54pesos » Natural Disasters

The Moral Side of Disasters

Luis Flores Ballesteros — Sun, 10 Apr 2011 21:34:09 +0000

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:

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. Not considering house values both ex-ante the earthquake and ex-post the reconstruction (and different factors than monies), your neighbor that said “no” to insurance resulted to be a better planner and more financially benefited. Now, what are you going to do when the time for renewing your insurance policy comes–a policy that is likely to be more expensive because insurers tend to increase prices after the occurrence of the hazard? >MORAL HAZARD.
You are the governor of the state with the highest exposure to floods per year in the country. Similar to the other case, you have to set your position regarding disaster risk management, but now you are affecting many more people with such decision. In this case, you could allocate public resources in prevention (e.g., relocating communities to safe areas), mitigation (e.g., building levees), or response and recovery capabilities (e.g., education to the community or a financial instrument to finance reconstruction). Let us suppose your administration decided for resettlement and relocation.
- Needless to explain, this is not an easy choice to implement. It entails a huge effort of lobbying with communities, politicians, the million of activist that will be questioning the decision, and conducting environmental impact evaluations, risk maps, other analyses, etc. Should the flood happens and would had affected the relocated communities, your decision MAY be rewarded; conversely, it is SURE that your name will be written along with words like ineptitude or corruption and other beauties. The fact is that the investment in prevention and mitigation is tremendously expensive if the hazard does not occur. And let us remember: nature does not follow administrative terms. The disaster can happen this year or five years from now. Since disasters are low-probability phenomena, the vast majority of governments in developed and developing countries prefer options that yield more political capital. In fact, statistical studies in the US suggest that voters reward post-disaster actions, but punish or give little to investments in prevention. How many politicians–stereotypes apply, e.g., rolled sleeves, helmet, work footwear–you remember leading response in disaster zones or lobbying for international aid? On the opposite, how many politicians are remembered because of their effective investments in prevention? Furthermore, if you are head of a poor state or country, your incentives to invest in prevention are relatively low because of a consciousness of an external aid network that would mobilize resources in case of a disaster. Aid that generally is free. Then, who wants to invest in disaster risk management if resources can be used to pay socially tangible infrastructure? >MORAL HAZARD.

Who’s getting the worst of natural disasters?

Luis Flores Ballesteros — Sat, 04 Oct 2008 04:00:13 +0000

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. Furthermore, the abilities and, mainly, the capabilities of a country to avoid, mitigate, cope with and recover from the effects of a natural event is determinant for the transformation of that event into a disaster. The following maps built with data from the International Emergency Disaster Database illustrate this assertion. Compare for example United States and Mexico, the former was affected by 23 natural disasters in 2007; whilst Mexico, by seven. However, the number of victims (people reported killed or affected by the event) in Mexico was three times the number in the US. India had 60 times the victims of the US, although it suffered from less number of disasters (not taking into account the characteristics of the event).

Are natural disasters increasing?

Luis Flores Ballesteros — Thu, 11 Sep 2008 22:42:31 +0000

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).

What determines a disaster?

Luis Flores Ballesteros — Thu, 11 Sep 2008 14:54:58 +0000

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).