a country. These risk primary commodities will likely see their terms-of-trade Globalization and Natural Disasters: An Integrative Risk Management Perspective 65 Figure 4.5 Commodity price developments, 1990­2000 Classes of Primary Goods Individual Primary Goods (food, agricultural, metals) (coffee, cotton, copper) 140 200 130 180 160 120 100) 140 100) 110 = = 120 100 (1990 (Jan-97 100 90 80 Value Index 80 60 Index Price 70 40 60 20 0 50 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Jan-97 Jul-97 Jul-98 Jul-99 Jul-00 Food Agricultural raw materials Metals Mar-97May-97 Sep-97Nov-97Jan-98Mar-98May-98 Sep-98Nov-98Jan-99Mar-99May-99 Sep-99Nov-99Jan-00Mar-00May-00 Sep-00Nov-00 Coffee Cotton Copper Sources: International Monetary Fund (IMF), Food and Agriculture Organization of the United Nations (FAO), and the London Metal Exchange (LME). deteriorate in the future. The only way to avoid this vicious reliable and consistent economic policies that main- commodity price trap is to encourage and support a tain fiscal and external trade balances within reason- focus on higher value-added business activities by going able boundaries. It also depends upon a country's beyond an emphasis on primary commodities and engag- integrative risk management capabilities that allow a ing in product development and new ways of creating country to cope with the economic effects of natural customer value to end users in global markets. Gov- disasters. Without the ability to manage and dampen ernments may support the development of specific skills the adverse impacts of external shocks, it is difficult to and capabilities and encourage local business entities to develop a sustainable base for economic value cre- become further engaged in competency-based economic ation. Firms and government entities insure themselves activities.37 This may induce FDI that links overseas against various kinds of risk that is beyond their con- distributors with domestic supplier affiliates and pro- trol and that otherwise could jeopardize firm survival vides local companies with opportunities to expand over- or severely damage public investment programs. If a seas and pursue linkages with sales affiliates in global firm or government assumes extreme risk exposure, markets. Effective linkages between local companies and insolvency risk increases and can reach levels where foreign affiliates require a mix of skills and technologi- credit becomes scarce and considerably more expen- cal know-how. This is even more critical when local com- sive.39 Potential restrictions on funding have adverse panies want to expand into overseas markets. There is impacts on economic activity levels that may cause an equal need to develop basic management skills and irreparable harm to important stakeholder relationships, international business capabilities to support the over- e.g., shareholders, employees, customers, suppliers, part- seas expansion of local companies.38 ners, etc., and strain profitability and future business The development of competency-based economic initiatives.40 This causes investment activities to drop as activities requires a relatively stable socioeconomic envi- viable funding sources dry up or become excessively ronment. This in turn depends upon the pursuit of costly. Hence, a highly disruptive business environment 66 Building Safer Cities: The Future of Disaster Risk without effective risk-transfer and hedging markets and factor income development may be sensitive to restrains economic growth. Indeed, the ability to iden- developments in primary commodity prices, foreign tify and manage risk in a proactive manner is heeded exchange rates, and global demand conditions. Income as a key characteristic behind the economic success of generation and economic growth are dependent upon modern society.41 the relative competitiveness of economic entities oper- A formal risk management process comprises a ating in a country and economic indicators in the global number of sequential tasks: risk identification, risk meas- economy. The potential direct losses deriving from urement, and risk monitoring. The contemporary risk various natural catastrophes can be determined on the management paradigm suggests that all relevant risk basis of advanced model simulations that are informed factors should be considered and integrated into the by data describing historical meteorological and seis- process and monitored on a continuous basis.42 Hence, mological event patterns and data describing the char- the risk management process in developing countries acteristics of the exposed economic infrastructure. It is should address exposure to a number of risk factors that also possible to develop econometric models that stip- affect economic performance, including market volatil- ulate the associated secondary effects on economic ity, natural catastrophes, and competitive risks. Differ- demand, investment activities, and government finances. ent risk exposures require different responses, but a The exposure position of different risk factors can diversified economy focused on competency-based man- be incorporated into a formal reporting system that ufacturing is generally more resilient to exogenous allows policymakers to monitor the manner in which economic shocks. A risk management process would a country's overall risk exposure is evolving. As the typically follow a series of sequential steps performed economic infrastructure, global market conditions, and in a continuous process (figure 4.6). As an initial step catastrophe frequencies change, risk exposure reports in the process, all risk factors that could affect an econ- reflect the consequences of the changed environmen- omy should be identified. Potential sources of risk must tal reality. As environmental conditions continue to be determined up front to devise alternative responses change, risk management frameworks should reflect an that could counteract the potential adverse effects of the ongoing and dynamic process. Registration and quan- risk exposure. Once key risk factors are identified, tification of important risk factors provide the basis for economic exposure associated with each factor should an informative mapping of the risk exposures that influ- be analyzed. ence a country's economic development path. This Exposure to each of the risk factors identified can be overview of a country's risk landscape allows decision- quantified and measured to assess relative importance. makers to evaluate the effects of alternative actions to For example, a country's balance-of-payments flows modify or limit the overall risk profile. The analytical framework also provides a basis for reducing risk exposure by making risk-transfer arrangements. Figure 4.6 Elements of the dynamic risk management Depending upon the nature of the risk, residual risk process exposure can be hedged through financial derivatives,43 3. reinsurance, and alternative risk transfer (ART) instru- ments. Economic exposure related to changing com- Risk monitoring petitive conditions in the global marketplace cannot be insured in the financial markets. Competitive advan- Risk Risk 4. 2. reassessment measurement tage typically relates to firm-specific, nontradable, intan- gible factors, so no market-based instruments exist to Risk hedge these exposures. It may be possible, however, to identification adopt a real options perspective to managing these long- 1. term exposures.44 The real options concept is the van- Source: Culp 2002. guard of strategic risk management, and it provides Globalization and Natural Disasters: An Integrative Risk Management Perspective 67 interesting new ways to respond to idiosyncratic non- rate in developing countries. The current approach to marketable economic exposures.45 New business oppor- multilateral catastrophe funding causes moral hazard tunities planned by economic entities, but not yet problems that leave too few incentives to engage in implemented, can be conceived as an options portfo- proactive risk management that could promote more lio that gives a country economic flexibility and enhances effective risk mitigation and post-disaster reconstruc- its development path.46 tion. There is an urgent need to support developing Options are not always obvious, however, and some- countries in managing the results of the current trend times must be innovated. The creation of options depends and assist them in pioneering new integrative risk upon the existence of economic entities in a country management practices. that are innovative and able to take on new business Open international trade relations can benefit all trad- initiatives. Governments can support the establishment ing partners, but a high export concentration of pri- of an economic environment conducive to serious options mary commodities among the world's poorest nations creation, such as managing excessive risk exposure, has entrapped them with terms-of-trade that continue maintaining public security and health standards, build- to deteriorate. Other industrialized developing coun- ing economic infrastructure, and investing in education tries are trapped by over-reliance on favorable labor and intellectual capital.47 The ability to create options costs, which constitute an unsustainable advantage. The and manage the associated flexibility can add signifi- poorest developing countries are also hit hardest by cant value to an economy. The more options available the economic devastation of natural disasters that in an economic portfolio, the more responsive and often aggravate an already-strained economic situation. resilient it can be to external shocks, whether from High dependence upon particular commodities pro- natural disasters or changing conditions in the global vides little room for responsiveness to adverse economic market. shocks. The obvious response is to create a more diverse A government that manages all risk factors on an industry structure and advance capabilities-based eco- integrative basis can cover excessive economic risk expo- nomic activities that have a better potential for creat- sure by combining a number of risk-transfer techniques ing competitive advantages. This approach requires a to ensure that sufficient funds will be available to stable economic environment founded in sociopoliti- retain economic responsiveness and quickly refurbish cal stability and active management of exposure to nat- essential infrastructure in the event of a disaster. Gov- ural catastrophes and other exogenous economic shocks. ernments should take steps to identify and continuously Prudent economic policies and proactive risk manage- survey risks that could impact the economy. They should ment practices can help developing countries establish also determine a level of prudent risk exposure and a business environment that is more conducive to a sus- manage the country's risk profile, within limits, through tainable development path. a combination of self-insurance, risk-transfer opportu- The paper has sought to derive conclusions from nities, a diversified industrial structure, and an eco- empirical evidence, but the underlying sample of devel- nomic options portfolio that builds flexibility into an oping countries has its limitations. As the conclusions economy. appear fairly generic, robust further analyses of more comprehensive data sets may be warranted. These stud- ies could consider some of the constructs introduced in this paper and define classes of competency-based Conclusions business activities, types of competitive advantage, and economic option portfolios. Risk management Globalization has significantly spurred trade and invest- approaches could also be tested in country-specific pilot ment flows over the past decades. At the same time, studies that specify the direct and indirect economic the frequency of natural catastrophes has increased benefits associated with an integrative risk management and associated economic losses have risen at an alarming process. 68 Building Safer Cities: The Future of Disaster Risk Annex 4.1 Reported catastrophe victims and economic losses, 1990­2000 People Total Affected/ Catastrophe GDP2 Losses/ affected population population1 losses PPP-basis GDP Country (#) (mill.) (%) ($ mill.) (# bill.) (%) Argentina 12,979,161 37.38 34.72 8,596 476.0 1.81 Bangladesh 329,090,346 131.27 250.70 10,579 203.0 5.21 Benin 844,000 6.59 12.81 3 6.6 0.05 Brazil 40,863,947 174.47 23.42 5,051 1130.0 0.45 Burkina Faso 2,823,293 12.27 23.01 0 12.0 0.00 Cameroon 810,070 15.80 5.13 2 26.0 0.01 Central Afr. Rep. 79,680 3.58 2.23 0 6.1 0.00 China 1,387,422,101 1,273.11 108.98 112,314 4500.0 2.50 Colombia 2,565,541 40.35 6.36 4,875 250.0 1.95 Costa Rica 1,179,442 3.77 31.26 848 25.0 3.39 Dominica 3,716 0.07 5.23 3 0.3 1.13 Dominican Rep. 2,368,827 8.58 27.61 2,264 48.3 4.69 Ecuador 577,276 13.18 4.38 801 37.2 2.15 Egypt, Arab. Rep. 199,331 69.54 0.29 292 247.0 0.12 Ethiopia 45,315,900 65.89 68.78 19 39.2 0.05 Haiti 4,089,855 6.96 58.73 211 12.7 1.66 Hungary 133,695 10.11 1.32 677 113.9 0.59 India 1,002,191,581 1,029.99 97.30 20,213 2200.0 0.92 Indonesia 7,198,000 228.40 3.15 17,879 654.0 2.73 Côte d'Ivoire 51 16.39 0.00 0 26.2 0.00 Jamaica 1,463,121 2.67 54.90 1,221 9.7 12.58 Jordan 198,744 5.15 3.86 400 17.3 2.31 Kenya 17,441,900 30.76 56.70 12 45.6 0.03 Malaysia 149,869 22.23 0.67 12 223.7 0.01 Mali 1,853,902 11.01 16.84 0 9.1 0.00 Mexico 3,515,773 101.88 3.45 10,203 915.0 1.12 Nepal 5,676,894 25.28 22.45 1,298 33.7 3.85 Nicaragua 2,439,230 4.92 49.60 2,044 13.1 15.60 Pakistan 26,206,278 144.62 18.12 1,341 282.0 0.48 Paraguay 760,652 5.73 13.27 84 26.2 0.32 Peru 5,325,635 27.48 19.38 1,549 123.0 1.26 Philippines 93,468,162 82.84 112.83 5,450 310.0 1.76 Rwanda 1,481,976 7.31 20.27 0 6.4 Thailand 25,849,910 61.80 41.83 4,218 413.0 1.02 Uganda 1,351,500 23.99 5.63 72 26.2 0.27 Uruguay 37,500 3.36 1.12 30 31.0 0.10 Venezuela, R. B. de 702,581 23.90 2.94 2,088 146.2 1.43 Zambia 4,306,218 9.77 44.08 21 8.5 0.24 Zimbabwe 10,861,153 11.37 95.57 2,598 28.2 9.21 1A ratio above 100 percent indicates that a number of people exceeding the entire population have been affected during the period. 2Based on purchasing power equivalents as opposed to factor cost converted at current foreign exchange rates. Sources: Centre for Research on the Epidemiology of Disasters (CRED) and World Factbook. Globalization and Natural Disasters: An Integrative Risk Management Perspective 69 . (%) 0 Change 1985­95 60.00- 71.95- 70.33- 74.89- 53.13- 43.44- 41.88- 46.13- 58.50- 42.56- 52.98- 65.89- 29.22- 44.93- 13.79- 17.78- 61.47- 52.69- 21.29- 40.76- 1.84- 65.74- 40.27- 23.35- 49.54- 51.58- 39.74- 14.68- 70.44- 38.13- 16.36 43.66- 48.00- 71.51- 59.16- 43.14- 133.70 fs %). arifT 1990­99 (agv 12.45 40.15 26.85 16.25 35.75 18.35 21.80 30.40 14.40 11.90 21.50 17.00 11.15 31.70 22.55 10.50 12.35 50.10 16.65 22.25 15.25 15.90 23.40 11.60 21.40 12.80 13.55 11.70 50.75 11.20 16.15 20.85 38.40 29.85 15.05 14.25 14.25 21.70 19.35 fs %) arifT 8.90 9.30 9.60 1995­99 (avg. 11.00 26.00 12.70 11.50 28.50 18.10 18.60 20.90 12.20 11.20 15.00 16.20 11.70 28.10 16.30 10.00 14.80 38.30 13.20 20.70 10.90 16.00 13.50 18.80 12.80 11.00 10.70 41.70 13.30 17.20 38.40 23.10 13.00 12.70 17.00 21.50 sf %) arifT 9.90 1990­94 (avg. 13.90 54.30 41.00 21.00 43.00 18.60 25.00 39.90 16.60 12.60 28.00 7.801 10.60 35.30 28.80 11.00 61.90 20.10 23.80 19.60 15.80 33.30 14.30 24.00 12.80 16.10 12.70 59.80 13.10 19.00 24.50 38.40 36.60 17.10 18.90 15.80 26.40 17.20 sf %) . arifT 9.20 1985­89 (avg. 7.502 2.709 2.804 5.804 0.806 2.003 2.003 8.803 9.402 19.50 31.90 4.303 9.703 9.602 1.601 8.001 9.409 7.902 6.302 18.40 16.30 9.403 14.90 6.701 1.802 2.102 9.206 0.901 5.004 7.802 3.003 1.004 5.002 3.703 1.103 9.902 p.a.) rade/GDPT 1990­99 (% 8.302 2.652 8.804 5.701 0.504 6.756 4.504 2.153 1.955 4.307 5.005 0.656 4.152 2.958 5.806 9.551 9.404 2.207 6.055 1.455 1.704 1.155 6.807 4.703 8.358 8.504 90.80 1.954 9.608 7.253 5.357 0.955 8.607 8.256 118.20 115.40 117.55 164.20 196.85 p.a.) 32.90 26.70 45.80 17.90 37.90 65.00 42.10 34.20 58.90 92.30 57.50 59.70 25.40 98.90 74.00 22.10 50.20 76.40 60.70 51.30 49.90 60.30 85.10 34.50 99.40 52.70 37.40 94.60 43.10 84.30 54.70 78.30 77.10 2001. rade/GDPT 1995­99 (% 128.10 112.30 125.90 166.20 219.80 106.10 Bank, orld W fs p.a.) 23.70 18.60 51.80 13.50 43.10 68.50 46.90 30.10 45.00 56.30 52.50 61.60 22.90 67.00 57.60 17.00 48.60 68.00 51.40 51.60 33.50 42.00 68.50 34.90 77.30 44.30 75.50 46.50 84.60 31.40 66.40 47.20 78.90 59.40 oup, tarif rade/GDPT 1990­94 (% 108.30 118.50 109.20 162.20 173.90 Gr ch and Resear owth trade, Gr p.a.) 6.00 3.55 2.00 1.25 1.15 1990­99 (% 2.55- 1.50- 8.20 1.50 0.95 1.60 3.70 0.85 1.70 1.90 3.80- 0.25 3.50 4.40 0.05- 1.75- 0.10- 0.00 5.60 0.25 3.30 2.60 1.10- 0.25 0.40 2.85 1.25 7.30- 3.75 2.90 4.60 1.25 0.50 1.75 GDP Development, national owth inter Poverty Gr p.a.) 5.20 3.70 2.60 1.60 3.20 2.10 1995­99 (% 0.20- 7.80 0.60 0.10- 1.80 5.60 0.60 3.30 5.00 0.30- 3.30 4.40 4.50 3.30 2.70- 1.60- 0.60 5.40 2.30 4.20 2.20 0 0.30- 0.20- 3.00 3.10 0.30 1.50 4.20 4.30 0.20 2.40 3.10 and GDP owth, owth, gr Gr owth radeT, income Gr p.a.) 6.80 3.40 1.40 0.90 8.60 2.40 2.00 1.40 1.80 1.10 0.10 2.60 4.30 1.40 5.80 2.40 3.00 0.80 1.00 2.70 6.00 1.60 4.90 2.30 0.40 1990­94 (% 0.90- 7.20- 2.80- 1.20- 7.30- 2.80- 3.40- 0.80- 0.60- 1.80- 2.20- 0.60- 14.90- 1.40- Kraay GDP A. de and National Rep.. Rep. B. Rep. e R. 4.2 Faso Dollar Afr