Economic and social cost estimate of natural disasters for developing countries

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Economic and social cost estimate of natural
disasters for developing countries

• Ricardo Zapata-Marti
• ECLAC

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Initial considerations regarding the situation

• Reflections and lessons concerning this season
  and the recent period (2004-2007)
• Recurrence and increasing frequency of climate
  events over geological events
• They simultaneously affect several countries and
  different regions of a country (Hurricane Dean),
• Impact on isolated, backward, marginal and weak
  areas (Hurricane Felix),
• Record levels of rainfall and changes in weather
  patterns (torrential rains in Nicaragua in the
  northwest and in the states of Chiapas and
  Tabasco in Mexico)
• Pressure and stress on capabilities in the areas
  of local, national and international response, as
  well as institutional humanitarian aid from the
  United Nations and also from co-operating
  entities, and agencies or NGOs.
• The positive impact made on the LAC and ACS
  region by the international co-operation and
  technical assistance received from international
  organisations, NGOs and specialised regional
  organisations (CEPREDENAC, CDERA, CAPRADE/CAN)
  and the institutional strengthening of the
  national civil defence or civil protection
  offices, without the number and severity of
  fatalities as events of similar magnitude (cat. 5
  hurricane, earthquake measuring 9 on the Richter
  scale) in other parts of the world.
• The increasing evidence of the link between
  extreme events and climate change/variability,
  which would give rise to the need for greater
  emphasis on adaptation and mitigation actions in
  the framework of intra-regional co-operation.
• The need for institutional strengthening at the
  local level and for regulatory changes, as well
  as the use of economic and financial instruments
  for prevention and improved risk management

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• Source OFDA-CRED (Louvain University) data base

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THE EFFECT OF A SUCCESSION OF DISASTERS (or the
potential accumulated negative impact of climate
change) ON THE GROSS CAPITAL FORMATION
GROSS CAPITAL FORMATION

TIME
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MITCH
STAN
DROUGHT
EARTHQUAKES
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JEANNE
JIMANI FLOODS LANDSLIDES
GEORGES
DAVID AND FEDERICO
FIFI
BEULAH
INES
FLORA
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HURRICANES IN THE CARIBBEAN, 2004Relative and
absolute impact of losses and damages
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The importance of the IPCC (Intergovernmental
Panel on Climate Change)

• The IPCC consists of three working Groups and one
  special Team
• Working Group I evaluates the scientific aspects
  of the climate system and climate change.
• Working Group II evaluates the vulnerability of
  socioeconomic and natural systems to climate
  change, the negative and positive consequences of
  said change and the possibilities for adapting to
  it.
• Working Group III examines the possibilities of
  limiting greenhouse gas emissions and reducing
  the effects of climate change.
• The special Team on national inventories of
  greenhouse gases is responsible for the IPCC
  Programme on national inventories of greenhouse
  gases.
• More than 24 Mexicans participated in the fourth
  report in the three working groups recognition
  of technical and scientific capabilities and the
  individual commitment of each of them

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Illustrative summary of the impact of climate
change in the region (IPCC, 4th report)

• Coral reefs and mangroves threatened by higher
  superficial sea temperature
• In the worst sea level scenario, mangroves are
  disappearing on low lying coasts
• The Amazon will lose 43 of 69 tree species by
  the end of the twenty first century.
  Savannisation in the eastern region
• Cerrados Loss of 24 of 138 tree species for a
  temperature increase of 2º C
• Reduction of suitable lands for coffee
• Increased aridity and lack of water resources
• Sharp increase in the extinction of mammals,
  birds, butterflies, amphibians and reptiles by
  2050
• Reduced water availability and warmth in
  hydroelectric generation as a result of a
  reduction in glaciers
• Depletion of the ozone layer with an increase in
  skin cancer
• Severe land degradation and desertification
• Río de la Plata threatened by increased storms,
  swells and a rise in sea level
• Increased vulnerability to extreme events
• The areas in red correspond to locations whose
  biodiversity is severely threatened, a trend that
  will continue in the future

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Illustrative summary of the impact of climate
change in the region (IPCC, 4th report, 2007)
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Is there still a controversy on change?

• Several meteorologists indicate that it is
  necessary to correct historical sequences due to
  errors in temperature records the 20th century
  would no longer be the warmest
• Different scenarios point to warming with
  droughts while others to a change that would lead
  to a small ice age

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Possibility of extreme events Atlantic Tropical
Cyclone Frequency 2006-2010An Experimental
Forecast Based on Multi-decadal Analogues, JORGE
SÁNCHEZSESMA,Coordinación de Hidrología,
Instituto Mexicano de Tecnología del Agua,
Morelos, México.
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Hurricanes in the North Atlantic have increased
as a result of the increase in superficial sea
temperature (SST)
The recording of hurricanes has improved since
1944 with air surveillance The total number
and percentage of high intensity hurricanes is
increasing
Notable increase since 1944
(1944-2005)
SST
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ECLACs position

• Is not solely an environmental issue, but also
  one of development
• Efforts undertaken in the region need to be
  geared toward making sustainable advancements in
  the areas of economic growth, poverty reduction,
  global insertion and improvements in the quality
  of life.
• As regards climate change, Latin America and the
  Caribbean, as is the case with most of the other
  developing regions, is suffering increasingly
  from the effects of climate change even when its
  role in emitting greenhouse gases into the
  atmosphere is relatively small when compared to
  that of other industrialised countries and the
  emerging economies of East Asia, as reported in
  the analyses conducted by the Inter-Governmental
  Panel on Climate Change (IPCC).
• There is a need to analyse the way in which
  international financial institutions together
  with the internal policies of countries,
  developments in the international climate regimen
  and in carbon markets, provide opportunities for
  synergy in order to strengthen one another.
• Seminar Expanding responses to climate change in
  Latin America and the Caribbean 10 July 2007
  Sala Celso Furtado

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Economic growth is not enough

• The high economic growth recorded in the region
  over the last five years has not been enough to
  solve the most pressing problems.
• The region is experiencing a stage of
  uncertainty, exacerbated by the degree of poverty
  and inequality, and also by the doubts of having
  long term sustainable economic growth,
  particularly in light of climate change.
• ECLAC anticipates a 4.7 increase in the Latin
  American economy in 2007, in respect of the
  previous period, and 4.6 in 2008, which is
  confirmed as the period of greatest expansion
  observed since 1980.
• There has been no decline in poverty in Latin
  America and the Caribbean, where 205 million of
  their 500 million inhabitants are still living in
  such conditions and 80 million in destitution.
• Fulfilling the Millennium Development Goals,
  approved in 2000 in the United Nations, will be
  difficult without a reduction in risk and without
  adaptation and mitigation regarding the effects
  of extreme natural events.
• There has been a new social contract coupled
  with a "fiscal agreement" to encourage the
  establishment of social cohesion.
• (seminar Social cohesion inclusion and sense of
  belonging" 2 August 2007, Mexico City).

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Prevention is better than cure old new
challenges

• Change the passive/reactive attitude or shift
  from planning to action and operation.
• There continues to be inadequate allocation of
  resources for prevention, with the continuation
  of the post-facto intervention policy to
  restore previous conditions
• Shift from a culture of response to a culture of
  prevention

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Risk, competitiveness and sustainability

• Competition is more than just production at low
  costs and trade with low prices
• Private investment in risk management as a tool
  to promote competitiveness and trade
• Risk emerges from an improper assessment of
  sustainability
• Sustainability involves
• The adequate use of natural resources, managing
  the environment so as to avoid its deterioration
  and to preserve it
• Maintaining economic growth rates (production,
  trade and investments) of a suitable level over
  time (to avoid fluctuations, sudden falls and
  declines)

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Risk and trade and competitiveness promotion

• Competitiveness cannot externalise risk, it must
  assume it
• Trade promotion must include the trade in goods
  and services that would reduce risk in the event
  of climate change
• There are opportunities for significant business
  in risk management in the form of goods and
  services
• In both prevention and mitigation, there are
  goods and services whose trading can help reduce
  risk
• In the adaptation and mitigation of risk there
  are environmental and ecological goods to be
  promoted

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Systemic overall impact its various aspects

• HUMAN
• Health
• Education
• Cultural identity

• NATURE / ENVIRONMENT
• Clean (drinking) water
• Clean air
• Biodiversity and integrity of ecosystems
  (microclimates)

• SOCIAL
• Networks and systems (safety, solidarity)
• Family ties and extended family
• Violence and security

• POLITICAL
• Governance
• Transparency
• Participation and inclusion

• PHYSICAL INFRASTRUCTURE
• Type and quality of settlements and housing
• Communications and transport infrastructure
• Other built infrastructure

• FINANCIAL
• Access to credit
• Possession of land, legality of ownership
• Compensation mechanisms
• Insurance

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Climate change a complete framework
IMPACT ON HUMAN AND NATURAL SYSTEMS Food and
sources of water Ecosystems and
biodiversity Human settlements Health
CLIMATE CHANGE Warming Rise in sea level Change
in rain Droughts and floods
Adaptation
Adaptation
EMISSIONS AND CONCENTRATIONS Of greenhouse gases
and aerosols
Socioeconomic development Economic
growth Technology Population Governance
Mitigation
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Policy implications

• Exposure to natural disasters is no different
  from exposure to other risks (financial,
  commercial, social, political)Exposure to risk
  has a definite correlation with poverty and
  equity disasters are not homogenously
  distributed, neither in their occurrence nor in
  their impact
• Decline in the social nature of the impact of
  disasters vulnerability and poverty,
  vulnerability and exclusion, vulnerability,
  gender and ethnicity

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Instruments available (anti-cyclical or
counter-trend)

• Markets of environmental goods. Production
  diversification and sectoral and intersectoral
  chains
• CAT bonds or catastrophe bonds parametric
  measurement and financial leverage
• Disaster contingency funds pluriannual resources
  and current operating budgets
• Insurance and reinsurance
• Possible levels of coverage (geographic,
  regional, national, local) the regional
  dimension
• Reduction in operating costs, transfer and
  dissemination of risk pooling of resources,
  micro-financing and micro-insurance systems
• Governmental support and promotion regarding
  protection and insurance
• Insurance mechanisms for problems related to
  possession, informality and financial capacity

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Financial Mechanisms to reduce the gap created by
disasters

• Retention of reserves for risk
• Transfer of risk
• Insurance (private, public, parametric)
• Catastrophe bonds
• Inter-temporal distribution of risk
• Contingent debt

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Ex ante financial mechanisms in Latin America and
the Caribbean

• Sectoral Facility for Disaster Prevention Managed
  by the Inter-American Development Bank
• Prevention and mitigation projects, Mechanism
  managed by the World Bank
• Disaster Mitigation Service for the
  CaribbeanManaged by the Caribbean Development
  Bank (CDB)
• Sectoral approaches (SWAPs)Managed by the donor
  entity and the recipient Government
• Catastrophe Bonds Managed by the financial
  institution issuing the bond
• Time Derivatives, Managed by several institutions
• Insurances and Reinsurances, Managed by insurance
  and reinsurance companies
• Natural Disaster Fund, Managed by the Government
• Financing Mechanisms for Communities affected by
  disasters

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Financing mechanisms for disasters, ex- post

• Budget support, Managed by the donor Entity and
  the recipient Government
• Flex Cotonou Agreement (Previously the Lomé
  Convention), Managed by the European Union
• Special Taxes, Managed by the Government affected
• Mobilisation of multilateral and bilateral
  Resources Managed by the donor Entity and the
  recipient Government
• Bilateral or multilateral Humanitarian
  AidManaged by the donor entity and the recipient
  entity
• Source Association of Caribbean States,
  Transport and Natural Disasters Directorate

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A few examples
Excess (excessive or residual risk)

• Sponsored by the IFIS in the region
• Colombia
• Caribbean
• Mexico

Risk to be covered (financial gap)
Acceptable Risk
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COLOMBIA World Bank Programme on disaster
vulnerability reduction (adaptable programme
loan - APL)
APL1 (initial) at the national level
Second Phase
APL2 Municipal Level
APL3 Municipal Level
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COLOMBIA Disaster vulnerability reduction
project (DVRP)

• World Bank instruments for emergency aid
• Emergency recovery loans (ERLs) take time to be
  prepared and there is a timeframe in which
  disbursements are to be made (16 months in the
  case of the earthquake in Armenia (Coffee
  region).
• A credit for a flexible APL programme with a
  floating nature requires an evaluation document,
  bank procedures and signature by the Vice
  President.
• The defer disbursement option (DDO) is aimed at
  providing the credit of middle income countries
  with access to more long term IBRD resources,
  when commercial credit is lacking or is
  complicated in light of emerging financing needs.
  However, the option functions as a development
  credit with all the conditions prior to signing
  and cannot be used to finance the necessary
  investment expenses.

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Potential impact of damages by events, by
probability of recurrence a/
a/ Simulations carried out by the project
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Specific scenario of the model
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CATASTROPHIC CARIBBEAN RISK INSURANCE INITIATIVE
(CCRII)
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Recurrence and concentration of storms and
cyclones in CARICOM countries
Category
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Particularities of CARICOM states

• High exposure to a myriad of natural events
• Limited resilience to disasters due to small size
  and limited indebtedness capacity
• Dependence on support from co-operating entities
  to cover post-disaster needs
• Limited access to insurance

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Catastrophic risk insurance mechanism

• Payment associated with the parametric index
  (i.e. category/level of hurricane, wind speed,
  etc.)
• Insurance premium related to individual exposure
  to risk (avoid crossed subsidies)
• Long term financial sustainability
• Annual premium paid by participating countries
• Small losses to be covered by a reserve fund
  (risk capital provided by donors)
• Reinsurance of excessive losses in the
  international market

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How to reduce the cost of the premium

• Breaking down of the commercial premium
• The commercial premium consists of
• Expected loss (Pure Premium)
• Reserve (Cost of capital)
• Administrative costs
• Rate of return on investment
• Varies by country depending on the risk to be
  covered

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Pure premium vs. commercial premium
Merely an illustrative estimate
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Mexicos catastrophe bond

• First issuance of a catastrophe risk bond in
  Latin America
• Sum of 160 million dollars as part of a coverage
  programme against earthquakes up to 450 million
  dollars
• Tremor caused in the zones located in close
  proximity to the Cocos tectonic plate or on the
  periphery of Valle de México when its magnitude
  ranges between 7.5 and 8.0 on the Richter scale,
  determined by the Natural Disasters Fund
  (Fonden).
• Does not involve an excessive burden on the
  external debt, nor the public debt,
• Transfers financial costs to capital markets in
  the case of a disaster.

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Thanks for your attention.

• See
• http//www.cepal.org/mexico disasters (Manual
  on the socioeconomic and environmental impact
  assessment (www.cepal.org/mexico, disasters,
  Disasters and development (publication of the
  ECLAC 2005 series, and numerous disaster
  evaluations between 1970 and 2007
• http//groups.google.ch/groups/pdna-for-recovery
  (materials, methodologies and instruments toward
  a post-disaster needs assessment platform, PDNA)
• http//www.isdr.org (International platform for
  disaster reduction, Hyogo Framework for Action)
• http//www.wmo.org/ipcc (4a. Evaluation by the
  Intergovernmental Panel for Climate Change,
  chapter 7 Industry, Settlements and Society)