Social Impact Economics Policy Mar 1, 2010

And the Poor Get Poorer

The eco­nom­ics of high­er glob­al temperatures.

Based on the research of

Melissa Dell

Benjamin F. Jones

Benjamin A. Olken

Cli­mate change presents poor nations with an unfor­tu­nate para­dox: Though they missed out on the rich­es of the fos­sil fuel era, they appear doomed to suf­fer the worst of its con­se­quences. Many experts pre­dict cli­mate change will drag down nation­al income, but how and where such effects may be felt has been anyone’s guess until recent­ly. Now research sug­gests that heat may hin­der growth in poor nations while leav­ing wealthy ones rel­a­tive­ly untouched.

High tem­per­a­tures are some­times blamed, fair­ly or not, for the lack of devel­op­ment in many poor nations. But since cli­mate change will almost cer­tain­ly make them hot­ter, the issue has tak­en on new impor­tance. New research by Ben Jones, asso­ciate pro­fes­sor of man­age­ment and strat­e­gy at the Kel­logg School of Man­age­ment, Melis­sa Dell, doc­tor­al stu­dent at MIT, and Ben­jamin Olken, a pro­fes­sor also at MIT, found ris­ing tem­per­a­tures in the late twen­ti­eth cen­tu­ry hurt poor coun­tries in myr­i­ad, pre­vi­ous­ly unknown ways, affect­ing every­thing from income to invest­ment, inno­va­tion, and polit­i­cal stability.

But most sur­pris­ing, accord­ing to Jones, was that the warm­ing trend appeared to be affect­ing the rate of eco­nom­ic growth as opposed to sim­ply the lev­el of it.” He had expect­ed a slump in out­put, but not the alarm­ing drop in growth. A peri­od of low out­put can be a tem­po­rary hand­i­cap, but reduced growth can cause last­ing eco­nom­ic dam­age. For exam­ple, a dry year can dev­as­tate har­vests, but if the drought lifts the fol­low­ing year, har­vests can rebound. These drought-year har­vests rep­re­sent lost out­put, but a recov­ery means no last­ing dam­age is done. But if dur­ing the drought the farmer’s cat­tle died for lack of water, her future har­vests will suf­fer, too. She may nev­er see the same yields again. Once you get an effect on growth, you lose your out­put one year and you don’t get it back,” Jones says.

Wide-rang­ing Effects
Agri­cul­ture was not the only vic­tim. Jones notes, We saw effects of tem­per­a­ture changes on indus­tri­al out­put in these coun­tries, effects on aggre­gate invest­ment lev­els, effects on polit­i­cal sta­bil­i­ty — even effects on sci­en­tif­ic outputs.”

Rather than attempt to pre­dict the eco­nom­ic effects of future cli­mate change, Jones and his col­leagues eschewed noto­ri­ous­ly com­plex fore­cast­ing mod­els. Instead they dove into his­tor­i­cal records to deter­mine the effect of heat waves in the past. Five decades of cli­mate records detail tem­per­a­ture and pre­cip­i­ta­tion across the entire globe, data the authors fur­ther refined into nation­al annu­al aver­ages. They also col­lect­ed eco­nom­ic data for 136 coun­tries, tal­lies of sci­en­tif­ic pub­li­ca­tions, and mea­sures of polit­i­cal stability.

Jones and his col­leagues then ground the num­bers through a mod­el, dis­till­ing the effects of tem­per­a­ture and pre­cip­i­ta­tion on each com­po­nent. Though his­tor­i­cal vari­a­tion in aver­age pre­cip­i­ta­tion did not play a major role, the vari­a­tions in tem­per­a­ture had far-reach­ing effects. Poor coun­tries took the most direct hit — GDP per per­son dropped by just over 1 per­cent when the tem­per­a­ture was 1˚ C high­er, while agri­cul­tur­al and indus­tri­al out­put both fell almost 2.5 per­cent. Poor coun­tries also invest­ed less, gen­er­at­ed few­er sci­en­tif­ic pub­li­ca­tions (a mea­sure of inno­va­tion), and became less sta­ble — their gov­ern­ments were almost twice as like­ly to be over­thrown in warmer years.

Each country’s tem­per­a­ture plot­ted against log gross domes­tic prod­uct (GDP) per capi­ta. Note the gen­er­al trend of poor coun­tries at high tem­per­a­tures (upper left of the plot) with rich­er coun­tries at low­er tem­per­a­tures (low­er right of the plot). Also note the change in aver­age tem­per­a­ture for each coun­try between 1950 – 1959 (blue) and 1996 – 2005 (red).

The breadth of these effects is remark­able, but what sur­prised Jones and his col­leagues the most was the unam­bigu­ous mark that ris­ing tem­per­a­tures left on eco­nom­ic growth. Between 1970 and 2000, the one degree of warm­ing reduced annu­al growth in poor coun­tries by as much as 3.2 per­cent. Growth in exports — espe­cial­ly agri­cul­tur­al prod­ucts and con­sumer goods such as cam­eras, shoes, and small appli­ances — also fell off.

Explain­ing the Drop
Jones offers two pos­si­ble expla­na­tions. First, agri­cul­ture dom­i­nates the economies of many poor coun­tries, and farm­ing is par­tic­u­lar­ly sus­cep­ti­ble to the vagaries of the weath­er. It could be that many of the oth­er effects that we see on invest­ment and indus­tri­al val­ue-added and even polit­i­cal sta­bil­i­ty are essen­tial­ly knock-on effects from the prob­lems in the agri­cul­tur­al sec­tor,” Jones speculates.

The sec­ond expla­na­tion has to do with human phys­i­ol­o­gy. There is a lot of lab­o­ra­to­ry evi­dence show­ing that peo­ple are less pro­duc­tive both phys­i­cal­ly and cog­ni­tive­ly in high tem­per­a­tures,” Jones says. Take footwear man­u­fac­tur­ing and their infa­mous sweat­shops as an exam­ple, Jones says. The sweat­shop might get sweati­er in high heat, and peo­ple are cor­re­spond­ing­ly less productive.”

Though poor coun­tries have already suf­fered ill effects from warm­ing, Jones says the next cen­tu­ry could be even more dif­fi­cult. Tem­per­a­tures are expect­ed to rise 3˚ C by 2100, mak­ing the warm­ing to date seem triv­ial. Even if poor coun­tries can ful­ly adjust to new, high­er tem­per­a­tures in just ten years — an opti­mistic assump­tion — their aver­age growth rate will be 0.6 per­cent low­er by 2100. While 0.6 per­cent may seem small, growth rate effects accu­mu­late over time so that the medi­an poor coun­try would have 50 per­cent low­er income by the end of the cen­tu­ry. At the same time, rich coun­tries may con­tin­ue to grow at their his­tor­i­cal rates, fur­ther widen­ing income inequality.

But while rich coun­tries may be able to avoid the direct impact of cli­mate change, they may not be entire­ly immune, Jones adds. An increase in inequal­i­ty may pose prob­lems for the rich­er coun­tries as well,” he says. Low­er pro­duc­tiv­i­ty in poor coun­tries could raise prices across the globe, and polit­i­cal insta­bil­i­ty could send out wave after wave of refugees.

No coun­try, even if they are an island, is tru­ly an island in terms of the glob­al econ­o­my,” Jones says.

Featured Faculty

Benjamin F. Jones

Professor of Strategy; Faculty Director, Kellogg Innovation and Entrepreneurship Initiative (KIEI)

About the Writer

Tim De Chant was science writer and editor of Kellogg Insight between 2009 and 2012.

About the Research

Dell, Melissa, Benjamin F. Jones, and Benjamin A. Olken. 2012. Temperature Shocks and economic growth: Evidence from the last half century. American Economic Journal: Macroeconomics, July, 4(3): 66-95.

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