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Posts Tagged ‘Natural Disasters’

Moral hazard is the most underrated driver of natural disasters. We know that it exists almost in every policy instrument or private strategy for managing the risk of natural disasters. For more than three decades, the literature has acknowledged and discussed extensively about the different types of moral hazard like the politician and the Samaritan dilemmas, and the market failure associated with traditional insurance. However, there is little progress achieved in this area. In short, the relationship between moral hazard and disasters may be taken from a couple of examples:

  1. Suppose that your house is located in a seismic area, you are aware of it AND have some idea that should an earthquake occur, it would likely damage or destroy, your house. The economic theory tells us that, since you are a rational individual (irrational does not mean–necessarily–that your make stupid decisions, rather that the theory is limited enough to understand your behavior), your risk aversion would have you opting into a strategy to protect your asset. For example, you buy insurance. (Note: one variable to which I am not paying strong consideration is your level of risk perception, or something that we can call “belief”. You may believe that the probability an earthquake hits the area and damages your house is nil and, then, investing in risk management is not worth it. That is a different story that I will be discussing about in another post).
    • OK. An earthquake occurs, you file a claim and the insurance company pays you enough money to rebuild. So far so good. The paid premium was insignificant compared with the amount of money you had to come up with with no insurance. However, life is not perfect, there is envy in this world and you became aware that the government disaster-fund is paying to those uninsured. (more…)

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Have you ever thought why catastrophes caused by natural events are more destructive in developing countries? An example? See the table below that compares the human impact (i.e., people killed or requiring immediate assistance during a period of emergency, that is requiring basic survival needs such as food, water, shelter, sanitation and immediate medical assistance) of natural disasters between the 10 richest and 10 poorest countries.

Source: the International Emergency Disasters Database (2004)

Another one: deaths associated to natural disasters and development status.

Sources: The UNDP (2004) with data from the International Emergency Disasters Database

It seems like an unfair situation and, yet, an expected outcome (a vicious cycle?). Specially, if we agree that risk to natural disaster is a function of vulnerability (determined by socioeconomic and demographic factors, and the environmental context) and hazards’ frequency, duration and magnitude, then we’ll understand better the differences in impact of natural disasters between poor and rich countries. (more…)

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According to the International Emergency Disasters Database and the International Strategy for Disaster Reduction , the frequency, duration and magnitude of natural hazards have increased over the last 40 years. For example, the UNDP (2004) reports that annual economic losses associated with natural disasters averaged 75.5 USD billion in the 1960s, 138.4 USD billion in the 1970, 213.9 USD billion in the 1980s and 659.9 USD billion in the 1990s. In particular, countries of low and medium development status are particularly vulnerable. They account for 85 percent of the people vulnerable to cyclones, droughts, floods, and earthquakes; between 1980 and 2000, an average of 184 deaths per day related to natural hazards was recorded, 53 percent of them occurred in countries with low-development level (UNDP 2004). In terms of post-disaster recovery, economic losses due to natural disasters are 20 times greater (as a percent of GDP) in developing countries than in developed countries (CRED 2008).

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Whether a hazard becomes a disaster or not depends ultimately on people’s vulnerability (Cutter 2006), that is, their ability to prevent, mitigate, cope with, and recover from the impact of a disruptive event.

The determinants of vulnerability include people’s demographic, social and economic characteristics, and their relationship with the natural and manmade environment.

Risk is a product of the interaction between human decisions and ecosystem. Understanding risk entails analyzing historic processes of human evolution and environmental change (Holzmann 2000). It entails, for example, identifying how the construction of Mexico City over a drained lakebed resulted in an urban center highly vulnerable to seismic risk. Alternatively, how inefficient decisions in terms of land use puts up informal settlements on steep hills that led to deforestation with the consequent increase of the impact of hurricanes, such as Mitch in Central America; or high-end residences built at the skirts of mountains in California that become highly vulnerable to forest wildfires (Smith, There’s No Such Thing as a Natural Disaster 2006). Lastly, it entails understanding how migration combined with lack of planning burden the infrastructure and capacity to respond of fast-growing cities, like Mumbai and Lagos, and create belts of poverty in the form of slums vulnerable to a mounting number of individual and covariant risks (Hoppe 2006).

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