This paper discusses the application of cost-benefit analysis (CBA) within Disaster Risk Management (DRM). It outlines the central premises of CBA, its function within DRM, and its real-world application and potential for scaling. Though disaster risk reduction (DRR) measures have proven to yield positive economic returns, whereby for every Euro invested in such measures, between two and four Euros are saved in terms of avoiding or minimizing the impacts of disaster on lives, property, the economy, and the environment, very few governments have taken its integration into development planning very seriously. Worse yet, much of international disaster aid is funneled towards responding and rebuilding after disaster has already occurred. This paper focuses on utilizing CBA to provide clear evidence of the economic irrationality of this particular state of affairs. CBA is defined as a methodology for determining the economic benefits of development initiatives. It consists of comparing the costs of implementing these development initiatives with the benefits that result from their implementation. When applying CBA to DRM, special attention should first be given to two important objectives: (1) risk assessment, and (2) avoided-risks assessment. The former refers to the idea that, in conducting analysis, one has to take into consideration the probability of future disasters. The latter emphasizes the reduction of adverse effects associated with disasters because of investments in DRM. CBA, when applied to DRM, is operationalized in four steps: (1) risk analysis; (2) risk management measures; (3) risk reduction analysis; and (4) economic benefits analysis. The document goes on to highlight the methodological details of the CBA process, its application to DRM strategies implemented in Uttar Pradesh, India, and its relevance for other case studies that are part of the Risk to Resilience project. The paper calls for a rational choice approach to DRM decision-making. While it’s overall objective is to convince decision-makers that the benefits of implementing DRM often outweigh its costs, this document presents CBA as a tool that policy-makers can use to determine which mix of DRM and DRR measures are appropriate investments given the particular contexts within which such measures would be taken. It calls for greater investments in improving CBA methodologies and also better data collection processes if CBA is going to be a central part of development and DRM decision-making.
General Risk Management
Development
Section 1: Cost-Benefit Analysis and its Role in CBA p. 1; Section 2: Essentials of CBA p. 5; Section 3: Application in Disaster Risk Management p. 9; Section 4: Assessing Risks p. 15; Section 5: Identification of Risk Management Measures and Associated Costs p. 19; Section 6: Analysis of the Benefits of Risk Management p. 21; Section 7: Calculation of Economic Efficiency p. 23; Section 8: Types of CBA Assessments and Requirements p. 25; Section 9: Conclusions p. 27; References p. 30; Annex I: Working Paper Series p. 31; Annex II: Acknowledgements p. 32