The Economics of Natural Disasters
Friday, 05 March 2010
Who benefits from the donations to victims of catastrophes such as the 2004 Asian tsunami and the 2010 earthquakes in Haiti and Chile?
On 27.02.2010 the news dawned on the world that yet another natural catastrophe had ravaged mankind. Soon afterwards a myriad of disaster relief NGOs started to plea for donations to repair the damage. Once again after the Asian tsunami in 2004, and the recent earthquake in Haiti, the citizens of the world reached into their savings to contribute. Judging on past performance when some $12.5 billion was raised for tsunami victims and quake-stricken Haitians, another impressive donation is in the making for Chile. Yet, few people are aware exactly how the resources were spent in the past and who benefits from the generous citizen gifts.
To get an inkling of how the 2004 tsunami donations were spent, we can follow the investigation of the British newspaper, The Guardian, and take a look at an interactive game available on the webpage of the British Red Cross. There we find out that relief organisations first identify the worst affected communities, where they distribute basic aid to everyone. Afterwards, additional aid is allocated to those in dire need. To reconstruct homes from the debris, the Red Cross selects local companies. If local building material is of low quality or unavailable, it is imported from abroad. To restore human activities, the organisation gives out cash to people or opens accounts for them in local banks. Social implications are considered as well. For example, the Red Cross makes funding available for improving community spirit through constructing the likes of football fields.
What does this plan of activity tell us about who benefits from donations? To determine this, we need to follow the Red Cross logic and establish a four group taxonomy (See Figure 1):
1. Administrative support for donations (usually provided in donor countries)
2. Foreign companies that supply food/drink/material unavailable locally
3. Local businesses and agencies
4. Population affected from the disaster.
According to the Red Cross plan of action, each of these groups receives resources. What is unclear, however, is what percent of total aid is allocated to each category. Those that donate the money would of course like to imagine that at least 80% of it is spent locally with most of that amount allocated to the affected population. Nobody wants to see their donation go to enrich current market behemoths or local business cartels. But is this the case in reality?
Figure 1- How is disaster relief aid distributed?
When we look at how donations for the Haiti disaster are spent, doubts about fairness and adequacy of donation distribution increases. As noted by the American television network ABC, the bulk of donation spending goes to food, water, tents, blankets, and some construction. However, most of these products are most likely purchased from non-Haitian companies. Thus, the local population experiences donations as a one-time consumption, while foreign businesses profit from solid investment capital. Furthermore, ABC notes that most of the donations are still sitting in American banks waiting to be allocated. As a result, the banks that hold the deposits make a substantial profit. Once again the donor is given an advantage over the ones that need the aid to survive.
The last dimension is the lack of clear responsibility of who should collect and allocate aid. In Haiti, this is supposed to be United Nations (UN). However, as ABC points out, the UN has appointed Bill Clinton as a main co-ordinator. Mr. Clinton’s office in turn refutes that the former American president is in charge. This lack of centralised responsibility and accounting allows that different relief NGOs spent donations according to own prioritisation schemes, with the overall beneficiaries unclear and impossible to track.
How can the situation be improved? First, for every disaster only one organisation, e.g. the UN should centralise the collection and allocation of donations. Furthermore, a strategic plan that focuses on local needs and opportunities should determine how the money is spent. Second, the UN should publish a detailed report on what proportion of resources is allocated to administration, foreign companies, local businesses and disaster affected population. Such a report would encourage accountability from the NGO to the donors that finance the relief effort. To add, such a document would allow a better assessment of the efficiency and effectiveness of the donation distribution process. Finally, this approach would ensure that the ultimate goal, or namely maximising the positive contributions to the disaster-stricken population, is not substituted for enriching local and foreign business cartels.
It would be in everyone’s best interest to adopt such a framework as soon as possible as the disaster relief NGOs start urging citizens to help address the consequences of the Chilean earthquake.
