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Rick van der Ploeg University of Oxford en Universiteit van Amsterdam

Climate Change, Scramble for Natural Resources, Financial Crisis and Sustainable Development SID , Theatre Concordia, The Hague, 11/12/2009. Rick van der Ploeg University of Oxford en Universiteit van Amsterdam. OVERVIEW. Global financial crisis Global climate crisis

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Rick van der Ploeg University of Oxford en Universiteit van Amsterdam

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  1. Climate Change, Scramble for Natural Resources, Financial Crisis and Sustainable DevelopmentSID, Theatre Concordia, The Hague, 11/12/2009 Rick van derPloeg University of Oxford en Universiteit van Amsterdam

  2. OVERVIEW • Global financial crisis • Global climate crisis • Natural resource curse? • Food crisis • Action Plans • Global Challenges

  3. I. GLOBAL FINANCIAL CRISIS • Asset price bubbles: housing equity, dotcom. • Long period of low interest rates after dotcom. • Credit booms with worsening lending standards for tens of millions of households. • Systematic risk build-up: subprime and loans in foreign exchange. • Greed, greed, greed .. Excessive leverage. • Regulation and supervision failures: does not keep up, especially for derivatives.

  4. Novel features of this crisis • More opaque: securitization, banks ‘surprised’ by large exposures to housing sector via SIVs, conduits, trading books. • Global financial integration: large capital flows, cross-border positions, more connection between markets incl. wholesale funding. • Higher leverage in lots of sectors/markets. • Central role of excessive borrowing by households in the US and UK: complicates restructuring.

  5. Lessons from crisis • Avoid regulatory arbitrage leading to shadow banking system and excess leverage, so coordinate financial regulation/supervision. • Regulation did not keep up with changing financial landscape of credit creation. • Need stronger (macro) risk management. • Avoid pro-cyclical regulation and boom-bust cycles. • Global imbalances (China vs. US) & need integrated macro and monetary policies.

  6. Dire Consequences for developing countries • Global recession and decline in world trade means more difficult to export to OECD. • Private capital flows dry up: in 2007 lending US$410 billion, but in 2009 repatriating 60US $ billion. • Less foreign aid (especially if indexed to GDP) • Falling commodity prices (terrible for non-diversified countries) • Less remittances from guest workers • Developing countries took some time to be hit, but are now hit very hard, even though roots of crisis are in the rich economies. • Russia is now shrinking by 8% per annum.

  7. Figure 1: Net Investments in Emerging Economies (flows, billion US $, IMF, 2009)

  8. Figure 2: Foreign Aid as Percentage of GNP (1970-2007)

  9. Figure 3: Sharp Falls in Commodity Prices Figure 4: Sharp Falls in Remittances

  10. New Global Cooperation • Some good stuff: China, India will get a bigger say in IMF and World Bank. • Global fiscal stimulus. Better financial regulation • Many good words at G20, but .... • Bad stuff: Global imbalances are hardly addressed if anything they are aggravated, so dollar and pound remain fragile unless China and Germany spend even more. • No structural reforms to pay for current fiscal stimulus in US, UK and elsewhere.

  11. II. GLOBAL CLIMATE CRISIS • Since 1750 both world population and production per person has risen tenfold. Hence, gigantic pressure on environment. • World population will go from 6.6. to 9 billion in next forty years and all these new people need to eat, to be housed and to transported. • During coming decades CO2 concentration in atmosphere may double: global warming. • And it is anthropogenic – caused by human beings (Crutzen). Half of CO2 caused by vehicles, industry and especially coal-using energy companies. Rougly 20% caused by deforestation. Methane via cattle also important cause of greenhouse gas emissions.

  12. Risks of global warming • Rising sea levels, more hurricanes, destruction of natural habitats, acidification of oceans leading to destruction of coral reefs and plankton, infectious diseases of hitherto unknown diseases, massive shortages of water (only 2.75% is fresh water and three quarters of that in icecaps etc.), desertification • Much of burden falls on developing countries, who were not even responsible for global warming. • Risk of tipping points and irreversible thresholds. Need not only mitigation, but also adaptation.

  13. Figure 5: Environmental Hazards and Global Warming Necessitate Adaptation Source: Edenhofer, presentation at Climate Summit, Munich, May 2009

  14. CLIMATE CHANGE AND WAR • Using high-resolution paleo-climate data 1400-1900, we see that cooling impedes agricultural production, leads to price inflation, war outbreak, famines, population decline. • Extra dimension to Malthusian population dynamics and Darwinian survival of the fittest. • But strong historical links between civil war and temperature in SSA. Global warming leads to 54% more armed conflict by 2030, that is 393,000 more battle deaths. Need to direct aid to combating climate change.

  15. Why should we act now? • Climate science is fraught with uncertainties, temperature could go up by 1.1 or 6.4 degrees Celcius. So why bother with limiting to 2 degrees? Tough to get political support. • Better safe than sorry, especially as the cost should be as little as 1% of global GDP (contrast with 5% for bailout of banks). Insurance policy! • But without a credible carbon tax of 40$ not 13$ based on a cap and trade system, the costs will be much higher! • And many silly policies have to be abandoned: fuel subsidies, corn-ethanol subsidy.

  16. Size of the carbon challenge • To cut US GHH 14% below 2005 level by 2020 and 83% by 2050 requires 1 to 6-7 Giga tons of CO2 cuts. • One Giga ton reduction requires 320 zero-emission 500 MW fired-power instead of coal-power plants, 127,500 wind turbines, conversion of 5.4 size of Iowa for biomass production, new forests 2.5 times the size of State of Washington. • During 2000-7 emissions have fallen by 7% in US but have risen by 10% in India, 21% in Canada (tar sands!) and 45% in China. • 80% of GHG emissions until 2050 will come from developing countries. Need China and India in a new Super Kyoto. • Problem is coal, not oil/gas! Much higher CO2 content.

  17. Ineffectiveness of carbon policy? • Carbon leakage: if Kyoto countries put a price on CO2 emissions, some of it will be shifted to producers especially if fuel demand is elastic and supply inelastic. Gift to non-Kyoto countries! Renders CO2 policy ineffective unless it truly is a global deal incl. at least China and India. ‘Carbon leakage’. • There may allow be pollution flight via dirty FDI. • If gradual CO2 tax ramp is politically infeasible and government subsidizes renewables (solar, wind, biomass), rational oil/gas owners will deplete faster to avoid capital losses and thus brings global warming forward. ‘Green Paradox’ • Unless renewables so cheap that oil/gas is left in situ. • Higher prices induce substitution towards abundant dirty coal (if it is not included for political economy reasons), CO2 intensive tar sands, and unsafe nuclear energy.

  18. Figure 6: Coal Reserves dominate Gas and Oil Reserves unconventional and conventional resources and reserves (respectively, 894 and 227 for oil) biomass + CCS (240; zero emissions; 400 ppm-eq scenario) under the ground. Estimated additional consumption (737 for coal), coal + CCS (192 for coal; zero emissions; 440 ppm-eq scenario), estimated consumption (227 for coal; 400 ppm-eq scenario) and cumulative historical consumption in atmosphere. Source: Edenhofer and Kalkuhl (2009)

  19. Tough dilemmas • Alternatives to oil/gas are dirty or unsafe. • Perhaps better to make it more attractive to keep oil/gas under the ground. • Never enough space to to sequestrate all CO2 emissions: empty coal mines and oil/gas reservoirs offer only tenth of space. • Even in EU carbon trading covers only 40% and mistake of grandfathering was made. New Super Kyoto needs to be coarser, but more comprehensive at global level. • Tipping points and irreversible thresholds: Knightian uncertainty rather than risk.

  20. Figure 7: Tipping Points in the Earth System Source: Lenton and Schnellnhuber (2007)

  21. Core of Stern Review • Must allow for prudence in avoiding extreme events/fat tails. Precautionary principle. • Global temperature predicted to rise by more than 3 degrees Celsius unless CO2 GHGs stabilized at 550 ppm CO2e. • Case for immediate action rather than policy ramp tough to make with IAM’s unless discount rate close to zero (0.1), a low CRRA (1.0) and low growth rate of consumption are used (1.3%), mitigation costs are downplayed (1% GDP rather than double), and global climate benefits (5% rather than 0-3% GDP) a century ahead are played up. Interest rate equals 0.1+1.0*1.3=1.4% and benefit-cost ratio is 4.5. Immediate climate mitigation action is no brainer!

  22. Weitzman critique • With triplet of twos, interest rate of 2+2*2=6% (discounted benefits 100 years from now are 100 times less!) and benefit-cost ratio of 0.1. So no action on climate change. • But with 50-50 outcomes, equivalent interest rate would be 2% not 3.7% ((1.4+6)/2!). • IAM’s correspond to market interest rate: problem for Stern Review. • Investment climate beta matters. • If benefits of climate change are perfectly correlated with economy a century ahead, then appropriate interest rate to use is risky rate of return, say 7%.

  23. However, if benefits are not correlated (e.g., natural landscapes, biodiversity), use risk-free interest rate of 1% and thus case for immediate action is much stronger. The latter is especially important for developing countries. • If investment beta is half, appropriate interest rate to use is 1.7% per annum which is not that different from the Stern Review. Case for immediate action rather than policy ramp may not be so bad. • Alas: Relationship to Mehra-Prescott puzzle. If financial crisis drives premium on risky assets really down to, say, 0.1%, then case for immediate action disappears.

  24. III. NATURAL RESOURCE CURSE? • Dutch disease: not so much decline of traded sector and loss of learning by doing as absorption constraints. So need home-grown capital (infra, education, ..) to alleviate them. • Addiction to unsustainable policies: import substitution, excessive borrowing, welfare state, consumption, erosion of tax bases • Rent grabbing, corruption • Wars & conflict fuelled by oil, diamonds, gold, but also less FDI if there is a lot of • Corruption curse for mining FDI and resource curse for non-mining FDI.

  25. Volatility quintessence of curse for developing countries • Volatile countries have lower growth • Developing countries more volatile than developed countries. • Countries with poorly developed financial systems more volatile. • Landlocked countries more volatile. • Resource-dependent and less diversified countries more volatile

  26. Figure 8: Volatility Correlated with Low Growth in GDP per Capita

  27. Figure 9: Resource-Rich Economies Are More Volatile Note: Resource share measures the total of food, agricultural raw materials, mining and fuel export revenue, as a percentage of GDP, average over the period 1970-2003.

  28. Does volatility harm growth? • No: Precautionary saving. • No: investors demand higher expected return. • Yes: more uncertainty-induced planning errors. • Yes: less irreversible investment. • Yes: less innovation if volatility in resource prices lead to liquidity constraints to bite more frequently, especially if financial system is not well developed. • Yes: excessive borrowing & induced boom-bust cycles in fiscal policy. • Ultimately an issue to be settled empirically.

  29. What if sub-Saharan Africa was more like Asian Tigers? • Higher investment, so 0.43% growth bonus. • Lower population growth rate (Sachs), so also 0.43% growth bonus. • Higher human capital, so 0.46% growth bonus. • Lower volatility: 2.98% growth bonus!! • Volatility is high as SSA is more landlocked, less financially developed, less open and more dependent on (point-base) natural resources. • And high with current account restrictions, open capital account, ethnic polarization.

  30. Table 2: Counterfactual Experiments for Resource-Rich and Landlocked Africa

  31. Do developing countries transform their sub-soil wealth into productive capital? • No: genuine saving is more negative for resource-dependent countries. Why? • Anticipation of better times: expect higher oil prices, lower extraction costs in future. Oil importers should save, oil exporters should borrow (Asheim). Against Washington consensus. • Rapacious rent seeking: interconnected/common pools with imperfect property rights. Distorted Hotelling rule. • But then also excessive investment, leaving genuine saving properly defined (Arrow/Dasgupta) zero and sustainable consumption too low. • Negative saving if wasteful conflict, e.g., war or strife.

  32. Figure 11: Negative Genuine Saving in Resource-Rich Countries Source: World Bank (2006, Figure 3.4). Listen to lecture of Kirk Hamilton.

  33. Table 3: Empirical evidence Impact of Natural Resources on Civil Wars

  34. IV. FOOD CRISIS • World prices are at or above historical records. • Temporary hike due to adverse weather and harvests in major grain-producing regions with spill-overs to crops/livestock that compete for same land in 2005/6. • Very long run: falling food prices due to agricultural productivity improvements such as GM food. • But also increasing demand for food/feed fuelled by urbanization, economic growth, rapid population growth, switch away from vegetarian diets. • And due to increased demand for bio-diesel! • OECD/FAO estimates that food prices will be much higher during 2008-17 than 1998-2007: from beef and pork for 20% to vegetable oils over 80% higher.

  35. Food crisis ctd. • Also food prices more volatile: demand less price-elastic as people become wealthier, more volatile weather and agricultural output due to climate change, more speculation on agricultural futures markets. • Policy need to take account of transitory & permanent factors, volatility and global shifts in demand and supply from OECD to poor countries (except for coarse grains, cheese, skimmed milk powder) to address needs of hungry and poor, especially in urban areas of food-importing developing countries. • Infra, governance, GM, but also stop subsidies on bio-fuels.

  36. Figure 11: Longer Perspective on Food Prices, Ores & Metals, and Crude Oil

  37. Food crisis before financial crisis • In February 2008 food prices rose above the historical record of 1973 & went much higher. • Billions of people eating less, underfed, ill, not sending their children to school. Food riots. • Why? Rapid demand especially in China and India. Switch to meat diets as it becomes more affordable for millions. Rapid population growth from 6.6 to 9 billion in next 40 years. Bottom billion can simply not compete with subsidized bio-fuels, so loose their farm lands (and destroys rain forests and adds to global warming).

  38. African prospects gloomy • In Africa population doubles to 2 billion yet hardly sufficient agricultural land available for rapidly growing number of African households. • Need Second Green Revolution for Africa, but tough: much strife, conflict, war, diseases, only 4% has access to irrigation, corruption, dysfunctional institutions, patchy road network, disconnected from world trade. Africa is too poor to save and to poor to invest in education, health, infra and agriculture. • Why no introduction of climate-resistant species like in Asia? Government failure. Distribution of seeds and fertilizers used to gain political power than to distribute foods. In Nigeria credits/subsidies did not reach farmers. During 2001 draught in Ethiopia food did not reach the people due to patchy road network.

  39. African agricultural prospects gloomy • Lack of knowledge, risk aversion leading to more predictable food crops with lower return, lack of credit for risky ventures. • Education not specifically directed at transfer of agricultural knowledge. • High oil/diesel price pushed up price of fertilizers, irrigation and transport. • Need bridging credits as farmers have almost no access to financial markets. • Population growth has continuously reduced average agricultural plot size for small farmers. Makes it even more difficult to get credit. • Many distortions in food prices: subsidies and import controls give wrong signals. Badly functioning international food markets. • Difficult for many developing countries to cope with peaks in food demand and supply.

  40. ACTION PLANS • Action Plan for a Crowded Planet (Jeff Sachs): curb population growth best way to promote prosperity, via large scale distribution of contraceptive, legal abortion, education especially for young girls, temporary support out of poverty traps, vaccination, malaria nets, antibiotics, clean drinking water, null tariff for basic water needs, water reservoirs to collect rain water and avoid draughts, Green Revolution for Africa incl. subsidized fertilizers & drop-by-drop irrigation, Millennium Villages, Marshall Plan for Africa, moratorium on deforestation and grazing ocean floors, protect extraterritorial fishing zones, meat tax, research into safe nuclear reactors and waste disposal. Critique: to top-down, cannot scale up just like that, ignores rent seeking and corrupt dictators.

  41. ACTION PLANS ctd. • Action Plan for the Bottom Billion (Paul Collier): invest in road & rail networks, ports, airports, offer young rebels work, 10 to 20 year commitment to keeping peace in resource-driven wars in fragile states and thus less emphasis on good governance (cf. China). • Global Green New Deal (UN/Ed Barbier): direct 1% of global GDP to new green infrastructure, helps to revive world economy and realize sustained and inclusive growth reducing poverty as well as carbon dependency and ecosystem degradation. Direct fiscal stimulus at energy-efficient buildings, & transports, renewable energy and in developing countries go for agricultural productivity boosts, freshwater management, sanitation. Reverse perverse fuel subsidies (e.g., cheap gas for Dutch horticulture). Develop global carbon markets via more inclusive CDM.

  42. GLOBAL CHALLENGES • China is crucial for global deal: biggest expanding domestic market, big surplus country propping up the dollar, biggest emitter of CO2, scramble for resources in Africa, rising global power factor. India too. China’s population is rapidly ageing, however. • US should take lead, but big deficit country, fragile dollar, root of financial crisis, CO2 emissions are actually falling. • Europe ageing old, declining, less relevant continent struggling with migration and the Lisbon agenda, but did take lead in carbon trading. • Much of Africa poor & hungry, war zone, landlocked, financially underdeveloped, ethnically divided.

  43. New Global Deal • China less focus on export markets, more focus on domestic consumption, less CA surpluses, long-run ethics in Africa, key player in super Kyoto, key mover in global governance. • US gets rid of CA deficits by spending less on armaments and consumption, restores financial confidence, takes lead in super Kyoto, developing clean technology and in helping Africa. • Global cooperation to avoid costs of extremely volatile commodity prices (avoid massive investments in CO2-intensive synthetic fuels) . • US, China and Europe cooperate to open markets for Africa, sustained peace efforts in Africa, and combat poverty, disease, infections in Africa.

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