# **2.2.5 “Ripple effects”, non-affected capital, and supply chains**

Output losses are not only due to forgone production from the assets that have been destroyed or damaged by the event. Assets that have not been affected by the hazards can also reveal unable to produce at the pre-event level because of indirect impacts, sometimes referred to as “ripple effects”.

# _Ripple-effect and diffusion of the shock in the economic system_

(McCarty and Smith, 2005) investigated the impact of the 2004 hurricane season on households in Florida, and find that among the 21% of the households who were forced to move after the disaster, 50% had to do so because of the loss of utilities (e.g., they had no running water). Only 37% of them had to move because of structural damages to the house. (Tierney, 1997) and (Gordon et al., 1998) investigate the impact of the Northridge earthquake in 1994 in Los Angeles; they find also that loss of utility services and transport played a key role. Tierney surveys the reasons why small businesses had to close after the earthquake. The first reason, invoked by 65% of the respondents (several answers were possible), is the need for clean-up. After that, the five most important reasons are loss of electricity, employees unable to get to work, loss of telephones, damages to owner’s or manager’s home, and few or no customers, with percentages ranging from 59% to 40%. These reasons are not related to structural damages to the business itself, but to offsite impacts. (Gordon et al., 1998) ask businesses to assess the earthquake loss due to transportation perturbations, and find that this loss amounts to 39% of total losses. (Kroll et al., 1991) find comparable results for the Loma Prieta earthquake in San Francisco in 1989: the major problems for small business were customer access, employee access, and shipping delays, not structural damages. Utilities (electricity, communication, etc.) caused problems, but only over the short term, since these services were restored rapidly; only transportation issues led to long lasting consequences. (Rose and Wei, 2013) investigate the impact of a 90-day disruption at the twin seaports of Beaumont and Port Arthur, Texas, and find that – even in the absence of other losses – regional gross output could decline by as much as $13 billion at the port region level (and that specific actions to cope with the shock can reduce these impacts by nearly 70%).

Output losses are also due to complex interactions between businesses. Business perturbations may indeed also arise from production bottlenecks through supply-chains of suppliers and producers. 6F<sup>7</sup> These ripple-effects can be “backward” or “forward”:

- _Backward ripple-effects_ arise when the impact propagates from clients to suppliers, i.e. when a business cannot produce, and thus reduces its demand to its suppliers, reducing their own activity (even in absence of direct damages).

- _Forward ripple-effects_ arise when the impact propagates from suppliers to clients, i.e. when a business cannot produce and thus cannot provide its clients with inputs needed for their own production.

The output losses due to a disaster depend on the characteristics of the firm-to-firm networks, such as the average number of suppliers that firms have, or the shape and structure of the connection between

> 7 These ripple effects can even take place within a factory, if one segment of the production process is impossible and therefore interrupts the entire production.

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