THE EFFECT OF TEMPERATURE AND EXTREME PRECIPITATION ON ECONOMIC PERFORMANCE: THE CASE OF VIETNAM

This study investigates the impact of temperature and extreme precipitation on economic performance. Studies examining the effects of extreme weather on economic growth have often used the frequency of natural disasters or the level of damage caused by natural disasters as a proxy for extreme weather. This study is one of the first to use the threshold of daily precipitation as a proxy of extreme weather, thereby capturing more precise and frequent weather variations that traditional measures may overlook. By using detailed panel data collected from 63 provinces and cities across Vietnam over the period from 2005 to 2018, this research systematically analyses how weather fluctuations influence regional economic performance. For the main empirical estimations, the study employs the Fixed Effects Model (FEM) to control for unobserved, time-invariant provincial characteristics. To further strengthen the robustness of the findings, the Generalised Method of Moments (GMM) is applied, addressing potential endogeneity and serial correlation issues within the dataset. Its results show that extreme precipitation adversely affects economic performance. Provinces that have more extreme precipitation have lower GDP per capita and labour. Temperature has a nonlinear effect on economic performance. The two variables exhibit an inverse U-shape relationship, and the optimal temperature for economic performance in Vietnam is 23 degrees Celsius. This finding provides critical insights for policymakers when considering regional development strategies in the context of climate change.