Joint OECD and World Bank report urges governments to improve resilience to disasters and related fiscal risks

This article is brought to you in association with OECD.

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Rapid economic development and climate change are increasing our vulnerability to natural disasters, and a new joint OECD-World Bank report calls for pro-active management of the financial costs of those disasters before they strike. Released during the annual OECD Forum in Paris, Fiscal Resilience to Natural Disasters estimates that natural disasters cost advanced and emerging economies around USD 1.2 trillion in damages and economic losses over the last decade, more than double what they cost over the previous 10 years. On top of the tragic loss of life from recent disasters, earthquakes in Chile and New Zealand in 2010 and 2011 cost 10% and 20% of annual GDP respectively. Japan’s 2011 earthquake, tsunami and nuclear disaster contributed to a 2% economic contraction in the following quarter of that year. It also led to a surge in additional central government spending for recovery and reconstruction in 2012, equal to 8% o its GDP and over 20% of the general account budget. “Central governments absorb a major share of disaster costs, especially in countries where private disaster risk insurance markets are under developed,” said Marcos Bonturi, Director of Public Governance at the OECD, launching the report at the OECD Forum in Paris. “Clearer ex-ante rules on burden sharing and more transparent conditionalities on financial assistance would help governments control or limit that cost and ease recovery when disaster actually strikes.” The report identifies the most important sources of disaster costs for governments. Damages to public infrastructure assets and related service disruptions are among the largest sources of the costs governments assume, and they are also the most difficult to control. The report also shows that many of such costs arise through claims made by subnational government agencies, state-owned enterprises or other partners that own or operate infrastructure assets and services. Broad or unclear rules about post-disaster assistance lead governments to take on a high share of disaster costs. Extreme disaster events put pressure on governments to act on an ad-hoc basis and often result in higher damage compensation. The OECD report finds that governments should be able to control their disaster-related contingent liabilities more effectively. Setting up clear rules for disaster assistance, including how costs are to be shared, can lead to improved resilience to fiscal risks. The report recommends that in the aftermath of disasters, governments could condition financial assistance to reward reconstruction designed to reduce future damages. For example, some countries decrease financial compensation for repeated damage claims to the same asset. “Every country will face unique challenges in managing its response,” said Alfonso Garcia Mora, World Bank Global Director for Finance, Competitiveness and Innovation. “The common thread is the potential for disaster recovery alternatives that will rely on stable markets, strong institutions, international co-operation as well as innovation and technology to improve financial resilience,” he added.