BinD

The BinD (Binary constrained Disaster) model is a structural, demand-led macroeconomic framework designed to capture how Small Island Developing States (SIDS) experience and respond to climate change under conditions of acute financial and external vulnerability. It extends the classic three-gap model, that highlights constraints in private savings, public finances, and the external balance, by embedding these gaps within a dynamic, climate-sensitive macroeconomic model. This allows the model to trace how climate shocks interact with investment needs, external borrowing, and income distribution to shape long-run development trajectories.

At its core, the BinD model links aggregate demand, capital accumulation, and climate-induced supply constraints. Output is fundamentally demand-determined but bounded by productive capacity defined through the available capital stock, which in SIDS is heavily dependent on imported capital goods. As climate change intensifies capital depreciation and reduces savings, economies may increasingly hit these capacity limits, even when demand is strong. This mechanism highlights one of the model's central insights that demand-led growth can become supply-constrained when climate damages and financial scarcity slow capital formation.

The model includes companies, workers, capitalists, government, and the rest of the world, interacting through flows and stocks consistent with fully consistent Social Accounting Matrix (SAM) and balance-sheet structure. Companies supply domestic and foreign markets and require both domestic and imported capital. Worker households earn wages and consume all disposable income, while capitalist households receive profits, consume part, and save the remainder. The government collects taxes, purchases goods, conducts public investment, and services external debt. The foreign sector provides export demand, capital goods, and external borrowing. By tracking evolving stocks of domestic and foreign capital, public capital, and external debt, the model captures path-dependent macro-financial dynamics central to SIDS.

A key innovation of the model is the explicit treatment of climate damages as structural macro constraints. Rising temperatures and increasingly frequent extreme weather events raise the effective depreciation rate of capital and depress labour productivity. Climate damages accumulate over time, accelerating capital loss and raising the investment needed for maintenance and reconstruction. Since SIDS rely heavily on imported capital goods, this increases import demand and widens external financing gaps. At the same time, lower productivity weakens wage growth and reduces household income and consumption. These feedbacks can push economies into low-growth, high-debt paths, especially under high-warming scenarios.

The model allows economies to transition between demand-driven and capacity-constrained regimes. When financial resources suffice, output adjusts to demand. But when investment falls short due to low savings, high debt burdens, or climate shocks, the economy becomes supply-constrained: output cannot rise to meet demand, and imports, consumption, and public spending adjust downward. This duality is central to understanding why SIDS may struggle to maintain growth under climate change.

Overall, the BinD model provides a tractable and policy-relevant framework for assessing climate-resilient development in capital import-dependent and financially constrained economies. It highlights how climate change interacts with macro-financial limitations, why warming trajectories crucially determine long-run growth prospects, and why SIDS require both effective domestic policies and affordable international climate finance to maintain sustainable development.