# **3 Impacts on households and microeconomic resilience**

To estimate the welfare impact of a macroeconomic loss in consumption, it is necessary to account for the distributional impacts of the disaster, and for the ability of households to cope with the shock (see for instance Adger et al., 2002; Morris et al., 2002; Adger, 1999, and a review of “resilience strategies” of households in Rose, 2013, Table I). The 2005 landfall of Katrina on New Orleans has renewed attention on the larger weather vulnerability of the poorest communities, and on the inequality-widening effect of disasters (Atkins and Moy, 2005; Tierney, 2006). Rodriguez-Oreggia et al. (2009) show that municipalities affected by disasters in Mexico see an increase in poverty by 1.5 to 3.6 percentage points. Often, the poorest have few assets to lose in a disaster and the impact on their welfare is therefore invisible in aggregated economic statistics. 16F<sup>17</sup> If the aim of the assessment is to look at welfare impacts, focusing only on economic aggregates can be misleading.

To assess welfare impacts, we thus need to account for the heterogeneity in consumption losses, and for the pre-disaster income distribution. To perform a detailed analysis, it would be necessary to consider the full distribution of income or wealth in the affected area, the full distribution of impacts of the disaster, and the correlation between the two (i.e. the differential likelihood of being affected by a given amount of losses, depending on the income level). Because it would make the exposition complicated and because lack of data makes it impossible to perform such an analysis, this section will present a simplified analysis based on a few household categories only.

In practice, we will be using only four categories of households depending on whether: (i) they are poor or not; and (ii) they are affected by the disaster of not. All poor households are assumed to have the same income and wealth; as do non-poor households. The framework is flexible regarding the definitions of “poor” and “non-poor.”<sup>18</sup> In particular, one can decide to focus on extreme poverty by defining the poor following the World Bank poverty line ($1.25 per day) or to use a broader definition of the poor that is relevant for disaster analysis (e.g., the population with no access to financial instruments, or the population that is “vulnerable” to falling back into poverty<sup>19</sup> ). All the calculations that are proposed in this section are theoretically possible in a more complicated framework with more than two categories. Note that in this analysis, we look at the welfare impact for the affected population without considering potential gains in other regions or countries, for instance if non-affected areas capture market shares lost by the affected region.

## **3.1 Ex-ante welfare impacts**

We assume first that all affected poor (respectively non-poor) households suffer from the same amount of losses (this assumption will be relaxed later on), and losses are assumed to be proportional to their income. These are strong assumptions for two reasons. First, poor households are often more

> 17 See an example on floods in Mumbai in (Hallegatte et al., 2010) showing that the impact on marginalized population is small in absolute terms, even though the effect of their welfare may dominate other disaster effects. 18 However, since the main difference between poor and non-poor will be the marginal utility of income, monetary definitions of poverty appears more appropriate than non-monetary definitions, in this very context.

> 19 See a discussion on the World Bank website: http://go.worldbank.org/R048B34JF0.

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