The economic cost of increased temperatures

Study: Warming episodes hurt poor countries and limit long-term growth.


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Even temporary rises in local temperatures significantly damage long-term economic growth in the world’s developing nations, according to a new study co-authored by an MIT economist.

Looking at weather data over the last half-century, the study finds that every 1-degree-Celsius increase in a poor country, over the course of a given year, reduces its economic growth by about 1.3 percentage points. However, this only applies to the world’s developing nations; wealthier countries do not appear to be affected by the variations in temperature.

“Higher temperatures lead to substantially lower economic growth in poor countries,” says Ben Olken, a professor of economics at MIT, who helped conduct the research. And while it’s relatively straightforward to see how droughts and hot weather might hurt agriculture, the study indicates that hot spells have much wider economic effects.

“What we’re suggesting is that it’s much broader than [agriculture],” Olken adds. “It affects investment, political stability and industrial output.”

Varied effects on economies

The paper, “Temperature Shocks and Economic Growth: Evidence from the Last Half Century,” was published this summer in the American Economic Journal: Macroeconomics. Along with Olken, the authors are Melissa Dell PhD ’12, of Harvard University, who was a PhD candidate in MIT’s Department of Economics when the paper was produced, and Ben Jones PhD ’03, an economist at Northwestern University.

The study first gained public attention as a working paper in 2008. It collects temperature and economic-output data for each country in the world, in every year from 1950 through 2003, and analyzes the relationship between them. “We couldn’t believe no one had done it before, but we weren’t really sure we’d find anything at all,” Olken says.

By looking at economic data by type of activity, not just aggregate output, the researchers concluded there are a variety of “channels” through which weather shocks hurt economic production — by slowing down workers, commerce, and perhaps even capital investment.

“If you think about people working in factories on a 105-degree day with no air conditioning, you can see how it makes a difference,” Olken says.

One consequence of this, borne out in the data, is that the higher temperatures in a given year affect not only a country’s economic activity at the time, but its growth prospects far into the future; by the numbers, growth lagged following hot years.

To see why, Olken suggests, first think of a dry year for vegetables in your backyard garden: The bad weather would hurt the plants, but if the weather is reasonable the following year, the backyard crop would return to its normal level. Now contrast that with problems that affect, say, industrial and technological development, and capital investment; temperature shocks limiting those activities can compound over time.

“If you think about economic growth, you build on where you were last year,” Olken explains. For longer-term industrial or technological projects, he adds, “If it’s that kind of activity that’s lost, then it affects the country’s long-run growth rate, [and it’s] not a one-off hit.”

Political change in the weather

Olken, Dell and Jones also integrated data about forms of government into the study, and found that temperature shocks are associated with an increase in political instability. A 1-degree-Celsius rise in a given year, they found, raises the probability of “irregular leader transitions,” such as coups, by 3.1 percentage points in poor countries. In turn, the authors write, “poor economic performance and political instability are likely mutually reinforcing.”

Olivier Deschenes, an economist at the University of California at Santa Barbara, calls the study “an important finding because most of the prior research on the economic impacts of climate change have focused on a few sectors of the economy, predominantly the agricultural sector.” By contrast, he notes, the broader finding of the current paper matters “because the growth rate is a key measure of the economic success of a nation and the standard of living of its population.”

Deschenes, who also conducts research on the economic and health effects of temperature changes, suggests that the “next step” for scholars “is to identify adaptation strategies that can moderate the negative impacts of global climate change in the coming decades.”

As Olken observes, the study does not try to account for all the possible problems that could be generated by long-term climate change, such as rising oceans, floods or increased storms. Still, he adds, the paper does suggest some general points about the economic impact of a warming atmosphere. It is vital, he says, to “think about the heterogeneity of the impact between the poor and rich countries” when leaders and policymakers map out the problems the world may confront in the future.

“The impacts of these things are going to be worse for the countries that have the least ability to adapt to it,” he adds. “[We] want to think that through for the implications for future inequality. It’s a double whammy.”


Topics: Climate change, Developing countries, Economics, Politics, Social sciences, Weather

Comments

The UK journal "The Lancet" had a series of articles about the medical impact of rising temperatures back in the 1990s. As an Englishman I have read about "ague" and "tertian fevers" as a schoolboy back in the 1950s. As an old man I urge better scientists than myself to go in for Genetic Engineering programs to breed mosquitoes which are inimical to the malaria parasite, then release them into the wild.
Studies like this one are virtually all fatally flawed. Land temperatures have been going up since about 1850 - the end of the Little Ice Age. Have things been getting worse over the last 150 years, or did we hit a Panglossian sweet spot thirty years ago? Different countries have different average temperatures. If one country averages 88 degrees F, and another averages 92, do they both suffer the same when the average increases two degrees? That still leaves the former cooler than the latter. How is that explained? And the increase in coups? Does anyone really believe that's a significant number? Seriously? An increase of 3.1%? Are we to assume that the decimal place is significant? Good God! I recall from grad school the saying: There is no science in social science. Obviously, these people set out with an agenda. Can you imagine that they would seek to publish the opposite results? They set out to show the harm done by climate change (you know they did), and they 'succeeded.'
JonFrum: One thing that is certain is that you did not read the paper. The paper examines temperature shocks around the trend line: "These results are identified using short-run fluctuations in temperature and precipitation, whereas the long-run effects of climate may be different." The temperature effect in poor countries are significant at the 1% level. The authors include a detailed section examining the robustness of the model and describe the mechanisms that explain the results. The increase in change in leadership is not 3.1% but an increase by 3.1 percentage points. This is a large increase, since the baseline probability of change of leadership is low. Finally, if you believe the data suggests other conclusions or that there is a hidden agenda, the authors make their data set avaialble on the AEA web site. Feel free to perform and publish your own analysis.
Are we to say that climate change does not have any POSITIVE impact? This implies that it is all negative. I can see where an increase in temperatures would lengthen the growing season in certain areas allowing the land to be farmed longer throughout the year, thereby increasing crop production. Why is this NEVER mentioned? But, be that as it may, we MUST learn to live with climate change because we ALL KNOW that the climate will NEVER stay constant - in fact, there is no such thing as constant. I can remember not too many years ago when California hadn't seen much rain in a NUMBER of years - that period is gone. I am quite happy that the past few years have been warmer than average - it has meant MUCH LOWER HEATING costs here in New England where heating oil runs around $3.50 a gallon these days. The biggest problem with "poor countries" is that they have not learned to adapt and, if we simply give them money, they will continue to NOT LEARN TO ADAPT. Key word: ADAPT
Whenever I hear of "economic impact of global warming," I'm puzzled. We are suffering crop failures this year from something that's simply an unusually warm first half of the year. If warming will really proceed from here, it seems likely we'll have some serious shocks to food supply. Two or three years of consecutive crop failures could cause mass starvation. It's not just a matter of "wow, it's hot in here, and people aren't as productive without air conditioning." Also, what indicators are used to measure growth? To be a proper measure, we need to factor out money spent simply holding our ground. For example, Katrina reconstruction money is counted as part of GDP, when the effect of spending it isn't actual growth, but rather recovery to a pre-disaster baseline. If we're spending more money to cope with warming effects, that will boost apparent GDP without actually giving any of the benefits of real growth to citizens.
Did the authors of the paper look at adverse effects on economy by trying to mitigate climate change. Off the top, biofuels programs have had terrible world wide effect. Ethanol from corn in the U. S. consumes 16 percent the world's corn crop causing huge corn price increases and shortages. Substituting solar and wind for economical coal, oil, and natural gas as means of generating electricity has to be devastating for poor countries. If this study did not consider these factors, I would think it is a poor effort to justify trying to mitigate climate change in pursuit of government dollars that is waiting to pay off those who do their bidding.
"If one country averages 88 degrees F, and another averages 92, do they both suffer the same when the average increases two degrees?" I'm puzzled by why you're asking this question. The data says an average decrease in rate of economic growth of 1.3 percentage points per degree C change. That's an average, so no, you don't expect any single country to be at the average. "That still leaves the former cooler than the latter. How is that explained?" What do you think needs explanation? A country with an average temperature of 88F would be planting crops adapted for that temperature and using farming practices adapted for that characteristic temperature and rainfall; a country with average temperature 92F would be planting crops adapted for that temperature and those conditions and rainfall. I would expect both would do worse if the average temperature changes. The data is the rate of change, not the absolute economy. Maybe a cooler country may start out and stay at a higher level- so?
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