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An exploration of the link between development, economic growth, and natural risk

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  • Hallegatte, Stephane

Abstract

This paper investigates the link between development, economic growth, and the economic losses from natural disasters in a general 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, (i) the probability of disaster occurrence decreases with income; (ii) capital at risk – and thus economic losses in case of disaster -- increases faster than economic growth; (iii) increasing risk-taking reinforces economic growth. Economic growth and improved protection transfer risks from frequent low-intensity events to rarer high-impact events. In this context, average annual losses from disasters grow with income, and they grow faster than income at low levels of development and slower than income at high levels of development. These findings are robust to a broad range of modeling choices and parameter values, to the inclusion of risk aversion, and to variations in the decision-making framework (including the introduction of prospect theory's decision weights, biases in risk perception and myopic expectations). They show that risk-taking is both a driver and a consequence of economic development, that risk taking should not be indiscriminately suppressed, and that the world is very likely to experience fewer but more costly disasters in the future.

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  • Hallegatte, Stephane, 2012. "An exploration of the link between development, economic growth, and natural risk," Policy Research Working Paper Series 6216, The World Bank.
  • Handle: RePEc:wbk:wbrwps:6216
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    1. Risk-taking and economic growth in natural disaster zones
      by Economic Logician in Economic Logic on 2012-11-15 21:28:00

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    2. Alessio D’Amato & Giovanni Marin & Andrea Rampa, 2019. "Environmental Disasters and Electoral Cycle: An Empirical Analysis on Floods and Landslides in Italy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(2), pages 625-651, October.
    3. Fankhauser, Samuel & McDermott, Thomas K. J., 2014. "Understanding the adaptation deficit: why are poor countries more vulnerable to climate events than rich countries?," LSE Research Online Documents on Economics 57620, London School of Economics and Political Science, LSE Library.
    4. Bolier Torres & Jhenny Cayambe & Susana Paz & Kelly Ayerve & Marco Heredia-R & Emma Torres & Marcelo Luna & Theofilos Toulkeridis & Antón García, 2022. "Livelihood Capitals, Income Inequality, and the Perception of Climate Change: A Case Study of Small-Scale Cattle Farmers in the Ecuadorian Andes," Sustainability, MDPI, vol. 14(9), pages 1-20, April.
    5. Stéphane Hallegatte & Jun Rentschler, 2015. "Risk Management for Development—Assessing Obstacles and Prioritizing Action," Risk Analysis, John Wiley & Sons, vol. 35(2), pages 193-210, February.
    6. Cira,Dean A. & Kalra,Nidhi Rajiv & Lempert,Robert J. & Lotsch,Alexander & Mao, Zhimin & Peyraud, Suzanne & Bach,Sinh Tan, 2013. "Ensuring robust flood risk management in Ho Chi Minh city," Policy Research Working Paper Series 6465, The World Bank.
    7. Federica Cappelli, 2020. "Investigating the Origins of Differentiated Vulnerabilities to Climate Change and their Effects on Wellbeing," Working Papers 2020.21, Fondazione Eni Enrico Mattei.
    8. Miao, Qing & Popp, David, 2014. "Necessity as the mother of invention: Innovative responses to natural disasters," Journal of Environmental Economics and Management, Elsevier, vol. 68(2), pages 280-295.
    9. Lee H. Endress & James A. Roumasset & Christopher A. Wada, 2020. "Do Natural Disasters Make Sustainable Growth Impossible?," Economics of Disasters and Climate Change, Springer, vol. 4(2), pages 319-345, July.
    10. Maruyama Rentschler,Jun Erik & Avner,Paolo & Marconcini,Mattia & Su,Rui & Strano,Emanuele & Bernard,Louise Alice Karine & Riom,Capucine Anne Veronique & Hallegatte,Stephane, 2022. "Rapid Urban Growth in Flood Zones : Global Evidence since 1985," Policy Research Working Paper Series 10014, The World Bank.
    11. Mensah, Edouard R. & Filipski, Mateusz J., 2022. "Saving for a rainy day: the impact of natural disasters on savings rates," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322266, Agricultural and Applied Economics Association.
    12. Stéphane Hallegatte & Adrien Vogt-Schilb & Julie Rozenberg & Mook Bangalore & Chloé Beaudet, 2020. "From Poverty to Disaster and Back: a Review of the Literature," Economics of Disasters and Climate Change, Springer, vol. 4(1), pages 223-247, April.
    13. Azreen Karim & Ilan Noy, 2016. "Poverty And Natural Disasters — A Qualitative Survey Of The Empirical Literature," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(01), pages 1-36, March.
    14. Daniel Osberghaus, 2017. "Prospect theory, mitigation and adaptation to climate change," Journal of Risk Research, Taylor & Francis Journals, vol. 20(7), pages 909-930, July.
    15. McDermott,Thomas K.J., 2016. "Investing in disaster risk management in an uncertain climate," Policy Research Working Paper Series 7631, The World Bank.
    16. Sivapuram Venkata Rama Krishna Prabhakar & Kentaro Tamura & Naoyuki Okano & Mariko Ikeda, 2021. "Strengthening External Emergency Assistance for Managing Extreme Events, Systemic, and Transboundary Risks in Asia," Politics and Governance, Cogitatio Press, vol. 9(4), pages 27-42.
    17. Hongxiu Li, 2017. "Innovation as Adaptation to Natural Disasters," Working Papers 1709, University of Waterloo, Department of Economics, revised Nov 2017.
    18. Trond Husby & Henri L. F. de Groot & Marjan W. Hofkes & Tatiana Filatova, 2018. "Flood protection and endogenous sorting of households: the role of credit constraints," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 23(2), pages 147-168, February.
    19. Jiandong Chen & Sishi Rong & Malin Song, 2021. "Poverty Vulnerability and Poverty Causes in Rural China," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 153(1), pages 65-91, January.
    20. Cappelli, Federica, 2020. "Investigating the Origins of Differentiated Vulnerabilities to Climate Change and their Effects on Wellbeing," FACTS: Firms And Cities Towards Sustainability 307987, Fondazione Eni Enrico Mattei (FEEM) > FACTS: Firms And Cities Towards Sustainability.

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    More about this item

    Keywords

    Economic Theory&Research; Hazard Risk Management; Banks&Banking Reform; Insurance&Risk Mitigation; Labor Policies;
    All these keywords.

    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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