The World Bank’s new report shows how climate change is hitting economies hard

Climate Economy

The World Bank’s new report shows how climate change is hitting economies hard

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A “Lost Decade” of slow growth threatens climate investment when it’s needed most.

Despite the cherry blossoms hitting their peak in Washington DC last week, there wasn’t a lot of spring joy in a new World Bank report predicting a looming “lost decade” of weak and falling growth for economies. Climate change is both a major reason for slow growth and the threat demanding bigger and faster investment in solutions and resilience that this slow down puts at risk.

The Bank’s report found that the global economy’s “speed limit”—the rate of potential growth at which it can expand without sparking inflation – is set to slump to a three-decade low by 2030. A structural growth slowdown is already underway, it says, with nearly all the forces that have powered global growth since the early 1990s (global trade, greater workforce participation, investment growth) seriously weakened.  

Potential growth is expected to average just 2.2% a year through 2030, down 0.4% from the previous decade, the lowest decade average since 2000, the Bank says.

While a limp global outlook is no real surprise given shocks like COVID-19 and the war in Ukraine, the report shows that the added economic drag effect of climate change is hitting countries hard.

“As if the convulsions of COVID, extreme weather events and the Russia-Ukraine war were not enough, developing countries are facing a silent crisis: their long-term growth prospects are declining,” said Shanta Devarajan of the Georgetown University’s Edmund A. Walsh School of Foreign Service. “Thanks mainly to demographic and climate change, potential growth will be significantly lower in the future than in the past.”

Extreme weather just keeps coming

Cruel and worsening natural disasters are presenting countries with such large recovery costs that when knocked down, many are unable to get back up again.

The low-lying Pacific Island nation of Vanuatu is a case in point. On March 1, Cyclone Judy hit the island group, ripping up power lines and crops, destroying homes and cutting many islanders’ access to running water. Then, just two days later, another Category 4 storm, Cyclone Kevin, walloped the country, worsening an already disastrous situation.

Judy and Kevin came just as Vanuatu was getting back on its feet from other recent cyclones, including Pam in 2015 and Harold in 2020. Both wiped out storms wiped out 60% and 67% percent of GDP for those years.  “We’re constantly in a state of recovery in response to climate disasters,” says Ralph Regenvanu, Vanuatu’s climate change minister.

See our report on Vanuatu: Sink of Swim. The extreme disparity of climate protection

On average, major disasters like these cut a country’s growth potential by 0.1% for the year it happened, the report finds — that’s a significant hit, especially for low-income countries. According to the report, the average small nation state has suffered loss and damage from climate-related disasters of 5% of GDP per year, on average.

Spending on recovery from overlapping disasters means governments (large and small) are diverting funds from investment.

In classic World Bank understatement, these losses did not occur in a predictable pattern, the report says. “Instead, it was not uncommon for the damages from a single climate-related disaster to cost a substantial portion of a country’s GDP, or even multiples of GDP in extreme cases.”

All the spending on recovery from overlapping disasters means governments (large and small) are diverting funds from investment – worsening the overall slowdown. With a slower global economy, the report warns that countries could be less inclined to invest in switching to renewables, electrifying their economies, and building in greater resilience – all the things they’ve committed to under the Paris Agreement.

So what’s to be done?

As the World Bank’s outgoing President David Malpass says in the foreword to the report, “An extraordinary series of setbacks has brought the world to another crossroads. It will take an exceptional mix of focused policies and effective international cooperation to revive growth.”

The Bank calls for a “Herculean effort” especially on climate-related investment needs which it says could account for an average of 2.3% of GDP per year for developing countries. Investing that much in the green transition every year over the next decade could lift the global economy by 0.1% and developing countries’ growth potential by 0.3% a year. As Shanta Devarajan said, the overall case for the green transition is clear. Pushing for it isn’t just a policy to reduce climate change, but it’s to enhance growth in the long run.

In a perfect world, countries would be prioritizing their investments in key areas like transport and energy, more climate-resilient food production, better water systems and regenerated landscapes. These investments in turn would boost long-term growth, while making countries more resilient to future natural disasters. But the reality is that governments are juggling an array of politically tricky spending decisions, often with the wrong sorts of incentives being dangled by the private sector.

Vanuatu goes to court

Vanuatu, which is yet again dealing with multiple disasters at once, isn’t waiting anymore. Three weeks after twin cyclones hit the country, its UN Mission in New York secured a historic motion to ask the International Court of Justice to define what legal responsibility countries have to fight climate change. The motion was backed by more than 100 other countries.

If multilateral climate commitments and green investment trends don’t get the job done, maybe it will be international law and the courts that finally deliver the killer blow.

“Vanuatu sees today’s historic resolution as the beginning of a new era in multilateral climate cooperation, one that is more fully focused on upholding the rule of international law and an era that places human rights and intergenerational equity at the forefront of climate decision-making,” said Ishmael Kalsakau, Prime Minister of Vanuatu, in a video statement to the UN.

Featured photo: UNDP

Written by

Elisabeth Mealey

Elisabeth Mealey is Climate & Capital Media's COP expert and is a freelance writer and communications strategist, specializing in climate change and environmental topics. She worked at the World Bank on climate policy, the Australian Government on indigenous land reform, WWF on Pacific Island conservation and Greenpeace on nuclear testing in the South Pacific. She started life as a journalist, working for newspapers in Australia and the UK and is now back on the environmental beat.