BinD: A Model of Growth, Climate Change, and Debt Sustainability

25 Pages Posted: 19 Oct 2023

See all articles by Ozlem Omer

Ozlem Omer

Bucknell University

Nepomuk Dunz

World Bank

Asjad Naqvi

Austrian Institute of Economic Research (WIFO); International Institute for Applied Systems Analysis (IIASA); Vienna University of Economics and Business

Date Written: September 25, 2023

Abstract

Climate change disproportionately impacts capital and output in low- and middle-income countries (LMICs). Limited fiscal space and high dependence on capital good imports further curtail their ability to make timely climate-resilient investments. In this paper we present a demand-driven model that is supply-side constrained due to insufficient build up of production capacity. Calibrating the model to Fiji, we evaluate growth pathways for three climate futures – 2C, 3C, and 4C global warming by the end of the century. We evaluate the role of a public climate fund to enable partial recovery that is financed through four different schemes - debt-led recovery, higher tax on households, higher taxes on capitalists, and unconditional grants from the rest of the world. Recovery is possible in the 2C scenario, but the 3C and 4C scenarios increasingly face higher investment costs in the face of lower growth and saving rates. In the 4C scenario, even the most generous unconditional grants scheme fails to prevent the downward spiral of hitting capacity constraints despite an initial boost to output. These insights underscore the need for effective and equitable domestic climate policies and affordable finance and compensation to support sustainable development in vulnerable countries.

Keywords: climate change, economic growth, low and middle income countries, sustainable economic development, climate financial resilience

JEL Classification: O11, O44, O23, Q54, Q01

Suggested Citation

Omer, Ozlem and Dunz, Nepomuk and Naqvi, Asjad, BinD: A Model of Growth, Climate Change, and Debt Sustainability (September 25, 2023). Available at SSRN: https://ssrn.com/abstract=4582207 or http://dx.doi.org/10.2139/ssrn.4582207

Ozlem Omer (Contact Author)

Bucknell University ( email )

701 Moore Ave.
Lewisburg, PA 17837
United States

Nepomuk Dunz

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Asjad Naqvi

Austrian Institute of Economic Research (WIFO) ( email )

P.O. Box 91
Wien, A-1103
Austria

International Institute for Applied Systems Analysis (IIASA)

Schlossplatz 1
Laxenburg, A-2361
Austria

Vienna University of Economics and Business ( email )

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