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An Exploration of the Link Between Development, Economic Growth, and Natural Risk

  • Stéphane Hallegatte

    (The World Bank, USA)

This paper investigates the link between development, economic growth, and the economic losses from natural disasters in a normative analytical framework, with an illustration on hurricane flood risks in New Orleans. It concludes that, where capital accumulates through increased density of capital at risk in a given area, it is optimal for (i) the probability of disaster occurrence to decrease with income; (ii) the capital at risk – and thus the economic losses in case of disaster – to increase faster than economic growth; (iii) the average annual losses to grow faster than income at low levels of development and slower than income at high levels of development. In that case, increasing risk-taking reinforces economic growth, and improving protections transfer risks from frequent low-intensity events to rarer high-impact events. These findings are robust to a broad range of modeling choices and parameter values, and to the inclusion of risk aversion. Risk-taking is both a driver and a consequence of economic development, and should not be indiscriminately suppressed. The observation of a trend in disaster losses should not be confused with the presence of excessive risk taking. In a descriptive framework, suboptimal decision-making (the introduction of prospect theory's decision weights, biases in risk perception and myopic expectations) may amplify these trends and lead to excessive or insufficient risk taking. In all instances, the world is very likely to experience fewer but more costly disasters in the future.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2013.29.

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Date of creation: Mar 2013
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Handle: RePEc:fem:femwpa:2013.29
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  1. Silvio Schmidt & Claudia Kemfert & Peter Höppe, 2008. "Tropical Cyclone Losses in the USA and the Impact of Climate Change: A Trend Analysis Based on a New Dataset," Discussion Papers of DIW Berlin 802, DIW Berlin, German Institute for Economic Research.
  2. Nicola Ranger & Stéphane Hallegatte & Sumana Bhattacharya & Murthy Bachu & Satya Priya & K. Dhore & Farhat Rafique & P. Mathur & Nicolas Naville & Fanny Henriet & Celine Herweijer & Sanjib Pohit & Jan, 2011. "An assessment of the potential impact of climate change on flood risk in Mumbai," Climatic Change, Springer, vol. 104(1), pages 139-167, January.
  3. Henriet, F. & Hallegatte, S. & Tabourier, L., 2011. "Firm-Network Characteristics and Economic Robustness to Natural Disasters," Working papers 355, Banque de France.
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  7. Hallegatte, Stephane & Hourcade, Jean-Charles & Dumas, Patrice, 2007. "Why economic dynamics matter in assessing climate change damages: Illustration on extreme events," Ecological Economics, Elsevier, vol. 62(2), pages 330-340, April.
  8. Thomas Fomby & Yuki Ikeda & Norman V. Loayza, 2013. "The Growth Aftermath Of Natural Disasters," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(3), pages 412-434, 04.
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  11. Loayza, Norman & Olaberria, Eduardo & Rigolini, Jamele & Christiaensen, Luc, 2009. "Natural disasters and growth - going beyond the averages," Policy Research Working Paper Series 4980, The World Bank.
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  14. Antonio Ciccone, 1998. "Agglomeration-effects in Europe," Economics Working Papers 499, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 1999.
  15. Hallegatte, Stephane, 2012. "A cost effective solution to reduce disaster losses in developing countries : hydro-meteorological services, early warning, and evacuation," Policy Research Working Paper Series 6058, The World Bank.
  16. Lall, Somik V. & Deichmann, Uwe, 2009. "Density and disasters: economics of urban hazard risk," Policy Research Working Paper Series 5161, The World Bank.
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  19. Hallegatte, Stephane & Shah, Ankur & Lempert, Robert & Brown, Casey & Gill, Stuart, 2012. "Investment decision making under deep uncertainty -- application to climate change," Policy Research Working Paper Series 6193, The World Bank.
  20. Joanne Linnerooth-Bayer & Koko Warner & Christoph Bals & Peter H�ppe & Ian Burton & Thomas Loster & Armin Haas, 2009. "Insurance, Developing Countries and Climate Change," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 34(3), pages 381-400, July.
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  26. repec:reg:rpubli:282 is not listed on IDEAS
  27. Susan Hanson & Robert Nicholls & N. Ranger & S. Hallegatte & J. Corfee-Morlot & C. Herweijer & J. Chateau, 2011. "A global ranking of port cities with high exposure to climate extremes," Climatic Change, Springer, vol. 104(1), pages 89-111, January.
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