Impacts of Climate Volatility on Long-run Economic Growth: Cross-Country Growth Regressions

Abstract

Climate change has recently been the central issue of debate for it affects different countries in different dimensions. The potential economic impacts of climate in particular, have focused the attention of policy makers all over the world. The cross-country evidences show that climatic variation affects country’s national income and hence overall economic performance. Moreover, the effects of gradual climate change and extreme weather events in the recent past have undermined progress in the alleviation of poverty and food insecurity. Though empirically the levels of climate variables are used to investigate the effect of climate variability on economic growth, economic growth may be subject to volatility of climate variables in a given year in addition to the change in the levels of climate variables. The purpose of this paper is to investigate how climate variability within the same year in a given country affects the long-run economic growth of the country using cross-sectional regressions. By using annual temperature and precipitation data over a period of 1983-2002 for a panel of 166 countries, the study assessed the impact of climate volatility on long-run economic growth. The result on the cross-sectional relationship between mean temperature and economic growth rate shows that a growth rate falls as temperature rises. The regression result for the effects of climate volatility shows that the more volatile climate hugely affects the economic growth of a country. Our analysis also confirms that the hotter countries tend to be poorer than the warmer counterparts. The impact of one degree Celsius average temperature increase in year on the long-run economic growth of poor countries is a 1.5% decrease in economic growth. It has also been found that poor countries grow faster than rich ones so that there is economic convergence across countries.

Keywords: Climate change, Economic Growth, Climate volatility, temporal variation