The Economics of Natural Disasters : Concepts and Methods

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.