Financial Strategies for Managing the Economic Impacts of Natural Disasters1 11 The Economic Impacts of Natural Disasters on Developing Countries Session 1 World Bank Institute International Institute of Applied System Analysis J. L. Bayer and R. Mechler

2Financial Strategies for Managing the Economic Impacts of Natural Disasters 22 The Economic Impacts of Natural Disasters on Developing Countries Disaster Impacts Economic Humanitarian Macroeconomic e.g. loss of GDP Direct : loss of capital stock Indirect: e.g. business interruption Ecological

3Financial Strategies for Managing the Economic Impacts of Natural Disasters Global Losses Are Increasing Source: Munich Re 2004

4Financial Strategies for Managing the Economic Impacts of Natural Disasters Global Direct Losses ( )

5Financial Strategies for Managing the Economic Impacts of Natural Disasters Developing Countries with over 1 Billion USD Natural Disaster Losses IIASA chart by L. Martin 2001 Data sources: Munich Re 1998; Munich Re 1999

6Financial Strategies for Managing the Economic Impacts of Natural Disasters Impacts of Disasters in Developed and Developing Countries Source: Munich Re 2000

7Financial Strategies for Managing the Economic Impacts of Natural Disasters Macroeconomic Consequences of Disasters Source: IIASA (Freeman, Martin, Mechler, Warner with Hausmann 2002)

8Financial Strategies for Managing the Economic Impacts of Natural Disasters Who Bears the Losses? Sources: IIASA (Linneroth-Bayer et al. 2003) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Northridge '94 Poland '97 Honduras '98 Estimated Direct Losses by Sector in Percent Agriculture Residential Public Commercial/Industrial

9Financial Strategies for Managing the Economic Impacts of Natural Disasters  Can be a significant proportion of losses;  Without timely reconstruction can cause long-term reductions in economic growth;  Need improved financial planning for assuring post- event funds  Financial hedging  Instruments available Kobe (Source: EQE) Public Infrastructure Losses

10Financial Strategies for Managing the Economic Impacts of Natural Disasters Importance of Mitigation The Philippines Jamaica and the Dominican Republic China Worldwide  Mitigation can bring about large benefits in terms of saving lives and preventing economic losses. Scattered evidence exists in

11Financial Strategies for Managing the Economic Impacts of Natural Disasters Loss Sharing and Risk Transfer Households Businesses Agriculture Private Market Risk Transfer Donors and Lenders Domestic and International Assistance International Financial Institutions Government Collective Loss Sharing Public Sector Informal Sector Family, Neighbors Victims

12Financial Strategies for Managing the Economic Impacts of Natural Disasters Global Insured Losses ( ) Source: Munich Re (2000)

13Financial Strategies for Managing the Economic Impacts of Natural Disasters Government Assistance Source: IIASA, Linnerooth-Bayer and Vari, 2003 Government financed housing reconstruction after the 2001 floods in Hungary

14Financial Strategies for Managing the Economic Impacts of Natural Disasters Family, Friends and Donors Source: Mechler 2003

15Financial Strategies for Managing the Economic Impacts of Natural Disasters Macroeconomic Management Issues  How can catastrophe risk management be part of general macroeconomic management?  How can sufficient domestic and foreign financial resources be mobilized?  How can relief and reconstruction needs be combined with prudent macroeconomic management (inflation, reserves, deficit, indebtedness)? From the standpoint of macroeconomic policy, the key question is how much and how rapidly can the government afford to borrow to finance the reconstruction costs, while keeping fiscal policy on a sustainable path. (IMF & WB staff assessment of the macroeconomic effects of the earthquakes in El Salvador 2001)

16Financial Strategies for Managing the Economic Impacts of Natural Disasters Microeconomic Management Issues Who should bear the responsibility for disaster risks facing households and businesses?  Efficiency argument: Disaster risks should be mainly the responsibility of those who are located in high-risk areas to discourage settlement in these areas and to encourage individual mitigation measures.  Equity argument: Many persons living or working in high-risk areas are poor and unable to take loss- reduction measures, purchase insurance or relocate to safer areas. There is a need for social solidarity with disaster victims. Woman who lost her home in the 2001 Hungarian flood