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# **1 Natural Disasters and Welfare**

As the world prepares for a changing climate and natural disasters hit with increasing frequency (UNISDR, 2009), especially in coastal areas (Costanza and Farley, 2007), it is imperative to better understand how natural disasters affect economies and their people. While disasters are known to cause substantial human and economic suffering (Okuyama, 2009), there remain important uncertainties about the magnitudes of the welfare loss and its persistence over time, the heterogeneity in their effects across socio‐economic groups, the conditions under which they are more or less harmful, and the effectiveness of different interventions in dealing with them. When it comes to economic or GDP growth (as opposed to welfare/GDP levels), there isn’t even an empirical or theoretical consensus about whether natural disasters are actually damaging for growth (not levels) or not (Cavallo and Noy, 2009; Loyaza, et al., 2009).

Careful examination of the welfare effects of natural disasters requires in the first place a disaggregated mapping of the natural disasters themselves. While the (economics) literature typically glances over this, this is anything but straightforward. For example, micro‐studies nowadays often use subjective measures of shocks and disasters.<sup>2</sup> When available, these are useful, but also suffer from important methodological and practical shortcomings. In particular, whether a household considers a meteorological event a natural disaster is likely to depend both on its ex ante exposure to it and its ex post capacity to cope with it. Yet, to reduce its exposure it may have adopted less risky portfolio strategies over time, which could come at the expense of lower average returns. The household may also be able to fall back on (formal or informal) support systems to cope with it ex post, leading it to consider the event less of a shock or disaster, as it is not bearing its full costs. Such considerations, which remain largely unknown to the researcher, may lead to an underestimation of the full welfare cost of the event. Besides methodological concerns, it is typically also hard to extrapolate the findings across space and time, as subjective shock measures are usually not available outside the sample. Neither are their probability distributions, which are necessary to predict in the future.<sup>3</sup> When objective measures of natural disasters have been used instead, for example directly derived from the weather data, these measures have often been constructed only at rather aggregated levels (Christiaensen and Subbarao, 2005).

To overcome these methodological and practical concerns, this study derives measures of natural disasters and hazards at disaggregated geographical levels from primary meteorological weather station data, storm tracks and satellite observations. Second, in understanding the economic impact from disasters both direct and indirect effects need to be considered. Their most direct (and visible) impact relates to the destruction of capital (for example productive assets, property and infrastructure in case of floods and hurricanes; livestock and crop loss, but also hunger and reduced work capacity in case of droughts and famines) (Loyaza, et al., 2009). But they also have important indirect effects (Okuyama, 2009), as the effects of the initial destruction of private and public capital works its way through the economy via the product and factor markets. Ruptures in infrastructure or the electricity supply for example reduce the flow of goods and services and 2 These are typically derived from answers to a shock module incorporated in household questionnaires asking respondents whether they experienced different types of shocks over a certain period (e.g. a drought, a flood, a storm, ...).

3 The latter could in theory be obtained (Delavande, Gine and McKenzie, 2010).