The Bennett Newsletter
“It was the best of times: it was the worst of times”. Dickens’s remark rings true for the present. Fortunately the world economy is doing quite well but underneath it is writhing with excessive debt which presages a new “era of austerity”; growing pressure on resources, adverse demographics, growing inequality and climate change. It is also a time of record disasters.
Even in the first half of 2011, before the Christchurch quake and Pike River, terrible floods in Pakistan, China, Brazil, Sri Lanka and Australia; and drought in Russia , Lord Levine (the Chair of Lloyds) said: “ the first six months were the costliest on record..testing insurers around the globe…events like the Chilean earthquake and the Deepwater horizon loss have proved challenging..”
These disasters may influence the rapidly increasing price of food and raw materials. Wheat took off after the Russian drought was established; wool has surged in response to the Australian floods. What is the link between the surge in commodity prices and monstrous accumulation of disaster? What are the economics of disaster? What can be done to manage risk better?
Disaster and commodity prices
Copper, steel and cotton are at record levels. Food and transport prices are rising globally. Consumers are struggling. Indians are forgoing onions; the government has banned food exports. China is trying to control prices. Food prices rose 25% last year according to the UN. Is inflation amok?
Markets have a message; and my interpretation is that the price rise is due to pressure on resources. This is something of a re-run of 2008 when oil peaked near $150 a barrel and there were food riots in many countries. I wrote a column about New Zealand price scams, especially the price of cheese, where retailers were charging export prices for cheeses which would never compete abroad.
Prices are rising in response to increased demand. This is a good news story as a modest recovery of even a 1%-3% increase in annual growth in the developed world puts colossal pressure on resources. Add is the more robust growth of emerging markets, and pressure on resources is extreme. Supplies are tight, as production of many goods slipped in 2009. Mining and exploring slipped on shortage of capital and farmers reigned in their inputs. Gearing up now is hampered by sky-high inputs as fuel, fertilizer and raw materials have escalated.
Reduced to its essence: my argument is that demand collapsed in September 2008 and prices fell; demand increased in 2010 and prices rose. Demand from the developed world had marginally increased, but it is escalating from emerging countries where a new middle class is demanding the accoutrements of the good life: the fridge, the car, and increased meat and dairy in the diet.
Nevertheless, the world’s markets have well integrated logistics and any event, like a natural disaster or poor Nigerians breaching a pipeline to liberate petrol, can have an immediate effect on the futures market. Some price rises may be driven in part by speculators (someone tried to corner the copper market this year). Speculation would explain partly why wheat jumped by 47%. Other huge rises affected cotton, soy, sugar etc. But I think tight supply and rising demand is paramount.
Disaster
The problem with disaster, I think, is the emphasis on relief rather than the action necessary to tackle the factors which makes the population vulnerable. Natural disasters, and financial disasters, are not in themselves a disaster. New Zealand had a recent earthquake in Fiordland which caused little damage because of remoteness. Christchurch had a big earthquake but damage was mitigated by good design and a resilient community. Disasters come when people build in flood plains and on fault lines. Political commitment is necessary to mitigate future disaster.
Nevertheless, there is an increase in disaster. Insurance payouts have escalated in the last decade. Climate change could account for increasing storms, droughts and floods. From 1995-2004, calamities caused 890,000 deaths and US$ 570 bn in losses. Weather accounted for 71% of disaster, 45% of mortalities, 69% of economic losses and 90% of insured losses. Reported disasters doubled 1995-2005, and data I have suggests they have doubled since 2004. More positively, deaths from drought and flood have fallen for a century as better transport has brought speedy aid. Unfortunately, population pressure has driven people into very marginal area (like Brazilian hill-sides) and base mortality from weather events is rising.
The idea of ‘climate proofing” is a fiction but disaster risk reduction is possible and is being studies by the UN with funding by the Swedish government.
We know that financial disaster is only too possible. Thousands of kiwis have lost their nest-eggs in financial and listed institutions. The world teetered on the verge of disaster in 2008. The insurance giant AIG could not meet its obligations but was saved by the US government—its first bailout having let Lehman’s fail.
Accountability
Disaster risk is sometimes poorly quantified and probability difficult to assess. It may be difficult therefore to quantify the value of projects like resettlement or stop-banks. Problems are compounded by many people not insuring themselves.
The key is greater responsibility. People should review their insurance and not free-load on the community. My pet hate is some people escape accountability for their actions. Many builders have, for example, left the local and central government the liability for leaky homes.
Similarly, those that develop land prone to flood or liquefaction should have gone through much more vigorous environmental impact processes. Those that destroy forest cover and create floods ought to be accountable. Greater accountability should be an incentive to reduce risk.
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