Plugging the Hole in China’s Disaster Recovery Budget
It has been nearly a month since a record-breaking storm dumped a year’s worth of rain on the central Henan province in the span of a few days, but the full extent of the damage is still being assessed. What we know so far: The floods killed at least 302 people, affected 14 million more, and caused direct economic losses of over 114 billion yuan, including collapsed houses, lost nest eggs, and ruined crops.
The indirect losses are far greater. The human side of the disaster is visible everywhere: an owner of a clothing store keeping watch over thousands of pairs of unsellable, waterlogged jeans; a restaurateur trying to salvage an oven from a sea of mud; a taxi driver staring helplessly at her totaled car, a major source of family income bought with money borrowed from friends, now destroyed. The waters have largely receded, as has the public’s attention. But for many residents, the pain will last for years.
The process of piecing one’s life back together in the wake of a natural disaster is both difficult and time-consuming. Getting an entire region back on its feet is even more challenging. In addition to being the second-largest crop producing province in China, Henan is a major transit hub for the country’s rail and highway systems, many of which are now in dire need of repair.
After the devastating Wenchuan earthquake in the southwestern Sichuan province in 2008, it took three full years for some of the hardest hit cities to rebuild. Fixing up the more than 1,000 towns and villages affected by this year’s floods will be no less complicated. It will take money, far more than Henan alone can muster. According to a July 30 announcement by China’s Ministry of Emergency Management, 1 billion yuan ($154 million) has been earmarked to help local governments carry out basic flood prevention and disaster relief work. That’s a drop in the bucket compared to the eventual reconstruction bill, which could run to the tens of billions. The question now is: Where is the rest of the money going to come from?
China’s disaster relief, recovery, and reconstruction funding is allocated largely out of the public coffers, with a small portion made up of private donations. Yet the increased frequency of natural disasters in recent years has put a strain on China’s treasury. Currently, only a tiny percentage of the budget is reserved at the beginning of each year for natural disasters. Should this amount not be enough to cover damages — an increasingly common state of affairs — the standard procedure is to dip into funds allocated to other sectors, or to spend funds originally reserved for next year’s budget, something that makes long-term planning and development much harder.
As for donations, there is often a disconnect between what people are willing to donate and what is actually needed. For example, at one point during the floods in Henan, there was a shortage of rescue boats. However, due to poor communication and delays during the donation process, most of the donations that relief organizations received were everyday supplies like instant noodles.
More to the point, both public and private relief resources are triggered only after the fact. As natural disasters become a regular challenge, policymakers should explore a more diverse range of financing channels for relief funds, including stable and sustainable economic mechanisms that will allow regions to recover as quickly as possible from losses incurred both during and after natural disasters.
Disaster insurance is one option. These plans allow for transferring and balancing risks before disasters occur and are already well-established across much of the world. From 2009 to 2014, 43.6% of damages caused by natural disasters around the globe were compensated through insurance. Yet in China, disaster insurance is still in a rudimentary stage of development — the average coverage rate of disaster insurance in the country is just 1%. The direct economic losses caused by Hurricane Katrina in the United States amounted to $125 billion, half of which was covered by disaster insurance. By contrast, after the Wenchuan earthquake three years later, insurance only covered 0.2% of the 845.1 billion yuan in damages.
One reason for this is that revenue from insurance premiums accounts for a small percentage of China's GDP — just 3.2%. By comparison, it accounts for 12.3% and 9.8% of GDP in the neighboring East Asian countries of South Korea and Japan, respectively. Chinese people are not particularly willing to buy insurance, especially in rural areas. Disaster insurance is barely known to the public, and many don’t believe that they’ll ever be personally affected by a disaster.
Another key reason is that, for most Chinese, insurance is simply unaffordable. The main recipients of post-disaster insurance compensation in China are large factories, commercial companies, and wealthy families; only a small portion of compensation is awarded to ordinary individuals, especially poor families. This is mainly because poor families cannot afford any of the currently available insurance options. To close this gap, government subsidies can be used to encourage insurance companies to offer low-priced, inclusive disaster insurance products to everyone. The government could even consider including mandating disaster insurance as part of its ongoing “rural revitalization” campaign.
Policymakers should also develop mechanisms for transferring risk ahead of natural disasters, such as dedicated lotteries. This will allow funds to be raised ahead of disasters and ensure they are available when needed. Given the known continuing outcomes of climate change, we can’t afford to bury our heads in the sand any longer. Disasters are going to be a part of life in the future, and while facing this new reality head-on and preparing for what’s to come may seem daunting, anything is better than waiting until it’s too late.
Translator: Lewis Wright; editors: Cai Yiwen and Kilian O’Donnell.
(Header image: Villagers sift through mud left by floods in Mibei Village, Henan province, July 24, 2021. Wu Huiyuan/Sixth Tone)