The Economic Effects of the Asian Tsunami on the ‘Tear Drop in the Indian Ocean’

Sri Lanka is the second worst affected country by the Indian Ocean tsunami (IOT) in absolute terms after Indonesia and the most affected country in relative terms of per capita deaths, missing and displaced people. In addition to the damages to public infrastructure and owner-occupied houses, some sectors of the economy such as fishing and tourism have been severely affected. This article demonstrates how a computable general equilibrium (CGE) model can provide some information on the effects of the IOT and on the likely effects of a reconstruction aid package on tsunami affected economies such as Sri Lanka, India and Indonesia. The article indicates that it is important to consider the combined effects of the IOT and the reconstruction package. While the IOT has produced negative economic effects on the economy, the reconstruction package would stimulate the economy.