The Indirect Cost of Natural Disasters and an Economic Definition of Macroeconomic Resilience
The 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 ability of the economy to cope, recover, and reconstruct, the reconstructio...
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2015
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2015/07/24744802/indirect-cost-natural-disasters-economic-definition-macroeconomic-resilience http://hdl.handle.net/10986/22238 |
| Summary: | The 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 ability of the economy to cope, recover,
and reconstruct, the reconstruction will be more or less
difficult, and the welfare effects smaller or larger. This
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 immediate loss of income for a
given amount of capital losses, and dynamic resilience,
which is the ability to reconstruct and recover quickly. The
paper proposes a rule of thumb to estimate macroeconomic
resilience, based on the interest rate (a higher interest
rate decreases resilience and increases welfare losses), the
reconstruction duration (a longer reconstruction duration
increases welfare losses), and a “ripple-effect” factor that
increases or decreases immediate losses (negative if enough
idle resources are available to cope; positive if
cross-sector and supply-chain issues impair the production
of non-affected 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). |
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