|Disaster Economics - 1st Edition (Department of Humanitarian Affairs/United Nations Disaster Relief Office - Disaster Management Training Programme - United Nations Development Programme , 1992, 52 p.)|
|Part 2 - Alternative disaster scenarios|
After reading this section and completing the exercises you will:
· Understand how economic analysis can be applied in a disaster situation to identify policy options on a case by case basis
· Understand some of the economic differences between different types of disasters
· Increase your ability to devise interventions for different types of disasters
Part 2 summarizes five disaster scenarios: the general multi-sectoral disaster, the disaster caused by economic mismanagement, disasters involving displaced populations and refugees, the disaster which leads to food insecurity, and disasters involving environmental damage. Each scenario provides:
· a brief, general background to the scenario
· an overview of some alternatives and trade-offs which might be considered in determining how government should respond to the disaster.
General multi-sectoral disasters might be caused, for example, by floods, tropical storms, earthquakes, or tornadoes. When the disaster strikes a widespread geographical area, problems may be especially severe for affected farmers and small businesses. The damage might include:
· death and injury to business owners, their families, and employees
· damaged and lost productive assets
· inadequate local supplies of necessary raw materials, foodstuffs, and services, and insufficient foreign exchange to purchase imports of these goods and services
· damaged physical and market infrastructure, including processing, storage, and transportation
· disruption of marketing activities and outlets
· inability to make loan payments, as well as lack of income and savings for immediate consumption and investment
Many types of interventions will be required to solve these problems, including resources to finance: a) credit lines to farmers and small businesses, which will allow the restoration of damaged and destroyed housing and other capital assets; and b) the rehabilitation of damaged public sector infrastructure necessary to support production, consumption and the provision of basic needs. In addition, time-limited grants will be required for displaced and affected populations to cover their immediate living requirements.
UNDRO News, Nov/Dec 1988
Given this background, it is possible to identify four reasons which justify government involvement in economic rehabilitation in the post-disaster situation:
1. A large proportion of the labor force will be unemployed, causing loss of output and income, and who subsequently must rely on cash and in-kind assistance for food, clothing, and medical/sanitary supplies.
2. The balance of payments will have been damaged, because of the loss of export earnings, as well as a general increase in commercial food imports.
3. Government revenues will have been reduced, as a result of lower taxes resulting from lower incomes.
4. Government staff will often still be in salaried posts, but unable to work, causing an unproductive drain on government resources.
Government will need to consider alternative policy and investment initiatives, to be able to develop a public sector rehabilitation programme. In reviewing these alternatives, attention is likely to focus on addressing certain questions, some of which are summarized below. In particular, the analyst will want to compare the quantifiable and non-quantifiable benefits and costs of the various alternatives identified.
1. Is the private sector supplying inputs and technical advice to the satisfaction of rural and urban consumers? Should any public sector input or service-delivery mechanism be terminated, perhaps because it will compete with the private sector? Does government wish to retain control over strategic or security-oriented assets or services which require rehabilitation or reconstruction?
2. Where proposals exist to replace or repair a damaged asset, such as a regional research or training center, is there clear unmet demand for its services? Could the private sector provide such services? If so, would any enabling action be required by government?
3. Where public sector infrastructure is involved in providing a service that can, in principle, be offered by the private sector, such as a regional hatchery, central poultry station or livestock/small ruminant stud farm, can the activity be transferred to the private sector? Should it be financed with a credit strategy associated with the rehabilitation programme? If so, under which interest and capital loan repayment conditions would credit be made available to the borrower?
4. Is the rehabilitation or repair of local level infrastructure, e.g. a regional hospital, going to guarantee the immediate supply of needed services? If not, how are those services going to be provided, by whom, and over which period of time, and what is the role of government in ensuring that those services are available?
5. Is infrastructure requiring rehabilitation, such as a bridge, conditional on implementation of an overall programme of rehabilitating all damaged public infrastructure, or can the bridge's repair be justified on a stand-alone basis?
6. Does infrastructure have to be fully replaced, or is a temporary "patch and repair" solution feasible, given existing priorities and budgetary restrictions?
7. Is the disaster likely to occur again? If so, what financial incentives or legal requirements need to be created to ensure that rebuilt structures can withstand another event?
8. Will insurance and existing resources be sufficient to finance a rebuilt business sector? Will subsidies and other credit schemes be necessary ?
Q. Consider a major multi-sectoral disaster with which you are familiar. Identify a major policy decision that government had to make with regard to whether or not to restore disaster-destroyed assets to their pre-disaster condition.
UNDRO NEWS July/ August 1984 CWS/Jon Otto
Many African countries - for example, Benin, Madagascar, Mali, Mauritania, Niger and Togo - have been characterized since their independence by an overvalued currency, which has led to cheap imports and difficulty in exporting agricultural commodities, excessive government expenditure, and too much parastatal control over producer prices and commodity marketing. This has led to a cumulative economic "disaster" and over 30-40 years of increasing rural and urban poverty, characterized by less and less incentive for farmers to produce for the urban market. This, in turn, has led to urban shortages, where commodities are only available at excessively high prices, partly as a result of private sector and parastatal seasonal hoarding. It is now evident that a similar situation has been evolving in the Central European States (CESs) since 1945. In both Africa and Europe, economic mismanagement has been compounded by serious environmental mismanagement.
The principal solution to this type of ongoing disaster is some form of structural adjustment which focuses on:
· promoting a market-oriented economy
· rehabilitating growth potential in key sectors
· removing infrastructural bottlenecks
· strengthening management of the national economy
· raising government revenues and controlling government expenditures
· implementing a comprehensive social policy to assist vulnerable rural and urban households, especially those whose vulnerability was increased by structural adjustment reforms
A schematic representation of some of the key points highlighted in structural adjustment is summarized in Figure 2 on page 11.
Government will need to consider alternative policy and investment initiatives, and their trade-offs, during the process of designing a structural adjustment package that is supported by the World Bank and the International Monetary Fund. Structural adjustment requires that specific targets be set. The following discussion identifies some of these targets.
1. A flexible and realistic monetary exchange rate has to be maintained. This raises questions regarding what level the rate should be and how long it should be controlled. Where the exchange rate is controlled this might require:
- Holding the differential between official and parallel market rates of exchange to less than a given percentage. This raises questions about which percentage and which parallel market rate should apply.
- Ensuring unrestricted access of the private sector to foreign exchange -through weekly currency auctions with the attendant questions of who should organize the auctions and under which conditions.
2. Interest rates must be high enough to reduce non-productive and non-essential borrowing, bring inflation under control and mobilize domestic financial resources. But, how high must the rates be and how will the rates be raised?
3. Taxes on imports and domestic production have to be adjusted to eliminate any bias in favor of imports. But, what should those levels be?
4. Export taxes have to be simplified and reduced, as well as eliminated where they affect significantly the demand for exports. Acknowledging this, the analyst must still decide on which export commodities to focus,. what the tax level should be, and in what order and over what time period the adjustments should be made.
5. Measures to encourage efficient export of goods and services, including tourism have to be provided. This could take the form of government or private sector overseas export trade/tourism centers.
6. Does the price of all commercial and food aid imports include the full cost of transportation, margins, insurance, losses and import duty? As the cost of imported food increases, is domestic agriculture able to compete with food imports? Is government going to implement a strategy of self-reliance i.e. ability to pay for necessary imports with export earnings, or self-sufficiency i.e. accepting inefficient domestic production as the price to pay for achieving domestic security over supplies of selected food and other commodities?
7. At what level should public utility charges be set to insure that short term operating, maintenance, and replacement costs do not require substantial public sector funding? Can public utility delivery be transferred to the private sector? Under which conditions would this be possible? Would any existing activities need to be liquidated?
8. What size core civil service is required to deliver required services in an efficient manner? Can positions be eliminated and government expenditures cut? What salary increases must be offered to those civil servants that retain their positions?
9. To what level should major excise tax rates e.g. on petroleum, tobacco and alcohol be raised? What type of institutional strengthening is required to improve levels of tax collection?
10. Which projects should be included in a newly designed public investment programme? Are these projects consistent with government's objectives, as well as its sectoral strategies, macroeconomic projections, debt scheduling commitments and overall policy initiatives?
11. Which public enterprises and parastatals can be liquidated? Which can be privatized and restructured? Which can be sold to foreign and national investors? Under which terms can this occur?
12. What type of social policy, including employment-generating programmes, targeted feeding programmes, and income transfer schemes will be most cost effective in protecting poor rural and urban vulnerable groups seriously affected during the transition phase of structural adjustment?
13. What programme of legislative and democratic reform is required to complement the economic initiatives undertaken during structural adjustment?
Q. Consider a country which has experienced long-term economic mis-management with which you are familiar. Identify a policy intervention that government might be forced to make to rectify the situation. Identify both the positive and negative consequences of that decision, and describe an intervention that might lessen the impact on the affected people in the country.
Many unstable situations result in substantial population migration. Sometimes this migration results from natural disasters, like floods or earthquakes, and sometimes from human-made disasters, like desertification and war. In some situations, particularly where war and food insecurity are combined, many of the migrants cross national boundaries and become refugees. There are, in all these cases, substantial economic consequences to the individuals forced to move, as well as to the communities and countries from and to which they move.
In the special case of refugees, the are three "durable" solutions proposed by UNHCR to reestablish refugees in viable communities.
Voluntary repatriation, or the re-establishment of the refugee within a community in his or her own country, is considered the most desirable solution. Where voluntary repatriation is impossible, local settlement in the country of first asylum is the next most appropriate approach to promote both self-reliance and viable integration of refugees. Most local -settlements are in rural areas, at either spontaneous or planned settlements. The criteria for seeking resettlement in a third country derive not only from conditions in the country of origin, but also in the country of first asylum. Some countries permit temporary asylum, on condition that resettlement to a third country will be undertaken as soon as practically possible. Ethnic, political or economic reasons may render local integration impossible, requiring the need to find a third country.
UNHCR/A. Hollman Refugees, June 1991
Populations moving internally in a country face several of the same solutions. They may find an existing local community in which to resettle and restore their lives; they may move to a previously uninhabited area and create a new community; they may move back to their original homes; or they may seek permission to move to another country.
Each of the potential solutions identified has economic consequences and humanitarian trade-offs. When governments accommodate migrants in spontaneous or organized (permanent or semi-permanent) local settlements they invariably incur costs to cover infrastructure as well as additional food requirements and basic needs.
The migrants themselves are often subject to exploitation by the host country and local communities. However, they also bring certain benefits with them. For example, once refugees are settled locally, they are a source of local purchasing power, and provide skilled and unskilled labor.
If governments desire to integrate migrants they may incur additional costs for retraining, health, education, housing and social security, which will be partially offset by purchasing power and labor/skill benefits.
Where expatriate populations are expelled suddenly from a host country, and have to return home, or go to a third country, (e.g. Palestinians, Filipinos, Bangladeshis or Yemenis working in Gulf States) they will lose their sources of income. Reduced remittance income will have a serious effect on family dependents and the balance of payments in the expatriate worker's home country. Such people may be forced to flee without taking their personal goods and other assets. On the other hand, if they bring savings with them, there may be an asset increase to their new or home countries. Overall, the cost to reintegrate returning persons may be very high and significantly strain existing service systems.
Population movements, especially when they involve refugees, are a sensitive political issue as well as a major humanitarian concern. Thus, it is difficult to be sure how to weigh the costs and benefits associated with a particular policy option. Certainly, the trade-offs will be heavily influenced by political considerations, even if all the costs and benefits can be quantified.
Q. Choose a recent population displacement with which you are familiar. Identify the economic consequences to the displaced persons and their new communities.
LRCS/Liliane de Toledo UNDRO News, Nov./Dec. 1984
Food security disasters have occurred in several countries, particularly in Africa, but also now in selected CES countries. The achievement of national food security requires that people have access to sufficient quantities of food, when they need it and at a price they can afford. In attempting to achieve national food security, three principal conditions (established by FAO) need to be satisfied:
1. The global supply of foodstuffs (domestic production plus imports) should be adequate to meet national demand.
2. Fluctuations in seasonal food supply should be minimized, and reflected in relatively stable seasonal food prices.
3. The population should have access to food supplies, either through adequate real income or, if this is insufficient, through targeted feeding programmes.
In many countries, these three conditions for achieving food security are not satisfied at the national level, because a price and trade regime has not been established which ensures available food supplies are adequate to meet national demand.
An overall food balance is not achieved, either when domestic production is inadequate, or there is insufficient foreign exchange with which to buy commercial food imports. As relief food aid cannot be sustained in the long term, supplies available through this source will not provide a permanent solution. In food-insecure countries, prices fluctuate seasonally, because of private sector hoarding. Also, local income levels are frequently inadequate to purchase available food supplies at prevailing food prices.
However, even in countries where the three food security conditions are satisfied at national level, nutritional problems might still exist at the microeconomic, household level especially among the most vulnerable groups i.e. pregnant and lactating women, as well as children under 5 years of age. In this situation, in addition to poverty, nutritional problems may exist because of inadequate knowledge of good nutrition and weaning practices. Nutrition related problems also occur in areas isolated from principal marketing routes. Geographic isolation limits trade, and reduces the opportunity for income generation and regional exchange of products, including fruit and vegetables, with which to diversify and improve diets.
Government must consider alternative means of intervening in the food system, covering production, harvesting, storage, processing, transportation, wholesaling and retailing. In order to make a full assessment of the alternatives which are available, including trade-offs, government must systematically undertake the following procedures:
1. Analyze the country's physical resource base, in order to assess production possibilities for food and other export crops.
2. Prepare domestic resource cost calculations to show the comparative advantage between growing food or export crops and other production technologies.
3. Use both sets of information, as well as estimates of population growth, to determine production and productivity targets for food and export crops, as well as to set commercial and concessional food import targets.
4. Prepare farm budgets for different crops and technologies to identify the price at which it is profitable for the farmer to produce and invest.
5. Prepare a cost structure analysis of the food system including production, storage, marketing, processing, and distribution for alternative food crops, particularly in those areas of the country where food security is weakest, and where cross-border trading is most important.
6. Define government's ultimate objectives for food security, as well as its strategic policy objectives for increasing domestic food production, stabilizing food flows and increasing food access.
Having followed this procedure, government can then evaluate alternative investments, policy instruments and regulatory measures to determine their expected impact on government's food security objectives.
Alternatives to be reviewed during this process could focus on:
· Does government wish to follow a policy of self-reliance or self-sufficiency (see definition number six)?
· If government opts for self-reliance, can it compete on world markets with other exporters who already have established markets in developed countries?
· Is large scale food production more efficient financially and economically than smallholder production?
· In order to achieve food security, what balance of stock holding internationally, nationally and locally is most cost effective?
· What is a feasible target date by which to eliminate all food aid?
Having reviewed questions such as these, and taken a view on which is its preferred option, government can then formulate an investment programme, identify project ideas, and confirm their local currency and foreign exchange requirements. Government can then discuss the proposed investment programme with potential multilateral and bilateral donors, as well as NGOs.
Q. Identify a recent situation that you are familiar with where there was a problem of food security. What actions did the government take? What were the economic consequences of the actions?
Michael Friedel, "Sustainable Development and the Environment," UNDP
In reviewing disasters which involve environmental challenges, it is worth considering a specific example, taken from the Maldives. This small island nation state consists of 19 atolls, made up of about 1,200 coral islands scattered over a wide expanse of the north central Indian Ocean. Most islands are small, with a diameter of less than 1.6 km. The islands are flat, and generally have an altitude of less than 2.5 meters. Approximately 55,000 people, (or 25% of the total population), live on Male, the capital. This large population has occurred because of a high national birth rate of about 3.5% per annum. There has also been inward migration to Male, because of (a) past failure to decentralize economic growth to the outer atolls, and (b) the concentration of resource allocation and decision-making in the capital. Population growth has generated a large demand for housing and public sector infrastructures which has been sited on newly reclaimed land.
Given the average altitude of the islands, Maldives faces the potential of rising tide levels, caused by global warming. An abnormally high tide occurred nationally between 10 and 15 April, 1987. Most of the damage occurred in Male, and included washing away sea walls and eroding approximately one third of newly reclaimed land. Private houses and the airport terminal were also damaged. The total national loss caused by this high tide was estimated at around US$ 10 million (1991 prices). The country suffered further high tide damage in June, 1988, and was affected by serious storm damage in May, 1991.
Under these circumstances, government has had to consider investing in mitigation, in order to prevent future catastrophic disasters. In 1987, the government of Maldives requested Japan to assist in identifying the damage that had been caused by that year's high tide.
On the basis of the Japanese recommendations, a breakwater was constructed in the south of Male. In 1992 it was proposed to reinforce this investment by constructing a sea wall at selected sites. This would require 3,000 cubic meters of mass concrete, armored with wave dissipating concrete blocks. The sea wall project was estimated to cost around US$ 28 million (1991 prices).
Construction of this wall would have to be closely coordinated with past and proposed projects, to ensure consistency and economies of scale. This is particularly true of the Male land reclamation project, launched in 1979 and completed in mid 1986. The project reclaimed 59.7 hectares of land in the shallow reef flat on the southern and western sides of Male and was used to provide land for homeless families, schools, a new hospital, a power plant, a harbor for inter-island shipping and fishing boats, a sports complex and other public facilities.
The total cost of the public sector investments that could be destroyed, if the mitigating sea wall is not built and the sea rises, is around US$ 70 million (1991 prices). In addition, there would be damage to private sector housing and enterprises.
Clearly, government must consider, and evaluate the trade-offs between a number of options, some of which are summarized below:
1. Should Male be the only island to be protected?
2. Should infrastructural and governmental (and thus population) decentralization be speeded up?
3. If decentralization takes place, will there be sufficient funds available to protect all the islands where new infrastructure is established?
4. Is it, in fact, better to increase the concentration of resources on Male, rather than decentralize, giving Male full protection at the same time?
5. If development is concentrated on Male, and given that the local water table on Male is falling fast, what water purification options does the capital have?
6. Is it better to pay for expensive mitigation investment, or take a chance that global warming will not occur?
7. If the mitigating investment could be grant-financed, should Maldives become grant dependent on a single country?
8. Do the advantages of surrounding Male with a sea wall outweigh locating the wall at selected sites?
9. Although there is no income or corporation tax in Maldives, should Male's population pay a specially introduced tax or insurance premium to contribute to the cost of the mitigating investment?
10. As tourism is now the main foreign exchange earner, (superseding tuna fishing and exporting), should funds be spent on protecting tourist islands against global warming, possibly financed by a tax on tourism?
11. Given that Maldives is increasingly experiencing illegal dumping of environmentally-damaging garbage, will a policy of compelling tourist islands to compact and bum their own waste lead to prohibitive holiday charges, forcing tourists to go to other destinations?
Q. Consider a disaster-prone country with which you are familiar. Identify a major asset that is vulnerable to disaster damage. Describe a mitigation investment which would reduce disaster related consequences. Estimate its cost and what it might save.
Part 2 has provided several specific disaster scenarios. Each of these scenarios is realistic and drawn from the author's real world experience. Each scenario has its own internal dynamics and potential solutions. This suggests that each disaster faced by the policy analyst is a unique event requiring unique solutions.
The important point, however, is that each scenario, when analyzed from an economic point of view, has alternative solutions and each of these solutions has trade-offs. Failure to identify the alternatives and their intended and unintended economic consequences leaves the policy analyst and decision-maker in the unenviable position of having few choices and a relatively limited understanding of the likely outcomes of proposed interventions.
The importance of economic analysis is the analytical framework, i.e. the questions asked by the analyst. What should be done right way, what can wait, and what should not be done - these are the key questions.