GAR 2013 Main Report

Part I - Chapter 2

2.1

The wealth of nations at risk

The wealth of a country in the form of produced, human and natural capital can be severely affected by disasters. In such cases, even a temporary inability of local and national economies to attract capital may have long-term negative impacts.

Disasters are often still described as exogenous shocks (G20/OECD, 2012

G20/OECD. 2012.,Disaster Risk Assessment and Risk Financing. A G20/OECD Methodological Framework., Paris,France: OECD.. Available at http://www.oecd.org/gov/risk/G20disasterriskmanagement.pdf..

). In reality, disaster risk is endogenous to investment and assets. Extreme hazards, such as major earthquakes, volcanic eruptions and destructive tsunamis, can certainly be described as exogenous events. But the losses and impacts that characterise disasters usually have as much to do with the exposure and vulnerability of capital stock as with the severity of the hazard event.

Capital stock can be divided into three categories: produced capital (including machinery and structures and urban land); intangible capital (including human and institutional capital); and natural capital (including energy, mineral and forest resources, crop and pasture land and protected areas) (World Bank, 2011

World Bank. 2011.,The changing Wealth of Nations : Measuring Sustainable Development in the New Millennium., Washington DC,. .

; UNU-IHDP and UNEP, 2012).ⁱ

Disaster risk becomes internalized in and endogenous to these different categories of capital stock,

reflecting how and where investment decisions orient capital flows, in the context of a range of mediating factors, including government regulation and incentives, insurance availability and pricing and financing. In other words, disaster risk is not natural but is produced through investment decisions and the range of factors that mediate those decisions.

Since the last global economic crisis of the mid1970s, a new economic globalisation has transformed the world beyond recognition—in its economy, society, politics, culture, territory and environment. It is beyond the scope or objective of this report to analyse the complexity or dynamics of these transformations. But if economic globalisation has changed the pathways through which capital flows, then the landscape of disaster risk will also have been transformed.

Over recent decades, spatial barriers to investment have been continuously eroded. Technological innovations such as containerization, satellite communication and the internet; the liberalization of trade and financial markets; new organizational models based on networks rather than hierarchies and the emergence of important new markets are only some of the components that have enabled and encouraged large businesses to decentralize, outsource or off-shore all or part of their operations to different locations worldwide (Castells et al., 2012

Castells, M., Caraca, J. and Cardoso, G. 2012.,Aftermath. The Cultures of the Economic Crisis., Oxford,UK: Oxford University Press.. .

Disaster risk has been etched into the contemporary economic landscape largely through investment decisions. In most countries, 70 percent to 85 percent of total investment is made by the private sector – small and large companies, investors and households. How these investments are made, directly determines levels of disaster risk. They shape the direction of capital flows and the level of disaster risk that is internalised in the capital stock or assets produced. To date, these investments have largely increased disaster risk.

As a consequence, the wealth of countries has repeatedly been eroded by disasters through loss of and damage to its capital stock. When produced, human and natural capital is affected by disasters; the competitiveness and sustainability of economies can be severely compromised with long-term negative impacts. These risks and the resulting costs are often transferred to and shared with other locations, actors or times.