Aug 27, 2012

Temperature Shocks and Economic Growth

This paper examines the historical relationship between temperature fluctuations and economic growth. We find substantial effects of temperature shocks, but only in poor countries. In poor countries, a 1◦C rise in temperature in a given year reduces economic growth by 1.3 percentage points on average. The estimates suggest that climate change may affect the rate of economic growth, rather than just the level of output. Moreover, estimates using medium-run shifts from 1970 to 2000 rather than annual variation produce similar though noisier estimates, suggesting that adaptation may not undo these effects in the medium term.  
By focusing on fluctuations in temperature, we seek to inform old debates over temperature’s role in economic development and new debates over future impacts of climate change. Our findings of large effects of temperature shocks on poor countries provide counterevidence to claims that temperature does not influence national production. While higher temperatures reduce agricultural output in poor countries, we also find that they lead to reductions in industrial output and political stability. These results underscore the breadth of mechanisms underlying the climate-economy relationship and emphasize channels not usually considered in the aggregate climate literature.
Source: A working paper by Dell, Jones, and Olken (August 2012). The full title is "Temperature Shocks and Economic Growth: Evidence from the Last Half Century" (Forthcoming, American Economic Journal: Macroeconomics).

The article has a good discussion on the channels through which temperature affects growth. 

I am on slippery terrain here. The R squares are not relatively high (most of them less than 0.20). One of the key issues in the model is how well the dummy for being a poor country captures many other variables that affect economic growth. Think about countries that are poor but have high rates of economic growth. The other concern is the intermediate channels through which temperature affects growth, historical institutions, for example (the authors talk about that). 

The paper is thought provoking (like everything Melissa Dell has written) and the main idea that high temperature affects current productivity is very plausible. In fact some countries such as Haiti might be in a circle of high temperature, low productivity, and low growth (of course, Haiti is complex). 

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