Natural disasters and their economic cost – Part 1

by Maxwell Haywood 17.JUN.11

The Hurricane season is upon us even before we could fully recover from Tomas and the floods of 2011. From the Caribbean to North America, from Africa to Asia, from Europe to Latin America, natural disasters are wreaking havoc around the world.{{more}}

The human suffering, death and grief cannot be calculated sufficiently. The wrath of nature is making societies pay dearly from already scarce resources available to governments, civil society organizations, and the majority of people, especially the poor. Also, the private sector has experienced the devastation or natural disasters. It is projected that disasters linked to weather are very expensive for societies around the world.

The concept of economic cost

According to the World Bank: “From an economic perspective, a disaster implies some combination of losses, in human, physical, and financial capital, and a reduction in economic activity such as income generation, investment, consumption, production, and employment in the “real” economy. There may also be severe effects on financial flows such as the revenue and expenditure of public and private bodies.”

Economic losses due to natural disasters are swiftly increasing around the world. This is reflected in the fact that many national budgets consist of large allocations for expenditures on disaster-related activities.

Many countries have made progress in building their national development infrastructure such as schools, business centers, roads, community development centers, hospitals, houses, libraries, cultural arts centers, and more. These achievements could be easily and quickly wiped out by natural disasters.

While the numbers, in terms of cost, represent economic and insured cost, these costs are linked to human suffering and human loss. The economic cost gives us an idea as to the tough economic and financial challenges that confront human beings and their societies in times of natural disasters.

Examples of economic cost

In 2004, Hurricane Ivan ravaged Grenada and 90 per cent of housing and other buildings were affected. In trying to rebuild Grenada after Ivan, it is reported that its debt rose to 130 per cent of GDP. It is also reported that Antigua and Barbuda has been hit by about 7 tropical storms between 1989 and 1999, which cost US$ 1.5 billion.

In addition, the economic cost of the earthquake that hit Haiti on January 12, 2010, amounted to about US$ 8 billion. Furthermore, the estimated cost to St. Lucia resulting from Hurricane Tomas in October 2010 amounted to about EC$907.7 million or US$336.2 million. The full economic impact of Tomas in St. Lucia corresponds to approximately 43.4 per cent of GDP. In St. Lucia, this amount is also more than what tourism contributed to GDP and much more than agriculture’s contribution to GDP. Natural disasters cost Jamaica J$3 trillion over the past 20 years due to about 20 disasters. These types of disasters were responsible for an average annual loss of 2-3 per cent of GDP in Jamica.

Reports have also shown that for the years 2000-2010, it is estimated that average economic losses amounted to US$ 110 billion and average insurance losses amounted to US$ 35 billion. Furthermore, it is estimated that the global economy suffered losses amounting to US$ 130 billion in 2010.

Last year, insurers had to pay out about US$110 billion as a result of natural disasters. About US$ 8 billion in insured losses resulted from earthquake which hit Chile on February 29, 2010. The total cost including insurance was about US$30 billion. The European Windstorm named Xynthia hit France in 2010 and cost insurers about 2 billion euros or US$ 2.78 billion.

Japan, Australia, China, Pakistan, and many African countries have been suffering from huge losses due to natural disasters.

An important point to note in all this is that the emerging global consensus points to the fact that businesses with strong disaster risk management practices suffered considerable less loss than businesses with weak or no risk management practices.

Countries already heavily indebted must now find the resources needed to effectively respond to natural disasters. Tough decisions are been made about deficit spending. Decisions have to be made about using the surplus, if any, to address people’s needs resulting from disasters. In many countries, national governments bear the greater cost of recovery and reconstruction at the local level.

As we could see, natural disasters have serious economic consequences, including the destruction of hard-won gains. My next article on this topic will look at St. Vincent and the Grenadines.