The Chilean earthquake of 27 February 2010 an overview

This report highlights some of the key macroeconomic implications of the massive

earthquake of magnitude 8.8 Mw that hit the Chilean Coast on 27 February 2010 and attempts to

provide some prospective lines and reconstruction scenarios based on currently available official

information.

The usual caveats apply and the information provided here should be used with caution as

the scenarios presented in this report were simulated by means of comparative static techniques

and lack the dynamics and sectoral inter-linkages of more sophisticated and complex modelling

tools. However, they serve the purpose of presenting different reconstruction scenarios and

financial gaps which are built upon different assumptions and levels of government expenditure

and public debt. The report does not aim at providing a full-fledged assessment of the total

damage and losses of the catastrophe since the primary information is not yet available and the

emergency, rescue and search activities are still under way.

For the past thirty five years, ECLAC has cooperated with governments in Latin America

and around the world in assessing —with the methodology developed by ECLAC itself— the

socio-economic incidence of climate and other extreme events that result in catastrophes. One of

the main findings and characteristics common to all natural events is that damage estimates

calculated shortly after the disaster tend to be significantly overestimated as opposed to

calculations which follow a thorough methodology based on consistency-stock-flow analysis

techniques and a sectoral inductive bottom-up-approach.

In principle, one can identify several sources of loss from natural events. For the purposes

of this report and on the basis of the evaluation criteria established by ECLAC, we distinguish

between direct damage, defined as damage to assets that are impaired, immobilized or destroyed

and to stocks, including final goods, goods in process, raw materials, inputs and spare parts; and

losses (sometimes referred to as indirect damage) defined as a disruption of economic activity

which may lead to loss of income or production, a curtailment of the flow of goods and services

that cease to be produced or provided from the moment a disaster occurs and potentially until the

rehabilitation and reconstruction process has been completed.

A number of empirical studies and evaluations conducted by ECLAC as well as other

research and academic institutions on the impact of natural disasters distinguish between shortterm

and medium-term impacts. The most common finding of these studies is an immediate

contraction in output and a worsening of external and fiscal balances as well as an increase in

poverty and short-term spikes in price levels. The final impacts are ultimately country-specific

and depend on the economy’s structural conditions and more decisively on the economic policy

mix undertaken to tackle the short-term effects of the disaster and the medium-term challenges of

the rehabilitation and reconstruction process.

This report is divided into five sections. The introduction is followed by Section 2, presents

the general description of the earthquake. Section 3 summarizes the potential macroeconomic

impacts of the disaster along with alternative reconstruction scenarios. Section 4 presents a

geographical and regional view and the final section summarizes the closing remarks. There are

two annexes, with information of other disasters in Chile and their cost, and maps with information

on social variables in the disaster areas.