New Financial Instruments for reducing vulnerability Potential applications and case studies: Some ideas on the basis of UN-ECLAC experience in the economic, social and environmental impact of disasters in Latin America and the Caribbean Ricardo Zapata-Marti Focal Point for Natural Disaster Evaluation Break-out session: Conference on Inovations in Managing Catastrophic Risk

ECLAC Methodology for evaluation of damages  ECLAC’s experience in the evaluation of economic effects of natural disasters.  Latin America and Caribbean vulnerability in the face of natural disasters, due its geographical location and structural-development characteristics.  Greater vulnerability of population segments of lower income that tend to settle in areas of greater risk.  Different type of disaster: natural (earthquakes, hurricanes, flooding, volcanic eruptions, etc.), technological and complex: “natural disasters do not exist; they result of man’s interaction with nature”.  Importance of valuation:  to mitigate its effects and ovoid repetition of negative impact,  to develop reconstruction programmes and strategies of mitigation and obtain necessary resources for disaster reduction (risk management and vulnerability mitigation).

My experience, as well as ECLAC, is based on our work in Latin America and the Caribbean  directly and indirectly affected population at 150 million.  the number of dead reached 108,000 and the total of those directly affected exceeded 12 million. million.  between 1972 and 1999 amounts to more than 50 billion dollars.  The true figure for human and material damages is much greater because ECLAC has only assessed damages when governments have asked it to

Disasters are clearly a development problem  certain natural phenomena, tend to have greater effects on developing countries than on developed countries.  several structural factors associated with a low level of development exacerbate such effects.  the negative impact of natural phenomena on the prospects for long-term development is considerably greater in less developed countries.  A broader consideration of disasters as a development problem should include the repercussions that the policies followed by developed countries have had on some threats, such as climate change and the processing of radioactive waste.

Social sectors Infrastructure and services Productive sectors Environment Dynamic interaction between sectors and activities with natural occurrences: Vulnerability and mitigation Mudslides and silt deposits Landslips, avalanches and erosion Groundswells, sea surges and high waves Flooding and rain

DIRECT DAMAGES  Are all damages to assets (capital, inventories and stock, finished products, inputs and production in process, raw materials, spare parts, etc.).  It includes damage to property that occurs simultaneously or immediately after the disastrous event.  Covers damage to physical infrastructure, buildings, machinery and equipment, warehouses, transport infrastructure and equipment, furnishings, agricultural soil, inputs and production -- including crops on ground not collected-- irrigation and drainage works, dams and reservoirs, etc.  Is measured in physical terms and is assigned a value in monetary terms.

CONSIDERATION OF REPLACEMENT COSTS  Value is assigned on “as is” basis: present value of assets including depreciation, tear and wear and level of maintenance or repair, not replacement (at current costs of similar good) or reconstruction (improved, less risky, technologically upgraded, etc.)  In the productive sectors replacement costs imply in addition to the losses in assets (infrastructure and lost production damaged by the event), income lost and production that will not be obtained indirectly due to the event, and investment that will have to be made to recuperate a similar production level to pre-hurricane levels. This preliminary estimate will vary in time, according to price fluctuations in the coming months, financial resources available and time-frame associated with investment maturity and natural growth of plants.

INDIRECT DAMAGES  Are losses in flows (production that will not be realised, goods and services not provided or made costlier due to the disaster).  Includes additional costs due to the emergency in the distribution, marketing and consumption cycle.  Are measured in monetary terms (not physical), at current (pre-disaster) prices and establishing changes in these.

INDIRECT DAMAGES (2)  Increased operational costs due to destruction or damage to infrastructure and other assets, including stocks.  Additional production costs and increased costs in distribution and supply of goods and services due to use of alternate means.  Income losses resulting of diminished economic activity (both in terms of production and distribution).  Extraordinary costs associated with emergency needs (such as health and hygiene campaigns, vaccination programmes, potabilization of water, etc.).  Extraordinary investments for the (temporary) resettlement of activities (production, distribution, services, etc.) and sheltering homeless or displaced population.

.  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.

GLOBAL EFFECTS OF A DISASTER  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  danger of setbacks in positive trends towards decentralisation, empowerment and active participation of society in decisions

Adapted from Mora, “El impacto de los desastres, aspectos sociales, polítifcos económicos, ambientales y su relación con el desarrollo de nuestros países (BID, 1999) THE “PERVERSE EFFECT” OF DISASTERS ON GROSS CAPITAL FORMATION IN A SMALL ECONOMY (Cochrane, 1997) Adapted from Mora, “El impacto de los desastres, aspectos sociales, polítifcos económicos, ambientales y su relación con el desarrollo de nuestros países (BID, 1999) * GROSS CAPITAL FORMATION TIME DEVELOPING COUNTRIES INDUSTRIALIZED COUNTRIES * DISASTER

Adapted from Mora, “El impacto de los desastres, aspectos sociales, polítifcos económicos, ambientales y su relación con el desarrollo de nuestros países (BID, 1999) THE EFFECT OF SUCCESSIVE DISASTERS IN CAPITAL FORMATION (modified, Cochrane, 1997) Adapted from Mora, “El impacto de los desastres, aspectos sociales, polítifcos económicos, ambientales y su relación con el desarrollo de nuestros países (BID, 1999) * * * * TIME GROSS CAPITAL FORMATION DEVELOPING COUNTRIIES INDUSTRIALIZED COUNTRIES * DISASTER

Policy implications  Natural disaster exposure is not unlike other exposures to risk (financial and commercial)  Risk exposure has a positive correlation with poverty: disasters are not evenly distributed neither in their occurrence or impact  There is a regressive nature to economic, social and other impacts  Measurement of natural phenomena’s strength and recurrence or direct asset losses does not give the real image of disaster’s perverse consequences  The main stakeholders in a disaster are its victim (actual or potential)  Imperfect or non-active markets require goverment intervention

Instruments: financial and otherwise  Financial instruments to reduce disaster risk should be similar to other risk reducing tools (insurance, bonds, derivatives, etc.)  Instruments should be sensitive to differentiated impact (in terms of descentralization, regionalization and social stratificaction)  Instruments should include redistribution mechanisms to promote equity and development  Instruments should aim at mitigating both assets and flow losses  Restoration (and development of more coherent and sustainable) social fabric is basic to mitigation  Insltruments are to be developed and implemented “owned” by the main stakeholders  Market instruments and government interventions to be seen as mutually reinforcing

ECLAC’s current mission  Updasting existing manual: expanding to cross cutting issues such as environment and gender  Expanding analytical capability to prospective analysis of implications  Use of modelling, scenarios and econometric analysis  Bring the issue to the attention of economic and financial decision-makers and entrepreneurs  Continue providing technical assistance to governments in need after the fact