Comments on The Impact of Manmade and Natural Disasters on Household Welfare by Yasuyuki Sawada

1. 1 Comments on ‘The Impact of Manmade and Natural Disasters on Household Welfare’ by Yasuyuki Sawada Chandra Athukorala Arndt-Corden Division of Economics Research School of Pacific and Asian Studies Australian National University Prema-chandra.athukorala@anu.edu.au

2. A very informative paper on an important subject A nice blend of theory and empirics Well informed by the relevant literature and the contemporary policy debate on disaster management

3. An Overview Two objectives To provide an interpretative survey of evidence on the impact of manmade and natural disasters on household welfare and To discuss policy options for designing strategies for mitigating risk arising from natural disasters

4. 1) Introduction A succulent typology of disasters, distinguishing between, Manmade and natural disasters idiosyncratic shocks (which affects specific individuals) and aggregate or convergence shocks (which affect a community/region as a whole) (My query: Can we treat shocks to households from a manmade economic disaster as an ‘aggregate’ shock. Not all households are equally affected; some even benefits (ed cocoa/coffee producers in Indonesia in the context of the 1997/98 financial crisis.)

5. 2) Risk management and coping against disasters - an interpretative survey of the theory of ex ante risk management strategies and ex post coping behavior supplemented by empirical evidence from: Asian financial crisis, 1997-98 Hanshin-Awaji (Kobe) earthquake Indian ocean tsunami Key inferences (my take) Risk management against natural disasters is a difficult task because they are typically large aggregate shocks, and they are rare, unforeseen shock Coping strategies of affected household is largely determined by the stage of development of the given society/country (eg. Contrasts in behaviour of affected households in Hanshin-Awaji and Kobe and Nagapattinam)

6. 4) The role of market and non-market institutions mechanics and limitations of, self-insurance Formal (institutional) insurance, focusing (focusing on index insurance (insurance; insurance contracts written against specific events) Key inferences Self-insurance (mutual risk sharing) is rather ineffective in the context of the big natural disaster (because they are aggregate (covariate) shock.

7. Formal insurance is a luxury: in low- and middle-income countries households are characteristically risk averse (My query: You have found that (Section 2) only 3% of the property in Hyogo Prefecture (Kobe) had been covered by earth quake insurance!) In any case, it is difficult to design actuarially fair insurance contracts against natural disasters because they are rare events

8. Policy implications Ex post public supports Ex ante risk management policies Managing the ‘emergency rescue face – how to match emergency demand and aid flows under imperfect information and uncertainties.

9. My Comments The focus/coverage - Too broad (inferences suffer form some over generalisation) Preferable the paper should have focused solely on natural disasters (1) Fundamental differences between manmade disaster (in particular economic crises) and natural disasters Compared to natural disasters, Economic crises are not necessarily unforeseen events (they are an amplified version of regular macroeconomic fluctuations experienced by an economy). Institutional infrasrture requirements (both international and national) are not very binding in managing the crisis In a strict sense, the shock to households is not ‘aggregate (covariate)’ but idiosyncratic.

10. Athukorala, Prema-chandra (2001) Crisis and Recovery in Malaysia: The Role of Capital Controls, Cheltenham: Edward Elgar. Athukorala, Prema-chandra and Peter Warr (2002) ‘Vulnerability to a Currency Crisis: Lessons from the Asian Experience’, World Economy, Vol..25, No. 1, pp. 33-57.

11. The challenge of natural disaster management in developing countries need to treated separately from those in developed countries - low income levels which make self-insurance rather ineffective - Institutional and governance issues (Remember (from Section 2 of the paper) contrasting household responses to the shock in Kobe and Nagapattanam)

12. Discussion on policy options Too short compared to the rest Some additional points based on Athukorala, P and Budy Resosudarmo (2005), ‘The Indian Ocean Tsunami: Economic Impact, Disaster Management and Lessons’, Asian Economic Papers, 4(1), 1-39)

13. Environmental regulation - The devastation caused by tsunami in Indonesia, South India and Sri Lanka reveled a close relationship between the magnitude of the damage cause by the killer waves and the extent that environmental regulations had been violated (ed. destruction of corral reefs and mangroves and unplanned/illegal costal construction)

14. The need to educate the public about simple precautions in the event of natural disasters Crisis prone countries (such as Indonesia) should develop institutional mechanisms and procedures, backed by a central disaster management fund, with the capacity to engage swiftly in rescue and initial rehabilitation operations (with effective institutional links with national and international NGOs and various international organizations involved in disaster management)

15. Important to place emphasis on challenges of aid management in the aftermaths of a disaster. The availability of funds does not necessarily guarantee speedy rescue/reconstruction Massive/unplanned aid flows can have a damaging effect on the economy