An economic chill

7/15/2009 - A rising tide is said to lift all boats. Rising global temperatures, however, may lead to increased disparities between rich and poor countries, according to a study by Kellogg Associate Professor Benjamin F. Jones, who evaluated the impact of climate change on growth.

After examining worldwide climate and economic data from 1950 to 2003, Jones and his co-authors concluded that a one-degree Celsius rise in temperature in a given year reduces economic growth by an average of 1.1 percentage points in the world's poor countries but has no measurable effect in rich countries.

“To the extent that future experiences are similar to what we’ve seen in the last 50 years, one would expect that poor countries will face substantial economic costs from temperature increases,” Jones said.

Jones’ analysis is contained in "Climate Shocks and Economic Growth: Evidence from the Last Half Century," a paper co-authored by Benjamin A. Olken, an associate professor of economics at the Massachusetts Institute of Technology and MIT economics graduate student Melissa Dell. The paper is currently under review for publication.

The precise reasons why higher temperatures lower economic output are likely to be complex, but the study’s results suggest the importance of the temperature’s impact on agricultural output. The data also provides evidence for a relationship between temperature and industrial output, investment, research productivity and political stability.

Growing hot-cold divide
It has long been observed that hotter countries, such as those in sub-Saharan Africa and parts of Latin America, tend to be poorer than cooler countries in North America and Europe; the main exceptions are hot, rich Middle East countries with oil reserves and cold, poor Communist or former Communist states like North Korea and Mongolia. What contemporary scholars have debated, however, is whether climate has a significant effect on a country's economy today or whether it is institutions and policies that now
solely drive prosperity.

To conduct their research, Jones and his co-authors used existing data sets of economic growth and productivity – everything from gross domestic product to the rate of publication of scientific papers – and combined them with country-by-country temperature and precipitation data from 1950 to 2003.

Jones and his co-authors conclude that rising temperatures do substantially reduce economic output and growth rates in both agricultural and industrial sectors, but only in countries that are already poor. Higher temperatures also reduce investment and innovation but, again, only in poor nations.

Rising temperatures may also have political consequences, the authors found. A one-degree rise in temperature in poor countries raises the likelihood of a so-called irregular leader transition (i.e., a coup) by 3.9 percentage points.

Jones acknowledges that the long-term impact of temperature change might be different from the short-term effect since countries may adapt to a particular climate over time. But the research found no such adaptation over a 10-year time horizon.

Should the future effects mirror recent history, world policy makers should be prepared for a widening gap between rich and poor countries as the globe continues to warm, the authors say.