Economic Planning in the Presence of Natural Disasters

by Associate Professor Mehmet Ulubasoglu

Date: 10 February 2011

Scope of Presentation

Problem Identification

Economic Model as the Workhorse of Economic Planning

Integrating Natural Disaster Shocks into the Economic Model

Results and Policy Simulation Analysis

Conclusion and Recommendations

One Model: Many Names

Econometric Model;

Macroeconometric Model;

Structural Model;

Economic Model

Feature of a Good Economic Model

Be simple in construction but realistic in forecasting;

Cover the whole economy which can be displayed with a simple diagram;

be consistent with economic logic;

able to utilize enough data (i.e., historical information)

Objectives of Constructing an Economic Model

Covering the basic linkages in the economy

Forecasting the impact of shocks

Assessing scenario outcomes

Policy-making

Generic Steps in working with an Economic Model

Step 1: Locating a Suitable Model

Step 2: Analyzing the Feasibility of the Model

Step 3: Establishing a Baseline Forecast

Step 4: Preparing the Policy Change to be Analyzed

Step 5: Running the Policy Scenario

Step 6: Assessing the Results

Economic Planning with Economic Model

An Economic Model

1. Selection of Key Elements

Economic Model

2. Assumptions: How the Blocks are Linked

Economic Model

3. Hypothesis …

Some Examples of Hypothesis

“Monetary policy is more effective than fiscal policy.”

“Exchange rate policy is more effective than monetary policy.”

“Fiscal policy is more effective than monetary policy.”

“Monetary along with exchange rate policy is more effective than fiscalpolicy.”

Economic Model

3. Hypothesis

Monetary policy Interest rate

Fiscal policy Government expenditure

Trade sectorExchange rate policy

Methodology:Integration of Natural Disasters

into Economic Planning

Natural Disasters and Economic Model

4. Inputs of the Model: Estimation of Damages due to Natural Disasters

From Risk Assessment to Pre-disaster Loss Estimation

From Damage Assessment to Post-disaster Loss Estimation

Natural Disasters and Economic Model

2. Assumptions: How the Blocks are Linked

Natural Disasters and Economic Model

5. Outputs of the Model: Policy Analysis

Available Policy Options:

1. Fiscal Policy given no natural disasters;2. Fiscal Policy given natural disaster shocks;3. Monetary Policy given no natural disasters;4. Monetary Policy given natural disaster shocks;5. Fiscal and Monetary Policy given no natural disasters;6. Fiscal and Monetary Policy given natural disaster shocks;

Production Block; Bop Block; Govt. Sector Block; Monetary Block; Price Block; and Exchange Rate Block

Natural Disaster Shocks:

Natural Disasters and Economic Model

3. Hypothesis Revised:

Some Examples of Hypothesis

“Monetary policy is more effective than fiscal/exchange rate policies forrecovering total damages due to natural disasters.”

“Exchange rate policy is more effective than fiscal/monetary policies forrecovering total damages due to natural disasters.”

“Fiscal policy is more effective than monetary/exchange rate policies forrecovering total damages due to natural disasters.”

“Monetary along with Exchange rate policy is more effective than fiscal policyfor recovering total damages due to natural disasters.”

Natural Disasters and Economic Model

3. Hypothesis

Monetary Policy Interest Rate

Fiscal Policy Government Expenditure

Natural Disaster Shocks Production Block

Policy Simulations

All production sectors are worse off

Figure: Hypothetical Effects of Fiscal Shock on Production Sectors of the Economy

With Fiscal Shock at 20%Without Fiscal Shock

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VAGR (Baseline)VMAN (Baseline)

VSER (Baseline)GDP (Baseline)

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VAGR (total_govt_exp)VMAN (total_govt_exp)

VSER (total_govt_exp)GDP (total_govt_exp)

Expansionary Fiscal Policy Simulation: REDUCE THE TAXES

Government budget deficit expands money supply followed by an increase in foreign price level that leads to a decrease in imports ;

Government revenue and budget deficit have grown up;

Total Government Revenue Government Budget Deficit

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GBD (Baseline) GBD (total_govt_exp)

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REVT (Baseline) REVT (total_govt_exp)

Money Supply Volume of Imports

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MV (Baseline) MV (total_govt_exp)

Expansionary Fiscal Policy Simulation: WITH TAXES REDUCED

Dynamic Policy Simulations2. Expansionary Monetary Policy Simulation: REDUCE THE INTEREST RATE

All production sectors are worse off

Figure 9.5: Effects of Monetary Policy on Production Sectors of the Economy

With Interest Rate Reduced by 5%Without Monetary Policy

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1985 1990 1995 2000 2005 2010

VAGR (Baseline)VMAN (Baseline)

VSER (Baseline)GDP (Baseline)

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1985 1990 1995 2000 2005 2010

VAGR (interest_rate)VMAN (interest_rate)

VSER (interest_rate)GDP (interest_rate)

Expansionary Monetary Policy Simulation

A decrease in interest rate has ended up with an increase in money supply An expansionary monetary policy has also speeded up the government

budget deficit

Money Supply Government Budget Deficit

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1985 1990 1995 2000 2005 2010

M (Baseline) M (interest_rate)

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70000

1985 1990 1995 2000 2005 2010

GBD (Baseline) GBD (interest_rate)

Total government revenue has been stronger continuously;

Government budget deficit widens;

However, GBD increases due to an increase in govt. expenditures;

All production sectors are worse off;

Agriculture is the most victim;

4. Fiscal & Monetary Policy Mix …With Fiscal & Monetary Policy MixWithout Fiscal & Monetary Policy Mix

0

500000

1000000

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1985 1990 1995 2000 2005 2010

VAGR (Baseline)VMAN (Baseline)

VSER (Baseline)GDP (Baseline)

0

400000

800000

1200000

1600000

2000000

2400000

1985 1990 1995 2000 2005 2010

VAGR (fiscal_monetary)VMAN (fiscal_monetary)

VSER (fiscal_monetary)GDP (fiscal_monetary)

Total Government Revenue Government Budget Deficit

-20000

-10000

0

10000

20000

30000

40000

50000

60000

70000

1985 1990 1995 2000 2005 2010

REVT (Baseline) REVT (fiscal_monetary)

-200000

0

200000

400000

600000

800000

1000000

1200000

1400000

1985 1990 1995 2000 2005 2010

GBD (Baseline) GBD (fiscal_monetary)

Natural Disaster Shock as Input into Economic Model

SectorTotal Effects (in dollars)

Damage Fraction of Capital Damaged

Primary Sectors:Agriculture ** 10%

Secondary Sectors:Industry ** 20%

Service Sectors:Transport & Communications ** 8%

Commerce ** 22%

Housing ** 4%

Tourism ** 35%

Electricity ** 17%

Education ** 2%

Health ** 3%

Water and Sanitation ** 7%

Public Administration ** 6%

Cultural Heritage ** 14%

Total *** ***

Potential Impact of Natural Disasters on GDP

Source: Chhibber & Laajaj, 2007

Methodology: At a Glance

INPUTS ECONOMIC MODEL OUTPUTS

Damage Data from Risk Assessment

Estimation of Loss

Selection of OptimumPolicy Option

Damage Data from ECLAC Methodology

Damage Data:Hypothetical Case

Q & A Session

Thank You