Climate Change, Scramble for Natural Resources, Financial Crisis and Sustainable Development SID, Th

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Climate Change, Scramble for Natural Resources,
Financial Crisis and Sustainable
DevelopmentSID, Theatre Concordia, The Hague,
11/12/2009

• Rick van der Ploeg
• University of Oxford en
• Universiteit van Amsterdam

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OVERVIEW

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

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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.

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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.

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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.

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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
  US410 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.

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Figure 1 Net Investments in Emerging
Economies (flows, billion US , IMF, 2009)
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Figure 2 Foreign Aid as Percentage of GNP
(1970-2007)
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Figure 3 Sharp Falls in Commodity Prices
Figure 4 Sharp Falls in Remittances

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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.

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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.

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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.

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

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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.

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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.

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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.

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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)
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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.

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Figure 7 Tipping Points in the Earth System
Source Lenton and Schnellnhuber (2007)
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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 IAMs 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 0.11.01.31.4 and
  benefit-cost ratio is 4.5. Immediate climate
  mitigation action is no brainer!

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Weitzman critique

• With triplet of twos, interest rate of 2226
  (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 ((1.46)/2!).
• IAMs 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.

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• 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.

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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.

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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

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Figure 8 Volatility Correlated with Low Growth
in GDP per Capita

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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.
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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.

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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.

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

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Figure 11 Negative Genuine Saving in
Resource-Rich Countries
Source World Bank (2006, Figure 3.4). Listen to
lecture of Kirk Hamilton.
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Table 3 Empirical evidence Impact of Natural
Resources on Civil Wars
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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.

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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.

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Figure 11 Longer Perspective on Food Prices,
Ores Metals, and Crude Oil
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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).

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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.

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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.

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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.

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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.

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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. Chinas 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.

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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.