How economic growth and rational decisions can make disaster losses grow faster than wealth

Policy research working paper 5617:

Assuming that capital productivity is higher in areas at risk from natural hazards (such as coastal zones or flood plains), this paper shows that rapid development in these areas—and the resulting increase in disaster losses—may be the consequence of a rational and well-informed trade-off between lower disaster losses and higher productivity. It proposes an economic framework to analyse this possibility, stressing the existence of benefits from investing in at-risk areas, investigating both investments in at-risk locations and risk mitigation choices in a common framework, and highlighting the trade-off between lower disaster losses and higher productivity.

It asserts that natural disasters may become more destructive in the future and that average losses may increase faster than wealth and income; and highlights the important consequences this possibility has on how to design risk management and risk reduction policies and how to deal with climate change.