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The World Bank/ECLAC workshop on Natural Disaster Evaluation

Macroeconomic effects of damage René A. Hernández, April 14-15, 2004

Washington, D.C.

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Basic steps

• Macroeconomic assessment sequence

• Role of the macroeconomist

• Establishment of a baseline

• Assessment of the economic situation following the disaster (effects on economic growth and income and then on private, fiscal and external accounts

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Phases in macroeconmic assessment

• Quantifiable effects of the disaster on the economic growth as a whole and on the main aggregates GDPNational incomeInvestment, gross capital formationEconomic gaps (private, public, external)Inflation, balance of payments

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Phases in macroeconomic assessment

• The pre-disaster situation

• Economy’s expected performance in the disaster year in the absence of it

• Expected situation following the disaster

• The evaluation is based on the reports prepared by the sectoral experts

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Phases in macroeconomic assessment

• The most difficult task is to verify the consistency of different estimations by comparing the evolution of macroeconomic variables with that obtained by putting together sectoral, regional or partial information

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Phases in macroeconomic assessment

• Most importantly, macroeconomic assessment provides a basis on which to estimate the financial and technical cooperation that the international community is expected to contribute during the rehabilitation and reconstruction processes

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Phases in macroeconomic assessment:

the pre-desaster situation• Clear understanding of trends prior to

disastersBaselines of the economy

Macroeconomic databases and simulation modelsUnderstanding of forecasts prior to the disaster

Economic growth forecast after the disaster

Effects on main macroeconomic variables

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Phases in macroeconomic assessment:

The expected performance• Important sources of information

Target variables Indices of macroeconomic activityBudget Inflation UnemploymentExternal sector

• ConstraintsData, consistency, qualityTime

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Phases in macro assessment:The post-disaster situation

• Overview of economic effects

• Summary of damage to fixed assets

and estimation of interruption of the

production of goods and services

(estimation of import requirements)

• Summary of main economic indicators

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Summary of general economic effects

• Summary appraisal of the effects of the disasterLosses on existing assets Interruption of flows of income and increased

expenditureSecondary effects

• Summary tableEstablish the order of magnitude of the disasterCapture the effects on private and public sectorsEstimate the import requirements

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Summary Table

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Phases in macroeconomic assessment:

The post-disaster situation• The summary analysis is essential for

reconstruction programmes purposes and for the orientation of loans and external aid

• The estimation of direct and indirect damages will be provided by the sectoral specialists

• The damage is assessed at current prices in the year the disaster occurred

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Secondary effects

• Economic growth• Investment• Public finance• Inflation• Unemployment• Debt• Balance of payments• Financial variables

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Measurement and valuation:economic growth

• Measure of economic activity based on sectoral data and at current prices

• Need to express GDP in constant prices

• Need to use constant disaster year prices

• Estimation of forescast scenarios

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Rate of growth of GDP on different countries

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Measurement and valuation:investment

• Interruption/suspention of investment

projects

• Inventory losses

• Factory and equipment destruction

• Disruption of trade channels

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Gross capital formation

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Gross capital formation

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Measurement and valuation:Public finances

• Composition and presentation of the budget• Resource gap

TUD = NFD + DA = GFN – DEN = FFGWhere:

TUD: total underlying deficitNFD: net financing needDA: debt amortizationGFN: gross financing needDED: disbursement of existing debtFFG: fiscal financing gap

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Measurement and valuation:Public finances

• Fiscal trends (undervaluation, debt, policy measures)

• Analytical presentation

Changes in current revenue and expenditure

Changes in capital expenditureFinancing needs

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Example: central government budget, Honduras 1997-1999

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Measurement and valuation:Inflation

• Through supply shortages and excessive liquidity and spending, higher costs

• Decomposition of the consumer’s price index

• No discernible pattern

• Data availability

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Difference in the rates of inflation

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Example: inflation in Jamaica

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Measurement and valuation:Unemployment

• Destruction of productive capacity and growing demand due to the disaster and during the reconstruction stageIntensive labor demand sectorsGender considerationsChanges in productive specialization

patterns

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Measurement and valuation:Debt

• Emergency loans

• Reorientation of existing loans

• New loans

• Temporary debt relief and its

implications

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Measurement and valuation:Balance of payments

• Flows of goods and servicesDecrease in exports and service earningsIncrease in importsEstimation of tariff reduction effectInsurance and re-insurance

• Unilateral transfersDonations and remittances

• Capital and financial account

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Measurement and valuation:Financial variables

• Net foreign assets will reflect the result

of the balance of payments

• Net domestic credit will reflect changes

in liquidity during the reconstruction

period

• Deposits changes in financial system

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Some macroeconomic patterns

• Limited data and time constraint• Poor growth rates forecasts (including

reconstruction plans)• Fiscal accounts (decrease in tax revenues,

increase in capital expenditures, external financing)

• Balance of payments (greater M, decline in X, increase in transfers, investment)

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Some consistency problems

• Data consistencySources of data discrepanciesIncomplete and/or inaccurate dataPoor forecasts estimations

• Data measurementApplication of different criteria for the

evaluation of the damage

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Macro impact table

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Possible scenarios

• Take into consideration the reconstruction costs, emergent reconstruction priorities and reconstruction strategies

• Always consider the suppositions regarding the economy’s absorption capacity and its institutional development

• Based on historical performance of variables and the reaction of those variables to changes in the level of available resources

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Possible scenarios

• Three recommended scenarios:OptimistMiddle of the roadPessimist

• Each scenario is based on specific assumptions and depends on the magnitude of external resources. This will ultimately determine the level of public expenditure and investment

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Macroeconomic models

• There is no such a model as “one size fits all”

• Some apply stock-flow and circuit approach models

• Others apply models looking for compatibility of a set of economic configurations fixing some parameters (fiscal stance, elasticities)

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Macroeconomic models

• Considering data limitations on disaster evaluations, the use of consistency models is an alternative that can provide quick and reliable estimations, given specific parameters and assumptions. However, final decision should be made on a case–by-case basis