Waking up to the threat of natural disasters

Last year was a major wake-up call for the global economy. With natural catastrophes causing economic losses of approximately US$ 366 billion, the highest on record, the question I’m left pondering is this: Has anyone woken up yet?

When I think back over the business headlines from the last six months it’s all about the euro crisis, US jobs and China’s soft landing. I can’t help but worry that one of the biggest stories of our times is passing us by – the effects of natural disasters on the global economy. Resilience to high-impact, low probability events is becoming the factor underpinning economic competitiveness in the global economy.

Nock-ten, Haitang, Nalgae, Washi – these are names not soon to be forgotten in Asia. These tropical storms last year led to the loss of thousands of lives and livelihoods. In Cambodia, more than 250,000 buildings, 3,000 kilometres of roads and 400,000 hectares of agricultural lands were damaged or destroyed. From the Philippines to Vietnam, from Laos to Myanmar, nature wreaked similar havoc. The economic losses caused by storm surges and floods in Thailand alone are estimated at US$ 45.7 billion, which makes the 2011 floods one of the top five costliest natural disasters in modern history.

What are the economic lessons for business and governments? While none of the effects of these catastrophes are more tragic than those suffered by the people caught up in them, the complex interconnectedness of the global economy means that such disasters cannot be understood as humanitarian crises alone. This was demonstrated by the combined earthquake, tsunami and nuclear disaster in Japan last year. The World Economic Forum’s Global Risks 2012 report explores how the repercussions of this crisis spilled around the world in unexpected ways and shed light on the leadership structures best equipped to cope with disasters.

The source of much of economic growth in ASEAN (the Association of Southeast Asian Nations) over the last two decades has been the proliferation of production networks that use domestic and multinational manufacturers as low-cost assembly lines, much like the previous generation of Asian Tigers before them. ASEAN countries have been able to carve out a sizable piece of the global economic pie, establishing themselves as global supply chain hubs through specialization and economies-of-scale.

Leaner, faster, more concentrated “just-in-time” operations have been at the heart of business strategies to build and maintain this competitive edge. However, as will be discussed in the Responding to a Region @Risk sessions of the upcoming World Economic Forum on East Asia, it may be time to consider a more sustainable path in light of the increasing vulnerability to natural catastrophes.

Competitiveness needs to move beyond productivity and profitability to include an assessment of a firm’s fitness for business continuity in the face of catastrophic shocks.

David Gleicher is a researcher for the World Economic Forum’s Risk Response Network.

Image: Passenger jets sit in flood waters at Don Muang airport in Bangkok REUTERS/Damir Sagolj