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Mother Jones and the Atlantic have an interesting joint article on the rising cost of disasters in rich countries. Drawing on observations from the classic work The Environment as Hazard, they juxtapose rise of safety (defined as “less loss of life from disaster”) with the simultaneous rise in the costs of disaster. At the same time, the ratio for poor countries is reversed, with an increase in loss of life, but lower monetary costs.

How are such costs measured? Consider the death toll and total cost of Japan’s Tohoku earthquake and tsunami as compared to Haiti’s 2010 earthquake. In Japan, around 15,000 people died, while in Haiti that number was 300,000. However, the total cost for the events was the hundreds of billions of dollars in Japan versus tens of billions of dollars in Haiti.

Why do disasters impact rich and poor countries differently? Vulnerability, the probability and exposure of a population to risks, dramatically differ between rich and poor populations. The world’s poor have fewer choices as to where they can live, fewer protections, and less backstops when disaster does strike.

In poor countries, the trend of rapid urbanization occurs in particularly hazardous areas; areas that would otherwise be undesired. Non-existent infrastructure and building codes plague these communities, leaving them vulnerable to a variety of natural events. When disaster does strike, there are fewer backstops available such as insurance, cash payouts, and cheap loans for disaster relief. Additionally, due to the concentration of urbanization, a larger number of people are likely to be affected, and poor infrastructure makes it hard to effectively distribute relief supplies. Finally, urbanization has weakened traditional networks and community-based hedges, leaving those affected more dependent on outsiders for aid.

On the other hand, why do disasters in rich countries cost more money, but result in fewer deaths? To begin with, rich countries have more infrastructure and that infrastructure is more expensive to rebuild. Additionally, disasters affect the workforce and production, causing net economic damage beyond the rebuilding required. In other words, economic loss incorporates the multiplier effect on the labor of rich, high-productivity societies.

For example, Tohoku was particularly dense in automotive production and the earthquake destroyed factories and disrupted global supply chains. Rich countries have resources to include preventative measures when building infrastructure. Such steps lessen vulnerability to an average disaster, which paradoxically increase costs, when a larger disaster strikes. Protections like levees are built to contain flooding and strong buildings are built in accordance to codes designed to help avoid catastrophe.

But when they are overwhelmed, catastrophe is higher than it would have been had the vulnerable area not been developed in the first place. This shapes the distribution of disasters into infamous black swans, increasing the (still very) small probability of a large catastrophe (For more on this, see e.g., White et al., 2001 “Knowing better and losing even more”). For an event like Hurricane Katrina, the failure of the levees brought devastation to New Orleans. But they worked until they were overwhelmed (For a somewhat cartoonish view of levees, see the National Flood Insurance Program’s Levee Simulator), otherwise increasing the development of the area.

In the U.S. collective decisions about risk are generally independent from their relationship with hazard. The probability of a disaster in a given area is small. If disaster does occur, the cost and risk is often borne by other entities. For example, the National Flood Insurance Program, which provides subsidized flood insurance, shifts the risk landscape of the country and makes it reasonable for people to live in flood-prone and coastal areas that would otherwise be too risky on which to build. For states and local governments, eligibility for federal disaster aid acts as a backstop that makes it cheaper to eschew the costs of protection in favor of a strategy of hope and post-disaster reimbursement.

However, as catastrophes increase in size and disruptions continue, System Logic believes these dynamics may start to change in both the residential and commercial markets. Despite inertia and distortions like subsidized flood insurance, the residential housing market can become more relatively efficient in subtle ways. For example, house prices already command a premium for access to good public schools. (House Prices and the Quality Of Public Schools: What Are We Buying?, Crone 1998) The security of a place to natural disruptions is difficult to ascertain compared with school quality. However, the increased frequency with which events like floods and power outages occur will make natural security a more readily observable factor for home purchasers, and secure houses may begin to command a premium.

For companies, the cost of disruptions to businesses is higher, and there are knock-on effects like supply chain disruptions. Resiliency to catastrophe includes considering the vulnerability of specific sites and the infrastructure surrounding those locations. This recognizes the importance of power, communications, shipping, and transportation when designing for redundancy. It also acknowledges the competitive disadvantage of being disrupted when one’s competitors are up and running. Indeed, careful planning can capture the strategic advantage of continuing operations in a time of crisis, and firms may start to pay more attention to these issues as probabilities and impacts increase.