Assessing Socioeconomic Risks of Extreme Weather Events: Lessons from El Niño-Related Road Damages in Peru

Abstract

Periodically, heavy rainfall associated with extreme El Niño events severely damage the Peruvian road-network. This study aims to assess the socio-economic effects of these non-frequent but recurrent climate shocks. For this purpose, we build a Computable General Equilibrium model that addresses the consequences of El Niño-related damages through an increase in interregional transportation costs and a negative externality effect on activities’ output, which has been estimated beforehand using a firm database. For designing simulation scenarios over a ten-year period where extreme El Niño events occurs at random as observed in the past in Peru, we model the occurrence of these events as a stochastic process with a VAR representation based on historical climatic data. Within this framework, we first show that such events constitute a significant one-off disaster risk for the country, threatening shifts of − 2.8% in GDP and + 1.9% in poverty rates with an annual probability p = 1.4%. We further show that they also present a longer-term risk, leading to average annual deviations from normal trend by − 0.8% in GDP and + 0.4% in poverty rate with a probability p = 12.6% over a ten-year period. However, we finally show that Peru might reduce these risks in constructing more disaster-resilient road infrastructure.