System-Wide Impacts of a Specific Extreme Event

1. System-Wide Impacts of a Specific Extreme Event Alvaro Calzadilla eee Programme - Seminar (November 15, 2005)

2. System-Wide Impacts of a Specific Extreme Event The general objective: “To show the overall economic cost of a natural disaster paying special attention to the market effects” “ To show that the economic burden of a natural disaster is not confined to the region where the disaster physically occurs”

3. System-Wide Impacts of a Specific Extreme Event Outline: - Natural disaster analysis - Flooding in Australia in 1998 - Simulation and results - Conclusion

4. System-Wide Impacts of a Specific Extreme Event Natural disaster analysis Economic and insured losses with trends (Munich RE, 2003)

5. System-Wide Impacts of a Specific Extreme Event Natural disaster analysis EXTREME WEATHER EVENT: Extreme weather is defined as weather that exceeds a locale’s normal weather intensity. By definition, it is infrequent or rare, and it will vary from location 1 to location 2 Extreme weather can be represent as a score of “extreme high” (95th, 98th or 99th percentiles) or “extreme low” (5th, 2nd or 1st percentiles) for a location

6. System-Wide Impacts of a Specific Extreme Event Natural disaster analysis NATURAL DISASTER: A natural disaster is often the coalescence of two or more extreme events An extreme weather event can become a disaster when the damage resulting from the event is beyond the capacity of a community to cope

7. Direct Effects: Losses of capital stock Indirect Effects: Business interruption Economic Costs Disaster Impacts Macroeconomic Effects: Loss of GDP, etc. Humanitarian Effects Ecological Effects System-Wide Impacts of a Specific Extreme Event Natural disaster analysis Impacts of natural disaster (ECLAC)

8. System-Wide Impacts of a Specific Extreme Event Natural disaster analysis Impacts of natural disaster (ECLAC) • Social Sectors: • Affected population • Housing and human settlements • Education and culture • Health Sector • Infrastructure • Energy • Drinking water and sanitation • Transport and Communication Economic Cost • Economic Sectors • Agriculture • Trade and industry • Tourism

9. System-Wide Impacts of a Specific Extreme Event Natural disaster analysis Economic Costs (ECLAC Methodology) Direct Damage: Physical impact on infrastructure - Total o partial destruction of housing, buildings, installations, machinery, equipment, means of transportation, storage and furniture. - Damage to cropland, irrigation works and dams. - Destruction of Crops ready for harvesting. Indirect Damage: Business interruption - Loss of production of goods and services resulting from the destruction of the means of production. - Loss of industrial output as a result of damage to factories or lack of inputs and increased transport cost. Macroeconomic: Secondary effects Loss in GDP, balance of trade, balance of payments, taxes, expenditure, etc

10. System-Wide Impacts of a Specific Extreme Event Natural disaster analysis The ECLAC methodology does not take into account the market effect in which the productive sectors may incur.

11. System-Wide Impacts of a Specific Extreme Event Natural disaster analysis MARKET EFFECT: The changes in the relative competitiveness caused by a natural disaster These changes are driven by changes in prices

12. System-Wide Impacts of a Specific Extreme Event Flooding in Australia This section is based in Yen (2002) “Flooding in Australia: A Review of Events in 1998” Yen’s paper reviews the diverse causes and styles, the frequency and the losses of Australia’s five most costly floods in 1998 (Townsville, Katherine, East Gippsland, Namoi Valley and Wollongong)

13. Katherine Townsville Namoi Valley region Wollongong East Gippsland region System-Wide Impacts of a Specific Extreme Event Flooding in Australia TONWSVILLE (Jan): - Rainfall > 100 Yr ARI - Flood highest on record KATHERINE (Jan): - Rainfall > 100 Yr ARI - Flood ~ 150 Yr ARI EAST GIPPSLAND (Jun): - Flood highest on record NAOMI VALLEY (Jul): - Flood 20 Yr ARI WOLLONGONG (Aug): - Rainfall > 100 Yr ARI - Flood ~ 50 Yr ARI

14. System-Wide Impacts of a Specific Extreme Event Flooding in Australia Tangible and intangible damages from the 1998 floods Economic Cost (Direct effect) Humanitarian Effects

15. System-Wide Impacts of a Specific Extreme Event Flooding in Australia Tangible damages from the 1998 floods

16. System-Wide Impacts of a Specific Extreme Event Simulation and results To model the effects of Australian floods, the GTAP-EF model is run by shocking the exogenous variables “capital endowment” and “land endowment” in region RoA1 (to which Australia belongs). The result is a counterfactual scenario, in which the world economy adjusts its structure, as a consequence of the reduction of productive resources in one region.

17. System-Wide Impacts of a Specific Extreme Event Simulation and results Indirect Effects (1188 MM USD) Macroeconomic Direct Effects (527 MM USD) Macroeconomic

18. System-Wide Impacts of a Specific Extreme Event Simulation and results

19. System-Wide Impacts of a Specific Extreme Event Conclusions Local impacts of an specific extreme event propagate inside the world economic structure, because of trade relationships among regions In this specific exercise if we do not consider the overall impact we would underestimate the global economic impact by 18.8%

20. System-Wide Impacts of a Specific Extreme Event Conclusions It is important to consider the market effect inside the indirect effect, because it can determine permanent losses in the international market shares The reconstruction cost following a Natural Disaster must prior the sectors with a high level of market effect