Tuesday, March 2, 2010

Economist's Notebook: Poverty and Risk

The recent earthquakes in Haiti and Chile present an interesting contrast between the deleterious effects of a major earthquake in one of the richest countries in the western hemisphere and in the poorest.  It may surprise you that Chile is (by relative standards) quite an advanced and relatively wealthy country as many Americans, I think, have a tendency to view all of Latin America as a poor region.  According to the CIA, the per-capita GDP in Chile in 2009 was $14,700 while Haiti was $1,300 - so while Chile is far from US or Western European standards of living, it is a much wealthier country and Haiti.  In both cases the earthquake (and subsequent tsunami in Chile) were devastating disasters, but the scope of the tragedy in Haiti was, it appears, much, much worse.

Part of this difference was the proximity of Port Au Prince to the epicenter of the Haiti quake but part of it was the ability of the relatively much wealthier Chile to prepare for their quake through the creation and enforcement of strict building codes, and their ability to mount a significant response in the aftermath. And this illustrates a major difference in how people in low-income nations live as compared to those in the high-income world: the susceptibility to, and management of, risk.  [This also just so happens to be the subject of my lecture last week in ECON 455/555: Development Economics]

Poorer countries are particularly vulnerable to risk largely due to a lack of infrastructure or quality of infrastructure to cope with variability and shocks.  Agricultural households that do not have modern irrigation, for example, are quite vulnerable to adverse weather shocks.  The poor quality of the built environment, like we saw in Haiti (and Pakistan before it) makes it more vulnerable to weather and natural disaster. And the poor quality and size of emergency services leave low-income countries even more vulnerable still.  

On top of the lack of ex ante investment that could help residents cope with adverse shocks, the poor also tend to have inadequate savings to deal with adverse shocks to income or wealth and they are often unable to afford risk insurance and do not have access to credit - the two main institutions of risk management.  In fact, in poor countries these markets, for insurance and credit, often simply don't exist for a large part of the population even if they could afford it.  Add to this the lack of social safety nets (unemployment insurance, basic medical care, etc.) and you get an idea of just how vulnerable the poor in low-income countries are to risk and how desperately they need our help when disaster strikes.

As a development economist I constantly have to defend economic growth as a goal.  Growth itself is not the goal, of course, but it is the means to just about all the ends most people identify as important: education, health and welfare, risk management, etc.  The traditional life is not a bucolic as some would make it out to be: infant mortality rates that are an order of magnitude larger than in high-income countries, life expectancy rates 30 or more years younger, high morbidity rates, low levels of education are all facts of life in low-income countries.  I am not denying that there are adverse affects of modernization by any means, but the reality of abject poverty is extraordinarily grim.


Fred Thompson said...

Great post. Yes, As Aaron Wildavsky observed, richer is safer.

People In The River said...

Great observations!!
Generally, poor people can stand more risk and unsafety than rich people. There are two obvious reasons:
1. safety is not among the basic levels of human needs.
2. opportunity cost for poor is less than rich people when they are facing the same risk and potential of losing.