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P R W P7357

e Indirect Cost of Natural Disasters and an Economic Denition of Macroeconomic

Resilience

Finance and Markets Global Practice Group

Global Facility for Disaster Reduction and Recovery

July 2015WPS7357Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure Authorized

Produced by the Research Support Team

?e Policy Research Working Paper Series disseminates the ?ndings of work in progress to encourage the exchange of ideas about development

issues. An objective of the series is to get the ndings out quickly, even if the presentations are less than fully polished. e papers carry the

names of the authors and should be cited accordingly. e ndings, interpretations, and conclusions expressed in this paper are entirely those

of the authors. ey do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and

its aliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

P R W P 7357

is paper is a product of the Disaster Risk Financing and Insurance Program (DRFIP), a partnership of the World Bank's

Finance and Markets Global Practice Group and the Global Facility for Disaster Reduction and Recovery, with funding

from the UK Department For International Development. It is part of a larger eort by the World Bank to provide open

access to its research and make a contribution to development policy discussions around the world. Policy Research Working

Papers are also posted on the Web at http://econ.worldbank.org. e author may be contacted at shallegatte@worldbank.org.

e welfare impact of a disaster does not depend only on the physical characteristics of the event or its direct impacts in terms of lost lives and assets. Depending on the abil- ity of the economy to cope, recover, and reconstruct, the reconstruction will be more or less dicult, and the welfare eects smaller or larger. is ability, which can be referred to as the macroeconomic resilience of the economy to natural disasters, is an important parameter to estimate the overall vulnerability of a population. Here, resilience is decomposed into two components: instantaneous resilience, which is the ability to limit the magnitude of the immedi- ate loss of income for a given amount of capital losses, and dynamic resilience, which is the ability to reconstruct and recover quickly. e paper proposes a rule of thumb to esti- mate macroeconomic resilience, based on the interest rate (a higher interest rate decreases resilience and increases welfare losses), the reconstruction duration (a longer reconstruc- tion duration increases welfare losses), and a "ripple-eect" factor that increases or decreases immediate losses (nega- tive if enough idle resources are available to cope; positive if cross-sector and supply-chain issues impair the produc- tion of non-aected capital). An optimal risk management strategy is very likely to include measures to reduce direct impacts (disaster risk reduction actions) and measures to reduce indirect impacts (resilience building actions).

MacroeconomicResilience

12

Keywords

JEL: 2

1 Introduction

CenterforResearchontheEpidemiologyof

forexternalassistance. 3 employmentandtaxrevenues,etc.

Eventhough

mechanismsthat are abletorecoverand 4 duringthe2005floodsinMumbai isin(Hallegatteetal.,2010).

2 Theeconomiccostofadisaster

2.1 Definingtheeconomiccostofextremeevents

3 callforinternationalassistanceisissued. 4 3 discrepanciesareinpart theassessment. 5

2.1.1 Directandindirectcosts

(e.g.,Cochrane,2004;LindellandPrater, that largerspatialscale effects).

Likein

categoriesthatoftenoverlap:

Production

affected); 5 includethem. 4 (includingoverͲreactions)that producedbyhousesand appliances). ofthepoorest loseina

GrossDomestic

populationscanhardlybevisibleonnational leastsomenonͲmarketandnonͲ

2.1.2 Assessingindirectlosses:Definingabaseline

Afirstdifficulty

disaster).Thisbaseline

Forinstance,adisaster

region.Also,reconstruction 5 welfarelosses.

Box1-DirectfloodlossesinMumbai

earthquakerisks. 6 $0.40ofinfrastructurelosses). needtostartproducingagain otherstressessuchaschangesin caneismoreprofitablethancoffee).Thefinal useddifferenttechniques.(CoffmanandNoy, isnotalways tools(DuPontandNoy,2012).

2.2 Outputlossesandtheirdrivers

7

2.2.1 Fromassetlossestooutputlosses

assetisthenetpresentvalue 6 loss count. thevalueofthelostassets. 7

Inestimatesof

infinity)isequalto multipliedbytheinterestrate. 6 7 value shouldincludethedepreciationrate.

Baselineproduction

(nodisaster)

Actualproduction(withdisaster

andnoreconstruction)

TimeProduction

"discounted"area=valueoflost assetsDISASTER 8 always returnisequaltothe infrastructureand objectives).Furthermore,output theirvaluetothesociety inSanFranciscoandhadtobeclosedforone capitalofthe (what directvalueofthisservice. equalityofassetvalueandoutputisvalidonly alargerproductivity 9 equalityofassetvalueandoutput efficientuseofthecarthanthelatter). ofoutputasthevalueoflostassets A. valueofthehousingserviceprovided fractionofhousesmaybedestroyed,leading serviceshouldtakeintoaccount any into byhurricanelossesinFloridain2004. 10

May04,Nov04,May05,May06,May07.

2.2.2 "Rippleeffects"

Outputlosses

"ripple 1998;

Tierney,1997).

transportplayedakeyrole. work,lossof duetotransportationperturbations,

Annualized wage change in Miami, FL

-5.00%0.00%5.00%10.00%15.00%20.00%

Aug-03

Oct-03

Dec-03

Feb-04

Apr-04

Jun-04

Aug-04

Oct-04

Dec-04

Feb-05

Apr-05

Jun-05

Aug-05

Oct-05

Dec-05

Feb-06

Apr-06

Jun-06

Aug-06

Oct-06

All occupations

Roofers

11

BeaumontandPort

Intheoreticalterms,thiseffect

of

Oneextremeexample

basedontheanalysisofone lossesthatarehigher(orlower)than 8 These activity(eveninabsenceofdirectdamages).

ForwardrippleͲeffects

production. al.,2012),such closeeconomies.Butthemodelused 8 12 water),severaloptionsare outside andproductionunitsthat limited,especially

2.2.3 Stimuluseffect

Disastersleadtoareduction

businesscyclesandtheexisting capacityscarcity,andaccelerated earthquake).Inthiscase,therefore,the The constructionboom). 13 economiesareplagued hasnoimpact. shouldnot.Indeed, sameoutput corrected

2.2.4 NonǦlinearityinoutputlosses

disaster(andtheamountofdestruction): affectedidlecapacity, existingeconomicsituation. Ͳ Second,the"rippleeffects"frominfrastructuretofirmsandhouseholdsandacrossfirmsarealso likelyto al.,2012). Ͳ Third,thereconstructioncapacityisalwayslimitedbyfinancialandtechnicalconstraintsandit

2004).

thanproportionallywithdirectlosses. reconstructionduration.The10billioneuros oninvestmentfrom 14

Whendirectlossesare

measuresofdisasterconsequences. likedisastersofincreasingmagnitude. onlyonthephysical oftherealeconomiccost make

Ͳ50050100150200250300350400

0 100 200 300

Indirectlosses(US$b)

Directlosses(US$b)

15

2.3 Assessingindirectlosses

2.3.1 Measuringindirectlossesusingeconometricanalyses

haveapositive

Others,like(Hochrainer,

stuckbyat disasters fromdifferentimpacts the

2.3.2 Modelingindirectlosses

which changesinrelativepricesbalance

2007a).

16 term workers adequately representedinproductionfunctions.

2.3.3 Ruleof

thumb capital,

Nquotesdbs_dbs50.pdfusesText_50

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