Macroeconomic impacts of changes in land use in an agricultural-commodity exporting country: the case of Argentina, 2003–23

Climate change and nature degradation can significantly affect economic activity and consequently, macroeconomic policy responses, particularly in emerging markets and developing economies (EMDEs). This brief from the Land and Ocean series examines how land-use changes driven by agricultural expansion and intensification impact balance-of-payments dynamics, wage and price inflation, and financial stability in agricultural commodity-exporting countries.

Exchange rate devaluations and increases in commodity prices boost agricultural output and export revenues, but also lead to increased carbon dioxide emissions and ecosystem degradation, ultimately reducing land productivity. These price changes translate into wage and price dynamics and impact economic activity and constrain investment, raising a policy dilemma: promoting short-term expansion of agricultural exports results in long-term environmental damage and loss of productive capacity.

The analysis demonstrates that physical climate risks, such as extreme weather events, directly impact central bank reserve accumulation by disrupting agricultural exports. The impact is not restricted to the trade balance, since portfolio decisions by non-resident investors take into consideration expected dynamics in foreign exchange accumulation. Using Argentina as a case study, the research confirms that climate shocks represent a material risk to monetary policy implementation in commodity-dependent emerging market economies.

Recommendations

• Policymakers should factor the impacts of climate change and nature loss into their reserve accumulation and exchange rate management considerations. For countries like Argentina that have long‑standing agreements with the IMF, these policies should also include safeguards and exceptions for extreme weather events, for instance in foreign reserves accumulation and fiscal targets.
• Agriculture relies heavily on credit and as a result both producers and lenders face significant risks from climate- and nature-related shocks. The development of resilient agricultural insurance coverage and future lending markets in EMDEs should therefore be a top priority to help protect producers.
• Banks face balance sheet risks from climate impacts that may warrant a policy of climate-related loan loss provisioning and/or a climate-related capital buffer to increase the stability of the banking sector. Establishing general precautionary loan loss provisions can also complement or substitute for environmental risk pricing in loans, as the non-linear nature of global warming makes it difficult to reliably estimate risk-based costs.
• If these measures have downside effects on banks’ profitability, they could be complemented with subsidies or a lower reserve requirement on climate-adaptation loans.
• Better models and scenario analysis can help improve banks’ exposure to extreme climate events.

This paper is part of the CETEx Discussion Paper Series: Land and Ocean, which aims to support financial and economic policymakers as they contend with and make considerations for environmental degradation issues, in addition to climate change. The papers have been written and peer-reviewed by leading experts from academia, think tanks and central banks and are based on cutting-edge research.

DOI: 10.21953/researchonline.lse.ac.uk.00137665