Developed nations have pledged to send developing countries a combined $100 billion a year to help them reduce their emissions and adapt to a warming world. Raghuram Rajan, the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago Booth School of Business, studied why access to “climate finance”—especially in the form of bank financing—could be so critical for a community’s ability to adapt and prosper.
The researchers sought to answer two questions: What factors can help a population adapt to adverse climate shocks? And, can these factors affect long-range outcomes? To answer these questions, they examined the consequences of the United States’ second most severe drought (following “the Dustbowl” during the Great Depression), which occurred in the 1950s and was both long and affected a large swath of the country.
Looking specifically at the role of access to bank finance, the researchers discovered that drought-stricken counties without access to loans saw more of their residents leave than counties with access to loans: a 6.3 percentage point decline versus a 1.5 percentage point decline in population growth, respectively, over a decade (1950-1960). These effects persisted long after the drought. When comparing two drought-exposed counties with identical populations in 1950, counties with more access to loans had a 4.5 percentage point higher population than the counties without access to finance by 1980. Over the three decades, the population in the counties without access to finance declined by 10.3 percentage points overall. One explanation for the long-run shifts, the researchers explain, is that more younger people left areas with little access to finance, while people over 70 stayed. This resulted in fewer people being born in these areas during the post-drought era, while the mortality rate increased.
Overall, the study showed that while large changes to the climate, such as sweeping multi-year droughts, can cause residents to flee, access to bank financing can change that. With equal access to finance, residents are less likely to migrate to richer places and more likely to stay in their communities. These communities are then better able to embrace innovation, adapt to climate change, and prosper in the long run.