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Global Assessment Report on Disaster Risk Reduction 2011
Revealing Risk, Redefining Development
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Chapter 5     Investing today for a safer tomorrow

Both individuals and governments tend to discount low-probability future losses and seem reluctant to invest in disaster risk management (DRM). Governments often cite a lack of financial resources as a constraint, but the allocation of available public resources reflects political priorities. The imperative to invest in DRM is likely to be greater in countries with effective institutions, and where a strong civil society can hold governments and other stakeholders to account for poor decisions. Despite the magnitude of disaster costs, reducing disaster risks is often perceived as less of a priority than fiscal stability, unemployment or inflation.

Evidence from Colombia, Mexico and Nepal indicates that this judgement is short-sighted. Country risk profiling and stratification can provide the basis for unexpected development and growth dividends. The data highlights that disasters and their downstream impacts represent major losses for governments, who are responsible not just for public assets, but implicitly at least, also for the uninsured assets of low-income households and communities. As the HFA Progress Review highlighted, few countries systematically account for their disaster losses, and invisible impacts do not generate incentives to invest.

Conducting a comprehensive risk assessment and systematically accounting for disaster losses do not guarantee that governments will invest more. They can, however, encourage governments to take ownership over their stock of risk and identify strategic trade-offs when making policy decisions for or against investing in DRM. Although economic costs and benefits are never the only criteria for investment, making the trade-offs transparent offers two significant advantages for governments. They would then be able to assess the liabilities implicit in the full spectrum of risk in their country, important for fiscal and fiduciary planning, and make more informed decisions concerning the most cost-effective portfolio of risk management and financing strategies.


5.1 The opportunity cost of DRM

The decision to invest in DRM is clearly not technical or administrative – it is fundamentally political. However, it is far less clear how governments identify the political and economic incentives to invest.

Japan has more people and GDP exposed to earthquakes and tropical cyclones than any other country in the world (UNISDR, 2009

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UNISDR (United Nations International Strategy for Disaster Reduction). 2009. Global assessment report on disaster risk reduction: Risk and poverty in a changing climate. Geneva, Switzerland: United Nations International Strategy for Disaster Reduction.
Click here to go to GAR09 page.
). Its risk-aware population has experience dealing with disasters, but even in Japan it is difficult to persuade citizens to invest in risk reduction. As Box 5.1 highlights, only a small minority of risk-prone households have participated in a government-sponsored earthquake retrofitting programme despite government cost-sharing, subsidized loans and tax breaks (GAR 11 paperOkazaki, 2010

x

GAR11 Okazaki, K. 2010. Incentives for safer buildings. lessons from Japan. Contribution to the 2011Global Assessment Report on Disaster Risk Reduction. Geneva, Switzerland: UNISDR.

Click here to view this GAR paper.
).

Difficulties persuading people to make rational choices have been observed in California (Stallings, 1995

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Stallings, R.A. 1995. Promoting risk. Constructing the earthquake threat. New York, USA: Aldine de Gruyter.
.
) and Romania,1  confirming that even in high-risk contexts, individuals heavily discount future risks and are reluctant to invest today for a safer tomorrow (Kahneman and Tversky, 1979

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Kahneman, D. and Tversky, A. 1979. Prospect theory: An analysis of decision under risk. Econometrica 47 (2): 263–291.
.
; Loewenstein and Prelec, 1992

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Loewenstein, G. and Prelec, D. 1992. Anomalies in intertemporal choice: Evidence and an interpretation. The Quarterly Journal of Economics 107 (2): 573–597.
Available at http://econpapers.repec.org/article/tprqjecon/v_3a107_3ay_3a1992_3ai_3a2_3ap_3a573-97.htm.
; Kunreuther and Useem, 2010

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Kunreuther, H. and Useem, M. 2010. Learning from catastrophes. Strategies for reaction and response. Upper saddle river, New Jersey. Philadelphia, USA: Wharton School Publishing.
.
). Despite evidence that DRM investments are costeffective, politically expedient and socially sustainable (ECA, 2009

x

ECA (Economics of Climate Adaptation). 2009. Shaping climate adaptation: A framework for decision-making. New York, USA: McKinsey & Company.
Available at http://www.mckinsey.com/App_Media/Images/Page_Images/Offices/SocialSector/PDF/ECA_Shaping_Climate%20Resilent_Development.pdf.
; UNISDR, 2009

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UNISDR (United Nations International Strategy for Disaster Reduction). 2009. Global assessment report on disaster risk reduction: Risk and poverty in a changing climate. Geneva, Switzerland: United Nations International Strategy for Disaster Reduction.
Click here to go to GAR09 page.
; World Bank, 2010b

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World Bank. 2010b. Natural hazards, unnatural disasters: The economics of effective prevention. Washington DC, USA: The World Bank and United Nations.
.
; GAR 11 paperCampos and Narváez, 2011

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GAR11 Campos Garcia, A. and Narváez Marulanda, L. 2011. Study of implementation of strategies for incorporating risk management criteria for public investment in Latin America. Background paper prepared for the 2011 Global Assessment Report on Disaster Risk Reduction. Prepared by Florida International University. Geneva, Switzerland: UNISDR.

Click here to view this GAR paper.
), given short political time horizons, governments are likely to overly discount future risks. As the HFA Progress Review highlighted, few governments have a dedicated budget line for DRM, and many are unable to quantify their investments.

Box 5.1 Incentives for safer building: lessons from Japan


In Japan, traditional wooden houses are vulnerable to earthquakes. During the 1995 Great Hanshin- Awaji Earthquake which claimed more than 6,000 lives, 80 percent of the mortality occurred in collapsed houses. While new buildings are earthquake resistant, about 25 percent of Japan’s total housing stock was still vulnerable (Japan, 2008

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Government of Japan. 2008. Ministry of land, infrastructure, transport and tourism (MLIT) statistics. Tokyo, Japan: Ministry of Land, Infrastructure, Transport and Tourism.
Available at http://www.mlit.go.jp/jutakukentiku/build/retrofitting.html.
), representing a significant risk to household budgets and public finances.

In 2003, a major retrofitting initiative was launched to reduce the vulnerability of the housing stock to 10 percent by 2013. Two thirds of the cost of evaluating houses and 23 percent of the cost of retrofitting houses constructed before 1981 has been subsidized by the government. Those who retrofit their houses are eligible for a 10 percent income tax deduction and low-interest loans from the Housing Finance Corporation.

Despite these subsidies, only 31,000 homes and 15,000 other buildings had been retrofitted by 2009, far less than the 50-60,000 homes which were being renovated annually before the programme began. A 2005 poll showed that although two thirds of households believed their homes could be hit by a strong earthquake within the next 10 years, only a tenth of those polled had evaluated vulnerability and invested in retrofitting. So despite a well-targeted and generous set of policy measures and subsidies, and a high awareness of disaster risk, persuading households to invest in DRR remains a challenge.

(Source: GAR 11 paperOkazaki, 2010

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GAR11 Okazaki, K. 2010. Incentives for safer buildings. lessons from Japan. Contribution to the 2011Global Assessment Report on Disaster Risk Reduction. Geneva, Switzerland: UNISDR.

Click here to view this GAR paper.
)

The decision to invest in DRM is clearly not technical or administrative – it is fundamentally political.2  However, it is far less clear how governments identify the political and economic incentives to invest. During financial crises, governments often act quickly to provide public resources to save banking systems and protect wealth. During the 1995 financial crisis in Mexico, for example, the public resources used to protect private assets amounted to approximately 20 percent of the country’s GDP. By comparison, between 1997 and 2009, accumulated allocations to Mexico’s disaster management fund added up to only 2.3 percent of the GDP in 1995. In Mexico, annual DRM investment has been decreasing since 1999, and in 2007 it was equivalent to only 0.01 percent of the government’s income and 0.04 percent of total public investment (GAR 11 paperMoreno and Cardona, 2011

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GAR11 Moreno, A. and Cardona, O.D. 2011. Efectos de los desastres naturales sobre el crecimiento, el desempleo, la inflación y la distribución del ingreso: Una evaluación de los casos de Colombia y México. Background Paper prepared for the 2011 Global Assessment Report on Disaster Risk Reduction. Geneva, Switzerland: UNISDR.

Click here to view this GAR paper.
). In Colombia, DRM investment has been increasing, but it was still only 0.08 percent of government income and 0.07 percent of public spending in 2009.

Figure 5.1
Comparing the annual cost of tax exemptions with accumulated investments in DRM over almost a decade
Figure 5.1
(Source: GAR 11 paperMoreno and Cardona, 2011

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GAR11 Moreno, A. and Cardona, O.D. 2011. Efectos de los desastres naturales sobre el crecimiento, el desempleo, la inflación y la distribución del ingreso: Una evaluación de los casos de Colombia y México. Background Paper prepared for the 2011 Global Assessment Report on Disaster Risk Reduction. Geneva, Switzerland: UNISDR.

Click here to view this GAR paper.
)
Governments indicate that a lack of financial resources constrains investment in DRM, but how available public resources are invested tends to reflect other political priorities. Figure 5.1 shows that government investment in DRM in Colombia and Mexico is significantly less than the amount of money the governments give out in the form of tax exemptions. In Mexico, for example, tax exemptions represented 6 percent of GDP and 50 percent of potential tax income in 2007, while cumulative DRM investment over eight years (1999–2007) amounted to less than 0.2 percent of GDP in 2007. These governments do not lack the resources to invest in DRM – they have not identified it as a priority.


Box 5.2 Political incentives in disasters


In the United States of America, electorally critical, hazard-prone states are twice as likely to have disasters officially declared than non-critical states, and for each disaster declaration, a US president can expect a one point increase in votes in a state-wide contest (Reeves, 2010

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Reeves, A. 2010. Political disaster. Presidential disaster declarations and electoral politics. Working Paper. Boston, USA: Boston University.
Available at http://people.bu.edu/areeves/papers/fema.pdf.
). The reverse is also true, however, and leaders can also be punished for major disaster losses. Between 1976 and 2007, 40 percent of countries with democratically elected governments replaced their leaders in any two-year period, but in countries that experienced a major earthquake (defined as having more than 200 casualties) this figure rose to 91 percent.

(Source: Smith and Quiroz Flores, 2010

x

Smith, A. and Quiroz Flores, A. 2010. Disaster politics: Why earthquakes rock democracies less. Foreign Affairs (15 July 2010).
Available at http://www.foreignaffairs.com/articles/66494/alastair-smith-and-alejandro-quiroz-flores/disaster-politics.
)

In contrast, there is usually a strong political imperative for disaster relief. Leaders have always understood the power of symbolic and real responses to disasters. Saving lives and assisting disaster victims is a moral, humanitarian and political paradigm that few would contest. As such, disaster relief can be a powerful tool for leaders, enhancing their political profile and facilitating patronage. As Box 5.2 highlights, electoral considerations certainly influence disaster responses (Sen, 1981

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Sen, A. 1999. Development as freedom. Oxford, UK: Oxford University Press.
.
; Bueno de Mesquita et al., 2004

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Bueno de Mesquita, B., Smith, A., Siverson, R. and Morrow, J. 2004. The logic of political survival. Cambridge, USA: MIT Press.
.
).

In contrast, the incentives for DRM, a public good, are far less obvious. If governments patronize the powerful private interests often internalized in sectors such as urban development, construction, agribusiness and tourism, there may be a disincentive to invest in DRM. As discussed in Chapter 3, the privatization of water resources by the agribusiness sector may increase agricultural productivity and generate foreign exchange but simultaneously transfer agricultural drought risk to subsistence farmers. Seriously addressing underlying risk drivers involves trade-offs which may represent an important political opportunity cost for governments.

5.1.1 Can disasters provide a political and economic incentive for DRM investment?

Major disasters can sometimes provide a political imperative, given a real or perceived social demand for improvements in DRM. The evidence, however, is mixed. In some countries the window of opportunity for DRM opens wider than in others. Unfortunately, the mechanisms through which large disasters can provide a political incentive, and under what conditions, have not been systematically studied. Despite huge investments,3  post-disaster recovery programmes are rarely assessed from the perspective of DRM improvement. The post-tsunami TRIAMS process represents one effort to address that gap, marking an important breakthrough by proposing a framework of core indicators to monitor DRR progress and assess impact across different countries, at different scales, and for a number of key sectors.4 

There are further examples of real change. In Iran (Islamic Republic of ), the 7.2 magnitude earthquake in Bueen Zahra in 1962, which resulted in the death of 12,000 people (EMDAT, 2011b), enabled a national consensus on building codes that had long been debated (Aon Benfield, 2010

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Aon Benfield UCL. 2010. When the earth moves. Mega-earthquakes to come? Chicago, USA: Aon BenfieldUCL Hazard Research Center.
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). In Colombia, the 1983 Popayan earthquake and the 1985 eruption of the Nevado del Ruiz volcano led to the establishment of a comprehensive DRM system. The 1999 Orissa super-cyclone and the 2001 Gujarat earthquake in India, the 2001 floods in Mozambique and the 2004 tsunami in Indonesia are other examples of large disasters that highlighted DRM capacity gaps and led to institutional and legislative changes. Following the 2004 tsunami, Indonesia also enacted comprehensive legislation and established a National Disaster Management Agency (BNPB) tasked with coordinating risk reduction (GAR 11 paperLlosa and Zodrow, 2011

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GAR11 Llosa, S. and Zodrow, I. 2011. Disaster risk reduction legislation as a basis for effective adaptation. Background Paper prepared for the 2011 Global Assessment Report on Disaster Risk Reduction. Geneva, Switzerland: UNISDR.

Click here to view this GAR paper.
; GAR 11 paperScott and Tarazona, 2011

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GAR11 Scott, Z. and Tarazona, M. 2011. Decentralization and disaster risk reduction. Study on disaster risk reduction, decentralization and political economy analysis for UNDP contribution to the 2011 Global Assessment Report on Disaster Risk Reduction. Geneva, Switzerland: UNISDR.

Click here to view this GAR paper.
). In many of these cases, including in Colombia and Mozambique, the emergence of individual champions also played a decisive role (GAR 11 paperLlosa and Zodrow, 2011

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GAR11 Llosa, S. and Zodrow, I. 2011. Disaster risk reduction legislation as a basis for effective adaptation. Background Paper prepared for the 2011 Global Assessment Report on Disaster Risk Reduction. Geneva, Switzerland: UNISDR.

Click here to view this GAR paper.
; GAR 11 paperWilliams, 2011

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GAR11 Williams, G. 2011. The political economy of disaster risk reduction. Study on Disaster Risk Reduction, Decentralization and Political Economy Analysis for UNDP contribution to the Global Assessment Report on Disaster Risk Reduction 2011. Geneva, Switzerland: UNISDR.

Click here to view this GAR paper.
).

For each success story, there are others where the social demand was either weak or ignored, the strengthening of DRM was cosmetic, or the initial impetus was difficult to sustain. Rarely does the recognized need for a revision of land use planning after disasters lead to a full reform of land use and tenure systems (Barnes and Riverstone, 2009

x

Barnes, G. and Riverstone, G. 2009. Exploring vulnerability and resilience in land tenure. Systems after hurricanes Mitch and Ivan. Florida, USA: Univeristy of Florida.Unpublished monograph.
Available at http://www.sfrc.ufl.edu/geomatics/courses/SUR6427/Barnes-riverstone-pap.
). In the HFA Progress Review, less than half of the countries reported that they had DRM provisions in their recovery and reconstruction budgets.

Countries with stronger governance are better placed to use the political window of opportunity following a major disaster, building on existing institutions, risk assessments, expertise and professional networks (GAR 11 paperIevers and Bhatia, 2011

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GAR11 Ievers, J. and Bhatia, S. 2011. Recovery as a catalyst for reducing risk. IRP Background Paper prepared for the 2011 Global Assessment Report on Disaster Risk Reduction. Geneva, Switzerland: UNISDR.

Click here to view this GAR paper.
). Weak governance linked with low institutional, financial and human capacities, and a lack of information on the costs and benefits of risk reduction, mean that governments are often unable to measure the opportunity costs of investing in DRM (GAR 11 paperKarayalcin and Thompson, 2010

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GAR11 Karayalcin, C. and Thompson, P. 2010. Decision-making constraints on the implementation of viable disaster risk reduction projects. Some perspectives from economics. Background Paper prepared for the 2011 Global Assessment Report on Disaster Risk Reduction. Geneva, Switzerland: UNISDR.

Click here to view this GAR paper.
).

In general, countries that experience more frequent major disasters are more likely to invest in risk reduction due to lower opportunity costs (Keefer et al., 2010

x

Keefer, P., Neumayer, E. and Plumper, T. 2010. Earthquake propensity and the politics of mortality prevention. Policy Research Working Paper 4952. Washington DC, USA: The World Bank.
.
). Predictable disasters, such as recurring tropical cyclones, stimulate more social demand for DRM, because a failure to reduce foreseeable risks will expose government negligence. In contrast, when confronted with low-probability events, governments are more able to discharge their responsibilities and blame external forces such as God, nature and, more recently, climate change.

In addition, disasters that affect marginal groups with little voice in national politics are less likely to catalyse investment than those that affect strategic economic or political sectors (Maskrey, 1996

x

Maskrey, A. 1996. Terremotos en el trópico húmedo: La gestión de los desastres del alto mayo, Perú (1990 y 1991), Limón, Costa Rica (1991), y Atrato Medio, Colombia (1992). Rugby, UK: ITDG Publishing.
.
; Smith and Quiroz Flores, 2010

x

Smith, A. and Quiroz Flores, A. 2010. Disaster politics: Why earthquakes rock democracies less. Foreign Affairs (15 July 2010).
Available at http://www.foreignaffairs.com/articles/66494/alastair-smith-and-alejandro-quiroz-flores/disaster-politics.
). Extensive disasters, for example, rarely create the concentrated citizen pressure necessary to stimulate a national political and economic imperative (GAR 11 paperWilliams, 2011

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GAR11 Williams, G. 2011. The political economy of disaster risk reduction. Study on Disaster Risk Reduction, Decentralization and Political Economy Analysis for UNDP contribution to the Global Assessment Report on Disaster Risk Reduction 2011. Geneva, Switzerland: UNISDR.

Click here to view this GAR paper.
).

It has remained difficult to justify DRM investments based on estimates of their avoided impacts on medium- and long-term economic growth. The conflicting evidence provided by macro-economic studies (Kahn, 2005

x

Kahn, M.E. 2005. The death toll from natural disasters: The role of income, geography, and institutions. Review of Economics and Statistics 87 (2): 271–284.
.
; Jaramillo, 2009

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Jaramillo, C. 2009. Do natural disasters have long-term effects on growth? Bogota, Colombia: Universidad de los Andes-Centro de Estudios sobre Desarrollo Económico.
.
; Noy, 2009

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Noy, I. 2009. The macroeconomic consequences of disasters. Journal of Development Economics 88 (2): 221–231.
.
; Cavallo et al., 2010

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Cavallo, E., Galiani, S., Noy, I. and Pantano, J. 2010. Catastrophic natural disasters and economic growth. Department of Research and Chief Economist, IDB-WP-183. Washington DC: Inter American Development Bank.
.
; Keefer et al., 2010

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Keefer, P., Neumayer, E. and Plumper, T. 2010. Earthquake propensity and the politics of mortality prevention. Policy Research Working Paper 4952. Washington DC, USA: The World Bank.
.
) may be due to the different econometric methods used and countries analysed. In Colombia, for example, most large disaster events did not produce lasting effects on economic growth but did affect inflation, per capita income, unemployment rates and inequality in the short term (GAR 11 paperMoreno and Cardona, 2011

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GAR11 Moreno, A. and Cardona, O.D. 2011. Efectos de los desastres naturales sobre el crecimiento, el desempleo, la inflación y la distribución del ingreso: Una evaluación de los casos de Colombia y México. Background Paper prepared for the 2011 Global Assessment Report on Disaster Risk Reduction. Geneva, Switzerland: UNISDR.

Click here to view this GAR paper.
). Such effects, however, were heavily conditioned by how each individual disaster was managed. For example, the 1994 Tierradentro earthquake devastated a remote indigenous region in southern Colombia. After the disaster, unemployment increased and stabilized at a higher rate, and inequality also increased to rates that persist today. In contrast, the major investments in reconstruction after a 1999 earthquake devastated Colombia’s central and economically important coffee-growing region actually led to reduced inequality.


Notes

1 Romania national progress report on the implementation of the Hyogo Framework for Action Interim Report, November 2010.

2 The importance of ‘political will’ for DRR both at national and local level is repeatedly cited as a crucial element for national strategies as well as a local enabling environment. This is described in various ways, often as local government commitment to effective DRR (Pelling, 2007

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Pelling, M. 2010. Urban governance and disaster risk reduction in the Caribbean: The experiences of Oxfam GB. Background Paper prepared for the 2011 Global Assessment Report on Disaster Risk Reduction. Geneva, Switzerland: UNISDR.
.
; ProVention, 2009

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ProVention. 2009. ProVention Forum 2009 - risk and governance: Bridging national enabling environments and local action. Geneva, Switzerland: ProVention Consortium.
.
). Some resources recognize that political will for DRR has to be created and actively maintained, often via a range of incentive mechanisms (Christopolos, 2008

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Christopolos, I. 2008. Incentives and constraints to climate change adaption and disaster risk reduction. A local perspective. Kräftriket, Sweeden: The Commission on Climate Change and Development Secretariat of the Commission.
.
; Trohanis et al., 2009

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Trohanis, Z., Shah, F. and Ranghieri, F. 2009. Building climate and disaster resilience into city planning and management processes. Fifth urban research symposium. Washington DC, USA: The World Bank.
.
).

3 From 1980 to 2003, the World Bank alone financed US$12.5 billion in post-disaster recovery projects.

4 The Tsunami Recovery Impact Assessment and Monitoring System (TRIAMS) is a common system to monitor recovery progress and long-term impacts in Indonesia, Maldives, Sri Lanka and Thailand.

GAR 11 Background documents
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GAR11GAR 2011 Contributing Papers

ERN-AL. 2010. Seismic risk assessment of schools in the Andean region in South America and Central America. Bogotá, Colombia, Barcelona, Spain, and México DF: Consortium Evaluación de Riesgos Naturales – América Latina. [View]

ERN-AL, 2011. Probabilistic modelling of disaster risk at global level: Development of a methodology and implementation of case studies. Phase 1A: Colombia, Mexico, Nepal. Prepared by the Consortium Evaluación de Riesgos Naturales – América Latina. [View]

Ievers, J. and Bhatia, S. 2011. Recovery as a catalyst for reducing risk. IRP. [View]

Karayalcin, C. and Thompson, P. 2010. Decision-making constraints on the implementation of viable disaster risk reduction projects. Some perspectives from economics. . [View]

Llosa, S. and Zodrow, I. 2011. Disaster risk reduction legislation as a basis for effective adaptation. [>View]

Moreno, A. and Cardona, O.D. 2011. Efectos de los desastres naturales sobre el crecimiento, el desempleo, la inflación y la distribución del ingreso: Una evaluación de los casos de Colombia y México. [View]

Okazaki, K. 2010. Incentives for safer buildings. lessons from Japan. [View]

Rogers, D. Tsirkunov, V. 2011. The costs and benefits of early warning systems. [View]

Scott, Z. and Tarazona, M. 2011. Decentralization and disaster risk reduction. Study on disaster risk reduction, decentralization and political economy analysis for UNDP contribution to the GAR11. [View]

Suarez, P. and Linnerooth-Bayer, J. 2011. Insurance-related instruments for disaster risk reduction. . [View]

Williams, G. 2011. The political economy of disaster risk reduction. Study on Disaster Risk Reduction, Decentralization and Political Economy Analysis for UNDP contribution to the GAR11. [View]
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