Over the coming decades, climate change and natural disasters have the potential to undo much of the progress made in lifting households out of poverty over prior decades. By one estimate, climate change could push 100 million people across the globe into poverty within the next 10 years. By the end of the century, the ratio of GDP per capita between the richest and poor countries in Latin America and the Caribbean is also expected to dramatically increase as a result of climate change and accompanying natural disasters.
As the recent IDB report The Inequality Crisis explains, the region needs to make a concerted effort to design policies that foster inclusive growth and sustainability to counteract these dangerous trends.
There are three reasons that climate shocks and natural disasters exacerbate inequality. First, poorer countries, regions, and people tend to be more exposed to climate change impacts and natural disasters than their wealthier counterparts. Second, they lose a greater share of their wealth when climate shocks hit. And third, they have fewer resources to cope with the negative impacts of climate shocks.
Figure 1. GDP Per Capita and Baseline Temperature of Latin American Countries
Source: IDB staff calculations based on Burke et al. (2015).
Within Latin America and the Caribbean, the high-poverty regions of Western Bolivia and Central and Southern Peru are the most vulnerable to heavy rainfalls and flooding. Moreover, across countries in Latin America, temperature is negatively correlated with GDP per capita, so that poorer countries are more exposed to high temperature (Figure 1). There are similar patterns within countries as well. For instance, Brazilian states with higher temperature have lower GDP per capita suggesting that poor states are more exposed to the impacts of rising temperature (Figure 2).
Figure 2. GDP Per Capita and Baseline Temperature of Brazilian States
Source: IDB staff calculations based on the University of Delaware (reconstruction data assembled by Willmott and Matsuura (2018)) and the Brazilian Institute of Geography and Statistics (IBGE) (2010).
When climate shocks do occur, the poor typically lose a greater share of their wealth. For example, Hurricane Mitch wiped out 18% of the assets of the poorest quintile in Honduras compared to only 3% for the richest quintile. These disparate losses of wealth translate into unequal reductions in consumption.
The poor are least able to cope with and recover from the negative impacts of climate shocks. They have fewer financial resources, both because their social networks — or support systems– tend to also be poor and because they have less access to formal savings, credit, and insurance. Remittances can also alleviate financial pressure — or smooth consumption — but the poor are disadvantaged here too. One study in Jamaica found that households who lived in better constructed housing, a proxy for wealth, were more likely to smooth consumption after tropical storms using remittances. Further, while wealthier households can adjust their budget, for example by delaying luxury purchases, poor households already dedicate a significant share of their budget to meeting their basic needs.
These three factors form a negative feedback loop in which the poor are more likely to experience climate shocks and lose a greater fraction of their wealth to them. Forced into poverty as a result, they are now in a worse position, with fewer resources to cope, when the next climate shock hits.
Fortunately, countries can break this cycle by implementing inclusive development policies that are consistent with climate stabilization and disaster risk management goals and, at the same time, reduce inequality. The first step is to improve social safety nets and enact policies that improve the poor’s ability to cope with the negative impacts of climate shocks. Better insurance and formal financial products, access to health care, and improved infrastructure services are some examples.
Governments also need to provide assistance to the most needy when natural disasters hit. Without quick assistance in the aftermath of a disaster, poor households may sell productive assets, withdraw their children from school, or delay seeking medical care to meet their immediate needs, jeopardizing their long-term prospects. Using funds pre-authorized for this purpose, governments can quickly target resources to the most vulnerable by utilizing existing cash transfer mechanisms.
Inequality should also be considered in the design of climate change adaption and mitigation policies. Using traditional cost-benefit calculations to select investments for climate change adaption, for example, is likely to favor the wealthy at the expense of the poor. That is because the poor typically live in marginalized neighborhoods that are more expensive to protect against climate change while possessing less wealth that would benefit from such protection. Only by explicitly considering inequality and involving the poor in decision-making, can those discrepancies be resolved in a fair manner. Climate change mitigation policies, such as the removal of subsidies for fossil fuel, can also be done equitably. For example, the Dominican Republic, and Mexico compensate poor households for energy price increases through cash transfers.
Unmitigated climate change threatens disastrous impacts for both economic growth and inequality in Latin America and the Caribbean. But by taking action sooner rather than later and taking poverty and inequality into account in the design of policy, the region can retain the social gains of the recent past and continue to progress towards its development goals.
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