The Effects of Climate Change on Public Investment Efficiency in Resource-rich Countries : Evidence from Stochastic Frontier Analysis

Developing countries suffer disproportionately from the negative impacts of climate change and environmental degradation on economic development in terms of financial costs and loss of potential revenues. In this paper, we examine the impact of climate change on the efficiency of public investment in 34 developing countries, with a particular focus on resource-rich countries, over the period 2000-2013. Using stochastic frontier analysis (SFA) to determine efficiency scores, we find that developing countries could increase the capital stock by 29% on average without changing their public investment spending. In particular, resource-rich countries could increase the capital stock by 26% without changing their spending. In the second step, we then use the fractional regression model (FRM) to capture the impact of climate change on the investment efficiency values obtained in the first step. Our results show that climate change has a negative impact on public investment efficiency. However, when the climate change index is disaggregated for the regressions, we find that only precipitation has a negative effect, while a 1°C temperature increase in resource-rich countries leads to a 16.32% improvement in public investment efficiency of GDP. These results are also statistically and economically robust to different controls and specifications. The main findings of this paper suggest that policies to address climate change in general and heavy rainfall shocks in particular should include strong provisions for financing more resilient public investments to adapt to climatic conditions and modernise public infrastructures to mitigate the negative environmental impacts for developing countries, especially resource-rich countries.