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The Economic Impacts of Climate Change and El Niño in the Andes

July 16, 2024 by Leandro Andrian - Cristhian Larrahondo - Miguel Alzamora - Augusto Chávez Baquero - Emily Diaz Rivera - Daniel Cárdenas - Luis Serrudo Leave a Comment


As climate change continues its persistent advance, its main effects, such as higher temperatures and changes in rainfall patterns, are becoming increasingly frequent and clear. One such effect is the El Niño Phenomenon (ENP), an anomalous warming of the surface waters of the Central and Eastern Pacific Ocean, which, in turn, modifies the climatic conditions for South American Pacific coastal areas.

In the Andean countries (Bolivia, Colombia, Ecuador, Peru, and Venezuela), the relationship between climate change and the ENP can be seen in extreme weather variations. While torrential rains and floods ravage the coasts of Peru and Ecuador, severe droughts in the Andes mountains drastically reduce the availability of water. There have been three periods of particular exposure and impact—1982-1983, 1997-1998, and 2016-2017—categorized as episodes of extraordinary, strong and moderate magnitude, respectively. All of them have had significant socioeconomic impacts.

A recent IDB publication, “Effects of the El Niño Phenomenon in the Andean Region: An Empirical Approach,” published in Spanish, delves into this cyclical phenomenon, exploring how and to what extent the ENP affects  the economies of the Andean countries. It focuses on changes in economic activity and price levels (inflation), two of the main macroeconomic indicators reflecting the regional economies’ welfare conditions. It also proposes measures to mitigate the ENP’s effects.

Figure 1. Oceanic Niño Index (ONI)

Source: National Oceanic and Atmospheric Administration (NOAA).
Note: Measures deviations from the average sea surface temperature in the central and eastern equatorial Pacific region. The study uses the Oceanic Niño Index (ONI) measured in a particular Pacific zone according to the country of interest. While for Peru it is Region 1+2, for the rest of the countries it is Central Region 3.4.  FEN = El Niño Phenomenon (ENP).

The El Niño Phenomenon: A Cyclical Weather Event

These effects vary for every country in the Andes, with different  weather phenomena and different intensities. And they deliver distinct impacts on economic sectors.  In Bolivia, Ecuador, and Peru, for example, the ENP has caused excess precipitation,  with significant effects on extractive activities such as fishing and agriculture. Meanwhile, in Colombia and Venezuela, it has generated a drop in rainfall, affecting the agricultural sector and electricity generation, with related increases in energy tariffs and inflationary pressure.

Figure 2. Economic Sectors most affected by El Niño

Source: Moody’s Investors Service.
Note: Agricultura = Agriculture; Energia = Energy; Pesca = Fishing; Construcción = Construction.

The study analyzes these economic reactions to the ENP. It examines not only inflation but also economic growth in the face of different ENP magnitudes while  comparing them to a baseline scenario in which the phenomenon did not occur. It also takes a historical perspective, analyzing what the economic impact of the ENP could have been in the recent 2023 event and, by extension, in future events of similar or greater magnitude, using past events as reference.

Deviations are estimated in percentage points with respect to a scenario in which there was no El Niño occurrence. The main results reveal that the ENP in the Andean region could have reduced economic growth in a range of 0.2 to 0.5 percentage points in the months of impact of 2023, and between 1.3 and 4.4 in the months of 2024, with Peru and Ecuador being the countries most susceptible to these impacts. A potential increase in inflation in Colombia and Peru of between 0.6 and 1.1 percentage points in 2023, and between 1.0 and 3.3 in 2024 was also found.

Figure 3. Economic Impact of the El Niño Phenomenon

Source: Authors’ elaboration.
Note: The effect represents the difference of each ENP scenario with respect to a base scenario in which the non-occurrence of the phenomenon is assumed. No significativo = Not significant.

Lessons from El Niño’s Effects

These results suggest that, given the heterogeneous effects of the ENP in the Andean region, mitigation and adaptation strategies need to be implemented to counteract these effects at the economic and social levels. These could include infrastructure reconstruction, subsidies to affected sectors, and conditional transfers to cushion the transitory impacts of higher price levels on the region’s most vulnerable people. Flexible policymakers and adaptable economies will be crucial in the efforts to counteract the negative consequences of ENP-related extreme weather events and strengthen resilience as the adversities of climate change deepen.


Filed Under: Social Issues Tagged With: #ClimateChange, #ElNiño

Leandro Andrian

Leandro Andrián is a Lead Economist at the IDB. Leandro Andrián is a Senior Economist at the IDB. He holds a PhD in Economics from Iowa State University. Prior to his doctoral studies he worked at the Ministry of Economy of the Province of Buenos Aires in Argentina, was a professor at the Catholic University of La Plata (Argentina) in macroeconomics and a research assistant at the National University of La Plata (Argentina). He joined the IDB in 2009, worked in the fiscal sector, was country economist for Bolivia and Colombia, and is currently a lead economist for Venezuela. He has published several papers on macroeconomics, fiscal, energy transition, growth, economic cycles, and poverty.

Cristhian Larrahondo

Cristhian Larrahondo es parte del equipo económico del Banco Interamericano de Desarrollo en Colombia. Economista egresado de la Universidad del Valle (Cali, Colombia) y magíster en economía de la Universidad EAFIT (Medellín, Colombia), cuenta con experiencia como consultor, analista de datos y asistente de investigación en diferentes temas como salud, educación y condiciones macroeconómicas.

Miguel Alzamora

Miguel Alzamora is a Peruvian citizen and holds a degree in Economics from the Catholic University of Peru. He has six years of professional experience in applied macroeconomics and public policy. Previously, he worked as a senior economist in macroeconomics at the Ministry of Economy and Finance of Peru. Currently, he is an economist consultant for the IDB country office in Peru.

Augusto Chávez Baquero

Augusto Chávez Baquero is part of the economic team of the Andean Group Countries Department (CAN) of the Inter-American Development Bank (IDB). He is an economist graduated from the School of Economics of the Universidad Nacional de Colombia and has experience in macroeconomic analysis and regional sector studies. Before joining the IDB as a consultant, he worked in the Public Policy Monitoring and Evaluation Directorate of the National Planning Department (DNP) and collaborated in the macroeconomic modeling department of Banco de la República.

Emily Diaz Rivera

Emily Diaz is a consultant and research assistant in the economic team of the Andean Group Country Department of the Inter-American Development Bank (IDB). Previously, she worked as a research assistant at the IDB Country Office in Ecuador. She graduated with a B.A. in Economics and International Relations from Universidad San Francisco de Quito. Emily began working at the IDB as an intern at the IDB Country Office in Ecuador, where she worked as an assistant on studies aimed at identifying and measuring discrimination against diverse populations in different markets in Latin America. Prior to joining the IDB, she worked as a logistical assistant for the Civil Society Organization Grupo FARO and also has experience in the private sector, where she focused on data analysis.

Daniel Cárdenas

Daniel Cárdenas is a consultant for the Inter-American Development Bank's economic team for Venezuela. He has experience in economic research, data analysis, and public policy design and evaluation. He is an economist graduated from the Universidad Central de Venezuela and holds master's degrees in Behavioral Economics (University of Nottingham, UK) and Finance (IESA, Venezuela).

Luis Serrudo

Luis Serrudo is a consultant and research assistant at the country office of the Inter-American Development Bank in Bolivia, as a part of the economic team of the Andean Group Countries Department. He holds a master’s degree in economics from the University of Chile and a bachelor's degree from the Universidad Católica Boliviana. Before joining the IDB, he worked as a research assistant at the Millennium Nucleus on the Evolution of Work, at the Faculty of Economics and Finance of the University of Chile and at CAF Development Bank of Latin America, where he worked on projects on the future of work, foreign trade, and inclusive growth. He was also Executive Editor of the academic journal Estudios de Economía. He is currently researching on digital financial inclusion and its potential benefits in developing countries.

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