Chen Chen, Koralai Kirabaeva, and Denchen Zhao of the International Monetary Fund present a model to help policymakers assess the most cost-efficient balance between adapting to climate change impact or standard country development strategies. They highlight that for developing countries, a high debt level, increasing borrowing costs, and limited access to international capital markets can hinder their ability to address climate change and sustainable development. This can result in underinvestment in sectors such as agriculture, making these countries more vulnerable to external shocks. In addition, over the past 60 years, climate change was responsible for 20% of agricultural productivity loss. The authors present a model designed to identify an efficient level of investment for agricultural adaptation to ensure food security. They focus on (1) the cost-efficient mix of climate adaptation and standard development, (2) the factors that influence investment needs for agricultural adaptation, and (3) the role played by trade in agricultural adaptation.
The results emphasize that trade openness is an effective adaptation strategy as it reduces investment needs when agricultural production falls short, especially for food importers. On the other hand, trade fragmentation fosters risks of food insecurity and requires a higher level of adaptation investments. Higher agricultural productivity and better efficient adaptation strategies can create more fiscal space and lead to a better allocation of capital. Policymakers can also benefit from reducing labor market distortions, such as regulatory barriers and upskilling, to take advantage of trade openness. Additionally, new regulations on land use planning could improve adaptation investment efficiency. Finally, the authors caution that both underinvestment and excessive investment in adaptation can have negative consequences, with the latter diverting funds needed for standard development.
