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date: 27 September 2022

Economics and Disaster Risk Managementfree

Economics and Disaster Risk Managementfree

  • Randrianalijaona Mahefasoa, Randrianalijaona MahefasoaUniversity of Antananarivo
  • Razanakoto Thierry, Razanakoto ThierryUniversity of Antananarivo
  • Salava Julien, Salava JulienCenter for Studies and Research on International Development
  • Randriamanampisoa HolimalalaRandriamanampisoa HolimalalaUniversity of Antananarivo
  •  and Lazamanana PierreLazamanana PierreUniversity of Antananarivo

Summary

Economics is the science of wealth, the main objective of which is to satisfy human needs within the constraint of limited available resources. The production and consumption patterns of economic agents are examined in order to identify the most efficient and optimal ways of meeting needs. At the same time, redistribution problems have an important place in economic science, and they lead to questions of development and economic growth.

Since the 1990s, officially declared by the United Nations as the International Decade for Natural Disaster Reduction (IDNDR), the relatively frequent occurrence of devastating disasters, induced mainly by natural hazards but also by human activities, development efforts and economic growth have been seriously threatened. Poverty alleviation efforts undertaken by nations in the Global South and supported by international donors, as well as development outcomes worldwide, are suffering from disasters. The international community has become more and more aware of the need to systematically mainstream disaster risk reduction in development policy and strategy. Therefore, disaster risk reduction economics is becoming a priority and part of economics as a science. For more than three decades, based on risk assessment, risk prevention and mitigation strategies, including structural and nonstructural measures, such as but not limited to, risk retention and transfer, preparedness as well as ex-post activities such as response, recovery and reconstruction are using economic variables and tools since mid-2000s to become more efficient. Furthermore, protecting economic growth and development benefits is possible only if enough attention is given to risk science. From this perspective, risk science is becoming part of economics, as evidenced by the new branch called risk reduction economics, which is essential to the attainment of sustainable development goals and resilient societies.

Subjects

  • Risk Management
  • Economic Analysis of Natural Hazards
  • Climate Change
  • Development

The Evolution of Economic Science and its Thought Currents Assumptions: Introduction to Disaster Risk Science

Contemporary political economic thought has evolved from the postulates of three main economic theories. Generally speaking, they are the liberal, Marxist, and Keynesian currents.

Emerging during the Age of Enlightenment (18th century), economic liberalism was initially based on the philosophy of the natural order. The model of Homo economicus, the rational being, was used to justify economic liberalism, according to which private ownership of the means of production is a guarantee of freedom and the market is the most efficient regulator of economic activities. These economic principles rested on Say’s opportunity law, which states that “supply creates its own demand” (Say, 1814). Then, through the concept of the general equilibrium condition, Walras (1874) laid the foundation for neoclassical theory in his book Elements of Pure Political Economy. The liberal movement began to approach the concept of risk in Knight’s work (1921), Risk, Uncertainty and Profit. From the science of wealth (Hollander, 1927) to the science of rare goods and services production, consumption, and exchange (Fourastié, 1959), economics studied how economic agents, individuals or societies, used resources in limited quantity to best satisfy their needs.

In contrast to economic liberalism, the Marxist current focused on historical study of the development and the rise of capitalism. This vision was clearly outlined in Karl Marx’s Capital (Marx, 1859). Marx maintained a political ideology of class struggle, in particular a form of social and economic justice aimed at a better wealth redistribution and that highlighted the right remuneration of the working class (later considered as human capital) based on the concept of work-value. Since the 1970s, members of the Chicago School, such as Friedman, have defended the superiority of the liberal system over all other systems, as in Friedman’s “Free to Choose” (1980).

On the other hand, Keynesian current opposes Say’s opportunity law and the stabilizing role of the market, which is held to show its failures by the occurrence of economic crises like overproduction and unemployment. State intervention is therefore considered the efficient solution realized through effective economic policies. Whether they are man-made or caused by natural hazards, disasters affect community life, and policies and strategies designed to cope with such phenomena clearly rely on direct and effective state intervention.

Disaster risk science, mainly through disaster economics, has furthered the evolution of economics, particularly since the 1990s, as economic analysis has increasingly revealed that disasters endanger development and interrupt or slow down economic growth by destroying public and private infrastructure. Furthermore, disasters have negative effects on production and on populations and economic activities. Accordingly, proactive economic policies need to effectively take into consideration disaster risk science—including risk-informed economic development policy—to properly and efficiently address sustainable development. It follows that the main question that deserves further explanations and answers is: What contributions does disaster risk science make to economics?

Addressing this question begins with a literature review on the theoretical foundations of economics, highlighting the different currents of economic thought and the theoretical linkages between economics and risk science. The aim is to highlight the contributions of risk science to economics in order to attain (sustainable) development by referring specifically to pioneering authors. The main concepts covered are disaster risk reduction (DRR), risk management strategies, economic evaluation, risk-sensitive investment, cost–benefit analysis, risk management financing, and financial protection mechanisms, as well as the fiscal impact of disaster risks.

This article first focuses on the theoretical foundations of economics and then highlights the links between economics and disaster risk science, particularly in its implementation through disaster risk management (DRM).

Theoretical Foundations of Economic Science

There are several definitions of economics, three of which seem to be the most comprehensive and relevant: First, economics is the science of wealth, in sense of Adam Smith (Hollander, 1927). Second, economics is the science of production, consumption, and exchange of rare goods and services (Fourastié, 1959). Finally, economics is the science of how limited resources are used to meet the needs of people living in society; it is concerned, on the one hand, with the essential operations of the production, distribution, and consumption of goods and, on the other hand, with the institutions and activities designed to facilitate such operations (Malinvaud, 1969).

Based on these definitions, economic analysis, or economics, starts from the observation that humans have needs, while the resources available to address those needs are limited. This disparity requires economic systems, as well as the economic agents that make them up, to make choices about the allocation of resources. (For example, should one study longer or go to work as soon as possible, buy or rent a house, save or invest, etc.) Each choice involves an opportunity cost. According to Samuelson, the 1970 Nobel laureate in economics, the objective of economics is to solve the problems of resource allocation by answering three main questions: what to produce, how to produce it, and for whom to produce it. The first question is related to resource allocation (inputs needed for production include capital, labor, energy, and natural resources), the second relates to production (e.g., what technology to produce), and the last relates to distribution (and the very important issue of inequality).

Economic analysis uses two approaches: microeconomics and macroeconomics. In microeconomics, the analysis focuses on a specific economic agent (e.g., household, enterprise, etc.) and is interested in individual rather than aggregate data, whereas macroeconomics considers a set of economic agents grouped according to a certain criterion (nation, region, companies, sectors, consumers, etc.). It focuses on a general vision of economic life, considering the overall dimension and the pace of how the economy works, rather than the functioning of the various parts of the economy

Introducing Risk Analysis into Economics

For economists, risk is an event with uncertain occurrence that can positively or negatively affect the well-being of the individual. Economists ask: How do people respond to risk? Most people dislike risk, and economic science calls this risk aversion. People are willing to pay a “risk premium” to protect themselves from future and unpredictable harmful events; the higher the risk aversion, the higher the risk premium. Symmetrically, when risk-taking is beneficial to society, it must be compensated. Thus, in these analyses, the entrepreneur or investor who accepts risk benefits through an increase in the expectation of gain. Furthermore, a “risk” situation implies that the individual is fully informed and knows the probability of the occurrence of various events, but very often this is not true. The individual is then in a situation of “uncertainty” (Knight, 1921), and the uncertainty is more or less depending on the confidence the person puts in subjective probabilities of risk (Keynes, 1921).

Economic theory as developed since World War II has focused on the risks associated with the production or holding of financial assets: For neoclassical economists, who believe that capital produces value, it is the risks incurred by the owner of capital that justify his remuneration. The formalism of economic models is borrowed from gambling. Schumpeter, for example, emphasized the role of entrepreneurs and the risks they took in innovating. In classical economics, Knight emphasized the uncertainty of production decisions; at the heart of Keynesian analysis is the effect of uncertainty on the behavior of economic agents, etc.

Since the middle of the 1980s, the world has been more concerned with financial risks and the adverse effects of industrial activities, particularly on the environment or on consumer health (Pradier, 2006). In the financial sector, risk management has become a priority for many businesses, including banks, insurers, and companies exposed to fluctuations in interest rates, stock market returns, exchange rates, and prices of raw materials or basic commodities. The fundamental work on risk was initiated by those who foresaw how much harm risks can cause in the proper functioning of the economy if they materialize (Lintner, 1965; Markowitz, 1952; Mossin, 1966; Sharpe, 1964). The work resulted in modern portfolio choice theory, which is based on the capital asset pricing model (CAPM).

Next, revolutionary works and articles emerged in finance, and the main authors received Nobel prizes for their work (Akerlof, 1970; Stiglitz & Weiss, 1980, 1983). The informational problems at the heart of this work were based on the premise of perfect individual rationality,1 and the work gave rise to some specific concepts. In the insurance sector, for example, risk sharing is beneficial for society, but it is not optimal when the insurer is “not sufficiently informed” (when there are information asymmetries: moral hazard2 and adverse selection3) or on the contrary when the insurer is “too informed” (selection and skimming problems). In addition, the anti-selection mechanisms formalized by Akerlof are well known to insurers. In the last example of an information problem related to insurance, skimming, the insurer will seek to obtain as much information as possible on the individual risks of the insured in order to adjust the amount of the premium to the actual risk. (This is the case, for example, with young drivers, who are charged the highest car insurance premium rates.) But persons at the highest risk may be excluded from insurance. Furthermore, selection can be increased by technical and scientific advances (big data, genetics, etc.).

Integrating Risk Analysis for Safe and Sustainable Development

At the turn of the 21st century, as disasters became a major international concern after the occurrence of a succession of devastating events (the September 11, 2001, attacks in New York; the 2003 heat wave in Europe; the 2004 Southeast Asian tsunami; Hurricane Katrina in Louisiana in 2005, etc.), the world’s population and economy were revealed to be in constant danger. Now, as climate change is increasing the frequency of hydrometeorological hazards, the risks have increased sharply, due mainly to rapid population growth and the general lack of, or ineffective, urban and environmental planning, which are continuously increasing the exposure and vulnerability of societies (Betard & Fort, 2014). While most countries have policies and programs in place to predict, protect from, and prevent natural hazards, risk perception and management vary widely in different parts of the globe, particularly in the Global South. A main concern is the management of the risks that affect economic growth and development. Major risks differ from one country to another, but internationally, sustainable development has received more and more attention in public policy and speeches. The characterization and management of the intersection of a hazard4 and socioeconomic5 issues with a certain vulnerability on the one hand, and the consideration of the environmental, economic, and social future of a territory and its population on the other hand, constitute two contiguous concerns (Andres & Strappazzon, 2007).

The need to consider DRM and development issues together has begun to find support on the global landscape. Through its vision and five priorities for action, the Hyogo Framework for Action (HFA; 2005–2015),6 for example, clearly promoted the idea, as seen in the global strategy it defined for different sectors and actors to work on DRR. The HFA’s guiding principle was a global call to governments and other stakeholders to use knowledge, innovation, and education to build a culture of safety and resilience at all levels. This aim was renewed in the Rio+20 Conference outcome document7 titled “The Future We Want,” which stated:

We call for disaster risk reduction and the building of resilience to disasters to be addressed with a renewed sense of urgency in the context of sustainable development and poverty eradication and, as appropriate, to be integrated into policies, plans, programs and budgets at all levels and considered within relevant future frameworks.

We invite governments at all levels, as well as relevant subregional, regional and international organizations, to commit to adequate, timely and predictable resources for disaster risk reduction . . .

We stress the importance of stronger interlinkages among disaster risk reduction, recovery and long‐term development planning, and call for more coordinated and comprehensive strategies that integrate disaster risk reduction and climate change adaptation considerations into public and private investment.

These mandates clearly link investment in DRR to the broader objectives of sustainable development and poverty eradication.

The link between development and DRR was reinforced in the Sendai Framework for Disaster Risk Reduction—SFDRR 2015–2030—which was the first global development instrument adopted for the post-2015 period (United Nations International Strategy for Disaster Reduction [UNISDR], 2015a, 2015b).

The SFDRR 2015–2030 came from a global conference on DRR in which major stakeholders actively took part. The conference was held in Sendai, Japan, in March 2015, with 187 member states signing the resolutions, which are actions to be undertaken by all stakeholders from 2015 to 2030. Note that the period of implementation of the Sendai Framework coincides with the period of the Sustainable Development Goals (SDGs; 2015–2030). The Sendai Framework focuses on sustainable development, climate change, and, above all, DRR. The HFA,8 the predecessor of the SFDRR, was planned for the period from 2005 to 2015. The HFA even served as the basis for the SFDRR in its aims to take up good practices and to make improvements for the future.

Along with seven global goals and their clear and verifiable indicators,9 SFDRR defines four priorities for action:

1.

Understanding disaster risk.

2.

Strengthening disaster risk governance to manage disaster risk.

3.

Investing in DRR for resilience.

4.

Enhancing disaster preparedness for effective response as well as to “Build Back Better” in recovery, rehabilitation, and reconstruction.

The SFDRR is a development framework that serves as a catalyst for achieving the SDGs. Indeed, the 2030 Agenda for Sustainable Development emphasizes the need to reduce disaster risk in a number of sectors. This document explicitly mentions that most objectives are unattainable without first addressing the exposure and vulnerability of populations living in hazard-prone areas and in conditions of extreme poverty. Thus, SDG 1 aims to end poverty in all its forms and all over the world and recognizes that reducing exposure and vulnerability to disasters is essential to ensure the sustainable eradication of poverty.

Risk management can be individual or collective. For example, individuals can adopt two main strategies: self-insurance (typically, precautionary saving) and diversification (for example, for a saver, diversifying one’s portfolio of assets, and for a company, diversifying output). Transferring risk to others, subject to payment, is another risk management modality. One of the functions of financial markets, such as futures markets, is to reallocate risk. The two main institutions that cover risks through mutualization are the family (more or less extended) and insurance (insurance companies and mutual, public insurance). At the collective level, various risk-management mechanisms are used, and at the institutional level, government can play an important role.

In general, DRM encompasses two main phases, commonly called the DRM cycle: First, the preparedness phase is composed of anticipation, emergency response, and recovery steps (early recovery, recovery, and rehabilitation), and second, the risk reduction phase includes reconstruction, prevention, and mitigation steps (structural and nonstructural measures).

Preparedness Phase

According to the United Nations Office for Disaster Risk Reduction (UNDRR) terminology (2016), the preparedness phase is defined as the knowledge and capacities developed by governments, response and recovery organizations, communities and individuals to effectively anticipate, respond to, and recover from the impacts of likely, imminent, or current disasters. Preparedness plan activities must be supported by formal institutional, legal, and budgetary capacities in order for communities to be able to respond appropriately to disaster events.

Prevention Phase

Disaster prevention is the concept and intention to completely avoid potential adverse impacts of hazardous events (UNDRR/ISC, 2020). While certain disaster risks cannot be eliminated, prevention aims at reducing vulnerability and exposure so that the risk of disaster is removed (UNDRR, 2016). In other words, prevention is activities and measures aimed at avoiding existing and stopping new disaster risks from happening or at least lessening their damaging impacts if they occur.

For each phase, economic analysis offers risk-analysis tools, assessment methods, pooling tools, and different management strategies at the individual and collective level.

Links Between Economics and DRR

In economics, an underlying assumption is that available resources are limited, but in real-world experience, hazards that can lead to disasters are increasing in number and intensity, placing development efforts under threat. Because managing vulnerabilities to hazards is difficult, many entities experience significant damage in disasters. As a result, economics and DRM have evolved side by side.

Indeed, economic science and DRM both serve the same objectives. They both work to preserve and improve the well-being of every individual, community, and nation in order to offer everyone harmonious and sustainable development. And because the impacts of disasters on economic growth are significant (Lee et al., 2018), the two sciences have become inseparable. Disasters most often affect development efforts. Some research findings show that climate shocks causing disasters have significant effects on household income, consumption, and poverty (Nguyen et al., 2020). Hence, reducing disaster risks is a priority in protecting development efforts from being destroyed. In parallel, development efforts need to be risk-informed and to benefit the population in order to decrease exposure and vulnerability as well as to enhance resilience (Randrianalijaona, 2018).

Economics is essential for studying human needs in disasters, including their impacts on households, communities, and nations. Accordingly, economics is closely linked to the science of disaster risk. This affinity and interdependence were further reinforced in the SFDRR, which set seven global goals in coordination with the SDGs. The SFDRR’s affirmation of the need to invest in DRR should encourage a more efficient allocation of national and international budgets in developing countries, making investment in DRR an investment in growth, instead of simply an expense.

Risk Reduction Economics—What Risk Management Strategies?

Development and humanitarian actors are increasingly recognizing the potential links between social protection, DRM, climate change adaptation, and humanitarian action to respond to and mitigate crises. Several projects are showing promising results, and the integration of social and human aspects into risk management is increasingly being considered essential (Hallegatte et al., 2016). Social protection refers to all policies and programs designed to prevent, or protect the entire population from, poverty, precariousness, and social exclusion, and it particularly targets disadvantaged or marginalized groups with limited capacity to cope with potential shocks. In this context, microfinance is proving to be an important tool in risk management by disadvantaged populations, whether before or after crises. Savings (as a precaution) enable reserves, and credit is used to compensate for shortages of reserves in times of crisis, whether to regulate consumption or to replace assets destroyed by disasters.

Importance of Economic Evaluation in DRR

Economic evaluation has an important role in disaster risk governance. Indeed, economic evaluation is one of the tools most widely used by decision makers before they make a decision, and economic assessment has become essential in the area of risks and disasters. For example, in DRR financing, it has always been argued that the costs of responding to a disaster far exceed the costs of prevention (Shreve & Kelman, 2014). The World Bank is often cited for saying that “every dollar of foreign aid spent on disaster prevention and mitigation saves an average of US $7 in humanitarian response to disasters” (UNOCHA), and this statement is supported by the World Health Organization, which found the same ratio, and the Federal Emergency Management Agency (FEMA) of the United States, which maintains that one dollar invested in prevention saves between four and seven dollars in response (UNISDR, 2011). Because accurate information is crucial for decision makers in funding decisions, appropriate economic evaluation is very important.

Economics offers concepts and methodologies that can be used to measure and/or estimate the cost of damage caused by disasters to capital stocks and losses in the production of goods and services, as well as possible temporary or permanent effects on major macroeconomic variables. Economics is most visible in DRM when considering the financial and monetarization aspects. Some studies have considered the impact of disasters on the sustainable development of nations, focusing on the role of financial development in mitigating the adverse effects of disasters on economic growth (Zhang & Managi, 2020). Other evaluations stand out by providing tools to help decision makers. Indeed, it has been argued that there is a need to integrate DRR into every development policy in order to achieve sustainability. Economic analysis tools like cost–benefit analysis (CBA) and multicriteria analysis (MCA) have been mobilized to justify this idea. In addition, the French economic literature also sets forth the use of “analyse coût avan

tage” (ACA, which can be roughly translated as cost advantage analysis), which goes beyond the traditional monetarization of benefits as per the CBA approach and catches the nonmonetary value of positive impacts (Méral, 2005).

Economic assessment tools can be mobilized to deal with everything related to financial estimates, either before the occurrence of a disaster (ex ante evaluation) or after (ex post assessment). Ex ante economic evaluation provides the necessary clarity and the importance of each scenario for sound decision-making. Above all, it provides the necessary information, through CBA, to support decision makers in making decisions about investment issues in relation to their social profitability. Ex post economic evaluation offers a range of tools for assessing the impacts of disasters in order to estimate the damage and losses suffered by individuals, communities, or nations (Government of Madagascar, 2008).10 Estimating losses of impacted assets often results in estimates of lost income by individuals and households or companies, as well as shares of GDP affected by the losses at the macroeconomic level.

To support arguments suggesting that DRR is cost-effective, an analysis based on CBAis often highlighted. The review compares documented data on the net benefits of a range of disaster management interventions, such as disaster preparedness, with risk reduction investment and risk financing. It is recognized that CBA continues to be an important tool for prioritizing effective DRM measures, but with more emphasis on infrastructure-based options (physical resilience) than on systemic preparedness and intervention (flexible resilience). Other tools, such as cost-effectiveness analysis, MCA, and robust decision-making approaches are also available and deserve more attention.

Economic analysis and assessment tools are used at different stages and cycles of disaster management or DRR. They help in the analysis of the economic efficiency of DRM, and because CBA is considered a key tool for this, it has an important place in DRM and is used by many practitioners to prioritize effective measures. CBA helped to support the idea that investing in DRR is more profitable because of the reduced and avoided costs of disasters, and it is found in several studies (Argyrous, 2017; Dedeurwaerdere, 1998; Mechler, 2005; Rose et al., 2007).

Practitioners have also mobilized the MCA approach to take into account certain aspects that are difficult to grasp by CBA, which often focuses on financial aspects and is not a participatory process. In fact, MCA is well suited to obtaining and modeling the preferences of all stakeholders for different nonmeasurable attributes (Levy & Gopalakrishnan, 2009).

Investment Prospects for DRR

The prevention phase is most common in DRR activities. DRR is promoted as having an important role in mitigating the impacts of hazards. Investment in this component is widely advocated, even by international bodies, and is reflected in SFDRR (2015—2030). Therefore, it became crucial to recognize the benefits of DRR investment. Economic appreciation of DRR investment options is becoming common worldwide (UNDRR, 2020). Decision makers are more and more convinced of the economic benefits DRR activities (Shreve & Kelman, 2014).

Usefulness of CBA in DRR

Despite the very positive arguments in favor of the use of CBA in DRR, CBA still has significant limits, in that it takes into account only the quantifiable monetary aspects, as briefly mentioned already. Different impacts and benefits are not considered when assessing nonmarket assets, etc. The use of CBA has focused on specific hazards like floods, droughts, and earthquakes, where it seems easier to make calculations of the costs and benefits of risk reduction measures. The temporal aspect is still problematic, since very little evaluation has incorporated the actualization process. The difficulty of taking qualitative aspects into account and monetizing them leads some practitioners to direct the economic studies of DRR to consider MCA instead, because it better captures the necessary information for decision makers.

Disaster Risk Financing and the Financial Protection Mechanism

In developing countries, it has been recognized that, historically, emergency spending after disasters has been financed mainly by adjustment of the state budget, specifically through budget reallocations coupled with grants and loans from international development partners. In Madagascar, for example, disaster spending after the 2015 Chedza and Fundi cyclones and floods was financed by reallocation and budgetary reorganization, accounting for 79% of total public disaster spending (Government of Madagascar, 2015). As a result, a number of questions arise about the links between DRR, risk financing, and development. How do risk financing instruments contribute to the implementation of risk reduction measures? To what extent are risk protection mechanisms integrated into fiscal and budgetary programming to support the development efforts nations are making?

It is no longer necessary to demonstrate that disaster risks linked to natural and climatic hazards create considerable challenges by discouraging the development efforts put in place by governments. As already stated, disasters interrupt or slow down economic growth by destroying public and private infrastructure, and they have negative effects on populations as well as on economic activities. Through physical damage to infrastructure and economic activities, disasters often contribute to a decline in real GDP and a decline in current balance-of-payments transactions, particularly as a result of decreased exports of agricultural products, increased imports of goods, and reduced revenues from tourism (Government of Madagascar, 2015).

In order to meet disaster-related emergency and recovery needs, decision makers require information and analysis that enable them decide on a functioning DRM financing mechanism, such as budgetary reorganization, loans from the central bank, treasury vouchers by invitation to tender, contingency credit, reserve funds, risk transfer, both parametric and nonparametric insurance, specific taxes, international assistance, and loans from international financial markets (Hochrainer, 2012). The process consists first of undertaking an in-depth assessment of the types of historical expenditure incurred after disasters, including considering the results of direct damage assessment in the sectors that have suffered damage as well as the amounts of indirect losses. It is then essential to analyze the sources of disaster expenditure by comparing state disaster-linked expenditure with expenditure by development partners. Furthermore, a very important step in the identification of disaster financial protection instruments is to carry out an assessment of the fiscal impact of disasters. This contributes to identify the most appropriate financing mechanism for a country according to its DRR national policy, strategy objectives and development vision.

DRR, Fiscal Policy, and National Economy

Disasters are increasing in number and intensity from year to year, generating considerable economic losses that are difficult to sustain in financial and human terms. Moreover, given the adverse effects of severe and intense weather events, the gap between macroeconomic forecasts of GDP and real achievements is growing, particularly because of the economic losses caused by disasters. Indeed, risks affect economic growth forecasts.

Coherence among DRR efforts, based on the combination of comprehensive risk assessments and the integration of risk reduction measures into national economic policy and the development plan, is a major challenge to the implementation of any public policy on DRM. Following this objective, the need to implement appropriate approaches and tools that integrate DRM into fiscal policy and the economy with the objective of reducing economic exposure to disasters becomes mandatory for nations. At the same time, this also provides an opportunity to decrease the losses caused by disasters to GDP. The objective is to show that the drivers of change are political commitment to the integration of DRM into development and the willingness to inject adequate funding.

The economic efficiency of DRM measures is assessed by estimating risk-based benefits, but the focus is on preparedness and resilience. As already mentioned, CBA is an important tool for prioritizing DRM actions, but only the focus on preparedness and resilience and the comparison between the benefit of the intervention and its cost are useful. If the benefits outweigh the costs, it makes sense economically speaking, to invest in DRR. In the dynamic macroeconomic model, the indirect benefit of DRR quantifies the present value of the future net income that productive capital is expected to generate over time. Furthermore, investment in DRR increases the potential for economic growth and can be designed for multiple purposes to generate benefits for sustainable development.

However, policy decisions are often limited to providing tangible benefits, rather than implementing development-enhancing contingency projects whose substantial distributional consequences are ignored in CBA (Boyce, 1990). Insufficient information results in the inability to implement appropriate DRM policies; this leads to uncertainty about the effectiveness of strategies.

Decisions about the role of national economic policy, tax policy, and development planning in DRM and initiatives to reduce the degree of exposure to hazards deserve encouragement. Supportive strategies to make DRM actions and interventions consistent with national economic policies include: the integration of DRM into national development strategies and ministerial operational plans, linking the DRM unit in the organizational chart at a very high level to avoid sectoral approaches, integration of DRM into fiscal and economic policy (the political solution), and promoting resilience to climate change and any other major hazards through development-friendly efforts.

Conclusions

Disaster Risk Science as Part of Economics

The theoretical foundations of economics highlight the limitation of available resources to meet the human needs. Through microeconomic and macroeconomic approaches, economic analysis helps to address societal problems. The introduction of risk analysis into economic science is based on the concept of risk aversion for individuals, including entrepreneurs and investors, who face risk or uncertainty related to the production or holding of financial assets and the undesirable effects of industrial activities, in particular on the environment or on consumers’ health. This is why the concept of risk has been analyzed by eminent economists, such as Knight, Keynes, and Schumpeter.

In the face of increasingly complex and uncertain risks and natural-hazard-induced disasters, in particular linked to climate change, economics has incorporated risk analysis relating to vulnerabilities and resilience for sustainable development. Economic analysis related to risk assessment focuses on risk management and risk reduction, including the prevention and preparedness phases, all of which are intrinsic to the process of growth and the achievement of development objectives. Framework documents, such as the SFDRR, serve as catalysts for achieving SDGs.

Furthermore, by referring to all policies and programs designed to prevent or protect the population as a whole from poverty, vulnerability, and social exclusion, and by specifically targeting the most marginalized groups, social protection is a public policy and strategy that could easily incorporate DRM measures. Microfinance, which was primarily defined to serve the bank system, can serve excluded people by offering deposit services and micro-credit to meet emergency expenses during times of crisis.

MCA, CBA, and assessment of disaster damage to infrastructure, as well as assessment of indirect economic losses, are proving to be indispensable in DRR, governance, and management, particularly in effective advocacy for disaster risk financing. CBA has been the most used economic tool over time, despite its limitations in capturing a temporal dimension. Overall, it is clear that disaster risk science or DRR economics can definitely be considered a new discipline of economics.

Disaster risk financing models highlight various strategies for financial protection mechanisms, such as budgetary reorganization, central bank loans, treasury bills by invitation to tender, contingency credit, reserve funds, risk transfer (parametric and nonparametric insurance), and loans from international financial markets. Clearly, many economic tools are being used by DRM practitioners to improve decision-making systems, which demonstrates the complementarity between risk science and economics.

Yet, although DRM and DRR make use of economic tools, relevant questions still need further attention, such as: How could disaster risk governance and DRR benefit more from economic tools to foster the development efforts of developing countries? How could preparedness activities be designed and implemented for humanitarian actors and development people to work together and to enhance marginalized groups’ resilience?

Further Reading

  • Flowers, B. (2018). The economics of natural disasters. Economic Research, Federal Reserve Bank of St Louis, Page One Economics.
  • Friedman, M. (1968). The role of monetary policy. American Economic Review, 58(1), 17.
  • Jevons, W. S. (1905). The theory of political economy. Ll .D (EDIN.), M.A. (LOND.), F.R.S.
  • Lucas, R. E. (1990). Supply Side Economics: An analytical review. Oxford Economic Papers, 42, 293–316.
  • Mankiw, G. (2016). The principle of microeconomics (7th ed.). South-Western College Pub
  • Pigou, A. C. (1921). The economics of welfare. The Economic Journal, 31(122), 206–214.
  • Porfiriev, B. (2012). Economic issues of disaster and disaster risk reduction policies: International vs. Russian perspective. International Journal of Disaster Risk Reduction, 1, 55–61.
  • Sachs, J. (2003). Macroeconomics in the global economy. Westview Press
  • Vorhies, F. (2012). The economics of investing in disaster risk reduction (UNISDR working paper). UNISDR.
  • Winsemius, H. C., Brenden, J., Veldkamp, T. I. E., Hallegatte, S., Bangalore, M., & Ward, P. J. (2018). Disaster risk, climate change and poverty: Assessing the global exposure of poor people to floods and droughts. Environment and Development Economics, 23(3), 328–348.

References Reading

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  • Argyrous, G. (2017). Cost-benefit analysis as operationalized neoclassical economics: From evidence to folklore. Journal of Australian Political Economy, 80, 201–211.
  • Bétard, F., & Fort, M. (2014). Les risques liés à la nature et leur gestion dans les Suds [Natural risks and their management in developing countries]. Bulletin de l’Association de Géographes Français, 91(3), 231–240.
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Notes

  • 1. Perfect or standard rationality presumes that the individual has stable and well-known preferences and seeks, by calculation, to maximize his personal interest, often his monetary gain.

  • 2. Moral hazard means that persons or firms insured against a risk may behave in a riskier manner than if they were fully exposed to the risk.

  • 3. The problem of adverse selection or anti-selection is a dysfunction of the market due to information asymmetry.

  • 4. The term hazard defined as: “A potentially damaging physical event, phenomenon or human activity that may cause the loss of life or injury, property damage, social and economic disruption or environmental degradation. Hazards can include latent conditions that may represent future threats and can have different origins: natural (geological, hydrometeorological, and biological) or induced by human processes (environmental degradation and technological hazards)” (UNISDR, 2009).

  • 5. The issues relate to persons and/or property that may be affected by a hazard.

  • 6. It sets five priorities for action:

    1.

    Ensure that DRR is both a national and a local priority, with a strong institutional basis for implementation.

    2.

    Identify, assess, and monitor disaster risks and enhance early warning.

    3.

    Use knowledge, innovation, and education to build a culture of safety and resilience at all levels.

    4.

    Reduce the underlying risk factors.

    5.

    Strengthen disaster preparedness for effective response at all levels.

  • 7. UN General Assembly Resolution 66/288. (2012). The Future We Want. Paragraphs 86–118.

  • 8. Adopted in January 2005 by the representatives of UN member states, international organizations, and civil society organizations: “The scope of this Framework for Action encompasses disasters caused by hazards of natural origin and related environmental and technological hazards and risks. It thus reflects a holistic and multihazard approach to disaster risk management and the relationship between them, which can have a significant impact on social, economic, cultural and environmental systems, as stressed in the Yokohama Strategy (section I, part B, letter I, p. 8)” (UNISDR, 2015a).

  • 9. The seven goals are: (a) significantly reduce global mortality by 2030; (b) sharply reduce the number of people affected by disasters worldwide by 2030; (c) reduce, by 2030, direct economic losses from disasters as a share of GDP; (d) significantly reduce, by 2030, the disruption of basic services and the damage caused by disasters to critical infrastructure, including by strengthening their resilience; (e) significantly increase the number of countries with national and local DRR strategies by 2020; (f) significantly improve international cooperation with developing countries by 2030 by providing them with appropriate and continuous support to implement the Framework; and (g) substantially increase the availability of, and access to, multihazard early warning systems and disaster risk information by 2030.

  • 10. Damage and losses assessment (DaLA) is generally performed by the GFDRR/World Bank to assess the macroeconomic impact of disasters.