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GTAP Resource #1791

"The Economic Effects of the Asian Tsunami on the “Tear Drop in the Indian Ocean”: A General Equilibrium Analysis"
by Bandara, Jayatilleke and Athula Naranpanawa

The Economic Effects of the Asian Tsunami on the “Tear Drop in the Indian Ocean”: A General Equilibrium Analysis
Jayatilleke S Bandara
Athula Naranpanawa

Sri Lanka, once known as “The Pearl of The Orient, “The Resplendent Isle”, “The Garden of Eden”, and “Paradise Isle”, has become the “The Tear Drop in the Indian Ocean” since the Boxing Day, 26 December 2004. It has been the second worst affected country by the Asian tsunami in absolute terms after Indonesia and the most affected country in relative terms of per capita death, missing and displaced people and the direct cost of tsunami as a percentage of GDP. According to a recent report prepared by the Asian Development Bank, Sri Lanka has become an adversely affected country because of its small geographical size, fiscal deficit and dependence on hard-hit industries such as fisheries and tourism. According to estimates, the following figures indicate the magnitude of the human tradegy in Sri Lanka:
· 30,196 were killed instantly
· 15,683 were injured
· 834,849 have been displaced
· 88,022 houses were totally destroyed and another 25,731 were partially destroyed
· 789 refugee camps are currently in operation

Although it is difficult to evaluate the cost of lives, missing persons and psychological trauma, it is possible to examine the direct and indirect effects of the tsunami on the economy and the effects of foreign aid package for the reconstruction. Two third of the costal area of the island has been destroyed. Therefore, fisheries and tourism industries have been badly affected in Sri Lanka. The tsunami destroyed about 80 percent of fishing boats and 57 out of 107 Southern hotels have been destroyed. In addition, a lot of small businesses and the infrastructure such as road and rail lines have been destroyed.

The international community has promised to provide massive amount of foreign aid to reconstruct the country in addition to immediate relief efforts such as cleaning the affected areas and providing food, clothing and medicine. It is clear that the foreign aid package will provide the stimulation in the economy and influence economic variables after the initial negative effects of the tsunami. For example, the Sri Lankan Rupee appreciated by about 10 percent against the US Dollar and it was the world’s best performing currency against the US dollar and the Japanese yen in the first week of January because of promised foreign aid. The IMF has already advised the government to control the flow of foreign aid. There are some indications on possible “Dutch Disease” effects on the economy as well. The main objective of this study, therefore, not only to examine the negative economic effects of the Asian tsunami but also to examine the possible effects of foreign aid on the Sri Lankan economy using a computable general equilibrium (CGE) model of the Sri Lankan economy. The second objective of the study is to examine the effects of tsunami and the foreign aid recovery package on poverty in Sri Lanka.

We have developed a CGE model for the Sri Lankan economy following the Australian ORANI model with an extension of poverty. We have modelled different income groups and introduced poverty lines following recent developments in the CGE literature.

We have assembled a SAM for Sri Lanka and collected poverty data to estimate poverty lines. In order to design two sets of simulations, we have collected data on the direct effects of tsunami on fisheries, tourism, infrastructure etc and the foreign aid recovery package from the Ministry of Finance and Planning in Sri Lanka. We use this information for the magnitudes of shocks. Two sets of simulations will be carried out to examine (1) the effects of tsunami and (2) the demand effects of foreign aid.

It is expected that the results will help us to quantify the direct and indirect negative effects of the tsunami on the Sri Lankan economy. The results will also help us to understand the stimulatory effects of the tsunami aid package to Sri Lanka together with possible “Dutch Disease” effects on the economy.

Resource Details (Export Citation) GTAP Keywords
Category: 2005 Conference Paper
Status: Published
By/In: Presented at the 8th Annual Conference on Global Economic Analysis, Lübeck, Germany
Date: 2005
Created: Bandara, J. (5/8/2005)
Updated: Batta, G. (10/6/2006)
Visits: 3,133
No keywords have been specified.

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