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

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