Investing in Climate Adaptation under Trade and Financing Constraints: Balanced Strategies for Food Security

IMF Working Papers, August 23, 2024

Source details

Canonical URL: Investing in Climate Adaptation under Trade and Financing Constraints: Balanced Strategies for Food Security

Authors: Chen Chen, Koralai Kirabaeva, Danchen Zhao
Date: August 23, 2024
Core problem: Financially constrained governments, particularly in emerging and developing economies, face a fiscal trade-off between adapting to climate change impacts and pursuing broader development goals, with this trade-off being especially relevant in the agriculture sector for ensuring food security.
Geographic applications: Ghana, Egypt, Brazil

Purpose: Present a model to guide policymakers on the cost-efficient balance between investing in adaptation in the agricultural sector versus broader development under financing and trade constraints.
Role of trade: International trade can offset agricultural production shortages and reduce adaptation investment needs; trade fragmentation reduces this adaptive role, exacerbating food insecurity and increasing adaptation investment requirements.
Factors examined that lower adaptation investment needs:
- trade openness
- higher agricultural productivity
- efficiency of adaptation spending
- reduced labor market distortions

Promoting trade openness and accessing concessional finance for adaptation help tackle climate challenges and ensure food security in lower-income countries.
Domestic structural reforms are necessary to facilitate adaptation investments and reduce investment needs by:
- improving labor market flexibility
- improving adaptation efficiency
- improving agriculture productivity
The model’s application to Ghana, Egypt, and Brazil highlights how country-specific characteristics affect the adaptation–development trade-off and the scale of adaptation investment needs.

Advance trade openness to leverage international markets in offsetting domestic agricultural shortfalls.
Seek concessional finance specifically for adaptation to alleviate fiscal constraints on lower-income countries.
Implement domestic structural reforms to:
- reduce labor market distortions (improve labor market flexibility)
- increase efficiency of adaptation spending
- raise agricultural productivity and efficiency