Natural disasters: damage and loss

This talk is about disasters and the way we think about measuring damage and loss from disasters. My name is Ilan Noy. I am the Chair in the Economics of Disasters at Victoria University of Wellington in New Zealand. I've been working on disasters for the past 14 years or so.

In the first lecture, we talked about measuring disasters and some of what the raw data can tell us. In this lecture, we're stepping back a bit and thinking about what exactly are we looking at and how we should conceptualize what leads to a disaster and what happens after it.

If we think of what happens after a disaster, this is what we call the typology of impacts. Impacts meaning both the damages and the losses, which we will distinguish between in a minute. The impact is everything that happens after the disaster. In terms of impacts, we differentiate between what happens directly because of that disaster, that is the damages and what happens to the economy in the aftermath of the disaster because of these damages, and that is those indirect losses. The distinction here is essentially between stocks and flows. You can think about that as the distinction between your wealth and your income. A disaster first has an impact on the amount of wealth you have. But then if it affects the way the economy works, it might affect income as well. From a macroeconomic perspective, that is the distinction. The wealth in the economy, the stock of capital and assets that are available in the economy, some of those can be damaged because of the disaster. Then because of those damages, there will potentially be an impact on incomes later on. When we think about those indirect losses, then we can think of first order losses. These are the immediate losses that happen, the immediate declines in economic activity that happened because of the damages to assets. For example, we can think of a disaster like a hurricane or a cyclone, an event like that that damages, some say, a factory. Because of that, the factory has to shut down temporarily until the machinery is fixed or the building is dried up or whatever it is. Economic activity does not happen because of damages. These are first-order losses. Second, or higher-order, losses are what happen to other economic activity because of this shutdown in the factory. We can think of the factory being shut down and because of that, the restaurant across the street from that factory, which typically serves lunch to the people who work in the factory, that restaurant now has less income because the factory has shut down. The reduction in income for this restaurant is a second-order effect. We can think of the third-order effect because the restaurant has less business, it buys fewer products from its suppliers, and those suppliers see a decline in their income and that would be third-order losses and so on. These losses propagate throughout the economy. This is what economists call multipliers. One effect leads to this cascade of changes in the economy, and potentially it leads to these reinforcing cycles, where declining economic activity in one sector leads to decline in economic activity in another sector and vice versa. This would be the second or higher-order losses. We can also distinguish between those on a temporal scale. We can distinguish between what happens in the short run, in the immediate aftermath of the event, that might be days, weeks or maybe months after the event. In the longer term, potentially, say six months or a year or more after a disaster. Typically disasters have an impact, especially large ones that can have an impact that lasts longer than a year or two. Then we can also think of permanent losses.