Climate Change and Economic Growth in a Rain-fed Economy: How Much Does Rainfall Variability Cost Ethiopia?

Economic growth may be impacted by climate change through rainfall variability. This paper, demonstrates that the adverse impact of rainfall variability on economic growth depends on the rate of expansion of the amplitude of rainfall variability and frequency of occurrence of extreme events. A co-integration analysis using time series data from Ethiopia shows both inter-annual and within-annual rainfall variations have negative effect on growth. Simulation results on the forgone growth due to rainfall variability for the last five decades implied that mitigation and adaptation strategies towards climate change that reduce the impact of rainfall variability would put Ethiopia on a higher trajectory of growth. The purpose of this paper is to show how rainfall variability in particular in the face of climate change keeps a poor country in what Nelson (1956) called the ’low-level equilibrium trap.’ The paper introduces rainfall variability with widening amplitude into the traditional growth model as a factor that incapacitates capital and demonstrates how dependency on rainfall drags growth. A time series data from Ethiopia is used to empirically support the argument.