Natural disasters and natural responses

Written by YRK Reddy | Updated: Sep 17 2005, 05:30am hrs
A major concern in framing disaster management policies and their implementation has been moral hazard, the term economists use to describe the fact that the certainty of protection/rescue can undesirably change the beneficiarys behaviour. Champions of free markets have recognized the danger in government trying to bail out people instead of encouraging them to own their risks, take preventive measures and insure against loss of life and property. David A Moss of the Harvard Business School, (author of the book When all else fails: Government as the ultimate risk manager, 2004), made a presentation in 2001 to a US Senate panel examining the governments role in handling risks such as terrorist attacks. He maintained that the moral hazard applied in the case of private insurance also applies in the case of governmentthat the federal disaster policy, in the absence of effective risk monitoring, is exceptionally vulnerable to moral hazard.

Many others had pointed out that bailouts during natural disasters imply we want you to buy insurance, but if you do not, will bail you out anyway. Such bailouts, many academicians maintain, also do not distinguish between those who acted responsibly to try and do everything they could and those others who risked in the hope that the government will bail them out.

Such thinking in recent years may have caused a reduced role for the government in disaster management, with three mutually reinforcing rationalizations moral hazard, resource constraints and, third, that government is less efficient than private enterprise even in such matters. The assumptions and dynamics that may be fine for exchange of private goods are sought to be applied for public goods as well, including disaster management. Thus, the behavioural assumptions in the insurance exchange when applied to disaster management would prevent government from doing its public duty wholeheartedly. The proponents of moral hazard should also reckon that those living in slums, on coastlines, low-lying areas and in makeshift houses cannot afford to take insurance. The issue is of poverty, deprivation and unabated alienation, not of outsmarting governments.

Thus, post-Katrina, if bodies have been allowed to rot, if evacuation has been slow, if there was mass-scale looting, murder, rape and vandalism, it points to a great failure of the assumptions behind the approach and management of calamities. Moral hazard in this disaster is more evident in the behaviour of government than common people! In the end, there is apparent round-tripping of risk, with the poor and the deprived having to bear the risks, rather than the government.

Historically, the response of the state, even in ancient India, was based on principles of public duty and human considerations than market assumptions. It was on the basis of immediate needs than what one deserved or otherwise. Relief measures had only to contend with immediate constraints of resources, infrastructure and logistics. If the flooding of Mumbai city or the tsunami did not witness the riots, looting, and rape as noticed elsewhere, it is because the common suffering was treated by the government, as well as the citizens, on human considerations and without convoluted thinking. It was with the full understanding that many are so poor and deprived that they cannot even fend themselves against the vagaries of unemployment. They do not have the luxury of buying insurance, building strong houses on elevated places or owning machines to evacuate themselves quickly.

The fears of misuse of state intervention and charity may not be unfounded in a democratic set-up, as there are always politics of patronage, leakages, and profiteering from such disaster. But the fear of encouraging conditions for moral hazard or inefficiencies in application of meagre resources must not result in ham-handed reactions to disasters.

The Katrina fiasco is not because of inefficiency. It is the result of a complex combination of misplaced assumptions regarding the role of free markets in handling public disasters and calamity on the one hand and, on the other, the adverse impact of similar thinking on the socio-economic conditions of the poor. Hopefully, it will serve as a shock therapy to policy makers throughout the world. It is time to reflect on the limits to market-savvy thinking. And also the increasing alienation of the poor and the deprived, that could even encourage criminality.