Justifying the cost of disaster risk reduction: a summary of costbenefit analysis

Cost–benefit analysis (CBA) can play a pivotal role in advocacy and decision-making on disaster risk reduction (DRR) by demonstrating the financial and economic value of incorporating DRR initiatives into aid planning. Natural disasters are affecting more of the world’s population, and are projected to increase in severity and intensity under climate change. The cost of disasters, both in terms of lost GDP as well as spending on relief and rehabilitation, is significant. Investment in DRR is, however, limited. There is uncertainty around where and when disasters will strike, and what harm they will cause (particularly in the case of events such as cyclones). Meanwhile, governments and donors focus spending on immediate needs for poverty reduction, such as health, water and food security, and hesitate to invest in DRR where the immediate development outcomes are not always clear.

Evidence on the costs and benefits of DRR consistently shows that investment brings greater benefits than costs, and therefore should be a priority for development planning. However, this evidence is limited and very location- and hazard-specific. Further work is needed to demonstrate to finance ministers and donors that mainstreaming DRR is financially and economically justified.

The cost of disasters

With their rising incidence and increasing severity, the cost of disasters, both in terms of lost GDP and expenditure diverted to relief and rehabilitation, is significant. The World Bank has estimated that, between 1990 and 2000, natural disasters caused damage valued at between 2% and 15% of an exposed country’s annual GDP.

The World Bank’s conclusions have been supported by the recent, high-profile Stern Review, which estimated the costs and benefits of reducing the risks associated with climate change, of which natural disasters are a core component. Stern’s central conclusion is that the benefits of strong and early action far outweigh the economic costs of not acting. The Review estimates that, if steps are not taken to combat climate change, the overall costs and risks will be equivalent to losing at least 5% of global GDP each year, now and for the foreseeable future. If a wider range of risks and impacts is taken into account, the damage could rise to 20% of GDP or more. In contrast, the costs of the action required to reduce emissions to a level which would avoid the worst impacts of climate change can be held at around 1% of global GDP each year.

Cost–benefit analysis and disaster risk reduction

Cost–benefit analysis is an economic tool that can be used to compare the costs and benefits of DRR interventions.

Only a handful of community-level studies have been conducted, and these have used different methodologies and approaches. Initial research suggests that DRR measures often bring greater benefits than the costs they incur, but this may vary significantly depending on factors such as the type of disaster, the country concerned and the DRR measures employed.

Further action

There is a critical need for further evidence of the costs and benefits of DRR. In particular, we need systematic studies comparing regions, types of hazard and DRR interventions to provide a sounder comparative basis upon which conclusions could be drawn on the costs and benefits of DRR measures. Practical guidance on how to undertake CBA is required for use by practitioners and governments alike to facilitate prioritisation of DRR measures and to maximise the effectiveness of limited financial resources.

Studies that seek to use the findings from CBA to engage in advocacy with governments and international institutions should be encouraged. This linkage between practice and policy is essential in order to ensure that any further detailed work on DRR options is used to effect change in high-level policy and decision-making. It is worth noting that work is also being taken forward within the climate change context to understand the costs and benefits of adaptation options. Much of this is overlapping, given that increases in climate-related natural disasters are a core impact of climate change. The climate change and DRR agendas should be more closely linked to ensure that effort is not duplicated.

Courtenay Cabot Venton is Senior Consultant, Disaster Risk Reduction and Climate Change Adaptation, Environmental Resources Management. Her email address is: courtenay.venton@erm.com.

References and further reading

World Bank, Natural Disasters: Counting the Cost, 2 March 2004, www.worldbank.org.

The Stern Review on the Economics of Climate Change, HM Treasury, available at: http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/stern_review_report.cfm.

C. Benson, ‘The Cost of Disasters: Development at Risk? Natural Disasters and the Third World’, in J. Twigg (ed.), Development at Risk? Natural Disasters and the Third World. Oxford: Oxford Centre for Disaster Studies.

Dedeurwaerdere, A. (1998) Cost–Benefit Analysis for Natural Disaster Management – A Case Study in the Philippines. Brussels: CRED.

IFRC (2002) World Disasters Report 2002. Geneva, IFRC.