The regional portfolio of disruptions, protection, and disasters

Abstract

This paper explains and implements a portfolio-based framework for analyzing the progression and consequences of disruptions to small-region economies. The first section discusses the underlying relationship between hazards, events, protection, disruptions, and disasters in regional economic systems. Such systems typically are adaptive in that they constantly adjust their levels and patterns of protection and compensation to changes in the frequency and magnitude of disruptions. The section explains how portfolio theory may be re-conceptualized to address policy choices related to the above issues. The second section explains conceptual issues in defining variables and specifying the production function balancing performance and protection. This function in turn defines the optimal expenditure for each actor against which their risk-tolerance is measured. Potential “tipping points” from singularly large or cascaded shocks, including disruptions from “lumpy” investment, suggest disaster-mitigating strategies that maximize societal utility or reduce tendencies to major disaster. In the third section, this theory is implemented empirically as a computer simulation model for a stylized open economy driven by tourism and oil refining. The simulations show how the potential for major disruptions varies with policy, increasing rapidly with the risk-propensity of policy makers. They also suggest how appropriate regional economic policy, notably rebalancing and export portfolio and rescheduling major investments, might reduce the likelihood of such events.