Transcript Figure 1

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
• Natural resource curse?
• Food crisis
• Action Plans
• Global Challenges
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.
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.
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.
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.
Figure 1: Net Investments in Emerging Economies
(flows, billion US $, IMF, 2009)
150
100
50
08Q1
07Q1
06Q1
05Q1
-50
04Q1
0
-100
-150
-200
-250
Portfolio
Anders
Directe
Netto derivaten
Totaal
50
4
40
3
30
2
20
1
10
0
0
YR2005
5
YR2000
60
YR1995
6
YR1990
70
YR1985
7
YR1980
80
YR1975
8
YR1970
Buitenlandse Hulp (% bnp)
Figure 2: Foreign Aid as Percentage of GNP (1970-2007)
Sub-Sahara Afrika
Zuid Azië
Oost Azië en Pacifisch Gebied
Latijns Amerika en Caraïbisch Gebied
Burundi (rechter as)
Zambia (rechter as)
Figure 3: Sharp Falls in Commodity Prices
Figure 4: Sharp Falls in Remittances
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.
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.
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.
Figure 5: Environmental Hazards and Global Warming Necessitate Adaptation
Source: Edenhofer, presentation at Climate Summit, Munich, May 2009
CLIMATE CHANGE AND WAR
• Using high-resolution paleo-climate data 14001900, 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.
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.
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.
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 nonKyoto 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.
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)
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.
Figure 7: Tipping Points in the Earth System
Source: Lenton and Schnellnhuber (2007)
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!
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%.
• 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.
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.
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
10
Figure 8: Volatility Correlated with Low Growth in GDP per Capita
5
Equatorial Guinea
0
United Arab Emirates
-5
Iraq
Liberia
0
10
20
Standard Deviation of Yearly GDP/Capita Growth
(1970-2003, %)
Fitted Values (slope = -.247***; Adj. R2=.14; n=150)
Landlocked countries
30
30
Figure 9: Resource-Rich Economies Are More Volatile
10
20
Liberia
United Arab Emirates
0
Bahamas, T
0
20
40
60
Average Resource Share of GDP
(1970-2003, %)
80
Fitted Values (slope =.149 (.016); Adj. R2=.44)
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.
100
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.
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.
Table 2: Counterfactual Experiments for Resource-Rich
and Landlocked Africa
Resource-Rich Africa versus South-East Asian
sample mean
Resource-rich Africa
Difference
on volatility
1.49%
4.04%
0.25%
-3.79%
1.48%
4.00%
1.07%
-2.94%
0.65%
17.26%
24.45%
14.96%
-9.50%
0.43%
-0.478***
-0.014***
0.002**
-0.971**
0.050*
-0.018**
1.72%
8.362
4.140
4.04%
4.35%
29.07%
1.86%
7.747
4.049
3.43%
4.32%
26.89%
2.75%
7.129
1.476
6.02%
13.13%
14.43%
0.89%
-0.619
-2.574
2.59%
8.80%
-12.47%
0.43%
-0.87%
0.46%
2.98%
-0.44%
-0.22%
1.621***
0.801
-1.290***
4.35%
7.27%
29.07%
4.32%
11.08%
26.89%
13.13%
10.52%
14.43%
8.80%
-0.56%
-12.47%
-0.41%
0.01%
-0.47%
0.52%
-0.02%
0.58%
-0.693***
0.374
0.746
0
-0.746
-1.37%
1.71%
0.001***
277.763
90.902
552.571
461.669
-0.86%
1.07%
4.04%
62
3.43%
4
6.02%
6
2.59%
GDP per capita growth
Mean equation
1st lag GDP per capita growth
South-East Asia
on yearly GDP/capita
growth rate
0.221***
Average investment share of GDP 1970-2003
0.045*
Average population growth rate 1970-2003
Initial log per capita GDP 1970
Initial human capital 1970
Volatility (σi)
Initial point-source resources 1970
Initial financial development 1970
Variance equation
Initial point-source resources 1970
Initial diffuse resources 1970
Initial financial development 1970
Sachs Warner updated openness dummy 70
Distance to nearest navigable river or coast
Estimated volatility
Countries
Note: Resource-rich African counties are Algeria, Congo, Rep.. Ghana, Malawi, Togo, and Zambia. The South-East Asian countries in our sample are South Korea, Malaysia, Philippines and Thailand. The calculations are based on regression
(6a). The effect of each variable on the growth rate (or on volatility) is measured as the effect of changing the respective variable to the sample mean level of the South-East Asian countries, while keeping all other variables constant.
Do developing countries transform
their sub-soil wealth into productive
capital?
• No: genuine saving is more negative for resourcedependent 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.
Figure 11: Negative Genuine Saving in Resource-Rich Countries
Source: World Bank (2006, Figure 3.4). Listen to lecture of Kirk Hamilton.
Table 3: Empirical evidence Impact of Natural Resources on Civil Wars
Resource measure used
Main findings
Onsets and Incidence
De Soysa (2002),
Fearon and Laitin
(2003), Fearon (2005)
Collier and Hoeffler
(2004),
al.
Fearon Collier
(2005), et
Bulte
and Brunnschweiler
Oil exporter dummy, fuel
exports / total exports
Primary exports / GDP
(with further robustness
Humphreys (2005)
Diamond deposit,
diamond production, and
oil production dummies
Oil production, oil
reserves, diamond
production
Ross (2006)
Fuel rents and diamond
rents per capita
Lujala et al. (2005),
Lujala (2009)
Both measures increase war
onsets
Increases war onsets (inverted Ushape)
The effect of primary exports on
war
onsets diamonds
seems notincrease
very
Secondary
onset and incidence (ethnic)
war, primary diamonds decrease
incidence war, (onshore) oil
Both oil production and diamond
production
increase
war onsets
Fuel onshore
and offshore
and
primary diamonds increase war
onsets, secondary diamonds
increase onsets separatist wars
Duration and fatalities
Fearon (2004), Ross
(2006)
Collier et al. (2004)
Lujala (2009)
Lujala (2009b)
Contraband (cocaine,
gems, opium etc) dummy
Primary exports / GDP
Gemstones, oil reserves
and production dummies
Gem, drug and
hydrocarbon production
dummies
Increases war duration
Level not significant. Lower price
of commodities exported
shortens war
The presence of these
measures in conflict zone
increases duration war
The presence of these
measures in conflict zone
increases combat deaths
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.
Food crisis ctd.
• Also food prices more volatile: demand less priceelastic 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.
Figure 11: Longer Perspective on Food Prices, Ores & Metals,
and Crude Oil
500
450
400
350
300
250
200
150
100
50
Voedsel
Ertsen en Metalen
Ruwe Olie
2005
2000
1995
1990
1985
1980
1975
1970
0
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).
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.
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.
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.
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.
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.
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.