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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.

Suggested Citation

  • 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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    References listed on IDEAS

    as
    1. Henriet, Fanny & Hallegatte, Stéphane & Tabourier, Lionel, 2012. "Firm-network characteristics and economic robustness to natural disasters," Journal of Economic Dynamics and Control, Elsevier, vol. 36(1), pages 150-167.
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    Blog mentions

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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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    Cited by:

    1. Noy, Ilan & Karim, Azreen, 2013. "Poverty, inequality and natural disasters – A survey," Working Paper Series 2974, Victoria University of Wellington, School of Economics and Finance.
    2. 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.
    3. repec:taf:jriskr:v:20:y:2017:i:7:p:909-930 is not listed on IDEAS
    4. McDermott,Thomas K.J., 2016. "Investing in disaster risk management in an uncertain climate," Policy Research Working Paper Series 7631, The World Bank.
    5. 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.

    More about this item

    Keywords

    Economic Theory&Research; Hazard Risk Management; Banks&Banking Reform; Insurance&Risk Mitigation; Labor Policies;

    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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