An Empirical Analysis of the Effects of Climate Variables on National Level Economic Growth

The influence of climate on economic growth is a topic of growing interest. Few studies have investigated the potential role that climate hazards and their cumulative effects have on the growth prospects for a country. Due to the relatively stationary spatial patterns of global climate, some regions and countries are more prone to climate hazards and climate variability than others. This study uses a precipitation index that preserves the spatial and temporal variability of precipitation and differentiates between precipitation maximums (such as floods) and minimums (such as droughts). The authors develop a year and country fixed effects regression model to test the influence of climate variables on measures of economic growth and activity. The results indicate that precipitation extremes (floods and droughts) are the dominant climate influence on economic growth and that the effects are significant and negative. The drought index is associated with a highly significant negative influence on growth of growth domestic product, while the flood index is associated with a negative influence on growth of gross domestic product and lagged effects on growth. Temperature has little significant effect. These results have important implications for economic projections of climate change impacts. In addition, adaptation strategies should give new consideration to the importance of water resources given the identification of precipitation extremes as the key climate influence on historical growth of gross domestic product.