Rethinking International Disaster Aid Finance

Article excerpt

Natural disasters pose daunting barriers to development in poor countries. The human and material losses resulting from droughts, floods, storms and earthquakes further impoverish already poor populations. The year 2005 was a case in point. Victims of already longstanding disasters continued to suffer in places like southern Sudan, the Democratic Republic of the Congo and Ethiopia. Recent disasters like the Indian Ocean tsunami, the food crisis in Niger, the earthquake in Pakistan, the hurricanes in Central America and the drought in Malawi struck already vulnerable populations in poor countries.

In order to maximize its value to the world's most vulnerable populations, often the victims of these disasters, the international aid community must endeavor to create an effective and equitable international emergency aid system. To reach this dual goal requires a conceptual shift from a reactive emergency aid business model to a proactive risk-management investment model. Vulnerable populations almost continuously suffer some losses as a result of localized, frequent natural calamities and manmade hazards. To treat these events as emergencies obscures the fact that some populations have become so poor that they can no longer support themselves even in normal natural conditions. From a financial perspective, providing assistance to vulnerable populations to enable them to survive normal one-in-two- or one-in-three-year fluctuations in weather and other expected events is an investment proposition. Aiding populations to cope with extreme events is an insurance proposition. The first needs a predictable, steady flow of investment funds; the second requires contingency funds to cope with probable but uncertain events. The second is the focus of this article.

The dilemma facing any aid agency with contingency funds is how to ensure effective and equitable use of a limited amount of funds within a specific emergency and across all disasters in a specific region during a fiscal year. (1) There are three obvious possibilities. First, one could use the contingency funds to create a fund of last resort, in which case one would wait to see how other donors respond to an emergency and fill in the gaps. However, this is hardly a prescription for timely funding. Second, one could fund as much as possible of the response to the first disaster that happens to strike and risk being unable to help victims of disasters which occur later in the fiscal year. Third, one could limit assistance to a dollar amount or a percentage of costs of each disaster, hoping other funds will come in later to fund the full operation. As a provider of last resort the aid agency would forfeit the gains of timely intervention. As a provider of first resort an agency could only pro vide aid based on a first-come, first-served basis or an arbitrarily limited basis. None of these approaches ensures efficient and equitable use of funds nor do they enable aid agencies to plan and manage effective operations.

A more equitable and effective system requires managing contingency funding against a portfolio of risks. Risk, in this context, is defined as the potential loss of lives and livelihoods, ultimately requiring a humanitarian aid response, which vulnerable populations face as a result of natural or other disasters in the developing world. Equity, in the sense of fairness, requires forward-looking risk management. Fairness requires anticipation of the magnitude and probabilities of disasters that may occur over the course of a budget period. To be fair, financial allocations over the course of this time must reflect our best understanding of this portfolio of risks--the sum of the spatial and temporal distribution of the risks associated with loss of lives and livelihoods faced by vulnerable populations. Allocating resources, such as a fund or anticipated contributions against this portfolio of risks ensures the equitable distribution of funds across emergencies and over time. …


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