Precipitation anomalies, economic production, and the role of “first-nature” and “second-nature” geographies: A disaggregated analysis in high-income countries

Abstract

Linkages between hydroclimate variability and economic development are often theorized to be present only in developing economies. Using spatially small-scaled data from multiple decades for European regions, we examine the relationship between precipitation anomalies and economic performance in highly developed economic systems. We conduct a disaggregated empirical analysis to mitigate the bias potentially arising from spatial aggregation because precipitation realizations tend to vary drastically within larger sized economic units. We modify original precipitation indices to capture the dynamic expectation formation of economic agents about climate conditions to measure deviations from these anticipated environmental states. Using panel model regressions in a quasi-experimental research design, we analyse whether deviations from average growth rates of aggregated economic output are potentially non-linearly related to the magnitude of precipitation deviations from the anticipated climate norm within regions, after accounting for any shocks common to all regions. We find that precipitation deviations that exceed critical thresholds (intermediate anomalies) for both unusually dry and unusually wet years reduce regional growth rates. The adverse impacts are more pronounced for overly dry periods. Importantly, the relationship between economic growth and precipitation anomalies is not generalizable across all regions. Natural geographical circumstances such as prevailing climatic conditions (“first-nature” geographies) and human-made socio-economic factors such as sector structure and income level (“second-nature” geographies) moderate the anomaly response. The empirical findings substantiate the necessity to incorporate precipitation variability into the assessment of economic costs of climate change; not only in developing countries or agricultural societies but also in highly developed economic systems. Moreover, the empirical results have important implications for policy makers as uneven effect sizes at the subnational level suggest that policy measures should be targeted in space and coordinated between national and regional levels of government.