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AnOverviewoftheIssues
The theoretically correct measure ofeconomic impactsfrom a natural disasterwouldbe the
change in welfare that occurred asa result ofthe event. Welfare can be evaluated ex post,
asthe compensation required to avoid loss, or ex ante, which accountsforuncertainty
(Rose 2!2". #lthough thin$ing in termsofhypotheticalwelfare measurescan be
instructive, a complete welfare analysisisusually quite difficult empirically and would
require ma$ing a numberof assumptionsand simplificationsin analysis. %fsociety were
ris$&neutral, ex ante welfare could be evaluated with the expected economic loss(Rose
2!2". 'cholarsinterested in empirical estimates(asopposed to modeling results, which
can be useful in estimating welfare calculations"have attempted to measure observable
disasterdamagesand follow&on economic impactsasa rough approximation ofthe neteconomic costsofa disaster.
ariouslistsand typologiesofdisasterimpactshave been created. )ost scholarsof
disastershave generally classified disasterimpactsinto direct and indirect impacts. *irect
impactshave been described asthe physical destruction from a disaster, and indirect impacts
(some authorspreferthe term higher-orderimpacts"are considered the consequencesofthat
destruction (+ational Research ouncil !---". %n thisway, direct damagesreferto damages
to structures, contents, and infrastructure that occurasa direct result ofexperiencing the
haard. *irect impactsalso include mortality and in/ury caused directly by the haard.
%ndirect damagesreferto lost economic activity, such aslossofpotential production,
increased costsofproduction, lossin expected income, and otherwelfare losses, which occur
asa result ofthe initial damage. *irect and indirect damagesinclude nonmar$et impacts,
such asdeclinesin the quality oflife, environmental degradation, orlost recreational
amenities, forexample. %n theory, it should be possible to sum up all direct and indirect
lossesto generate a measure ofthe total economic costsofa disaster. %n practice, thisisquite
difficult, forseveral reasonsdiscussed in thissection.
The approach ofdividing disasterimpactsinto direct and indirect damagesand
summing them appearsto be a theoretically straightforward accounting method forestimating
the total economic impact ofnatural disasters0 however, the difficulty in practice hasled much
ofthe literature to focusinstead on the impact ofdisasterson macroeconomic variables. This
approach isanotherlensthrough which to viewdisastersand isclearly not additive with direct
and indirect damages (1# 23" The assumption is that direct and indirect effects would
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be reflected in macroeconomic accountsifthe disasterwassignificant. The focuson
macroeconomic variables isprobably due in part to the fact that good data are available on
them, but the ease ofdata availability doesnot imply that macroeconomic variablesare the
best measure ofdisaster impacts, as%discussfurtherbelow.
DirectandIndirectImpactsfromaDisaster
%ndirect lossesinclude businessinterruption coststo those businessesthat did not
sustain direct damage but may not be able to operate because, forexample, theirsupplier
wasdamaged, theirwor$ersevacuated, orthey lost power. %t also includesthe multiplier
effectsfrom reductionsin demand orsupply (more on these below". %n addition to causing
businessinterruption, lossofinfrastructure orotherlifelines(e.g., power, sewage, orwater"
can lead to utility lossto householdsin termsofa diminished quality oflife orcould cause
both householdsand businessesto adopt costly measures(such asincreased commuting
time asa result ofdamaged roadsorthe extra costsofrunning a private generatorwhen the
electricity isout".
Twomain complicationsarise when trying to measure the full economic costsin each
ofthe categoriesin Table !. 4irst, it isnecessary to be very clearabout the spatial and
temporal scale being examined because a different drawing ofthe boundariesofthe analysis
can lead to different results. 4orexample, considerthe economic costsofa disasterfrom the
point ofviewofa homeownerwho lost herhome. 'ome direct losses, such asthe home, are
reimbursed by insurance oraid from government orothergroups, and some lossesare un
reimbursed and borne fully by the victims. That is, assetsthat are replaced (some may not be"
are eitherfrom inter temporal transfersofthe individual orinterpersonal transfersfrom one
person to another(+ational Research ouncil 25". %fthe individual receivesdisasteraid
from the government, the economic cost ofthe disasterto that person will be the value ofthe
lost home minusthe amount ofthe aid. 4rom the perspective ofsociety, however, the aid is
/ust a transferfrom one taxpayerto anotherand thusshould not be added orsubtracted from
the direct damage to the home.
Temporal boundariescan also matter. #san example, it hasbeen shown (see below"
that construction sectorscan experience a boom right aftera disasteraspeople rebuild. #couple ofyearsafterward, however, they may face a lull because people will underta$e
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upgradesduring the post&disasterreconstruction that they would have deferred until further
into the future. oo$ing only one yearpost&disastermay suggest a benefit to the construction
sector, but loo$ing overthree yearsmight diminish thisbenefit. #nd to highlight again the
point made in the preceding paragraph, although the construction sectormay get a benefit,
had the disasternot occurred, the fundsspent on rebuilding would have been spent elsewhere
in the economy, with a higherutility to the homeowner0 thus, post&disasterspending should
not simply be counted asa benefit to the disaster.
The second challenge isthat it isquite easy to double&count losses. 4orexample,
assume a machine isdamaged irreparably in a flood. The value ofthat machine isthe net
present value ofthe future returnsfrom itsoperation. Thusthe value ofthe machine and the
lost production ofit should not both be counted asa loss(Rose 26". #sanotherexample,
one would not want to count both the aid disbursed by government and the rebuilding costsbecause much ofthe aid isprobably used forthe rebuilding.
'o, given these difficulties, what would be the most preferable measure ofdirect and
indirect damages7 The next three sectionsdiscussin more detail the challengesconfronting
an analyst, who must comprehensively assessthe economic lossfrom a natural disaster, in
arriving at a total estimate ofthe disasterimpacts.
DirectDamages
The economic cost that usually first comesto mind when thin$ing about natural
disastersisdamage to buildingsand contents. Though seemingly straightforward to measure,
getting the precise economic costsofthisimpact isnot theoretically trivial. onsidera house
that iscompletely destroyed. The economic losscould be measured aseitherthe mar$et value
ofthe house right before the disasterhit orthe replacement cost to rebuild it. The most
appropriate measure isthe mar$et value at the time ofdisasterimpact. The replacement cost
could be higherorlowerforseveral reasons. 8ost&disaster, some materialsmay be in short
supply and more expensive substitutesused orhigherpricescharged, forexample, orlabor
may be in short supply and thuswageshigher, driving the cost ofrebuilding above what it
would have been before the disaster(9lsen and 8orter2:". Thisisoften referred to as
demandsurge. #lthough these highercostsare a lossto the homeowner, they are a gain to the
suppliersand builders0 therefore, from the point ofviewofsociety asa whole, they are
;/usttransfers. 9n the flip side, if businessinterruption issevere and more laborersare
loo$ing fortemporary wor$, rebuildingcostscould be lower. Thisagain wouldbe a savings
to the homeownerthat, from the perspective ofsociety asa whole, would offset the lossto the
wor$er
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Thispicture iscomplicated by government disasteraid payments. 4orthe individual,
aid will lessen the economic impact ofa disaster. 4rom the point ofviewofsociety, the
government aid isa transferfrom one taxpayerto another, asstated above. The dead eight
lossoftaxation ispositive, however, and the marginal opportunity cost ofa dollarof
government spending isin most casesli$ely to be greaterthan
to include thiscost ofgovernment spending. =owever, it isnot necessarily the case that
disasteraid will require newtaxation because fundsmay instead be diverted from anotheruse.
%n such a case, it ispossible that thisdiversion could lessen the dead eight lossoftaxation if
the aid waslessdistortionary than the fundsin theirnon disasteruse. %fthe fundswere from
increased government borrowing, thiscost offederal borrowing would need to be included.
The homeownercould also receive insurance payoutsifhe orshe had disaster
insurance. Thiswould again lessen the negative wealth shoc$ to the homeowner. #ssuming
ris$&based pricing ofinsurance and well&diversified companies, claimspayoutsshould not be
considered a cost ofa disaster. They are often used asa proxy foreconomic costs, however,
asthey should theoretically be closely correlated with the lost value ofthe homesand
structures>at least in areaswith high ta$e&up ratesofinsurance. 4urther, insurance
companiesusually $eep extremely good recordsand so are an excellent data source.
%n addition to the cost ofthe lost home, otherdirect lossesto the homeownerinclude
the time lost to the rebuilding effort, emotional trauma orstress, and lossofnonmar$et items
ofvalue, such asbaby photographsorfamily $eepsa$es. These lossesare rarely included in
disasterdamage estimates.
*estruction to the buildings, contents, inventory, and capital offirmscan be similarly
analyed. 4ordestroyed capital, depreciation must also be considered, and the correct
measure ofeconomic lossisthe depreciated value ofthe lost asset. %fproduction islost from
the delay in replacing damaged capital, then the lost production from delay should also be
counted asan economic loss. The literature examining possible positive impactsofdisastersis
premised on the notion that replaced capital could be more productive than the capital
destroyed ifthere hasbeen technological change (discussed in 'ection ? below". This
productivity bump could not be so high asto ma$e the firm betteroff, orelse they would
have already upgraded the capital. 'till, the productivity increase will offset some ofthe
economic loss. %fthe firm receivesdisasteraid such that the upgrade is, in a sense, free to the
firm then it could in theory be better off post disaster if the productivity bump is great
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enough. #gain, though, from the point ofviewofsociety, the aid issimply a transfer.
%nfrastructure damage isanothercategory ofdirect lossfrom a natural disaster. #gain,
the depreciated value isthe correct measure ofeconomic loss. *elaysin repairand rebuilding
can triggerindirect costs, discussed next, through an interruption in use orservice.
1specially in the developing world, lossoflife and in/ury from disasterscan be large,
and these are direct costsofa disaster. #n enormousdebate centerson howto value lossof
life and in/ury, and %will not rehash that here, except to note that a value&of&a&statistical life
('"estimate based on disasterris$ explicitly would be the best measure. To my
$nowledge, very few, ifany, ' estimateshave loo$ed explicitly at natural disasterris$,
although one comparative stated preference study findsthat willingnessto pay (WT8"toreduce mortality ris$ isgreaterforterrorism than fornatural disastersand that reducing the
mortality ris$ from natural disastersisvalued about the same asthat from traffic accidents,
even though the latterisa much higherris$ (iscusi 2-". %n/ury and illnesscan be measured
in quality&ad/usted life&yearsorsimilarmeasures.
*irect damagescan also include environmental degradation. 4orsuch nonmar$et
losses, an estimate ofsociety@stotal WT8to have avoided the lossex ante isa measure oftheeconomic loss. #gain, a large literature addressesnonmar$et valuation techniquesthat can be
applied to obtain such estimates, which will notbe discussed here (see, forexample, 4reeman
23".
4inally, emergency response and debrisclean&up could also be considered direct costs
of a disaster. Thiswould include the opportunity cost ofpeople@stime spent hauling away
debris, forexample, orthe costsofevacuation. )any ofthese costsare borne by
governments, and ifthe interest isin total economic impactsto society asa whole, care must
be ta$en in correctly estimating these costs. %ssuesthat must be considered include whether
newtaxation was required, ifgovernment indebtednessincreased, andAorwhat the funds
would have been spent on in the absence ofa disaster.
#lthough thispaperisfocused exclusively on economic impacts, previouswor$ has
examined broaderimpacts, including demographic shiftspost&disaster. 4orexample, it was
found that after=urricane #ndrew, low&income groupsmoved into areasthat had been
damaged (potentially because these areaswere cheaper", the proportion ofmiddle&income
groups in damaged areas declined and the wealthy remained (perhaps because insurance and
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self&protectionwere more affordable forthisgroup0 ('mith etal.25". 'uch changescould
have welfare effects.
IndirectDamages
*isasterscan be viewed asa negative capital shoc$ to a region. Thishasfollow&on
economic consequencesin addition to the value ofthe lost assets. 4irst, economic lossesarenot exclusive to firmsorhouseholdsthat sustain direct physical damage. %felectricity or
wateris lost, forinstance, it can cause businessinterruption to even firmsthat are not
themselvesdirectly damaged. Thisisa widely recognied disastercost. 'imilarly, the lossof
such servicescan lead to a decline in the quality oflife forhouseholds, and thusa utility loss,
and could also lead to the need forcostly measuresto compensate, although thisisrarely
discussed in the literature. 'uch compensating actionscould involve longertravel timesdue
to a road outage orthe purchase ofbattery&powered lighting in response to a lossof
electricity, forinstance. These are indirect damagesto include in estimatesoftotal costs.
#ttention in the literature hasfocused on possible multipliereffectspost&disaster.
onsumerdemand post&disastermay be higherforsome sectors>such asconstruction,
particularly ifaid orinsurance isfunneled to rebuilding>and lowerforothersasconsumers
forgo some expendituresto use theirfundsforrebuilding. These typesofexpenditure changes
could have economic multipliereffectswithin the community (positive ornegative". #
similarstory can be told forbusinessinterruption. Thiscould decrease demand forinputsand
reduce outputs, having negative ripple effectsin the supply chain0 although here, aid and
insurance could mute these impactsifsuch fundsallowfora fasterresumption ofnormalbusinessactivity.
4rom the perspective ofthe whole economy, however, multipliereffectsmay well be ero,
with positive andnegative impactscancelling out (+ational Research ouncil !---". 4or
instance, ifa firm failsto produce an output, itscustomermay simply purchase the good
elsewhere. Thisisa lossforthe disaster&impacted firm but a gain fora competitor, and thusa
wash from the point ofviewofthe whole economy. #sanotherexample, touristsmay avoid a
hurricane&stric$en coast, but instead ofnot traveling, they may /ust frequent anotherarea.
#gain, thismay be a wash from the point ofviewofthe entire economy, but clearly thedistributional impactscould be quite large and could have significant consequencesfor
individuals, firms, orcommunities.
%fa government doesma$e changesto taxation orresource allocation post&disaster,
thiscould have indirect economic effects. 4orhard&hit countries, particularly small orpoor
countries, thisisa distinct possibility and would need to be evaluated. ountriescan also
receive international assistance (which, again, would be a transferfrom a global perspective".
ase study evidence suggeststhat donorsdo not necessarily provide additional aid aftera
disaster, but simply reallocate aid budgets(Benson and lay 26".
)ortality or illness could also occur as a result not of the haard but of the initial
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damage. 4orinstance, ifwaterbecomescontaminated asa result ofthe shutdown ofa
treatment plant and thisleadsto illness, it would be an indirect cost ofthe disaster. #fter
hurricane Catrina, an increase in mortality rateswasobserved because the storm destroyed
much ofthe health infrastructure ofthe city ('tephens2D". These would be deaths
classified asan indirect cost.
4inally, disasterscould causepeople to altertheirris$ perceptions. Thiscould then
induce behavioral responsesand a reallocation ofresources. These could have
economic consequences, such aswor$ersrequiring a ris$ premium post&disaster(on
thispoint in the context ofterrorism, seeE Rose 2!2", but are not furtherconsidered in
thisreview. 'imilarly, utility functionsmay be state dependent and may change aftera
disaster, such that ex ante valuationsare not the same asex post valuations.!#
complete welfare assessment would need to considerthese possibilities.+otably,
positive utility gainscould occurvia public aid post&disasterifpeople feel good abouthelping those in need and reassured that ifthey are victims, aid will be forthcoming.
i$ewise, utility lossescould be associated with any increasesin fear(or other
negative emotions", which #dler(26"arguesshould be measured and included in
regulatory costFbenefit analysiswhen relevant.
1conomistsexhibit some hesitancy regarding estimationsofhigher&ordereffects, and
the complicationsdiscussed above hint at why. Rose (26"notesthe following concernsE
indirect effectsare hard to verify, modeling them can be difficult, the sie ofthe impactscan
very substantiallydepending on the resiliency ofthe economy and pace ofrecovery, and themodeling ofsuch effectscould be manipulated forpolitical purposes(e.g., inflating the
multiplier". 'till, when calculated carefully, they are a true cost ofthe disasterand should be
included in any complete accounting. )ost estimatesoftheirmagnitude have been done
through modeling ratherthan empirical analysis.
MacroeconomicApproaches
The ma/ority ofeconomic studies, instead ofattempting to estimate direct or
indirect costs, evaluate the impact ofnatural disasterson macroeconomic indicators,
primarily grossdomestic product (G*8". %t isthusworth saying a word about howthese
estimatesofdisasterimpactsrelate to estimatesofdirect and indirect economic effects.
%t ispossible that the direct andindirect effectsofa disastercould be large enough to
have macroeconomic effects, includingimpactson economic growth, balance ofpayments,
fiscal revenues, levelsofindebtedness, and investment rates(1# 23". %fdamagesare
severe, output could decline. 9utput could also increase from post&disasterreconstruction. %t is
unclear, on net, howthese effectswould balance out. *amagesto firmscould alterimports
and exports. Government spending foremergency response, ifhigh enough, could change
indebtedness. Tax revenue could be impacted. %fseriousprice increasesresult from the
disaster this could fuel inflation 4oreign direct investment could fall if companies see too
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great a ris$ ortoo much damage.
'ome ofthese impactsare essentially indirect economic impactsthat should be counted in
total economic impact estimates. )ore often, however, macroeconomic variablesare used as
aproxy forthe direct and indirect impacts/ust discussed. 4orexample, government spending
isoften used asa measure ofthe damagesfrom a disasterbut need not be directly related to
economic losses. 'imilarly, G*8isoften used to capture total economic impacts. %t isworth
stressing, however, that G*8issimply a measure ofeconomic activity, not ofwealth or
welfare. The usual argumentson thispoint extend to the case ofnatural disasters. The
literature on the G*8impactsofdisastersisreported here, but with thisstrong note ofcaution
that it isa poorproxy foreithertotal economic costsorwelfare impactsofa disasterevent.
MeasurementProblems
The thorny theoretical problemsinvolved in estimating the economic consequencesofdisastersare coupled with extreme data limitationsthat ma$e actual estimatesfarfrom
what would be the hypothetical ;truedisastercosts. )any scholarshave stressed the need
for reliable, comprehensive, systematicallycollected disasterlossdata (e.g., Thomas2!".
Good data on disasterlossesare needed fora range ofpurposes, including costFbenefit
analysisofmitigation measures, government preparednessplanning, calibration ofloss
models, and ris$ analysisforinsurersand otherentities. 1ven in highly developed countries
with generally good record&$eeping, comprehensive disasterlossdata are difficult to come
by. The Hnited 'tates doesnot $eep systematic recordsin one location oflossesassociated
with natural haards. )any expertshave called forsuch a database to be developed and
maintained by the federal government (e.g.,+ational Research ouncil !---", but thusfarit
hasnot occurred.
%n general, the data available on disasterimpactsare on those thingsthat are easily
observable ex post. 4orinstance, depreciated replacement value isthe best estimate of
damage to structuresand assets, but isnot available in most data sets()ileti !---"0
replacement cost ismore li$ely to be observed. Because public expendituresare fairly easy to
observe and often are already measured in some form in most countries, they are frequently
used asa proxy forlosses0 but, asalready mentioned, public expenditureson reconstruction
may not match the magnitude oflossesto capital (avallo and+oy 2!". )ost disasterdata
setsdo not include indirect lossesordamagesto nonmar$et goodsand services0 therefore,
most disasterlossdata probably underestimate the full economic impact ofdisasters()ileti
!---0)itchell and Thomas2!".
#notherdifficulty with disasterdata isthat many high&magnitude eventsare complex,
with multiple interrelated perils(Cron et al. 2!2". 4orinstance, strong hurricanesbring
with them high winds, torrential rain, and storm surge0 these could furthertrigger
landslides. 'evere stormscouldinclude damage from wind, hail, flooding, lightening,
and tornadoes 1arthqua$escan trigger tsunamis or fires This ma$es classifying
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disastersforcomparison acrosseventsdifficult.
4inally, some countrieshave much betterrecord&$eeping than others. 'ome countries
may not have institutionsthat are tas$ed with damage estimation, and in some placespost&
disasterassessmentsmay be difficult. 4urther, developing countriesmay have an incentive to
exaggerate damagesto gain international aid and, regardless, obtaining good damage
estimatesin developing countriescan be a challenge because insurance penetration islow,
boo$ $eeping isoften poor, and much economic activity occursin informal sectors(Toya and
'$idmore 2D". ery little is$nown empirically about disasterimpactson informal sectorsof
the economy.
Thus, all disasternumbersshould be interpreted with some degree ofcaution. %n
addition, the nature ofthe database can influence the conclusionsdrawn about disasterlosses,
asnoted by Gall et al. (2-". 4orinstance, different databasesinclude different itemsin the
estimate ofdamages(e.g., /ust direct damages, orboth direct and indirect", which can causedifferencesin ran$ingsofevents. %n theircomparison ofdisasterdamage estimatesin the
Hnited 'tatesacrossthree different databases, Gall et al. (2-"find that, although all three
databasesagree that hurricanesand tropical stormsare the most damaging haard in the
Hnited 'tates, they differon which haard isran$ed second>earthqua$es, severe weather, or
floods.
#t an international scale, three primary data setsare available forcross&country,
multiple&haard analysis. These are the entre forResearch on the 1pidemiology of*isasters@
(R1*@s"1mergency 1vents*atabase (1)&*#T", 'wissRe@s'igma, and )unich Re@s+atat'1R%1. 1)&*#T hasa humanitarian focus, and the reinsurance databases('igma
and +atat'1R%1", not surprisingly, focuson insured and material losses. The databases
have different thresholdsforthe inclusion ofevents(Cron et al. 2!2". 1)&*#T includes
eventswith more than ! fatalities, more than ! people affected, a declaration ofa state of
emergency, ora call forinternational assistance. 1ventsare included in 'igma ifoverall losses
exceed H'< :5.5 million, insured lossesexceed H'< 63.3 million (both in 2! dollars", or
there are 2 ormore fatalitiesormissing persons.+atat'1R%1 includesany event in
which harm to people orproperty damage occurs. #ll ofthese databasesacquire information
from a variety ofsources.
1)&*#T ispublicly accessible, whereasthe reinsurance databasesare not, althoughstatistical
analysesare published by the firms. Thismeansthat foralmost every cross&country,
multihaard paper, the 1)&*#T data are used. Because ofthis, a fewthingsshould be $ept in
mind about these data. 4irst, given the threshold forinclusion mentioned above, small events
are not included, even though frequent lower&impact eventscould still cause substantial
economic costs. 'econd, 1)&*#T isfocused on aiding humanitarian response. #ssuch, it has
no threshold fordamages, so eventsin more developed countrieswith a high level ofdamage
but lowlossoflife and no call forinternational aid may fail to be included. 4inally, 1)&*#T
data are compiled from multiple sources and are only as good as those sources 'ources
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include the Hnited+ations, governmental and nongovernmental organiations, insurance
companies, research institutes, and the press. The sourcesare ran$ed according to their
trustworthinessin providing accurate and complete data. ollecting disasterdata isa difficult
process, and R1*should be commended on the wor$ done to create and maintain this
database. %t isthe best source forconsistent, multicountry natural disasterdata available. That
said, we would be more confident in ourestimatesofthe economic impactsofnatural
disastersifmultiple data sourcesall found the same results. With so much ofthe literature
relying on thisone data source, any problemswith the data will propagate through all
analyses.
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