Modeling the economic costs of disasters and recovery: analysis using a dynamic computable general equilibrium model

Abstract

Disaster damages have negative effects on the economy, whereas reconstruction investment has positive effects. The aim of this study is to model economic causes of disasters and recovery involving the positive effects of reconstruction activities. Computable general equilibrium (CGE) model is a promising approach because it can incorporate these two kinds of shocks into a unified framework and furthermore avoid the double-counting problem. In order to factor both shocks into the CGE model, direct loss is set as the amount of capital stock reduced on the supply side of the economy; a portion of investments restores the capital stock in an existing period; an investment-driven dynamic model is formulated according to available reconstruction data, and the rest of a given country's saving is set as an endogenous variable to balance the fixed investment. The 2008 Wenchuan Earthquake is selected as a case study to illustrate the model, and three scenarios are constructed: S₀ (no disaster occurs), S₁ (disaster occurs with reconstruction investment) and S₂ (disaster occurs without reconstruction investment). S₀ is taken as business as usual, and the differences between S₁ and S₀ and that between S₂ and S₀ can be interpreted as economic losses including reconstruction and excluding reconstruction, respectively. The study showed that output from S₁ is found to be closer to real data than that from S₂ . Economic loss under S2 is roughly 1.5 times that under S₁ . The gap in the economic aggregate between S₁ and S₀ is reduced to 3% at the end of government-led reconstruction activity, a level that should take another four years to achieve under S₂ .

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