Column Flood economics

Written by Michael Walton | Michael Walton | Updated: Sep 16 2008, 04:31am hrs
In this time of devastating flooding and critical human conditions in Bihar, it may be useful to step back and ask what this means for how to think about vulnerability and the role of the state.

The floods have sparked immense attention, in the state of Bihar, by the Union government, the press and beyond. This is a good thing. Amartya Sen famously asserted that no famine would occur in a democracy with a free press. The combination of information and political pressure is a potent spur to public action. This is now happening now in Bihar.

However, vulnerability to shocks is not only a matter of occasional crises. It is an ongoing fact of life for most Indians. Recent surveys in rural Karnataka, Madhya Pradesh and Orissa found that, in the previous year, some 45% of households had experienced natural disasters, such as drought, cyclones and floods, while 28% suffered major health problems or the death of a household member.

Vulnerability is a reflection of intrinsic failures of markets. There are three, complementary, ways of managing risks, and markets typically fail in each of them.

First, risks can be reduced by appropriate investments. Water management systems are clearly central. Immunisation, clean water and sanitation reduce diseases. These investments often involve public goods, benefiting whole communities, and thus are systematically underprovided by households and the private sector. State provisioning is necessary here.

Second, individual households manage shocks through savings and borrowing. But this is hard in the absence of secure financial savings: savings in livestock are lost, or lose their value, when whole communities suffer a shock. The state has a role in providing the regulatory and institutional context for broad and deep financial systems.

Third, formal and informal insurance allows for the pooling of risks. This is a classic area of market failure: insurers dont like bad risks, or charge a price that means good risks leave the market, destroying the gains from risk-pooling; and too much insurance can lead to riskier behaviour. The state plays a central role in creating universal risk pools even in rich countries, from disaster management to health systems.

Lets return to the Bihar floods. Natural disasters are as old as the human condition. But describing them as natural suggests no role for human action. The Kosi rivers bursting of its embankment was at least partly man-made, influenced by both delayed long-term investments and inadequate short-term monitoring of the river. Similarly, very few of the people affected have significant personal finances; they have rather seen their assets destroyed. Even fewer had insurance.

All this implies an economic, as well as a compassionate, case for state action to manage risks, outside of moments of intense crisis. So why does it seem that the Indian state is often so weak at helping those in need of managing vulnerability One element is the lack of influence of poorer groups, especially outside major disasters.

We can illustrate this with the experience of the US, a democracy with one of the most powerful state machines in the worldwhen this is aligned with political imperatives. The 2005 Hurricane Katrina led to devastating flooding in New Orleans, with the impact concentrated in poor black communities. The inadequacy of the response became a national shame. Much was made of President Bushs seemingly insouciant response when the Katrina first hit. But this was not the central issue. The real problem lay in two other areas. First, there were system design flaws in the embankments. Moreover, these followed a longer history of design choices in the flood management system that tended to favour property owners, rather than poor, black residents. Second, the Federal Emergency Management Agency, in the past an effective, well-respected agency, had been neglected, in terms of resources and leadership. It was not up to the task.

The experience of the US has lessons for India. Reducing risks requires preventive, long-term investment strategies, whether for natural disasters or health. Having an effective response strategy depends on building state capacities before a shock hits. But the functioning of the state is linked to the structure of power, and democracy needs to be made to work well for effective state capabilities to be build.

It is absolutely right that there is now widespread attention on the plight of affected communities in Bihar. When this passes, there will be a more subtle, but equally important, challenge: to develop long-term strategies to reduce shocks, especially for the poor, and implement policies that foster broad financial and insurance systems that help people manage shocks when they do occur. The state will be central to this.

The author is at the Harvard Kennedy School, the Institute of Social and Economic Change, and the Centre for Policy Research.