All Ruins, No Victors: Application of a New Disaster Impact Analysis Approach to the 1985 Mexico City Earthquake

A basic analysis of EM-DAT database shows that natural hazards have substantial macroeconomic impacts in developing countries in Latin America and the Caribbean (LAC) countries which are highly exposed to extreme natural events (e.g. hurricanes, earthquakes, volcanic eruptions, and tidal waves). These events often result in disastrous affects on the entire economic, human and physical environment due to the region’s high vulnerability to Natural Disasters (ND). While economic loss estimates may exist, they provide little insight as to how the economic impact of the disaster manifests itself across the economy. In order to more effectively understand the economic consequences of natural disasters, we combine two commonly, but separately utilized tools, in the disaster literature: computable general equilibrium (CGE) and catastrophe risk models. We apply these tools to examine the economic impact of the 1985 Mexico City earthquake. The first step of the process uses AIR’s Mexico Earthquake Model to generate a loss footprint of the event. The AIR model recreates the seismological parameters of the earthquake and imposes those on the current exposure (physical assets) in order to model the impact of the event if it were to recur today. The model outputs losses at a detailed geographic resolution and for distinct classes of assets such as housing stock and commercial buildings and industrial factories. In the second step, the estimated probabilistic loss information enters the CGE model as the external shock representing the earthquake. The choice of a CGE model permits (i) more flexibility in economic agents’ behaviors, (ii) capturing substitution/complementarity relations across demand for goods and services, and (iii) calculating price changes resulting from changing demand and supply conditions. The Mexico CGE model is designed to allow a comprehensive and robust analysis of disasters’ impact since; on the one hand, the specification for flows and stocks (as model inputs) draw on the economic theory, and officially published data from national accounts. On the other, the CGE simulations on macro-economic variable in the base year and post-disaster periods make possible a comparative analysis of the economic structure before and after the disaster shock. The new equilibrium presents the impact of the shock and deviation from the benchmark year reveals the damage. The CGE outcome provides an estimate of the impact to the Mexican economy if a similarly damaging earthquake were to recur today. The results may be used for policy analysis regarding recovery and reconstruction activities. This exercise aims to combine the analytical tools commonly used by researchers and practitioners to guide multi-level decision making in Mexico regarding risk transfer and preparedness against Earthquake hazard in Mexico.