Simulating the Economic Ripple Effects of the 2025 Sumatra Disaster Across Indonesia

When flash floods and landslides tore through Aceh, North Sumatra, and West Sumatra in late 2025, the immediate human toll was devastating enough. But a new modeling study suggests the economic aftershocks may have traveled far beyond the disaster zone, rippling through Indonesia’s interconnected provincial economies in ways that conventional damage assessments completely miss. Using an interregional computable general equilibrium (CGE) model grounded in Indonesia’s official Interregional Input-Output database, researcher Achmad Rifa’i of the study published in Environmental Challenges has demonstrated that a disaster confined to three provinces can measurably contract national output, consumption, trade, and employment—even in regions untouched by floodwater.

The research arrives at a moment when Indonesia’s disaster exposure is intensifying. Straddling three tectonic plates and the Pacific Ring of Fire, the archipelago faces earthquakes, tsunamis, volcanic eruptions, and, increasingly, climate-driven hydrometeorological events such as the 2025 Sumatra floods. Disasters disrupt production, distribution, trade, and interregional connectivity, transforming what might appear to be local tragedies into systemic economic shocks. Yet most existing studies of Indonesian disaster economics estimate direct losses within single regions, leaving the transmission mechanisms—the supply chains, trade flows, and logistics networks through which shocks propagate—largely unexamined within an integrated national framework.

To fill this gap, the study employs IndoTERM, an interregional CGE model built on the TERM (The Enormous Regional Model) architecture. IndoTERM takes a bottom-up approach: the national economy is represented as an aggregation of regional economies, so changes in one province directly affect others through input-output relationships, domestic trade, and interprovincial supply chains. The underlying database covers 185 sectors and 34 provinces, which the study aggregates into 15 regions and 20 broad sectors—keeping strategically exposed categories such as food crops, plantations, infrastructure, transportation, and manufacturing distinct while balancing computational tractability.

The simulations work by imposing negative productivity shocks on specific sectors through the model’s all-factor augmenting technical change parameter. A 10% productivity decline in a sector means it can produce less output from the same combination of labor, capital, and intermediate inputs—capturing the economic essence of flooded farmland, damaged roads, or disrupted logistics without pretending to replicate exact physical damage. The study is explicit that these are stylized scenarios, not ex-post estimates of the 2025 disaster’s actual losses. The model uses a short-run closure in which capital stocks are fixed, labor is mobile between sectors within regions, and national investment is exogenously determined—meaning regional investment changes represent spatial redistribution rather than aggregate decline.

Four scenarios structure the analysis. The first applies a 10% productivity shock to Aceh’s food crop sector, chosen for agriculture’s vulnerability to flooding and its importance to regional food supply. The second hits North Sumatra’s plantation sector—palm oil and rubber commodities that dominate the province’s trade and feed manufacturing and export chains. The third strikes West Sumatra’s infrastructure sector, reflecting how damage to roads, bridges, and transport networks raises distribution costs across the economy. The fourth combines all three shocks simultaneously, simulating the cumulative effect of a multi-province disaster like the 2025 event.

The results reveal a striking asymmetry. When Aceh’s food crops take the hit, the province’s output contracts by 1.041%, household consumption falls 0.684%, and employment drops 0.356%—but national GDP declines only 0.013%. Food crop production in Aceh serves largely local markets, so the shock has limited interregional reach. North Sumatra’s plantation shock is a different story: provincial output falls 1.261%, consumption drops 1.288%, and exports contract 1.431%, while national GDP slips 0.047% and the plantation sector’s national output falls 0.533%. The sector’s dual role as industrial raw material supplier and export base creates strong backward and forward linkages that propagate the disruption widely.

West Sumatra’s infrastructure shock proves the most locally destructive of the three. Regional output contracts 1.717%, household consumption falls 1.553%, investment plummets 3.213%, and exports decline 2.077%. Because infrastructure is an enabling sector—supporting the movement of goods, services, and production factors—its disruption simultaneously burdens multiple downstream sectors, including resource-based manufacturing, construction, and transportation. Nationally, GDP falls 0.028%, with the transportation sector among the hardest hit, underscoring how connectivity damage amplifies economic loss far beyond the initial destruction.

The combined scenario delivers the study’s most consequential finding: simultaneous shocks across the three provinces cut Indonesia’s GDP by 0.088%, with national exports declining 0.285% and import volumes rising as domestic supply shortfalls are offset from abroad. Sectoral contractions accumulate across plantation, food crop, resource manufacturing, and transportation. The simulations also capture a subtle spatial adjustment: some unaffected provinces—Jambi, Bengkulu, Sulawesi, and Bali-Nusa Tenggara among them—show small increases in output, consumption, and investment as production and trade partially relocate to less disrupted areas. The study cautions that these gains are not net welfare improvements but redistribution effects within a fixed national investment envelope; the country as a whole still loses.

Beyond the numbers, the analysis carries a pointed message for disaster policy. The magnitude of a disaster’s economic impact depends not only on where physical damage occurs but on the strategic position of the affected region and sector within national production networks. A relatively localized disruption to a critical input supplier, export base, or enabling infrastructure component can generate economy-wide consequences, meaning disaster vulnerability is systemic rather than purely geographic. The findings align with international evidence—spatial CGE studies of flooding in China’s Hubei province and cross-border supply chain spillover analyses—but extend them by showing these transmission mechanisms operate powerfully within Indonesia’s domestic interregional economy.

The policy implications are concrete. Because plantation and infrastructure shocks generate the largest spillovers, the study argues that disaster-resilient infrastructure investment, logistics network strengthening, and protection of strategic commodity production centers should top national priorities. It also calls for interregional coordination in risk management: since economic impacts cross administrative boundaries through trade and production linkages, mitigation cannot be left to individual provinces. The study acknowledges its limits—the static model captures only short-run equilibrium responses, the 2016 input-output benchmark may not reflect 2025 economic structures, and the 10% shock is a stylized assumption. Still, as climate change raises the frequency of hydrometeorological disasters across archipelagic economies, the research makes a compelling case that resilience planning must account for the hidden wiring of interregional production networks—before the next flood tests it.

Subject of Research: Interregional transmission of disaster-induced productivity shocks in the Indonesian economy using a CGE model

Article Title: Economic impacts of regional disaster-induced productivity shocks in Indonesia: a scenario analysis of the 2025 Sumatra disaster

Article References: Economic impacts of regional disaster-induced productivity shocks in Indonesia: a scenario analysis of the 2025 Sumatra disaster. (n.d.). https://doi.org/10.1016/j.envc.2026.101657

Image Credits: AI Generated

DOI: 10.1016/j.envc.2026.101657

Keywords: disaster economics, Indonesia, Sumatra floods, computable general equilibrium, interregional input-output, productivity shocks, supply chain spillovers, regional resilience, IndoTERM, infrastructure disruption, plantation sector, disaster risk management