Effects of temperature shocks on economic growth and welfare in Asia

Abstract

Using Burke, Hsiang and Miguel (2015) framework, we examine non-linear response effects of economic growth to historic temperature and precipitation fluctuations. Our results show that the impact of temperature change associated from RCP8.5 scenario until 2100 is estimated at a 2.7 percentage point drop in global agriculture growth; however, its impact on agriculture growth in developing Asia is substantially higher at a 5 percentage point reduction. Moreover, we confirm that temperature change also affects non-agriculture economic activities such as industrial production and investment decision that might serve as channels through which temperature significantly and non-linearly affects macroeconomic growth. At an aggregate level, relative to the business-as-usual growth scenario under SSP2, the resulting impacts of future temperature change are projected to reduce average global per capita income level by 3.1 percent and average developing Asia per capita income by 11.5 percent in 2100. The increasing weather volatility associated with climate change is likely to pose adverse effects to households’ welfare that may worsen poverty. Recognizing the adverse impacts of temperature change on the economic growth trajectory of countries across different levels of economic development, we empirically analyze policy measures and factors that help countries mitigate consumption volatility driven by climate change related events. Consistent with several micro-level findings, financial inclusiveness helps households mitigate consumption volatility amid temperature change. Likewise, financial openness makes a country more able to cope with temperature shocks, but provided a certain level of financial development. Lastly, government plays a critical role to moderate the negative impact of rising temperature in both output and consumption. Institutions and governance need to be facilitative and proactive to improve the application of investments to adaptation and to direct funds to where it is needed most.