In developing countries, the provision of disaster relief is among the most visible and costly functions performed by governments to promote social welfare. In China, for example, disaster relief accounted for 70 to 80% of social welfare expenditures between 1983 and 1987. Disaster relief is also a large budget item in industrialized countries like the United States. The U.S. government regularly pays substantial sums for relief and a large share of humanitarian aid to other countries is given in the wake of disasters. The United Nations noted the importance of relief and the debates about how to provide it when it designated the 1990's as the International Decade of Disaster Relief. The study has three objectives. The first is to set out the basic economic principles of disaster relief programs. A theoretical analysis will clarify tradeoffs between welfare and efficiency in the provision of aid. A central argument is that the economic effects of disaster relief differ substantially in economies with well-developed insurance markets like the U.S. and these without, like China or India. The second aim is to apply the theoretical insights and analyze the disaster relief system in China. It is estimated that the cumulative loss from disasters amount to 3-4% of GNP each year, and disaster relief has become an especially important part of the social safety net since de-collectivization. The effect of environmental changes on the frequency and scale of disasters is also investigated in terms of increased costs, the ability to target the most needy recipients, and institutional weaknesses in China. The third aim of the study builds on the first two and involves extending the collection of a household level data set initiated in the Shandong Province of China. The data set will allow the application of new econometric techniques to test hypotheses about the extent of consumption smoothing and risk taking in face of possible disasters.
