On the macroeconomic impact of the August 1999 earthquake in Turkey: a first assessment

The devastating earthquake that struck the most densely populated and indus trialized area of Turkey on 17 August, 1999 was one of the most damaging na tural disasters during this century. This paper is a first attempt to estim ate the transition path of the Turkish economy to its new equilibrium after the earthquake. An applied general equilibrium model is utilized to provid e an initial assessment and to obtain the second best policy options to mit igate the negative effects of the earthquake. The analytical foundations of the model rest upon intertemporal dynamics as laid out in neoclassical gro wth theory. Simulation results suggest that the initial impact of the earth quake on GDP may range from -4.5% to + 0.8% of GDP, conditional upon polici es followed by the government and international donors. The policy implicat ion of the paper is that best outcomes might be reaped via a negative indir ect tax (a subsidy financed by foreign aid) to individual sectors to recove r their capital losses. On the other hand, an indirect tax to finance the e xtra fiscal spending would result in an output loss, further deepening the impact of the earthquake on the economy.