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| Impact of Climate Risks on China's Agricultural Economic Development: Heterogeneity and Mechanism Analyses |
| DING Yugang, SUN Qixiang
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School of Finance, Guangdong University of Foreign Studies;
School of Economics, Peking University |
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Abstract Food is the paramount necessity of the people. The Chinese central government considers the agricultural economy extremely important and has always regarded solving its people's food issues as its primary task. A report delivered at the 19th National Congress of the Communist Party of China clearly indicates that “agriculture, countryside, and farmers” are fundamental to the national economy and are the top priorities of Communist Party of China, and that we must accelerate the modernization of agriculture and rural areas.
The development of the agricultural economy is restricted by various factors, with the negative effects of climate risk being undoubtedly the most direct and significant. As global warming continues to intensify and climate risks continue to increase, the economic impact of climate risks is receiving increasing attention. Hence, the assessment of the effects of climate risks on the development of the agricultural economy, especially the differences in the effects of climate risks on the agricultural economy in different regions and the underlying mechanisms, has important theoretical and practical significance. Only by clarifying the heterogeneity and mechanisms of these effects can we devise targeted measures to deal with climate risks, thereby offering important strategies to improve the climate risk assessment and response systems, promote the development of a modern agricultural economy, and ensure the security of the food supply.
We first conduct a theoretical analysis of how climate risks affect the development of the agricultural economy and propose hypotheses for testing based on the agricultural aggregate demand-aggregate supply theory and the neoclassical growth theory. Overall, climate risks and the associated natural disasters can cause losses in agricultural produce and increase the marginal costs of agricultural production, thereby shifting the aggregate agricultural supply curve toward the left or upward. According to the aggregate demand-aggregate supply model, the abovementioned changes in the aggregate supply curve may significantly affect the equilibrium of agricultural output in a negative manner. Furthermore, we theoretically analyze why the impact of climate risks on the development of the agricultural economy may differ in regions with different levels of per-capita income, agricultural insurance coverage, and agricultural modernization.
Next, we use the weather station and regional economic data and subject them to the panel fixed-effects model, spatial panel model, and mechanism analysis model to empirically test the above hypotheses. Our empirical results show that climate risks significantly decelerate the growth rate of the agricultural economy. The annual agricultural output growth rate in regions with higher climate risks is approximately 1.05 percentage points lower than that in other regions. Heterogeneity analysis shows that climate risks have a greater impact on regions with lower per-capita income levels. Moreover, climate risks have less impact on regions with higher agricultural insurance coverage levels or higher agricultural modernization levels. This indicates that agricultural insurance can effectively reduce the negative effects of climate risks on the agricultural economy through risk transfer and loss compensation functions, thereby highlighting the importance of financial products in addressing climate risks. Furthermore, improvements in the agricultural modernization levels can effectively reduce the adverse impact of climate risks on the agricultural economy. Finally, mechanism analysis shows that climate risks do not significantly affect agricultural inputs. That is, rather than affecting the output through affecting the input, climate risks directly affect the output. When the severity of natural disasters increases, climate risks directly affect the agricultural economy; moreover, the direct effect is greater than the indirect impact. This indicates that the agricultural insurance coverage, which mainly compensates for the losses caused by direct disasters, is insufficient. Therefore, new products such as agricultural index insurance should be promoted.
Our study makes two major contributions to the literature. First, previous studies assess the economic effects of both natural disasters and climate risks separately; no study provides combined findings for empirical analysis. Because of this disconnect, it is impossible to distinguish between the direct and indirect effects of climate risks on the economy, thereby making it impossible to accurately estimate the economic effects of both climate risk and natural disasters. This paper makes a distinction between the economic effects of climate risk and those of natural disasters, thereby providing a better understanding of how climate risk affects economic development. Second, when discussing the heterogeneity of the impact of climate risks on the agricultural economy, the literature focuses primarily on differences between regions with different incomes and temperature levels. In contrast, our paper examines the heterogeneity from the perspectives of agricultural insurance and agricultural modernization, thereby providing a better understanding of the role of financial markets and agricultural technologies in mitigating climate risk.
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Received: 12 November 2021
Published: 12 October 2022
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