After the disaster, who cares?

Click to read the report
Click to read the report

Today’s post is from Kate Lancaster, editor in charge of publications on regional development at the OECD.

Earthquakes. Droughts. Tsunamis. Landslides. Floods. Fires. Tornadoes. Epidemics. Hurricanes. Volcanic eruptions. Stories of disasters punctuate recorded history and resonate even now. Consider Pliny the Younger’s detailed account of the eruption of Mount Vesuvius in 79 CE, which destroyed Pompeii and Herculanum, or Daniel Defoe’s journal recounting the 1665 plague in London, or even the less carefully documented tale of the cow that set Chicago ablaze in 1871.

Today, however, disasters unfold live and pass quickly. They fill our televisions, computers, even phones, as events are happening and in their immediate aftermath. Striking photos, heart-wrenching stories. But then, it’s all over. Once the initial shock has passed, the material and economic damage assessed, a death toll announced, the media often goes home and we turn our gaze away, back to our regular lives, until the next “big one”.

It’s easy to forget that the effects of a disaster linger long afterwards, shaping the places and regions in which they took place.

The Italian region of Abruzzo, already in economic decline, was hit by a devastating earthquake in 2009. Concentrated in the capital city, L’Aquila, the quake also affected more than 50 other small towns nearby. Nearly half the region’s population was displaced by the quake and 309 people died. Thirty-seven thousand buildings were damaged, with devastation concentrated in the renowned historic centre of L’Aquila. Emergency relief in the immediate aftermath of the quake totalled around EUR 3 billion, and another EUR 8 billion was earmarked for reconstruction.

The biggest challenge of reconstruction is not just financial, however, as a recent OECD report, Policy Making after Disasters: Helping Regions Become Resilient – The Case of Post-earthquake Abruzzo, explains. Rather, it is simply how to “get it right” going forward. Reconstruction should help make the afflicted area more resilient, which means not only better able to weather future exceptional shocks or disasters, but stronger than before, with a sustainable local economy and a long-term development strategy. Citizens’ voices should be an important part of this process, the report argues. Authorities should create spaces for community deliberation, both physical and online, and should ensure that the opinions expressed can influence the decision process.

Yet in the three years since the quake, community engagement in strategy setting for the future of L’Aquila has, in fact, been very weak, though first steps towards improvement started in 2012. This has worsened social fragmentation and distrust of local governments.  Nevertheless, international experiences show that community engagement does have an important role in post-disaster regions. It can help decision makers to  determine redevelopment plans and can help ensure that these fit local circumstances, thus creating a sense of community ownership.

In Christ Church, New Zealand, for example, University of Canterbury has publicly shared its own experiences during and in the wake of the city’s 2010 earthquake, while Lincoln University has made public its research into the economic impact of the quake. In New Orleans, a local non-profit research group, the Greater New Orleans Community Data Center has been monitoring the quality and pace of rebuilding after Hurricane Katrina in 2005, through its New Orleans Index. The index tracks key social and economic recovery indicators, chosen based on input from local residents and when published, the limitations of each indicator’s data set are clearly spelled out in plain language to ensure transparency.

The experience of these cities, of Abruzzo, and of other regions examined in this report, provide valuable lessons to areas where natural disasters have forced a rethinking of the development model, or where long-term decline has done so. The report concludes with a list of eight practical recommendations for building resilient regions of interest to governments, decision makers, opinion leaders and community residents alike.

Useful links

 L’Aquila earthquake: relaunching the economy Workshop organised by the OECD in partnership with the Italian Ministry of Economy and Finance.

Recommendation of the OECD Council on Good Practices for Mitigating and Financing Catastrophic Risks

Large-scale disasters: Lessons learned

OECD Methodological Framework on Disaster Risk Management

OECD International Network on the Financial Management of Large-scale Catastrophes

IMF adds to debt warnings

Rising national debt is fast emerging as perhaps the most worrying hangover from the recession. The latest warning comes from the IMF, which says sovereign debt risks triggering a new round of economic woes.

“If the legacy of the present crisis and emerging sovereign risks are not addressed, we run the real risk of undermining the recovery and extending the financial crisis to a new phase,”  said Jose Vinals, director of the IMF’s monetary and capital markets department.

As noted previously on the blog, sovereign debts rose substantially during the crisis as government spent heavily to keep economies afloat. In the OECD area, government debt looks set to equal about 100% of GDP in 2011, up from about 70% before the crisis. That debt, along with government purchases of banks’ bad assets, means that in advanced economies “the biggest threats [to financial stability] have moved from the private to the public sectors”, says the IMF.

There is some good news in the Fund’s latest Global Financial Stability Report: Although banks and financial institutions remain in a “fragile” state, they are – says the IMF – “slowly regaining their health”.

Useful links

OECD Insights: From Crisis to Recovery

OECD work on the crisis

OECD work on economics

Debt – you ain’t seen nothing yet

National debts have risen sharply during the crisis – typically, they look set to hit 100% of GDP in OECD countries. But could they go higher – to 200, 300 or even 400% of GDP? That’s the worrying scenario set out in a paper from three economists at the Bank for International Settlements, the international organisation of central banks. Writing in a personal capacity, the team warns that rapidly ageing populations could lead to huge increases in government borrowing over the coming decades.

Unless action is taken, they say, those rises could eventually dwarf the debt run-up seen during the crisis. Countries in the OECD area, but also the “BRIC” economies, look set to see a growing imbalance in their populations over the coming decades. As people live longer and fewer babies are born, the size of the workforce will shrink and there will be fewer people of working age to support retirees. In the OECD zone in 2000 there were about 27 retirees for every 100 workers, according to the OECD Factbook ; by 2050, the proportion of retirees is forecast to hit 62, and in some countries there will be one retiree for every worker. That combination will hit governments hard: Fewer workers means they’ll be taking in less in tax, while more retirees means higher pension payments and healthcare bills.

The BIS team warns that the cost of fulfilling current government spending commitments means that by 2020 national debt would soar to 300% of GDP in Japan, 200% in the U.K., and 150% in Belgium, France, Ireland, Greece, Italy and the U.S. Their longer-term projections are even more startling, and warn of debt above 400% in the U.S. and 500% in the U.K by 2040. Clearly, such increases would be unsustainable.

For one thing, financial markets would probably stop lending to a country long before debts hit such levels. For another, the cost of paying off the interest on these debts would suck huge sums of productive capital out of the economy in the form of tax. “With a debt level that is two or three or four times your earnings each year, that just won’t work – you won’t be able to service that debt,” the team’s leader, Stephen Cecchetti, told the BBC . “The lesson here is not that this is going to happen – it almost certainly can’t happen,” he added, “the lesson is that something has to change.”

In fact, there are already signs that some change is happening, with a number of countries moving to raise retirement ages. That’s something we’re likely to see more of in the years – and decades – to come.

Useful links

OECD Insights: From Crisis to Recovery

OECD: Ageing and employment policies project – Live Longer, Work Longer

OECD Observer – Ageing

OECD Societies (a chapter from Trends Shaping Education, OECD 2008)

OECD Economic Outlook

The roots of a crisis­­

To kick off our new site, we will publish From Crisis to Recovery, a new book from the OECD Insights series here on the blog, chapter-by-chapter.   This book traces the roots and the course of the crisis, how it has affected jobs, pensions and trade, while charting the prospects for recovery.

These chapters are “works in progress” and their content will evolve.  Reader comments are encouraged and will be used in shaping the book.

By way of introduction…

The events of 2008 have already passed into history, but they still have the power to take our breath away. Over a matter of months, a succession of earthquakes struck the world’s financial system – the sort of events that might normally happen only once in a century.

In reality, the warning signs were already there in 2007, when severe pressure began building in the subprime securities market. Then, in March 2008, the investment bank and brokerage Bear Stearns collapsed. More was to come. Early in September, the United States government announced it was taking control of Fannie Mae and Freddie Mac, two huge entities that underpin mortgage lending in the U.S. Then, in the middle of that month, came news of the collapse of investment bank Lehman Brothers. A fixture on Wall Street, Lehman had been a home to the sort of traders and dealers that novelist Tom Wolfe once dubbed “masters of the universe”. Around the same time, another of Wall Street’s legends, Merrill Lynch, avoided Lehman’s fate only by selling itself to the Bank of America.

It wasn’t just investment banks that found themselves in trouble. The biggest insurer in the U.S., American Insurance Group, teetered on the brink of failure thanks to bad bets it had made on insuring complex financial securities. It survived only after billions of dollars of bailouts from Washington.

How did the stock markets react? In New York, the Dow Jones Index fell 777 points on 29 September, its biggest-ever one-day points fall. That was a mirror of wider fears that the world’s financial system was on the brink of meltdown. The mood was summed up on the cover of The Economist, not usually given to panic, which depicted a man standing on the edge of a crumbling cliff accompanied by the headline, “World on the edge”.

What happened? Find out by reading the full chapter here The Roots of a Crisis