Adapting to Extreme Weather in the Developing World
An Analysis of Brad DeLong's Great Quote in the Financial Times
My wife signed up my family for a Financial Times subscription so we now all read it and debate what we learn. Today, I skimmed a great interview with my friend Brad DeLong. In this entry, I want to discuss one quote from the interview.
The end of the quote is fascinating. Brad posits that 3.5 billion poor people in the rural developing world cannot adapt to changes in local weather conditions. IF this is true and if more extreme Monsoons take place, then these individuals will face mortality and consumption risk that will greatly injure their quality of life.
Let’s return to microeconomics. Every Econ 101 student is taught about the production function such that a given task can be achieved using different combinations of inputs. For example, 12 pizzas can be baked using different combinations of inputs and a cost minimizer will consider which of the various input configurations minimize the total $ cost of producing the 12 pizzas.
In the case of the 3.5 billion people facing climate change induced extreme weather, Brad is positing a Leontief Production Function such that these poor people cannot substitute to growing other crops or a variety of other strategies to protect themselves.
Back in 2017, Max Auffhammer and I wrote a whole Handbook Chapter on this question that you can access here. Our paper is titled; “ The farmer's climate change adaptation challenge in least developed countries”. Around that time, I wrote a second related paper titled; Will Climate Change Cause Enormous Social Costs for Poor Asian Cities?
Poor rural people facing extreme weather will not be “passive victims” they will seek strategies to protect themselves and their families. During a time when LDC cities are growing, labor demand for low skill jobs is rising in such cities and young people will move to the cities. Mushfiq Mobarak and his co-authors have done important work set in Bangladesh documenting that by lowering the transportation costs of temporary migration to cities that many individuals can earn more in cities and help their rural families to achieve higher consumption levels through remittances.
This research documents that the economic returns to moving to the cities differs across urban people. Rural people with greater skill and who have more grit and tenacity gain more from urbanizing. Economists will recognize the Roy Model here. A key point that Jim Heckman emphasizes is the ability to acquire skill over the life-cycle. If rural people anticipate that climate change threatens their “old ways” of earning income (the DeLong Point), then they have an incentive to invest in their children’s skills to prepare them for city life. In this sense, the expectation of climate change could accelerate rural human capital accumulation and increase poor nation’s economic growth because urbanization and human capital are complements. For those who are skeptical here, read this paper by Rob Jensen and Nolan Miller and this work by Manisha Shah.
I recognize that poor people in the developing world face borrowing constraints in financing lumpy investments. How will free markets help such individuals re-optimize? What new financing arrangements will emerge? This is an example of how capitalism evolves. An example. More and more poor people have a cell phone and access to mobile money. In the United States, economists have founded “Give Directly” to wire $. This effective altruism connects donors and recipients and allows those who receive the money to finance their own adaptation goals. I recognize that this example isn’t a transaction and instead represents a gift but the point generalizes.
So, to wrap up this entry —- I disagree with Brad. The anticipated shock to the LDC rural country-side will accelerate skill formation and urbanization and this will increase economic growth in these nations. As the rural population shrinks, this will increase land per remaining person and this general equilibrium effect will raise incomes there for those who remain.