UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIET NAM THE NETHERLANDS VIET NAM – THE NETHERLANDS PROGRAMME FOR MASTER IN DEVELOPMENT ECONOMICS ------------------------------------------- THE EFFECT OF CLIMATE FLUCTUATION ON OUTPUT IN DEVELOPING COUNTRIES By NGO KHANH LIEN HUONG (VIETNAM) Academic supervisor Dr. PHAM KHANH NAM This paper was submitted in partial fulfillment of the requirements for Master’s degree in Development Economics Ho Chi Minh City, July 2012 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIET NAM THE NETHERLANDS VIET NAM – THE NETHERLANDS PROGRAMME FOR MASTER IN DEVELOPMENT ECONOMICS ------------------------------------------- THE EFFECT OF CLIMATE FLUCTUATION ON OUTPUT IN DEVELOPING COUNTRIES By NGO KHANH LIEN HUONG (VIETNAM) Academic supervisor Dr. PHAM KHANH NAM This paper was submitted in partial fulfillment of the requirements for Master’s degree in Development Economics Ho Chi Minh City, July 2012 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ACKNOWLEDGEMENTS This paper has could not be started and completed without the help of several individuals who supported me directly and indirectly. First of all, I appreciate my supervisor Dr.
Pham Khanh Nam so much for his enthusiastic assistance. He has not only given me genuine intellectual guidance in academy but also encouraged me a lot through the analysis process. It is so hard for me to complete this research without his profound advice. Thus, I am very grateful to him.
I am also thankful to Dr. Nguyen Trong Hoai for sharing his knowledge and practice experiences in researching which are very useful for this study. I also thank all my classmates in class MDE17 for sharing their advantage discussions on econometric techniques, especially Nguyen Thi Thuy Thanh. Last but not least, I would like to thank my parents, and all my other family members for their concern and invaluable moral support.
~ i~ LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT Climate change is one of the critical problems in recent years on over the world. It impacts on many aspects of human life, that has a lot of researches and evident. This paper has analysis the effect of climate change on the aggregate output particularly with two typical elements: temperature and precipitation in developing countries. Besides, control variables proxy unobserved effects at country level and country fixed effects are also counted in the relationship of temperature and precipitation with the country’s output.
The finding shows that both temperature and precipitation have significant influence on the GDP of developing countries. It is specially that temperature affects the GDP in U-shaped, while precipitation affects the GDP in hump-shaped. Moreover, this paper also conducts the relationship of temperature and precipitation with the output by two characteristics: “hot country” and “agricultural country”. The results are also significant; however, the relationship share cannot be identified.
Further, this research suggests some adaptive recommendations for production to changing of climate. Key word: climate change, output, panel data, developing countries. ~ ii~ LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com TABLE OF CONTENTS CHAPTER 1: INTRODUCTION……………………………………………………….5 CHAPTER 2: LITERATURE REVIEW………………………………………………6 2. Descriptive statistics………………………………………………………………28 ~ iii~ LUAN VAN CHAT LUONG download : add luanvanchat@agmail.
Non parametric analysis…….…52 ~ iv~ LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com List of Tables Table 3.1: Variable descriptions…………………………………………………………26 Table 4.1: Descriptions Statistic…………………………………………………………29 Table 4.3: Temperature and Precipitation - Estimation Result…………………….4: Estimation result with hot countries dummy………………………….5: Estimation result with agriculture countries dummy……………………….42 List of Figures Figure 2.1: The way climate fluctuation affects the country’s output………….1: Histogram of temperature – precipitation – GDP per capita………….2: Average temperature trend……………………………………………….3: Average precipitation trend……………………………………………….4: Average temperature vs Average GDP per capita………………………….5: Average precipitation vs Average GDP per capita…………………………33 ~ v~ LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 1: INTRODUCTION 1. Problem statement Increasing output is one of the most important targets of most of the countries, especially developing countries. The output of a country has been identified in the function of elements such as human capital, physical capital, and technology. However, the changing of climate belongs to environment elements in recent years, which is considered that it has a critical effect on country’s output.
Further, the climate change has economically effected on human health, life and production in agricultural countries, which makes the studies more attractive and interesting. Human activities have already changed the atmospheric characteristics such as rainfall, global warming, sea level rise, increasing global carbon dioxide (CO2) emissions and the thinning of ozone layer. Those climate changes happening constantly as a big problem all over the world have impacted upon many aspects of human life such as natural ecosystem, biodiversity, human health, landscape, socio-economic, etc. There are obvious evidences that climate change affects human life (IPCC 2007).
For example, expanding water stress, increasing temperature but reducing the rainfall has caused a decline in agricultural production in Asian developing countries while demands for production are increasing more and more. Climate change has affected the supply, demand, and quality of water resources. For instance, Northern Pakistan has been facing water shortages because of expanding winter period over the Himalayas during last 40 years; China is facing up to the drying up of rivers and lake in the dry weather while 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com water need is increasing. Likewise, In India, Bangladesh, and Nepal, water shortage is aggravated by climate change; consequently it has leaded to rising urbanization, and using water inefficiently.
Contrary to the water shortage, glaciers are melting rapidly in Central Asia, which has threatened human settlement, cities, forest ecosystem, and the rising of water level caused the disasters of landslides. The 1997/98 El Nĩno event in Philippines and Indonesia fired around 2 million ha of peatlands, 9.7 million hectares of forest (IPCC 2007). That is the extreme climatic event caused substantial fatalities and economic losses. Climate change puts over 50% biodiversity of the Asia at risk, so many species could be fragmented or extirpated such as pine forest in Korea or beech tree in Japan (IPCC 2007).
Other critical sector relating to climatic influence is human health. Siberia has been reported a big number of deaths associated with heatwaves, while there is a spreading disease like diarrhoeal, cholera, malaria, etc. due to poor drinking water and sewerage system in flood season. Malnutrition and Diarrhoeal are posed as substantial risk of human health in year 2000 at Bangladesh, India, Nepal, Maldives, and Myanmar under climate change (IPCC 2007).
Specially, the effects of climate change on the countries having high temperature climate and agriculture share has been considered profoundly. Those heavy effects are explained that hot climate countries are sensitive to any small change of temperature, while agricultural countries are sensitive to the changing of precipitation. Development activities of human are continuously creating greenhouse gas, one of the causes of climate chance, although they also contribute to enhancing adaptation greatly and decreasing vulnerability of vulnerable sectors to the changing of climate. In general, climate change affects human life through different 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com channels such as societal (e.
migration, civilization, culture), psychological (e. mental illness, cognition), physiological (e. nutrition, starvation), and economic (e. energy, manufacturing) aspect.
In recent years, there are a lot of researches working on influences of climate change. The most interesting sector is the climate change’s economic consequences. Climate change is the result of greenhouse gas emission from human activities. Hence, finding out the relationship between climate change and output will help suggest the policies or adaptation strategies in socio-economic sectors to control the effects of climate change within each country.
Furthermore, we can adjust the changes of climate at our will toward increasing output. For instance, the Kyoto Protocol’s main target is to balance greenhouse gas emission (CO2, CH4, N2O, SF6…) in our environment to prevent dangerous effects from harming the existence and improvement of the human beings. This required developed countries to reduce greenhouse gas, and submit annual activity reports; meanwhile, developing countries are encouraged to joint this protocol. Existing studies about the relationship between climate change and the aggregate output have been quite rare until now.
Most of them were conducted for the countries of OECD (Organization for Economic Cooperation and Development), which are strongly impacted by temperature because they belong to the relatively low temperature areas. For some other countries, studies mainly focused on the suffering of separate sectors under climate change such as food production, fish catching, forest, or agriculture. Moreover, other published researches estimate the effect of climate change on economic growth 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com based on CO2 level. My thesis mainly examines the effects caused by the fluctuation of climate, temperature and precipitation on aggregate GDP of the developing countries with the data from 1990 to 2006.
Research Objective The overall research objective of my study is to investigate the impact of climate fluctuation on country’s aggregate output with individual national characteristics within developing countries. I am going to consider the economic impact of climate change in the short run on output under two typical elements: temperature and precipitation. Besides, my study also discusses some national characteristics, called control effects such as Inflation, GDP per capita growth, population density, urban population, and unemployment. Moreover, according to Del (Dell et al, 2008), developing countries move toward to be more agricultural and hotter.
The reason is pointed out that developing countries focus on agriculture which requires low capital, technology, labor skill level (Tol, 2002). Furthermore, high temperature is advantage condition for increasing pests, pathogens, etc which depreciates agricultural (Masters and McMillan, 2001; and John, 2009). Therefore, my objective also conducts the effect of climate fluctuation on developing countries with two special characteristics “hot” and “agriculture”. My research questions are “Is the relationship between temperature, precipitation and the output of developing countries significant? - Do the impacts of temperature and precipitation vary across “hot country” and “agriculture country”? 4 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com This thesis considers the relationship between temperature, precipitation and output, which is divided into five chapters.
Chapter 1 introduces the problem statement and research objective. The Reviewing of empirical studies about the influence of climate change on the output is presented in Chapter 2 – Literature review. Chapter 3 shows how I collect data for this paper and set up the model. Chapter 4 reports the economic result of regression, and the discussion about comparing with other literature.
The last chapter, Chapter 5 is used for conclusion and recommendation. Chapter summary This chapter has introduced the problem statement that the effect of climate change on the world’s economy has been happening constantly. Thus, the changing of climate is essential concerned topic, especially in the aspect of the output. The aim of this paper is conducting the research on the impact of climate fluctuation on the aggregate output of the developing countries, then answering two questions: “Is the relationship between temperature and precipitation with the output of developing countries significant? Do the impacts of temperature and precipitation vary across “hot country” and “more agriculture country”? 5 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 2: LITERATURE REVIEW 2.
The theory To demonstrate the relationship between climate and output, I follow the research of John (2009) and Mankiw et al (1992), which is based on the Solow-Swan model. According to this model, the climate is considered as “natural resource” input in the Cobb-Douglas production function: yt = atkαt hβt T-γt with yt is output per capita, kt is physical capital per capita, ht is human capital per capita, and Tt represents the climate in average temperature at year t. at is all exogenous country- specific variables, which may be composed of temperature in history T0. Thus we specify at = AtT0-Ø with At is considered as an technology input of exogenous elements.
The exponents α, β, γ, and Ø are assumed positive and identical across countries. The γ and Ø capture the impact of historical and contemporaneous temperature.