When does a disaster become a systemic event? Estimating indirect economic losses from natural disasters

Abstract

Reliable estimates of indirect economic losses arising from natural disasters are currently out of scientific reach. To address this problem, we propose a novel approach that combines a probabilistic physical damage catastrophe model with a new generation of macroeconomic agent-based models (ABMs). The ABM moves beyond the state of the art by exploiting large data sets from detailed national accounts, census data, and business information, etc., to simulate interactions of millions of agents representing each natural person or legal entity in a national economy. The catastrophe model introduces a copula approach to assess flood losses, considering spatial dependencies of the flood hazard. These loss estimates are used in a damage scenario generator that provides input for the ABM, which then estimates indirect economic losses due to the event. For the first time, we are able to link environmental and economic processes in a computer simulation at this level of detail. We show that moderate disasters induce comparably small but positive short-to medium-term, and negative long-term economic impacts. Large-scale events, however, trigger a pronounced negative economic response immediately after the event and in the long term, while exhibiting a temporary short-to medium-term economic boost. We identify winners and losers in different economic sectors, including the fiscal consequences for the government. We quantify the critical disaster size beyond which the resilience of an economy to rebuild reaches its limits. Our results might be relevant for the management of the consequences of systemic events due to climate change and other disasters.

A gap approach for preventing stress in complex systems: managing natural hazard induced fiscal risks under a changing climate

“…Thus, they outperform state-of-the-art modeling tools typically used in disaster analysis especially when non-linear dynamics are the focal point. One way forward with our suggested gap approach would be then to not assume international finance flows covering the gap but instead use the gaps as an input to the ABM model (Poledna et al, 2018). In that way, the indirect consequences due to such events that spread through the socioeconomic system can be better understood and be related to other sustainability dimensions (Bachner et al, 2024).…”

Revealing indirect risks in complex socioeconomic systems: A highly detailed multi‐model analysis of flood events in Austria

“…The scenarios are selected according to risk-layers (Mechler et al, 2014) which distinguish frequent, less frequent, and very rare events according to their occurrence probabilities. The Armageddon scenarios were selected based on stakeholder interactions (Reiter et al, 2022) and previous studies (Poledna et al, 2018). Note, that the Armageddon scenarios are illustrative and highly unlikely, serving to show possible nonlinear economic effects under severe stress.…”

“…Building on a previous study (Poledna et al, 2018), flood damages are implemented in the ABM as a reduction of the capital stock of individual household and firm agents.…”

Economic Impacts of Natural Hazards and Complexity Science: A Critical Review

“…Along the same lines, Inoue and Todo (2019) use an ABM based on Hallegatte (2008) and Henriet et al (2012), informed with very granular Japanese firm-level data on customer-buyer relationships, to study the indirect effects of the 2011 Great East Japan earthquake. Poledna et al (2018) use instead a macroeconomic ABM of Austria coupled with a probabilistic damage function to evaluate the overall sign of the indirect impacts of floods, finding mixed evidence. Macroeconomic ABM (Poledna et al, 2020) with probabilistic damage function -Moderate disasters have small but positive effects in the short-medium term, negative in the long-term.…”