Assessing the Impacts of Compounded

Disaster Shocks to a City Economy:

Case of the City of Naga, Philippines

BY

Ramon L. Clarete, Philip Arnold P. Tuaño, Rolly Czar Joseph T. Castillo,

Cymon Kayle Lubangco, Marjorie S. Muyrong, Marlyn L. Tejada,
Frances Michelle C. Nubla and Wilfredo B. Prilles, Jr.

Working Paper No.2023-06

August 15, 2023

ADMU Econ-ACERD working papers are preliminary versions of research papers that
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 Assessing the Impacts of Compounded Disaster Shocks to a City Economy: Case of the
City of Naga, Philippines

Ramon L. Clarete1
Philip Arnold P. Tuaño2,3*
Rolly Czar Joseph T. Castillo4
Cymon Kayle Lubangco2,5
Marjorie S. Muyrong2,6
Marlyn L. Tejada7
Frances Michelle C. Nubla7
Wilfredo B. Prilles, Jr.8
1
Winrock International | Email: [email protected]
2
Department of Economics, Ateneo de Manila University, Loyola Heights, Quezon City,
Philippines 1108 | Email: [email protected] (P. Tuano), [email protected] (C.
Lubangco), [email protected] (M. Muyrong)
3
Ateneo School of Government, Ateneo de Manila University, Loyola Heights, Quezon City,
Philippines 1108
4
Natural Sciences Research Institute, University of the Philippines, Diliman, Quezon City,
Philippines, 1101 | Email: [email protected]
5
Bangko Sentral ng Pilipinas, Malate, Manila, Philippines 1004
6
La Trobe University, Melbourne, Australia 3086
7
Ateneo Social Science Research Center, Ateneo de Naga University, Bagumbayan Sur, Naga
City, Philippines 4400 | Email: [email protected] (M. Tejada),
[email protected] (F. Nubla)
8
Naga City Planning and Development Office, Concepcion Pequeña, Naga City, Philippines
4400 | Email: [email protected]

*corresponding author

Abstract

The impacts of natural disasters in the national and local economy have been one of the
development challenges in the Philippines. Compared to the rest of the Philippines, the Bicol
Region, located in the northeastern portion of the country, is known for its several development
challenges, among which includes its vulnerability to typhoon-related disasters. In Naga City,
one of major cities in the region, which is situated in a valley surrounded by hills and
mountains, is usually prone to flooding during periods of typhoons and heavy rains. The city
therefore presents a case of a local city economy devastated by a series of typhoons in 2020.
Typhoons and floods pose significant risks to the safety and well-being of communities. While
previous studies examined the direct financial impacts in terms of damages in infrastructure
and agricultural crops, this study focuses on estimates on loss on economic output and
employment. Using the computable general equilibrium model as the empirical strategy, we
simulate the economic impacts of the compounded typhoon disasters in 2020 and better
understand the specific risks that different cities and regions face and develop strategies to
minimize those risks.
Keywords: computable general equilibrium, typhoon disaster, Philippines, local economy

JEL codes: C68, D58, Q54, O13

1. Overview

The impacts of natural disasters in the national and local economy have been one of the
development challenges in the Philippines. The 2020-21 World Risk Index has ranked it as one
of the top ten most affected countries in terms of extreme weather events and in other different
types of climate-induced disasters, including typhoons, earthquakes, and flooding, which in
many areas of the country has been aggravated by human-instigated risks such as armed
conflict. The national government has estimated that the direct effect of these extreme events
has amounted to PHP 463 billion (or USD 8.3 billion in current exchange rates) in the 2010 to
2019 period alone (Philippine Statistics Authority, 2020), with trillions of pesos in other
indirect effects, such as loss of wages and productivity, among those affected.
Compared to the rest of the Philippines, the Bicol Region had been known for its several
development challenges. With higher unemployment rates and lower median wages compared
to other regions in the Luzon Island, studies point to its geographical location to explain lower
investments and lower productivity rates across its provinces that are ultimately related to the
region’s susceptibility to typhoon-related disasters. The region is also located in the eastern
portion of the country, which has a Type II agro-climatic condition, exemplified by no dry
season but maximal rainfall at the latter part of the year, which has a greater probability of
being affected by lower agricultural productivity and therefore poorer socioeconomic
conditions (Philippine Human Development Network, 2013). This susceptibility to typhoon-
related disasters serves as an aggravating factor to the fact that provinces in the region have
higher levels of poverty incidence in the rest of the Luzon Island region.
Local leaders in the region, over the years, have designed strategies to respond to the natural
disasters to reduce its socio-economic impacts especially for the vulnerable population,
including capacity-building seminars and adequate infrastructure. However, despite the
programs and projects implemented in the area, economic outcomes continue to remain poor.
In Naga City, one of major cities in the region, which is situated in a valley surrounded by hills
and mountains, is usually prone to flooding during particular periods of typhoons and heavy
rains. Its location in the eastern part of the country, close to the Pacific Ocean typhoon belt,
make it also vulnerable to being hit by strong tropical storms. This has adverse consequences
on the infrastructure and livelihoods in the city; for example, Typhoon Reming (international
name: Durian) in 2006 significantly devastated homes, especially in the low-lying areas of the
city and knocked down power lines in the area. The total estimates made by the National
Disaster Coordinating Council (the government agency in charge of disaster response) was that
the typhoon damaged PHP 34 billion (or more than USD 600 million in current foreign
exchange rates) in infrastructure and agricultural assets, and reported more than 120,000 homes
that were destroyed (Murphy, 2008). Therefore, the poor geographical location of the city and
other socioeconomic factors have affected the economic outcomes in the area.
Naga City therefore presents a case of a local city economy devastated not just by a series of
typhoons in the 2000s but also more recently natural disasters, such as typhoons and floods,
pose significant risks to the safety and well-being of communities. While previous studies
examined the direct financial impacts in terms of damages in infrastructure and agricultural
crops, this study focuses on estimates on loss on economic output and employment. By
studying their impact, we can better understand the specific risks that different cities and
regions face and develop strategies to minimize those risks.
In these cases, economic activities in city centers become important drivers of growth as they
lead in pursuing development goals of the region. Therefore, understanding the impacts of these
series of disaster shocks to the city economies, such as in Naga becomes warranted. The
purpose of this study is to better understand the impacts of natural disasters in a local economy.

2. Socio-economic profile of Naga City

Naga City is an urban, second income-class city located about 377 km south of Manila City,
the country’s capital city. It has a total land area of 8,448 hectares which were distributed,
according to 2016 data, into agriculture (49.5%), water bodies (43.7%), eco-tourism and parks
(14.3%), residential areas (19.2%), commercial, institutional, and industrial sites (8.5%), forest
reserves (7.2%), and transportation and other utilities (0.8%) (Naga City Planning and
Development Office 2018). The city comprises a total number of 27 barangays (or villages),
and is surrounded by rich agricultural and fishery areas, and given that it is surrounded by the
Naga and Bikol rivers, has been important for agro-processing industries.

The city is one of the oldest in the Philippines (Jamero, et al., 2021); Spaniards arrived in the
area in 1576, a little over a decade after the arrival of Miguel Lopez de Legazpi, a Spanish
military officer who financed an expedition to conquer the country. The city was initially
named Nueva Caceres and became the administrative center of the Bicol region. The growth
of the city was initially facilitated by the development of the abaca industry which saw an
influx of Chinese merchants in the area, and the presence of the colonial bureaucracy. The
number of Catholic religious and education institutions in the city showed that it has been an
important cultural center; a training center for Catholic clergy, the Holy Rosary minor
seminary, was founded in the late 18th century. Nueva Caceres was initially the capital of the
Spanish Camarines Province, and when the province was split in the early 20th century during
the American colonial period, the municipality was renamed as Naga, which became the capital
of the newly founded Camarines Sur province. Naga was upgraded to a city in 1948, and in
1955, became independent of the Camarines Sur province.

The city has a total population of 196,003 individuals in 42,152 households as of the 2015
Philippine Statistics Authority (PSA) census; in the 2020 PSA census, its population increased
to 209,170, which made Naga City the second most populous city after Legazpi, in Albay
province, which had 209,533 people, in the Bicol region. It makes up 9.6% of the total
population of Camarines Sur, and 3.2% of the region. Naga City is the most densely populated
city of the region at 2,320 per km2. The city households have an average size of 4.61 members
in 2015 which decreased to 3.9 members in 2020 based on Community-Based Monitoring
System (CBMS) 2020 (Ateneo Social Science Research Center, 2021).

The working-age population was 42% (92,651 individuals) of the total population in 2015
(Naga City Planning and Development Office, 2018) and increased to 70% in 2020 (Ateneo
Social Science Research Center, 2021). The labor force was at 75.6% of those who are of
working age which consisted of 89.6% employed and 10.4% unemployed with a 43%
underemployment rate in 2019 (Ateneo Social Science Research Center, 2021). Employment
situation, as expected, worsened in 2020 due to the pandemic with a labor force of 51.8% of
those who are working age, where 82.9% were employed and 16.4% were unemployed (Ateneo
Social Science Research Center, 2021). The city’s unemployment rate in that period was still
lower than the national unemployment rate of 17.6% in April 2020. Of those employed, 30.1%
were regular employees, 43.2% were daily wage earners, and 9.6% were entrepreneurs.
The mean annual household income based on the 2020 Community Based Monitoring System,
a system of collection of household information undertaken at the local government level,
undertaken in Naga City was PHP 179,053 (Ateneo Social Science Research Center, 2021).
The per capita income was PHP 31,377.03, higher than the per capita poverty threshold in
Camarines Sur of PHP 24,271 in 2018. Using the 2018 threshold as benchmark, poverty
incidence was at 31.9% in 2020, lower by 6.3% from the poverty incidence of 38.2% based on
CBMS 2015.

The main source of income of most of the households (67%) were earned from salaries and
wages (Ateneo Social Science Research Center, 2021). A small percentage of the households
(1.2%) engaged in entrepreneurial activities and other income-earning activities (0.3%). Naga
City has been a trading and service-driven economy (Naga City Planning and Development
Office, 2018) which is manifested until 2020 where most enterprises were engaged in
wholesale and retail trade (39.5%) as the city is a commercial center for not only the Camarines
Sur province but of the entire Bicol region. Other enterprises were engaged in mining and
quarrying (30.8%), informal sector’s activities (30.8%), and agriculture (10.6%). Agriculture’s
employment decreased by 1.4% since 2012 mainly due to the conversion of prime agricultural
lands to commercial and residential lots (United Nations Economic and Social Commission for
Asia and the Pacific, 2019; Naga City Planning and Development Office, 2018). There is a
small agro-processing manufacturing sector in the city, including meat processing and rice
milling plants, and feed mills.

For its performance on economic dynamism, infrastructure development, government

efficiency, and resiliency, Naga City has been continuously rated as one of the ten most
competitive component cities in the country since 2013 (National Competitiveness Council,
2020). Its infrastructure projects in September to November 2020 consisted of 53.7 million of
construction projects which were mostly spent on drainage and flood control facilities, some
road upgrading, and construction and maintenance of the city’s health and educational
facilities. Its dynamic economy is depicted by its growing number of business establishments,
which increased by 36% from 7,468 establishments in 2017 to 10,161 in 2018 (Naga City
Treasurer’s Office 2021). The city’s business tax collections increased annually on an average
of 9.6% from 2015 to 2018 while real property tax collection has an average annual increase
of 6.9% in the same period (Naga City's Treasurer Office, 2021). Overall, the LGU’s locally-
sourced revenues had a steady average growth of 9% from 2017 to PHP534.89 million in 2019
(Bureau of Local Government Finance, 2021).
In 2020, similar with most localities in the country, Naga City’s economic vibrance paled due
to the pressure of the COVID-19 conditions but the city government infused PHP 10 million
to aid small businesses with loans as a coping measure (Madrid, 2020). Other government-
propelled expenditures are lined-up to improve the city’s socio-economic conditions, which
include the construction of the new City Health Office, new City Hospital worth PHP 5 million,
three new high schools and the Metro Naga TESDA Hub, upgrading of Naga City Abattoir to
the standard of Triple A, and the establishment of ten mini-forests.

Furthermore, risks of typhoons may present a short-term deep shock on the city’s economy. In
fact, typhoon scenarios expose 61% of the city’s population, 21% of its roads, and 46 of its
schools to flooding (Naga City Planning and Development Office, 2018). The average annual
rainfall in Naga city had an average annual rainfall of 2,450 mm between 2004 and 2015, which
represents a 19% increase over the 2,104 mm recorded during the previous ten-year period.
Two of the 27 barangays are highly vulnerable to flooding, while eight other barangays are
moderately vulnerable; only one barangay has been classified as not vulnerable. More than
2,200 hectares of agricultural areas in the city that are planted to annual and perennial crops
are exposed to flooding of various depths; of these, more than 15% is affected by deep floods
of more than 1.5m depth.

Physical assets that are vulnerable to flooding include food and retail establishments, medical
facilities including hospitals, clinics and pharmacies, government installations such as police
stations, tourist facilities such as motels and hotels, and other recreation facilities, religious
infrastructure such as church, government offices, and transportation facilities such as the bus
and train stations. There are four bridges that are exposed to flooding; more than a quarter of
public roads are also vulnerable to flooding with strong typhoons.

Naga City’s climatic condition has been classified as Type II (Naga City Planning and
Development Office, 2018). The city, as with the region, have been witness to a significant
number of typhoon events; ten of the 16 most disastrous typhoons in the country have directly
hit the city or the storms’ eye have passed through closer than 100 kilometers from the city
center.

The city is continuing to be exposed to several extreme weather events, including greater heat
stress and drought, especially during the summer months, but at the same time, it will receive
greater rainfall during the typhoon season, a greater sea level rise (which will result in the
increase and depth of flooding as the city is at the mouth of the Bicol River), which will also
affect other cities in the region (Naga City Planning and Development Office, 2018).

With this, the city local government unit developed a self-reliance capability to address such
hazards at the barangay level. To complement this, the city local government has strengthened
its institutional arrangements and partnerships with the Local Disaster Risk Reduction and
Management Office (LDRRMO), which is the local government office in charge of addressing
disaster-related events, various entities from the civil society, and the local security sector
(Naga City Planning and Development Office, 2018). The city mayor is currently the head of
the Local Disaster Risk Reduction and Management Council (LDRRMC), which supervises
the LDRRMO. A disaster emergency operations center (DEOC) is activated during the peak of
disasters in the city This is operated by the city public safety officer and the DEOC is
responsible for the local disaster Plan, which includes coordination, operations management,
data collection, record keeping, public information, resource management and development of
proposed projects.

3. Review of Literature
In identifying the relationship between natural disasters, on the one hand, and economic and
social outcomes, on the other hand, it is important to identify the causal relationships that
impact on the latter. This study utilizes a computable general equilibrium (CGE) type of
modelling these relationships where the economic flows and stocks of local economy are
constructed using national and local level data and changes in these flows and stocks are
documented given certain disruptions that occur in the economy. This section reviews the
literature on the impacts of natural disasters on local economies, and on the construction of
counterfactual scenarios using the modelling framework.
The existing literature on the impacts of persistent natural disasters on economies include an
investigation on the relationship between such disasters and poverty and development.
Specifically, while existing literature on said relationships have been mainly examined at the
national level, these relationships can also hold true at the local level. Hallegatte et al. (2016)
pinpoint three channels where the effects of climate on poverty are most pronounced, namely,
(i) agricultural production, ecosystems, and food security; (ii) natural disasters; and (iii) health.
Unfortunately, as poverty reduction and alleviation are non-static, one-time events, climate
disasters continue to be a risk for those who are above the poverty line to fall below it, and
those in poverty to fall further and be chronically poor (Anwar, 2008; Shepherd, 2015;
Hallegatte, et al., 2016).
In terms of agricultural production and food security, Karim and Noy (2016) note that in
Ethiopia and Mexico, food consumption is severely affected by temperature shocks brought by
El Nino. This is especially true for farm households who experience an increase in
vulnerabilities to food consumption relative to non-farm households (Karim & Noy, 2016).
This reduction in food consumption is a direct effect of price shocks that arise from lower
agricultural production due to droughts (Hallegatte, et al., 2016). This forces the poor to
allocate more resources of their resources to food and other direct expenditures, and less to
savings and accumulation of assets (Islam, 2018; Hallegatte, et al., 2016).
While climate disasters such as droughts severely affect food security and agricultural
production, the wide array of such disasters (i.e., typhoons, flooding, landslide, etc.) inevitably
pull people further down into poverty. For instance, Hallegatte et al. (2016) note that such
disasters destroy people’s assets which would force them to exhaust their savings and be
indebted to conduct the necessary repairs needed in their households. As demonstrated in
Bangladesh and the Nigerian coastal state of Akwa Ibom, vulnerable households are also
characterized as those who are unable to cope with the effects of these disaster events on their
livelihoods (Islam, 2018; Amos, Akpan, & Ogunjobi, 2015). This is especially true for those
who fail to access or those who experience reductions in their physical, natural, financial,
social, and human capital due to said disasters (Amos, Akpan, & Ogunjobi, 2015; Scoones,
1998). Meanwhile, hurricanes that hit Florida’s coastal counties cause decrease in earnings in
the short run and cause slower employment growth in the long run (Belasen & Polechek, 2009).
Geographic characteristics related to households’ locations, limited personal resources, poor
infrastructure, and political instability further expose households in various cities and
communities to vulnerabilities in the face of climatic disasters (McMahon, 2007).
Finally, persistent disasters cause deaths and illnesses (Hallegatte, et al., 2016), severely
affecting a household’s welfare especially if it causes the death of an income-generating
household member as observed in the rural households of Nigeria (Shehu & Sidique, 2015).
While climatic disaster shocks can cause deaths, gradually worsening environmental
conditions can give rise to outbreaks and illnesses such as malaria, diarrhea (Hallegatte, et al.,
2016), dengue (Morin, Comrie, & Ernst, 2013), and even the COVID-19 pandemic (Keogh-
Brown, Jensen, Edmunds, & Smith, 2020; Nechifor, Boysen, Ferrari, Hailu, & Beshir, 2020).
These health issues cause poverty as it drives the combined effects of health expenditures,
reduced income, and impaired productivity due to disabilities and the like (Hallegatte, et al.,
2016).
Hallegatte, Henriet and Corfee-Morlot (2010) provide a framework for understanding these
impacts at the city level and some possibilities for utilizing different assessment methodologies.
The paper classifies the impacts into two broad categories: market impacts, which directly
affect the economy, including asset losses due to sea level rise or even flooding, and non-
market impacts, which affect humans and the environment in a wider manner, such as health
costs due to illnesses and diseases or the loss of productivity of natural resources.
The effects of disasters can also be either direct, or even indirect; while the former focuses on
the issue of the replacement costs for crops, buildings, and other infrastructure that are damaged
by a disaster, the latter focuses on the system-wide changes in production.
With these issues and effects of climate disasters on poverty in local economies, disaster
resilience and risk management are key to secure the safety nets for the vulnerable. For the
Philippines, while the country is categorized as a high-hazard and high-poverty country, its
disaster risk management capacity is better than average and is adaptive (Shepherd, 2015). This
implies the country’s capacity to minimize long-term disaster impacts in the country. Coastal
cities in the Philippines must therefore invest in physical, social, and financial resilience to
minimize risks and uncertainties by integrating these risks into these cities’ development plan
(Razafindrabe, Parvin, Surjan, Takeuchi, & Shaw, 2009).

4. CGE Modeling framework

4.1. CGE Model

CGE models are standard tools in economic analysis when one wishes to determine how
economic shocks affect the entire economy and therefore this is the framework that would be
utilized in analyzing events that have socioeconomic impacts. Most CGE models are
deterministic, i.e., there is perfect foresight of all sources of changes that can occur in an
economy. With this property, CGE models are commonly employed where shocks are fully
known such as in ex ante simulation of international trade, fiscal policy, or other shocks in the
real economy.
While CGE models are classified as macroeconomic models, i.e., their results describe the
changes that occur at the macroeconomic level, they differ from other modeling techniques
because CGE models explicitly incorporate microeconomic behaviors of economic agents.
Thus, the results of numerical simulations using a CGE model reflect the aggregate effect of
how optimizing economic agents—either maximizing their utility levels as in the case of
consumers or minimizing their costs as in the case of firms—reacted to economic shocks. In
the presence of economic shocks, the results of CGE simulations also represent the movement
of the economy from one equilibrium point to another.
Economic agents in the CGE model are all optimizing: consumers maximize utility subject to
their budget constraint, while producers maximize their profits by producing a level of output
where their marginal revenue equals their marginal cost. The behavior of economic agents is
modeled using constant elasticity of substitution (CES) and constant elasticity of
transformation (CET) functions. The Naga CGE model adopts the functional forms in Tuaño,
Clarete and Muyrong (2016), Rutherford (1999), and Mathiesen (1985) who formulated the
general equilibrium as a mixed complementarity problem (MCP) in which a system of
nonlinear equations is solved instead of a constrained optimization problem.1
The Naga City model differs from standard CGE models in two respects. First, since the model
covers only a city-level economy, the rest of the world refers to all geographic areas outside
Naga City. To simplify the model, it is assumed that Naga does not trade directly with other
countries and Naga does not influence global world prices. Instead, a fictitious economic agent

1
The functional forms used in the Naga City model are available upon request.
is assumed to trade with foreign countries on behalf of areas in the Philippines, which include
Naga City. This fictitious agent is subsumed in the rest of the world.
Second, there are two government entities in the Naga City model, the local government (LGU)
and the national government (NG). It is assumed that the NG does not directly transact with
economic activities and institutions in Naga City apart from collection of national taxes which
include value-added tax (VAT) and income taxes, and also through income transfers to
households. Meanwhile, the LGU transacts with economic activities through the sector called
‘public administration.’ It also collects local taxes such as real property taxes and other taxes
from economic agents.

Figure 1. Detailed Representation of the Economic Accounts and Flows in the Model
Source: Authors’ representation of the economic model from Tuaño, Clarete and Muyrong (2016).

Figure 1 provides a more detailed illustration of the flow of resources from the different
institutions assessed in Naga City. Production output of commodities is provided to domestic
sales and exports; the former, combined with imports from the rest of the world, consists of
Armington goods that are sold to domestic institutions, including households, government, and
firms as household consumption, government consumption (spending) and firm investment.
Households provide factors and together with other firms which produce intermediate inputs
are utilized in the production of goods and services.
The income of households from selling these factors (including land, labor and capital) together
with transfers from government are utilized to purchase household consumption goods and also
to pay taxes to the government, and any residual is retained as household savings. Government
earns income from taxes from firms and households, which are then used for transfers to both
institutions, and also to provide for government consumption. Firms earn incomes from selling
intermediate goods and then also pay for the factors of production and also for taxes that are
paid to the government; the residual is then kept as enterprise savings. The rest of the world
sector earns incomes from exports which are used to pay for imports; any residual income is
retained as foreign savings. All the savings from the different institutions flow to the financial
sector which uses these to pay for investments.

4.2. Description of Data: The Social Accounting Matrix for Naga

Unlike econometric models, the parameters of a CGE model are calibrated instead of estimated.
Calibration means setting parameter values. The coefficients of functional forms in a CGE
model are obtained from a social accounting matrix (SAM). The SAM for Naga City is an 𝑛 ×
𝑛 table that summarizes the values of economic transactions in the economy (Table 1). In a
SAM, the column 𝑗 entity pays row 𝑖 entity the amount in the entry (𝑖, 𝑗). Thus, the sum of
entries across a row is the total income earned by the entity represented by the row. Meanwhile,
the sum of entries across a column is the total expenditure and outlays made by the column
entity. As an assumption, the sum across a row is equal to the sum across the corresponding
column. This implies that total income equals total expenditure, an important assumption in
Walrasian CGE models.
Savings- Rest of the
Activity Commodity Labor Capital Household Firm Govt Investment World Total
Activity 𝑐1 𝑟1 𝐴
1 1 1 1
Commodity 𝑎 ℎ 𝑔 𝑠 𝐶
Labor 𝑎2 𝐿
Capital 𝑎3 𝐾
Household 𝑙 𝑘1 𝑟2 𝐻
Firm 𝑘2 𝐹
Government 𝑎4 ℎ2 𝑓1 𝐺
Savings-
Investment ℎ3 𝑓2 𝑔2 𝑟3 𝑆
Rest of the
World 𝑐2 ℎ4 𝑠2 𝑅
Total 𝐴 𝐶 𝐿 𝐾 𝐻 𝐹 𝐺 𝑆 𝑅
Table 1. Overview of SAM
Source: Author’s illustration based on Cororaton (2003)

Following Cororaton (2003), the Naga City SAM contains a production activity account, a
commodity markets account, factors of production accounts, and institutional accounts.
Although production activities and commodity markets accounts contain the same set of
sectors, they are distinguished from each other to easily identify parameters for both production
and consumption activities in the model. The Naga City model covers 19 economic sectors
listed in Table 2. The same set of sectors populate the commodity markets accounts. There are
three factors of production in the model, namely capital 𝑐𝑎𝑝, and two types of labor called 𝑙𝑠𝑘
and ℎ𝑠𝑘 representing two different skill sets. As for the institutional accounts, the SAM
contains ten representative households corresponding to each income decile, one representative
firm, two separate government entities (LGU and NG), a financial intermediary, and the rest
of the world.
Code Sector
Agri Agriculture
 Hogs Hog raising
Mng Mining
Mfg Manufacturing
Elec Electricity production and distribution
Watr Water utility
Cons Construction
Trde Wholesale and retail trade
Tran Transportation
Htrt Accommodation and food service
Comm Communication
Fina Financial intermediation
Real Real estate and renting
Professional, technical, and business support
Prof
activities
Puba Public administration
Educ Education
Heal Health
Arts Arts and recreation
Oths Other service activities
Table 2. Sectors in the Naga City Social Accounting Matrix
Source: Authors’ representation of sectors in the Naga economy.

Chen and Haynes (2017) argue that for CGE models to work well, their parameters must be
based on actual data. Thus, various datasets are used to construct the Naga City SAM.
First, to reflect the actual structure of the Naga City economy in terms of the economic sectors
present, the inventory of firms from the Business Processing and Licensing Office (BPLO) of
Naga City, which is in charge of the registration of socioeconomic enterprises at the local
government level, was used to extract the actual level of output in each economic sector for the
year 2018. The use of the said dataset also guarantees that the economic sectors present in the
SAM are consistent with the actual sectors in Naga City. The BPLO data was supplemented
by the 2012 Input Output Table especially in constructing the production activities accounts.
This implies that production activities in Naga City use the same production technology as in
the national level in 2012. The data was adjusted to the same 2018 reference year.
Second, the Naga City Community Based Monitoring System (or CBMS), a data collection
system to collate information on households in specific local government units, and the merged
2018 Family Income and Expenditure Survey - Labor Force Survey (FIES-LFS), which
contains demographic and employment information among provinces and major cities are used
to calculate the factor earnings as well as other incomes of households by income decile. The
same datasets are also used to calculate the expenditures by goods and services of households,
as well as their other outlays such as tax expenditures and savings. The FIES serves as a primary
source of household income and expenditure data in the Philippines (Ericta & Fabian, 2009),
while the LFS is a quarterly survey of employment, wages, and working conditions in the
Philippines; the master sample of the LFS is also used for the FIES.
The income and expenditure of Naga City LGU, as well as the expenditure of the national
government in Naga City, came from the Budget of Expenditures and Sources of Financing
(BESF) dataset. The BESF is a data source for government revenue and expenditures produced
by the country’s Department of Budget and Management and provides details of proposed
expenditures for the upcoming fiscal year as well (Menifeld, 2011). This information was
supplemented by the LGU’s financial statement for 2018, which was sourced from the Naga
City budget office, which is in charge of planning expenditures in the city.
Finally, the 2018 Commodity Flow in the Philippines (CFP) was used to calculate trade data
for Naga City. However, it is worth noting that trade via water mode of transport dominates
inter-regional commodity trade in the Philippines (Odchimar & Hanaoka, 2015). Thus, inter-
regional and by extension, inter-city trade, via land and air are understated. Since the CFP
contains the value of trade across regions, the ratio of the city's value added by sector relative
to the value added in Region V or the Bicol Region, where Naga is located, was used to extract
the imports and exports of Naga City. The trade data from the CFP is likely to be understated
for Region V and Naga City because the dataset only captures values of goods transported
through air or through ships only. Thus, as an assumption, when consumption exceeds the
amount produced in the city, the difference is added to the value of imports. Meanwhile, when
consumption falls below the level of production, the difference is added to the value of exports.
4.3. Counterfactual design
In CGE analysis, these disaster events are shocks understood to enter the system usually either
through reduction in factor endowments of households, reduction in total factor productivity
(TFP) among economic activities, or changes in the implicit tariff rates if traded goods are
affected. The following details how the researchers understand the series of disaster shocks to
the Naga city economy and how the CGE model will be perturbed by the “shocks” represented
by the experience of the resident in Typhoons Quinta, Rolly, and Ulysses. The design of the
counterfactuals was also informed by focus group discussions undertaken by the authors with
select business and government leaders last July 2021.
On average, the annual temperature in Naga City ranges from 26°C near Mt. Isarog, the
mountain on the East portion of the city, to 27°C at the city center (Jamero, et al., 2021). The
lowest monthly temperature is recorded from December to February, with an average of about
25°C. The hottest months are from March to August, which can go as high as 28°C. The
average temperature is projected to increase in the future which may reach up to 32˚C. Rainfall
is almost evenly distributed throughout the year, with maximum rainfall amounts typically
registered from September to November. Average rainfall is expected to decrease in the future.
Typhoons, flooding, and liquefaction are the three disaster risks identified by the city. While it
was projected that average rainfall will reduce, still a number of studies indicate that global
warming may enhance the intensity of typhoons (Sun, et al., 2017; Esteban, Gasparatos,
Pomeroy, & Stromberg, 2013). For instance, in 2020, Naga experienced three successive
typhoons in a span of three weeks. Typhoon “Quinta” (international name: Molave) intensified
from a tropical depression and endangered the Albay-Camarines Sur area on 25 October 2020;
more than 100,000 individuals were initially affected because of the rains. On 1 November
2020, Super Typhoon Rolly (international name: Goni), described as the world’s most powerful
tropical cyclone in 2020 (United Nations Office of the Coordination for Humanitarian Affairs,
2020) brought torrential rains and violent winds reaching up to 225 km/h as it had its first
landfall in Bato, Camarines Sur, which is about 48 kilometers away from the city. The National
Disaster Risk Reduction and Management Council of the Philippines estimated that the country
was hit by more than PHP 17.9 billion (USD 370 million) in total damages. Ten days later on
November 12, typhoon Ulysses (international name: Vamco) struck the main island of Luzon
including Naga lashing destructive maximum sustained winds of 150 km/h and gustiness of up
to 205 km/h and dumping heavy rainfall, especially in southern Luzon province.
 Figure 2. Naga after Typhoon Ulysses Figure 3. Naga after Super Typhoon Rolly
Source: Bicol Voyager TV - Roaming Rome (2020) Source: Naga City Government (2020)

Flooding seems to be a result of typhoons. But not always as in Naga’s experience in January
2018. The flood reached some major roads and even rose up to waist-deep in Barangay Calauag
but there was no typhoon except the tail-end of the cold front that brought heavy rains across
the Bicol Region (Jamero, et al., 2021). Naga’s built-up areas and the urban center are located
right where these are susceptible to floods. Approximately 44.6% of the schools have a 20%
chance of being affected by flood in any given year as shown in the 5-year return flood hazard
map (Figure 4). Same chance of occurrence also stands for 40.9% of the City’s health facilities.
Liquefaction was identified by local stakeholders during the IRA workshop in 2020 as well as
in the Comprehensive Land Use Plan (Jamero, et al., 2021). It usually manifests through
earthquakes because vibrations cause structures to sink or tilt and, in some cases, pipelines may
float. Based on PHIVOLCS maps, about 11% of the total land area of the city, which is
composed of 12 barangays, is exposed to liquefaction. These liquefaction-prone areas pass
about 21 kilometers or 7% of the roads in the city (Naga City Planning and Development
Office, 2018).
How do we then translate these series of disaster shocks into counterfactuals from which we
compare the baseline levels of economic variables?

Shocks are introduced into the simulation through perturbations in the model. These
perturbations may differ based on the nature of shocks. For instance, disasters such as typhoons
and floods cause physical damage to capital stock and may prevent workers from working.
Thus, modeling these shocks requires introducing perturbations to the supply of workers and
capital. Shocks that have the same effect are also treated the same way. The COVID-19
pandemic may not have damaged firms’ physical capital, however, it restricted labor supply.
In terms of the model, a perturbation in the labor endowment is introduced to simulate the
impact of the pandemic on the economy. If a modeler wishes to simulate a new tax policy, then
the perturbation must involve tax rates in the model. Once the shocks are identified and
introduced into the model, the solution of the perturbed model will now constitute a
counterfactual which will then be compared to the baseline.
The succeeding sections discuss the treatment of the natural resource shocks considered in this
study. Two separate online FGDs were conducted on 6 August and 28 October 2021 to consult
the Naga City business sector about the impact of the 2020 typhoons, and two other shocks
(COVID-19 pandemic and African swine flu effects on the hog industry) on their operations.
Representatives from agri-tourism, food manufacturing, construction sector, trade (including
e-commerce), transportation and storage, and education participated in the FGDs. The FGDs
collected insights and qualitative information about the extent of the impact of COVID-19
pandemic and the typhoons Quinta, Rolly, and Ulysses in 2020 on the labor and capital
endowments of economic activities. These economic shocks have varying impacts on sectors.
For instance, while the pandemic damaged most economic activities, e-commerce in Naga city
thrived as people became accustomed to online shopping. However, more sectors suffered
because of impaired supply chain and because of restrictions in mobility. In the case of
typhoons, while all sectors suffered losses, some sectors were able to restore full operation
faster than others. These results were used in this study to supplement available data used in
calculating the value of shocks and inform economic modeling.

Figure 4. Naga City Flood Hazard Map (5-Year Return)

Source: Coastal Cities at Risk Project

Following Tuaño, Muyrong and Clarete (2016), the impacts of typhoons are expressed as
reduction in the availability of both labor and capital endowments. Figure 5 presents the factor
availability of labor and capital over nine weeks. In this scenario, the simulation period is
shorter because according to the FGDs, economic activities were able to recover quickly after
the series of typhoons. Note however that capital endowment is able to recover faster than labor
because according to FGD respondents, workers need to attend to their own needs after the
typhoons, thus are unable to return to work immediately.
 1.2

Factor Displacement Rate

1

0.8

0.6

0.4

0.2

0
1 2 3 4 5 6 7 8 9
Week

Labor Capital

Figure 5. Labor and capital displacement rates due to typhoons.

Source: Authors’ calculations.

5. Results
5.1. Changes in sectoral output and GDP
The results show the simulation of the effects of typhoons that have been identified as affecting
Naga city and its environs. The effects of the typhoons Quinta, Rolly, and Ulysses is then
discussed below. The impacts of typhoons are also modelled to be reductions in all types of
endowments not just with laborers being unable to go to work but also with damage and
destruction on physical capital assets. Added to this would be the constraints on the electricity
and water sectors as their physical capital assets sustain damage and unable to provide the
services for an extended period of time.
These typhoons occurred in the 4th quarter and was relatively short-lived, lasting only for at
most 2 months according to survey and FGD responses. The impacts on the different sectors
of the economy, including the agriculture, industry and service sectors is shown below.
In Figure 6, agricultural output declined by more than 50 percent due to the impact of the
typhoons. However, it steadily recovered immediately and by the 5th week, it had returned to
its normal level of output.
 1.1

1
Sector Output (base = 1) 0.9

0.8

0.7

0.6

0.5

0.4
t0 t1 t2 t3 t4 t5 t6 t7 t8
Week

agri hogs

Figure 6. Change in agricultural and hog industry output, Sectoral output (base=1) and time
period in weeks (t0 = occurrence of the shock)
Source: Authors’ calculations.

Industrial activities follow the same recovery path. As shown in Figure 7, all industrial sectors
experienced immediate decline in output following the typhoon and recovering immediately in
the succeeding period. By the fifth week, all sectors have fully recovered.

1.05

0.95
Sector Output (base = 1)

0.85

0.75

0.65

0.55

0.45

0.35
1 2 3 4 5 6 7 8 9
Week

mng mfg elec watr cons

Figure 7. Change in industrial output, sectoral output (base = 1) and time in weeks (t0=
occurrence of shock)
Source: Authors’ calculations.

Service activities registered a wider range of impact, as seen in Figure 8 below. The education
sector remains the most heavily affected by typhoons, declining by more than 60 percent. The
financial sector emerges from the slump before the fourth week, the shortest length of recovery.
By the fourth week, the financial sector even overshoots its baseline level of output.
Meanwhile, all other sectors fully recover after the fifth week. The resulting Naga City GDP is
shown in Figure 9 and as in the plots of sectoral output, GDP is fully recovered after the fifth
week.
 1.1
1

Sectoral Output (base = 1)

0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
t0 t1 t2 t3 t4 t5 t6 t7 t8
Week

trde fina prof puba educ

Figure 8. Change in selected services output, sectoral output (base = 1) and time in weeks
(t0= period of typhoon)
Source: Authors’ calculations.

400
Naga City GDP (in PHP million)

350
300
250
200
150
100
50
0
t0 t1 t2 t3 t4 t5 t6 t7 t8
Week

GDP

Figure 9. Change in Naga City GDP, In Philippine pesos and time period in weeks (t0 =
occurrence of shock)
Source: Authors’ calculations.

Sector t0 t1 t2 t3 t4 t5 t6 t7 t8
agri 1.00 0.46 0.62 0.78 0.94 1.00 1.00 1.00 1.00
hogs 1.00 0.44 0.60 0.77 0.93 1.00 1.00 1.00 1.00
mng 1.00 0.41 0.59 0.78 0.96 1.00 1.00 1.00 1.00
mfg 1.00 0.42 0.59 0.77 0.94 1.00 1.00 1.00 1.00
elec 1.00 0.41 0.59 0.77 0.95 1.00 1.00 1.00 1.00
watr 1.00 0.43 0.60 0.77 0.94 1.00 1.00 1.00 1.00
cons 1.00 0.40 0.58 0.76 0.93 1.00 1.00 1.00 1.00
trde 1.00 0.42 0.59 0.76 0.93 1.00 1.00 1.00 1.00
tran 1.00 0.42 0.59 0.77 0.94 1.00 1.00 1.00 1.00
htrt 1.00 0.36 0.55 0.74 0.94 1.00 1.00 1.00 1.00
comm 1.00 0.38 0.57 0.76 0.95 1.00 1.00 1.00 1.00
fina 1.00 0.42 0.62 0.82 1.03 1.00 1.00 1.00 1.00
real 1.00 0.42 0.58 0.74 0.91 1.00 1.00 1.00 1.00
prof 1.00 0.33 0.53 0.72 0.92 1.00 1.00 1.00 1.00
puba 1.00 0.22 0.46 0.69 0.92 1.00 1.00 1.00 1.00
educ 1.00 0.38 0.54 0.71 0.87 1.00 1.00 1.00 1.00
heal 1.00 0.42 0.60 0.77 0.94 1.00 1.00 1.00 1.00
arts 1.00 0.32 0.52 0.72 0.93 1.00 1.00 1.00 1.00
oths 1.00 0.39 0.57 0.75 0.93 1.00 1.00 1.00 1.00
Table 3. Levels of domestic output under typhoons (in ratio of baseline t0)
Source: Authors’ calculation.

5.2. Industry resilience

As discussed above, the economic shocks have varying impacts on sectors. A sector that is
resilient may not suffer deep output losses or if it does, it quickly recovers. Thus, the resilience
of a sector can be measured by two variables: (1) its level of output over the period of interest,
and (2) the length of time it takes for the sector’ output to return to its normal level. These two
variables can be summarized by the industry resilience index which expresses the sum of an
industry’s output over its recovery time 𝑛 as a proportion of its normal level of output over the
same length of time.
∑𝑛𝑡=1 𝑉𝐴𝑖𝑡
𝐼𝑅𝐼𝑖 = (1)
𝑇𝑖 ⋅ 𝑉𝐴𝑖0

A sector that is perfectly resilient has an 𝐼𝑅𝐼 ≥ 1. Meanwhile, a sector that completely not
resilient has an 𝐼𝑅𝐼 = 0.
Based on the definition, computing the IRI using the simulated sectoral output may only be
possible for sectors that recovered their baseline output. However, there are two other cases
that are possible: first, a sector, despite experiencing adverse economic shocks, may not exhibit
losses at all. Second, a sector may not totally recover within the specified time horizon. In the
case of the former, such sector must be automatically classified as perfectly resilient mainly
because 𝐼𝑅𝐼 ≥ 1. For the latter, the 𝐼𝑅𝐼 must consider all the periods in the horizon of interest.
Thus, there is a need to adjust the 𝐼𝑅𝐼 to allow comparison of resilience across these sectors. If
the time horizon of interest is fixed at 𝑛, then the 𝐼𝑅𝐼 of sector 𝑖 can be expressed as,
∑𝑇𝑡=1 𝑉𝐴𝑖𝑡
, 𝑖𝑓 𝑇𝑖 > 0 𝑓𝑜𝑟 𝑠𝑒𝑐𝑡𝑜𝑟 𝑖 𝑠𝑢𝑐ℎ 𝑡ℎ𝑎𝑡 𝑎𝑡 𝑇𝑖 , 𝑉𝐴𝑖0 ≤ 𝑉𝐴𝑖𝑇
𝑇𝑖 ⋅ 𝑉𝐴𝑖0
𝐼𝑅𝐼𝑖 = (2)
∑𝑛𝑡=1 𝑉𝐴𝑖𝑡
, 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒
{ 𝑛 ⋅ 𝑉𝐴𝑖0

With this expression for the 𝐼𝑅𝐼, the resilience index for sectors that were not able to recover
can still be computed.
Table 4 presents the resilience index for the sectors in Naga City. The resilience of an economic
activity depends on the economic shock. Typhoons affect both labor and capital inputs, thus,
the impact on activities may be more uniform on both inputs in the economy. Based on
simulations, for most of the sectors, there has been a small variation among many of the sectors
of the economy in terms of resilience, with most indices ranging from 0.70 to 0.77. Meanwhile,
the least resilient sector against typhoon shocks is the public administration sector.
Sector Typhoon
agri 0.76
hogs 0.75
mng 0.75
mfg 0.74
elec 0.74
watr 0.75
cons 0.73
trde 0.74
tran 0.74
htrt 0.72
comm 0.73
fina 0.72
real 0.73
prof 0.70
puba 0.66
educ 0.70
heal 0.74
arts 0.70
oths 0.73
Table 4. Industry resilience index for the Naga City sectors.
Source: Authors’ calculation.
Note: Computed over the entire period

Based on simulations, there are two sources of resilience for economic sectors. First, resilience
is determined by factor availability. Thus, one way to improve the resilience of a sector is to
shorten the period of recovery of factors of production or to protect the supply of factors of
production from being impaired. Second, the ease at which sectors can substitute factors whose
endowment becomes severely restricted by the shock with factors that become relatively more
abundant also contributes to resilience, especially when an economic shock affects a specific
factor. This has been observed during typhoons when some activities that were previously
considered labor-intensive such as retail and food service saw an abrupt shift to technology-
based operations. Thus, to improve resilience, public policy may focus on these two factors.

6. Conclusion

The paper provided an overview of the economic effects of disasters in Naga City, including
the results of the natural disaster shock having a severe economic impact in the city. The results
show that there are similarities and slight differences in the trajectories of the effects on sectoral
output and production in the city.
The effect of a typhoon is to reduce output in most sectors of the economy by more than fifty
percent in the first week, but the city economy fully recovers by the fifth week. The total
indirect losses that the economy incurs is around PHP 500 million in loss output over the five-
week area which is significant given that the total direct effect of a typhoon is around PHP 34
billion for the whole region. Given that Naga City is affected by multiple typhoons each year,
the magnitude of this economic loss is quite significant.
7. Data Statement
Data will be made available upon request.

8. Acknowledgements
The authors would like to thank the Coastal Cities at Risk Philippine Project, which was
supported by the International Development Research Center of Canada, and the Ateneo de
Manila University for the funding and assistance they have given in this endeavor. The authors
would also like to acknowledge the efforts extended by the partners from Ateneo de Naga
University and the Naga City Planning and Development Office.

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https://reliefweb.int/report/philippines/philippines-storms-and-winds-multiple-
regions-typhoon-molave-0600-oct-29-2020