Work-in-Progress: Economic Analysis for Integrated Risk Management

1. Work-in-Progress: Economic Analysis for Integrated Risk Management Carter Brandon, Latin America Region, World Bank

2. Average losses from extreme weather events for selected Latin America and Caribbean countries from 1992-2011 Average Annual Losses per GDP (%) Deaths per 100,000 inhabitants • () indicate Global Rank of 183 countries or territories evaluated. Showing the top 12 for the region. • Sorted by Losses per GDP (%) Source: Harmeling, S. and Eckstein D. “Global Climate Risk Index 2013”. Germanwatch, November 2012. http://germanwatch.org/fr/download/7170.pdf

3. Select Damages from Disasters as a % of GDP

4. Disaster events are increasing as are disaster losses

5. Source: Planning Institute of Jmaica

6. Honduras – Growth impacts of Hurricane Mitch after 1998

7. The economic cost of disasters • Negative economic impacts, especially on the poor: • Households sell assets • Children drop-out from school • Production systems/supply chains disrupted, sometimes for years • Disasters are exogenous shocks to the budget and impact growth and development prospects: • Direct financial losses through damage to public assets and spending for emergency response and recovery; • Indirect costs through loss of growth and revenue generation

8. But countries face many sources of exogenous risk: Many advances, but still most risks are analyzed and managed sectorally, e.g., disaster risk management (DRM) investmentsand insurance, agricultural insurance, commodity price hedging

9. Integrated Risk Management: Needed, a common economic and fiscal framework to better quantify, compare, and prioritize risk

10. These types of risks can be grouped and addressed with different instruments

12. Key questions for countries trying to assess national priorities We want to invest in risk management, but where will we get the biggest bang for the buck? What should we optimize– reduced uncertainty, reduced volatility, reduced costs/impacts, improved price stability, more targeted social protection? Should we allocate more for hurricanes, earthquakes, droughts, import commodity price shocks, export commodity price shocks, flawed PPP projections, contractual liabilities? How should we compare the marginal benefits of expenditures for infrastructure investments, price hedging instruments, insurance programs, catastrophe reconstruction bonds, or building retro-fitting?”

13. Key questions for the World Bank How can we help improve household level resilience, highly correlated with poverty and vulnerability? How can we improve the countries’ capacity to respond while protecting the budget and long term fiscal balance of the state? How can we reduce the financial exposure (contingent liability of the state)? How can we ensure funds are spend effectively in the aftermath of a disaster?

14. Requires multi-prong analysis • The economic impacts of physical impacts, on built assets, economic output, and employment • The explicit and implicit impact on fiscal expenditures of physical impacts, e.g., constructing and maintaining public assets, subsidies, public insurance programs, support of state-owned enterprises, social safety nets, and the need to respond to emergencies and help rebuild damaged communities: • Explicit contingent liabilities from contracts and regulations, credit guarantees, public-private partnerships in infrastructure • Implicitcontingent liabilities from political commitments (financial bailouts), humanitarian grounds (disaster relief), or to finance public goods (environmental clean-up). • Projected impact on government revenues, via tracing the impacts on reduced economic activity on direct and indirect taxes.

15. Requires multi-prong analysis of impacts Direct damages to public and private sector assets Social programs e.g. subsidies, safety net payout Recovery and reconstruction costs not explicitly budgeted Incapacitation of other sectors, interrupted services, disruption of economic flows

16. How much do we know?

17. Key knowledge gaps • Natural disasters: economic impacts of natural disasters on direct and indirect output loss (esp. short- and medium-term employment) and public and private assets; the magnitude of contingent liabilities; and medium-term revenue implications. Trends and probabilities over time. • Commodity output and price shocks: economic and fiscal dimensions of price movements in commodity sectors, expressed as deviations from expected expenditure and revenue streams. Needed for commodity price hedging or insurance schemes (for import-dependent countries). Probabilities but less clear trends unless climate-related. • Under-funded state contractual guarantees (primarily PPPs and project-specific guarantees): explicit and implicit risks associated with state financial guarantees in the infrastructure sectors. • Impact, effectiveness, and efficiency of risk management instruments, such as rate of return/value for money on risk management expenditures. • Sequencing and trade-offs between key dimensions of a sovereign risk management program.

18. Conclusions/Next Steps • Do country case-studies, starting with a small, high risk economy (e.g., Jamaica, a Central American country) • Refine methodologies to assess the economic and fiscal impacts of risk • Develop a tool-kit for countries to better address exogenous risks and use market-based approaches • Expand/adapt the offerings of financial instruments, inc. CAT bonds, CAT DDO’s, CAT SWAPs, indexed loans, hedging instruments, weather derivatives, guarantees