CEPAL The World Bank/ECLAC workshop on Natural Disaster Evaluation Macroeconomic effects of damage René A. Hernández, April 14-15, 2004 Washington, D.C.

CEPAL 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

CEPAL Phases in macroeconmic assessment Quantifiable effects of the disaster on the economic growth as a whole and on the main aggregates  GDP  National income  Investment, gross capital formation  Economic gaps (private, public, external)  Inflation, balance of payments

CEPAL 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

CEPAL 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

CEPAL 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

CEPAL Phases in macroeconomic assessment: the pre-desaster situation Clear understanding of trends prior to disasters  Baselines of the economy  Macroeconomic databases and simulation models Understanding of forecasts prior to the disaster Economic growth forecast after the disaster Effects on main macroeconomic variables

CEPAL Phases in macroeconomic assessment: The expected performance Important sources of information  Target variables  Indices of macroeconomic activity  Budget  Inflation  Unemployment  External sector Constraints  Data, consistency, quality  Time

CEPAL 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

CEPAL

Summary of general economic effects Summary appraisal of the effects of the disaster  Losses on existing assets  Interruption of flows of income and increased expenditure  Secondary effects Summary table  Establish the order of magnitude of the disaster  Capture the effects on private and public sectors  Estimate the import requirements

CEPAL Summary Table

CEPAL 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

CEPAL

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

CEPAL 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

CEPAL Rate of growth of GDP on different countries

CEPAL Measurement and valuation: investment Interruption/suspention of investment projects Inventory losses Factory and equipment destruction Disruption of trade channels

CEPAL Gross capital formation

CEPAL Gross capital formation

CEPAL Measurement and valuation: Public finances Composition and presentation of the budget Resource gap TUD = NFD + DA = GFN – DEN = FFG Where: TUD: total underlying deficit NFD: net financing need DA: debt amortization GFN: gross financing need DED: disbursement of existing debt FFG: fiscal financing gap

CEPAL Measurement and valuation: Public finances Fiscal trends (undervaluation, debt, policy measures) Analytical presentation  Changes in current revenue and expenditure  Changes in capital expenditure  Financing needs

CEPAL Example: central government budget, Honduras

CEPAL 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

CEPAL Difference in the rates of inflation

CEPAL Example: inflation in Jamaica

CEPAL Measurement and valuation: Unemployment Destruction of productive capacity and growing demand due to the disaster and during the reconstruction stage  Intensive labor demand sectors  Gender considerations  Changes in productive specialization patterns

CEPAL Measurement and valuation: Debt Emergency loans Reorientation of existing loans New loans Temporary debt relief and its implications

CEPAL Measurement and valuation: Balance of payments Flows of goods and services  Decrease in exports and service earnings  Increase in imports  Estimation of tariff reduction effect  Insurance and re-insurance Unilateral transfers  Donations and remittances Capital and financial account

CEPAL 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

CEPAL 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)

CEPAL Some consistency problems Data consistency  Sources of data discrepancies  Incomplete and/or inaccurate data  Poor forecasts estimations Data measurement  Application of different criteria for the evaluation of the damage

CEPAL Macro impact table

CEPAL 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

CEPAL Possible scenarios Three recommended scenarios:  Optimist  Middle of the road  Pessimist 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

CEPAL 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)

CEPAL 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