RIETI Report September 2011

Studies Under way in Global Disaster Preparations

There is no preventing the occurrence of natural disasters, whether earthquakes, tsunami, or hurricanes. However, it is possible to prevent or at least mitigate damage arising from disasters, both in terms of the number of human casualties and economic impacts, and preparedness is what makes a key difference, according to Yasuyuki Sawada, Associate Professor at the University of Tokyo's Graduate School of Economics. He says that the world faces four types of major disasters--natural disaster, technological disaster, economic crisis, and war--which hit advanced and developing countries alike and often come in combinations, as was the case with the Great East Japan Earthquake. In this month's RIETI Report, Professor Sawada discusses what can and should be done to better prepare ourselves and people around the world for disasters and what role Japan can play as a country that has experienced diverse forms of disasters.

Also in this issue, we invite readers to take a look at the summary of RIETI-RAND Symposium "What Have We Learned from the Panel Data of the Elderly? :For better life and health." The symposium brought together the world's leading researchers conducting comprehensive surveys of elderly people around the world.Also, the nature of the Japanese Study of Aging and Retirement (JSTAR) results was discussed and analyzed the health, medical, pensions and labor conditions multidimensionally and the importance of panel studies was presented. For further details, please scroll down to the Recommended Reading section.

This month's featured article

Studies Under way in Global Disaster Preparations

SAWADA YasuyukiFaculty Fellow / Associate Professor at the University of Tokyo's Graduate School of Economics

Natural disasters, whether they occur in advanced or developing nations, can destroy people's lives. As we continue our ceaseless efforts to recover from the Great East Japan Earthquake, we are rediscovering the importance of advance preparations, such as drawing up emergency plans, disseminating and teaching emergency knowledge, conducting evacuation drills, and investing in infrastructure. How should we protect ourselves and the people of the entire world from catastrophes? Let us take a look at how we can prepare for disasters, working from the results of current studies in economics.

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The latest disaster in Tohoku was a natural disaster comprising an earthquake and tsunami, which was accompanied by a high-level technological disaster involving a nuclear power plant's leaking radioactive matter. Taking a look around, we see that the Japanese and global economies are still in the midst of the global financial crisis caused by the 2008 Lehman Shock, nations in Africa are still at war and involved in conflicts, and terrorist attacks are having a serious impact on advanced nations.

These various world disasters fall primarily into four categories: natural disaster, technological disaster, economic crisis, and war. It is clear that the latter three are man-made disasters.

The Center for Research on the Epidemiology of Disasters (CRED) in Belgium organizes detailed, long-term time series data on natural disasters per country, including hydrometeorological and climatic disasters such as floods, storms and drought, geographical disasters such as earthquakes, tsunami and volcanic eruptions, and biological disasters such as infectious disease epidemics. The Center also disseminates data on technological disasters comprising industrial disasters such as the latest radioactive leak from the nuclear power plant or the collapse of infrastructure, and airline and railway accidents.

As for economic crises, including financial, currency and debt crises and hyperinflation, and disasters resulting from the violence of war, Professors C. Reinhart of the University of Maryland and K. Rogoff of Harvard University (both in the U.S.) produce and disclose time series data.

The Figure shows the average occurrence of each of the four types of disaster per country per year. We can see that while natural and technological disasters are increasing rapidly, financial crises and war are maintaining stable patterns. Even so, they are not showing any trends toward reducing in frequency. These disaster trends indicate the importance of careful preparations in reducing damage arising from disasters.

Figure: Occurrence frequency of four types of major disasters in the world (Average per country)Figure: Occurrence frequency of four types of major disasters in the world

(Note) Prepared by the author based on the database of the CRED (natural disaster and technological disaster) and the database of Professors Reinhart and Rogoff (economic crisis and war).

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First, how should we prepare for natural disasters? Professor M. Kahn of the University of California in Los Angeles published an intriguing paper in 2005. According to this paper, natural disasters occur in advanced and developing nations alike, but when a nation is democratized and has better governance, the number of casualties is drastically reduced owing to disaster risk information that is communicated and shared, early warning systems that are developed, and infrastructure that is well developed to prevent or mitigate the impact of disasters.

Indeed, as the World Bank and United Nations describe in their 2010 joint report, Natural Hazards, UnNatural Disasters: The Economics of Effective Prevention, Bangladesh, where frequent cyclones have affected several hundred thousand people, has significantly reduced the number of casualties by investing in emergency infrastructure such as improving its early warning system, which operates via radio, and building numerous cyclone shelters.

However, as noted by Associate Professor D. Young of the University of Michigan in the U.S., data on the world's storms of the past 30-plus years show that the economic damage has been enormous. That tells us that we should balance emergency information systems and infrastructure that prevent damage to people with market-based insurance systems that prevent economic damage to prepare ourselves for natural disasters. In a study on the Chuetsu Earthquake that I conducted with Professor Hidehiko Ichimura of the University of Tokyo and Dr. Satoshi Shimizutani of the Institute for International Policy Studies, we found that earthquake insurance and public transfers had functioned quite well.

There is another form of preparation for natural disasters called "parametric insurance." This type of insurance pays out on storms that exceed a pre-designated speed, rainfall that falls short of a threshold level, and earthquakes that exceed a certain seismic intensity. It is an excellent system that alleviates the time and costs required by conventional indemnity-based insurance systems to assess damage.

One example is the Caribbean Catastrophe Risk Insurance Facility (CCRIF), which is a parametric, multinational hazard insurance fund for hurricanes and earthquakes that works with the international reinsurance market and was established as the first of its kind in the world. Haiti was a member of the Facility, and after the Haiti Earthquake in January last year, the government received 7.75 million dollars in earthquake insurance—around twenty times its premium—as soon as two weeks after the quake. This is evidence of the importance of preparing a new insurance system such as CCRIF.

In addition, Professor E. Miguel of the University of California at Berkeley et al. reported in their 2004 paper their discovery of the causal relationship between droughts in Africa and conflicts. This signifies that preventative action taken against natural disasters could also prevent conflicts and wars.

Today, we are capable of issuing early warnings of drought risks based on rainfall measurements and vegetation indices obtained from satellite images. Professor Miguel proposes a new type of foreign aid—Rapid Conflict Prevention Support (RCPS), which would reduce the risk of conflicts by using this information to estimate droughts and natural disasters, and by transferring aid immediately.

So how could we prepare for nuclear power plant failures and technological disasters? In 1997, Dr. G. Rothwell of Stanford University and Professor J. Rust of the University of Maryland released a paper titled On the Optimal Lifetime of Nuclear Power Plants. They developed a detailed decision-making model on continuing or ceasing the operation of a nuclear power plant. The econometric model assumed highly convincing data from nuclear power plants actually operating in the U.S. and studied the effects of government policy changes.

The results of their study indicated that the government's changes in restrictions, particularly the changes over years of approved operations, have a significant impact on the behavior of plant operators. Also, the Kahn paper mentioned above stated that the extent of casualties occurring as a result of industrial accidents depends on the level of democratization and governance of the nation. These studies support the importance of ex ante governmental actions for technological disasters.

Let us also touch upon preparations for economic crises. The Group of Twenty nations/regions (G20) and other meetings are discussing the installation of an early warning system that predicts and helps to counter the currency and financial crises that have occurred frequently since 1990. But as Professor A. Rose of the University of California at Berkeley and Dr. M. Spiegel of The Federal Reserve Bank of San Francisco point out in their 2011 paper, current research has not yet developed an early warning system that is sufficiently reliable.

On the other hand, preparations for economic crises have been enhanced. In 2009, for example, the International Monetary Fund (IMF) established a new prevention facility against economic crises. In the East Asia region, the Chiang Mai Initiative (CMI), a bilateral currency swap agreement to be implemented in times of a currency crisis, expanded to a multilateral framework (CMIM) in 2010.

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Advanced nations can deal with a major disaster by managing their financial resources. But developing nations, which carry diverse risks of major disasters, have weak financial groundwork and are less tolerant of such risks. Disasters come in combination, as was the case with the Great East Japan Earthquake.

This is why a global system of pooling the risks of the four types of disasters would be effective for both developing and advanced nations to diversify the risks of disasters. In other words, we should also work on the securities and reinsurance markets to develop a global disaster insurance system that would encompass various regional frameworks such as CCRIF and CMIM beyond disaster types.

When we consider the actual form of such a system, there are numerous issues involved, such as whether it would be an institutionalized system such as a disaster fund, or something more flexible such as a coordination forum. Yet our nation has experienced diverse forms of disasters, including the Second World War, the Great Hanshin-Awaji Earthquake, and the financial crises of the late '90s. Japan should therefore have sufficient capacity to take the lead in developing a system that undertakes comprehensive preparations against the risks of a variety of disasters.

>> Original text in Japanese

* Translated by RIETI from the original Japanese "Keizai kyoshitsu" column in the August 1, 2011 issue of the Nihon Keizai Shimbun.

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