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.