In this project on the Distributional Implications of Climate-related Disasters (DIoD) we study the feedback effects on macroeconomic aggregates due to changes in income distributions once a disaster has hit. We do so by introducing agent heterogeneity into two state-of-the-art disaster models already used by many researchers as well as policymakers.

The first model is a DSGE model in the real business cycle tradition where we replace the representative agent and allow for differential wealth holdings and income sources (capital and labor). Changes in the 2 distributions of wealth and income therefore affect prices, employment, and growth. The second model follows a dynamic structuralist framework. Here we focus on the demand-side responses due to disaster shocks and their effects on income distribution. While the advancement of the modeling techniques is a key part of the project, we also emphasize usefulness and applicability of the advances. Throughout the entire project, we involve end-users from policy and administration to make sure our models remain grounded in the policy domain. Ultimately, we aim for novel insights which allow governments, central banks, and multilateral development institutions to design and implement effective policies that moderate the burdens of extreme weather shocks and enable economies to achieve their sustainable development goals, while also protecting their most vulnerable members.

DIoD aims to assess the effects of shifts in the distributions of income and wealth on the macroeconomic recovery process once a disaster has occurred and provide policy-relevant recommendations. DIoD achieves this goal by introducing conceptual and methodological innovations in the modelling of disaster risks, introducing a distributional dimension into two state-of-the-art disaster models used for policy analysis. Model advancement will co-evolve with involvement of and feedback from end-users during the entire project to ensure the appropriateness and usefulness of the developed model tools. DIoD strives to answer six interconnected research questions (RQs):

RQ1: What are the distributive effects of extreme weather events?

RQ2: How do distributive effects, following an extreme weather event, impact the macroeconomic recovery process?

RQ3: How do distinct disaster response policies help to mitigate distributive effects and in turn their consequences for macroeconomic recovery processes?

RQ4: Which scientific uncertainties remain in the assessment of RQ1-RQ3 and the derived policy recommendations? How can these be quantified?

RQ5: How can the macroeconomic models for the assessment of distributional effects of disasters developed in DIoD be turned into effective tools for policy-makers and intergovernmental decision makers?

RQ6: What robust and policy-relevant lessons can be learned from modeling the impact of extreme events on income and wealth distribution?

To achieve a scientific breakthrough in the key research objectives as well as societal and policy impacts, the project develops and applies cutting-edge theoretical, empirical, and modelling analyses, while giving a central role to end-users’ involvement and the timely communication of ideas. By integrating robust quantitative and policy-relevant methodologies, the project yields data-driven results to inform how distribution and disasters interact on a macroeconomic level. In particular, the project advances the research frontier by introducing distribution and risks in the domain of growth dynamics. We hope that thereby we can promote crossfertilization between knowledge domains and disciplines that have remained disconnected so far (e.g. political economy distribution, climate economics, growth theory, and monetary models).

This project has received funding from the Jubiläumsfonds of the Austrian National Bank (OENB) under grant agreement 18654.

 

Project Results

With regard to the dynamics of public debt, the findings show that even in a 2°C global warming scenario, rising debt can become a heavy burden for LMICs, even if they introduce compensatory measures such as a national tax-financed climate risk fund. This underscores the urgent need for international institutions to provide access to affordable finance and compensation for loss and damage (e.g., through the Loss and Damage Fund) to ensure a climate-resilient future in the most vulnerable countries.

One of the main factors determining the distributional consequences of a disaster is whether the constraint of subsistence consumption, i.e., the choice between work and education, is binding or not. If we observe an increase in the labor force participation of children and young people immediately after a disaster, a disaster may not have a major negative impact on GDP in the short term, but it can widen the human capital gap and thus have a negative impact on growth and inequality in the long term. In such societies, proactive policies to develop disaster protection infrastructure, combined with appropriate tax policies, are crucial to reducing disparities in human capital accumulation and thus mitigating the negative effects on growth and inequality in the long term.

Our research findings confirm that natural disasters cause direct harm to children, teachers, and the school community by damaging or destroying school infrastructure, as well as having medium-term indirect effects through physical and psychological stress and disrupting school operations, teaching, and learning. It is evident that the effects of disaster risk reduction policies do not lead to an even distribution of benefits across heterogeneous households and that there is also the possibility of a regressive effect. Therefore, it is important to coordinate the actions of national and international organizations to reduce damage to productive capital, provide post-disaster loans, reduce health risks, and reinforce school buildings, as proposed in the GFDRR Comprehensive School Safety (CSS) framework.

Another important finding from this research project is that there is no single modeling approach for assessing all potential long-term macroeconomic and distributional effects of climate-related disasters. The researchers advise policymakers to base their decisions on complementary model assessments, each of which focusing on specific impact channels.

Scientific presentations by the DIoD project team:

  • July 2024: University of Bologna
  • July 2024: European Association of Environmental and Resource Economists (EAERE 2023)
  • June 2024: Joint Vienna Institute, Course on Climate Change Economics
  • December 2023: IMF Fiscal Affairs Department Analytical Hour Series
  • December 2023: World Bank
  • October 2023: Final DIoD Workshop on developing quantitative methodologies for analyzing the distributional impacts of climate-related disasters (at IIASA)
  • October 2023: EMCEE 2023, Uni Bologna
  • September 2023: Joint Vienna Institute, Course on Climate Change Economics
  • September 2023: Marseille School of Economics
  • July 2023: Ludwig-Maximilians University
  • June 2023: The 26th Conference “Theories and Methods in Macroeconomics” (T2M)
  • June 2023: Economics Forum (at IIASA)
  • June 2023: European Association of Environmental and Resource Economists (EAERE 2023)
  • March 2023: Joint Vienna Institute, Course on Structural Reforms
  • March 2023: ETH Zurich
  • March 2023: CESifo
  • September 2022: European Association of Evolutionary Political Economy (EAEPE)
  • September 2022: The 12th International Conference of the International Society for the Integrated Disaster Risk Management (IDRiM)
  • September 2022: Workshop on Resilience and Disruptive Change (at IIASA)
  • July 2022: European Association of Environmental and Resource Economists
  • May 2022: WIIW Vienna Institute for International Economic Studies.
  • September 2021: The 11th International Conference of the International Society for the Integrated Disaster Risk Management (IDRiM)
  • July 2021: 46th Annual Natural Hazards Research and Applications Workshop
DIoD final workshop © Muneta Yokomatsu / IIASA

DIoD Project Workshops

On 17 October 2023, IIASA organised a full-day DIoD project workshop, where participants discussed project results and avenues for future research. The workshop brought together researchers and experts from various universities, the Austrian Institute of Economic Research (WIFO), the Joint Vienna Institute (JVI), the World Bank and the International Monetary Fund (IMF).

Agenda & Abstracts

On 16-17 September 2024, IIASA invited an international group of researchers, in the context of the 18th Workshop on Social Capital and Development Trends of Countryside in Knowledge and Risk Society, to discuss final results of the project, represented by Muneta Yokomatsu's chaired session on "Knowledge and Development" and his presentation of "A Nonlinear Dynamic Model of Opportunity-Based Learning in Disaster Time and Knowledge Formation."

Publications by the DIoD project team:

    Rezai, A., F. Ruch, R. Choudhary, and J Francois.2024. Fiscal Policy’s Role in Economic Resilience to Climate Shocks, mimeo.

Yokomatsu, M., Schinko, T. , Mochizuki, J. , & Rezai, A. (2024). Climate-related Disaster and Human Capital Investment in the Global South — Household Heterogeneity and Growth. Economics of Disasters and Climate Change 10.1007/s41885-024-00150-8.

Yokomatsu, M., Mochizuki, J. , Joseph, J., Burek, P. , & Kahil, T. (2023). Macroeconomic co-benefits of DRR investment: assessment using the Dynamic Model of Multi-hazard Mitigation CoBenefits (DYNAMMICs) model. Disaster Prevention and Management: An International Journal 32 (1) 139-162. 10.1108/DPM-07-2022-0154.

Omer, O., Dunz, N., & Naqvi, A. (2023). BinD: A Model of Growth, Climate Change, and Debt Sustainability. SSRN Electronic Journal 10.2139/ssrn.4582207. (Submitted)

van der Ploeg, F. & Rezai, A. (2021). Optimal carbon pricing in general equilibrium: Temperature caps and stranded assets in an extended annual DSGE model. Journal of Environmental Economics and Management 110 e102522. 10.1016/j.jeem.2021.102522.

Dunz, N., Tanaka, H., Shiiba, N., Mochizuki, J. , & Naqvi, A. (2021). Building Back Better in Small Island Developing States in the Pacific: Initial Insights from the BinD Model of Disaster Risk Management Policy Options in Fiji. ADBI Working Paper 1290. Asian Development Bank Institute , Tokyo, Japan.