Climate Change and State-Building in Developing Countries

Despite the short run negative effect of adverse climate shocks on economic outcomes is undisputed, our understanding of their long run institutional impact is limited. To clarify this issue, we propose a time inconsistency theory of state-building and we document that, in the world's most agricultural countries, severe droughts pushed the elites to grant a more inclusive political process. This reform convinced the nonelites that a sufficient part of the returns on joint farming investments would be shared via public good provision and, thus, to cooperate. To elaborate, the severity of droughts has a negative and short run direct effect on agricultural output, whereas its institutional impact is positive and persistent. Moreover, reforms towards more inclusive political institutions shift tax revenues from military to education expenditures and, thus, exert a positive and delayed impact on agricultural output. These results suggest that policymakers should: (a) consider short and long run effects of climate change; (b) calibrate climate-related policies according to the degree of complementarity of group-specific skills; (c) avoid the unfettered transplantation of strong political rights in all developing countries. From a methodological point of view, our analysis emphasizes the need of combining natural and social sciences to inform policy intervention.