世界銀行-烏拉圭氣候沖擊的宏觀經(jīng)濟(jì)影響 The Macroeconomic Impact of Climate Shocks in Uruguay

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PolicyResearchWorkingPaper10740

TheMacroeconomicImpact

ofClimateShocksinUruguay

FernandoGiuliano

DanielNavia

HeatherRuberl

WORLDBANKGROUP

Macroeconomics,TradeandInvestmentGlobalPractice

March2024

PolicyResearchWorkingPaper10740

Abstract

Uruguayisaneconomythatisvulnerabletoprecipita-tionpatterns,asevidencedduringthecountry’shistoric2022/23drought.Yet,anddespiteitsrichmacroeconomicandclimatedataenvironment,thecountrydoesnothaveaconsistentmacroeconomicmodeltoaddresstheaggregateimpactofclimateshocks,letalonetheexpectedadditionalimpactfromclimatechange.ThispaperintendstofillthisgapbyintegratingclimateshocksintotheWorldBank’sMacro-FiscalModel,itsworkhorsestructuralmacroeco-nomicprojectionmodel.Buildingonexistingcountrystudiesonthesectoraleffectsofdroughtsandfloods,theanalysisfindsthatthevolatilityofasimulatedUruguayaneconomyonlysubjecttohistoricalclimateshocksreaches22percentofthehistoricalvolatilityofgrossdomesticproduct.Moreover,asclimateshocksareonlyoneofmany

shocksthatcansimultaneouslyaffectaneconomy,incor-poratingexogenousmacroeconomicshocksintohistoricalclimateshocksexacerbatesvolatilityandincreasespoten-tiallosses.Grossdomesticproductcanfallby2.3percentunderacombinednegativeclimateandmacroeconomicshockofthetypewitnessedonceeverysixyearsonaverage,and4.1percentunderaonce-in-40-yearscombinednega-tiveshock.Climatechangecompoundstheseeffectsgoingforward,worseningthemagnitudeofthedownsiderisksfromdroughtsbybetween18and30percent,althoughestimatesincorporatingclimatechangearesubjecttolargeuncertainty.TheorderofmagnitudeoftheseeffectscallsforamoresystematicconsiderationofclimateshocksinmacroeconomicprojectionsandfiscalriskassessmentsforUruguay.

ThispaperisaproductoftheMacroeconomics,TradeandInvestmentGlobalPractice.ItispartofalargereffortbytheWorldBanktoprovideopenaccesstoitsresearchandmakeacontributiontodevelopmentpolicydiscussionsaroundtheworld.PolicyResearchWorkingPapersarealsopostedontheWebat

/prwp.Theauthorsmay

becontactedatfgiuliano@,dnaviasimon@,andhruberl@.

ThePolicyResearchWorkingPaperSeriesdisseminatesthefindingsofworkinprogresstoencouragetheexchangeofideasaboutdevelopmentissues.Anobjectiveoftheseriesistogetthefindingsoutquickly,evenifthepresentationsarelessthanfullypolished.Thepaperscarrythenamesoftheauthorsandshouldbecitedaccordingly.Thefindings,interpretations,andconclusionsexpressedinthispaperareentirelythoseoftheauthors.TheydonotnecessarilyrepresenttheviewsoftheInternationalBankforReconstructionandDevelopment/WorldBankanditsaffiliatedorganizations,orthoseoftheExecutiveDirectorsoftheWorldBankorthegovernmentstheyrepresent.

ProducedbytheResearchSupportTeam

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TheMacroeconomicImpactofClimateShocksinUruguay

FernandoGiuliano,

DanielNavia,HeatherRuberl§

Keywords:Uruguay;macro-structuralmodel;climateshocks;droughts;floods;climatechange.

JELClassification:C10,C50,E37,Q54

§WorldBank;Macroeconomics,TradeandInvestmentGlobalPractice.ThispaperwasproducedundertheguidanceofDoerteDoemeland.Theshort-termdistributionalanalysiswasjointlydevelopedwithLourdesRodriguezChamussyandDiegoTuzmanFernandezfromthePovertyandEquityGlobalPractice.TheteamwouldliketothankMarianneFay,DirkHeine,MarianaConteGrand,AnaBucher,LuciaSpinelli,FlorenciaBalestro,CarlosCosta,JulietaSchiro,AndrewBurns,CharlJooste,EdwardBresnyan,PedroValdivia,andFlorentMcIsaac,whoprovidedvaluablefeedbackandadviceatdifferentstagesofthestudy,andMarielenaPerezforherresearchassistance.ThisstudybenefitedfromaclosecollaborationwithUruguayantechnicalteamsattheMinistryofFinanceandtheMinistryofLivestock,Agriculture,andFishing.Theteamwouldliketothankthefollowingcurrentandformergovernmentofficialswhichhelpedimprovethestudy,noneofwhomshouldbeheldaccountableforanymistakesormisinterpretations.AttheMinistryofFinance(inalphabeticalorder):MarceloCaffera,JuanChaves,LuciaHeguy,JuanLabat,GabrielaMiraballes,VictoriaNovas,MariaLuisaOlivera,NicolePerelmuter,MariaTornaria,CarolinaSteneri.AttheMinistryofLivestock,Agriculture,andFishing:ángelaCortelezziandVeronicaDuran.

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1.Introduction

Uruguay,arelativelysmallcountryofapproximately3.4millionpeopleinSouthAmerica,hashistoricallystoodupintheregionforitshighincomepercapita,egalitariansociety,lowpovertylevels,andstrongsocialcompact.AftertwodecadesofcontinuouseconomicgrowthonlyinterruptedbytheCOVID-19pandemic,thecountryranksfirstinLatinAmericaintermsofGDPpercapitaandcurrentlyenjoysthelowestsovereigncountryspreadsintheregion.Uruguayhasrelativelyhighlevelsofwelfare,asmeasuredbyindicatorssuchastheHumanDevelopmentIndex,hasvirtuallyeradicatedextremepoverty,andisknownforitspoliticalandinstitutionalstability.

NaturalcapitalliesatthecoreofUruguay’swealthandculture.Uruguayhashistoricallyreliedonlivestockandagriculture(L&A)asthefoundationofitseconomicactivityandnationalidentity.Bythemid-20thcentury,one-thirdofGDPwasdirectlyaccountedforbyL&A,withindustryandservicessplittingtheotherportionequally(BertinoandTajam,1999).Asthecountryadvancedinitsdevelopmentprocess,aslowbutsteadystructuraltransformationprocesssawtheemergenceofservicesandthefallinthedirectcontributionofL&A,whichcurrentlyaccountsforapproximately6.3percentofGDP.However,thissignificantlyunderestimatesthemacroeconomicrelevanceofnaturalcapitalforUruguay.First,itdoesnotaccountforL&A’sbackwardandforwardlinkagesalongvaluechains,withmanyservices(transport,logistics,relatedcommerce,etc.)andmanufacturingindustries(leather,foodstuff,etc.)tightlylinkedtotheprimarysector.Second,L&Aandrelatedactivitiescontributetoalargeshareofthecountry’sexportsofgoods.Third,othernaturalcapital-basedactivitiesplayasignificantroleinUruguay’seconomy,suchaselectricitygeneration(closetofullyrenewableinUruguay)ortourism.Thecountry’snationalmotto,UruguayNatural,paystributetothislegacy.

Uruguay’seconomyisthusparticularlyvulnerabletocertainclimateshocks,notablythoselinkedtoprecipitationpatterns.Forexample,theMinistryofLivestock,AgricultureandFishing(MGAP)estimatesUS$1.8billionindirectlossesfromlivestock,agriculture,andthedairyindustryfromthe2022-23drought,trumpingthelargelossesfromthe2017/18agriculturalcampaign(MEF2023).Floodstriggerproductivelosses(cropyieldsandpastures)anddamagetothecapitalstock(transportinfrastructure).Asidefromtheirdirectimpact,theselossesanddamagestrickledowntotherestoftheeconomy,furtheraffectingeconomicactivity,externalandfiscalaccounts,andincomes.Climatechangecouldexacerbatethealreadylargeimpactsoftheseshocks,astheyincreasetheirfrequencyandintensity.

Climateshocksshouldthereforebeanalyzedunderthesamelightasothermacro-relevantshocks.Standardsensitivityexercisestobaselinemacroeconomicprojectionsandriskassessmentsusually-andrightly-recognizetherelevanceoftermsoftradeshocks,internationalinterestratemovements,orfluctuationsinthedemandfromtradepartnersformacroeconomicoutcomes.Afallinthetermsoftrade,forexample,usuallyinducesaworseningofexternalaccounts,arealexchangeratedepreciation,andafallinGDP,thescaleofwhichdependsonthepersistenceoftheshock.Climateshocks,despitetheirevidentrelevanceformanycountries,arenotusuallymainstreamedinmacroeconomicanalysis.Moreover,thecompoundeffectsofclimateandstandardmacroeconomicshocksareseldomaddressed.

WeassessthemacroeconomicimpactofthemostrelevantclimateshocksaffectingUruguay′seconomy,usingthewideavailabilityofcountry-specificdataandbackgroundanalysis.Usingamacro-structuralprojectionmodelcustomizedtoUruguay(MFMODUY)andexpandedtoaccountforclimate

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shocks,thispaperisolatesthemaintransmissionchannelsofdroughtsandfloodsonaggregatemacroeconomicoutcomes.Thisallowsustoquantifythesecond-roundeffectsofclimateshocksandtheinducedadjustmentdynamicsofthemainmacrovariables.Inaddition,wesimulateclimateshocksjointlywithstandardmacroeconomicshockstoaddresstheircompoundeffects.Todoso,thestudyexploitsthestochasticcharacteristicsofclimateshocks,aswellasthejointdistributionofstandardmacroeconomicshocks.ThispaperbenefitsfromrelevantbackgrounddataandanalyticalstudiesrelatedtoclimateshocksandtheirimpactsavailableforUruguay,whichprovidehistoricalestimatesofdirectlossesandstochasticprojectionsofclimateshocksunderdifferentclimatescenarios.

Thecontributionofthisstudyisthreefold.First,andmorespecifictoUruguay,acomprehensivemacroeconomicassessmentofclimateshockswasmissing,despitetherichbackgrounddataandanalyticsaboutthehistoricalandexpecteddirecteffectsofclimateshocksinthecountry.Second,wedevelopaninnovativeanddetailedapproximationtothemodelingofdroughts,whosetransmissionmechanismstoaggregateoutcomesareoftenoversimplified.ThisisparticularlyimportantforUruguay,givenitseconomicstructure,butalsohaspotentialimplicationsforothercountriesinLatinAmericathatshareitsdependenceonL&A.Third,ofamoregeneralnature,macroeconomicanalysesthatincorporatetheeffectsofclimateshocksdonotusuallyaddresshowtheyinteractwithmorestandardmacroeconomicshocks,andthusunderstatetheirimplieddownsiderisks.Ourapproachallowsforthesimultaneoussimulationofstandardmacroshocks(interestrates,externaldemand,etc.)andclimateshocks,henceprovidinginsightintohowtheyjointlyaffectmacroeconomicvolatility.

Wefindthatclimateshockshaverelevantandpersistenteffectsonaggregatevariables.Droughtsinparticularrepresentlargeandpersistentshockstoeconomicactivityandfiscalbalances.However,thiseffectisdynamicallycomplex.IncorporatingthetemporalpatternofproductionlossesinhistoricaldroughtsinUruguay,andlinkagesbetweentheL&Asector,otherproductivesectors,andthedemandsideoftheeconomy,ourmodeledresultsimplythatindirecteffectsmagnifythedirectimpactofadroughtoneconomicactivitybyaround50percentintheyearofoccurrence.Forthe2022/23drought,thistranslatesintoa2.8percentfallinGDPaccountingfordirectandindirecteffects.Giventhepersistenteffectofclimateshocksoneconomicactivity,particularlyonlivestock,GDP,fiscaloutcomes,andexportsarestilllowerthaninthebaselinescenarioofnoclimateshockstheyearafterthedrought.Wefindsmallbutpersistentdistributionaleffectsintheshortterm,witha0.5percentagepointincreaseinpovertylevelsonimpact.

ThevolatilityofasimulatedUruguayaneconomyonlysubjecttoclimateshocksreaches22percentofhistoricalGDPvolatility.AveragerealGDPisestimatedtofallbyupto0.4percentbecauseofcontinuedhistoricalclimateshocks,andbyupto2.3percentasaresultofone-in-40yearsclimateshocks.Exportsareaffecteddisproportionately,asclimateshocksaffectactivitiesoverrepresentedintheexportbasket.Theimpactofclimateshocksonfiscalaccountsisalsorelevant,reducingthefiscalbalance(asapercentageofGDP)byupto0.5percentagepointsforclimateshocksthathistoricallyoccurredonceevery40years.OurresultssuggestthatfuturechangesintheUruguayanclimateassociatedwithhigheremissionsconcentrationpathwayswouldtendtoworsenthemagnitudeofthedownsiderisksfromdroughtsbybetween18and30percent,andfromfloodsbybetween57and212percent.Climatechangeestimatesaresubjecttolargeuncertaintygiventhedispersionofthemodel’sprojectedprecipitationpatternsforUruguay.

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Theseclimateeffectsarecompoundedbymacroeconomicshocks.Climateshocksdonotoccurinavacuumbutareonlyoneofmanyshocksthatcansimultaneouslyaffectaneconomy.Incorporatingexogenousmacroeconomicshockstohistoricclimateshocksexacerbatesvolatilityandincreasespotentiallosses.GDPvolatilityroughlydoublescomparedtotheclimateshocks-onlyscenario.GDPcanfallby2.3percentunderacombinednegativeclimateandmacroeconomicshockofthetypewitnessedonceevery6years,onaverage,and4.1percentunderaonce-in-40-yearscombinednegativeshock.Thisaffectsdownsiderisksforthefiscalbalance,whichcanworsenaround0.8percentagepointofGDPand1.5percentagepointsofGDP,respectively.

Therestofthispaperisorganizedasfollows.Section2providessomebackgroundonUruguay’sstructuralcharacteristicsandrecentmacroeconomicperformance.Section3describesthemaintransmissionchannelsofclimateshockstotheUruguayaneconomy.Section4presentstheanalyticalapproachusedtoassessthemacroeconomicimpactofclimateshocks.Section5presentsthedataandbackgroundanalyticsusedtoinformthisstudyandperformthequantitativeexercises.Section6describesandpresentsthemainresultsofthestudy.Section7laysoutbroaddevelopmentpolicyimplications.

2.AprimeronUruguay:Aserviceeconomyrootedinitsnaturalcapital

EconomicStructure

UruguayisarelativelysmallandprosperouscountrylocatedinSouthAmerica,withapopulationofapproximately3.4millionpeople.AlthoughatUS$71.4billionitsgrossdomesticproduct(GDP)isordersofmagnitudesmallerthanthatofneighboringBrazilandArgentina,Uruguayisahigh-incomecountry,withrelativelylowpoverty,lowlevelsofinequality,andastrongsocialcompact.Asmostmoderneconomies,Uruguayisheavilyreliantontheservicesector,whichaccountsforapproximately67percentofGDP.However,L&Aisasignificantcontributortothecountry'seconomy–directlyaccountingforapproximately6.3percentofGDPandwithlargespillovereffectsonmanufacturingandservices–andadisproportionatelyhighcontributortoexportrevenues.

The2002crisisusheredinthecountry’slongesteconomicgrowthspell,leveragedbyaperiodofexceptionalagriculturalcommodityprices.Between2002and2019,Uruguayexperienceda153percentincreaseinGDPpercapitaadjustedforrealpurchasingpowerparity(PPP).ThisgrowthpositionedUruguayasthethird-highestperformerintheregion,onlytrailingbehindPanamaandPeru.Thisrobusteconomicperformancewasdrivenbyacombinationoffactors,includingthecommoditysuperboomandthesuccessfulimplementationofpost-2002crisisreformsaimedatenhancingthecountry'smacroeconomicandfiscalpolicyframework.Welfareindicatorsimprovedsignificantlyintheperiod,withthepopulationunderthenationalpovertylinereachingarecordlowof7.9percentin2017.

Economicgrowthdeceleratedsignificantlyasthecommoditypriceboomwanedandinthefaceofadverseweatherevents,stressingtheimportanceofnaturalcapitalforthecountry’seconomicperformance.GDPgrowthdeceleratedfromanaverageof5.1percentbetween2003and2014to0.9percentbetween2015and2019.Withthedecelerationofgrowth,improvementsinpovertyandinequalityexperiencedinthefirstsubperiodcametoahalt,andshowedanincipientreversalstartingin2017.Publicfinancesdeterioratedslowlyaswell,astaxrevenuedeceleratedwithlowerGDPgrowthandhealthandsocialsecurityspendingincreased.TheCOVID-19pandemicaddedtothechallenges,andfurtherexposedexternalvulnerabilities.

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Uruguayanbeefexportsareperhapsthemostrecognizablenaturalcapital-relatedactivity.LivestockproductionisasignificantpartofUruguay'sprimarysector,withcattlebeingthelargestcontributor.In2021,therewerealmost12millionheadofcattleinthecountry.Uruguayisknownforitshigh-qualitygrass-fedbeef,whichisexportedtoseveralcountries,includingtheUnitedStates,China,andtheEuropeanUnion.Otherlivestockproductionincludessheep,goats,andpigs.DairyisalsoanimportantsectorinUruguay,producingenoughmilktosupplyabout20millionpeople.Uruguay'sdairyindustryismainlyfocusedontheproductionofcheese,yogurt,andmilkpowder.Thedairysectorisalsoamajoremployerinthecountry,providingjobsforthousandsofpeople.

Uruguayisalsoanimportantproducerofcrops,especiallysoybeans,maize,wheat,barley,andrice,mostlydestinedtoglobalmarkets.Thecountry’sclimateandsoilconditionsarefavorableforextensiverainfedagriculture,particularlyinthesouthwesternportionofthecountry

(Map1)

.Soybeansarethemostsignificantcropintermsofproductionandexportearnings,followedbyrice,wheat,maize,andbarley.Inrecentyears,therehasbeenasignificantincreaseinthesurfaceareaplantedwitheucalyptus,whichisusedbythreepulpmillstoproduceandexportcellulose.Uruguayhasalsobeenmakingstridesinorganicagriculture,withanincreasingnumberoffarmersadoptingsustainablefarmingpractices.Lookingatmajorsectorswithintheprimarysector,productioniscomprisedof44percentcrops,40.5percentlivestock(meat),and15.5percentdairy

2

(Figure1)

.Thecountry'smaintradingpartnersareChina,Brazil,andtheUnitedStates.L&Aandrelatedproducts(excludingwoodandpaper)makeupmorethan65percentofmerchandiseexports

(Figure2)

.

Map1:AgricultureandLivestockProducingAreas

Source:MGAP(2015)

2Five-yearaverageto2021.

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Figure1:AgriculturalproductioninUruguay

TotalProductionofmainCrops,inthousandtonsTotalProductionofL&A,inUS$bil

Thousandsoftons

7

6

5

3,500

3,000

2,500

2,000

4

1,500

3

1,000

2

500

1

0

2016/172017/182018/192019/202020/21

0

SoyRiceWheatMaltingbarleyMaizeSugarcane

Source:FoodandAgricultureOrganizationoftheUnitedNations.

$USbil

$USbil

Crops

Dairy

Meat

1991199620012006201120162021

7

6

5

4

3

2

1

0

Alsolinkedtoitsnaturalcapital,tourism,andmorerecentlyprocessedfoodsandwines,areanimportantsourceofexportrevenue.Uruguay’sserviceexportshavehistoricallybeendominatedbytourism,mostlylinkedtoinboundtravelersfromArgentina-andmorerecentlyBrazil-towardsitsbeaches.Manyresortcitiesandvillagesalongits220kilometersofAtlanticcoastbecometourismhotspotsduringthesummermonths,notablyPuntadelEste,ahigh-enddestinationwithamixwidenaturalbeaches,coastalforests,andmodernamenities.Wineriesarebecomingacomplementarytouristicattraction,andmoregenerallyastapleexportindustry,makingheadwayintointernationalmarketswiththeflagshipTannatreds.SoftwaredevelopmentandotherICT-relatedactivitieshavebecomeanincreasinglyimportantengineofexportgrowthinrecentyears,reachingUS$980millionin2022.

Figure2:Uruguaymerchandiseexportcomposition

Dairy

9%

Other

12%

Livestock

31%

Industrial

Manufacturing

11%

Cropand

PaperandWood

Animaland

VegetableOils

12%25%

Source:BasedonUruguayXXI.

Notes:Averagefrom2019-2022.

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2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

FiscalAccounts

Followingthe2002economiccrisis,Uruguaymadesignificantprogressinimprovingitsfiscalframeworkandoutcomes.Startinginthemid-20thcentury,fiscalimbalancesandthemonetizationofdeficitsresultedinchronicallyhighinflationandnominalvolatility,whileUruguay’seconomydivergedfromthefrontier.Inflationreturnedtosingle-digitfiguresonlyinthe1990s,asfiscalimbalancesmoderatedandthemonetizationofdeficitswasphasedout.

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Fiscaloutcomesimprovedafterthe2002crisis,underpinnedbyprudentmacroeconomicandfiscalpolicies,sounddebtmanagement,androbusteconomicgrowth.

4

Thegrossdebtofthenon-financialpublicsector,whichspikedto96.1percentofGDPin2003followingthedepreciationoftheUruguayanpeso,felltoalowof53.8percentin2012

(Figure3)

.Theimprovementinfiscalaccountsstalledwiththedecelerationofgrowthin2015,andtheCOVID-19pandemicaddedtothechallenges.Debtincreasedto67.6percentin2020,drivenalsobythedepreciationoftheUruguayanpeso(abouthalfofpublicdebtisnominatedinUSdollars).

Despitethegrowthslowdownsince2015andCOVID-19challenges,Uruguayemergedfromthepandemicasthecountrywiththelowestsovereignspreadsoftheregion.Uruguayimplementedareformagendatoenhancethemacro-fiscalframework,whichincludedastructuralbalancefiscalrule,anexpenditureceilinglinkedtopotentialGDPgrowth,theestablishmentofanindependentcommitteeofexpertstoprovideinputstoestimatethestructuralbalance,andanindependentadvisoryfiscalcouncil.Atthesametime,itrationalizedspendingnotdirectlylinkedtothepandemic,suchaspublicwages,tobufferthenegativeimpactonfiscalaccounts.Inaddition,areformtoimprovethelong-termsustainabilityofthepensionsystemwasapprovedin2023.Asthepost-pandemicrecoverywentunderway,Uruguayfounditselfasthecountrywiththelowestsovereignspreadsoftheregion,andimprovedcreditratingsfromthemaincreditagencies.

Figure3:Uruguay'sfiscaloutcomes

a)FiscalBalanceofthenon-monetarypublicsectorb)Debt-to-GDPratioofthenon-monetarypublicsector

InpercentofGDPInpercentofGDP

0%-1%-2%-3%-4%-5%

-6%

100%

80%

60%

40%

20%

0%

Source:WorldBankdatabase,basedonBCUandMEF

3MarandinoandOddone(2022).

4SeeWorldBankGroup(2022)formoredetails.

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3.Givenitseconomicstructure,Uruguayisvulnerabletoclimateshocks

Agrowingliteraturehasprovidedcharacterizationsoftherisksthatclimatecancreatefortheeconomy,aswellastheirassociatedchannels(see,forexample,DunzandPower(2021)forapaperwithafiscalperspective).Theserisksaretypicallycategorizedintophysicalandtransitionrisks.Physicalrisksarethoseassociatedwithclimateoutcomes,eithercurrentorfuture,inwhichcasethereisadependencyontheprojectedpathofgreenhousegasesconcentrations.Physicalriskscanbeeitheracute,whentheyaredrivenbyspecificeventslikedroughtsorhurricanes,orchronic,whentheyreflectlongertermpatternssuchaschangingtemperaturesorsealevelvariations.Transitionrisks,ontheotherhand,arethoseassociatedwiththereductionofgreenhousegasemissionsandthecorrespondingtransformationoftechnologies,regulations,andsocialhabits.

Uruguay,givenitseconomicstructure,isvulnerabletoacomplexsetofclimate-relatedriskdrivers,includingbothphysicalandtransitionrisks.Afullevaluationoftheserisksisbeyondthescopeofthispaper.Forexample,theeffectsofdroughtsondrinkingwaterqualityandavailability,theimpactofheatwavesonaggregateproductivity,ortherisksofclimatechangetothetourismandhydroelectricgenerationsectorsarenotassessedinthisstudy.WealsodonotconsidertransitionrisksthatarisebecauseoffastdecarbonizationinUruguay′smarkets,includingthroughchangesintradepoliciesorconsumerhabits.

Ourfocusisonhydrometeorologicalclimateshocks:droughtsandfloods.Givenitsrelianceonnaturalcapital,theseeventsarealreadythelargestsourceofclimateimpactsonUruguay’seconomy,asevidencedbytheimpactofthe2022/23droughtinthecountry,andthereisconcernthatfutureclimatechangecouldworsentheimpactsoftheseshocks.ThisanalysisattemptstocoveranexistingknowledgegapbyestimatingthedirectandindirectimpactsofthesechannelsontheUruguayaneconomy,andhowtheycouldbeaffectedbyclimatechange.Ourmodelingapproachcanserveasabuildingblockforfuturebottom-upassessmentsofclimatedamages,aswellascomplementingtop-downapproaches(seeCEA-OMB(2023)forareviewofdifferentmodelingapproaches).

DroughtisasignificantrisktoUruguay'sL&Aproduction.Droughtscancauseashortageofwaterandpasture,leadingtoloweryieldsandhigherproductioncosts.Forcrops,droughtscanleadtoreducedplantedareas,loweryields,lowercropquality,andhigherpricesforconsumers.ThisisespeciallythecaseforcropsthatrelyonthevariablesummerrainsinUruguay,suchassoybeansandmaize.Inthecaseoflivestock,droughtscanleadtoashortageoffeedandwater,whichcancausesignificantlossesinweight,breedingrates,andearlyweaning,partofwhichmaterializesintolowerproductiononlyinsubsequentyears.Additionally,droughtscancausefarmerstoselltheirlivestockatlowerpricesduetoashortageoffeedandwater,whichcanhavelong-termimpactsontheindustry'sprofitability.Thedairyindustrycanalsobeimpactedbydroughts,asashortageoffeedleadstosupplementalfeedingcosts.

Consecutivedroughtsexacerbatetheiraggregateimpact.Soilmoistureiscrucialforcropgrowth,andconsecutivedroughtscanleadtoareductioninsoilmoisturelevels.Thiscancausefurtheryieldlossesandcanleadtoadeclineinsoilfertilityovertime,makingitmoredifficulttoproduce