Chapter 5     Investing today for a safer tomorrow

5.1 The opportunity cost of DRM

Japan has more people and GDP exposed to earthquakes and tropical cyclones than any other country in the world (UNISDR, 2009). Its risk-aware population has experience dealing with disasters, but even in Japan it is difficult to persuade citizens to invest in risk reduction. As Box 5.1 highlights, only a small minority of risk-prone households have participated in a government-sponsored earthquake retrofitting programme despite government cost-sharing, subsidized loans and tax breaks (Okazaki, 2010).

Difficulties persuading people to make rational choices have been observed in California (Stallings, 1995) and Romania,¹  confirming that even in high-risk contexts, individuals heavily discount future risks and are reluctant to invest today for a safer tomorrow (Kahneman and Tversky, 1979; Loewenstein and Prelec, 1992; Kunreuther and Useem, 2010). Despite evidence that DRM investments are costeffective, politically expedient and socially sustainable (ECA, 2009; UNISDR, 2009; World Bank, 2010b; Campos and Narváez, 2011), given short political time horizons, governments are likely to overly discount future risks. As the HFA Progress Review highlighted, few governments have a dedicated budget line for DRM, and many are unable to quantify their investments.


The decision to invest in DRM is clearly not technical or administrative – it is fundamentally political.²  However, it is far less clear how governments identify the political and economic incentives to invest. During financial crises, governments often act quickly to provide public resources to save banking systems and protect wealth. During the 1995 financial crisis in Mexico, for example, the public resources used to protect private assets amounted to approximately 20 percent of the country’s GDP. By comparison, between 1997 and 2009, accumulated allocations to Mexico’s disaster management fund added up to only 2.3 percent of the GDP in 1995. In Mexico, annual DRM investment has been decreasing since 1999, and in 2007 it was equivalent to only 0.01 percent of the government’s income and 0.04 percent of total public investment (Moreno and Cardona, 2011). In Colombia, DRM investment has been increasing, but it was still only 0.08 percent of government income and 0.07 percent of public spending in 2009.

Governments indicate that a lack of financial resources constrains investment in DRM, but how available public resources are invested tends to reflect other political priorities. Figure 5.1 shows that government investment in DRM in Colombia and Mexico is significantly less than the amount of money the governments give out in the form of tax exemptions. In Mexico, for example, tax exemptions represented 6 percent of GDP and 50 percent of potential tax income in 2007, while cumulative DRM investment over eight years (1999–2007) amounted to less than 0.2 percent of GDP in 2007. These governments do not lack the resources to invest in DRM – they have not identified it as a priority.



In contrast, there is usually a strong political imperative for disaster relief. Leaders have always understood the power of symbolic and real responses to disasters. Saving lives and assisting disaster victims is a moral, humanitarian and political paradigm that few would contest. As such, disaster relief can be a powerful tool for leaders, enhancing their political profile and facilitating patronage. As Box 5.2 highlights, electoral considerations certainly influence disaster responses (Sen, 1981; Bueno de Mesquita et al., 2004).

In contrast, the incentives for DRM, a public good, are far less obvious. If governments patronize the powerful private interests often internalized in sectors such as urban development, construction, agribusiness and tourism, there may be a disincentive to invest in DRM. As discussed in Chapter 3, the privatization of water resources by the agribusiness sector may increase agricultural productivity and generate foreign exchange but simultaneously transfer agricultural drought risk to subsistence farmers. Seriously addressing underlying risk drivers involves trade-offs which may represent an important political opportunity cost for governments.

5.1.1 Can disasters provide a political and economic incentive for DRM investment?

Major disasters can sometimes provide a political imperative, given a real or perceived social demand for improvements in DRM. The evidence, however, is mixed. In some countries the window of opportunity for DRM opens wider than in others. Unfortunately, the mechanisms through which large disasters can provide a political incentive, and under what conditions, have not been systematically studied. Despite huge investments,³  post-disaster recovery programmes are rarely assessed from the perspective of DRM improvement. The post-tsunami TRIAMS process represents one effort to address that gap, marking an important breakthrough by proposing a framework of core indicators to monitor DRR progress and assess impact across different countries, at different scales, and for a number of key sectors.⁴ 

There are further examples of real change. In Iran (Islamic Republic of ), the 7.2 magnitude earthquake in Bueen Zahra in 1962, which resulted in the death of 12,000 people (EMDAT, 2011b), enabled a national consensus on building codes that had long been debated (Aon Benfield, 2010). In Colombia, the 1983 Popayan earthquake and the 1985 eruption of the Nevado del Ruiz volcano led to the establishment of a comprehensive DRM system. The 1999 Orissa super-cyclone and the 2001 Gujarat earthquake in India, the 2001 floods in Mozambique and the 2004 tsunami in Indonesia are other examples of large disasters that highlighted DRM capacity gaps and led to institutional and legislative changes. Following the 2004 tsunami, Indonesia also enacted comprehensive legislation and established a National Disaster Management Agency (BNPB) tasked with coordinating risk reduction (Llosa and Zodrow, 2011; Scott and Tarazona, 2011). In many of these cases, including in Colombia and Mozambique, the emergence of individual champions also played a decisive role (Llosa and Zodrow, 2011; Williams, 2011).

For each success story, there are others where the social demand was either weak or ignored, the strengthening of DRM was cosmetic, or the initial impetus was difficult to sustain. Rarely does the recognized need for a revision of land use planning after disasters lead to a full reform of land use and tenure systems (Barnes and Riverstone, 2009). In the HFA Progress Review, less than half of the countries reported that they had DRM provisions in their recovery and reconstruction budgets.

Countries with stronger governance are better placed to use the political window of opportunity following a major disaster, building on existing institutions, risk assessments, expertise and professional networks (Ievers and Bhatia, 2011). Weak governance linked with low institutional, financial and human capacities, and a lack of information on the costs and benefits of risk reduction, mean that governments are often unable to measure the opportunity costs of investing in DRM (Karayalcin and Thompson, 2010).

In general, countries that experience more frequent major disasters are more likely to invest in risk reduction due to lower opportunity costs (Keefer et al., 2010). Predictable disasters, such as recurring tropical cyclones, stimulate more social demand for DRM, because a failure to reduce foreseeable risks will expose government negligence. In contrast, when confronted with low-probability events, governments are more able to discharge their responsibilities and blame external forces such as God, nature and, more recently, climate change.

In addition, disasters that affect marginal groups with little voice in national politics are less likely to catalyse investment than those that affect strategic economic or political sectors (Maskrey, 1996; Smith and Quiroz Flores, 2010). Extensive disasters, for example, rarely create the concentrated citizen pressure necessary to stimulate a national political and economic imperative (Williams, 2011).

It has remained difficult to justify DRM investments based on estimates of their avoided impacts on medium- and long-term economic growth. The conflicting evidence provided by macro-economic studies (Kahn, 2005; Jaramillo, 2009; Noy, 2009; Cavallo et al., 2010; Keefer et al., 2010) may be due to the different econometric methods used and countries analysed. In Colombia, for example, most large disaster events did not produce lasting effects on economic growth but did affect inflation, per capita income, unemployment rates and inequality in the short term (Moreno and Cardona, 2011). Such effects, however, were heavily conditioned by how each individual disaster was managed. For example, the 1994 Tierradentro earthquake devastated a remote indigenous region in southern Colombia. After the disaster, unemployment increased and stabilized at a higher rate, and inequality also increased to rates that persist today. In contrast, the major investments in reconstruction after a 1999 earthquake devastated Colombia’s central and economically important coffee-growing region actually led to reduced inequality.


Notes