Economic Consequences of Natural Disasters Among Pacific Island Countries

PACIFIC ECONOMIC BULLETIN

Economic consequences of natural disasters among Pacific island countries

Teo I.J. Fairbairn

This paper explores some of the economic consequences of Te'o Fairbairn is an natural disasters among Pacific island countries, especially in economic and financial relation to damage caused to social and economic infrastruc- consultant specialising in ture and the productive base. It draws on the experience of the development problems Fiji, Samoa (formerly Western Samoa) and Papua New of small island countries. Guinea, each of which has recently suffered exceptionally heavy economic losses from disaster events. The analysis concludes with a few observations on major mitigation policies required to minimise economic losses.

Pacific island countries are exposed to a post-disaster relief and emergency needs range of natural disasters, particularly in while neglecting broader economy-wide the form of tropical cyclones, tsunamis, repercussions, both short and long term. flooding, volcanic eruptions and Moreover, few attempts have been made earthquakes. These disasters can have a to incorporate disaster risk and mitigation considerable impact on a country’s strategies in the overall policy and productive capacity and impose a heavy planning framework. financial burden on national governments. Significant financial and macroeconomic Disaster vulnerability instability can result while the capacity to achieve accelerated and sustainable The vulnerability of Pacific island development can be seriously impaired. countries to natural disasters is associated Pacific island countries have with their location, geological structure, generally failed to account properly for physical size, climatic characteristics and the economic aspects of natural disasters, geographic configuration. Vulnerability particularly on their longer-term growth to destructive cyclones is particularly prospects. Typically, governments have high for those countries that are located tended to focus on tackling immediate within the so-called tropical cyclone

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zone, that is, the ocean zone around Guam expansion in government expenditure for and the Northern Marianas in the North post-disaster relief and rehabilitation Pacific and those around Tonga, Fiji and work invariably gives rise to high and Vanuatu in the South Pacific. The unsustainable fiscal deficits and rising importance of size combined with the debt levels. A country’s external financial physical diversity of the landmass is situation can deteriorate significantly demonstrated by Papua New Guinea under the twin pressures of disaster- which, being large and physically diverse, related damage to export crops and rising is vulnerable to a wide range of natural import demand—a situation that usually hazards including volcanic eruptions, results in a significant run-down in floods, land slides, tsunamis, drought, foreign reserves. Disaster events can also frost and coastal inundation. This have marked effects on the domestic price contrasts with the situation of the low- level, money supply, and the rate of lying coral islands where (apart from the capital formation and, ultimately, a possibility of rising sea levels over time) country’s capacity to achieve continuous tropical cyclones and drought are the development and economic growth. main threats. In these cases a cyclone can The ‘index of disaster proneness’ devastate the whole country and cause recently compiled by the United Nations severe and widespread economic losses. covers a wide range of disasters several of Tropical cyclones are the most which are not natural disasters as usually common form of natural disasters in defined (such as epidemics and civil strife, Pacific island countries, and the main but excluding disasters of a political source of destruction and economic loss. nature) (UNDRO 1990; see also Briguglio Such cyclones can wreak heavy damage 1995:44).1 The index applies to the to existing infrastructure, such as roads, experience of 56 ‘disaster prone’ port facilities, power, commercial developing countries—mostly small buildings and housing. The agricultural insular states—over the period 1970 to sector can suffer enormous losses—both 1989, and provides a ranking of countries in the monetised and subsistence according to the degree of exposure to sectors—as a result of the destruction of disaster events. Mainly because detailed standing crops and basic infrastructure, data for other Pacific island countries were while considerable damage can be not available, the index includes only Fiji, inflicted on reef fishing zones and forestry. Tonga and Vanuatu and shows that each Losses in other productive sectors, of these countries ranked well above the including manufacturing and tourism, median score for the whole group. Vanuatu can also be extensive, although such earned the dubious distinction of being losses are usually less severe and more ranked number one (the most vulnerable), short term compared with agriculture. while Tonga and Fiji were ranked eleventh The destruction of standing crops, basic and twenty-seventh respectively. social and economic infrastructure and the capital base in general can have An economic perspective severe negative economy-wide effects, especially in terms of exports, productive Natural disasters can be viewed as investment, employment and GDP. exogenous factors that cause internal At the macroeconomic level, disaster shocks, with potentially significant damage and associated rehabilitation economy-wide effects both on the supply efforts can be highly destabilising. The and demand side (Benson 1997:1).

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Depending on the severity of the disaster SPDRP 1997:20–21). Direct loss potential event, the impact on the supply side can refers to that resulting from the damage be dramatic and carry considerable or destruction of physical and social economic costs, both in the short and infrastructure and its associated repair longer term. In the short term, the and replacement costs. It also covers destruction of basic infrastructure and damage to crops, loss of productive assets standing crops can be severe while in the and natural resources. Indirect loss longer term, damage to productive assets potential relates to the impact on lost can result in serious loss of production production, vital services, employment and reduced economic growth. The extent and various income-earning activities. of the damage and associated economic Secondary effects apply to costs in terms consequences will depend on a variety of of inflation and related macroeconomic factors including agriculture’s share in aspects, income disparities and economic GDP, degree of structural diversification growth. From a practical policy viewpoint, achieved, resource endowment, inter- estimates of direct and indirect losses can sector linkages, progress made in disaster be used to design possible disaster preparedness and the overall policy frame- alleviation measures, taking into account work. For small Pacific island countries the estimated cost of relief and recovery with a high dependence on agriculture action and mitigation measures required and limited sector diversification, the (Asian Development Bank 1991:37). economic effects of these disasters are At the formal level, it is apparent that likely to be the most serious. a major disaster will cause productive On the demand side, heavy damage capacity to contract, principally due to to commercial crops can result in a damage to a country’s capital stock as significant loss of cash income for farmers well as the destruction of crops. The effect and thus a loss of purchasing power with on productive capacity can be immediate consequent adverse effects on the overall and can mean a dramatic collapse in the level of demand for goods and services. level of economic activity, as reflected, Disruption to industrial activity caused for example, in export production, GDP by damage to basic services such as power and employment. Economic recovery may and transportation can lead to reduced be a long, drawn-out process, depending, levels of employment and income and, in among other things, on the availability of turn, aggregate demand. (However, funds for reconstruction purposes, higher spending on relief and rehabilitation external aid support and the vulnerability measures during the post-disaster period of agricultural crops. At worst, full will tend to boost demand and this may, recovery may take from eight to 10 years at least for a while, offset the induced with some aspects of the economy decline in demand to a significant degree.) unlikely to recover altogether (as with Any diminution in the level of demand export production of cocoa in Samoa and will tend to reinforce supply-side effects passionfruit cultivation in Niue). A more on the level of economic activity and GDP. favorable scenario can be expected where In analysing the economic a Pacific island country has access to consequences of natural disasters (and adequate external assistance for the hence vulnerability), it is possible to rebuilding of infrastructure and related distinguish three kinds of potential losses, capital items. In such a case, recovery can namely direct, indirect and secondary or be fairly speedy and virtually complete ‘knock-on’ effects (UNDP/UNDHA and over a period of four to five years.

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Recent natural disaster damage financial resources for post-disaster rehabilitation was found by the A large number of Pacific island countries reallocation of budgeted capital funds for have recently experienced highly cyclone-related expenditure and the destructive natural disasters, particularly resulting rise in government expenditure tropical cyclones, some of which have led to a significant increase in the fiscal wrought enormous economic costs. Papua deficit (rising from 2.5 per cent to 4.0 per New Guinea has recently suffered two cent of GDP). Deficit financing involved major natural disasters, namely prolonged local borrowing supported by relatively drought in the Highlands regions and a modest external aid assistance. tsunami on the Sepik coast on the Regarding other major economic northern coast, while Fiji has suffered a variables, the monetary authorities chose highly damaging drought. Analysis here not to take specific action in relation to is focused on Cyclone Kina in Fiji in 1993, monetary policy but, nonetheless, kept a Cyclone Val in Samoa in 1991 and close watch on the possible effects of volcanic destruction in Papua New Cyclone Kina on the overall level of Guinea in 1994. liquidity. Domestic prices surged as a result of the sharply higher prices for Cyclone Kina cyclone-affected supply of root and vegetable crops. (Prices eased within the Cyclone Kina struck Fiji on 2–3 January year as market supply improved.) Real 1993 and inflicted damage to all major GDP growth was lower than the previous sectors, including agriculture and year (1.8 per cent versus 3.2 per cent) but infrastructure. The overall cost of destruction was assessed at F$153 million it is difficult to judge how much of the (US$109 million), the equivalent of 7 per decline can be attributed to the cyclone. cent of GDP. Apart from agriculture, An interesting perspective on the roads, bridges, telecommunications and impact of natural disasters on Fiji’s power facilities also suffered heavy economic growth over the long term is damage. Heavy rains, overflowing of provided by a recent study by Benson rivers, flooding and landslides caused (1997:20–26). Employing a simple auto- much of the damage. regressive linear model using ordinary Fiji’s export sub-sector suffered least squares multiple regression analysis, markedly from cyclone damage with Benson derives a no-disaster growth particularly severe effects on coconut scenario for the period 1982–93 (the and cocoa production, while sugar—Fiji’s calculation also allows for the political principal export crop—failed to reach its coups of 1987).2 The result indicates that targeted level. The balance of payments the no-disaster scenario would have situation deteriorated significantly as resulted in an average growth rate for Fiji import demand surged, largely reflecting of 4.8 per cent per annum over a 12-year the heightened demand for foodstuffs period (Figure 1). This is well above the and building materials and this, in the average growth rate of 2.4 per cent per face of an anaemic export performance, annum actually achieved, implying that resulted in a decline in Fiji’s stock of natural disasters (but also allowing for the foreign reserves. effects of two military coups) cost the Government finances were put under economy an average of 2.4 per cent considerable strain in the aftermath of annually in terms of economic growth cyclone destruction. Much of the forgone.

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In coping with post-disaster relief and government financial resources and on rehabilitation needs, Fiji has relied heavily macroeconomic stability as a whole. The on the budgetary reallocation of funds total damage was assessed at over $700 supported by external assistance including million tala (US$280 million), equivalent that provided by non-government to more than twice the country’s GDP at organisations. However, the recovery the time. High winds and waves caused process was also facilitated by the inflow much of the damage, while the extent of of considerable amounts of insurance the damage was exacerbated by the payments from overseas insurance unusually lengthy duration of the cyclone. companies, which were particularly The cyclone had a dramatic impact important for the rehabilitation of the on export production as it virtually wiped private corporate sector. out two of the country’s leading export crops, namely coconut and cocoa. Tourism Cyclone Val activity, another major source of foreign Cyclone Val struck Samoa over the period exchange earnings, fell away sharply, 6–10 December 1991—21 months after while industrial activity suffered another major cyclone (Cyclone Ofa)— significant losses due to disruption to and proved to be one of the most power and water supply and the loss of destructive disasters that the country has vital raw materials. Largely as a result of experienced in recent times. The cyclone the decline in exports, real GDP fell caused enormous damage to Samoa’s markedly and remained below pre- productive base, especially agriculture, cyclone levels for several years. Further- roads, residential and commercial more, the sharp slump in exports buildings, school buildings and natural combined with a strong rise in imports resources, and put heavy pressure on widened the current account deficit (as

Figure 1 Fiji: GDP growth, actual and fitted growth assuming a no-disaster scenario, 1983–94 (per cent)

Actual growth

Real growth (per cent) -5 No disaster scenario -10 . 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Source: Benson, C., 1997. The Economic Impact of Natural Disasters in Fiji, ODI Working Paper, London:20–26.

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high as 32 per cent of GDP in 1993), which active for about a week and proved to be directly led to a significant deterioration one of the most damaging disasters in the level of foreign reserves. experienced by Papua New Guinea in As in the case of Fiji, the Government recent times. The eruptions wrought of Samoa responded to post-disaster almost total devastation on Rabaul rehabilitation needs by a significant township and associated commercial life, reordering of budgeted funds, chiefly with enormous damage inflicted on involving a drastic cut in development housing (80 per cent destroyed), roads, expenditure and some reduction in airport and other infrastructure facilities, recurrent expenditure. This was supported commercial buildings and public utilities. by substantial external borrowings, The government declared a state of principally from international agencies emergency and a major evacuation such as the World Bank, and bilateral program was set in motion. Economic life assistance. Government expenditure rose came to a virtual standstill with major sharply and resulted in the incurring of a impact on employment and income. significant fiscal deficit which, by 1993, Damage to infrastructure from the had risen to an unsustainable 18 per cent eruptions alone was assessed at around of GDP. The magnitude and persistence K100 million (US$85 million), while the of such a deficit would have been a major private sector loss was placed at K180 factor in causing significant macro- million (US$150 million). The total economic instability lasting several years. assessment was therefore at least K280 Monetary policy was temporarily million (US$240 million), equal to eased to facilitate access to credit for approximately 5 per cent of GDP and at reconstruction—a move that would also least five times the annual provincial have contributed in some degree to budget. financial instability. Strong inflationary The eruptions appear to have had a effects were triggered by the severe significant effect on export production of shortage of locally produced fresh cocoa and coconut products—of which foodstuffs, and this situation persisted for the Gazelle Peninsula is a major producer close to two years. —causing a sharp drop in the value of To a greater extent than in Fiji, the export earnings from these products. Samoan government relied on external aid However, this was not translated into (predominately concessionary loans) to lower export earnings at the national provide the bulk of the financial resources level due to higher prices for these needed for post-cyclone rehabilitation. A products and expansion of other export significant reallocation of the current items. The disaster imposed a heavy budget was also undertaken, mainly financial burden on the provincial involving the reordering of funds from the government, although assistance from development budget for rehabilitation the national government was fairly work. However, unlike Fiji, the inflow of significant. The disaster-related shortage insurance payments was very low, reflect- of locally produced foodstuff caused a ing the lack of development in this field. surge in prices, but this appears to have been short-lived and had little impact on Rabaul volcanic eruptions the overall CPI. Because of favourable The volcanic eruptions that struck the conditions in other sectors, the impact of Rabaul area of East New Britain Province the Rabaul disaster on GDP appears to in September 1994 remained highly have been minimal (in fact, GDP rose

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moderately in 1994). All in all, although to infrastructure, agriculture and a the impact on the provincial economy country’s export base. Import demand was considerable, because of the country’s will invariably climb sharply, while the size and resource diversity, the impact at immediate demand for relief and the national level was relatively mild. rehabilitation work can result in a A major response to the Rabaul significant reduction in government disaster was the government’s decision to development expenditure, with establish a new administrative and implications for economic growth. (The regional center at Kokopo, approximately impact on overall capital formation will 45 kilometres south-west of Rabaul—an tend to be boosted by capital expenditure area considered less vulnerable to associated with the rebuilding effort.) volcanic activity than Rabaul. A major Such aspects can seriously undermine a restoration program was launched, and is country’s capacity to achieve sustainable still in progress, involving the implement- economic growth and development. ation of numerous rehabilitation and At the macroeconomic level, the development projects costed at over experience of the above Pacific island US$100 million. A significant proportion countries indicates that the disaster- is to be used for developing the social and related pressure on government finances economic infrastructure at Kokopo. invariably results in a significant blowout Both the provincial and national of the fiscal deficit and, hence, government governments have contributed heavily debt. The balance of payments can toward the relief and rehabilitation effort. deteriorate markedly with usually adverse However, in relation to funding the effects on external reserves and debt. As restoration program, a consortium of in Samoa, the monetary authority may external donors led by the World Bank and act to relax monetary policy and this, the European Union, will provide most of combined with an enlarged fiscal deficit, the funds. This consortium has committed can lead to significant financial instability. a total of US$100 million to Papua New A surge in inflation usually takes place Guinea for restoration projects. The although this tends to be temporary (as national government as well provincial government representatives are local supplies pick up). implementing the program under the In response to post-disaster supervision of the so-called Gazelle rehabilitation requirements, the above Restoration Authority—a body evidence indicates that governments comprising appointees from both resort to a reallocation of budget national and provincial governments. expenditure and, in some cases, to cutting current expenditure, as a way of meeting emergency and reconstruction needs. This Implications normally involves drastic cuts in development budgeted expenditure. It is also It is apparent that major natural disasters apparent that external assistance, can have a serious and prolonged impact including that provided by non- on the economic life of small Pacific island government organisations, has played a countries. The physical destruction and crucial role in supporting disaster relief associated economic loss can be enormous and rehabilitation. Such external and calls for a substantial government assistance is particularly important in response. Productive capacity can be restoring basic infrastructure and in seriously affected, particularly in relation rebuilding productive capacity.

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Mitigation policy issues coverage can help ensure a substantial inflow of foreign exchange earnings in While disasters normally cannot be the wake of natural disasters, thus avoided, much can be done to alleviate helping to alleviate the adverse effects on the extent of the damage and reduce the balance of payments (Benson 1997:94). economic costs. There appears to be a An extension of the insurance industry growing appreciation among Pacific island can help promote improved building countries of the importance of taking standards. adequate preparedness, preventative and Another key requirement is to ensure mitigation measures as opposed to that disaster management issues are focusing predominantly on meeting post- integrated within the overall national disaster relief and emergency needs. development policy and planning Among key requirements for framework to ensure, for one thing, that establishing an effective preventative disaster risks are properly accounted for and mitigation program are the setting in the designing of major development up of an adequate institutional and projects. On the macroeconomic front, organisational framework—both at the major challenges are to pursue sound national and community levels—for fiscal and monetary policies so as to managing and coordinating disaster- promote financial and overall economic related policy and strategies (Fairbairn stability. This can be difficult given the 1998:23). A major task for such bodies is disaster-related pressure on government to promote a clear understanding among finances. An ongoing commitment to policymakers—and the general public—of maintaining strong macroeconomic the often severe economic consequences fundamentals, such as avoiding of natural disasters and how these events unsustainable high fiscal deficits and can seriously undermine longer-term maintaining a healthy foreign reserves growth prospects. At the regional level, position, is also important in enhancing collaborative efforts between the Pacific the capacity to deal with disaster-inflicted island countries and donors, such as damage to the economy. Australia, New Zealand and Japan, to Traditional mechanisms for coping improve early warning systems carry a with disasters at the community and high priority. Such facilities can be household level should be encouraged to valuable for Pacific island countries in a greater extent than at present. Such preparing for the onslaught of a major mechanisms include giving greater disasters, particularly cyclones and emphasis to the cultivation of traditional tsunamis. crops (such as taro and yams) that are Appropriate sector/industry policies relatively disaster resistant and the use of are important in minimising the potential traditional food storage practices. Many for economic loss from natural disasters. of these traditional coping mechanisms Here the cyclone proofing of buildings and have, for various reasons, broken down infrastructure items can be particularly over time and could be advantageously effective. Equally important are efforts to revived. This would promote greater encourage business and householders to community self-help (as opposed to a take out insurance policies to help spread relief-dependent syndrome) and, at the the cost of natural disasters and facilitate same time, reduce the burden on the recovery. High levels of reinsurance central government.

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Other important possibilities for to cope with natural disasters in order to dealing with natural disasters and reducing reduce economic losses and human economic losses include efforts to promote suffering. This involves the establishment greater agricultural diversification of appropriate preventative and through, for example, the encouragement mitigation measures both at the national of more hardy, early-maturing crops; and and community level. Here an essential to develop comprehensive water and element is the establishment of adequate land management approaches directed at institutional structures capable of water conservation, flood avoidance and effectively coordinating and planning overall greater sustainability in the use of disaster-related policies and strategies on natural resources. Furthermore, Pacific an ongoing basis. Regarding post-disaster island countries need to consider the activity, it would appear that external aid possibility of establishing a special fund can play a vital role in facilitating for disaster emergency and rehabilitation economic recovery, especially the purposes that would allow a quick rebuilding of damaged social and response to disaster devastation, and to economic infrastructure. Such assistance adopt more effective mechanisms for can be particularly valuable to the monitoring, over the longer term, the smaller Pacific island countries faced extent of disaster damage and associated with a chronic shortage of savings and social and economic consequences. limited technical capabilities.

Conclusion Notes

Major natural disasters, including tropical 1 In the UNDRO study, disaster damage cyclones, can cause heavy damage to the is calculated as money damage in economic base of small Pacific island relation to GDP of the country countries and can be a major constraint to concerned. Non-significant disasters economic development and sustainability. are excluded, a significant disaster The sudden destruction of a country’s being defined as one which has an productive base, both monetary and impact of at least 1 per cent of GDP. subsistence, can have significant economy- The disasters covered included drought, floods, earthquakes, wide repercussions and impose a heavy hurricanes, storms, typhoons, fire, financial burden on national governments. volcanic eruptions, famines, landslides, Significant financial and macroeconomic accident, power shortage, epidemics instability can result while real GDP can and civil strife (Briguglio 1995:21). decline markedly and remain well below 2 In this model, GDP at factor cost in pre-disaster levels for an extended period year was regressed on GDP at factor of time. Such costs will be particularly t cost in yeart-1 and the cyclone/ drought high for the most vulnerable Pacific and coup dummy variables: y = a + by island countries, for example, those t t- 1 + gCt + dCpt + et where yt is real subject to frequent ‘repeat’ cyclones and (constant prices) GDP at time t, C is the those small economies where a disaster is cyclone/drought dummy variable and capable of devastating the whole country Cp is the coup dummy. The regression (and not just a particular region). coefficients were then used to estimate A major challenge for Pacific island rates of growth assuming a no-disaster countries is to strengthen their capacity scenario (Benson 1997:22).

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References

Asian Development Bank, 1991. Disaster Mitigation in Asia and the Pacific, Manila. Benson, C., 1997. The Economic Impact of Natural Disasters in Fiji, ODI Working Paper, London. Briguglio, L., 1995. ‘Small island states and their economic vulnerabilities’, World Development, 21:1615–32. ——, 1998. Towards the construction of an economic vulnerability index: small island developing states, paper presented at the International Eco- nomics Study Group mini-conference on Small States in the International Economy, 16–17 April, Birmingham. Fairbairn, Te’o I.J., 1998. Pacific island economies: the economic impact of natural disasters, paper presented at the International Economics Study Group mini-conference on Small States in the International Economy, 16–17 April, Birmingham. UNDRO, 1990. Preliminary study on the identification of disaster-prone countries, based on economic impact, Geneva. UNDP/UNDHA and SPDRP, 1997. The Economic Impact of Natural Disasters in Fiji, ODI Working Paper, Suva. UNDP/UN, Department of Humanitarian Affairs, 1998. The Economic Impact of Natural Disasters in the South Pacific, Suva.