Major Disasters in Modern Economies: An Input-Output Based Approach at Modeling Imbalances and Disproportions

Abstract

It seems that large-scale disasters are becoming an inevitable part of modern societies. Major calamities such as earthquakes, typhoons, and tsunamis are endangering the lives of many people and their possessions all over the world. Some of the most obvious questions to address are: How vulnerable are modern economies to extreme events? And: In which way should modern societies prepare themselves to deal with adversities on a grand scale? A disaster is a multi-faceted phenomenon. In this study, we concentrate on the economic aspects of a large-scale disaster. We address distinctions between direct and indirect costs, problems of double counting between stocks and flows, issues related to temporal and spatial dimensions and, more general, issues of preparedness (mitigation and adaptation) and response (resilience). We discuss modelling issues, and develop a special type of Input-Output model for addressing the major questions. We propose a three-step procedure in disaster policy. The first step consists of thinking about the remaining productive capacity after a major shock in a novel way; the second step involves strategic thinking about a return to equilibrium after a catastrophe; and the third one includes weighing ex-ante preparedness against expected costs. We position our approach against the background of recent developments in Dutch water management and policy, where we signal a change in thinking about flood threats. The country faces new dilemmas, and has to strike a balance between expected losses and future growth