Sebastian Acevedo, Mico Mrkaic, Natalija Novta, Marcos Poplawski-Ribeiro, Evgenia Pugacheva and Petia Topalova, with contributions from Manoj Atolia, Claudio Baccianti, Ricardo Marto, and

support from Gavin Asdorian, Olivia Ma, Jilun Xing and Yuan Zeng

THE EFFECTS OF WEATHER SHOCKS ONECONOMIC ACTIVITY: HOW CAN LOW-INCOME

COUNTRIES COPE?

Average global temperature from 20,000 BCE to present(Degrees Celsius)

2

+1.8°C

+3.7°C

2100

Sources: Intergovernmental Panel on Climate Change (IPCC); Marcott and others (2013); Matsuura and Willmott (2007); Shakun and others (2012); and IMF staff calculations.

15

16

17

18

19

20

21

22

23

–20,000 –18,000 –16,000 –14,000 –12,000 –10,000 –8,000 –6,000 –4,000 –2,000 0 2,000

Average global temperatureUnmitigated climate change (RCP8.5) scenarioIntermediate (RCP4.5) scenario

Most mammoths go extinct

Last glacial period ends

The Great Pyramid completed

Industrial revolution begins, ca.1760

1920

Early farming begins

–0.5

0.0

0.5

1.0

1.5

1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

The warming coincides with increasing GHG concentration

3

Global Temperature Forcings(Land and ocean temperature, deviations from 1880–1910 avg., degrees Celsius)

Temperature

GHG

Natural

Human

Sources: Carbon Dioxide Information Analysis Center; National Aeronautics and Space Administration (NASA) Goddard Institute for Space Studies; Roston and Migliozzi (2015); and IMF staff calculations.

Natural factors:• Orbital changes• Solar output• Volcanic activity

Human factors:• Land use• Ozone emissions• Aerosols emissions• GHG emissions

Does warming matter for the economy?

• Annual data– GDP, temperature and rainfall

– 180 countries over 65 years.

• Changes in weather exogenous estimate causal links

• Our specification can accommodate nonlinearities:

ln(yt+h) – ln(yt) = αT + βT2 + region-year & country fix. eff.

4

What do we find?

5

• Find a robust concave relationship between GDP per capita and temperature.

• Temperature is exogenous.

• Low temperatures can have a positive effect.

• High temperatures strong negative impact.

• Optimal temperature ~13-15 °C

Effect of temperature on growth

Temperature

–15

–10

–5

0

5

10

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Per

cent

Average effect

What do we find?

6

• Find a robust concave relationship between GDP per capita and temperature.

• Temperature is exogenous.

• Low temperatures can have a positive effect.

• High temperatures strong negative impact.

• Optimal temperature ~13-15 °C

Effect of temperature on growth

Temperature

–15

–10

–5

0

5

10

–3

–2

–1

0

1

2

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Per

cent

Per

cent

Marginal effect (left scale)

Average effect (right scale)

024681012141618

–3

–2

–1

0

1

2

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Per

cent

of c

ount

ries

Per

cent

Most AEs not affected in the medium term

7

Distribution of Advanced Economies across temperature

Estimate 90 percent confidence intervalPercent of countries (right scale) Median temperature

Iceland

Germany

Singapore

USA

• Find a robust concave relationship between GDP per capita and temperature.

• Temperature is exogenous.

• Low temperatures can have a positive effect.

• High temperatures strong negative impact.

• Optimal temperature ~13-15 °C

024681012141618

–3

–2

–1

0

1

2

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Per

cent

of c

ount

ries

Per

cent

Significant negative effect forthe median emerging market economy

8

Russia

Brazil

Bahrain

Egypt

Estimate 90 percent confidence intervalPercent of countries (right scale) Median temperature

Distribution of Emerging Market Economies across temperature

• Find a robust concave relationship between GDP per capita and temperature.

• Temperature is exogenous.

• Low temperatures can have a positive effect.

• High temperatures strong negative impact.

• Optimal temperature ~13-15 °C

024681012141618

–3

–2

–1

0

1

2

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Per

cent

of c

ount

ries

Per

cent

Even greater negative effect forthe median low income country

9

MongoliaMauritania

BangladeshNigeria

Estimate 90 percent confidence intervalPercent of countries (right scale) Median temperature

Distribution of Low Income Countries across temperature

• Find a robust concave relationship between GDP per capita and temperature.

• Temperature is exogenous.

• Low temperatures can have a positive effect.

• High temperatures strong negative impact.

• Optimal temperature ~13-15 °C

In sum, the effect of a 1°C increase in temperatureis uneven across the globe …

10

… with adverse effects concentrated in LICs and EMs where the majority of world’s population currently lives

11

Further Findings• Temperature effects are long lasting…• …and work through several channels

– Lower productivity– Reduce investment– Reduce effective labor supply

• Buffers and sound policies can help.• Climate adaptation can also help, but…

12

…but, LICs have low adaptation capacity

13Sources: Notre Dame Global Adaptation Index; and IMF staff calculations.

Also, LICs have not caused the problem

14

• CO2 emissions in LICs are very small both in total as well as per capita.

• In addition, LICs have started increasing their emissions much later than AE’s.

• Since CO2 stays in the atmosphere for centuries, the aggregate contribution of LICS is tiny. 0

2468

1012

AdvancedEconomies

EmergingMarket

Economies

Low IncomeCountries

Average CO2 emissions per capita, 2014(Metric tons)

Sources: Carbon Dioxide Information Analysis Center; and IMF staff calculations.

In conclusion

• Low income countries– will suffer disproportionate economic damages from warming,– and have contributed little to the problem.

• Adaptation can help, but capacity to adapt in LICs is limited. • International community must play a key role in helping LICs cope with

climate change– Climate change related transfers to LICs will help alleviate a negative externality and

are also a moral imperative.– Only a concerted global effort to curb emissions can limit the long-term risks of

climate change.

15