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The economics of natural disasters : concepts and methods

  • Hallegatte, Stephane
  • Przyluski, Valentin

Large-scale disasters regularly affect societies over the globe, causing large destruction and damage. After each of these events, media, insurance companies, and international institu-tions publish numerous assessments of the"cost of the disaster."However these assessments are based on different methodologies and approaches, and they often reach different results. Besides methodological differences, these discrepancies are due to the multi-dimensionality in disaster impacts and their large redistributive effects, which make it unclear what is included in the estimates. But most importantly, the purpose of these assessments is rarely specified, although different purposes correspond to different perimeters of analysis and different definitions of what a cost is. To clarify this situation, this paper proposes a definition of the cost of a disaster, and emphasizes the most important mechanisms that explain and determine this cost. It does so by first explaining why the direct economic cost, that is, the value of what has been damaged or destroyed by the disaster, is not a sufficient indicator of disaster seriousness and why estimating indirect losses is crucial to assess the consequences on welfare. The paper describes the main indirect consequences of a disaster and the following reconstruction phase, and discusses the economic mechanisms at play. It proposes a review of available methodologies to assess indirect economic consequences, illustrated with examples from the literature. Finally, it highlights the need for a better understanding of the economics of natural disasters and suggests a few promising areas for research on this topic.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5507.

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Date of creation: 01 Dec 2010
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Handle: RePEc:wbk:wbrwps:5507
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  1. Stefan Dercon, 2003. "Growth and Shocks: evidence from rural Ethiopia," Economics Series Working Papers WPS/2003-12, University of Oxford, Department of Economics.
  2. Gaddis, Erica Brown & Miles, Brian & Morse, Stephanie & Lewis, Debby, 2007. "Full-cost accounting of coastal disasters in the United States: Implications for planning and preparedness," Ecological Economics, Elsevier, vol. 63(2-3), pages 307-318, August.
  3. Eduardo Cavallo & Ilan Noy, 2009. "The Economics of Natural Disasters - A Survey," Working Papers 200919, University of Hawaii at Manoa, Department of Economics.
  4. Stéphane Hallegatte & Nicola Ranger & Olivier Mestre & Patrice Dumas & Jan Corfee-Morlot & Celine Herweijer & Robert Wood, 2011. "Assessing climate change impacts, sea level rise and storm surge risk in port cities: a case study on Copenhagen," Climatic Change, Springer, vol. 104(1), pages 113-137, January.
  5. Hallstrom, Daniel G. & Smith, V. Kerry, 2005. "Market responses to hurricanes," Journal of Environmental Economics and Management, Elsevier, vol. 50(3), pages 541-561, November.
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