Extreme disasters have become more frequent in recent years, with some observers believing that this effect is partially due to climate change. Although fewer natural disasters happened in 2017, evidence showed increased costs from disasters was estimated to be around 49 per cent above the previous average of $141 billion. In 2017, 335 natural disasters affected over 95.6 million people, killing 9,697 and costing a total of USD $335 billion. Asia appeared to be the most vulnerable continent for floods and storms, with 44 per cent of all disaster events, 58 per cent of the total deaths, and 70 per cent of the total people affected.
In order to reduce the impact of natural disasters, many studies have been conducted on the effect of prevention and mitigation policies. While risk prevention seeks to reduce the probability of the risk happening, mitigation policies aim at reducing the damages associated with the disaster after its occurrence. Preventive measures tend to have an effect on the number of dead and injured, as natural hazards are hardly preventable. Mitigation measures, on the other hand, generally affect the level of damages after a disaster. Examples of prevention policies include education and disaster drills, while mitigation policies generally refer to infrastructure development.
The role of quality infrastructure in mitigating the impact of natural disasters has been highlighted by many authors throughout the academic literature. Developing infrastructure resilience was even one of the seven global targets of the Sendai Framework for Disaster Risk Reduction (DRR) 2015–2030. The importance of quality infrastructure is highlighted by the fact that two out of the four priorities directly relate to resilient infrastructure development, namely “investing in DRR for resilience” through collaboration between public and private entities and “enhancing disaster preparedness for effective response and to “Build Back Better” in recovery, rehabilitation, and reconstruction”.
Of the few studies that have been published on the subject, most do not assess quantitatively the impact of infrastructure on mitigating disasters’ impacts. While Hosoya quantified the effect of infrastructure on the recovery after the occurrence of a disaster, the studies did not assess mitigation practices in reducing damages. Rahman (2018) did quantify the impact of infrastructure on earthquakes, but only considered urbanisation without assessing the quality of infrastructure nor the role of other development indicators.
Our research aims at filling the gap in the literature by assessing quantitatively the impact of infrastructure on reducing the damages after a disaster occurs, through a comprehensive framework of analysis.
Determinants of society’s resiliency to disasters
As previously stated, some authors have highlighted that quality infrastructure has a positive impact on disaster resilience. Both McDaniels et al and Havko et al highlighted the need to make cities more resilient to disasters. Analysing the Great East Japan Earthquake and Tsunami of 2011, Hosoya (2016, 2019) studied the impact of public infrastructure in the recovery after disasters. Both studies concluded that infrastructure substantially accelerated the recovery, the speed of which depended on the estimation methodology used (Hosoya, 2016, 2019). Focusing on earthquakes, Rahman (2018) analysed a panel of countries across 60 years and proved that governments could significantly reduce casualties by focusing on the quality, rather than the quantity, of infrastructure.
In addition, the magnitude of the disaster is a decisive factor increasing the total amount of losses after a disaster. Academic studies seem to reach a consensus in affirming that more severe disasters tend to increase the overall costs and economic losses (Bergholt and Lujala 2012; Kousky 2014; Bahinipati et al 2015). Using a normalising methodology, Neumayer and Barthel (2011) argued that there was no significant increase in economic losses even though disasters became more severe, although such result may be due to mitigation practices which were not assessed in their methodology. Studies also seemed to concur on whether the increased frequency and intensity of natural disasters is due to anthropogenic climate change or not. Bergholt and Lujala (2012), Kousky (2014), and Bahinipati et al. (2015) argued that climate change would increase the severity of climate-related disasters, and hence would result in increased economic losses and negative effects on growth. Therefore, it is crucial to take into account the severity and intensity of a natural disaster.
Role of the government in developing and financing quality infrastructure
Quality infrastructure has been proved to mitigate the impact of natural disasters, but financing of that infrastructure remains an issue in many aspects. Mostafavi, Abraham, and Vives argued that the fiscal space in the government budget for infrastructure development in the United States is not sufficient to create resilient infrastructure. Jain (2015) emphasised the need for private investors for large-scale infrastructure projects in India and identified some obstacles for their participation in the regulatory environment, as well as a lack of information about insurance premiums available for private investors. Finally, Macaskill and Guthrie (2018) argued that the main issue in reconstruction is the availability of capital, as well long negotiations between the public and private sector for the construction of resilient infrastructure. It is certain that the public sector alone cannot carry the burden of building resilient infrastructure, and that there is a need for cooperation between the public and private sector.
One way to promote the development of quality infrastructure is public–private cooperation for projects that are highly risky. Infrastructure projects, in particular, suffer from a large variety of risks, such as a political regime change that may affect the project through subsidy cuts or even stoppage, cost increases due to the extension of the construction period or delays in land acquisition, and an unexpected decrease in revenue.
Additional burdens, for example, compensation for noise after the completion of the project, can add to costs for completing infrastructure projects. Private investors apply various strategies to avoid or reduce the possibility of the aforementioned risks and maximise their benefits. In doing so, some investors may force the transfer of risks onto the public sector. This is especially the case in Japan, where infrastructure projects have been carried out by third-party entities established by various regional governments.
As a consequence, there has been a budget deficit in the public sector. It is thus essential to determine beforehand how risks should be shared between the public and private sector. A viability fund coming from tax revenues created by the spillover effects of infrastructure, such as highways and railways, could be an ideal solution to solve this issue, in particular for infrastructure projects which are indispensable for the public, but do not offer enough benefits to represent interesting opportunities for the private sector. Figure 1 illustrates this effect. The figure clearly shows that the rate of return for the private sector for this project will be increased, hence making it more attractive. Private funds can also be introduced in projects thanks to toll revenue. However, if the toll revenue is too low, there is a possibility that the private sector would not put their money into the project at all.
Source: Authors’ compilation based on Yoshino, Taghizadeh-Hesary, Nakahigashi (2019)
Credit Guarantee Scheme (CGS) is another type of instrument that can be used to reduce the risk of investment in infrastructure projects. Taghizadeh-Hesary and Yoshino (2019) proposed the Green Credit Guarantee Scheme (GCGS)to low-carbon infrastructures (renewable energy projects), as it can help by reducing information asymmetry and the expected default losses. As loans are guaranteed by the credit guarantee corporation (government), banks are more likely to lend money to low-carbon projects. However, the GCGS does not imply an increased budget burden on the public sector. Indeed, the CGS is financed through premiums collected from green project investors who are seeking credit guarantees. The spillover effect of green energy supply also provides a source of funding from local governments, and a portion of the increase in tax revenue is to be returned to private investors, directly or through contribution to GCGS, allowing the investor to use the GCGS for collateral when getting a new loan. CGS is more applicable in the beginning part of establishment of the infrastructure when the spillover effect is low. As the spillover effect gradually increases, governments can collect more taxes from the region and refund a portion of it to the private investors, shifting from CGS to spillover tax refund.
Empirical study on role of quality infrastructure in natural disaster resiliency
Despite being largely praised for contributing to disaster impact mitigation, no study has quantified the role of quality infrastructure on disaster impact mitigation, except Taghizadeh-Hesary et al (2019) who attempted to assess this effect through the use of two methods, Generalized Method of Moments (GMM) and Vector Error Correction Model (VECM), on a panel data of 14 countries from Asia and the Pacific between 2007 and 2017. Using measures of intensity and infrastructure, as well as development indicators and institutional quality, the study attempted to identify the weight of mitigation practices in reducing damages from disasters. Various diagnostics and robustness checks were also conducted to ensure the stability of our model. To the best of our knowledge, such a comprehensive framework of analysis is unprecedented.
The results of this study showed that, while disaster intensity remains the largest factor explaining the total amount of damages, its effects are short-lived. On the other hand, infrastructure components have the second largest impact on total damages and have a long-term effect on damages. In particular, transport infrastructures are shown to have a robust impact on damages. A higher GDP per capita and control of corruption were also associated with a decrease of the adverse effect of disasters. Finally, while a higher level of poverty is shown to increase the estimated amount of total damages, it is the indicator with the lowest magnitude in both GMM and VECM. The empirical results from this research suggest that increasing the quality of infrastructure has a large impact on decreasing costs arising from natural disasters, even larger than development or poverty indicators.
Therefore, policymakers should prioritize quality infrastructure for the mitigation of disasters by using, for instance, public–private cooperation and schemes introduced in the study to prompt the construction of quality infrastructure.
AUTHOR
Farhad Taghizadeh-Hesary is a faculty member and Assistant Professor of Economics at Faculty of Political Science and Economics of Waseda University (Tokyo, Japan), and Visiting Fellow at the Griffith Asia Institute and Department of Business Strategy and Innovation.
Please click here to read the full “Quality infrastructure and natural disaster resiliency” working paper written by F Taghizadeh-Hesary, N Yoshino, A Mortha and T Sarker (2019) published by the Asian Development Bank Institute.
