Speaker 1  00:06
That by 2050, over eight hours of the day, it will be kind of too hot to work. This isn't a partisan or ideological issue per se. It is just a real issue that everyone is going to have to face. Floods of various sizes and severities-kind of one in 50-year flood, the one in 7,500-year flood. What can't be observed relatively well are local solutions and adaptations. Which is when you look at flooding in rural areas, you actually find that richer households are are more likely to live in flood-prone areas. Urban areas, for sure, poorer neighbourhoods tend to be more flood-prone. The economic costs of natural disasters and extreme weather events are are much lower in rich countries than they are in poor countries. That is, in some sense, I think a million dollar question. Sri Lanka should be investing basically everything into adaptation.

Speaker 2  00:53
Dr. Jonah Rexer is an applied development microeconomist at the World Bank's South Asia Region Office of the Chief Economist. His research explores how firms and investors navigate difficult markets, and his interests include international finance, the impacts of natural resource wealth, urbanisation in emerging economies, and climate change adaptation. Previously, Dr. Rexer was a postdoctoral associate in the Empirical Studies of Conflict Group and a lecturer at Princeton's School of Public and International Affairs. He holds a PhD in applied economics from the Wharton School and a master in public administration in international development from Harvard Kennedy School. He joins us today on our latest episode of Advocata Conversations.

Murtaza Jafferjee  01:32
Jonah Rexer, welcome to the Advocata Conversation.

Speaker 1  01:36
Thank you, mr. Taza.

Murtaza Jafferjee  01:38
Why don't we first start by you telling us a little bit about yourself.

Speaker 1  01:42
Absolutely. So I'm Jonah Rexer. I'm an economist at the World Bank South Asia Chief Economist's Office. I've been an economist, a development economist, for 10-15 years at this point. I joined the bank about two years ago. Prior to that, I was a lecturer, a postdoctoral associate at Princeton in the the public policy school there. Excuse me, and so I've been in development I think for for quite some time. I did my my undergrad at Stanford, and following that I spent a couple years in Uganda working on microfinance, RCTs, impact evaluations, mostly in agriculture, and that kind of brought me into really into the development sector and into economic research, you know, more broadly. As we discussed earlier, after that, I did my MPA at at the Kennedy School, and kind of expected, I guess, to to go into the development sector after that, but but you know I found myself being drawn towards research in that process. I worked with some great professors there, and so you know I decided to do a PhD after that. So I did my PhD at Penn in economics, and just continued to work on on development topics. My specialty during the PhD was was actually in political economy, so I did a lot of work on you know the political economy of growth and development, and in particular the role that conflict plays in in preventing or kind of stymieing growth. So I did a lot of field work in Nigeria at that time and wrote a couple of papers about you know the political economy of Nigeria's oil sector, which you know as you are probably aware is quite a thorny topic. Published a few papers on on that, and then and then kind of continued the academic path to Princeton, where I continued to work on on conflict issues. At the bank, so so kind of made the transition out of academia, which I think was, you know, given the state of the of the market today, probably a good a good transition for myself. And at the bank, I've worked on you know just a wide variety of issues. This is actually the the first time at the bank that I've been working on South Asia. I had basically no experience in the region before that, so it's really been kind of a crash course in getting to know all the countries. I've travelled here several times. I guess this is my second time in Colombo, and yeah, I've worked on just like a wide range of issues at the bank, from gender and female labour force participation to climate change, which we're going to discuss today, to more recent work, which we're going to be presenting at a few other places on this trip, on on the impact of AI, artificial intelligence on the labour market. So it's a it's a wide range of stuff, generally kind of around issues with with jobs and labour markets in developing countries. That's a focus of ours at the bank these days because you know we we think that kind of creating jobs is is really the big challenge of the next century for for development and particularly in this in this region. So that's kind of a background. It's really you know I'm I'm a bit of a jack of all trades in that sense. I've I've worked. Lots of different development topics. I've worked in several different continents, and and now I'm here. So thanks for having me.

Murtaza Jafferjee  05:09
Welcome. So what kind of kindled your interest in economics?

Speaker 1  05:14
That's a great question, and I would say you know I've been interested in in development more generally since since undergrad, and and and to me, I was drawn into economics through through that lens, and and and I think you know there's there's a great paper by by Lucas that kind of says that once you think about kind of the vast differences in income per capita across countries, it's it's hard to think about anything else, and you know that really resonated for me. Certainly, when I when I went to Uganda, one of you know the poorest countries in the world, coming from a relatively you know upper middle class life in New York, that was was was certainly really eye opening, and those per capita income differences. It's one thing to see them in the data, but it's another thing to see them in person. And and I do believe that once you start thinking about those and and why you know global inequality is is so vast, and how we can get kind of poor countries to grow, it's hard to think of anything else. But then it also becomes immediately apparent, I think, that that economics is the is the thing that you want to study, right, and that there are a whole host of kind of different market failures and political failures that lead to kind of persistent poverty and underdevelopment across the world, and so that really drew me in that big question, and you know, in the in the process of thinking about that big question, you end up being drawn to and answering you know many small questions, which I think ultimately you know hope to aggregate up into a kind of a body of knowledge that can help us make better policy, right? And so that's really what what pulled me in. I also had the benefit at at the Kennedy School, of having some really fantastic advisors who who kind of pushed me to do research, because it's one thing to to kind of think about policy, it's certainly a completely other thing to to think about generating new knowledge and and doing research, and trying to ask kind of novel questions that that hopefully contribute to kind of that our knowledge about about development, so you know, had some great mentors who pushed me in that direction, and yeah, ever since I think it's it's become kind of an obsession. Yeah, I don't think about much else these days.

Murtaza Jafferjee  07:35
Interesting, you talked about the Kennedy School because the Growth Lab at the Kennedy School worked with Sri Lanka in 2016 to 2018. It was funded by the Soros Foundation and two two to three professors: Ricarda Hausman, Matt Andrews, and Robert Lawrence. They all worked on Sri Lanka. Did you interact with any of them?

Speaker 1  07:55
Yes, I did. I did take Ricardo Hausmann's course on growth diagnostics, which I found to be kind of a useful applied methodology for understanding where a country is at a given moment and what kind of the binding constraints to to growth are, where policy policy should focus. Actually, funny enough, I mean this was almost a decade ago at this point, but I did my kind of, you know, my capstone project in that course on Sri Lanka.

Murtaza Jafferjee  08:25
How did you do?

Speaker 1  08:26
I did okay. I think it was a, it was a way for Ricardo Hausman to source ideas on what were you know the constraints because it was during the the engagement that they were having with the Sri Lankan government. So that was kind of my first exposure with kind of anything related to Sri Lanka, and little did I know I would I would be here, you know, a decade later working on Sri Lanka and the South Asia region more generally, and you know all the kind of many challenges that that the region faces.

Murtaza Jafferjee  08:55
You mentioned about the banks' focus on jobs and growth. You know that they are going to do a in-depth report on Sri Lanka on jobs and growth. Yeah, I was asked to also be a review of the concept note. Will you be working on that?

Speaker 1  09:11
We'll probably be giving comments on it. You know, typically at the bank there are lots of teams doing lots of work on different things. Our role at the Chief Economist Office, we do our own research, but we also are asked to comment on all of this type of stuff that comes from many different teams in South Asia, whether that's operational projects, whether it's reports like that. You know, if if they kind of, we have many degrees of kind of quality control internally at the bank for anything that goes out to the public, and so we are typically one of those layers in South Asia. So I've heard of that report. I don't know much about what's actually going to be in it because I haven't seen the concept note, but we'll we'll definitely our team will probably be reviewing it for sure. Yeah.

Murtaza Jafferjee  09:53
So today's conversation is about the book that you have co-authored from. To resilience, helping people and firms adapt in South Asia. So, as a segue to our conversation, I thought I'd read the first paragraph from an advanced praise. Poor people are poor because markets fail them and governments fail them. Governments intervene to correct market failures such as externalities or public goods, but these in turn create governance failures such as unaccountable service providers or any capture of public resources. The challenge of poverty reduction is to design actions that correct government failures without recreating the market failures, the policies were meant to address, and vice versa. This has been written by our own Shanta Devarajan, who, as you know, was a very senior economist at the World Bank and now a professor at Georgetown. So that basically kind of says something about your work in Uganda also, that people are poor because of poor policy. Why did you decide to work on this report?

Speaker 1  11:11
That's a good question. I mean, I think that there are there are two. I think key points about the report. One is simply kind of the motivation for for why it's important to work on this, and the other I think is the is the somewhat novel approach that we take to this question of climate adaptation and resilience, which I think Shanta you know alluded to in his in his comments. So let me talk about both of those two points. Just brought a couple numbers with me to illustrate really the kind of massive risk economically that climate change poses to the world, but but particularly to South Asia, with which by many measures is is one of the most climate affected parts of the world. So you know by 2030, which is only you know just a few years out at this point, 90% of South Asians will be exposed to you know some form of extreme heat. About 20% will be exposed to to flooding risk. In Sri Lanka, temperatures have gone up by about one and a half degrees Celsius since the 60s, and you know these are kind of unequal burdens, right? What we find in our research, actually in the report, is that in in in particularly in urban areas, the hottest places tend to be kind of 20, 30 percent poorer than than cooler places, right? So, so the poor are kind of disproportionately exposed. Now, you know, this wouldn't necessarily be a huge concern from an economic standpoint if there weren't very large kind of economic costs to to to rising temperatures and increasing extreme weather events in Sri Lanka, for example, some folks have estimated that by 2050, you know, eight over eight hours of the day it will be kind of too hot to work. Right? There's there's a variety of studies that which we review in the report that have estimated relatively large kind of labour productivity, negative labour productivity effects of heat, on the order of of between kind of five and 10% productivity losses for every degree Celsius increased. You see very similar estimates again in that five to 10% range, about 7% in fact for the for the agricultural productivity losses from a from a degree Celsius of heat. So, for example, if pre estimates about a 7% loss in crop output by 2050 for for South Asia, these are under kind of moderate climate scenarios. What that means is is, and we do this in the report. We estimate kind of these these are kind of the two main mechanisms that we think climate change will will lead to kind of reduced growth and and increased poverty. We estimate about a 7% drop in GDP for Sri Lanka, which is similar to the South Asia estimate in in a macroeconomic model based on kind of business as usual climate scenarios where where the temperature warms by about an additional degree and a half by 2050. So, so these are, you know, these are really important numbers. I mean, seven 10% doesn't sound that large, but you know, if if there was a 7% recession right now, you know, people would feel that. I guarantee you. I mean, that's that's worse or as bad as kind of the the recent, you know, economic crisis in in Sri Lanka. So we're talking about major economic and productivity effects, and so that's why to study, right? To answer your question, I think it's not just because we kind of care about the environment per se, although the environment has kind of value and benefit in and of itself. But it's more importantly, or perhaps equally importantly, because because there are these large economic costs, and because South Asia is disproportionately affected, and within South Asia the poor are going to be disproportionately affected. So that's that's kind of point number one. Point number two is is kind of why do we address this issue in a slight. Different framing, I think, than than most other reports on on this question. You know, the first point to make on that is that you know we consider kind of adaptation as a result of these these numbers to be kind of one of the top priorities, policy priorities for South Asia, for the world, but but particularly for South Asia. And the question then is kind of how do you get to adaptation?

Speaker 1  15:22
How do you kind of make the necessary investments that ultimately offset some, or ideally all, of those of those economic damages from climate change? And most of the literature, I think most of the policy conversation has focused around quite large, you know, top-down solutions to that problem. We just need to increase government budgets to invest in all sorts of infrastructure, for example, you know, like seawalls to prevent sea level rise or things like that, right? And you know, we take a somewhat different approach. Not to say that those infrastructure investments are unimportant, but our approach is to say, well, what if we empowered the private sector, agents in the economy, workers, firms, farmers, to adapt on their own, right? And and kind of the corollary of that is, why aren't those those agents in the economy sufficiently adapting? What are the constraints that prevent them from from kind of realising the full potential of their adaptive investments? Because what we kind of note is ultimately that you know kind of adapting to climate change is a kind of privately beneficial investment for for a firm, right? The firm has an incentive to instal air conditioning in the factory floor, so that its workers don't lose productivity. The farmer has an incentive to adopt, you know, improved flood-resistant seeds, so it doesn't lose its crop when when the monsoon rains are kind of excessive, right? The question is then, why is that not happening, right? Or not happening sufficiently to kind of offset the cost of climate change based on kind of current trajectories, and that's really the question that we're trying to answer in this book.

Murtaza Jafferjee  17:07
So before we dig in deep, you come from the United States, and your president says climate change is not for real. Is it for real?

Speaker 1  17:18
Yeah, I mean I think that ultimately the the numbers I just shared with you make a pretty strong case. That again, you know, this isn't a partisan or ideological issue per se. It is just a real issue that everyone is going to have to face. And the sooner you kind of figure that out, the quicker you can invest in adaptation measures that will ultimately reduce the long-term economic costs, right? I mean, this is not necessarily about caring for the environment for the sake of that, although again, you know, many people do. But it's really about limiting the economic damages from climate change, and and and I think the data that that I presented, and we we share a lot of it in the report that motivates this problem is is relatively incontrovertible, right? Again, in Sri Lanka, we've seen about a one and a half degree rise in temperatures since the since the 1960, s. That's broadly consistent with the with the global average rise in temperatures, about one and a half degrees. So this is definitely something that's happening. You know there are kind of pretty extensive studies, both on the modelling side and also on these economic impacts. And so, you know, without trying to be political about it at all, you know, because of course the World Bank likes to kind of stay out of politics as much as possible. We are going to continue to make these investments in adaptation because we we recognise the economic threat that this poses.

Murtaza Jafferjee  18:42
So global warming is because carbon is trapped in the atmosphere, and

Speaker 1  18:47
that's as far as I know what the kind of state of the science sets. Yes,

Murtaza Jafferjee  18:53
and in the case of Sri Lanka, we are further closer to the equator than many of our other South Asian neighbours, and I think there was a chart in the book basically showing the temperature, the average mean temperature, and we are right at the top. Absolutely, is that why the World Bank said that we are probably the country that is most vulnerable from climate change? That is

Speaker 1  19:16
one reason. Yes, so that stat that I gave you about you know eight hours per day on average by 2050. That it will be too hot to work in Sri Lanka. That is the highest in the region. That number, that eight eight hour a day. And I saw

Murtaza Jafferjee  19:29
Afghanistan at only about two hours because they're a more mountainous country. Exactly.

Speaker 1  19:34
So Sri Lanka is already a very hot country. It's at the equator, and so even the same increase in temperature will have larger impacts here because you're kind of moving towards thresholds where it becomes hard to to to be productive. And and one thing you see in the in the economic literature on this, which I've contributed to, and some of which is in the book, a lot of which we review, is that the effects of of temperature. On output of all sorts, whether that's labour productivity, agricultural productivity, or other, tend to be nonlinear. They tend to kick in really once average temperatures hit kind of the high 30s Celsius. And so again, if you're already a hot country, you're closer to that point. And so the the kind of marginal effect of of a one degree centigrade increase in in temperature is is can be quite large economically. Yeah.

Murtaza Jafferjee  20:26
So one negative outcome of high temperatures is that the air expands and can hold more water, and then the intensity of rain increases, which creates flooding. There is also another chart about flood proneness, and it shows the eastern side of Sri Lanka fairly flood prone. Can you comment a little bit about floods? Yes,

Speaker 1  20:55
absolutely. So, so the map that you're referring to from the report, essentially, what we did was we we kind of plotted the the predictions from kind of a state of the art climate flood model, which predicts you know floods of various sizes and severities over you know various return periods, as they call it. So the you know the kind of one in 50 year flood, the one in 7,500-year flood, and you know, of course, over all of those metrics, you know, there's going to be an increase in flooding severity across the board. Sri Lanka is particularly exposed, just in part because it's, you know, at least in the coastal areas, it's a low-lying island nation, right? And so there's definitely going to be increased increased flooding from from from sea level rise and from from rainfall, right? So so the thing about climate change is is it ultimately has all of these different channels by which it affects affects weather and flooding is kind of a very common outcome. We see it in India, we see it in Pakistan. Pakistan in particular has been hit with really devastating floods in recent years, and we're going to, I think, continue to see it in Sri Lanka as well.

Murtaza Jafferjee  22:05
So, what differentiates this report from many of the other work on climate is, I think, you took a very, very rigorous approach with data. That not only did you have news surveys to collect data, but you're using a lot of satellite data for meta. You're using data, a lot of quantifiable approaches you are taking. Is this because there's a lot more data available? What was the reason that you became so rigorous? That's a

Speaker 1  22:36
great question, and I think that there are you know in terms of the data landscape on this issue, it's yes, it's increasingly the case that we have spatially granular, very disaggregated down to kind of the 500 metre squares all over the world data on climate outcomes, so temperature, precipitation, flooding. You know, so a lot of that data does come from satellite data. It comes from modelling of weather stations. So weather station coverage has also proved pretty dramatically in many countries. So yeah, we're in an environment now where we have spatial data products that are more granular and more comprehensive and cover more climate outcomes than than kind of ever before. So that's great. That allows us to say something when we link that data up with economic data at the local level, whether that's data on firms or households and their behaviour, their productivities. It allows us to say something about that. The the the piece that was missing, I think, and this is an important part of the report. Actually, it's kind of the core of the report, is data on how firms, households, farmers are actually adapting to climate change. That's data that's that's you know quite a bit more difficult to find. It's not just out there being collected, you know, in in these all of these climate science approaches because that's you know social and economic data that someone has to design a survey and go collect. What we so so so we kind of got at that problem in two ways. The first thing we did is we just reviewed the literature, the economics literature, and there's there's been a fair amount of work on this, on you know how households and and firms adapt to climate change. Now most of those studies come from existing datasets, household surveys, firm censuses, things like that, and as a result, these are not data sources that are tailored to studying adaptation. For example, in the in the context of households, there's a few margins of let's say climate adjustment or adaptation that are easy to observe in standard household surveys like the type that the Sri Lankan government collects. One of those would be what sector of work you're you're working in, right? If agriculture is is really vulnerable to increase in heat, then you might shift to another sector, right? Another. Commonly studied phenomenon is migration in response to heat or flooding. Those are things that can be observed relatively well in existing data. What can't be observed relatively well are local solutions and adaptations that again are not you know these surveys are not designed to capture like are people adopting you know flood resistant or heat-resistant seeds. Are people upgrading their their buildings, their housing structures, their firms to to cope with climate change? Are firms buying air conditioners? Are they investing other sort of capital goods to to to combat the effects of climate change? Those you know data points are just not really out there, and so ultimately, what we did, and I think this is kind of the innovation of the report, I suppose, is we ran a variety of surveys in these contexts. So we we we had surveys in Pakistan, in India, in Bangladesh, you know, all over the region where we surveyed firms, farmers, workers, households, and tried to understand, you know, just what they're doing, you know, just as a, you know, kind of on a descriptive level, you know, how are households and firms adapting to climate change, and is it is is it working, right? And so, you know, I think we contribute in that way to to get a much more granular picture of of these adaptation mechanisms than was previously kind of available in the literature when we had to rely on these just existing data sources.

Murtaza Jafferjee  26:30
What I gathered from your book is that the effects of climate change are not equal; that there are a much more vulnerable part of the population. Can you speak about that?

Speaker 1  26:45
Absolutely. So I think that there are two there are two components to that. One is unequal exposure. So are poor people more likely to live in areas that are disproportionately affected by climate change? And the other is unequal kind of resilience, let's say. So let's first talk about exposure. It's certainly the case, and this is indeed what we find, that there there is a lot of inequality in who's exposed to climate. So throughout the the the report, we look at heat and floods as kind of the two main big climate trends that are likely to affect the region, and what we did to study this question is we took you mentioned this earlier data from Meta, so Meta has an incredible set of data products that they release to the public. It's it's a really wonderful initiative, and this particular one is called the Relative Wealth Index, where you're able to measure wealth or kind of a predicted wealth score at a very spatially granular level, and this comes from Meta's internal data where they train you know machine learning models to predict people's wealth, and then they project that down to kind of basically cover the entire world. So it's a really amazing data set, and and as you might have guessed, you can link that up very easily with the climate data, with the data on rainfall, flooding, and and temperature, and so that's what we do. And ultimately, you just kind of look at the correlations that you find there, and ask the question: Is it true that you know the hotter places, the places that are getting hotter faster, the places that are exposed to floods tend to be disproportionately poorer, and you know, with some nuances and caveats, I would say that yes, we do find that. As I mentioned earlier, it's about 20 to 30 percent poorer. The hottest places in South Asia, relative to kind of the average, the average heat. So it certainly seems to be the case that that poor people are more exposed. There's one interesting exception to that, which is when you look at flooding in rural areas, you actually find that richer households are are more likely to live in flood-prone areas in rural areas across South Asia, and kind of we I mean there's many ways one could interpret that, but we interpret that as kind of reflecting the effects of flooding on agricultural productivity and fertility, because you know these floodplains, particularly in India and Pakistan, tend to be the most fertile agricultural regions as well. So you know that's kind of the one exception to that rule. In urban areas, for sure, it looks like you know poorer neighbourhoods tend to be more flood prone, and that is very consistent with what you might think, kind of when you think of informal settlements in cities that are kind of on the margins of the city tend to be in in flood prone regions. So that's the the exposure piece. The second question is, is it true that conditional on getting hit by a certain shock, the poor are kind of less able to to cope with

Speaker 3  29:44
it,

Speaker 1  29:44
and that you know seems seems reasonable as a as a broad conjecture. It's very much true that at kind of a national level across countries, richer countries tend to have tend to be less sensitive in their economies to natural disasters. Right, the cost the. Economic costs of natural disasters and extreme weather events are are much lower in rich countries than they are in poor countries, and that's again it's a problem of adaptation, right? In some sense, income and development is is really the best form of adaptation, right? And that's also true on the micro level within countries in the surveys that that we collect, right? It's certainly true that that that poorer households are less able to adapt. That's something that that comes out, I think, many times in the in the book.

Murtaza Jafferjee  30:31
So, in Sri Lanka, especially in the city of Colombo, we can see that the poorer areas are subject to far greater flooding. We have a river here called Kalania, which goes through Colombo City, and historically the poorer areas have been on the banks of the river. So I would presume that the land is cheaper there because it's prone to flooding, and that is why they they live there. Now, with regard to hotter areas, is it again because nobody else wants to live there, or they're poor because it's hot?

Speaker 1  31:06
That's a great question, and it's ultimately a question that you can't answer just by looking at the correlations between these two variables, right? You know, you're asking kind of a cause, causal versus correlation question. We think that

Murtaza Jafferjee  31:20
also the direction, right? What sizes what

Speaker 1  31:22
exactly? We think that the the relationship between between heat and poverty is both reflects selection that mechanism that you just mentioned that those areas might be cheaper, they're less desirable to live, that's where poor poor people can afford, but also treatment, as we would say, or kind of the causal effect of heat, because we know that heat has a negative causal effect on productivity, on wages, on labour supply. There was I was actually in India last week, and I was talking to some some fellow researchers who are at the at the IIMB, the Indian Institute of Management in Bangalore, who are working on a study that shows really negative effects of heat on labour supply. So we know that there are these direct causal effects, but those I don't think can fully explain this relationship. Right? There's certainly kind of a selection aspect to it as well.

Murtaza Jafferjee  32:17
If we can now move on to adaptation or the coping mechanism, so in your book there are two: one what you call autonomous, and the other one directed.

Speaker 1  32:30
That's right.

Murtaza Jafferjee  32:31
So explain to us what autonomous means.

Speaker 1  32:35
So autonomous adaptations, you can think of these as kind of the the normal responses that agents in the economy take to the changing incentives and price signals that climate change will present to them. So, for example, if a firm, you know, if inputs become more costly to a firm because their suppliers are affected by climate change and and they go out of business. The firm will switch to different suppliers or using different inputs that are kind of near substitutes, right? Similarly, if a household you know is in agriculture and we know that agriculture tends to be more heat sensitive than other sectors, that household might switch its labour supply into another sector, or might migrate, for example, those are what we would call autonomous adaptations. Basically, just agents in the economy following their incentives, and and ultimately reallocating their labour, their inputs, their consumption habits to kind of align with the with the relative price changes that are generated by by climate change. Now, what's interesting about autonomous adaptation is again there's there's no government in that process. The role of government, I think, we argue in that process is to make it as frictionless as possible for agents to do that, to make it easy to switch jobs, to make it easy to borrow to invest in in you know some sort of resilient technology to to kind of solve the market failures where they exist, so that so that we can kind of frictionlessly move goods, resources, labour, etc. to where it should go. And in in the in the book, we have kind of a big macroeconomic model where we estimate the impact of autonomous adaptation on the damages from climate change. So that 7% number I gave you earlier is what we would expect, you know, business as usual climate change to to do to South Asian economies by 2050. If we you know allow for autonomous adaptation. So that's in kind of the no adaptation case. If we allow then for full, you know, full kind of reallocation of goods and resources and adjustment of prices, we find that that number goes down to about four and a half percent. So just by kind of facilitating that process and letting agents in the economy. Do what they're normally going to do. Follow their incentives. You can really cut the the damages from climate change substantially. Now, the other form of adaptation is what we in the book call directed adaptation.

Murtaza Jafferjee  35:12
Before we go there, Joe. Yes, I quote again from Shanta's first paragraph: "Poor people are poor because markets failed them and governments fail them, and you said that you know in your general equilibrium model the loss is about seven and a half percent, but if if markets are working efficiently, can be reduced to four and a half percent. That's right. So what explains the difference?

Speaker 1  35:40
I mean, there's a whole host of of of different market failures that kind of prevent us from realising that that 3% kind of gain, right? I think one we kind of keep coming back to in in the report is financial markets, right? And there are you know multiple financial products that that should help agents adjust to to to climate shocks. Obviously, insurance is an important one, right? You know, there are real gaps in insurance markets. In fact, in most countries in South Asia, there's almost no take up or supply of of agricultural weather insurance, for example, and that's hugely important in insuring farmers against against these you know increasing climate risks. So financial markets are a big one, but the other the other one that we look at, I think quite a lot in the in the book is is labour markets, right? If there are some you know kind of frictions that prevent you from moving out of agriculture and into a less heat-sensitive sector, whether that's because migration is difficult, there are high costs to migration, whether it's it's because you don't have the skills, you know, there's there's a whole host of things that might prevent you from doing that, or or or perhaps you just don't even have the information, right? So information is another kind of common market failure that I think applies kind of across all markets, right? That's a very cross-cutting issue that we we come back to in the report. So these are just kind of a few examples of the ways in which, you know, relatively light-touch government interventions, which might include a combination of deregulating the private sector to allow labour markets to move better, or supporting the financial sector. So I think again the insurance example is illustrative because it does imply, in some cases, government intervention in insurance markets. So the big issue in a lot of these insurance markets is simply that the actuarially fair premiums that you would have to charge to insure against climate risks in certain contexts, particularly where risk is very high, are just much higher than most farmers, most small farmers, for example, will be willing to pay. And the most successful insurance programmes, agricultural insurance programmes, like India's agricultural insurance programme, which has done relatively well at kind of increasing coverage, are are subsidised in part by the state. So that's a context in which I think state intervention makes sense. Again, there are other contexts in which deregulation is the solution. There, I'm thinking again more about labour markets and reducing frictions to hiring and firing, for example. Those things are what allow firms to grow, particularly non-agricultural firms, who can then absorb more labour that's being released from agriculture as as as the agriculture sector is affected by climate change. So that's you know there's a whole host of things, and we we go into a lot more detail than this in the book that governments can do to kind of facilitate autonomous adaptation.

Murtaza Jafferjee  38:36
You alluded to incentives of private agents. One thing you said is that what blunts incentives is property rights. That if people don't have secure tenureship, they are more reluctant to take action because it's not theirs.

Speaker 1  38:54
Absolutely. Would

Murtaza Jafferjee  38:55
you like to comment on the importance of property rights?

Speaker 1  38:58
Absolutely. So, and I think it's it's pretty well established in the literature that stronger tenure security increases, for example, agricultural investment in your plot. Exactly for the reason that you just mentioned, which is that you have a stronger incentive, you get to you know kind of reap the returns of improving land quality, for example. Those same you know insights apply to investments in climate adaptation as well. For example, if you if you need to invest in a particular agricultural practice that's more resilient, or if you need to invest in a new you know variety of seeds, you're more likely to do that if you have stronger tenure security. One thing we find in the report is it's not just 10-year security, but it's also just land holdings that are strongly correlated with adaptation, particularly among agricultural households. So, land-owning households tend to adapt more, even conditional on, you know, controlling for their level of wealth. So, it's not just a wealth effect; it's that having you know access to your own land, which is. Highly complementary with all these good adaptations that you could make seems to be seems to be very important. South Asia is is a context in which there's there's a lot of land inequality, there's a lot of lack of tenure security, and so these are areas again in which which policy can help and ultimately I think move the needle on on making people more resilient.

Murtaza Jafferjee  40:19
So the second channel you spoke about is directed. Yes. So what's that?

Speaker 1  40:28
So directed adaptation, in kind of our definition, is is more the the types of adaptations that I mentioned at the beginning of this interview, kind of top-down government-directed investments, basically, you can think of those as infrastructure investments that might kind of defend against climate catastrophes like flooding. You can think of those as you know government R and D into new varieties that are that are you know of seeds, for example, that are heat resilient. There's a whole host of these types of of interventions that ultimately, you know, require government investment, big government projects, to kind of attack climate change and make society more resilient. Now, what we find in the in the report is that kind of the marginal effect of of some of these big these big directed adaptation approaches once you've already accounted for autonomous adaptation is actually relatively small. It's not nothing. You can you can basically gain back an an additional 10% of the losses from climate change. So let's say you know the autonomous adaptation kind of gets you 30, 40% of the way back to to to kind of neutral. You can gain maybe another 10% from from from these directed adaptations, and you know ultimately these types of adaptations are are often no regret. What we would call no regret investments. Like you want to invest in agricultural R and D anyway because it's going to improve you know agricultural productivity, right? So so those types of kind of double dividend type investments are the ones you should be looking for. And ultimately, since climate change is happening and it's likely to have these large effects, you're probably not going to regret making big investments in these types of resilience Strategies, but again, in what we emphasise in the report, the autonomous adaptation by private sector agents who are just following incentives is going to kind of comprise the lion's share of the resilience in any given society.

Murtaza Jafferjee  42:36
So, the second largest city in Sri Lanka is Kandy, which is in the hill country, and close to Kandy there is a town whose name slips me at the moment, which is predominantly inhabited by Muslim people, and it is very prone to flooding, and it is very political to the population there because you have pretty large floods, which have got worse with climate change. So they are reaching out to the politicians to solve the problem. Now you talked about the concept of locking.

Speaker 1  43:23
Yes.

Murtaza Jafferjee  43:24
Now this is when I read your book. I mean, I thought about this town. So should government intervene and solve the problem of flooding? Yeah. Or is the better solution for those people to simply move out because it's a flood-prone area.

Speaker 1  43:41
That is, in some sense, I think a million-dollar question in this space. And to to kind of illustrate that, let me bring up another example, one that we studied in detail in the report that I think sounds very similar to to the to the one you've just raised. And so we did a kind of in-depth study. It's in the it's in the book on northern India, Bihar state, and particularly the the Kosi River basin, which is a very heavily flood-prone region. In 2008, they had these kind of devastating floods that caused billions of dollars in damage and displaced lots of people. It's really bad, but it also kind of gets just annual flooding. It's a regular thing, and again, we think it's going to get worse because of climate change. The World Bank, so the Indian government has invested lots of money over the years in building embankments along the Koshi River that ultimately kind of contain the flow of the river and prevent it from moving too far in one direction or another, but also those embankments can breach. They often do, and that's kind of what causes these these catastrophic floods. So the World Bank was contracted or kind of engaged with the Indian government to to rebuild these embankments recently, and I know many folks who worked on this on this. Project and and so we decided you know how does this affect private adaptation and and kind of local adaptation strategies among rural households in that area and ultimately what does that tell us about exactly this question of whether we're kind of creating lock in by making these big infrastructure investments and what we found I think is somewhat consistent with this Lockean hypothesis, just to kind of clarify, you know, kind of define that it's this idea that by investing in large protective infrastructure projects, you're kind of crowding out private adaptations, and one of those adaptations might be people moving away, or at very least moving into other, you know, sectors like non-agriculture that are somewhat less exposed or sensitive to to flooding or heat or whatever it may be, and so that's basically exactly what we found in the data when we kind of evaluated this World Bank project. What we found was that households tended to migrate less; they tended to engage more in agriculture. They kind of doubled down on agriculture. They tended to adopt fewer flooding-specific adaptations. So, in this context, the main flooding adaptation is kind of either digging drainage canals around your house or raising your home so that you know the the flood waters don't penetrate the house. So various kind of basic building upgrades like that. People do less of that when they're protected by an embankment. They also seem to invest somewhat less in agriculture. That's that's not entirely clear. So there were there were a bunch of these these kind of expected effects. Now that does suggest that there's some lock-in happening there. People who otherwise would have migrated are not doing so because of the existence of these embankments. You know, I think that the that's a descriptive point. The less clear point is whether that's a good or a bad thing, right? And and there, I think that's that's a political question as much as as it is an economic one, and certainly it's really hard to say that you should kind of abandon these communities from a political standpoint. From an economic standpoint, we can think a little bit about what the welfare implications of this are. For example, if this is a relatively unproductive rural area, where ultimately people might be better off working in in in non-agricultural professions or in cities if they migrate, and and will ultimately probably be more productive in those in those different locations and and and and sectors. Then yeah, maybe locking in is not is not a great idea, but then that also means that you're going to treat Colombo very differently than you treat this village, right?

Speaker 1  47:49
And that is a very politically difficult thing to justify, even if it you know in some sense is an economically efficient thing to do, right? So I don't you know I don't have the answer to this. I think this is a question that should be debated publicly, and should be kind of a political decision because it has a lot to do with how power and resources are distributed within a country, but from kind of an economic standpoint.


Transcribed by https://otter.ai