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Economic and social cost estimate of natural disasters for developing countries

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Title: Economic and social cost estimate of natural disasters for developing countries


1
Economic and social cost estimate of natural
disasters for developing countries
  • Ricardo Zapata-Marti
  • ECLAC

2
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

3
  • Source OFDA-CRED (Louvain University) data base

4
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5
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
6
MITCH
STAN
DROUGHT
EARTHQUAKES
7
JEANNE
JIMANI FLOODS LANDSLIDES
GEORGES
DAVID AND FEDERICO
FIFI
BEULAH
INES
FLORA
8
HURRICANES IN THE CARIBBEAN, 2004 Relative and
absolute impact of losses and damages
9
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

10
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

11
Illustrative summary of the impact of climate
change in the region (IPCC, 4th report, 2007)
12
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

13
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.
14
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
15
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

16
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).

17
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

18
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)

19
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

20
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

21
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22
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
23
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

24
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

25
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

26
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27
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
    Caribbean Managed 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

28
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
    Aid Managed by the donor entity and the recipient
    entity
  • Source Association of Caribbean States,
    Transport and Natural Disasters Directorate

29
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
30
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
31
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.

32
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33
Potential impact of damages by events, by
probability of recurrence a/
a/ Simulations carried out by the project
34
Specific scenario of the model
35
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36
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37
CATASTROPHIC CARIBBEAN RISK INSURANCE INITIATIVE
(CCRII)
38
Recurrence and concentration of storms and
cyclones in CARICOM countries
Category
39
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

40
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

41
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

42
Pure premium vs. commercial premium
Merely an illustrative estimate
43
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.

44
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)
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