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The Economic Impacts of Natural Disasters on Developing Countries

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. 1. 1. The Economic Impacts of Natural Disasters on Developing Countries. Direct : loss of capital stock.

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The Economic Impacts of Natural Disasters on Developing Countries

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  1. The Economic Impacts of Natural Disasters on Developing Countries Session 1World Bank InstituteInternational Institute of Applied System AnalysisJ. L. Bayer and R. Mechler Financial Strategies for Managing the Economic Impacts of Natural Disasters 1 1

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

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

  4. Global Direct Losses (1985-1999) Financial Strategies for Managing the Economic Impacts of Natural Disasters

  5. Developing Countries with over 1 Billion USD Natural Disaster Losses 1980-2000 IIASA chart by L. Martin 2001 Data sources: Munich Re 1998; Munich Re 1999 Financial Strategies for Managing the Economic Impacts of Natural Disasters

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

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

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

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

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

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

  12. Global Insured Losses (1985-1999) Source: Munich Re (2000) Financial Strategies for Managing the Economic Impacts of Natural Disasters

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

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

  15. 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) Financial Strategies for Managing the Economic Impacts of Natural Disasters

  16. 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 Financial Strategies for Managing the Economic Impacts of Natural Disasters

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