ECONOMIC IMPACT OF NATURAL DISASTERS ON DEVELOPMENT IN THE PACIFIC Volume 2: Economic Assessment Tools May 2005 This research was commissioned and funded by the Australian Agency for International Development (AusAID). It was managed by USP Solutions and jointly conducted by the University of the South Pacific (USP) and the South Pacific Applied Geoscience Commission (SOPAC). Volume 2 – Contents Tool 1 Guidelines for Estimating the Economic Impact of Natural Disasters on Development in the Pacific Tool 2 A Toolkit for Assessing the Costs and Benefits of Disaster Risk Management Measures in the Pacific Tool One: Guidelines for Estimating the Economic Impact of Natural Disasters on Development in the Pacific This research was commissioned and funded by the Australian Agency for International Development (AusAID) as part of a research project on: ‘The Economic Impact of Natural Disasters on Development in the Pacific’. It was managed by USP Solutions and jointly conducted by the University of the South Pacific (USP) and the South Pacific Applied Geoscience Commission (SOPAC). Tool One: Guidelines for Estimating the Economic Impact of Natural Disasters Authors: Emily McKenzie, Resource Economist, South Pacific Applied Geoscience Commission (SOPAC) Dr. Biman Prasad, Associate Professor & Head of Economics Department, University of the South Pacific (USP) - Team Leader Atu Kaloumaira, Disaster Risk Management Advisor, South Pacific Applied Geoscience Commission (SOPAC) Cover photo: Village damaged by a cyclone in Vanuatu (Source – South Pacific Applied Geoscience Commission). 2 Tool One: Guidelines for Estimating the Economic Impact of Natural Disasters Guidelines for Estimating the Economic Impact of Natural Disasters on Development in the Pacific A practical guide for estimating the direct, indirect and macroeconomic impacts of natural disasters, both in the short and long term, on development in the Pacific. April 2005 3 Tool One: Guidelines for Estimating the Economic Impact of Natural Disasters Contents LIST OF TABLES 6 LIST OF BOXES 6 LIST OF EQUATIONS 6 LIST OF FIGURES 6 FOREWORD 8 ACKNOWLEDGEMENTS 9 ACRONYMS 10 GLOSSARY 11 INTRODUCTION 13 OUTLINE 14 1. Overview of Assessment Methodology 15 2. Types of Disaster Impact 17 2.1. Direct impacts 18 2.1.1. Valuing direct physical damage 19 2.1.2. Intangible direct impacts 20 2.2. Indirect impacts 22 2.2.1. Production and income 23 2.2.2. Operating costs 24 2.2.3. Reduced investor confidence 24 2.2.4. Costs of responding to new situations 24 2.2.5. Demolition and debris removal 25 2.2.6. Relocation costs 25 2.2.7. Valuing indirect impacts 25 2.2.8. Valuing indirect impacts in present value terms 25 2.2.9. Intangible indirect impacts 26 2.3. Macroeconomic effects 27 2.3.1. Gross domestic product 27 2.3.2. Gross investment 27 2.3.3. Balance of payments 27 2.3.4. Public finances 27 2.3.5. Inflation 28 2.3.6. Employment 28 3. Sectoral Assessments 29 3.1. Social sectors 30 3.1.1. Overview of housing, education and health sectors 30 3.1.2. Assessment of sectors ‘without’ the disaster 31 3.1.3. Disaster impact assessment 32 3.1.4. Example – Impact of droughts on Tuvalu’s health sector 33 3.1.5. Sources of information 36 4 Tool One: Guidelines for Estimating the Economic Impact of Natural Disasters 3.2. Infrastructure 37 3.2.1. Overview of energy, water and sanitation, transport and communication sectors 37 3.2.2. Assessment of sectors ‘without’ the disaster 38 3.2.3. Disaster impact assessment 39 3.2.4. Sources of information 40 3.3. Economic sectors 42 3.3.1. Overview of the agriculture, enterprise and tourism sectors 42 3.3.2. Assessment of sectors ‘without’ the disaster 43 3.3.3. Disaster impact assessment 44 3.3.4. Example – Impact of Cyclone Ami and related flooding on Fiji’s agriculture sector 45 3.3.5. Sources of information 47 4. Cross-Sectoral Impacts 49 4.1. Overview of environmental impacts 49 4.1.1. Assessment of environment ‘without’ the disaster 50 4.1.2. Environmental disaster impact assessment 50 4.1.3. Valuation of environmental impacts 51 4.2. Other cross-sectoral impacts 52 4.2.1. Impacts on vulnerable groups 52 4.2.2. Psychosocial impacts 52 4.2.3. Impacts on governance and financial sectors 53 4.3. Sources of information 54 5. Overall Impact Assessment 56 5.1. Analysis of direct and indirect impacts 56 5.1.1. Total impact summary 56 5.1.2. Breakdown by sector, geographical area and population group 57 5.2. Macroeconomic impacts 58 REFERENCES AND SUGGESTIONS FOR FURTHER READING 59 5 Tool One: Guidelines for Estimating the Economic Impact of Natural Disasters List of Tables Table 1: Information needed for assessment of social sectors ‘without’ disaster 31 Table 2: Information needed for disaster impact assessment of social sectors 32 Table 3: Summary matrix of disaster impacts in social sectors 33 Table 4: Summary statistics – Tuvalu’s health sector without droughts 34 Table 5: Assessment of impact of drought on Tuvalu’s health sector 35 Table 6: Sources of information on social sectors 36 Table 7: Information needed for assessment of infrastructure sectors ‘without’ disaster 38 Table 8: Information needed for disaster impact assessment of infrastructure sectors 39 Table 9: Summary matrix of disaster impacts in infrastructure sectors 40 Table 10: Sources of information on infrastructure sectors 41 Table 11: Information needed for assessment of economic sectors ‘without’ disaster 43 Table 12: Information needed for disaster impact assessment of economic sectors 44 Table 13: Summary matrix of disaster impacts in economic sectors 45 Table 14: Summary statistics – Fiji’s agriculture sector without Cyclone Ami 46 Table 15: Assessment of impact of Cyclone Ami on Fiji’s agriculture sector 47 Table 16: Sources of information on economic sectors 48 Table 17: Types of environmental goods and services affected by Cyclone Heta in Niue 51 Table 18: Sources of information on cross-sectoral impacts 55 Table 19: Summary matrix of total disaster impact 56 List of Boxes Box 1: UNECLAC Handbook for Estimating the Socio-economic and Environmental Effects of Disasters 8 Box 2: Current practice of disaster impact assessments in the Pacific 13 Box 3: Direct damage caused by Cyclone Heta to residential buildings in Niue 18 Box 4: Estimating impacts of Cyclone Heta on the private sector in Niue 19 Box 5: Using alternative methods to value housing damage caused by Cyclone Keli in Niulakita, Tuvalu 20 Box 6: Loss of historical and cultural records caused by Cyclone Heta in Niue 20 Box 7: Valuing intangible disaster impacts 21 Box 8: Valuing a human life 22 Box 9: Input-output and CGE modelling 23 Box 10: Loss of income and production in fisheries and education sectors caused by drought in Tuvalu 24 Box 11: Higher operating costs caused by natural disasters in Niue, Vanuatu and Fiji 24 Box 12: Health problems caused by drought in Tuvalu and flooding in Fiji 26 Box 13: Pressure on public finances caused by cyclones and flooding in Fiji 28 Box 14: Estimating coastal erosion caused by Cyclones Gavin and Hina in Tuvalu 50 Box 15: Valuing environmental damage 52 Box 16: The Tuvalu dormitory fire 53 Box 17: Heavy impact of disasters on SIDS relative to population and GDP 57 List of Equations Equation 1: Calculation of present value 26 List of Figures Figure 1: Direct, indirect, intangible and macroeconomic impacts of natural disasters 17 6 Tool One: Guidelines for Estimating the Economic Impact of Natural Disasters It is widely recognized that existing data on the impact of disasters are weak, presenting an incomplete and, in parts, highly inaccurate account of their impact. Poor data are a problem in both the developed and the developing worlds. Benson and Twigg ‘Measuring Mitigation’ 2004, p15 7 Tool One: Guidelines for Estimating the Economic Impact of Natural Disasters Foreword Pacific Island Countries regularly suffer damages, losses and casualties caused by natural hazards, such as cyclones, floods, landslides, droughts, volcanic eruptions, earthquakes and tsunamis. The extent of the impact of these natural hazards on development in the Pacific, however, is not well known. Impact assessments of natural disasters are often incomplete and inaccurate. They are usually conducted immediately after a disaster, within a few weeks, to prioritise relief and rehabilitation needs. Assessments often focus on quantifying direct physical damage to infrastructure in the public sector, and estimating the number of deaths and injuries. Damage to the private sector is frequently ignored. There are rarely follow-up assessments to estimate indirect impacts that can only be ascertained months or years later, such as the effects of the disaster on production and income. Consideration of the macroeconomic, environmental, distributional and psychological impacts of natural disasters is rare. The need for improved data on the impacts of natural disasters has been widely recognised by disaster risk management practitioners in the Pacific region1 and elsewhere around the world2. Why is this an important area for Pacific Island Countries and international aid donors to address? The lack of comprehensive, systematic and consistent assessments of natural disaster impacts holds back Pacific Island Countries in several important ways: First, it makes it difficult to plan effective post-disaster rehabilitation and reconstruction strategies, and prioritise the needs of different sectors, geographical areas, and demographic groups. Second, it constrains the effective design and implementation of proactive Disaster Risk Management (DRM) measures. Without estimates of disaster impacts it is difficult or impossible to assess the relative merits of various DRM options. The Toolkit for Assessing the Costs and Benefits of DRM Measures, which accompanies these Guidelines, can be used to assess whether particular DRM measures are worthwhile investments and to choose the most effective option from a range of alternatives.