The Effect of Climate Change on Economic Growth in Iran

اقتصاد و توسعه کشاورزی

Article 7, Volume 34, Issue 2 - Serial Number 48, June 2020, Pages 223-238   

Document Type: Research Article

DOI: 10.22067/jead2.v34i2.86135

Authors

Z. Malakoutikhah; Z. Farajzadeh^*

Shiraz University

Abstract

Introduction: The increase in greenhouse gases has affected global weather, resulting in changes in climate zones. Climate change is mostly characterized by changes in temperature. There is strong evidence showing that climate change will adversely affect the world especially developing countries in the following decades. Agricultural activities are more vulnerable to climate change as they are more dependent on water resources and temperature. Moreover, damages to agricultural activities may contract output in other sectors as well. Given the importance of the issue, Iran is a prominent example since it is located in an arid and semi-arid region, and its average annual precipitation is less than one-third of the global precipitation. In addition, there is a large body of literature indicating an increase in average temperature of Iran over the last decades. Therefore, this study aims to investigate the effect of climate change on the economic growth in Iran.
Materials and Methods: The Solow-Swan growth model was applied to investigate economic growth under climate changing environment. The growth models were estimated using time series data of 1350-1395 (1971-2016). In the growth model, a damage function, change in which damage is a function of temperature, was applied to examine the effect of climate changes. The growth model determinants are physical as well as other types of capital including human, social and environmental capitals. Internet access and phone access were used as proxies for social capital. Also, literacy rate, primary school enrolment rate, and university students were applied as proxies for human capital. Agriculture, mining, and oil and gas production were considered as proxies for natural and environmental resources. Another proxy for environmental capital was the value of natural resources marginal product. This variable is defined as the ratio of CO2 damages to GDP. Trade impact on economic growth was also investigated through using Foreign Direct Investment (FDI) and trade openness variables. Also, to examine the trend of temperature, an ARMA model was used. GDP is technically considered as an endogenous variable so Generalized Method of Moments (GMM) method is applied.
Results and Discussion: The specification of ARMA model revealed two significant moving average trends including five-year and nine-year. These trends indicate an increasing average for temperature, leaving less doubt about the phenomenon of climate change. Our results showed that the increase in temperature will negatively affect economic growth. It was also found that one-degree increase in average temperature is expected to reduce Iranian GDP by 5-6.6 percent. Physical capital showed the highest contribution to Iranian GDP. Its contribution to the economic growth, in terms of elasticity, was found to be 0.08-0.16. The corresponding values for human and social capital were 0.02-0.06 and 0.03-0.08, respectively. However, environmental capital failed to affect the economic growth significantly. Among the variables applied for human capital, university students were found to play a more significant role. The insignificant effect of environmental capital on economic growth may be attributed to its nature that is used as a public good, resulting in intensive as well as irrational use. Among the variables applied for environmental capital, the value of natural resources marginal product showed a slightly strong effect, needing to be considered as a proxy for environmental capital. Also, FDI showed an insignificant effect; however, trade openness was found to affect economic growth positively.
Conclusion: The general trend of the economic growth in Iran is far from what is expected. In addition, this trend is threatening by, among the others, climate change which is characterized by increasing average temperature as well as decreasing precipitation. Also, as far as the capital is considered, economic growth in Iran is highly dependent on physical capital while the contribution of other types of capital including human, social and environmental capital is not significant. However, it is worth noting that environmental capital seems to be used intensively while for human capital reasons like inappropriateness of labor quality and education system is more acceptable. Even for physical capital, higher contribution is expected since the Iranian economy enjoys lower capital accumulation. It was also found that removing trade barriers and being more connected with the global economy may provide more opportunities to enjoy higher growth.     

Keywords

Climate change; Capital; temperature; Solow growth model

References

1- Aaheim A., Amundsen H., Dokken T., and Wei T. 2012. Impacts and adaptation to climate change in European economies. Global Environmental Change 22(4): 959-968.

2- Abbaspour K.C., Faramarzi M., Ghasemi S.S., and Yang H. 2009. Assessing the impact of climate change on water resources in Iran. Water Resources Research 45(10): 1-16. (In Persian with English abstract)

3- Afshari Z., Yazdanpanah A., and Rahmatizadeh A. 2009. Relationship between FDI and Capital Flight. Journal of Monetary and Banking 2: 79-102. (In Persian with English abstract)

4- Afzal M., Rehman H.U., Farooq M.S., and Sarwar K. 2011. Education and economic growth in Pakistan: A cointegration and causality analysis. International Journal of Educational Research 50(5-6): 321-335.

5- Akbarian R., and Zare Haghighi N. 2011. The impact of openness and growth on poverty in Iran. Quantative Economics 8: 25-50. (In Persian with English abstract)

6- Almasi M., Sohaili K., and Sepahban Gharehbaba A. 2011. Investigation of effect of investment on higher education on economic growth of Iran during 1971-2005. Journal of Macroeconomic Rrsearch 11: 13-34. (In Persian with English abstract)

7- Aluaro M.P., and Miguel S. 2004. Comparing macroeconomic returns on human and public capital: An empirical analysis of the Portuguese case. Journal of Policy Modeling 1: 314-335.

8- Alvarez R., and Lopez R.A. 2008. Is exporting a source of Spillovers?. Review of World Economics 144: 723-749.

9- Amini A., and Elmi Z. 2017. Approaches about natural resources cures. Comparative Economics 6: 1-43. (In Persian with English abstract)

10- Andersen A.D., Johnson B.H., Marin A., Kaplan D., Stubrin L., Lundvall B.Å., and Kaplinsky R. 2015. Natural resources, innovation and development, Aalborg Universitetsforlag.

11- Arbex M., and Batu M. 2017. Weather and Climate Change in a Real Business Cycle Model (No. 1707).

12- Asadpour A.A. 2017. The effect of trade liberalization on economic growth in Iran. Teritory 55:17-36. (In Persian with English abstract)

Ashraf Vaghefi S.A., Keykhai M., Jahanbakhshi F., Sheikholeslami J., Ahmadi A., Yang H., and Abbaspour K.C. 2019. The future of extreme climate in Iran. Scientific Reports 9(1): DOI: 10.1038/s41598-018-38071-8.

13- Baltagi B.H. 2008. Econometric Analysis of Panel Data. Chichester, John Wiley& Sons Ltd.

14- Barkhordar Z.A., and Saboohi Y. 2013. Assessing alternative options for allocating oil revenue in Iran. Energy Policy 63: 1207–1216.

15- Beugelsdijk S., and Van Schaik T. 2005. Social capital and growth in European regions: An empirical test. European Journal of Political Economy 21(2): 301-324.

16- Blanco L., and Grier R. 2012. Natural resource dependence and the accumulation of physical and human capital in Latin America. Resources Policy 37(3): 281-295.

17- Calzadilla A., Zhu T., Rehdanz K., Tol R.S., and Ringler C. 2013. Economywide impacts of climate change on agriculture in Sub-Saharan Africa. Ecological Economics 93: 150-165.

18- Central Bank of Iran 2014. Available at: http://tsd.cbi.ir/Display/Content.aspx.

19- Costantini V., and Monni S. 2008. Environment, human development and economic growth. Ecological Economics 64(4): 867-880.

20- Dinda S. 2008. Social capital in the creation of human capital and economic growth: A productive consumption approach. The Journal of Socio-Economics 37(5): 2020-2033.

21- Dixon P., Rimmer M., and Wittwer G. 2007. The 2006–07 drought in Australia: Analysis in TERM-H2O. 36th Annual Conference of Economists (pp. 24-26), Hobart.

22- Djeflat A., and Lundvall B.Å. 2016. The resource curse and the limited transformative capacity of natural resource-based economies in Africa: evidence from the oil and gas sector in Algeria and implications for innovation policy. Innovation and Development 6(1): 67-85.

23- Du D., Zhao X., and Huang R. 2017. The impact of climate change on developed economies. Economics Letters 153: 43-46.

24- Elmi Z., and Jamshidnejad A. 2007. The effect of education on economic growth of Iran in 1971-2003. Journal of Humanities and Social Sciences 26: 135-154. (In Persian with English abstract)

25- Enders W. 2004. Applied Econometric Times Series. 2n edition, John Wiley & Sons.

26- Estrada F., Tol R.S., and Gay-Garcia C. 2015. The persistence of shocks in GDP and the estimation of the potential economic costs of climate change. Environmental Modelling & Software 69: 155-165.

27- Falihi N. 2008. An investigation of higher education effects on economic growth in Iran. Financial Economics (Financial and Development Economics) 5: 36-61. (In Persian with English abstract)

28- Fankhauser S., and Tol R.S. 2005. On climate change and economic growth. Resource and Energy Economics 27(1): 1-17.

29- Farajzadeh Z. 2018. Emissions tax in Iran: Incorporating pollution disutility in a welfare analysis. Journal of Cleaner Production 186: 618-631.

30- Farajzadeh Z., Amadeh H., and Omrani M. 2017. Determinants of Iranian economic growth. Journal of Economic Research 52(3): 663-686. (In Persian with English abstract)

31- Farajzadeh Z., Zhu X., and Bakhshoodeh M. 2017. Trade reform in Iran for accession to the World Trade Organization: Analysis of welfare and environmental impacts. Economic Modelling 63: 75-85.

32- Ganegodage K.R., and Rambaldi A.N. 2011. The impact of education investment on Sri Lankan economic growth. Economics of Education Review 30(6): 1491-1502.

33- Gharibnavaz M.R., and Waschik R. 2015. Food and energy subsidy reforms in Iran: A general equilibrium analysis. Journal of Policy Modeling 37: 726–741.

34- Hahn M.B., Riederer A.M., and Foster S.O. 2009. The livelihood vulnerability index: A pragmatic approach to assessing risks from climate variability and change (A case study in Mozambique). Global Environmental Change 19(1): 74-88.

35- Huong N.T.L., Bo Y.S., and Fahad S. 2018. Economic impact of climate change on agriculture using Ricardian approach: (A case of northwest Vietnam). Journal of the Saudi Society of Agricultural Sciences 103: 1-9.

36- IPCC. 2007. Fourth Assessment Report of the Intergovernmental Panel on Climate Change Glossary Climate Change: Climate Change Impacts, Adaptation, and Vulnerability. Cambridge University Press, Lodon.

37- IPCC. 2014. Fifth Assessment Report - Impacts, Adaptation and vulnerability. Cambridge, United Kingdom and New York, NY, USA. Cambridge University Press, Lodon.

38- Iran’s Energy Balance 2015. Deputy of Electricity and Energy Affairs, Ministry of Energy. Avaialable at http://pep.moe.org.ir.

39- Iranian Metorological Grganization 2015. Avaialable at http://www.irimo.ir/eng/index.php.

40- Ishise H., and Sawada Y. 2009. Aggregate returns to social capital: Estimates based on the augmented augmented-Solow model. Journal of Macroeconomics 31(3): 376-393.

41- Jafari M., Eslamlouyan K., Hadian H., and Samadi A.H. 2014. The effect of social infrastructure on economic growth in a resource-rich economy: The case of Iran. Journal of Iranian Energy Economics 12: 27-60. (In Persian with English abstract)

42- Kemfert C. 2008. Climate Protection Requirements–the Economic Impact of Climate Change. Handbook Utility Management Springer, Berlin: Heidelberg 725-739.

43- Keshavarz A.R. 2019. Determinants of economic growth in Iran emphasizing on natural capital. MSc Thesis of Agricultural Economics, Shiraz University. (in Persian with English abstract)

44- Khaleghi S., Bazzazan F., and Madani S.H. 2015. The effects of climate change on agricultural production and Iranian economy. Journal of Agricultural Economics Research 25: 113-135. (in Persian with English abstract)

45- Kim S.H., and Kose M.A. 2014. Welfare implications of trade liberalization and fiscal reform: A quantitative experiment. Journal of International Economics 92: 198–209.

46- Liyanaarachchi T.S., Naranpanawa A., and Bandara J.S. 2016. Impact of trade liberalisation on labour market and poverty in Sri Lanka. An integrated macro–micro modelling approach. Economic Modelling 59: 102–115.

47- Mahdavi A., and Azizmohammadlou H. 2013. The effect of social capital on industrial growth through the innovation and technology improvement. Journal of Economic Research 48(1): 179-201. (In Persian with English abstract)

48- Managi S., Hibi A., and Tsurumi T. 2009. Does trade Openness Improve Environmental Quality?. Journal of Environmental Economics and Management 58: 346–363.

49- Mansouri B. 2004. Impact of drought and fiscal policy on private consumption, private investment and economic growth in Morocco: An empirical analysis. Workshop on the prospects of Arab economic cooperation to boost savings and investment Alexandria, Egypt.

50- McKinnish T. 2005. Lagged dependent variables and specification bias. Economics Letters 88(1): 55-59.

51- Mehrara M., and Rezaei Bargoshadi S. 2016. The determinants of economic growth in Iran based on bayesian model averaging and weighted averaging least square. Economic Grwoth and Development Research 23:89-114. (in Persian with English abstract)

52- Mehrgan N., Daneshkhah A., Chatrabgoun O., Ahmadi R., and Tishekani F. 2014. Examine Dutch disease phenomena and oil shock influence on the Iran’s macroeconomic variables by copula approach. Journal of Economic Research 49(2): 411-428. (In Persian with English abstract)

53- Mo K.J. 2006. An estimation of growth model for South Korea using human capital. Journal of Asian Economics 17: 852-866.

54- Momeni F., and Samadian F. 2013. The effect of institutional quality on the mechanisms of turning oil blessing into a curse (a case-study on Iran). Economic Research 50: 17-62. (In Persian with English abstract)

55- Mousavi S.N., and Zarei S. 2017. Environmental and social capital contribution to Iranian economic growth. Agricultural Economics 11(1): 185-209. (In Persian with English abstract)

56- Nejati M., and Akbarifard H. 2018. Spillover effects of exportsinmanufacturing industries sector: The case of Iran. Quarterly Journal of New Economy and Trade 38: 141-166. (In Persian with English abstract)

57- Nili M., and Nafisi S.H. 2003. Human capital, education distribution of labour force and economic growth: the case of Iran. Iranian journal of Economic Research 17: 1-31. (In Persian with English abstract)

58- OECD. 2001. The evidence on social capital. In The well-being of nations: The role of human and social capital. Paris.

59- Pourfaraj A.R., and Khaleghian A. 2014. The effect of oil export concentration on economic growth in OPEC countries. Economic Growth and Development Research 14: 93-112. (In Persian with English abstract)

60- Rahmani T., and Amiri M. 2007. The effect of trust on economic growth in provinces of Iran by spatial econometric method. Journal of Economic Research 42(2): 23-57. (In Persian with English abstract)

61- Rao B.B. 2010. Estimates of the steady state growth rates for selected Asian countries with an extended Solow model. Economic Modelling 27: 46–53.

62- Reed W.R., and Zhu M. 2017. On estimating long-run effects in models with lagged dependent variables. Economic Modelling 64: 302-311.

63- Reidsma P., Lansink A.O., and Ewert F. 2008. Economic impacts of climatic variability and subsidies on European agriculture and observed adaptation strategies. Mitigation and Adaptation Strategies for Global Change 14(1): 35-59.

64- Renani M., Emadzadeh M., and Moayedfar R. 2006. Social capital economic growth: Providing a theoretical model. Humaniti Journal of Esfahan University 21(2): 133-151. (In Persian with English abstract)

65- Rezaei M., Yavari K., Ezzati M., and Etesami M. 2007. Analysis of the effect of the abundant natural resources (oli & gas) on financial repression and economic growth through the income distribution channels. Journal of Iranian Energy Economics 14: 89-122. (In Persian with English abstract)

66- Roseta-Palma C., Ferreira-Lopes A., and Sequeira T.N. 2010. Externalities in an endogenous growth model with social and natural capital. Ecological Economics 69: 603–612.

67- Saadat R. 2008. The estimation of social capital in Iran. Journal of Economic Research 43(2): 41-56. (In Persian with English abstract)

68- Sachs J. D., and Warner A.M. 2001. The curse of natural resources. European Economic Review, 45(4-6): 827-838.

69- Sala-i-Martine X., and Subramanian A. 2003. Addressing Natural Resource Curse: An illustration from Nigeria. National Bureau of Economic Research Working Paper 9804. (No. 3-139), International Monetary Fund.

70- Shahabadi A. 2012. Rate of returns expenditure research and development and physical investment in the Economic of Iran. Financial Monetary Economics 19(4): 185-205. (In Persian with English abstract)

71- Shahnoushi Foroshani N. 2003. The impacts of drought on the agriculture sector and economy of Iran: An estmation in macroeconometric modelling approaches. PhD Thesis. University of Tehran. (in Persian with English abstract)

72- Shajari S., Farajzadeh Z., and Salah A. 2018. Prioritizing credit allocation in Fars province agriculture subsector using neoclassical growth model. Agricultural Economics and Development 103: 31-52. (In Persian with English abstract)

73- Shakeri A., Mohammadi T., Nazeman H., and Taherpoor J. 2013. A study on the occurrence of the Dutch disease in Iranian economy and its impact on economic growth. Economic Research 50: 63-86. (in Persian with English abstract)

74- Souri A. 2005. The growth residual: Human capital or social capital. Useful Letter 51: 71-84. (In Persian with English abstract)

75- Souri A. 2014. Social capital and its growth in Iran. Economic Research and Policies 69: 49-64. (In Persian with English abstract)

76- Statistical Center of Iran 2013. Available at https://www.amar.org.ir.

77- Thurlow J., Zhu T., and Diao X. 2009. The impact of climate variability and change on economic growth and poverty in Zambia (No. 890). International Food Policy Research Institute (IFPRI) Discussion Paper 00890 Zambia: 1-72.

78- Tsigaris P., and Wood J. 2016. A simple Climate-Solow model for introducing the economics of climate change to undergraduate students. International Review of Economics Education 23: 65-81.

79- Tzouvelekas E., Vouvaki D., and Xepapadeas A. 2007. Total factor productivity growth and the environment: A case for green growth accounting. Beijer International Institute of Ecological Economics.

80- UN Statistical Databases 2015. Available at http://data.un.org.

81- UNFCCC (United Nation Framework Convention on Climate Change) 2010. Iran (Islamic Republic of): Intended Nationally Determined Contribution. Available at http://www4.unfccc.int/submissions/indc/Submission%20Pages/submissions.aspx.