Evaluating the Economic Impacts of a Disaster: A CGE Application to the Tokai Region of Japan

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1 Evaluaing he Economic Impacs of a Disase: A CGE Applicaion o he Tokai Region of Japan Hioyuki SHIBUSAWA * Absac Naual disases have a negaive effec on people and he egional economy. The cenal and egional govenmens have made naual disase educion a high pioiy. In his pape, we develop a dynamic spaial CGE model fo evaluaing he economic impac of an eahquake on he Tokai egion of Japan. Ou model is chaaceized as a decenalized economy wih uiliy-maximizing consumes and value-maximizing fims in a dynamic conex. This model embodies boh he spaial ineacions among egions and he dynamics of egional invesmens. A simulaion model is consuced of an ine-egional ine-secoal economy in which Japan is subdivided ino 47 egions. All he egions ae conneced by anspoaion newoks. The model is calibaed fo he egional economy in Japan. By numeical simulaion, we examine he economic impacs of an eahquake on he Tokai egion using ou analyical scenaios. 1. Inoducion In his pape, we develop a dynamic spaial compuable geneal equilibium (DSCGE) model o evaluae he economic impacs of an eahquake on he Tokai egion of Japan. Ou model is chaaceized as a decenalized economy wih uiliy-maximizing consumes and value-maximizing fims in a dynamic conex. This model embodies boh he spaial ineacions among egions and he dynamics of egional invesmens. A numeical simulaion model is developed of an ine-egional ine-secoal economy in which Japan is subdivided ino 47 egions. All he egions ae conneced by oad, ail, sea, and ai anspoaion newoks. The model is calibaed fo he egional economy in Japan. The dynamic impacs of an eahquake on he Tokai egion ae analyzed by numeical simulaion. In ou analyical scenaio, a educion in he capial sock is he pimay physical damage caused by an eahquake. CGE analysis is a mao aey in economics, egional science, and engineeing. I is also widely ecognized as a policy evaluaion mehod. Thee is a vas lieaue epoing applicaions of saic CGE models, bu few sudies have employed * Toyohashi Univesiy of Technology, 1-1 Tempaku Toyohashi, Aichi , Japan

2 dynamic and spaial famewoks. Recen ials of dynamic and spaial CGE modeling have been undeaken by Giesecke (2002,2003), McGego, Swales and Yin (1995), and McKibbin and Wilcoxen (1992). These pevious sudies mosly ely on a quasi-dynamic famewok, which is chaaceized by an evoluionay appoach and a sequenial pocedue. Economic impacs of disases in a spaial conex have been analyzed by Okuyama, Chang (2004) and Shon, Kim, Hewings, Lee and Jang (2003). Koike and Ueda (2005) examined he economic damage caused by a caasophe in Japan by using a saic spaial CGE model. In his sudy, he CGE model is developed based on dynamic macoeconomic heoy wih a muli-egional and muli-secoal specificaion. The invesmen is endogenously deemined by he behavio of value-maximizing fims, which face capial adusmen coss. The dynamic impac of an eahquake in Japan is evaluaed by using he spaial CGE model. In his pape, we show a modified vesion of he model which was developed by Shibusawa, Yamaguchi and Miyaa (2009). 2. Basic Assumpions The wold is subdivided by egion. Thoughou he wold hee ae geneal indusies, anspoaion indusies and households. The economy is endowed wih he pimay facos of labo and capial. Labo is mobile acoss indusies bu no egions and capial is immobile acoss indusies and egions. Goods and faco pices ae deemined in pefecly compeiive egional makes. Commodiy ade beween egions in he couny geneaes demand fo anspoaion sevices and uni anspoaion coss ae endogenous. Commodiies ae pefec subsiues, i.e., he ades ae deemined by he ade coefficiens. The ineacion of commodiies among egions is enabled by oad, ail, sea and ai anspoaion newoks. The modal shae is also given. The model is solved fo aional expecaion equilibium unde he assumpions of pefec compeiion and foesigh. Howeve, we assume ha fims place pioiy on he invesmen-savings balance. Then he level of invesmen is deemined by he fim s opimizaion behavio. The model is finiely se up in discee ime. T {1,2,, F } denoes a planning peiod index and F is he final planning peiod. The wold is divided ino a home couny and foeign couny. These ae subdivided by egion. R denoes a egional index in he home couny. Thee ae hee kinds of indusies, i.e. geneal, anspoaion and disibuion indusies. The geneal indusy involves domesic and foeign ade beween egions. I denoes a seco index fo he geneal indusy. M is a seco index of he anspoaion indusy. All he egions ineac wih each ohe

3 via he anspoaion newoks. A anspoaion newok is defined by nodes and links. A anspo pah connecing wo egions is fixed and he anspo link disance is exogenously given. 3. The Model The model is based on dynamic macoeconomic heoy wih a muli-egion and muli-seco specificaion. Each egion has poducion and household secos. Commodiy ade flows ae deemined by he ade and modal shae coefficiens. We chaaceize he poblems elaed o he maximizaion of he poducion and household secos in his economy. 3.1 Poducion Secos Each seco of he geneal and anspoaion indusies maximize hei pesen cash flow values in each peiod NC and he asse value of hei indusial capial in he final peiod (). The seco opeaes wih consan euns o scale echnology. The seco chooses he opimal invesmen and labo employmen saegies. The behavio of he poducion seco I M in egion R is given as max NC 1 (, 1) F K F, { K, L, X, Z } T subec o K, 1 (1 ) K K ( Ζ ), O D D whee NC p Y ( K, L, X ) w L p X p G ( Z ). i i i i i i i 1 1/(1 ) epesens he discoun faco and is he posiive discoun ae. Y () is a poducion funcion of capial K, labo L, and a veco of inemediae inpu X { 1,, X X I}. The value added poducion funcion fo labo and capial has a Cobb-Douglas fom, while he inensiies of inemediae goods ae fixed. The asse value fo he final peiod () is a linea funcion of he capial sock fo he final peiod. The capial sock K is accumulaed by an invesmen funcion K () wih consan euns o scale. I is a funcion of a veco of inemediae inpus fo he invesmen Z { 1,, Z ZI}, and a Leonief ype echnology is assumed. is he depeciaion ae. I is assumed ha he cos funcion of inemediae goods fo invesmen Gi ( ) has inceasing euns o scale. I can be inepeed ha he funcion eflecs boh he coss of inemediae goods and he coss of adusing hei capial inpus.

4 In hese secos, hee ae wo kinds of pices in each egion. One is he O D poduce s pice p and he ohe is he puchase s pice p in egion. If a commodiy is adable beween egions o and d, hen he poduce s pice in egion o is epesened by p Oo and he puchase s pice is epesened by p Dd ( I). In he anspoaion seco, p O ( M ) means he uni pice of he anspoaion sevices in egion. w is he wage ae. Afe having paid wages o households, he seco has o decide how o disibue pofi and finance invesmen. In his model, he ne invesmen is financed by new bonds. Le B be he numbe of bonds in peiod and be he inees ae. The bonds ae aded in each egion. The iniial numbe of bonds is nomalized by B 1 K 1. In his case, he pofi dividend is calculaed as O Dz z p Y ( K, L, X ) B w L p X p K. i i B iiio If he ne invesmen is financed by issuing new bonds, i holds ha D pbb pi Gi ( Zi ) pb K, i whee B is he numbe of new bonds issued by seco in egion fo peiod. p B is he pice of he new bond. Theefoe he ousanding bond is given by B, 1 B B wih B 1 B 1. I is assumed ha he pice of he new bond is given by pb q whee q is he cosae vaiable of he cuen-value Hamilonian funcion H [ ( ) NC q K Z K ]. In his model, we assume ha adable goods ae pefec subsiue. The pofi of he disibuion seco is given by ( M ) D o o Oo To o o To O o p F ( p p ) F p p D. D m m m or mm or mm whee o The commodiy flow F is calculaes as o o F ( X C ) i i m m m m o o To whee is he given ade coefficien. m is he given modal shae. p m is he o anspoaion cos of mode m fom egion o o egion. D m is he disance beween oigin and desinaion along wih a pah. The pah is exogenously given by he shoes pah ule. m is a given uni anspoaion sevices of mode m fo goods i. Fom he zeo pofi condiion, he puchase s pice is given by D Oo To o o p ( p p ) F. m m or mm

5 3.2 Household Seco A epesenaive household maximizes he uiliy level subec o income consains. The full income consiss of wages and inees on bond holdings. The behavio of a household in egion R is given as max U ( C ), C U T. D subec o w A d FA p C p A 0 i i i i Bi i i i i () is a Cobb-Douglas uiliy funcion fo peiod and i is a funcion of consumpions C { C1,, CI}. A i is he numbe of bond holdings pe household. A i epesens new bonds issued fo indusial invesmens. The household can eceive he inees income bu mus pay o obain a new bond. FA is he income ansfe ha povides a balance agains a suplus o defici in foeign and egional ades. d is he pofi dividend ha is given as d i / N i since he uiliy funcion is no idenical among egions. If he poducion funcion is of he consan euns o scale, hen he pofi of he fim becomes zeo. In his model, we assume ha he level of invesmen is deemined by a fim s opimizaion behavio. Fims place pioiy on he invesmen-savings balance. Theefoe, he level of household savings is adused o coincide wih he level of invesmen. In his case, he new bonds and he bond holdings pe household ae calculaed as A B / N ( i I M) and A, 1 ( A A ) N / N 1 ( i I M). i i i i i i 3.3 Equilibium Condiions To obain an equilibium soluion, he following make cleaing condiions should be saisfied in each egion ( R). (1) Goods and Sevices Makes Geneal Goods d o Y ( K, L, X ) X C N T T E M ( i I) i i dr or whee E is a given expo fom egion and Tanspoaion Sevices o o o Y ( K, L, X ) D F ( m M) m m m m im im im im iii or (2) Labo N i L i M is a given impo o egion. N is he oal labo foce (populaion ) in each egion and i is exogenously given.

6 (3) Capial A N B ( i ) i i II M AN B K wih AN 1 1 B 1 K 1 ( i I M) i i i i i i A is he iniial numbe of bond holdings of a household. 1i (The simulaion esuls will be shown in he meeing.) Refeences Abel, A.B. and Blanchad, O. J., An Ine empoal Model of Saving and Invesmen, Economeica, Vol.51, No.3, 1983, pp Ciesecke, J., Explaining Regional Economic Pefomance: An Hisoical Applicaion of a Dynamic Muli-Regional CGE Model, Papes in Regional Science, Vol.81, 2002, pp Ciesecke, J., Tageing Regional Oupu wih Sae Govenmen Fiscal Insumens: A Dynamic Muli-Regional CGE Analysis, Ausalian Economic Papes, Vol.42, 2003, pp Kehoe, T.J., Sinivasan, T.N. and Whalley, J., Fonies in Applied Geneal Equilibium Modeling, Cambidge Univesiy Pess, Koike, A. and Ueda, T., Economic Damage Assessmen of Caasophe by using Spaial Geneal Compuable Geneal Equilibium Analysis, Poceeding of he 19 h Pacific Regional Science Confeence, McGego, P.G., Swales, K., and Yin, Y.P., Migaion Equilibia in Regional Economies: A Muli-Peiod CGE Analysis of an Impovemen in Local Ameniies, in Recen Advances in Spaial Equilibium Modeling, eds. Jeoen C.J.M. Van Den Begh, P. Nikamp, and P.Rieveld, New Yok: Spinge, McKibbin,W. and Wilcoxen, P., GCUBED: A Dynamic Muli-Seco Geneal Equilibium Gowh Model of he Global Economy, Bookings Discussion Papes in Inenaional Economics, No.97, Okuyama, Y. and Chang, S.E., Modeling Spaial and Economic Impacs of Disases, Spinge, Shibusawa, H., Yamaguchi, M. and Miyaa, Y., Evaluaing he Impacs of a Disase in he Tokai Region of Japan: A Dynamic Spaial CGE Model Appoach, Sudies in Regional Science, Vol.39, No.3, 2009, pp Sohn, J., Kim, T.J., Hewings, J.D., Lee, J.S. and Jang, S-G, Reofi Pioiy of Tanspo Newok Links unde an Eahquake, Jounal of Uban Planning & Developmen, 2003, pp Taniguchi, H., Developmen of an Esimaion Mehod fo Diec Economic Damage Loss caused by Eahquake, Bullein of he Gaduae School of Social and Culual Sudies, Kyushu Univesiy, Vol.4, 1998, pp