How do Climate Shocks Affect the Impact of FDI, ODA and Remittances on Economic Growth?

July 23, 2021

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Format: Chicago

Alassane Drabo. How do Climate Shocks Affect the Impact of FDI, ODA and Remittances on Economic Growth?, (USA: International Monetary Fund, 2021) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The three main financial inflows to developing countries have largely increased during the last two decades, despite the large debate in the literature regarding their effects on economic growth which is not yet clear-cut. An emerging literature investigates the dependence of their effects on some country characteristics such as human and physical capital constraint, macroeconomic policy and institutional capacity. This paper extends the literature by arguing that climate shocks may undermine the effect of Foreign Direct Investment (FDI), official development assistance (ODA) and migrants’ remittances on economic expansion. Based on neoclassical growth framework, the theoretical model indicates that FDI, ODA, and remittances improve economic growth, and the size of the effect increases with good absorptive capacity. However, climate shocks reduce this positive effect of financial flows in developing countries. Using a sample of low and middle-income countries from 1995 to 2018, the empirical investigation confirms the theoretical conclusions. Developing countries should build strong resilience to climate change. Actions are also needed at global level to reduce greenhouse gases emissions, and build strong structural resilience to climate shocks especially in developing countries.

Subject: Absorptive capacity, Balance of payments, Climate change, Environment, Foreign direct investment, Human capital, Labor

Keywords: Absorptive capacity, Asia and Pacific, Climate change, East Asia, Effect of foreign direct investment, Effect of ODA, Foreign direct investment, Global, Human capital, Income group, Inflows-economic growth nexus, Middle East, North Africa, Role of Climate, South Asia

Publication Details

Pages:

42
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/193
Stock No:

WPIEA2021193
ISBN:

9781513585635
ISSN:

1018-5941

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