Natural disaster costs are mushrooming while government coffers shrink. Between 1990 and 2015, the costs for floods, hurricanes and earthquakes have gone up 600%, after accounting for inflation, to some $300 billion. And this year alone, economic losses from Hurricanes Harvey, Irma and Maria could hit $200 billion, plus another $85 billion to pay for the California wildfires. The challenge: Finding ways to have public and private rescue efforts coordinate more closely to put as many resources as possible toward rescue and recovery efforts, say Wharton management professors Michael Useem and Tyler Wry, and Luis Ballesteros of The George Washington University. They offer their ideas in this Knowledge at Wharton interview.
An edited transcript of the conversation appears below.
Knowledge at Wharton: Please explain why the idea of a corporate crowding-out effect could be a worry when it comes to disaster aid. Most people would probably think the more aid, the better, regardless of the source.
Luis Ballesteros: You basically described the main motivation that we have when we start discussing this study. Because on the one hand, we have this phenomenon that has happened, really, in the last 10 years, where you have an increasing participation of for-profit organizations in disaster relief and recovery. And Tyler, Mike and I started studying cases of disasters for which the largest proportion of aid was coming from business organizations, not the traditional providers like governments, multilateral agencies or NGOs (non-government organizations).
And the second part: There’s a decrease in the relative participation of these traditional providers in disaster aid. And this brings the question that our paper is trying to answer: Is this better from the social point of view? Is this efficient for the affected country? [The paper is titled, “Masters of Disasters? An Empirical Analysis of How Societies Benefit from Corporate Disaster Aid” – with a data set that includes more than 74,000 donations by over 34,000 corporations. The researchers recently wrote a Knowledge at Wharton opinion piece based on their work; you can read it here.]
Because one can argue that, yes, we have more resources from firms, so regardless of who’s providing the aid, it’s better to have more money. But on the other hand, we have this argument that some providers that specialize in this type of activity, like multilateral agencies — such as The United Nations — or government agencies like USAID, should be providing this action — and the affected community, will be better off by receiving this specialized action.
At the same time, we have the business organization that obviously doesn’t have, normally, this type of specialization in disaster relief and recovery. So that’s precisely the question that we are trying to tackle with this study.
Knowledge at Wharton: You have, say, multilateral organizations that are questioning whether this outside aid from profit-making companies is helpful. What is their complaint? If you’re on the ground, the roads are already crowded or there’s not enough electricity, or there’s limited resources and they need to command them? What is this crowding-out effect that you talk about in the paper?
Michael Useem: If you think about Walmart, say, around Houston when the hurricanes came through a couple months ago: If Walmart begins, through its own distribution centers and its own trucking, to provide water and other relief supplies in the area, is there some chance that the local government will find reason to pull back because the private sector’s going in? The net effect may be less aid than were Walmart not to be there to begin with.
Knowledge at Wharton: Or maybe not getting to all the right places as fast as it should.
Useem: That’s the second exact point, and that is a question of where is it going. As Luis indicated, these companies that are already on the ground, like Walmart in that region, often have a very good understanding of where the relief supplies are most in need.
Knowledge at Wharton: So that’s a case where they have a better idea. But it sounds like at least some agencies or some governments think that, at times, private companies are getting in the way. Do you have an example of where that happened, where they were crowding out and caused a bigger problem?
“We have cases in specific disasters where organizations donated items that were not necessarily needed. But this is a problem that normally happens in disasters, regardless of the source.” –Luis Ballesteros
Ballesteros: We have cases in specific disasters where organizations donated items that were not necessarily needed. But this is a problem that normally happens in disasters, regardless of the source. And believe it or not, it’s often seen more with donations that are coming from other governments.
This is very related to the fact that it is really difficult to understand what the emergency is, in the sense that we don’t know what the particular needs of the victims are. Oftentimes, governments don’t come out with a list of the emergency items that are needed. And this is super important to really make the delivery of aid more efficient.
So, given that corporations normally are the first responders, at least that is what we observe in our data set, they often mimic what other organizations have been doing. And so they provide aid that is not necessarily needed.
Knowledge at Wharton: So you could be in a situation where there’s plenty of water to go around and not enough medicine. And if someone’s bringing in a lot of water, it’s not helpful.
Ballesteros: That’s right.
Useem: And here’s an example that we saw in Chile, which had a terrible earthquake back in 2010, an 8.8 on what they call the moment magnitude scale. The government was extremely hard-pressed to get roads going again, to get Telecom back up and children back into schools. And so, in a couple regions, some of the large, local mining companies that have lots of equipment — they can build buildings pretty quick because that’s what they do — stepped in, and on their own, private companies, began to reconstruct or construct schools and housing for victims of the earthquake in a region.
And on first glance, that can look like a crowding out, because the government then didn’t do that in that region. But it had the net effect of allowing the government of Chile to put its limited resources into other regions. Thus, overall, if you look in a too micro way, it can look like there’s crowding out, but what we find is that as government comes in or as the private sector comes in, it does not leave the other to kind of just throw up their hands and walk away from the circumstance.
Knowledge at Wharton: It sounds like, at a minimum, that some close coordination would be a good thing. We’re going to get to your other findings, your conclusions of the paper, which look at when a company can be helpful, what qualities it takes for them to be most helpful. But first, Tyler, can you look at the coordination issue?
The other thing that you mention in the paper is that the overall costs of disasters is growing, which is an important thing to take on board here. Because you note that, between 1990 and 2015, the costs for floods, hurricanes and earthquakes have gone up 600%, after accounting for inflation, to some $300 billion. I think that number is interesting because with the hurricanes and fires in California that we know about, cost estimates this year have been about $300 billion for those alone. What you’re addressing in this paper is becoming even more important.
“The scale of need is rising dramatically. When you look at the ability of the traditional actors to respond to [disasters], they really don’t have the capacity.” –Tyler Wry
Tyler Wry: You hit the nail on the head. The scale of need is rising dramatically. When you look at the ability of the traditional actors to respond to [disasters], they really don’t have the capacity. That’s one of the things that motivated us to look at the question of, what does corporate aid do when it hits the ground in these situations?
The only enterprises that have the kind of capital to respond on that scale are corporations. And so really understanding the contributions they make or the situations where they might be crowding out or working at cross purposes with others is something that’s fundamentally important. And with the number and scale of the disasters, even just in the United States in the past six months, this becomes a really prescient question.
The research really gets at an issue that we need to understand deeper and at least give some top line indication that corporations, despite some of the theories that might suggest they’re not the perfect tool for doing this, actually do more good than they do harm.
Knowledge at Wharton: The flip side of that coin is that, while the overall costs of disasters have been growing, traditional sources of aid have shrunk. But, as you mentioned, corporate sources are increasing. I think in your paper you show, going back to that Chile earthquake in 2010, that business supplied 55% of international aid. And after the earthquake and tsunami in Japan, which was 2011, businesses accounted for about 68% of foreign assistance. And so that trend is already well underway. And so what you’re saying is that this can be largely a good thing.
Wry: Yes, that’s absolutely right.
Knowledge at Wharton: Let’s turn to some of the things that your research has uncovered. I wanted to cite one other example. After the Indian Ocean tsunami in 2004, which killed 200,000 people — Mike, can you explain what happened with Coca-Cola?
Useem: Sure. It’s a nice illustration of the essence of what we’re seeing, which is, in one region with the terrible earthquake and tsunami coming out of Aceh, Indonesia, countries around the Pacific, including Sri Lanka, India, Thailand and so on, were hit very hard. In Sri Lanka in particular, Coca-Cola was on the ground and already bottling there. It simply stopped bottling Coke and began to put water in its bottles. And because it could do that very quickly, despite the earthquake and its damage, and because Coke had trucks for delivery, Coke could quickly, without an instruction from any government authority whatsoever, fill in with what it could do well because it was already on the ground.
That’s the bigger point that I think is most striking for us from this research, which is that if you look at what the World Bank refers to as its Human Development Index, in the wake of disasters around the world, this is what we find with companies stepping forward — the net effect, taking everything into account, is that the country that’s receiving corporate aid, along with all the other kinds of aid, tends to recover more quickly.
“The net effect, taking everything into account, is that the country that’s receiving corporate aid, along with all the other kinds of aid, tends to recover more quickly.” –Michael Useem
Ballesteros: [Following a disaster,] there is going to be a reduction in the productivity of the country and, over time, a decrease in GDP. We use the Human Development Index as a variable to understand what the effect is. In all cases, on average, we see that there’s really a hit on the Human Development Index after the disaster, in line with what other researchers have found in the past.
Now, we are trying to understand how the country recovers. We are trying to calculate this recovery using two measures. One is the speed of aid, because experts in the area of disaster management mention that how quickly aid comes to the victims is going to be a factor in the long-run negative effect on the country. And the second part is, what is the ultimate trend of Human Development Index for the affected country? In both cases, we observed that if you control for a number of factors and try to figure out what is the ultimate effect of having more corporations providing aid, the country that receives more aid from the business community is going to recover faster, by looking at the Human Development Index.
Knowledge at Wharton: You also looked at what situations make it productive for corporations to come in — in other words, some guidelines that corporations can follow, or governments and others can follow, to determine when it is good for a company to come in.
Wry: In general, I’d say that our research suggests that it’s mostly good for corporations to come in. Theoretically, what we argue in the paper, and I think it bears out in reality, is that the reason that corporations can have a positive effect on the economic and human recovery of a country after a disaster is because, if they’re on the ground, they can sense what’s going on and quickly see the areas of need. They can also seize opportunities to respond.
And in doing so, they have resources that are on the ground that they can repurpose for addressing the disaster impacts. So because they’re close to it, and because they have the ability and the motivation to address these harms, we argue that this is why we see the effect that we do. So it’s less a general set of principles about when corporations should come in or what they should do. But we do highlight the capabilities that they have on the ground that let them intervene effectively.
But in addition to that, we find really strong evidence that companies can have a pronounced effect when they are using their existing resources, if they’re giving aid that’s related to the things that they do already. Mike mentioned the example of Coca-Cola switching their bottling lines in Indonesia from soft drinks to water and then using their own distribution network to get this stuff out. It makes sense — if you can take the experiences that you have as a company, the expertise, the routines that you’ve built up over a number of years, and deploy these for disaster aid, you’re going to be in a real position to help.
Knowledge at Wharton: You talked about how costs for floods, hurricanes and earthquakes, have gone up 600% 1990 to 2015. How much of this could be possibly attributed to climate change?
Useem: When it comes to natural disasters, let’s say from earthquakes, that’s obviously climate independent. But people who track storms, who understand extreme weather, have generally said that the last couple of years we have indeed seen more extreme weather. And then, with rising sea levels, extreme weather coming into the coastal U.S., whether the Gulf or along Florida, the impact is going to be greater.
That’s what, in part, got us to do this research. Because, as you indicated, the impact of disasters of all kinds, including natural disasters of this kind, has been going up in recent years. And public aid has not kept pace. And thus, in our view, it’s good thing that companies are beginning to jump in.
“If you can take the experiences that you have as a company, the expertise, the routines that you’ve built up over a number of years, and deploy these for disaster aid, you’re going to be in a real position to help.” –Tyler Wry
Knowledge at Wharton: When people talk about climate change, there’s often discussion that we should be making changes that would help to ease the effects of climate change and reduce carbon emissions — reduce the effects in the future. Then you’ll hear that this is going to cost a lot of money, this will hurt business and be a negative thing for the economy.
But when you look at this kind of disaster money — we’re talking about $300 billion in the U.S. alone, although not all of that is attributable to climate change — there’s also costs associated with climate change. Are there studies out there that look at the net-net — here’s the cost of mitigating, here’s the cost of not mitigating, and here’s the net result? That would vary whether you’re looking out two years or 30 years, obviously — but just in a general sense, does that get looked at?
Useem: You raise a great question. If you take it from a company standpoint, they do give substantial resources away. It costs them quite a bit in the wake of some of these disasters. And is there an argument for more preventive intervention by companies to avert the disasters? And in fact, many companies have been stepping forward to sign some of these public documents, including one that the U.N. puts out that calls upon a company, if you sign it, to then take steps that are providing for a more sustainable world.
Ballesteros: I think obviously this is a very difficult question, and we don’t have the data to answer it thoroughly. But … we hopefully are on track to really understand that having more corporations working in this field is beneficial from the social standpoint.
At the same time, we have more and more resources that have been invested in an activity that is not necessarily as productive as other types of activities that are related with industries and sectors of production. And obviously, the organizations have to make a choice in terms of investing all these resources, either in their normal market operations, or to help the market recover in the aftermath of all these disasters. So your question [raises the point that] there’s an option for us to start thinking about prevention and mitigation as a way to be more efficient in the use of financial resources at the global level.