The Disaster Profiteers: How Natural Disasters Make the Rich Richer and the Poor Even Poorer (6 page)

There is a silver lining for some people who actually benefit from being displaced to a location where the residents are generally better off, much the way poor migrants benefit from entering richer host countries. This can be especially true for children who are displaced into areas with better schools and health-care systems. They may acquire better skills than they would have and are around others of their age for whom completing high school and going on to college is a normal expectation, not an impossible dream.

Even more uncertain but often reported are the number of people “affected” by disasters. That figure can be extremely high, as it was in 2012 for Superstorm Sandy, a storm of huge dimensions that hit a very densely populated area of the northeastern United States. Tens of millions of people were affected by Sandy in some way, even if they just lost power and shivered for a while. After many disasters, the total number of those affected is often a pure guess. Although the number of people who lose power in a storm in the United States can be determined with accuracy, can the same be said for the Philippines? Most people who make comparative studies of disaster consequences cannot use data on populations affected by disaster events
(which CRED faithfully maintains as best as it can) because the data are far too unreliable.

When we ask what social harm
disasters do, one thing is certain: they take many lives and cause countless injuries and massive displacement, and they do so much more in poor countries than in rich ones. But what this discussion has made clear is that these numbers are not well known. Death tolls, at least, should be simple, but they are not. If an independent agency was tasked with counting body bags, we could have reasonable figures, but the counts are done by local governments with highly variable capacities and motivations for correct reporting. When three people die, you can be fairly sure the number really is three, but when 30,000 die, the number can be higher or lower for good reasons or political ones. After any disaster, we can never state very accurately how many people died, how many were injured, and how many moved away to better lives or worse lives. What we know from directly counting bodies are minimum death tolls.

Most people assume there really is an agency or a Meigs-like person whose task it is to get the numbers right, but there rarely is. Mostly, it seems to me, we don't really want to know. Hardly anyone remembers death tolls. Most people asked to remember how many died in 9/11 cite a figure that is much too high. I have asked the question in classes of graduate and undergraduate students and of colleagues; no one has come close to the correct number. In fact, some people overestimate by a full order of magnitude. Responses to a similar question about Hurricane Katrina yield similar inaccurate results.

After talking about deaths, and sometimes even before, the media will cite “economic” losses resulting from the disaster, often without providing a source. This happens most in the United States, where
death tolls are typically small, and it's one of the most common ways rankings get made—the top ten costliest. We forget the deaths fairly quickly. But there are many problems with estimating economic losses, more even than accounting for deaths and injuries. In the US media, first you hear about deaths; soon after “economic” losses are tallied. Technical Appendixes I and II explain some special issues involved in the basic economics of natural disasters.

I used quotation marks around the word
economic
because what are so often referred to as economic losses are not that at all; rather, they are losses of capital stocks, mostly manufactured or built capital. Natural capital—forests or beaches, for example—can be damaged, too, but generally those costs are not cited in disaster economic losses unless restoration costs are included. But a stock, like the type of stock lost in a natural (or even industrial) disaster, is not in itself an economic loss. This is not splitting hairs, just as the difference between a hazard and a disaster is not trivial. The economy of a country, a city, or a home includes stocks and flows. The economy is the function of, for instance, the rate at which production of goods and services takes place, not just the capital stock produced. It reflects how much people are regularly paid for the work they do, not just the accumulation of physical assets that they surround themselves with. Your house can be thought of as an important capital stock: it has come to you from a flow of income. If your income goes away, having a house isn't much help unless you sell it.

Not all capital is productive capital. Your home is not really productive capital unless you have a home business, something that happens a lot in poor places and rather less in wealthy places. This sounds harsh, but the things we cherish might not matter very much to the performance of an economy.

The first accounting of so-called economic losses from disasters often comes from insurance and reinsurance companies that cover
all manner of capital, including home exercise equipment, which is of no consequence to the economy at all. In fact, losing your flat-screen TV might be good all around: If it is insured, you'll get a newer version with higher definition, and the electronics company will make a sale. Roughly about half of all disaster capital losses are private property losses that are more likely to spur economic growth than detract from it.

Uncomfortable as this fact may make us feel, there is very little relationship between human losses and economic ones. It sounds callous to say it, but the people most likely to be killed in a disaster—the very old and infirm, the very young, and the very poor—don't much influence the performance of the aggregate macroeconomy because economically they are not very productive individuals. Most of the victims of the Chicago heat wave that Klinenberg described were elderly people living on their own and isolated on the upper floors of walk-up apartment buildings. So, too, were the great majority of victims of the western European heat wave of 2003, which killed more than 14,000 people in France alone. Overwhelmingly, those who died in Hurricane Katrina were elderly and alone.

These deaths matter for other, more important, noneconomic humanitarian reasons. But all forms of reporting on disasters equate large death tolls with large economic impacts when in fact the reverse may even be true: if most of those who died were living on welfare, their deaths actually may represent a savings to government coffers.

Capital losses from disasters are increasing, but that's just what you would expect as the world economy as a whole grows richer. The cost of capital losses
per
disaster will increase as the amount and value of the capital increases. It is like the poverty effect on deaths but in reverse. Wealth leads to fewer deaths but greater capital losses. Whether global capital losses are increasing at a rate faster than that
of the global economy is an open question. Part of the problem is the metric we use to count.

Haiti was said to have lost more than 100 percent of its annual GDP in the 2010 earthquake. Disaster economic losses often are given as a percentage of a country's GDP. That means it is important to understand what GDP is, what it measures, and what losing some fraction of GDP in a disaster means to an economy. Diane Coyle's excellent book,
GDP: A Brief but Affectionate History,
outlines the rise of GDP as the universally adopted way to gauge an economy.
30
Thomas Piketty also discusses GDP in his celebrated book
Capital in the Twenty-first Century
because much of his work draws on national income accounts.
31
Joseph Stiglitz gives a clear picture of what's wrong with GDP in
Mismeasuring Our Lives: Why GDP Doesn't Add Up.
32
So what is wrong with GDP, and how might that make a difference to how we understand the way disasters affect societies?

GDP became a way to measure an economy in the period before World War II, in the midst of the Great Depression. Prior to this time, there were many different measures of how economies were assessed and considerable debate about what should be measured—what constitutes the “economy,” a debate that continues to today. GDP is calculated as the sum of four terms:

GDP = private consumption + gross investments + government spending + (value of exports minus imports)

Even though it's a pretty simple formula, if you look up country rankings by GDP or GDP per capita available from the International Monetary Fund, the Central Intelligence Agency, and the World Bank, you will find that they differ and not by small amounts.

GDP does not translate to average income because only a fraction of the income from a country's production goes directly to workers'
salaries. GDP masks inequality. A disaster might cause great losses to low-income people but not show up very strongly in GDP.

And while the formula is simple enough, the problem is in totaling up what goes into each of the terms. What exactly are gross investments? What goes into consumption? The UN's
System of National Accounts
manual is hundreds of pages long and provides guidelines on how this should be done. Many countries don't, won't, or can't follow the guidelines very closely. Most poor countries don't have the institutional bodies needed to keep track of the figures that go into GDP.

As noted earlier, in poor countries much of the economy is informal, in the sense that many transactions, including pay for labor, are done in cash or bartered. Hence they are not taxed or regulated and do not show up in government accounts. The size of the informal economy in any country is hard to guess. Even in wealthy countries, the informal economy can be around 20 percent of the total, while in poorer countries it can exceed 60 percent.
33
The greater effect a disaster has on the informal sector, as it does in many poorer countries, the less likely the amount will be revealed in GDP figures.

After Italy started to include in its GDP an estimate of its quite-large informal economy in 1987, the country's GDP rose by 18 percent overnight and jumped ahead of the GDP of the United Kingdom. In an even bolder move, Italy started included drug trafficking, prostitution, and alcohol and tobacco smuggling in its national accounts in late 2014.
34
The United Kingdom followed a week later. Illegal businesses are big businesses in many countries, and it makes good sense to include their output in GDP figures, but the very fact that they
are
illegal makes them difficult to estimate. There is no reason to think these illegal activities decrease following a disaster. In fact, with law enforcement distracted by dealing with the disaster, criminal activities may even increase.

Low GDP can indicate low production of goods and a weak position in global markets. But comparing GDP outputs across countries is no simple business. Anyone from a developed country who has visited a relatively poor country knows that goods you buy there seem cheap. It is not uncommon for travelers to conclude that, although poor people have low incomes, goods are cheap, and perhaps people can live reasonably well on a small income. But goods that seem cheap to wealthy travelers still are out of reach of many poor people.

This difficulty is what gave rise to the Big Mac Index created by the
Economist.
You can get a Big Mac practically anywhere. To calculate the index, first take the price of the hamburger in the United States—say, $2.50—and in another country, such as Mexico, where you pay in pesos. Then convert pesos to dollars using current exchange rates and get the price of a Mexican burger in dollars. If currency exchange rates were perfectly aligned, the Mexican Big Mac would also cost about $2.50. But that never happens. After converting to dollars, the Mexican burger costs less than the American burger, which indicates that the peso is undervalued compared to the dollar. The same burger in Sweden is more expensive; the Swedish currency is overvalued relative to the dollar. The Big Mac Index calculates these relative valuations; it is a way to show what is more formally termed the purchasing power parity (PPP) adjustment.
35

One very serious problem with GDP is that capital stocks are not explicitly involved in the equation, and capital stocks are what are lost in a disaster. Capital and capital depreciation are included implicitly because capital stocks are needed to achieve production. But the effect of capital on production is quite variable and is very different in economies at different stages of maturity. The marginal return to capital may be quite low in comparison to total GDP in very advanced economies. If that is true, a marginal loss of capital should
mean less in a rich country than in a poor country. In fact, if those losses give rise to new investment and consumption, as they so often do, capital stock losses actually can benefit GDP.

GDP also does a poor job of measuring the output of the service sector of an economy because there is no physical product as such. What is the product of nursing, dentistry, or teaching yoga classes (or prostitution for that matter)? According to economist Diane Coyle, what the financial services industry produces is especially difficult to measure. Economic development typically is associated with a move away from agriculture and manufacturing (areas GDP measures fairly well) and toward services (an area GDP does not measure well at all). This move is hugely consequential. At both the high and the lower ends of development, GDP is notably imprecise. For that reason, disaster consequences measured in GDP have to be viewed with great caution.

Discussing the flaws of GDP also gives an important insight into the reason wealthy countries and wealthy people might have the ability to rebound after a disaster. Disasters destroy manufactured capital more than anything else, and wealthy countries are not so reliant on this form of economic activity. Thus, the capacity of wealthy countries to keep going after a disaster is greater than that of an economy in which physical capital and capital production are more important.