12 February 2016
Economic valuation of the cost of disasters
Issues in Economic Analysis for DCPP chapters and Chapter Guidance
Contribution to chapter on Management of Disasters.
DISEASE CONTROL PRIORITIES PROJECT
Ricardo Zapata Marti, Focal Point on Disaster Evaluatio, ECLAC
Some background for discussion: Impact of disasters is difficult to understand and
estimate, not to say controversial. This brings the need to address the question of whether
the impact of disaster is always negative or are there some positive outcomes, where
disaster brings an opportunity for improvement and change.
The negative first: losses are, particularly from the health sector outlook, under
three categories: Lives are lost or affected due to injuries associated with the cause of
disaster (be it climatic, geological, vulcanological or anthropic) as well as by the physical
collapse of infrastructure and the collapse of services and equipment, instruments, medical
attention) . The valuation of this may be translated into DALY and the economic valuation
of these is really perceived in a twofold manner: firstly the cost of tending to those injured
or of disposing of those that died and secondly the effect these lives lost or disabled will
have on the overall welfare and economic development process (in terms of production,
income generation, etc.)
The second category of direct losses is in infrastructure and supplies, affecting
investment made or the need to rebuild facilities destroyed or damaged, capital in terms of
equipment and other assets, and medicines and other stocks crucial for the provision of
health personal and public services.
The third category of damage is the loss or disturbance in the attention and response
capabilities, both curative and preventive.
Negative impacts in these categories highlight the value and need for mitigation,
which would translate in saving lives, by maintaining services and the increasing resilience
both of the infrastructure and the care services. Mitigation will also increase the investment
capacity since by avoiding losses and the need for reconstruction, you do not lose the
opportunity cost of new investment which otherwise should be channelled to
reconstruction). Another benefit of mitigation is shifting the emphasis to increasing the
prevention capacity in contrast to passive curative interventions.
Hence the question is there any positive outcome of disasters? The conviction that
their occurrence increases resilience and those disasters provide an opportunity for
reduction of vulnerability in the face of menaces and risk leads to the need to evaluate the
impact of disasters and, conversely, the gains from mitigation or –in the UN’s current
language, disaster reduction.
The crucial then becomes that evaluating damage helps to establish mitigation
criteria that have to be negotiated (what is an acceptable level of damage or loss?). The
content of this negotiated is schematized in the following table: firstly which should be the
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primal criterion, and the desirable one would be to maintain operational services, even at
the loss of infrastructure (the cost of such provision being part of the evaluation of damage)
and thus saving lives would be minimized (thus reducing those costs both in economic and
DALY terms).
Save Lives
Save infrastructure
(investment)
Maintain function (services
operating)
High priority
High priority
High priority
Priority
Priority
Priority
Low Priority
Low Priority
Low Priority
Incorporated in
function
Incorporated in
function
Incorporated in function
Such a negotiation leads to the definition of the requirements to fulfil the agreed
objectives and points to the systemic character of disaster mitigation. It is also relevant to
consider the actors in that negotiation process which can be schematically divided into the
categories: on the demand side would be both the beneficiary population and end users of
the health services as well as those that provide them (professional care givers of every
level and specialization). On the supply side would be a multidisciplinary team including
academics, technicians, professional associations and policy and decision makers in charge
of providing mitigation (i.e. designing and implementing risk management and disaster
reduction interventions). Finally the third set of actors is the financial ones, both banking
and insurance institutions as well as donors. All these actors may be public or private,
include non-governmental institutions, and represent both the central and local levels of
government and civil society.
The crucial element is the introduction of mitigation in the project cycle in order to
maintain services operational (i.e. disaster prevention) by considering the profitability of
this prevention / mitigation both in economic and social terms. It is this context that
damage and loss valuation becomes strategically crucial.
It must be indicated from the outset that some things are easier to measure than
others. Even though in human terms an approximation to the burden of disease and life
damage may be expressed in DALYs, it is difficult to determine the value of lives lost or
affected in an economic context that moves policy makers to assign financial resources to
prevention and mitigation. The thresholds for such resources may vary from country to
country not only on purely economic terms but on cultural ones. Ownership and
appropriation of losses is not homogenous. Additionally the opportunity cost, cost-benefit
or investment / profitability depends on the valuation criteria and the difficulty to establish
these is associated with the lack of adequate base lines that assess the level, quality and
efficiency / efficacy of health services provided. The value and quality of services
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provided (both curative and preventive) is also non-homogenous and not necessarily linked
to the quality and cost of the available equipment and infrastructure. Additionally, in the
event of these being disrupted by a disaster, the cost of this loss is dependent on the
duration of the transition / emergency phase (when field hospitals and evacuation processes
are operational). On the other hand it is easier to determine the amount of investment
required for reinforcement vs. the potential losses in equipment and inventories, or the cost
of reinforcement as compared to the reposition cost of affected infrastructure. It is also
possible to calculate the alternative cost of providing services when infrastructures collapse.
Lack of such estimates does not allow an approximation to basic issues such as:
- human suffering and deterioration of living standards,
- disproportionate negative effects on most vulnerable groups,
- loss of capital and investment that was made at great sacrifice,
- postponement of development and investment projects to face reconstruction,
- deterioration on macroeconomic results,
- inability to face challenges of reconstruction without international co-operation,
- expose country’s vulnerability and fragile economic and social equilibrium, and the
- danger of setbacks in positive trends towards decentralisation, empowerment and active
participation of society in decisions
ECLAC has responded over the years to the need of countries where disasters
surpass their capacity to respond and rebuild with their own resources and as an instrument
for planning reconstruction. The result has been a still evolving methodology for the
valuation of disasters.1 It is seen as a tool for reconstruction, mitigation and planning
resilience. Increasingly it has proved its usefulness by developing historical records of
major events in the region over time. Not only it develops a systemic approach that defines
vulnerability as the result of menace (probability of a certain event recurring with a
determined strength on a location) and risk (the level of exposure given infrastructural
conditions and the leverage those at risk have in terms of appropriate management in
physical, social and economic terms).
Valuation 2 rests on the basic concepts of direct damage (destruction or damage to
assets/capital) and indirect losses (as the effect on flows/economical, financial, fiscal).
Valuation criteria will vary in accordance with the purpose of the analysis. Present value
will give a historically accurate and comparable notion of damage and losses but, since it
stands on the principle that present value reflects actual conditions and discounts assets
value over time, it is an insufficient measure of replacement or reconstruction needs. Even
more so if, as is necessarily the case, mitigation considerations must be incorporated in
reconstruction and sometimes, due to the disaster, lack of resilience of the affected
conditions is made apparent. This is even more evident in developing countries where
negative impacts tend to concentrate on those more at risk (the poor, marginalised, and less
1
See ECLAC, Handbook for Estimating the Socio-economic and Environmental Effects of Disaster,
LC/MEX/G.5, July 2003.
2
Valuation is made using all possible sources of information, from geo referenced satellite mapping
and remote sensing to more conventional statistical data, direct observation, surveys, although, given the
nature of the events there is a reliance on second hand information gathered immediately after the event.
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resilient). Under those circumstances it would be unthinkable to replace assets lost by a
reconstruction under the same conditions of vulnerability. Just as in infrastructure for
example, a poorly designed and maintained highway should not be reconstructed under the
pre existing conditions, or poor quality housing such as shanty towns should not be rebuilt
in the same condition, health infrastructure affected must be replaced by more resilient and
efficient means that ensure a better and sustainable service.
Given its multi-sector and multidisciplinary approach such a valuation allows the
socio-economic and environmental assessment of disasters. By using standard sectored
procedures that allows comparability of results. It is expected to be an instrument for the
decision making process and for policy formulation as it identifies more severely affected
sectors, geographical areas and vulnerable groups. Over the year a number of conceptual
improvements have been made to allow for the measuring of aspects not included in the
national accounting systems to bring attention to environmental losses as a cross-cutting
issue, the contribution of specific groups, namely women, as agents for change and the
better management both of the emergency and the reconstruction processes, by analyzing
their specific vulnerability.
LATIN AMERICA AND THE CARIBBEAN: SUMMARY OF DISASTER IMPACT
DATE
AFFECTED POPULATION
TOTAL DAMAGE (million US dls.)
DEATHS
Directly
affected
TOTAL
DAMAGE
DIRECT
INDIRECT
EXTERNA
SECTOR
EFFECTS
1972-1980
1980-1990
1990-1999
2001-2002
TOTAL OF
"MAJOR"
EVENTS
1972-2002 (30
YEARS)
38,042
33,638
11,086
120
82,886
4,229,260
5,442,500
2,318,508
4,828,470
16,818,738
9,375
19,603
20,901
4,491
54,371
5,420
13,916
10,401
2,270
32,006
3,956
5,687
10,501
2,228
22,371
2,749
8,059
6,109
1,835
18,752
Average per
year
2,763
560,625
1,812
1,067
746
625
Impact of
"small
disasters" a/
691
140,156
453
267
186
156
OVERALL
ESTIMATE
103,608
21,023,423
67,963
40,008
27,964
23,440
a/ The full image should include the recurrent “small” disasters that don’t make the headlines but have a cumulative
negative effect that is more pervasive and damaging to the development process since its economic, social, psychological
and political impact is hardly perceived.
An estimate of the average losses of "small disasters" would increase in at least 25 percent the average impact of large
disasters.
Source: ECLAC
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These calculations, sector by sector, summarized in a globalized, non-duplicative
account, allow projecting scenarios of future performance of the affected economy in the
short and medium term, and estimate the potential alternative costs of implementing the
necessary corrective economic policy measures. It allows determining the State’s capacity
to face reconstruction tasks and determine needs for cooperation and international
financing. The process by which the methodology is used also facilitates training in
damage valuation and formulation of mitigation strategies and involves affected population
with relevant authorities and aid providers.
The following table summarizes the valuations made by ECLAC over the years for
the Latin American and Caribbean region in terms of deaths, affected population and
economic losses at current value.
The multi-sector approach puts in evidence the systemic character of the
development process and the interaction among sectors and stakeholders. The sequence of
effects of a disaster may be illustrated in diagrammatic form:
SEQUENCE OF EFFECTS
PHENOMENON:
EFFECTS:
direct
indirect
Characteristics
(physical description,
typology and context)
LINKAGES
Menace
Vulnerability
Risk
Impact/Benefit of reconstruction (global, by sector)
qReduce vulnerability
qSynergies for reconstruction: “appropriation” of risk by affecte d/menaced
population (community, social group, sector, country)
This sequence underpins the way these effects are measured. Again it is useful to see them
in a diagram.
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SEQUENCE OF DISASTER
VALUATION
VALUE OF DAMAGES
By economic actors and sectors
Public
Private
REPLACEMENT COSTS
By economic sectors and actors
Public
Private
TECHNOLOGICAL IMRPOVEMENT
REINFORCEMENT/REINGENEERING
PREVENTION
MITIGATION
Scheduling
Input availability
Material
Human
Finacial
Macroeconomic impact
RECONSTRUCTION REQUIREMENTS
By economic and sector actors
Public
Private
Absorption capacity
At present value costs
Material
Includes asset depreciation
Work force
Considers the state of asset at time of damage
Institutuional
Discounts lack of maintenantce
Project formulation
Reconstrction and replacement
Mitigation and reinforcement
Prevention
MACROECONOMIC VIABILITY
SUSTAINABILITY
CREDIBILITY
Financial implications
Public
Private
Domerstic resources
Credits
Donations
Insurance and reinsurance
External resources
Credits
Donations
Homogeneity of results is ensured by a close understanding of two basic concepts
used throughout to assess the impact: direct damage and indirect effects. Direct damage is
defined as the material losses occurring as an immediate consequence of a disaster3,
measured first in physical terms. These refer to assts, to capital, to material things that can
be counted. Hospital beds lost, equipment and medicines destroyed, health services
providing installations damaged or affected (number and type of installations, stocks of
medicines, laboratory facilities, operating rooms, etc.) These are then valued both in terms
of their present value (discounting it, taking into account their condition, repair needs prior
to the event, etc.) as well as estimating the replacement costs.
On the other hand, indirect effects are seen in flows to which a monetary cost is
established. In general these refer to production of goods and services that will not occur,
reduced income associate with these activities not occurring and increased expenses to be
able to provide them as an outcome of the disaster. In the case of health services it means
both the income losses associated with its diminished supply and the increased costs of
providing those required by the disaster itself. Indirect impact is valued at the current
market value of production of goods or services not occurring and the costs associated with
3
Evidently these direct losses are not as easily to determine in long-developing events (such as the
ones associated with slow processes or climatic variability since over time there will be overlapping damage),
in contrast to those occurring in sudden events like hurricanes or earthquakes.
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the necessary provision under emergency, disaster-related conditions. Indirect impacts are
perceived after the phenomenon, for a time-period that can last from weeks to months, till
recuperation occurs. The purpose is measuring the damage “delta” or damage gap (D = Va
– Vb), where Va is the initial condition expected for a variable (in each sector, weighed in
accordance with the sector’s importance and links to the rest of the economy) and Vb is the
discounted effect of the disaster. See the following diagram.
Measuring the damage “delta” or damage gap
Pre-existing
conditions (ex ante)
The measure
Of direct and indirect damages
Upon the pre-existing situation
(sector by sector baselines) is aggregated into the
national accounts and determines the resulting disastercaused scenario, as the gap over the expected
performance prior to the event. Several scenarios may
be outlined, based on the assumptions made for the
Expected
Disaster impact
reconstruction process
performance (without
(ex post)
disaster) 3-5 years
3-5 years
Starting point is the asset or capital loss (K = Ka – Kb). Capital (assets) lost is
estimated by compiling direct damages computed sector by sector. These result in flows
being affected (Y = Ya – Yb) where the measure reflects production/income losses. In
spite of the material losses it is considered that the disaster does not immediately cause
technological change (although immediate adaptation during the emergency occurs) and
thus, for calculating purposes, the capital/income-production ratio is generally assumed not
to vary substantively as a result of the disaster. This analysis requires access to information
that allows the observer to know the pre-existing situation. Such information will allow
identifying the core development factors of the economy, as well as the main characteristics
at the time of the disaster: the phase of the economic or production cycle, consider seasonal
elements, available resources in terms of domestic savings, FDI flows, and indebtedness
level.
In more precise terms these means access to the macroeconomic data bases from
national authorities, academic analysts and/or consultants and advisors in the country,
identifying existing econometric models for the local economy, and where possible
determine the links among sectors. Ideal tools are input-output tables and when not
available determine weighing factors that indicate inter sectoral linkages. This information
allows acknowledging the expected or projected outcome in the absence of disaster and is
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necessarily obtained from government, academics and/or advisors and private consultants
the existing scenarios or short and medium term projections before the disaster.
There may have been more than one pre-disaster scenario for the main economic
variables. Necessary information requires building a price table at current value for the
disaster period with at least five year projections. It requires building a constant-value (real
magnitude) series for the main variables (using the country’s base year, either in local
currency or an internationally acceptable monetary measures, mostly US dollars or Euros,
as the case may be. The established rate of exchange that will be used for the valuation will
be set up front. On the basis of all these data and the flow impact of direct damage the
situation caused by the disaster will be determined as stemming from sector valuations
assess the value-added changes expected for every sector in the short term and for a
medium-term period to be agreed (3-5 years or more). A damage scenario is built (taking
into account the measured losses at replacement value) showing expected or possible
variations in the main economic gaps in the external sector, the fiscal burden, and on the
internal equilibrium (prices, exchange rate, etc.). The following chart indicates the image
that is expected to emerge from such valuations:
GROSS CAPITAL FORMATION
THE EFFECT OF SUCCESSIVE DISASTERS
ON CAPITAL FORMATION
*
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9)
DISASTER
DEVELOPING COUNTRIIES
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*
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TIME
In addition to providing an instrument for the immediate reconstruction process,
these valuations build a case to affirm there is a clear link between vulnerability and
development. Resources used to rebuild and remedial action take away scarce funds that
otherwise could have been used to increase or improve existing capital –both material and
human. The gap showed in concrete cases also provides an approach to the cost of not
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taking preventive action. It is clear that in the health sector loss of services, especially in
the face of a disaster that overwhelms the capacity to respond, the benefits of prevention
and risk management are more evident than in other ones. Nevertheless a monetary figure
associated with the loss of these services gives a parameter of the benefit that investment in
risk management and disaster reduction can bring. An approach to cost-effectiveness of
disaster reduction in the case of hospital infrastructure was developed for Latin America
and the Caribbean by PAHO. 4
By linking the impact of a disaster over an economy or country other factors are
also made evident, such as the relation of size, development and vulnerability and leads to
the consideration of such factors as resilience (strengthening and preparedness of physical
and organization infrastructure) in the face of sudden or unexpected shocks (internal,
environmental, climatic, external).
It also points out to factor of dependency and the need for diversification and, in
some basic elements, redundancy. It is true in the overall economy that if one activity
dominates the economy (tourism in a Caribbean island for example) and a disaster will
affect it severely (such as a hurricane) the overall impact will be felt in all components of
that economy and society. It is also true that if the provision of services (such as health
care be it preventive or curative) is centralized in a non-protected process, vulnerability is
larger than if there alternative service-providers or the provision is diversified. This brings
the attention to the necessary linkages of all stages in the provision of such services and
how resilience and competition are part of the same process.
As a more systemic approach to development evolves the linkages between
economic, social and environmental variables appear as increasingly relevant: economic
damage is aggravated by skewed social structures and poor environmental management
increases vulnerability in the face of natural risks. Another consideration that emerges
from the application of this analytical tool in concrete cases the linkage between specific
occurrences in a country and global processes as well as trans-border or regional impacts of
a specific event. One particularly clear case was Hurricane Mitch that affected a whole
region (the Central American Isthmus), bearing an impact over a vast multinational
territory, affecting infrastructure that linked trade and economic activity in the region (a
highway whose cuts in several parts affected regional transport, an air navigation control
system that with damages in one country affected regional travel, the risk of transmissible
diseases from one country spilling to others as contaminated waters in multinational
watersheds might be a conduit and the need for regional epidemiological actions, the
migration flows from affected areas that led to people moving to neighbouring countries
and beyond. Another case in point is a drought in the same region and in Mexico (in 2000)
that caused smoke clouds to affect air quality in distant areas, including cities in the
southern cities of the United States.
4
See CEPAL (Daniel Bitrán), “Impacto económico de los desastres naturales en la infraestructura
de salud” (LC/MEX/L.291, 8 January 1996, presented to the “Conferencia Internacional sobre Mitigación de
Desastres en Instalaciones de Salud” (Pan American Health Organization (PAHO) / Organización
Panamericana de la Salud (OPS), 1996)
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The consideration of prospective alternative scenarios and macroeconomic models
linked to scientific evidence of the probability and danger or exposure to specific events
provides the necessary quantification for cost-effectiveness analysis of prevention and risk
reduction policies and investment. Since the impact of disasters affects society in all its
aspects, the disease related factors are just one –albeit very important or even central
factor—that has to be coupled with others such as the consequences over production,
competitiveness, share in world markets, technological change and societal organization
and response structures.
This kind of quantitative and qualitative analysis is thus not only a requirement for
national authorities in the areas of economics and planning but a powerful instrument to
promote mitigation and risk management policies beyond prevention and response. Not
only it provides a tool for needs assessments after the fact and information to undertake a
causal analysis that will face concrete operational problems: setting priorities and
differentiating emergency from urgency: simultaneity and sequencing, it leads to the costbenefit or, more appropriately cost-effectiveness of risk management. The quantitative
element gives a base for the estimation of resource allocation and economic implications of
policy change promotion.
It is on the basis of these quantifications that ECLAC has proposed courses of
action at the national and international policy levels and indicated some sectoral
components of those policies.
A brief outline of these is given in the box:
Internal policies are to
include vulnerability
reduction as an objective
of development plans
alongside goals of
 competitive growth,
 equitable
development,
 sustainable and
sustained
development, and
 social participation
External policies ought to
introduce risk management
as part of the regional
international agenda,
alongside:
 External competitive
insertion
 Benefiting from the
globalization process
 Inclusive regional
insertion
Sectoral components of disaster reduction and
risk management policies might include:
 Monitoring, analysis and climate
forecasting, including forest fires
 Contingency plans in key sectors, for
example:
o Agriculture, cattle raising,
o rural poverty,
o energy and baselines
o Water and health
 Interconnected systems and redundancy in
essential lifelines
 Regulation of basic services with
sponsorship of private enterprise
 Focalized plans for vulnerable groups,
including employment, food availability and
nutrition
 Education to reduce vulnerability
 Diagnosis and monitoring of vulnerability at
the local level
The ultimate goal of disaster reduction and reconstruction processes is finally to
preserve or if affected restore economic and social fabric, restore and strengthen productive
linkages (upstream/downstream), and reduce internal / external vulnerability.