The Impact of Natural Disasters on Business - Essay Example

1. Given that the local tax base disappears after a disaster, and that government-owned critical infrastructure is built and maintained from local tax revenues, should the tax issue be taken into account in formulating a risk assessment? Why or why not? Immediately after a disaster, local business and productive activity are impaired, thereby eroding the tax base in the affected locality. As a result thereof, tax returns are bound to dwindle even as the government will be needing its resources to respond first of all to the disaster as it unfolds, and secondly after the disaster but during the rebuilding effort. Because of this, the speed with which the local government’s coffers are replenished in order to meet the recovery effort becomes an important determination, and therefore the generation of tax returns becomes a vital consideration. When local resources are insufficient, localities are nevertheless benefitted by the release of federal funds for disaster response. The fund release may have their unforeseen irregularities, however, such as delay or slow release of funds, insufficient amounts released, and other contingencies. With the resumption of interrupted public services and the possible damages which have been sustained by local infrastructure, the restoration of these services and infrastructure becomes priority. Taxes being probably the single largest income of the local government, the possibility of a severe reduction in tax collections can jeopardize the speed of recovery of a town or city. It therefore becomes imperative that scenarios of recovery efforts also take into consideration the possible drop in taxes (Alesch). In the Input-Output Model (I/O) of risk assessment, the effect of a reduced tax base is factored in as an input to the rebuilding infrastructure. A reduction in tax collections is estimated as part of the net income loss that may occur, an estimate of which can enable the local government to take necessary measures to mitigate the likelihood of an event. Numerous studies have urged that nonlocal impacts cannot be ignored (Committee on Assessing the Costs of Natural Disasters, NRC, 1999; Rose & Liao, 2005; Greenberg, et al 2007). Such effects may include disruption of power, communications, and other utilities; damage to roads, bridges and other infrastructure and interruption of transportation services; declines in sales, wages and profits, and subsequently the erosion of tax collections not only at the local level, but also at the state and federal levels. On the other hand, the impact on taxes should also take account of the fact that during times of disasters, there are also opportunities created that may offset the adverse consequences at least in the economic sense. Suppliers of goods and services situated outside the risk area will tend to enter and fill in the demand vacated by the incapacitated businesses within the area. There will also be the need for reconstruction of vital structures which able construction firms will be called to fill, in which case jobs for construction workers will be created (Greenberg, 2007, p. 85). In this surge of productive economic activity, depending on local tax laws, there may be opportunities created for tax assessments on those business activities locally conducted, that may offset the losses to the coffers of the local government. What is important, however, is that expected tax losses should be estimated so that the local government may take steps to mitigate the negative consequences. 2. How should resilience and business recovery be treated, if at all, in preparing a risk assessment? Resilience may be defined as “the adaptations within an economy that speed recovery from a shock and avoid some losses” (Greenberg, Lahr & Mantell, 2007, p.86). The comprehensive view of this would include the availability of the necessary skilled manpower, materials, infrastructure, government mechanisms, private organizations, and other resources aside from the finances needed to effect recovery. It includes activities such as conserving, substituting, rescheduling activities, and other contingency plans that immediately take effect upon the onset of the disaster. An example provided by Greenberg, et al (2007) is the plan that provides for drawing electricity from non-grid sources, resort to nonelectric energy, and suspension of power-intensive non-critical tasks, when a significant power outage takes place. Resilience is seen as a complement to mitigation; where mitigation is well provided for, the need for resilience is reduced (p. 86). Resilience and business recovery should be approached in a pro-active manner. The ability to build in resiliency capabilities must pre-exist the happening of an event, therefore they must have been planned, provided for, and implemented even while a hazard is still a remote possibility. In short, resiliency should be built into the system, built upon the premise that the hazardous event will occur. Greenberg, et al., recommends a continuous program of learning and testing; for instance, if in a locality a large proportion of potable water service is significantly restored after only two days instead of the one week forecasted by the experts, then analysts should study the source of the resiliency and seek to replicate the important elements of that model in other localities and regions. Furthermore, attention towards continuous improvement should be maintained. As for business recovery, it has been observed from previous events that an area devastated by natural disasters tend to reap economic benefits in the long term. For instance, old structures rendered unusable by the disaster are replaced with new and more sustainably designed ones, and improvements are introduced in the course of reconstruction of vital systems likewise damaged in the event. There are therefore economic opportunities created in the course of recovery and reconstruction, which create new demand that may spur businesses in the vicinity and create new ones. In the course of risk assessment, coordination must be established with information resource recovery and business recovery planning activities, as these are mutually supporting elements in the course of disaster preparedness (Rittinghouse & Ransome, 2005, p. 28). The beneficial effects of a fast recovery of local businesses cannot be discounted. The private sector is an important catalyst of economic activity and a vital partner with public sector instrumentalities in creating jobs and restoring the communities affected to their former economic status. The local government will be able to amplify the results of its recovery efforts and accelerate rehabilitation if it will be able to harness the productive capability of the business sector in its emergency plans. Quick recovery of businesses, the industrial and commercial firms, should be a priority of disaster preparedness in order to facilitate the return to normalcy in the life of the affected communities. References: Alesch, Chapters 11 & 12 (95-109). Greenberg, M. R., Lahr, M., & Mantell, N. (2007). Understanding the economic cost and benefits of catastrophes and their aftermath: a review and suggestions for the U.S. federal government. Risk Analysis: An International Journal, 27(1), 83-96. Piegorsch, W.W., Cutter, S.L., & Hardisty, F. (2007). Benchmark analysis for quantifying urban vulnerability to terrorist incidents. Risk Analysis: An International Journal, 27(6), 1411-1425. Rittinghouse, J. W. & Ransome, J. F. (2005) Business Continuity and Disaster Recovery for Infosec Managers. Burlington, MA: Elsevier Digital Press Read More