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Understanding the economic and financial impacts of natural disasters

This study examines the short and long term economic and financial impacts of natural disasters. It relies in part on in-depth case studies of overall sensitivity to natural hazards in the small island economy of Dominica; public finance consequences of disasters in Bangladesh; and the economic consequences of climatic variability and the use of climatic forecasting in Malawi and southern Africa. Policy implications are drawn, and, where appropriate, recommendations are made. Finally, directions for future research and cooperation are outlined.

Economic and financial impacts

  • Major natural disasters can and do have severe negative short-run economic impacts. Disasters also appear to have adverse longer-term consequences for economic growth, development, and poverty reduction. But negative impacts are not inevitable.
  • Vulnerability is changing quickly, especially in countries that are experiencing economic transformation – rapid growth, urbanisation, and related technical and social change. In the Caribbean area and in Bangladesh, there is evidence of declining sensitivity to tropical storms and floods and increased resilience as a result of economic transformation and public measures for disaster reduction.
  • The largest concentration of high-risk countries, which are increasingly vulnerable to climatic hazards, is in Sub-Saharan Africa.
  • Risks emanating from geophysical hazards need to be better recognised in highly exposed urban areas across the world, as the potential costs are rising exponentially with economic development.
  • Natural disasters cause significant budgetary pressures, with both narrowly fiscal short-term impacts and wider long-term implications for development.
  • Reallocation is the primary fiscal response to disaster.
  • Disasters have little impact on trends in total aid flows.

Public Policy Implications

  • A full reassessment of the economic and financial impacts of a major disaster should be made 18 to 24 months after the event. It should be taken into account in reviewing the affected country’s short-term economic performance and the assistance strategy for the country.
  • Governments need appropriate risk management strategies for future disasters, including medium-term financial planning covering 8 to 10 years.
  • The basis of funding has to be broadened, using a range of insurance and other mechanisms for different layers of loss.
  • Natural hazard risk management should be integrated into longer-term national investment policies and development strategies and appropriately reflected in the allocation of financial resources.
  • High-quality, reliable scientific information is a necessary condition for effective disaster risk management. The international community should support global and regional research and information systems on risk. It should also ensure that there are adequate complementary monitoring and dissemination programs at the national level. Priorities include climatic variability, regional and national flood forecasting, and geophysical hazards.

[adapted from authors]