Climate Change, Loss of Agricultural Output and the Macroeconomy: the Case of Tunisia

Abstract

This paper constructs an empirical, multi-sectoral, open-economy Stock-Flow Consistent (SFC) model to assess the long-term macroeconomic impact of a sustained climate-induced decline in Tunisia's agricultural production. Our framework captures the main interactions between climate-driven agricultural impacts, the real economy, and the financial system. We empirically calibrate our model using a large set of datasets including national accounts, input-output tables, balance of payments, banking sector balance sheets and agricultural production projections from crop models. We then simulate the model for the period 2018-2050. Our results show that the costs of inaction in the face of declining agricultural production are dire for Tunisia. The economy will face high unemployment and inflation, growing internal and external macroeconomic imbalances, and a looming balance of payments crisis, especially if global food inflation remains high in the coming decades. We then simulate two possible adaptation scenarios envisaged by policymakers and show that adaptation investments in water resources, increased water efficiency in production, and a public, investment-driven big push can put the economy back on a sustainable path in the long-run.