Economic resilience, in its static form, refers to utilizing remaining resources efficiently to maintain functionality of a household, business, industry, or entire economy after a disaster strikes, and, in its dynamic form, to effectively investing in repair and reconstruction to promote accelerated recovery. As such, economic resilience is oriented to implementing various post-disaster actions (tactics) to reduce business interruption (BI), in contrast to pre-disaster actions such as mitigation that are primarily oriented to preventing property damage. A number of static resilience tactics have been shown to be effective (e.g., conserving scarce inputs, finding substitutes from within and from outside the region, using inventories, and relocating activity to branch plants/offices or other sites). Efforts to measure the effectiveness of the various tactics are relatively new and aim to translate these estimates into dollar benefits, which can be juxtaposed to estimates of dollar costs of implementing the tactics. A comprehensive benefit-cost analysis can assist public- and private sector decision makers in determining the best set of resilience tactics to form an overall resilience strategy.
Joanne Stevenson, Ilan Noy, Garry McDonald, Erica Seville, and John Vargo
The economics of disasters is a relatively new and emerging branch of economics. Advances made in analysis, including modeling the spatial economic impacts of disasters, is increasing our ability to project disaster outcomes and explore how to reduce their negative impacts. This work is supported by a growing body of case studies on the organizational and economic impacts of disasters, such as Chang’s in-depth analysis of the Port of Kobe’s decline following the 1995 Great Hanshin earthquake, and the evolving studies of the workforce trends during the ongoing recovery of Christchurch, New Zealand, following a series of earthquakes in 2010 and 2011.
The typical view of post-disaster economies depicts a pattern of destruction, renewal, and improvement. Evidence shows, however, that this pattern does not occur in all cases. The degree of economic disruption and the time it takes for different economies to recover varies significantly depending on characteristics such as literacy rates, institutional competency, per capita income, and government spending.
If the impacts are large relative to the national economy, a disaster can negatively affect the country or sub-national region’s fiscal position. Similarly, disasters may have significant implications for the national trade balance. If, for example, productive capacity is reduced by disaster damage, exports decrease, the trade balance may weaken, and localized inflation may increase.
Studies of individual, household, industry, and business responses to disasters (i.e., microeconomic analyses) cover a broad range of topics relevant to the choices actors make and their interactions with markets. Both household consumption and labor markets face expansion and contraction in areas affected by disasters, with increased consumption and employment often happening in reconstruction related industries.
Additionally, the ability of businesses to absorb, respond, and recover in the face of disasters varies widely. Characteristics such as size, number of locations, and pre-disaster financial health are positively correlated with successful business recovery. Businesses can minimize productivity disruptions and recapture lost productivity by conserving scarce inputs, utilizing inventories, and rescheduling production.
Assessing the progress of economic recovery and predicting future outcomes are important and complex challenges. Researchers use various methodologies to evaluate the effects of natural disasters at different scales of the economy. Surveys, microeconomic models, econometric models, input-output models, and computable general equilibrium models each offer different insights into the effect of disasters on economies.
The study of disaster economics still faces issues with consistency, comprehensiveness, and comparability. Yet, as the science continues to advance there is a growing cross-disciplinary accumulation of knowledge with real implications for policy and the private sector.
Ilan Noy and Rio Yonson
This is an advance summary of a forthcoming article in the Oxford Research Encyclopedia of Natural Hazard Science. Please check back later for the full article.
About four decades ago, the discourse on disasters was largely about natural hazards and their characteristics. The failure of this approach to substantially explain disaster impacts led to a change in paradigm. This new paradigm places its emphasis on the influence of vulnerability or resilience on the resulting impacts of disaster—be they direct or indirect. Disasters triggered by natural hazards have since been perceived as unnatural occurrences brought about by a confluence of societal factors. Economic vulnerability and economic resilience, interacting with the hazard itself and the exposure of populations and economic systems, are considered critical determinants of the resulting disaster impacts.
The theoretical conceptualization and empirical measures of vulnerability and resilience remain, however, as subjects of contentions. Some argue that vulnerability and resilience are different expressions that refer to one and the same thing; the former is viewed from a negative standpoint; and the latter, from a positive standpoint. This implies that what measures one, measures the other. Other arguments consider resilience as one of the subcomponents of vulnerability, with the other subcomponents being one or some of the following: sensitivity, susceptibility, fragility, adaptive capacity, and coping capacity. However, what these subcomponents mean and cover are not clear-cut, thereby adding to the complexity of developing appropriate measurement tools.
An apparently dominant view is that, while vulnerability and resilience have similar underlying factors, they refer to different things. For instance, economic vulnerability and economic resilience are both shaped by the level of development, quality of development governance, and characteristics of development (widespread inequality, rapid and unplanned urbanization, etc.), yet vulnerability is considered a pre-disaster concern; resilience, a post-disaster concern. Here, vulnerability is taken as that component of disaster risk that explains the varying impacts on elements (people, assets, systems) that have the same level of exposure to a given hazard. Resilience is what enables the exposed elements to withstand, cope, and recover from disaster impacts. Thus, in terms of disaster risk reduction priorities, vulnerability is typically linked to prevention, preparedness, and mitigation; resilience, to rehabilitation, reconstruction, and recovery.
To date, the intensified application of economic theory resulted in important advances in concretizing the concepts of economic vulnerability and resilience, as well as in measuring them. Nonetheless, alongside these advances some refinements are needed, including the following: address the overlaps with other dimensions, for instance, to social vulnerability and resilience; apply a systematic method for identifying a plausible set of indicators to capture and measure the distinct economic vulnerability and resilience of each element in different contexts and circumstances; and translate the measures into tools for systematically identifying and prioritizing a set of policies and actions to reduce vulnerability and strengthen resilience.
Overall, the ultimate aim is for a sound and widely accepted set of concepts and measures that can be easily adjusted for practical application in different contexts (e.g., developed and developing countries), levels of assessment and governance (e.g., macro and micro; community, city, province, and country), hazard types (e.g., meteorological and geologic), and elements at risk.
Natural disasters cause massive social disruptions and can lead to tremendous economic and human losses. Given their uncertain and destructive nature, disasters invariably induce significant governmental responses and typically pose severe financial challenges for jurisdictions across all levels of government. From a public finance perspective, disasters cause governments to incur additional spending on various emergency management activities, and by disrupting normal business activities they also affect tax base robustness and cause revenue losses. The question is: How significant are these fiscal effects and how do they affect hazards governance more generally? Understanding the fiscal implications of natural disasters is essential to evaluating the size of the economic costs of disasters as well as forecasting governments’ financial exposure to future shocks. Furthermore, how disaster costs are shared among different levels of government is another important question concerning the intergovernmental dynamics of disaster management.
In the U.S. federal system, the direct fiscal costs of natural disasters (i.e., increased government expenditures due to disaster shocks) are largely borne by the federal government. It is estimated that Hurricane Katrina cost the federal government approximately $120 billion while Hurricane Sandy cost $60 billion. Even in the years without large-scale disaster events, federal disaster spending is between $2 billion and $6 billion annually. Under the Stafford Act, the federal government plays a critical role in funding disaster-related programs (e.g., direct relief, mitigation grants, and subsidized insurance programs) and redistributing the actual costs of natural hazards, meaning that a considerable portion of the local disaster burden is shifted to all U.S. taxpayers. This raises a set of issues concerning the equity and efficiency of the U.S. disaster policy framework.
Managing disasters involves multiphased activities to mitigate, prepare for, respond to, and recover from disaster shocks. There is a common belief that the federal government inappropriately spends far more on ex post disaster response, relief, and recovery than what it spends on ex ante mitigation and preparedness, often driven by political motivations (e.g., meeting voters’ preferences for postdisaster aid) and the current budget rules. As pointed out by many others, federal disaster relief and assistance distort the subnational incentive to invest in local disaster prevention and mitigation efforts. Furthermore, given the mounting evidence on the cost-effectiveness of disaster mitigation programs in reducing future disaster damages, the current practice of focusing resources on postdisaster assistance means substantial public welfare losses. In recent years there has been a call for the federal government to shift its disaster policy emphasis toward mitigation and preparedness and also to facilitate local efforts on mitigation. To achieve the goal requires a comprehensive reform in government budgeting for emergency management.
Ilan Noy and William duPont
This is an advance summary of a forthcoming article in the Oxford Research Encyclopedia of Natural Hazard Science. Please check back later for the full article.
What are the long-term economic and demographic impacts of disasters? Do disasters caused by natural hazards lead to long-term declines in economic activity, or do they stimulate the local economy because of the added investment and the upgrading of infrastructure? What are the main facets of the economy that are impacted in the long term—population, incomes, employment, other parameters, or none at all? Are the long-term impacts of disasters caused by natural hazards different from those caused by man-made shocks, such as civil wars or terrorist attacks?
The type and severity of the natural hazard surely have an effect on the kinds of dynamics experienced after a disaster, but so do the levels of exposure of people and wealth (in the form of man-made infrastructure), and the social and economic vulnerabilities that characterize the affected area. Additionally, one needs to differentiate, when examining long-term impacts, between direct and indirect damage, and whether this distinction assists us in explaining different trajectories. The role of policy in shaping long-term outcomes is potentially very important. While it is difficult to claim significant agreement on any one topic, some intriguing insights have been emerging in recent research.
To discuss the long-term economic impact of natural disasters, one must first define impact. A common way to determine this impact is to compare the economy post-disaster to its state prior to the disaster. Some argue that an economy has recovered when it returns to pre-disaster levels. This approach can be misleading as the evidence suggests that, in some cases, economies that were severely impacted by disasters may experience a brief return to pre-disaster levels, occasioned by the boom in reconstruction spending, but then decline back to experience long-term decline associated with the disaster event itself or the fear it has created of future events.
It is clear from the above example that the appropriate comparison is to a counterfactual scenario without event. Of course, even more challenging is to identify, or predict, what would have happened had the disaster not occurred. Not surprisingly, the ways in which this counterfactual, disaster-free state is identified may determine the conclusions reached.
A minority of observers argue that it is common to see economies and communities reconstructed to a better state than they were pre-disaster (a “build-back-better” scenario), and others conclude that disasters occasioned by natural hazards are benign in the long term, at least at a large enough scale (potentially at the country level). On the other hand, very poor countries, very small countries, or regional economies within countries can all experience significant and very prolonged declines in economic activity in the aftermath of catastrophic natural hazard events. These adverse developments can be experienced as long-term declines in populations (e.g., New Orleans, post-2005), long-term declines in incomes and employment (e.g., Kobe, post-1995), very long-term declines in asset prices (the Dust-Bowl midwestern United States, post-1930s), or shifts in the sectors of economic activity (San Francisco, post-1906).
Stephanie E. Chang
Infrastructure systems—sometimes referred to as critical infrastructure or lifelines—provide services such as energy, water, sanitation, transportation, and communications that are essential for social and economic activities. Moreover, these systems typically serve large populations and comprise geographically extensive networks. They are also highly interdependent, so outages in one system such as electric power or telecommunications often affect other systems. As a consequence, when infrastructure systems are damaged in disasters, the ensuing losses are often substantial and disproportionately large. Collapse of a single major bridge, for example, can disrupt traffic flows over a broad region and impede emergency response, evacuation, commuting, freight movement, and economic recovery. Power outages in storms and other hazard events can affect millions of people, shut down businesses, and even cause fatalities. Infrastructure outages typically last from hours to weeks but can extend for months or even years. Minimizing disruptions to infrastructure services is thus key to enhancing communities’ disaster resilience.
Research on infrastructure systems in natural hazards has been growing, especially as major disasters provide new data, insights, and urgency to the problem. Engineering advances have been made in understanding how hazard stresses may damage the physical components of infrastructure systems such as pipes and bridges, as well as how these elements can be designed to better withstand hazards. Modeling studies have assessed how physical damage disrupts the provision of services—for example, by indicating which neighborhoods in an urban area may be without potable water—and how disruption can be reduced through engineering and planning. The topic of infrastructure interdependencies has commanded substantial research interest.
Alongside these developments, social science and interdisciplinary research has also been growing on the important topic of how infrastructure disruption in disasters has affected populations and economies. Insights into these impacts derive from a variety of information sources, including surveys, field observations, analysis of secondary data, and computational models. Such research has established the criticality of electric power and water services, for example, and the heightened vulnerability of certain population groups to infrastructure disruption. Omitting the socioeconomic impacts of infrastructure disruptions can lead to underinvestment in disaster mitigation. While the importance of understanding and reducing infrastructure disruption impacts is well-established, many important research gaps remain.