Can Policy Stability Buffer Climate Damages on Economic Growth? Evidence from Green Foreign Direct Investment Inflows in North Africa

In the developing world, the economy and the weather are locked in a tight, often painful embrace. When a region suffers from extreme heat, unpredictable rains, or violent storms, the immediate damage is visible: crops fail, roads wash away, and energy grids strain under the load. But the deeper, slower damage is to the very engine of a nation's future: its economic growth. For decades, economists have known that climate change acts as a heavy anchor on development, dragging down the ability of countries to build wealth and improve lives. The question that has recently moved to the forefront of research is not just how much damage occurs, but whether a country's internal strength can soften that blow. Specifically, can a government that is steady, predictable, and free from sudden upheaval protect its people from the worst economic effects of a changing climate? And if such stability exists, can it help attract a special kind of foreign money—investment dedicated to green technology and renewable energy—that acts as a shield against these shocks?

A team of researchers set out to answer these questions by looking closely at North Africa, a region where the sun is intense, water is scarce, and the political landscape has seen significant turbulence over the last two decades. Focusing on six nations—Algeria, Egypt, Libya, Mauritania, Morocco, and Tunisia—the study examined a twenty-two-year period from 2000 to 2022. The researchers wanted to see if the stability of a country's policies could act as a buffer, absorbing the economic jolts caused by climate disasters. They also wanted to know if "green foreign direct investment"—money flowing in from abroad specifically for things like solar farms, wind turbines, and sustainable infrastructure—could make that buffer even stronger. By combining data on temperature spikes, rainfall failures, and extreme weather events with records of government stability and international investment, the team built a detailed picture of how these forces interact in a real-world setting.

The first step in their investigation was to confirm the baseline reality: does climate damage actually hurt economic growth in this region? The answer was a resounding yes. The researchers constructed a composite index that measured the severity of climate stress, combining how much temperatures deviated from normal, how much rainfall was missing or excessive, and how often extreme weather disasters struck. They found that for every standard increase in this climate damage score, the annual growth rate of income per person dropped by approximately 1.6 to 1.9 percentage points. In a region where the typical annual growth is often just around 3 percent, this is a devastating blow. It means that a severe climate shock can nearly cut a country's economic progress in half, erasing years of development gains in a single year. This confirms that the link between a warming planet and a struggling economy is not just theoretical; it is a measurable, immediate reality for North African nations.

However, the study did not stop at measuring the damage; it asked whether some countries fared better than others and why. The researchers discovered that the stability of a country's government played a crucial role in determining how much of that damage actually hit the economy. In countries where the government was steady, where policies did not flip-flop with every election, and where there was no threat of sudden violence or upheaval, the economic impact of climate disasters was significantly less severe. It is as if a stable government acts like a shock absorber on a car; the road is still bumpy, but the passengers feel less of the jolt. The data showed that political stability directly supported economic growth on its own, but more importantly, it actively reduced the negative effect of climate shocks. The more stable the political environment, the less the economy suffered when the weather turned against it.

The final piece of the puzzle involved the flow of green money from abroad. The researchers found that when a country with a stable government also attracted significant amounts of green foreign investment, the protective effect became even stronger. This specific type of investment, which goes toward renewable energy and environmental technology, does not just bring cash; it brings new technologies and management skills that help a country adapt to a changing climate. When this green investment arrived in a politically stable environment, it amplified the country's ability to withstand climate shocks. The combination of steady governance and green capital created a powerful cycle: stability attracted the right kind of investment, and that investment, in turn, made the economy more resilient. The study suggests that in the most stable countries with the highest levels of green investment, the economy's capacity to absorb climate damage is at its peak.

The researchers were careful to ensure these findings were not just a fluke of the data. They tested their results using different statistical methods, swapped out their measures of government stability for other indicators like the rule of law, and even removed one country at a time to see if the results held up. In every test, the core story remained the same: climate damage hurts growth, but stable institutions soften that blow, and green investment makes those institutions even more effective. The study also noted that while stability helps, it cannot completely erase the damage unless a country reaches a level of governance that is nearly perfect, a threshold that is very high to achieve. For the countries in the study, the best-governed nations could achieve meaningful protection, but the threat of climate damage never fully disappears.

These findings offer a clear path forward for policymakers in North Africa and beyond. The research suggests that the fight against climate change is not just about building sea walls or planting trees; it is also about building strong, reliable institutions. Governments that prioritize political stability and the rule of law are not just creating a better environment for business in general; they are actively investing in their own climate resilience. Furthermore, the study highlights that attracting green investment is most effective when that investment is welcomed into a stable, predictable environment. For international investors and development banks, this means that supporting institutional reforms is just as important as funding specific green projects. The paper concludes that while the climate challenge is severe, it is not an unstoppable force. With the right mix of steady governance and targeted green capital, nations can build an economy that is tough enough to weather the storms of a changing world.