Tuesday, April 5, 2011

Disasters: rich blindness and poor people drown.

It is no surprise to me, but a surprise coming from the World Bank:
Assuming that capital productivity is higher in areas at risk from natural hazards (such as coastal zones or flood plains), this paper shows that rapid development in these areas—and the resulting increase in disaster losses—may be the consequence of a rational and well-informed trade-off between lower disaster losses and higher productivity.....These results also suggest that the overall risk — i.e. mean annual losses — can increase with time, and even faster than wealth, in spite of continuously improving protection. A consequence of these findings is that future increase in disaster losses might be difficult to avoid.....
The more interesting stuff comes later:

All risks are not linked to rational choices, however. We showed that imperfect information and
myopic expectations can amplify risk-taking behaviors. This effect can be reinforced by other
sub-optimalities. In particular, some economic agents have little flexibility in their localization
choices, like the poorest households who locate in informal settlements in developing-country
What this means in more plain speak is "myopic expectations" is the most revered short term interest of profit, the so called invisible hand that is supposed to make everybody happy in the end. And that the effect of this, like always, hurt poor people most.

So in essence what their research show is the profit motives are not giving an optimal result or an optimal resource allocation and that the cost of failure will have to be born by the poor. Well, we knew that already, but it is good to have World Bank papers to prove the point...It also shows the inherent danger of too complex economic systems and the danger of trying to "compete" with nature. When you build a dyke it protects you from the flood, but once that dyke burts, you are worse off than without the dyke. 

Download the paper

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