The devastating earthquake that struck the most densely populated and industrialized area of Turkey on August 17, 1999 was one of the most damaging natural disasters during this century. This paper is a first attempt to estimate the transition path of the Turkish economy to its new equilibrium after the earthquake. We utilize an applied general equilibrium model to provide an initial assessment and to obtain the second best policy options to mitigate the negative effects of the earthquake. The analytical foundations of the model rest upon intertemporal dynamics as laid out in neoclassical growth theory. Our simulation results suggest that the initial impact of the earthquake on GDP may range from -4.5 percent to + 0.8 percent of GDP, conditional upon policies followed by the government and international donors. The policy implication of the paper is that best outcomes might be reaped via a negative indirect tax (a subsidy financed by foreign aid) to individual sectors to recover their capital losses. On the other hand, an indirect tax to finance the extra fiscal spending would result in an output loss, further deepening the impact of the earthquake on the economy.
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Paper provided by Economic Research Forum in its series Papers with number
2001.
Find related papers by JEL classification: Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General Q00 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - General E00 - Macroeconomics and Monetary Economics - - General - - - General