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

The link between development and disaster losses is investigated in a normative framework. The paper innovates in modeling risk taking and its benefits. Under undemanding conditions, it is optimal for (i) disaster probability to decrease with income; (ii) the relative exposure to risk, i.e. the share of capital located in at-risk areas, to increase and the losses per event to increase faster than economic growth; and (iii) the risk, i.e. expected losses, to grow faster than income at low levels of development and slower than income at high levels of development. Increasing exposure to risk is both a consequence and a driver of economic growth and reducing disaster risk through reduced exposure is costly.