Friday, April 2, 2010

The Price of Disasters

There are two prices to be paid in the event of natural disasters. One is the human toll, the other the financial losses. US News and World Report recently did an interesting article on how the two types of losses don't necessarily work in parallel.

Chile and Haiti both recently experienced devastating earthquakes. America experienced the horror of Hurricane Katrina. As populations increase, so do the numbers of human beings moving into potential natural disaster areas. The photograph shows a little of the two types of losses in the capital of Haiti. The crumbling building is the presidential palace with human sufferers on the lawn and an American rescue helicopter hovering overhead.

Over the past ten years, the world has suffered the costliest natural disasters in history, but not necessarily in the same places nor in the same ratios. Haiti suffered a big quake that resulted in an immense human loss. Chile suffered an even larger earthquake (perhaps the strongest in more than half a century), but the loss of life was relatively low. At the same time, and over the past several decades, financial losses have increased at a rate of approximately 5% annually in natural disaster zones--but not human deaths. As Matthew Bandyk reports: "While the economic cost of disasters has been rising, a perhaps more important value--the death toll--has been falling. From 1900 to 2003, 62 million deaths resulted from natural disasters throughout the world. But 85 percent of those deaths occurred between 1900 and 1950."

Where is this disparity showing up most clearly? A study at the UCLA Institute of the Environment, helmed by professor Matthew Kahn seems to answer that question. The human losses occur most heavily in areas of the world where there are the largest concentrations of poverty. It had been assumed prior to the study that the correlation existed in that poor countries tend to be located in the areas most subject to natural disasters. Kahn seemed to notice that poor countries seem inherently more vulnerable to severe human losses no matter where they are located. Bangladesh, for instance, is located in a hurricane and flood zone. Haiti, on the other hand, experiences rare instances of hurricanes and floods, and is not in a particularly active earthquake zone.

Kahn's conclusion was that higher death tolls in some nations was not explained by a larger number of catastrophes or severe earthquakes, floods, droughts, or other shocks. "After controlling for the number of natural disasters and the intensity of those disasters, wealth was the most important factor in determining why some nations have higher death tolls from disasters than others." Even more detailed analysis showed that "if a country's gross domestic product per capita increased from $2,000 to $14,000,that country would have 764 fewer deaths from natural disasters every year."

At $14,700, Chile suffered far, far fewer human losses than Haiti at $1,300. As Kahn puts it: "In Chile, we know that they had better building codes [which result in higher construction costs]. A richer guy can afford a home built from better materials with better structural integrity. In Haiti, many houses were built with cruddy materials."

But that doesn't tell the whole story. Katrina caused far fewer deaths than the earthquake in Haiti, but it created $111 billion dollars more in estimated financial losses and reconstruction costs than that estimated for Haiti. Kahn explains that very simply: "Being richer also means that there is more wealth to destroy." The poorest of New Orleans residents lived well above the economic level of all but the very richest of Haitians. Harvard Business School professor Eric Werker adds to that assessment: "Even as disaster mitigation lowers the total percentage of capital stock that is damaged, when the capital stock itself goes up, it's possible that the total damage goes up as well."

California experienced a stronger earthquake than Haiti in 1989. But California was a wealthy state with largely modern (and expensive) infrastructure. By Haitian standards, California is still a rich state. The quake did immense financial damage to the heavily-populated Bay Area, but resulted in comparatively few deaths (most as the result of a badly-planned and archaic piggyback freeway collapse).

But even such logical analyses by college professors are not going to be free from the mantra of "climate change" (formally known as global warming). The professors conclude that with climate change, storms and droughts will get worse, and even if populations become wealthier and better prepared, it won't be enough to keep up with the damage caused naturally. Amazingly, after paying proper obeisance to "climate change," they both assume that with more economic growth and wealth, improved economies can help to prepare for those natural disasters. In other words, they'll be more expensive financially, but less expensive in terms of human losses.

Still, there are limits to what money alone can do to improve the future lot of poor people caught in natural disasters. Wealthy nations, most notably the United States, are pouring billions into the cause of the Haiti disaster. But how much good will that do in the long run? Like the failed financial bailouts domestically, the handouts to Haiti can produce both a temporary euphoria while producing long-term dependence on the good nature of others. Werker says: "Just as large financial institutions know that, since they are 'too big to fail,' the government will bail them out in a crisis [despite their poor planning and profligacy], so too can individuals or even governments expect to be bailed out in the event of a natural disaster."

That latter expectation does not lead toward sound planning and good investment for the future. Why plan well if poor planning and loosened-belts have no serious consequences? In the case of natural disasters, that will result in continued large human losses with the unfortunate addition of the necessity of replacing the wasted money [so generously given to them previously] when the next natural disaster strikes. So Werker suggests that charitable donations can be a very good thing so long as countries and citizens with money to give shift their priorities.

Charity is still charity, even when it comes with strings attached. Says Werker: "It's probably safe to say that as a whole, the international community is too focused on relief over prevention. Donors [should] give money to institutions that will allow poor countries more of the same advantages that rich countries can afford: building codes and enforcement, dikes, levees, early-warning systems for tsunamis, and basic infrastructure like irrigation and rural road maintenance to combat drought."

Although Werker did not directly address the Haiti earthquake by itself, he certainly touched on it in his suggestion regarding building codes and enforcement. After the medical care has been rendered from the funds of charities and the US government, what money is left (and even more) should be spent on building safe homes, hospitals, and other infrastructure. But that money is not a bottomless well. Sooner or later, Haiti, like many other nations, is going to have to get its priorities straight, get its economy in gear, and learn to plan for the future using their own funds. How many times can we continue to provide new livers for patients who refuse to stop their alcoholic ways? We're a generous people, but even charity has its limits.


BevfromNYC said...

These studies do not touch on one of the more important aspects of what makes a society more developed - Education. An open education system breeds and supports engineers, scientists, thinkers and doers who develop ways to protect the population from the devastating effects of natural disasters and move a society out of short range survival mode to long range planning. An educated population understands the need for a well developed infrastructure and the risks of building in disaster prone areas.

LawHawkSF said...

Bev: Excellent catch. The authors were doing a purely financial analysis. They did mention "other factors," including education, but felt that it was a matter for treatises of their own. Nevertheless, they did mention schools as part of the infrastructure that money should be spent on, so they didn't entirely miss the issue.

You're right, it's part of "getting their priorities straight."

HamiltonsGhost said...

Lawhawk--Haiti's a good example of where dependency on the government leads. The Haitian government is more corrupt than most, but not a true exception to the rule. Even in a socialist state, somebody has to produce something and work for something if the economic level is going to be raised. The Haitian government believed that money grew on the trees of other nations, and spent what they plucked on themselves. The people of Haiti foolishly relied on them to take care of them. Now, everybody in Haiti needs to get to work, including the politicians.

LawHawkSF said...

HamiltonsGhost: Those who are willing to surrender their independence and assume the "government will provide" always end up poverty-stricken and usually vulnerable. Haiti is an excellent example. Haiti is not overflowing in natural resources, but it is certainly not bereft of them either.

Its neighbor, the Dominican Republic, fares much better on the same island of Hispaniola. The government is more like the European social welfare model, but has a relatively free economy. It uses what resources it has sensibly, and expects people who can work to work. It, too, suffers from corruption, but not close to the extent of its neighbor. The smartest move the Dominicans made was their break from Haiti in 1844. The per capita GDP of Dominicans was $9208 (in 2009), and it is the first or second-highest per capita in Central America. Same island, different result.

AndrewPrice said...

I think the connection between poverty and susceptibility to natural disasters is well know, because the poor tend to live in more concentrated locations, with less care taken to improve structures or develop infrastructure. Dams, for example, have saved million of lives.

In terms of why poverty persists, I think the blame has to be laid firmly at the feet of culture. There is no reason that every society and every one within society should not be able to achieve as much as any other person or society. But some groups simply persist in living the poverty lifestyle. And, inevitably, those groups value the wrong things and pass them on to their kids.

Bev is right about education being the way out of poverty. But let's put a caveat on that, you also need the right kind of education. The world is full of people with meaningless degrees that teach them none of the skills they need to be productive. The worlds need engineers, scientists, business people and other workers much more than it needs sociologists.

BevfromNYC said...

And Andrew, when I say "education" I do not necessarily mean formal education. I mean access to information from books, magazine, idea sharing. Most of our greatest human achievements and discoveries were made by accident by individuals going "huh, I wonder why that happens? Hey, Grog, what do you think?".

A curious mind will seek out an education no matter what the social strata it is born to. And, now more than any other time in human history, everyone on Earth has the potential to access whatever information they seek.

LawHawkSF said...

Andrew: I agree. And education doesn't necessarily have to be "higher" education. How many times have I said that I would kill just to be able to find a good auto mechanic? And for that matter, we need those who build the automobiles. I want a big, literate work force, and fewer sociologists.

As for choosing to live the poverty lifestyle, they will always be with us. But a few, maybe even many, can be forced out of it when the perpetual safety net and rewards for indolence are removed. In Haiti, it will be a slow and difficult process, but just a few industrious types, given the motive, opportunity and education who succeed can be a beacon to their neighbors.

LawHawkSF said...

Bev: Again--well said. Education is a great deal more than a high school diploma or a college sheepskin. It is a combination of knowledge and the ability to make that knowledge useful to oneself and society. Some of the least-lettered people I know are among the most educated and useful members of society. A successful businessman is worth ten Harvard MBAs.

AndrewPrice said...

Bev and Lawhawk, Education is relative to the needs of the job. A great mechanic doesn't need to understand human anatomy. But I think there is a certain level of education that is needed -- primarily learning how to learn.

The problem with using higher education as a proxy for intelligence/wisdom is that it's too easy to simply drift through college, picking up irrelevant knowledge and never really learning what you don't know.

But on the other hand, far too many people hide behind the "education don't mean nothing" and "the only real education is real life" mantras to hide what is nothing more than ignorant populism. Anyone who equates "uneducated" with "real" is an idiot, just as anyone who equates "college degree" with "intelligent" or "wise" is an idiot.

LawHawkSF said...

Andrew: We've reviewed the current round of anti-intellectualism before, and it bears repeating. We should not be denigrating a genuine and hard-earned college degree, nor are the fine arts and humanities to be dismissed as irrelevant. But each kind of education serves a purpose. Not everyone is emotionally-driven toward or intellectually capable of becoming a doctor, a nuclear physicist, or even a lawyer. But on the other hand, I haven't been able to repair an automobile engine since they eliminated generators and changed the basic nature of distributors.

Tennessee Jed said...

Hawk - interesting post!!

One of the big differences, of course, is quality of construction. This is true for both hurricanes and earthquakes. Hurricanes are easier for developed countries to deal with because there is more lead time to evacuate. At the same time, the more expensive properties raise the toll of property damage.

having spent a career in the insurance industry (private enterprise division) I can tell you it would be extremely difficult to obtain private insurance for damage from wind driven water damage for most buildings built on the east coast beaches. Of course government wants the bulding for tourism, taxes, etc. What governments typically do is require any private carrier writing property insurance in their state (Florida comes to mind) to participate in a state pool with participation based on your market share. Of course, the amount you are permitted to collect is kept artificially too low for politcal reasons. (Insurance companies are always politicians favorite villains.

Insurance departments are supposed to make certain that rates are neither redundant or inadequate. They are usually good about redundancies, but rarely do they worry about inadequate rates. They want their constituent policyholders happy. Another effect in the last 25 years is the impact of building contractors who inflate their costs during rebuilding. This is usually a supply/demand issue.

If you think about, people who don't build expensive structures shouldn't have to pay a premium surcharge to subsidize people who build structures on coastal barrier islands.

Happy Easter to all.

LawHawkSF said...

StanH: Nobody said it would be easy. But you're so right about people needing at least a minimal education in the things we take most for granted. The connection between hygiene and drinking water is one of those things. The Christian missionaries of the late 19th and early 20th centuries did a better job of teaching those things to the natives than modern government efforts (all we hear about in "history" classes today is how the missionaries exploited the natives and forced Christianity on them).

A perfect example of more recent divergence is that of some 20th century states in Africa. In areas where Christian missionaries worked closely with the natives on overpopulation and control of sexually-transmitted diseases, the birth rates went to civilized standards and STDs plummeted. Where the government and groups like Planned Parenthood attempted the same task, STDs and immense birth rates continued at their former rate. It turned out that the governments and PP handed out condoms and birth-control pills, and as soon as those scientific advancements made their way into the countryside, the uneducated populace got no instructions, and began to worship the packaging.

The same holds true in Nigeria where the abstinence and marital fidelity Christian areas suffer far fewer STDs, explosive birth rates, and unexpected pregnancies than the Muslim and animist areas.

For all my criticism of the Peace Corps, at least they lived with the people and learned the local ways while at the same time bringing many of the benefits of the modern world directly to the masses.

The infrastructure, as we've discussed above, includes providing the basics of modern civilization via education. Failure to do that renders most charity and government aid ultimately moot.

LawHawkSF said...

Tennessee: Very astute. But in Haiti they're nowhere near getting to the insurance angle. First they need to learn to be self-reliant and insist on decent quality construction. Then they could build a casualty insurance (and even life) insurance business once there is a reasonable possibility that structures and humans will survive the next catastrophe. When they finally become "modern," then they can blame the insurance companies for all their ills. LOL

PS: I worked my last two years of law school in the contracts department of The Equitable. For the fun of it, I picked up both life and casualty licenses, and made a decent side income from them. I really enjoyed the wide latitude I was allowed in creating small group health insurance plans, but that was before the state ruined the ability to be creative. My ex will soon be retiring as a senior claims adjuster for Farmer's, and my kids' godfather was a CIGNA (previously I.N.A.) accountant. So needless to say, I'm not prone to blaming insurance companies alone for our health care problems.

LawHawkSF said...

Tennessee: To you, and all those who have wished us a Happy Easter, I say thanks, and say the same to you and yours. The sadness of Good Friday ultimately leads to the joy of the Day of Resurrection. The darkness of the world yields to the bright sunlight of the soul.

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