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What Is a Disaster? An Economic Point of View

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Natural Disasters and Climate Change

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Abstract

This chapter focuses on the economic consequences of a disaster and discusses the definition of the “economic cost” of a disaster. It stresses that a natural disaster is not a natural event, but the combination of a natural hazard (e.g., a hurricane) with a human system that is exposed to it and suffers from damages and perturbations. It reviews concepts such as direct and indirect losses, market and non-market losses, and consumption and output losses. The chapter also describes some of the most important mechanisms that determine the economic consequences of a disaster, such as the response of prices or the propagation of impacts through supply chains. It reviews the various tools that have been developed to measure and assess output losses from disasters, covering econometric analyses, input-output and computable general equilibrium models. It concludes with a definition of economic resilience and stresses the fact that reducing disaster welfare impacts can be done by reducing direct losses or by building resilience.

This chapter is based on a working paper coauthored with Valentin Przyluski.

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Notes

  1. 1.

    Through its effect on soil dynamics, a drought may however cause large damages to buildings. The 2003 heat wave and drought over France is estimated to have cause damages to building larger than 1 billion euros.

  2. 2.

    Unsurprisingly, different hazards communities have different approaches for defining indirect costs. Contentious issues may emerge around the edge of these definitions across hazard communities.

  3. 3.

    Note that the net present value is the sum of the production, discounted to account for the fact that production far in the future has less value than more immediate production; see a discussion on the discount rate in Chap. 6 and especially Box 6.2.

  4. 4.

    These ripple effects can even take place within a factory, if one segment of the production process is impossible and therefore interrupts the entire production.

  5. 5.

    This analysis was performed using the NEDyM model. This model is a highly idealized macro-economic model that follows the classical Solow growth model in considering an economy with one representative producer, one representative consumer and one good, used both for consumption and investment. The original Solow (1956) model is composed of a static core describing the market equilibrium, and a dynamic relationship describing the productive capital evolution. In NEDyM, the static core is replaced by dynamic laws of evolution, building delays into the pathways toward equilibrium.

  6. 6.

    On a related issue, it has been shown by Qing and Popp (2013) that natural disasters could trigger innovation in risk-mitigation technologies.

  7. 7.

    This is similar to the fact that a change in the saving ratio in a Solow growth model can influence the output level, not the growth rate.

  8. 8.

    The reality is more complex that what has been described here because not all output losses are translated into consumption losses. In practice, the loss in output changes the terms of the inter-temporal investment-consumption trade-off and translates into ambiguous instantaneous changes in consumption and investment. But the main conclusions of the analysis are not affected by this complexity.

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  1. Sustainable Development Network, World Bank, Washington, DC, USA

    Stéphane Hallegatte

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Hallegatte, S. (2014). What Is a Disaster? An Economic Point of View. In: Natural Disasters and Climate Change. Springer, Cham. https://doi.org/10.1007/978-3-319-08933-1_2

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