Temperature Shocks and Economic Growth

Hollywood screenwriters and climate economists have one thing in common: they both use natural disasters to explore relationships.

In a forthcoming article, Melissa Dell, Benjamin F. Jones, and Benjamin A. Olken look at the relationship between higher temperatures and economic activity. Drawing on a large dataset of historical temperature patterns for 125 countries, they find that higher temperatures substantially reduce economic growth and that these reductions occur in rates of growth, not just annual levels of output.

After performing a number of tests of robustness, they estimate that a one degree Celsius rise in temperature reduces economic growth rates by 1 to 1.5 percentage points. Interestingly, the negative impact of climate change was almost completely limited to poorer countries. Rich countries showed no signs of decreased economic growth as a result of higher temperatures.

The authors distinguish between two impacts on economic activity. First, they note that higher temperatures can impact a country’s level of economic output. For example, hotter summers might lower agricultural yields. But temperatures can also influence a country’s ability to grow by affecting the “investments or institutions that influence productivity growth.” Dell, Jones and Olken find that countries encounter greater political instability under temperature changes as the population responds to lower agricultural and industrial output levels.

Dell’s, Jones’s and Olken’s research offers insight into the role of temperature in economic development and how future warming might impact wealth around the world. Their work adds to a growing literature that points to large differences between how rich and poor countries are affected by climate change. Moreover, the impact of temperature change on economic growth is relevant to the assumptions that underlie climate impact models at the heart of policy initiatives guiding our global response to climate change.

Feature photo: cc/Sameer Vasta