January 9, 2011

The Economics of Natural Disasters: Concepts and Methods

by Stephane Hallegatte and Valentin Przyluski

- 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.

Hallegatte, S. and V. Przyluski (2010). "The Economics of Natural Disasters: Concepts and Methods." World Bank Policy Research Working Paper no. WPS 5507, Dec 2010.