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Farming First: A Recipe to Feed a Crowded World

6 Mai, 2019 - 18:54

By Timothy A. Wise

Cross-posted at Mark Bittman’s Heated at Medium

One version of an old joke features a shipwrecked economist on a deserted island who, when asked by his fellow survivors what expertise he can offer on how they can be rescued, replies, “Assume we have a boat.” Economists have a well-deserved reputation for making their theories work only by making unrealistic assumptions about how the real world operates.

I was reminded of the joke often in the five years I traveled the world researching my book, Eating Tomorrow: Agribusiness, Family Farmers, and the Battle for the Future of Food. Policy-makers from Mexico to Malawi, India to Mozambique, routinely advocated large-scale, capital-intensive agricultural projects as the solution to widespread hunger and low agricultural productivity, oblivious to the reality that such initiatives generally displace more farmers than they employ.

Where are the displaced supposed to go? “Assume we have employment,” can be the only answer, because economic growth sure wasn’t generating enough jobs to absorb those displaced from rural areas. No one can sail home on an economist’s assumed boat. And assumed jobs wouldn’t address the chronic unemployment and under-employment that characterize most developing countries.

With demographic shifts creating youth bulges, job-creation remains an urgent priority. Indeed, growing populations are often portrayed as a demographic “time bomb,” conjuring images of unemployed youth joining gangs, insurgent groups, or just falling into despair in urban slums.

But what if we saw all those unemployed workers as a resource rather than a curse? Economist Michael Lipton and others have long argued that the bulge in working-age youth can be a demographic dividend rather than a demographic time bomb, but only with policies that focus on creating and rewarding work, beginning with labor-intensive farming in agricultural societies. That is exactly what I see starting to happen in Mexico under its new president.

The Demographic Dividend

Lipton makes what should be an obvious point: labor creates wealth. So a society with a large share of able-bodied workers has a vast resource to generate economic development. The economic success stories in South and East Asia relied on an increase in the number of young people entering the workforce to accelerate economic growth. Lipton estimated that about one-third of the widely acclaimed “Asian miracles” of growth and poverty reduction could be attributed to those countries’ low dependency ratios — the share of the population (children and older people) who don’t work and are therefore dependent on the share of the population who can.

The United States now faces the opposite problem, with baby-boomers collecting their Social Security checks and with fewer workers paying into the government retirement system. But in Africa, low dependency ratios, economically, mean fewer mouths to feed per able-bodied worker. In 2012 there were 120 working-age people for every 100 dependents; in 2050 there are projected to be 196, a 63% rise in workers-per-dependent.

That should be a boon to economic growth, but only if those available workers can be put to productive work. In contemporary Asian success stories, such as China’s, the first place they were put to work was in labor-intensive agriculture, with land reforms that created and supported intensive production on small farms of about two acres each.

Sub-Saharan Africa is the ticking demographic time bomb everyone now worries about; populations are expected to double, or more, by 2050. But that could be a demographic dividend if governments pursue policies that put people to work, first in agriculture. The young will be a resource, not a curse. And bottom-up economic development, particularly if it improves the lives of women and girls, will slow population growth, as it has in other developing countries.

Little Support for Labor-Intensive Agriculture

In my research in Africa, I didn’t see much evidence that governments saw working-age youth as a resource. And they certainly were not investing in the kind of labor-intensive small-scale farming that was the foundation for Asia’s economic miracles. But I saw plenty of examples of farmers taking matters into their own hands and intensifying their own production, generally with scant government support.

Intensification now has a bad name among many sustainable agriculture advocates because the term has become associated with increased use of commercial inputs to raise productivity. Even “sustainable intensification” has been co-opted by advocates of Green Revolution technologies to argue for “sustainable” use of chemicals.

But everywhere I traveled to research Eating Tomorrow, I saw farmers creatively intensifying the farming of their small plots, in truly sustainable ways. Those few who had access to irrigation could essentially double production, growing a second set of crops on the same land by irrigating it in the dry season. Even those who couldn’t irrigate raised goats or other small livestock, composted the manure, and applied it to their fields, increasing soil composition, fertility, and productivity. Farmers inter-planted various food crops with their corn, ignoring Green Revolution monocultures and the bribes –- subsidies for commercial corn seeds and chemical fertilizers –- that backed them up.

Farmers knew when they harvested cowpeas from the same fields from which they had recently picked their corn that they had indeed intensified production –- two harvests rather than one –- from their land. Agricultural economists measure yield as corn-per-acre, not total-food-per-acre, so those shipwrecked economists see intercropped fields as less productive than monocultures. But these farmers know better. And when corn crops fail due to drought or pests, they also know they have grown other foods that survive to sustain their families.

Lipton’s policy advice is to provide public support so small-scale farmers can intensify production, putting all able-bodied family members to productive work. Organic and ecological agriculture, in fact, require more intensive farm management, more labor. If that labor is rewarded with good prices, it can initiate a virtuous cycle of economic development, taking advantage of the productive resource represented by a large working-age population, turning a potential demographic time bomb into a demographic dividend.

Making Rural Mexico Great Again

Interestingly, I now see such policies being implemented in Mexico, 25 years into the rural disaster that the North American Free Trade Agreement (NAFTA) helped create. The new approach comes from the government of Andrés Manuel López Obrador, who was swept into office last year in a landslide of discontent with Mexico’s corrupt leaders and their failure to sustain a decent standard of living for the majority of Mexicans.

In 1994, NAFTA opened the floodgates to cheap, subsidized U.S. corn, wheat, soybeans, and other crops, inundating rural Mexico. Corn imports jumped fivefold, driving local corn prices down by two-thirds. Some five million able-bodied workers fled rural Mexico, and they did not find waiting for them any of the job’s NAFTA’s economists had assumed would materialize. Some ended up as seasonal laborers on Driscoll’s strawberry farms in Northern Mexico. Others swelled city slums. Many risked the increasingly dangerous crossing to seek work in the United States. Most sent money back home so the family could keep its farm, often its only asset.

Today, an embarrassing 57 percent of Mexico’s able-bodied workers are in the informal sector, the broad category of off-the-books work ranging from street vending to drug trafficking. That is a higher share than before NAFTA. Clearly, Mexico hadn’t put its able-bodied people to productive work to jumpstart economic development.

The new López Obrador administration, however, seems determined to make rural Mexico great again by investing in the productivity of the country’s family farmers in the most neglected areas of the country. The leader of his new Office of Food Self-Sufficiency, veteran farm leader Victor Suárez, has ambitious programs underway to reinvigorate rural economies by paying support prices for key food crops –- corn, beans, wheat, rice, and milk –- and using that public procurement to provide high-quality foodstuffs to schools, hospitals, and other public institutions and to the poor. A host of other policies, such as a massive agro-forestry program, aim to invest in soil fertility and sustainable resource use on the country’s small farms.

If that approach sounds familiar, it should. It is exactly what the U.S. government did in the Great Depression, and it is part of what won Brazil’s “Zero Hunger” campaign international recognition. It is the cornerstone of India’s National Food Security Program, which I document in my book.

In Mexico, López Obrador says that the explicit goal is to eliminate the root causes of rural outmigration and illicit drug trafficking. In other words, echoing Lipton, to create dignified work in agriculture to turn Mexico’s chronic youth unemployment into a demographic dividend.

Timothy A. Wise directs the Land and Food Rights Program at the Small Planet Institute in Cambridge, Mass. He is the author of the recently released Eating Tomorrow: Agribusiness, Family Farmers, and the Battle for the Future of Food (New Press, 2019), available wherever books are sold.

 

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Italy and China’s One Belt One Road Initiative

30 April, 2019 - 21:15

By Sara Hsu

China has become a leader in globalization, most visibly through its One Belt One Road initiative, which spans several continents and aims to build up infrastructure and trade between China and the rest of the world. While the program has, for the most part, remained controversial in the West due to a fear of Chinese imperialism, in March 2019, Italy broke with the G7 major economies and signed up for the program. Some analysts have expressed concerns that this move will allow China a back door into Europe’s heartland, while others see it as a shrewd move on the part of the Italians, allowing them to obtain much-needed financing for a number of endeavors. So, which is it, and is this a win-lose or a win-win situation?

Italian-Chinese agreement

A few details first. Italian leader Deputy Prime Minister Luigi Di Maio signed a memorandum of understanding of cooperation between the two nations. The MOU states, “the Parties will work together within the Belt and Road Initiative (BRI) to translate mutual complementary strengths into advantages for practical cooperation and sustainable growth, supporting synergies between the Belt and Road Initiative and priorities identified in the Investment Plan for Europe and the Trans-European Networks, bearing in mind discussions in the EU China Connectivity Platform. This will also enable the Parties to enhance their political relations, economic ties, and people-to-people exchanges.” Economic benefits have been a focus of the BRI. Di Maio views the agreement as a means to correct the trade imbalance between two countries by shipping more Italian-made goods to China.

Under the collaboration, the nations agreed upon a $2.8 billion package that included 29 deals. The deals targeted a variety of sectors, including energy, finance, agriculture, and infrastructure. Luxembourg soon after followed suit, signing an accord that endorsed the Belt and Road Initiative. The agreements boost China’s reputation as a leader of economic globalization, as Western Europe joins countries from Central and Eastern Europe, Asia, and Africa in participating in infrastructure projects with the Middle Kingdom.

Winners and losers

In this deal, if there is any winner, it is China. Italian involvement in Xi Jinping’s flagship program gives the Chinese leader “face” and signals to the rest of the G7 that Chinese influence is potentially welcome everywhere. China has been racking up signatories to the program in almost every continent. The appeal is cheap loans, skilled Chinese labor, and the potential for long term returns on investment. China helps to build up infrastructure, such as bridges, roads, and ports, that can help countries improve their economic circumstances.

Some in Italy also view the deal as beneficial. With high levels of debt and recent experience with recession, Italy has struggled to improve its economic performance amid a backdrop of slow Eurozone growth. Politics has played a role in maintaining debt costs, as Italy and the European Union locked horns over increasing Italy’s budget deficit and implementing a fiscal stimulus plan. The dispute ended up driving up Italy’s borrowing costs before an agreement was reached at the end of 2018.

However, major Western powers disagree that joining the One Belt One Road project will help Italy. Rather, countries like the US see the move as a means for China to penetrate national security barriers and engage in debt trap diplomacy. The latter charge stems from China’s tendency to finance BRI projects through loans. The European Commission remains wary of the Asian nation. In a Strategic Outlook publication, the European Commission called China “an economic competitor in pursuit of technological leadership and a systemic rival promoting alternative models of governance.”  China has been viewed poorly due to it state subsidies for traded goods and government involvement in the technology sector, which could provide a gateway to Chinese spying.

Complicating matters, not all top Italian officials agree that the deal is good for Italy. Even Di Maio’s own coalition partner, the far right League, has sought to uphold strong relations with the US, which has been involved in a trade war with China under the Trump administration. Italian opposition parties have opposed any deal between China and Italy on the grounds that it could harm Italian industry.

Europe against Chinese practices?

French President Emmanuel Macron wants to unite Europe against unfair Chinese trade and investment practices. Macron stated on March 25 during a visit from Chinese President Xi Jinping that fair competition between European and Chinese firms should be a goal, and that BRI projects must meet international norms. Despite this talk, France and China signed 15 business deals in the amount of 40 billion euros ($45 billion) to further the economic interests of both sides.

Measures of success

The conclusion is not simple, as there may be different measures of success for such a collaboration. One measure is simply Italy’s growth that arises from the program. Will the deals made be fruitful, and how significant will the gains be? Another measure is whether there really will be security costs associated with the deals. Will China truly have the ability to access Western Europe’s private economic and social networks due to the cooperation, or is this just Sinophobia? Finally, there is a question of who will gain or lose due to the partnership-for example if there are jobs or contracts lost or gained as a result.

In this globalized world, relationships are complex. China is working to expand outward by recognizing that other nations have economic needs that they cannot easily fulfill themselves. Whether the China’s partnerships with other nations are fair or will make economic and political sense in the long run has yet to be seen, but they remain contentious among Western critics.

Sara Hsu is an assistant professor of economics at the State University of New York at New Paltz. Her research interests include the Chinese economy, financial flows, and the international economy.

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China Has Strategic Objectives In Going Global, Does Africa?

25 April, 2019 - 20:53

From The Real News Network.

If Africa as a continent does not have strategic objectives of its own, the history of impediments to African economic development will be repeated in its engagement with China, says Ethiopia’s Alemayehu Geda.  

LYNN FRIES: It’s The Real News. I’m Lynn Fries. My guest on today’s show is Ethiopia’s Alemayehu Geda, who is a Professor of Economics at University of Addis Ababa. We are meeting at the UN Geneva, where Professor Geda just presented at anexperts meeting. Professor Geda, welcome.

ALEMAYEHU GEDA: Thank you very much.

LYNN FRIES: The formal title of your presentation was THE ELUSIVE QUEST FOR STRUCTURAL TRANSFORMATION & JOB CREATION IN AFRICA – WILL CHINA MAKE A DIFFERENCE. Start by commenting briefly on the underlying topic, that the reshaping of the global economy has major implications for Africa.

ALEMAYEHU GEDA: Historically Africa has been trading and in terms of finance engaging with today’s developed countries, the western economies of Europe, North America, and Japan, so basically OECD countries. But in the last 15 years the pattern of African trade and African finance is changing from the traditional partners to new partners, China, India, Brazil, and to some extent also Russia. So this is an emerging pattern, and it’s very important for African countries to understand it and also strategically think about it.

LYNN FRIES: Here’s a clip from some of your opening comments at the expert meeting where you provide some context on all this.

ALEMAYEHU GEDA: In the last decade African growth has been very good, over 5 percent per annum for nearly a decade. This growth is primarily driven by high commodity prices. And the demand for that comes from emerging economies in general, and China and India in particular. It has obvious significant implications for structural transformation in the continent. Starting in 2003 up until 2013, for the first time the terms of trade of Africa is getting better, reversing, perhaps, the 100 years of deterioration of terms of trade by about 0.8 percent per annum thanks to this commodity price. And in particular the engagement of China in Africa became huge. Like if you compare from mid-1990s to 2016, the trade between China and Africa increased by about 66 times, from $3 billion to over $200 billion now. And in terms of finance also, Chinese finance is overtaking traditional financiers in Africa. This takes both foreign direct investment (FDI) and also credit from EXIM (Export/Import) bank of China. FDI is not that important compared to traditional financiers. Chinese FDI in Africa in terms of stock is not more than 4percent. Still, the Western economies are dominant in terms of stock of FDI. However, in terms of credit finance coming from the EXIM bank of China is becoming very important. It is estimated it could be about over $100 billion right now. And this is going invariably to the infrastructure sector, and the resource sector, and not only that, it is focused also in a few countries.

LYNN FRIES: What are some of the main characteristics, as you see it, in this engagement between Africa and China?

ALEMAYEHU GEDA: There are three channels through which African countries are engaging within China. One is trade, basically. Africans in general sell primarily commodities, unprocessed primary commodities like oil, copper, and what have you, this kind of mineral resources, and the Chinese are selling manufactured goods. So basically one of the characteristics of this trade is the Chinese are selling manufactured processed commodities, manufactured goods, while the Africans are selling primary commodities. Second characteristic is there is a significant inflow of capital from China to Africa. And you know, traditionally with the industrialized countries of the West it used to be foreign direct investment. Foreign direct investment means, you know, a company from Europe or North America comes to Africa, sets up a company, and they control the management and do their business. But with China it is different. Although they have foreign direct investment it is not that important. Like, from the total stock of foreign direct investment in Africa, which is over$557 billion, the share of China is just $17 billion, which is about 4 percent.

But there is a different finance coming from China. We can call it quasi-FDI. It is not really foreign direct investment. It is quasi-FDI, or credit financing, or sometimes they call it vendor financing, which means basically it is the African country who is doing the job or the investment. But the money for that comes from China, EXIM bank, usually. But there are also other development banks from China, but the EXIM bank is the dominant one. And how different is this from foreign direct investment? Well, the investment, to begin with, is owned by African countries. Second, relative to traditional finance that we used to get from development partners, it is a little expensive. I think that’s what characterizes the finance and trade.

LYNN FRIES: On the issue of how credit finance from the EXIM bank of China is becoming very important in Africa, what do you mean when you talk about bundling in the context of Chinese transnational corporations and the export-import bank of China?

ALEMAYEHU GEDA: The Chinese government has a policy for its companies, multinational companies. As you know, Chinese have both private and public multinational companies. And their strategy was what they call it – going global. They have a strategy called going global. That means the government of China encourages its firms to go global, strategically engage with any country. And as part of that incentive, these companies can get money from the Chinese government to do their business. Now, therefore, when they came to a particular African country, they could be interested in trade. Say they can come to South Sudan or Sudan and then they want to trade oil. For instance,Sudan, before it split into two, used to import 90 percent of its oil to China. OK? So basically they came with trade. But that trade could be facilitated if there is finance for the firms that extract oil. Therefore the EXIM bank of China will give them that finance that is required to do this trade.

And sometimes, although it’s not significant, that finance could have also some aid part. It’s not significant. We did a study on Madagascar and Ethiopia and the share of pure aid is just less than 1 percent in this country. So it’s not significant, but there is aid in it. So there is credit finance in it. But primarily it’s coming to support the Chinese multinational while engaging, say, in the Sudanese oil sector. That’s why I say that now trade, finance, and aid is bundled to have the strategic objective of going global from China’s point of view. That’s what I mean when referring to bundling.

LYNN FRIES: In the case of Africa, what do you see as key challenges and opportunities that have been put into play on the back of China’s strategic objectives of going global?

ALEMAYEHU GEDA: The coming of China to Africa is an opportunity in the sense that the Chinese way of growing in the last 20 years by close to 10 percent per annum, and that creates a huge demand for resources, which Africa is capable of supplying. And as a result, from 2002 until 2013 the global commodity price has increased, primarily because of the Indian and Chinese demand for these commodities. And this is an opportunity because the terms of trade of Africa, African primary commodity prices if you compare it with manufactured goods that Africa is importing, had been deteriorating for the last hundred years. It’s only starting in 2002 that it started to go up, and this is because of China. So this is a good opportunity.

Second opportunity, the Chinese are building a lot of infrastructure in Africa, and Africa has a huge infrastructure deficit. And this is an opportunity. The third opportunity is that the Chinese have a new policy called rebalancing, which means they want to focus now their growth to be based domestically instead of the export orientation they had before, or outward orientation they had before. Now they want to do it more domestic, depend on domestic investment, depend on domestic consumption growth. So this is what they call rebalancing. And also they want to go up on the manufacturing ladder to more skill-intensive, technological-intensive production of goods and services. Also there is a possibility that some of the low labor-intensive goods producing firms might be relocated to other developing countries, because wages in China are growing. Now the average wage in China is becoming about $500-$600 dollars. And if you happen to move to Ethiopia, for instance, the average wage that you pay is about $40. So this huge opportunity for the Chinese. But for Africa this is also a good opportunity, because it is estimated about 85 million jobs, firms that created about 85 million jobs in China are moving to developing countries, and Africa can have a part of that share. So these are the opportunities. Shall I go to the challenges?

LYNN FRIES: Please do. Yes.

ALEMAYEHU GEDA: Yeah. The challenge is that the Chinese, when they come to Africa – for that matter, when the Chinese go to developed countries or developing countries – they have a strategy. They know what they want. But when it comes to Africa we do not have a strategy on how to engage with them. Can we leverage this deal for our benefit? Can we tell them to go to a particular sector in which we have a comparative advantage, and in which we can create a lot of jobs, and after this we can reduce poverty? Not really. Why? Because we don’t have the institutional and human capital to do that. To do research, to negotiate with them, to direct them, to follow them during implementation to make sure that there is technological transfer during this process. So I mean, to my knowledge, except probably in South Africa, we don’t have that kind of systematic engagement with China. That is, I think, the danger, the challenges that Africans are facing.

LYNN FRIES: What kind of strategic policy response do you think should be pursued by Africa in relation to China?

ALEMAYEHU GEDA: It should be multifaceted to begin with. It shouldn’t be locked to a particular country. It should be coordinated. I can think of two channels. One is the African Union, the Economic Commission for Africa. These are continental organizations. They were supposed to do research, engage African governments to strategically think about engaging with emerging economies in general, and China in particular. Or for that matter, even with the West in general. So probably one channel I can think of to use is the A.U., the African Union, the Economic Commission for Africa, to have a collective, coordinated, continental strategy.

The second channel is using the building block for the Africaneconomic community that the AU is envisaging, is what we call a Regional Economic Community. So the West African have the West African Economic Union. If you come to East Africa we have the East African Economic Community. If you go to Southern Africa we have the SADC, or the Southern Africa Development Community, and in North Africa we have the Maghreb Union. So probably each of these RECs, or Regional Economic Communities, need to come up with a regional engagement strategy. And their individual countries need to pay homage to this agreed strategy when they design their own policy. Otherwise, you know, if every country is competing for the resources and markets and opportunities coming from China, it will definitely lead to a race to the bottom. And for that, probably, my suggestion is to first have an engagement strategy. Do it in a coordinated manner. If you want to use the existing institution one possibility is to use the African Union and Regional Economic Communities.

LYNN FRIES: We should note that in Q&A at the expert meeting, the notion of ‘kicking away the ladder’ that’s been climbed to economic success, not only in the United States and every other developed country throughout history, but by China, was raised as an example of the kind of impediments to economic development facing African and other developing countries today.

ALEMAYEHU GEDA: Actually, you don’t even have to go to history. You just can think of the Trump administration, which basically has this protectionist stance in its policy. So definitely if you go in the history books, we knew that when Europe developed and when the Americans developed their economy they were protectionist. And a famous American economist called Carey was against the import of commodities from the British. And he explicitly said – he was an adviser of one of the American presidents [Chief Economic Adviser to U.S. President Abraham Lincoln] 150 years ago – and he said if we don’t protect the American economy we end up being primary commodities forever for British interests. But see, once they pass that stage, they don’t allow us, they don’t allow African countries, to do it because the West wants the African countries to liberalize.

Now, come to China. I mean, for me there is no fundamental difference between the East and the West. Every nation has its own interest. So it’s not their fault, actually, the Chinese or the Americans or the Europeans. It’s not their fault. It’s the Africans’ responsibility, because we have to see that history, that when these guys developed they have interventionist governments, they have protectionist governments, they were planning everything. And I think Africans also need to do that. Now, these days we have to do it in a coordinated manner, because you cannot do it by yourself. So be it China, or dealing with China or the East or the West, I think the market cannot deliver what you want. Free market cannot deliver what you want. You have to guide the market. That basically means you have to have a government that strategically thinks. And to do that you have to have, as I said earlier, the human and institutional capability to do that. If you don’t do that you end up repeating … the relationship that Africa has with the West will be repeated with China, probably.

LYNN FRIES: Specifically drawing from Ethiopian history and the seminal thinkers among Ethiopia’s economists, whose shoulders can you stand on today as a contemporary Ethiopian economist?

ALEMAYEHU GEDA: Historically in 1920 there was this famous economist, it’s my favorite, called Gebrehiwot Baikedagn. A hundred years ago he did an empirical analysis of the relationship between Europe and Ethiopia. And he showed a hundred years ago that the terms of trade of Ethiopia vis-a-vis Europe is deteriorating because Ethiopia is selling primary commodities while importing manufactured goods. And he said unless we industrialize by protecting our markets, we will end up poor for the foreseeable future. And it was prophetic. A hundred years down the line, we still didn’t manage to realize his policy recommendations.

And there were great economists in Ethiopia. We call them actually – in the ‘30s there were about four or five of them – we call them the “Japanesers” in Ethiopia. That’s in 1920 to 1930.Because they were advocating for a Japanese way of developing, which means basically take the knowledge, the skill from Europe and North America, from the West, but domesticate it to your own interests, within your cultural setup. And they usually take Japan as their model, and in Ethiopian economic history we usually call them the Japanesers.

LYNN FRIES: Alemayehu Geda, thank you.

ALEMAYEHU GEDA: You’re welcome. I enjoyed it.

LYNN FRIES: And thank you for joining us on The Real News Network.

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World Bank Financialization Strategy Serves Big Finance

9 April, 2019 - 19:17

 By Jomo Kwame Sundaram and Anis ChowdhuryCross-posted at Inter Press Service.

The World Bank has successfully built a coalition to effectively advance its ‘Maximizing Finance for Development’ (MFD) agenda. The October 2018 G20 Eminent Persons Group’s (EPG) report includes proposals to better coordinate various international financial institutions (IFIs) in promoting financialization.

MDB Midwives of Financialization The MFD approach wants multilateral development banks (MDBs) to actively re-shape developing countries’ financial systems to better ‘complement’ global finance. MDBs have already urged developing countries to encourage local institutional investors by redesigning pension systems along lines inspired by US private pensions. Thus, MDBs have been: •    influencing what projects are deemed ‘bankable’, probably prioritizing large infrastructure over smaller projects. •    enabling securitization to transform bankable projects into tradable securities, generating more revenues and strengthening global finance. •    persuading developing country governments to finance subsidies and other ‘de-risking’ measures designed by MDBs to guarantee private financial profits. •    determining how developing countries supply securities preferred by transnational banks and institutional investors. G20 Financialization Proposals The main G20 EPG proposals for collaboration to promote financialization include: •    IFIs working together to increase the supply of bankable projects and to share data and information to support infrastructure data platforms needed to securitize MDB loans. •    IFIs should provide risk insurance to increase the number of bankable projects stuck due to high political risk. This requires government guarantees against ‘political risks’ to be more attractive to re-insurers. As securitization of MDB loans involves tradable assets with different credit ratings for investors with diverse ‘risk appetites’, MDBs are being urged to securitize both private and sovereign loans, and to retain stakes in junior tranches to induce private investments. MDBs No Longer Development Banks? While MDBs should follow recent advice for issuers to remain stakeholders by retaining shares of securitized tranches on their balance sheets, the implications are quite different when MDBs, and not private banks, securitize loans. As originators, MDBs may politically pressure low- and middle-income country governments to provide de-risking instruments, including guaranteed income from securitized public-private partnership (PPP) infrastructure projects. World Bank Guidance on PPP Contractual Provisions can burden states and citizens more than any trade or investment agreement or international law. States take on inordinate risk while its right to regulate in the public interest is fettered. New Washington Consensus? The Washington-based Center for Global Development (CGD) has similarly discouraged borrowing in its paper for the G20 EPG, ‘More mobilizing, less lending’. Instead, it proposes augmenting MDB private sector windows with special purpose vehicles (SPVs). The CDG also calls on MDBs to use sovereign lending to promote reforms to make projects financially viable and to help finance the public share of PPPs. Hence, MDBs are pressuring governments to support the MFD with their own fiscal resources. The recommendations will also make it more difficult to manage systemic vulnerabilities arising from the envisaged securities, repo and derivative markets to be officially promoted. Various options promoted by the CDG thus involve high risk, high leverage, financialized investors as partners in international development, exposing the MDBs themselves to the vulnerabilities of the MFD approach. Checks and Balances? The tendency towards concentration in asset management (with economies of scale and scope) is likely to result in US-based asset managers allocating finance globally using considerable institutional investments from developing countries. The G20 EPG is not unaware that its proposal — to transform developing country financial systems to contribute to the global supply of securities — involves significant systemic risks. Nevertheless, it claims to be seeking to secure the benefits of open financial markets while mitigating systemic vulnerabilities. Thus, it has called on the IMF to: develop and manage a framework for managing volatile capital flows; create a resilient global ‘safety net’ that can effectively mobilize resources to address financial fragilities; and integrate financial surveillance with an effective early warning system. However, the EPG paper does not make the shift to securitization conditional on mitigating systemic risks. As its proposed safeguards are largely unrealizable or ineffective, its financial instability concerns do not mean much. Although recognizing the dangers and vulnerabilities involved at both national and international levels, including the loss of effective sovereign control over financing conditions, the IMF supports the EPG proposals. Despite the experience of recent financial crises, the IMF continues to preach that freely floating exchange rates can effectively buffer capital flow volatility, while capital controls should only be used after exhausting all monetary and fiscal policy instruments. Anis Chowdhury, Adjunct Professor at Western Sydney University & University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok.
Jomo Kwame Sundaram, a former economics professor, was Assistant Director-General for Economic and Social Development, Food and Agriculture Organization, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.
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New Pan-Agency Development Financing Report Suggests Major Economic Crisis Brewing

5 April, 2019 - 23:01

By Jesse Griffiths

Cross-posted at ODI.

The 2019 Financing for Sustainable Development report from the Inter-Agency Task Force (IATF) on Financing for Development was launched today.

For those – like me – who worry that the world is sleepwalking into another crisis, it’s not reassuring. It confirms that global debt is at record levels and ‘financial fragilities’ have built up across the globe. It’s also disappointingly light on solutions that could reverse these trends.

What is the IATF report?

The IATF is a group of fifty major international institutions that work on finance issues, including various United Nations bodies, the International Monetary Fund, World Bank and World Trade Organization.

This report is its annual stocktake on progress towards meeting commitments to finance the Sustainable Development Goals (SDGs). It’s an impressive undertaking, covering all major financing sources, with a mandate to look at the global financial and economic system as a whole.

Three things stood out to me:

1. Debt risks continue to grow

First, both public and private debt continue to grow in all country categories. As the graph shows, emerging economies should be particularly worried about corporate debt, which is close to 100% of GDP. This high level of debt makes these economies highly vulnerable – changes in the internal or external environment could trigger bankruptcies that could lead to a full-blown financial crisis.

Meanwhile, more than a decade after the global crisis, developed countries continue to have record levels of government debt. Clearly public finances in this group would be badly placed to weather any future crisis.

2. The financial sector is on shaky ground

Second, global financial sector risks are very worrying. The graph shows how the financial sector has ‘deepened’ – grown relative to the size of the economy – in all categories of countries since the turn of century.

This can be a good thing for developing countries, but it depends on the way that the financial sector has developed. The report highlights that developing countries’ financial sectors have internationalised, with international banks now making up 40% of their banking sector – a share which has doubled since mid-1990s.

This can bring advantages, but it also makes them more vulnerable to the international financial system, where risks have continued to grow despite reforms taken after the global crash. For example, the report notes that ‘th­e global stock of high yield bonds and leveraged loans has doubled in size since the global financial crisis, driven by low borrowing costs, high risk appetite, and looser lending standards.’

Reports like this are prone to understatement. One conclusion it draws is that ‘In the current uncertain environment, financial markets are highly susceptible to a sudden shift in investors’ perception of market risk, which could result in a sharp and disorderly tightening of global financial conditions.’

In other words, it wouldn’t take much to precipitate a crash. Add to this the fact that three quarters of countries are found not to have a financial sector strategy, and it’s beginning to look like a warning cry.

3. Solutions are lacking

Third, as might be expected from a report that is essentially a compromise between the differing perspectives of a wide range of institutions, recommendations on what to do to prevent another major crisis hitting the global economy are thin on the ground.

One key area I’ve highlighted before is what to do about the increasing risk of a widespread public or ‘sovereign’ debt crisis.

The report devotes a chapter to debt, and does mention some potential solutions. It has a section on the idea of making debt contracts dependent upon the ability of the debtor government to pay – known in the trade as ‘state contingent debt instruments.’ The idea of reducing the repayment burden when, for example, states face recessions or natural catastrophes is a good one, as a recent ODI report explores.

However, on the central issue of how to rapidly and fairly resolve debt crises that do occur – to prevent the lost years (and often decades) that can result – the report is spectacularly unambitious, saying only that it might be time to revisit this issue.

Perhaps I am expecting too much of a report produced by major international bureaucracies: the internal wrangling over each issue is likely to stymie creative, solution-oriented thinking.

The time is therefore ripe for others to pick up this baton and produce the companion set of solutions to help prevent or resolve the problems highlighted by the report, and ensure that the world can meet the ambition of the SDGs without suffering another major crisis.

Jesse Griffiths is Head of Programme at ODI and a specialist in development finance and the international development finance architecture. He has done work for a range of national governments, international organisations, non–governmental organisations and think–tanks, and has published widely on these topics.

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World Bank Financializing Development

30 März, 2019 - 21:42

By Jomo Kwame Sundaram and Anis Chowdhury

Cross-posted at Inter Press Service.

The World Bank has successfully legitimized the notion that private finance is the solution to pressing development and welfare concerns, including achieving the Sustainable Development Goals (SDGs) through Agenda 2030.

A recent McKinsey report estimates that the world needs to invest about US$3.3 trillion, or 3.8 per cent of world output yearly, in economic infrastructure, with about three-fifths in emerging market and other developing economies, to maintain current growth.

The world financing gap is about US$350 billion yearly. If new commitments, such as the SDGs, are considered, the gap would be about thrice the currently estimated gap as available public resources alone are not enough. Thus, for the Bank, the success of Agenda 2030 depends on massive private sector participation.

Maximizing finance
The Bank’s ‘Maximizing Finance for Development’ (MFD) strategy marks a new stage. It presumes that most developing countries cannot achieve the SDGs with their own limited fiscal resources and increasingly scarce donor overseas development assistance (ODA).

Bank prioritization of financial inclusion presumes that fintech-powered digital financial inclusion would increase growth, create jobs and promote entrepreneurship in developing countries.

The MFD purports to respond to the G20’s April 2017 Principles of MDBs’ strategy for Crowding-in Private Sector Finance for growth and sustainable development. The G20 has offered the Roadmap to Infrastructure as an Asset Class for energy, transport and water inter alia.

The 2017 MFD strategy recycled the Bank’s 2015 Billions to Trillions: Transforming Development Finance, arguing that MDBs should increase financial leverage via securitization to catalyse private investment, thus promoting capital markets by transforming bankable projects into liquid securities.

The MFD presumes that public money should mainly be used to leverage private finance, particularly institutional investments, to finance the purported US$5 trillion SDG funding gap.

Financialization coalition 
The MFD strategy seeks to enable financialization and transition to securities-based financial systems in developing countries, complementing other initiatives by the Bank, IMF and G20. Such initiatives are expected to encourage investors to use environmental, social and governance criteria to attract, mobilize and sustain needed financing.

The MFD presumes that public money should mainly be used to leverage private finance, particularly institutional investments to finance the funding gap. Government guarantees are deemed necessary to ‘de-risk’ projects, especially for public-private partnerships (PPPs).

Meanwhile, the International Finance Corporation (IFC), a Bank subsidiary, is helping subsidize capital market involvement in infrastructure development; the MFD strategy envisages capital markets in ‘green bonds’, ‘social impact bonds’, infrastructure bonds and so on.

Securities markets are supposed to enable institutional investors to make desirable social and environmental impacts. MFD advocates claim that capital markets provide new solutions to development challenges such as inadequate infrastructure, and poor access to schooling, clean water, sanitation and housing.

The Financial Stability Board has also proposed measures to transform ‘shadow banking’ into securities-based finance, while the European Commission’s Sustainable Finance initiative seeks to similarly reorient institutional investors and asset managers.

Cascading financialization
The Bank’s ‘Cascade’ approach seeks to institutionalize this bias for private financing. It seeks to facilitate securities lending by enabling ‘repo’ market financing and hedging, and ‘rehypothecation’, i.e., allowing securities to be used repeatedly for new lending.

The Cascade approach seeks to accelerate financialization with measures to accommodate new asset classes, enable banks to engage in securities and derivatives markets with minimal regulation, deregulate financial institutions creating tradable assets from PPP projects, and facilitate capital flows ostensibly for development.

It presumes market imperfections and missing markets deter the private sector from financing sustainable development projects, and proposes to address such bottlenecks by ‘internalizing externalities’ and providing subsidies and guarantees to de-risk investments.

Tito Cordella notes that it prioritizes private finance even when a project is likely to be profitable if undertaken with public funds. He notes the tensions between maximizing private financing and optimizing financing for development, and some implications. Public options are only to be considered after all private options are exhausted or fail.

Thus, the Cascade approach presumes that the private sector is always more efficient, despite actual experiences. Clearly, it not only reflects an ideological preference for private finance, but also seeks to promote securities and derivatives markets, as market liquidity is among the core G20 Principles of MDBs’ strategy for crowding-in Private Sector Finance.

Hijacking development finance
The strategy would thus commit scarce public resources to ‘de-risking’ such financing arrangements to transform ‘bankable’ development projects into tradable assets. This means that governments will bear more of the likely costs of greater financial fragility and crises.

Such government measures will inadvertently undermine needed financial institutions such as development banks. There is no reason to believe that MFD will somehow create the capital market infrastructure to improve finance for SMEs or needed development transformations.

Once a project’s future revenue streams are securitized, the multilateral development banks’ environmental and social safeguards no longer apply. Contracts to repay securitized debt held by investors would be disconnected from the underlying project financed and its consequences.

Holders of these securities have no incentives to prioritize social or environmental goals. Private equity and hedge funds that have short-term incentives for profit-taking, including by asset-stripping, are not concerned with social, environmental or other public interests.

Not surprisingly, considerable doubt exists as to whether private capital markets and institutional investors can be incentivized to finance long-term public goods as these mechanisms serve the profit motive, not public welfare.

Anis Chowdhury, Adjunct Professor at Western Sydney University & University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok.
Jomo Kwame Sundaram, a former economics professor, was Assistant Director-General for Economic and Social Development, Food and Agriculture Organization, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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China’s Belt and Road Initiative vs. the Washington Consensus

26 März, 2019 - 14:24

Cross-posted at Inter Press Service.

With the Washington Consensus from the 1980s being challenged, President Donald Trump withdrawing the United States from the Trans-Pacific Partnership (TPP), and China pursuing its Belt and Road Initiative (BRI), most notably with its own initiatives such as the multilateral Asian Infrastructure Investment Bank (AIIB), the political and economic landscape in East Asia continues to evolve. Jomo Kwame Sundaram was interviewed about likely implications for developing countries in the region and beyond.

IPS: What do you think of world growth prospects and China’s Belt and Road Initiative?

Jomo: Although there are some hopeful signs here and there, there are few grounds for much optimism around the North Atlantic (US and Europe) for various reasons. Unconventional monetary policies, especially quantitative easing (QE), have helped achieve a modest recovery in the US, but appears less likely to succeed elsewhere. Such measures have also accelerated massive wealth concentration, which is why a few of the world’s richest men own more than the bottom half of the world’s population.

The situation is more promising in East Asia due to China’s diminished but sustained growth, and its almost unique rising labour share of national income. Most importantly for others, China has been willing to finance massive infrastructure projects, although this has given rise to a host of problems. For example, Chinese contractors are known for using Chinese material and human resources as far as possible, minimizing multiplier benefits for host economies. A few years ago, China’s ambassador to Tanzania publicly apologized for the conduct of Chinese firms in Africa, but most others tend to see all Chinese in monolithic terms. Meanwhile, US, European, Japanese, Indian and other competition for influence has helped increased options for other developing countries. However, it is not yet clear that China’s BRI and ‘alternative globalization’ will be enough to sustain rapid progress in the region.

Trade Liberalization?

IPS: You once said that “If President…Trump lives up to his campaign rhetoric, all plurilateral and multilateral free trade agreements will be affected.” Now, with the US having withdrawn from the TPP, why are the Japanese, Australians and Singaporeans still pushing for the CPTPP (Comprehensive and Progressive TPP) with all the others without the US?

Jomo: It must be emphasized that the US, the EU and Japan have done little to advance trade multilateralism and keep the promise of the Doha Round of World Trade Organization negotiations, flawed as they are against developing country interests. Meanwhile, the Japanese, Australians and Singaporeans are trying to hype up the CPTPP as a political counterweight to China. But as a trade agreement, it will not do much except to strengthen foreign corporate power and further weaken governments, e.g., through its investor state dispute settlement (ISDS) provisions.

IPS: Why will the CPTPP have little impact on growth, but will strengthen the power of foreign enterprises?

Jomo: Let us be clear that even with the original TPP, all projections, including the most optimistic ones by the Peterson Institute, projected very modest economic growth attributable to trade liberalization. US government projections were much more modest. About 85 percent of the Peterson Institute’s projected ‘growth gains’ were attributed to ‘non-trade measures’, mainly broadening and strengthening intellectual property rights (IPRs) and foreign corporate legal rights against host governments with its ISDS provisions, which they are promoting as features for so-called 21st century free trade agreements. So, for example, if stronger IPRs raise the prices of medicines, the value of trade will also rise! With ISDS, if a government decides to ban the use of a toxic agrochemical to protect farm workers and consumers for instance, it will have to compensate the supplier for loss of profits!

International Financial Institutions

IPS: Do you think the Washington Consensus is threatened by South-led financial institutions like the Asian Infrastructure Investment Bank and New Development Bank?

Jomo: Although still very influential, the Washington Consensus is acknowledged to have been superseded by new policy prescriptions. Despite recent ethno-nationalist Western reactions, all too many developing country governments still believe that further trade liberalization will boost growth. Meanwhile, financial globalization continues despite its adverse effects for growth, stability and equity.

Now, digital globalization is supposed to have wonderful progressive effects when it has clearly accelerated concentration of power and wealth, albeit with the rapid ascendance of innovative new players able to quickly consolidate lucrative monopolies.

I wish the new multilateral development banks would be bolder, but thus far, they have largely chosen to work within the dominant framework shaped by the Washington Consensus, probably to secure market confidence.

Credit from China’s banks, usually benefiting China’s corporations, is far more important than what the AIIB and NDB offer. Of course, lending by China’s banks has undermined the BWIs’ monopolies, and this has already been reflected by new policy initiatives by the West and Japan, e.g., to more generously provide infrastructure finance.

Meanwhile, the World Bank has aligned itself more closely with the UN’s Sustainable Development Goals in order to provide its new initiatives to promote market-based private finance such as securities and derivatives besides public private partnerships.

Capital Controls

IPS: You have pointed out that both portfolio investment inflows to developing countries have in recent years. Do you think it appropriate to resume capital controls, as Malaysia did during the 1997-1998 Asian financial crisis, to counter capital outflows?

Jomo: With even China reintroducing capital controls, it is important to consider such options. I have long advocated counter-cyclical ‘capital account management’ to smoothen financial cycles, rather than to only impose controls after a crisis, as effective capital account management must be pro-active, agile, and flexible.

Almost by definition, capital account management is context specific. There are few ‘one size fits all’ rules. What I specifically called for in the early and mid-1990s is probably no longer relevant or appropriate. The challenge is not to expect the last crisis to recur, but to protect national economic progress from likely future threats.

Capital inflows to sustainably enhance the real economy should be prioritized, not portfolio flows which tend to be speculative, easily reversible, and do not enhance the real economy.

Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.

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Greening the New Deal

22 März, 2019 - 21:24
By Shaun Ferguson (guest post)

The Green New Deal is desperately needed, and arguing about a price tag is like Henry Ford wondering if the country will be able to afford his brand new automobile.  With the introduction of a House Resolution by Rep. Alexandria Ocasio-Cortez (D-New York) and Sen. Edward Markey (D-Massachusetts), a debate has surged across the country on the affordability of the Green New Deal. The sheer distraction of the affordability discussion is enough to ensure that very few people will pay attention to what is really at stake. For when the bigger fish eat up this little fish we will need to remember how we got here and what matters most.  As the bright young critics have quickly observed, the Green New Deal could hardly be too green. Time is wearing thin and we need to make haste.

But there can be no greening that abstracts from political economy realities and while the tug of war taking place in the media at the moment is all about the so-called economy-of-it-all, there is next to no analysis on the political constraints of sustainably embarking on another New Deal when the first one withered away long ago. After World War II, the ambition of a nationwide spending program was quickly replicated on an international scale as the country rightly observed that in a vacuum the United States would be hard pressed to expand its economy and that what it needed to make large projects like the Tennessee Valley Authority which introduced unprecedented stimulus, sustainable in the long run was the integration of the United States capital stock’s capacity to produce output with a global trend of expanding markets.  Unless the United States comes to terms with the global characteristics of its (not to mention everyone else’s) economy, we will all the rest of us more than likely pay the brunt of another American adventure.  How does America exact these payments?  By imposing continued low growth trajectories, low wage growth,  contractionary balance of payments adjustments, and what Keynes called “forced exports”, which is basically what we call today narrow and specialized development: all opposed to diversification.

 

If the truth be told, the heavy handed unilateral approach of the United States renders the rest of the global economy akin to something that can be thrown off the back of a train to pay for America’s projects. By America’s choice, the world has pursued a most exclusionary development path with low growth trajectories being imposed on much of the world’s population, even Europe’s, to ensure the political dominance of one country, which itself is willing to sacrifice the high growth it could enjoy itself along with the rest of the world through inclusive multilateralism. The decision for this can be traced back to 1951, two years after what has sometimes been referred to as ‘the Kaldor Report’ was discussed at ECOSOC.  This would be the last serious consideration for institutionalizing Full Employment at the international level, which is to say that it was the last serious effort to institutionalize multilateral trading in support of an expansive global economy.

 

It is this author’s opinion that this would have required the mediatory institutions sought by John Maynard Keynes.  As he confided to his compatriots, “the difficulties are thoroughly shirked” (Keynes, 1980: 325), “The two Institutions have become different from what we were expecting.” (Ibid: 232)  These statements  commence a long line of lament by those working in the official institutions of international development.  Contrary to the less than exhaustive investigations by the most powerful parties involved in the post-War framing, certain extensive and earnest treatments of the rationale for full employment have been attempted.  The tensions that constituted the political sequence which framed the post-War economic institutions were all but resolved. They can fruitfully be resubmitted to thought.

 

The ability of the USA to pay for the Green New Deal is inherently connected to its relation to the global economy, at the broadest level. It can flounder on uninviting seas and when needed release its fury spanking the waves after Xerxes, or it can take stock of what Keynes called the “high ways of the real world”, and awake to the rough realities it has imposed around the globe. To the extent that America’s low growth trajectory displaces demand in the global economy— or to the extent that its low wage growth policy is the only way it manages to insert itself into the global economy, its longstanding policy of aggressive bilateralism will continue.  The world’s economies are intimately interlinked and what is needed is not an American scheme but a global one — which picks up the multilateralism that once wanted to be born.

 

Shaun Ferguson has worked in development economics at various United Nations agencies including UNCTAD, ESCWA and UNSCO since 2002. He has a doctoral degree in Economics at the New School for Social Research.

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Promoting Privatization

18 März, 2019 - 17:09

Cross-posted at Inter Press Service.

By Jomo Kwame Sundaram

Privatization has been central to the ‘neo-liberal’ counter-revolution from the 1970s against government economic interventions associated with Roosevelt and Keynes as well as post-colonial state-led economic development.

Many developing countries were forced to accept privatization policies as a condition for credit or loan support from the World Bank and other international financial institutions, especially after the fiscal and debt crises of the early 1980s. Other countries voluntarily embraced privatization, often on the pretext of fiscal and debt constraints, in their efforts to mimic new Anglo-American criteria of economic progress.

Demonizing SOEs

Globally, inflation was attributed to excessive government intervention, public sector expansion and state-owned enterprise (SOE) inefficiency. It was claimed, with uneven and dubious evidence, that SOEs were inherently likely to be inefficient, corrupt, subject to abuse, and so on.
In the 1970s, the motives of many involved in the preceding public sector expansion – enabled by high commodity prices and earnings as well as low real interest rates due to easy credit, with the need to ‘recycle petro-dollars’ (invest revenues from petroleum exports) – were developmental and noble.

Regardless of their original rationale or intent, many SOEs become problematic and often inefficient. Yet, privatization is not, and has never been a universal panacea for the myriad problems faced by SOEs.

Only more pragmatic and appropriate approaches — recognizing their origins, roles, functioning, impacts and problems — can realistically expect to address and overcome the burdens they have come to impose on many developing economies.

Various meanings

Privatization usually refers to a change of ownership from public to private hands. Over recent decades, the term has been used more loosely. For example, it may only involve minority private ownership after the corporatization of an SOE, and the sale of a minority share of its stock, or even a majority share with control remaining in state hands by various means such as the use of a ‘golden share’.

It sometimes also refers to contracting out services previously undertaken solely by the government. The definition may include cases where private enterprises are awarded licenses to participate in activities previously reserved for the public sector.

Strictly speaking, however, privatization involves the transfer of at least a majority share of and a controlling interest in a public enterprise or SOE and its assets, or an entity (such as a government department, a statutory body or a government company) previously controlled and typically at least majority-owned by the government, either directly or indirectly.

Mainstreaming privatization

Following the oil price shocks of the mid- and late 1970s, inflation spread through much of the world. US President Jimmy Carter appointed Paul Volcker as Chairman of the US Federal Reserve in 1980. The US Fed sharply raised interest rates to stem inflation, which precipitated the fiscal and debt crises of the early 1980s in many parts of the world, especially in Latin America, Africa and Eastern Europe.

The unexpected sovereign debt crises forced many countries to seek emergency financial support from the International Monetary Fund (IMF) and the World Bank (WB), both headquartered in Washington, DC. The IMF provided emergency credit facilities requiring (price) stabilization programmes to bring down inflation, typically blamed on ‘deficit financing’ due to ‘macroeconomic populism’.

Generally, the WB worked closely to provide medium- and long-term credit to these governments on condition that they adopted structural adjustment programmes (SAPs). The SAPs generally prescribed economic globalization (especially of international trade and finance), national (or domestic) deregulation and privatization.

Since then, these international financial institutions have been more powerful in relation to developing countries than ever before. Soon, privatization became a standard requirement of SAPs. Thus, many governments of developing countries were forced to privatize by the SAPs’ loan conditions.

Many other governments voluntarily adopted such policies which became standard pillars of the emerging ‘Washington Consensus’ associated with the WB, the IMF and the US policy consensus of the 1980s. Privatization in developing countries was preceded by the political ‘counter-revolution’ associated with the rise and election of Margaret Thatcher as the Prime Minister of the United Kingdom and Ronald Reagan as the President of the United States of America.

Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.

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Ignorance-Inspired Brexit Imperial Nostalgia

5 März, 2019 - 21:13
By Jomo Kwame Sundaram and Anis Chowdhury Cross-posted at Inter Press Service. As the possible implications of Britain’s self-imposed ‘no-deal’ exit from the European Union loom larger, a new round of imperial nostalgia has come alive. After turning its back on the Commonwealth since the Thatcherite 1980s, some British Conservative Party leaders are seeking to revive colonial connections in increasingly desperate efforts to avoid self-inflicted marginalization following divorce from its European Union neighbours across the Channel.

Imperial Nostalgia Part of the new Brexit induced neo-imperial mythology is that its colonies did not provide any significant economic benefit to Britain itself. Instead, it is suggested that colonial administrations were run at great cost to Britain itself. The empire, it is even claimed, was long maintained due to a benevolent imperial sense of responsibility. To revive patron-client relations neglected with the turn to Europe in the 1980s, the new mantra is that British rule helped ‘develop’ the empire. As the sun never set on Britain’s far flung empire, acquired by diverse means for different reasons at various points in time, few generalizations are appropriate. Nevertheless, there is already significant research indicating otherwise for many colonies, but India, of course, was the jewel in the crown. Empire Strikes Back Former Indian foreign minister Shashi Tharoor has debunked many imperial apologetic claims, including those made by former Oxford and Harvard historian Niall Ferguson. Probably the most prominent, Ferguson famously insisted decades ago that countries progressed thanks to imperialism in an influential TV series and coffee table book sponsored by the British Broadcasting Corporation (BBC), Empire. Malaysian Sultan Nazrin Shah’s Oxford University Press book has underscored the crucial contribution of colonial Malayan commodity exports in the first four decades of the 20th century, while other scholarship has shown that post-war British recovery depended crucially on the export earnings’ contribution of its Southeast Asian colony. Less well known is Utsa Patnaik’s painstaking work on nearly two centuries of tax and trade data. She estimates that Britain ‘drained’ nearly US$45 trillion from the Indian subcontinent between 1765 and 1938, equivalent to 17 times the United Kingdom’s current gross domestic product. Colonial Surplus After the English East India Company (EIC) gained control of and monopolized Indian external trade, EIC traders ‘bought’ Indian goods with tax revenue collected from them. After the British crown displaced the EIC in 1847, its monopoly broke down, and traders had to pay London in gold to get rupees to pay Indian producers. Under imperial monetary arrangements, the colonies’ export earnings were considered British, and hence booked as a deficit in their own ‘national’ accounts despite their often large trade surpluses with the rest of the world until the Great Depression. Thus, the empire has been depicted by imperial apologists as liabilities to Britain, with India having to borrow from Britain to finance its own imports. Thus, India remained in debt to and thus ‘bonded’ by debt to Britain. Not surprisingly, two centuries of British rule did not raise Indian per capita income significantly. In fact, income fell by half in the last half of the 19th century while average life expectancy dropped by a fifth between 1870 and 1920! Infamously, tens of millions died due to avoidable famines induced by colonial policy decisions, including the two Bengal famines. Slavery Too Britain used such fraudulent gains for many purposes, including further colonial expansion, first in Asia and later in Africa. Taxpayers in the colonies thus paid not only for the administration of their own exploitation, but also for imperial expansion elsewhere, including Britain’s wars. Early accumulation for Britain’s Industrial Revolution depended significantly on such colonial arrangements. Imperial tribute financed the expansion of colonialism and investments abroad, including the European settler colonies. Not unlike Eduardo Galeano’s magnum opus, Open Veins of Latin America, Walter Rodney’s 1972 classic, How Europe Underdeveloped Africa showed how slavery and other imperial economic policies transformed, exploited and brutalized Africa. In The Empire Pays Back, Robert Beckford estimated that Britain should pay a whopping £7.5 trillion in reparations for its role in the transatlantic slave trade, breaking it down as follows: £4 trillion in unpaid wages, £2.5 trillion for unjust enrichment and £1 trillion for pain and suffering. Britain has made no apology for slavery or colonialism, as it has done for the Irish potato famine. There has been no public acknowledgement of how wealth extracted through imperialism made possible the finance, investment, manufacturing, trade and prosperity of modern Britain. Neo-colonialism With Brexit imminent, a renewed narrative and discourse of imperial nostalgia has emerged, articulated, inter alia, in terms of a return to the Commonwealth, long abandoned by Maggie Thatcher. Hence, well over half of those surveyed in UK actually believe that British imperialism was beneficial to the colonies. This belief is not only clearly self-deluding, but also obscures Britain’s neo-colonial scramble for energy and mineral resources, enhanced role as tax haven for opportunistic finance, as well as its continued global imperial leadership, albeit only in a fading, supporting role to the US as part of its ‘special relationship’. Anis Chowdhury, Adjunct Professor at Western Sydney University & University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok.   Jomo Kwame Sundaram, a former economics professor, was Assistant Director-General for Economic and Social Development, Food and Agriculture Organization, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

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Inequality, Sunk Costs, and Climate Policy

27 Februar, 2019 - 15:00

By Frank Ackerman

Fifth in a series on climate policy; find Part 1 here, Part 2 here, Part 3 here, and Part 4 here.

Climate change is at once a common problem that threatens us all, and a source of differential harms based on location and resources. We are all on the same boat, in perilous waters – but some of us have much nicer cabins than others. What is the relationship of inequality to climate policy?

The ultimate economic obstacle to climate policy is the long life of so many investments. Housing can last for a century or more, locking residents into locations that made sense long ago. Business investments often survive for decades. These investments, in the not-so-distant past, assumed continuation of cheap oil and minimally regulated coal – thereby building in a commitment to high carbon emissions. Now, in a climate-aware world, we need to treat all fossil fuels as expensive and maintain stringent regulation of coal. And it is impossible to repurpose many past investments for the new era: they are sunk costs, valuable only in their original location or industry.

If we could wave a magic wand and have a complete do-over on urban planning, we could create a new, more comfortable and more sustainable way of life. Transit-centered housing complexes, surrounded by green spaces and by local amenities and services, could offer convenient car-free links to major employment sites. Absent a magic wand, the challenge is how to get there from here, in a short enough time frame to matter for climate policy.

Space is the final frontier in energy use. Instead of shared public spaces for all, an ever-more-unequal society allows the rich to enjoy immense private spaces, such as McMansions situated on huge exurban lots. This leads to higher heating and cooling costs for oversized housing, and to higher infrastructure costs in general: longer pipes, wires and travel distances between houses. And it locks in a commitment to low population density and long individual commutes. Outside of the biggest cities, much of the United States is too sparsely settled for mass transit.

Pushing toward clean energy

Carbon prices and other incentives are designed to push people and businesses out of the most emissions-intensive locations and activities. Along with the wealthy exurbs, cold rural states, with high heating and transportation requirements per person, will become more expensive. So, too, will investment in emissions-intensive production processes, whether in electricity generation, heavy industry, or agriculture.

The art of policymaking requires a delicate balance. Too much pressure to make fuel expensive can produce a backlash, as in the Yellow Vests protests in France, which successfully blocked an increase in the price of gasoline. Too little pressure leads to complacency, to the false belief that enough is already being done. Subsidies to support the transition may be useful but must be time-limited to avoid becoming a permanent entitlement.

The green new deal, the hopeful, if still vague, political vision that is now drawing widespread attention, calls for a transition to clean energy, investment in low-carbon infrastructure, and a focus on equality and workers’ rights. It would create substantial net benefits for the country and the economy. A more fine-grained analysis is needed, however, to identify those who might lose from the transition. Their losses will loom large in the policy debate, regardless of the benefits to the rest of society.

For example, after years of seniority-based cutbacks, many of the remaining workers in legacy energy industries (coal mines, oil wells, fossil-fueled power plants) are nearing retirement age. Pension guarantees, combined with additional funding to allow early retirement, may be more important to these workers, while new green jobs could be important to their children or to the smaller number of younger workers in at-risk jobs.

Older residents who have spent their lives and invested their savings in a rural community, or have no assets except a farm, should be welcome to remain in those communities. But the lingering mystique of an almost-vanished rural America should not lead to new initiatives to attract younger residents back to an energy-intensive, emissions-intensive lifestyle.

 

Responding to inequality

Energy use and carbon emissions are quite unequally distributed, within as well as between countries. In all but the poorest countries, the rich spend more on energy in absolute dollar terms, but less than others as a percentage of income. As a result, any carbon price introduced in the United States or other high-income countries will be regressive, taking a greater percentage of income from lower-income households.

To address this problem, James Boyce proposes refunding carbon revenues to households on an equal per capita basis, in a cap-and-dividend system. Boyce’s calculations show that most people could come out ahead on a cap-and-dividend plan: only the richest 20 percent of U.S. households would lose from paying a relatively high carbon price, if the revenues were refunded via equal per capita dividends.

Other authors have proposed that some of the revenues could go to basic research or to infrastructure development, accelerating the arrival of sustainable energy use. Any use of the revenues, except distribution in proportion to individual fuel use or emissions, preserves the incentive effect of a carbon price. The question of cap-and-dividend versus investment in sustainable energy is largely a debate about what will make a regressive carbon price politically acceptable.

 

Stranded assets

It is not only households that have invested too heavily in now-obsolete patterns of energy use. The same pattern arises in a different context, in the energy sector itself. Electric utilities have often invested in fossil-fuel-burning plants, expecting to recover their investment over 20 to 30 years of use. Now, as changing prices and priorities shut some of those plants before the end of their planned lifetimes, the unrecovered investment is a stranded asset, no longer useful for producers or customers.

The problem is further complicated by the regulatory bargains made in many states. Depending on utility regulations (which differ from state to state), a utility may have formally agreed to allow state regulators to set its rates, in exchange for an opportunity to recover its entire investment over a long period of years. What happens to that regulatory bargain when a regulated plant becomes uneconomic to operate?

Businesses whose investments have gone badly do not elicit the same degree of sympathy as individuals stuck in energy-intensive homes and careers. Indeed, Milton Friedman, the godfather of modern conservative economics, used to emphasize that private enterprise is a profit and loss system, where losses are even more important than profits in forcing companies to use their resources effectively.

Despite Friedman’s praise of losses, demanding that a utility absorb the entire loss on its stranded assets could provoke political obstacles to clean energy and climate policy. Neither zero recovery nor full recovery of a utility’s stranded assets may be appropriate in theory. Given the urgency of a rapid and complete energy transition, it may be more expedient to negotiate a settlement that allows prompt progress. Once again, it is the political art of the deal, not any fixed economic formula, that determines what should be done. Offering utilities too little provokes opposition and delay; offering them too much is unfair to everyone else and could encourage similar mistaken investments in the future.

 

What does global sustainability look like?

Climate change is a global problem that can only be solved by cooperation among all major countries. The challenge for American policy is not only to reduce our own emissions, but also to play a constructive role in global climate cooperation. U.S. leadership, in cooperation with China and Europe, is crucial to the global effort to control the climate. Reviving that leadership, which had barely surfaced under Obama before being abandoned by Trump, is among the most important things we can do for the world today.

In the longer run, questions of climate justice and international obligations are among the most difficult aspects of climate policy. High-income countries such as the United States and northern Europe bear substantial responsibility for the climate crisis worldwide. Among other approaches, the Greenhouse Development Rights framework combines historical responsibility for emissions and current ability to pay for mitigation, in assigning shares of the global cost of climate stabilization.

In the current political climate there is no hope of achieving complete consensus about international burden-sharing before beginning to address the climate crisis. The urgency of climate protection requires major initiatives as soon as possible, in parallel with (not waiting for the conclusion of) discussions of international equity. U.S. actions on both fronts are essential for global progress toward climate stabilization. Significant steps toward equity and burden-sharing may be required to win the support of emerging economies such as India, Indonesia and Brazil.

Finally, assuming success, what would global sustainable development look like? In view of the rapid urbanization of emerging economies, the key question is, what kind of low-carbon urban life can the world afford? The sprawling, car-intensive and carbon-intensive expanse of Los Angeles, Phoenix, or Houston seems like an amazingly expensive mistake. The compact, energy-efficient, transit-based urbanism of Tokyo or Hong Kong is at least a contender, a high-income life with much lower resource use per person.

The American example matters around the world: if our vision of the good life remains one of extravagant sprawl, others will try to imitate it. If we develop a more sustainable vision of our own future, the whole world will be watching.

 

Frank Ackerman is principal economist at Synapse Energy Economics in Cambridge, Mass., and one of the founders of Dollars & Sense, which publishes Triple Crisis. 

Kategorien: Blogs

Prices Are Not Enough

23 Februar, 2019 - 19:11

By Frank Ackerman

Fourth in a series on climate policy; find Part 1 here, Part 2 here, and Part 3 here.

We need a price on carbon emissions. This opinion, virtually unanimous among economists, is also shared by a growing number of advocates and policymakers. But unanimity disappears in the debate over how to price carbon: there is continuing controversy about the merits of taxes vs. cap-and-trade systems for pricing emissions, and about the role for complementary, non-price policies.

At the risk of spoiling the suspense, this blog post reaches two main conclusions: First, under either a carbon tax or a cap-and-trade system, the price level matters more than the mechanism used to reach that price. Second, under either approach, a reasonably high price is necessary but not sufficient for climate policy; other measures are needed to complement price incentives.

Why taxes and cap-and-trade systems are similar

A carbon tax raises the cost of fossil fuels directly, by taxing their carbon emissions from combustion. This is most easily done upstream, i.e. taxing the oil or gas well, coal mine, or fuel importer, who presumably passes the tax on to end users. There are only hundreds of upstream fuel producers and importers to keep track of, compared to millions of end users.

A cap-and-trade system accomplishes the same thing indirectly, by setting a cap on total allowable emissions, and issuing that many annual allowances. Companies that want to sell or use fossil fuels are required to hold allowances equal to their emissions. If the cap is low enough to make allowances a scarce resource, then the market will establish a price on allowances – in effect, a price on greenhouse gas emissions. Again, it is easier to apply allowance requirements, and thus induce carbon trading, at the upstream level rather than on millions of end users.

If the price of emissions is, for example, $50 per ton of carbon dioxide, then any firm that can reduce emissions for less than $50 a ton will do so – under either a tax or cap-and-trade system. Cutting emissions reduces tax payments, under a carbon tax; it reduces the need to buy allowances under a cap-and-trade system. The price, not the mechanism, is what matters for this incentive effect.

A review of the economics literature on carbon taxes vs. cap-and-trade systems found a number of other points of similarity. Either system can be configured to achieve a desired distribution of the burden on households and industries, e.g. via free allocation of some allowances, or partial exemption from taxes. Money raised from either taxes or allowance auctions could be wholly or partially refunded to households.  Either approach can be manipulated to reduce effects on international competitiveness.

And problems raised with offsets – along the lines of credits given too casually for tree-planting – are not unique to cap and trade. A carbon tax could emerge from Congress riddled with obscure loopholes, which could be as damaging to the integrity of carbon pricing as any of the poorly written offset provisions of existing cap-and-trade systems. More positively speaking, either approach to carbon pricing can be carried out either with or without offsets and tax exemptions.

 

Why taxes and cap-and-trade systems are different

Compared to the numerous similarities between the two approaches, the list of differences is a shorter one. A carbon tax is easier and cheaper to administer. In theory, a carbon tax provides certainty about the price of emissions, while a cap-and-trade system provides certainty about the quantity of emissions (in practice, these certainties can be undone by too-frequent tinkering with tax rates or emissions caps).

Cap-and-trade systems have been more widely used in practice. The European Union’s Emissions Trading System (EU ETS) is the world’s largest carbon market. Others include the linked carbon market of California and several Canadian provinces, and the Regional Greenhouse Gas Initiative (RGGI) among states in the Northeast.

Numerous critics have pointed to potential flaws in cap-and-trade, such as overly generous, poorly monitored offsets. Many recent cap-and-trade systems, introduced in a conservative era, began with caps so high and prices so low that they have little effect (leaving them open to the criticism that the administrative costs are not justified by the skimpy results). The price must be high enough, and the cap must be low enough, to alter the behavior of major emitters.

The same applies, of course, to a carbon tax. Starting with a trivial level of carbon tax, in order to calm opponents of the measure, runs the risk of “proving” that a carbon price has no effect. The correct starting price under either system is the highest price that is politically acceptable; there is no hope of “getting the prices right” due to the uncertain and potentially disastrous scope of climate damages.

Perhaps the most salient difference between taxes and cap-and-trade is political rather than economic: in an era when people like to chant “no new taxes”, the prospects for any initiative seem worse if it involves a new tax. This could explain why there is so much more experience to date with cap-and-trade systems.

 

Beyond price incentives

Some carbon emitters, for instance in electricity generation, have multiple choices among alternative technologies. In such cases, price incentives alone are powerful, and producers can respond incrementally, retiring and replacing individual plants when appropriate. Other sectors face barriers that an individual firm cannot usually overcome on its own. Electric vehicles are not practical without an extensive recharging and repair infrastructure, which is just beginning to exist in a few parts of the country. In this case, no reasonable level of carbon price can, by itself, bring an adequate nationwide electric vehicle infrastructure into existence. Policies that build and promote electric vehicle infrastructure are valuable complements to a carbon price: they create a combined incentive to move away from gasoline.

Yet another reason for combining non-price climate policies with a carbon price is that purely price-based decision-making can be exhausting. People could calculate for themselves the fuel saved by buying a more fuel-efficient car and subtract that from the sticker price of the vehicle, but it is not an easy calculation. Federal and state fuel economy standards make the process simpler, by setting a floor underneath vehicle fuel efficiency.

When buying a major appliance, it is possible in theory to read the energy efficiency sticker on the carton, calculate your average annual use of the appliance, convert it to dollars saved per year, and see if that savings justifies purchase of a more efficient appliance. But who does all that arithmetic? Even I don’t want to do that calculation, and I have a PhD in economics and enjoy playing with numbers. My guess is that virtually no one does the calculation consistently and correctly. On the other hand, federal and state appliance efficiency standards have often set minimum levels of required efficiency, which increase over time. It’s much more fun to buy something off the shelf that meets those standards, instead of settling in for an extended data-crunching session any time you need a new fridge, air conditioner, washing machine…

In short, the carbon price is what matters, not the mechanism used to adopt that price. And whatever the price, non-price climate policies are needed as well – both to build things that no one company can do on its own, and to make energy-efficient choices accessible to all, without heroic feats of calculation.

Frank Ackerman is principal economist at Synapse Energy Economics in Cambridge, Mass., and one of the founders of Dollars & Sense, which publishes Triple Crisis. 

Kategorien: Blogs

Agribusiness Is the Problem, Not the Solution

19 Februar, 2019 - 20:46

By Jomo Kwame Sundaram

Cross-posted at Inter Press Service.

For two centuries, all too many discussions about hunger and resource scarcity has been haunted by the ghost of Parson Thomas Malthus. Malthus warned that rising populations would exhaust resources, especially those needed for food production. Exponential population growth would outstrip food output.

Humanity now faces a major challenge as global warming is expected to frustrate the production of enough food as the world population rises to 9.7 billion by 2050. Timothy Wise’s new book Eating Tomorrow: Agribusiness, Family Farmers, and the Battle for the Future of Food (New Press, New York, 2019) argues that most solutions currently put forward by government, philanthropic and private sector luminaries are misleading.

Malthus’ ghost returns

The early 2008 food price crisis has often been wrongly associated with the 2008-2009 global financial crisis. The number of hungry in the world was said to have risen to over a billion, feeding a resurgence of neo-Malthusianism.

Agribusiness advocates fed such fears, insisting that food production must double by 2050, and high-yielding industrial agriculture, under the auspices of agribusiness, is the only solution. In fact, the world is mainly fed by hundreds of millions of small-scale, often called family farmers who produce over two-thirds of developing countries’ food.

Contrary to conventional wisdom, neither food scarcity nor poor physical access are the main causes of food insecurity and hunger. Instead, Reuters has observed a ‘global grain glut’, with surplus cereal stocks piling up.

Meanwhile, poor production, processing and storage facilities cause food losses of an average of about a third of developing countries’ output. A similar share is believed lost in rich countries due to wasteful food storage, marketing and consumption behaviour.

Nevertheless, despite grain abundance, the 2018 State of Food Insecurity report — by the Rome-based United Nations food agencies led by the Food and Agriculture Organization (FAO) — reported rising chronic and severe hunger or undernourishment involving more than 800 million.

Political, philanthropic and corporate leaders have promised to help struggling African and other countries grow more food, by offering to improve farming practices. New seed and other technologies would modernize those left behind.

But producing more food, by itself, does not enable the hungry to eat. Thus, agribusiness and its philanthropic promoters are often the problem, not the solution, in feeding the world.

Eating Tomorrow addresses related questions such as: Why doesn’t rising global food production feed the hungry? How can we “feed the world” of rising populations and unsustainable pressure on land, water and other natural resources that farmers need to grow food?

Family farmers lack power

Drawing on five years of extensive fieldwork in Southern Africa, Mexico, India and the US Mid-West, Wise concludes that the problem is essentially one of power. He shows how powerful business interests influence government food and agricultural policies to favour large farms.

This is typically at the expense of ‘family’ farmers, who grow most of the world’s food, but also involves putting consumers and others at risk, e.g., due to agrochemical use. His many examples not only detail and explain the many problems small-scale farmers face, but also their typically constructive responses despite lack of support, if not worse, from most governments:

• In Mexico, trade liberalization following the 1993 North American Free Trade Area (NAFTA) agreement swamped the country with cheap, subsidized US maize and pork, accelerating migration from the countryside. Apparently, this was actively encouraged by transnational pork producers employing ‘undocumented’ and un-unionised Mexican workers willing to accept low wages and poor working conditions.
• In Malawi, large government subsidies encouraged farmers to buy commercial fertilizers and seeds from US agribusinesses such as now Bayer-owned Monsanto, but to little effect, as their productivity and food security stagnated or even deteriorated. Meanwhile, Monsanto took over the government seed company, favouring its own patented seeds at the expense of productive local varieties, while a former senior Monsanto official co-authored the national seed policy that threatens to criminalize farmers who save, exchange and sell seeds instead!
• In Zambia, greater use of seeds and fertilizers from agribusiness tripled maize production without reducing the country’s very high rates of poverty and malnutrition. Meanwhile, as the government provides 250,000-acre ‘farm blocks’ to foreign investors, family farmers struggle for title to farm land.
• In Mozambique too, the government gives away vast tracts of farm land to foreign investors. Meanwhile, women-led cooperatives successfully run their own native maize seed banks.
• Meanwhile, Iowa promotes vast monocultures of maize and soybean to feed hogs and bioethanol rather than ‘feed the world’.
• A large Mexican farmer cooperative launched an ‘agro-ecological revolution’, while the old government kept trying to legalize Monsanto’s controversial genetically modified maize. Farmers have thus far halted the Monsanto plan, arguing that GM corn threatens the rich diversity of native Mexican varieties.

Much of the research for the book was done in 2014-15, when Obama was US president, although the narrative begins with developments and policies following the 2008 food price crisis, during Bush’s last year in the White House. The book tells a story of US big business’ influence on policies enabling more aggressive transnational expansion.

Yet, Wise remains optimistic, emphasizing that the world can feed the hungry, many of whom are family farmers. Despite the challenges they face, many family farmers are finding innovative and effective ways to grow more and better food. He advocates support for farmers’ efforts to improve their soil, output and wellbeing.

Eating better

Hungry farmers are nourishing their life-giving soils using more ecologically sound practices to plant a diversity of native crops, instead of using costly chemicals for export-oriented monocultures. According to Wise, they are growing more and better food, and are capable of feeding the hungry.

Unfortunately, most national governments and international institutions still favour large-scale, high-input, industrial agriculture, neglecting more sustainable solutions offered by family farmers, and the need to improve the wellbeing of poor farmers.

Undoubtedly, many new agricultural techniques offer the prospect of improving the welfare of farmers, not only by increasing productivity and output, but also by limiting costs, using scarce resources more effectively, and reducing the drudgery of farm work.

But the world must recognize that farming may no longer be viable for many who face land, water and other resource constraints, unless they get better access to such resources. Meanwhile, malnutrition of various types affects well over two billion people in the world, and industrial agriculture contributes about 30% of greenhouse gas emissions.

Going forward, it will be important to ensure affordable, healthy and nutritious food supplies for all, mindful not only of food and water safety, but also of various pollution threats. A related challenge will be to enhance dietary diversity affordably to overcome micronutrient deficiencies and diet-related non-communicable diseases for all.

Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.

Kategorien: Blogs

Methane Measurements and Short Attention Spans

18 Februar, 2019 - 21:22

By Frank Ackerman

Third in a series of posts on climate policy.  Find Part 1 here and Part 2 here.

Carbon dioxide (CO2) represents most, but not all, greenhouse gas emissions. In EPA’s Greenhouse Gas Inventory for 2016, CO2 represented 82 percent of gross U.S. GHG emissions, while methane represented 10 percent (measured as CO2-equivalents). The top three sources of methane are agriculture, the energy industry, and waste management.

As fascinating as some of us may find such details, the general public has a short attention span for new information about climate change. Within that constraint, what do we want to communicate? For methane, there are two choices, an introductory and an advanced message.

The introductory message emphasizes that methane, the principal component of natural gas, is an important cause of global warming under any version of the data. It is therefore crucial to reduce and eliminate all fossil fuels, gas included, as soon as possible, replacing them with efficiency, renewables and energy storage.

At a more advanced level, some new research suggests that conventional data understate methane emissions. And a different way of comparing methane to CO2 implies that methane should have a higher CO2-equivalent value, raising its relative importance in GHG accounting. Some combination of these factors might even make natural gas as bad as coal, from a global warming perspective.

The introductory message is the one that matters for public communication. It focuses discussion on the simple fact that natural gas, like other fossil fuels, has got to go: it is part of the problem, not the solution. The advanced message, in contrast, emphasizes technical controversies and interpretation of recent research. It tends to produce eyes-glazed-over responses along the lines of “I wasn’t that good at science in school.”

But if you’re reading this, you can probably follow the technical debates, at least partway down the rabbit hole. Consider three chapters of the story of methane: the time span for calculating CO2-equivalents; the issue of gas leaks; and the gas vs. coal comparison.

Thinking about tomorrow

Methane is a much more potent heat-trapping gas than CO2, but CO2 remains in the atmosphere and traps heat for much longer than methane. On balance, how much does a ton of methane emissions contribute to warming, relative to a ton of CO2?

The answer depends on the time period under consideration. Methane has an atmospheric lifetime of 12 years. CO2 is affected by several processes that operate at very different speeds: 50 percent of CO2 is removed from the atmosphere within 30 years of emission, while 20 percent persists in the atmosphere for thousands of years.

Zooming in on a timespan as short as 20 years after emissions means focusing mainly on years when methane is still present in the atmosphere, trapping a lot of heat. Over a longer interval such as 100 years after emissions, most of the years are ones when methane has faded away, while a significant fraction of the CO2 emissions remains in the atmosphere. As a result, the CO2-equivalent value of methane is 84 over a 20-year period, compared to only 28 over a 100-year period.

Early IPCC and other technical reports tended to standardize on the 100-year CO2-equivalent value, implying that methane is 28 times as bad per ton as CO2. More recent studies have often highlighted the 20-year CO2-equivalent value, making methane 84 times as bad.

Neither one or the other is the correct value. Climate change is a problem of both short-term urgency and long-term consequences, of 20-year impacts, 100-year impacts, and beyond. This produces an awkward situation for research and reporting on greenhouse gases: the “exchange rate” between the two leading gases is either 28 or 84. It is less of a problem for public policy, where either of the CO2-equivalent values for methane is enough to make the case: a low-carbon economy must eliminate methane emissions, not rely on natural gas as a bridge to anywhere we want to go.

Counting the leaks

Natural gas leaks from wells and pipelines, increasing the lifecycle methane emissions associated with gas-fired heating or electricity generation. EPA estimated that methane leaks represented 1.4 percent of gas production nationwide in 2015. But a new study based on extensive field measurement found that methane leaks were 2.3 percent of gas production that year. Other studies have reported even higher leakage rates in areas where fracking is widespread.

It would be a mistake, however, to pin the critique of natural gas solely to high levels of leaks. The same study that found leaks of 2.3 percent also found that “the higher estimates stem from a small number of so-called superemitters … most tied to [malfunctioning] hatches and vents in natural gas storage tanks at extraction wells.”

It is not hard to imagine the industry, under pressure from regulators, fixing the malfunctioning hatches and vents, and developing better ways to seal leaks in general. This would increase the amount of gas that could be delivered to customers, potentially increasing industry profits. The International Energy Agency, which estimates gas leaks of 1.7 percent worldwide, also finds that 40 to 50 percent of current methane emissions could be avoided at no net cost.

The key point about methane is not the current high levels of leaks. Rather, reducing methane emissions, from leaks and other sources, is one of the most cost-effective strategies for greenhouse gas mitigation.

Different shades of bad

Some environmental advocates now claim that burning gas is just as bad for the climate as burning coal. There are several strong counterarguments, which do not undermine the case against gas.

Above all, coal is an environmental disaster, causing havoc throughout its life cycle. Coal mining devastates local communities, on a level that equals or surpasses anything done by fracking. It even releases methane from coal mining, equal to 8 percent of U.S. methane emissions according to the 2016 greenhouse gas inventory. The canaries in the coal mines, back in the day, were brought in to detect carbon monoxide and methane, the deadly gases that threatened miners.

Coal combustion gives rise not only to CO2, but also to many toxic pollutants which kill people near the plants. Since coal plants are usually located in low-income and minority neighborhoods, plant siting raises issues of environmental justice. After combustion, coal ash must be disposed of, creating a whole new set of toxic risks and environmental justice concerns in the siting of these impacts. Gas does not cause local toxic emissions or leave ash behind when it burns.

Even restricting attention to greenhouse gas emissions, an extraordinary level of leakage is required to make gas as bad as coal from a 20-year perspective, let alone a 100-year perspective. The IEA has a graph displaying the relationship between leak rates, time horizon, and climate impacts from coal vs. gas.

Finally, consider the emotional meaning of the statement that gas is as bad as coal. It often seems as if activists feel the need to show that gas is as bad as it gets, in order to support opposition to gas-fired power plants. This is surely a mistake.

It is not necessary to make something the worst ever, in order to establish that it is bad. George W. Bush was a bad president, for the environment and so much else; now it turns out that he was not the worst possible president. There is no reason to claim that Bush was as bad as Trump – or that a return to Bush-era policies would be a bridge to the future. It’s just a different shade of bad.

A gas-fired electric grid is different from a coal-fired one. But from a climate perspective, they are different shades of bad: both involve carbon emissions far above a sustainable, climate-friendly level. The need for a carbon-free alternative is the conclusion that matters, independent of the latest research details on methane.

Frank Ackerman is principal economist at Synapse Energy Economics in Cambridge, Mass., and one of the founders of Dollars & Sense, which publishes Triple Crisis. 

Kategorien: Blogs

Climate Damages: Uncertain but Ominous, or $51 per Ton?

12 Februar, 2019 - 22:53

By Frank Ackerman

Second in a series of posts on climate policy.  Find Part 1 here.

According to scientists, climate damages are deeply uncertain, but could be ominously large (see the previous post). Alternatively, according to the best-known economic calculation, lifetime damages caused by emissions in 2020 will be worth $51 per metric ton of carbon dioxide, in 2018 prices.

These two views can’t both be right. This post explains where the $51 estimate comes from, why it’s not reliable, and the meaning for climate policy of the deep uncertainty about the value of damages.

A tale of three models

The “social cost of carbon” (SCC) is the value of present and future climate damages caused by a ton of carbon dioxide emissions. The Obama administration assembled an Interagency Working Group to estimate the SCC. In its final (August 2016) revision of the numbers, the most widely used variant of the SCC was $42 per metric ton of carbon dioxide emitted in 2020, expressed in 2007 dollars – equivalent to $51 in 2018 dollars. Numbers like this were used in Obama-era cost-benefit analyses of new regulations, placing a dollar value on the reduction in carbon emissions from, say, vehicle fuel efficiency standards.

To create these numbers, the Working Group averaged the results from three well-known models. These do not provide more detailed or in-depth analysis than other models. On the contrary, two of them stand out for being simpler and easier to use than other models. They are, however, the most frequently cited models in climate economics. They are famous for being famous, the Kardashians of climate models.

DICE, developed by William Nordhaus at Yale University, offers a skeletal simplicity: it represents the dynamics of the world economy, the climate, and the interactions between the two with only 19 equations. This (plus Nordhaus’ free distribution of the software) has made it by far the most widely used model, valuable for classroom teaching, for initial high-level sketches of climate impacts, and for researchers (at times including myself) who lack the funding to acquire and use more complicated models. Yet no one thinks that DICE represents the frontier of knowledge about the world economy or the environment. DICE estimates aggregate global climate damages as a quadratic function of temperature increases, rising only gradually as the world warms.

PAGE, developed by Chris Hope at Cambridge University, resembles DICE in level of complexity, and has been used in many European analyses. It is the only one of the three models to include any explicit treatment of uncertain climate risks, assuming the threat of an abrupt, mid-size economic loss (beyond the “predictable” damages) that becomes both more likely and more severe as temperatures rise. Perhaps for this reason, PAGE consistently produces the highest SCC estimates among the three models.

FUND, developed by Richard Tol and David Anthoff, is more detailed than DICE or PAGE, with separate treatment of more than a dozen damage categories. Yet the development of these damages estimates has been idiosyncratic, in some cases (such as agriculture) relying on relatively optimistic research from 20 years ago rather than more troubling, recent findings on climate impacts. Even in later versions, after many small updates, FUND still estimates that many of its damage categories are too small to matter; in some FUND scenarios, the largest cost of warming is the increased expenditure on air conditioning.

Much has been written about what’s wrong with relying on these three models. The definitive critique is the National Academy of Sciences study, which reviews the shortcomings of the three models in detail and suggests ways to build a better model for estimating the SCC. (Released just days before the Trump inauguration, the study was doomed to be ignored.)

 

Embracing uncertainty

Expected climate damages are uncertain over a wide range, including the possibility of disastrously large impacts. The SCC is a monetary valuation of expected damages per ton of carbon dioxide. Therefore, SCC values should be uncertain over a wide range, including the possibility of disastrously high values.

Look beyond the three-model calculation, and the range of possible SCC values is extremely wide, including very high upper bounds. Many studies have adopted DICE or another model as a base, then demonstrated that minor, reasonable changes in assumptions lead to huge changes in the SCC. To cite a few examples:

  • A meta-analysis of SCC values found that, in order to reflect major climate risks, the SCC needs to be at least $125.
  • A study by Simon Dietz and Nicholas Stern found a range of optimal carbon prices (i.e. SCC values), depending on key climate uncertainties, ranging from $45 to $160 for emissions in 2025, and from $111 to $394 for emissions in 2055 (in 2018 dollars per ton of carbon dioxide).
  • In my own research, coauthored with Liz Stanton, we found that a few major uncertainties lead to an extremely wide range of possible SCC values, from $34 to $1,079 for emissions in 2010, and from $77 to $1,875 for 2050 emissions (again converted to 2018 dollars).
  • Martin Weitzman has written several articles emphasizing that the SCC depends heavily on the unknown shape of the damage function – that is, the details of the assumed relationship between rising temperatures and rising damages. His “Dismal Theorem” article argues that the marginal value of reducing emissions – the SCC – is literally infinite, since catastrophes that would cause human extinction remain too plausible to ignore (although they are not the most likely outcomes).

 

Whether or not the SCC is infinite, many researchers have found that it is uncertain, with the broad range of plausible values including dangerously high estimates. This is the economic reflection of scientific uncertainty about the timing and extent of climate damages.

 

How much can we afford?

As explained in the previous post in this series, deep uncertainty about the magnitude and timing of risks stymies the use of cost-benefit analysis for climate policy. Rather, policy should be set in an insurance-like framework, focused on credible worst-case losses rather than most likely outcomes. Given the magnitude of the global problem, this means “self-insurance” – investing in measures that make worst cases less likely.

How much does climate “self-insurance” – greenhouse gas emission reduction – cost? Several early (2008 to 2010) studies of rapid decarbonization, pushing the envelope of what was technically feasible at the time, came up with mid-century carbon prices of roughly $150 – $500 per ton of carbon dioxide abated.[1] Since then, renewable energy has experienced rapid progress and declining prices, undoubtedly lowering the carbon price on a maximum feasible reduction scenario.

Even at $150 to $500 per ton, the cost of abatement was comparable to or lower than many of the worst-case estimates of the SCC, or climate damages per ton. In short, we already know that doing everything on the least-cost emission reduction path will cost less, per ton of carbon dioxide, than worst-case climate damages.

That’s it: end of economic story about evaluating climate policy. We don’t need more exact, accurate SCC estimates; they will not be forthcoming in time to shape policy, due to the uncertainties involved. Since estimated worst-case damages are rising over time, while abatement costs (such as the costs of renewables) are falling, the balance is tipping farther and farther toward “do everything you can, now.” That was already the correct answer some years ago, and only becomes more correct over time.

That’s not the end of this series of blog posts, however. Three more are coming, addressing three policy problems that arise in climate advocacy: how to talk about methane and natural gas; taxes versus cap and trade systems; and the role of equity and economic obstacles to climate policy.

 

Frank Ackerman is principal economist at Synapse Energy Economics in Cambridge, Mass., and one of the founders of Dollars & Sense, which publishes Triple Crisis. 

 

[1] See the Ackerman and Stanton article cited above for description of studies. Prices were reported in 2005 dollars; multiply by 1.29 to convert to 2018 dollars.

Kategorien: Blogs

On Buying Insurance, and Ignoring Cost-Benefit Analysis

8 Februar, 2019 - 21:43

By Frank Ackerman

First in a series of posts on climate policy.  

The damages expected from climate change seem to get worse with each new study. Reports from the IPCC and the U.S. Global Change Research Project, and a multi-author review article in Science, all published in late 2018, are among the recent bearers of bad news. Even more continues to arrive in a swarm of research articles, too numerous to list here. And most of these reports are talking about not-so-long-term damages. Dramatic climate disruption and massive economic losses are coming in just a few decades, not centuries, if we continue along our present path of inaction. It’s almost enough to make you support an emergency program to reduce emissions and switch to a path of rapid decarbonization.

But wait: isn’t there something about economics we need to figure out first? Would drastic emission reductions pass a cost-benefit test? How do we know that we wouldn’t be spending too much on climate policy?

In fact, a crash program to decarbonize the economy is obviously the right answer. There are just a few things you need to know about the economics of climate policy, in order to confirm that Adam Smith and his intellectual heirs have not overturned common sense on this issue. Three key points are worth remembering.

Worst-case risks matter more than likely outcomes

For uncertain, extreme risks, policy should be based on the credible worst-case outcome, not the expected or most likely value. This is the way people think about insurance against disasters. The odds that your house won’t burn down next year are better than 99 percent – but you probably have fire insurance anyway. Likewise, young parents have more than a 99 percent chance of surviving the coming year, but often buy life insurance to protect their children.

Real uncertainty, of course, has nothing to do with the fake uncertainty of climate denial. In insurance terms, real uncertainty consists of not knowing when a house fire might occur; fake uncertainty is the (obviously wrong) claim that houses never catch fire. See my Worst-Case Economics for more detailed exploration of worst cases and (real) uncertainty, in both climate and finance.

For climate risks, worst cases are much too dreadful to ignore. What we know is that climate change could be very bad for us; but no one knows exactly how bad it will be or exactly when it will arrive. How likely are we to reach tipping points into an irreversibly worse climate, and when will these tipping points occur? As the careful qualifications in the IPCC and other reports remind us, climate change could be very bad, surprisingly soon, but almost no one is willing to put a precise number or date on the expected losses.

One group does rush in where scientists fear to tread, guessing about the precise magnitude and timing of future climate damages: economists engaged in cost-benefit analysis (CBA). Rarely used before the 1990s, CBA has become the default, “common-sense” approach to policy evaluation, particularly in environmental policy. In CBA-world you begin by measuring and monetizing the benefits, and the costs, of a policy – and then “buy” the policy if, and only if, the monetary value of the benefits exceeds the costs.

There are numerous problems with CBA, such as the need to (literally) make up monetary prices for priceless values of human life, health and the natural environment. In practice, CBA often trivializes the value of life and nature. Climate policy raises yet another problem: CBA requires a single number, such as a most likely outcome, best guess, or weighted average, for every element of costs (e.g. future costs of clean energy) and benefits (e.g. monetary value of future damages avoided by clean energy expenditures). There is no simple way to incorporate a wide range of uncertainty about such values into CBA. The second post in this series will look more deeply at economists’ misplaced precision about climate damages.

Costs of emission reduction are dropping fast

The insurance analogy is suggestive, but not a perfect fit for climate policy. There is no intergalactic insurance agency that can offer us a loaner planet to use while ours is towed back to the shop for repairs. Instead, we will have to “self-insure” against climate risks – the equivalent of spending money on fireproofing your house rather than relying on an insurance policy.

Climate self-insurance consists largely of reducing carbon emissions, in order to reduce future losses.[1] The one piece of unalloyed good news in climate policy today is the plummeting cost of clean energy. In the windiest and sunniest parts of the world (and the United States), new wind and solar power installations now produce electricity at costs equal to or lower than from fossil fuel-burning plants.

A 2017 report from the International Renewable Energy Agency (IRENA) projects that this will soon be true worldwide: global average renewable energy costs will be within the range of fossil fuel-fired costs by 2020, with on-shore wind and solar photovoltaic panels at the low end of the range. Despite low costs for clean energy, many utilities will still propose to build fossil fuel plants, reflecting the inertia of traditional energy planning and the once-prudent wisdom of the cheap-fuel, pre-climate change era.

Super-low costs for renewables, which would have seemed like fantasies 10 years ago, are now driving the economics and the feasibility of plans for decarbonization. Many progressive Democrats have endorsed a “green new deal”, calling for elimination of fossil fuels, massive investment in energy efficiency and clean energy, and fairness in the distribution of jobs and opportunities.

Robert Pollin, an economist who has studied green new deal options, estimates that annual investment of about 1.5 percent of GDP would be needed. That’s about $300 billion a year for the United States, and four times as much, $1.2 trillion a year, for the world economy. Those numbers may sound large, but so are the fossil fuel subsidies and investments that the green new deal would eliminate.

In a 2015 study, my colleagues and I calculated that 80 percent of U.S. greenhouse gas emissions could be eliminated by 2050, with no net increase in energy or transportation costs. Since that time, renewables have only gotten cheaper. (Our result does not necessarily contradict Pollin’s estimate, since the last 20 percent of emissions will be the hardest and most expensive to eliminate.)

These projections of future costs are inevitably uncertain, because the future has not happened yet. The risks, however, do not appear dangerous or burdensome. So far, the surprises on the cost side have been unexpectedly rapid decreases in renewable energy prices. These are not the risks that require rethinking our approach to climate policy.

Costs of not reducing emissions may be disastrously large

The disastrous worst-case risks are all on the benefits, or avoided climate damages, side of the ledger. The scientific uncertainties about climate change concern the timing and extent of damages. Therefore, the urgency of avoiding these damages, or conversely the cost of not avoiding them, is intrinsically uncertain, and could be disastrously large.

It has become common, among economists, to estimate the “social cost of carbon” (SCC), defined as the monetary value of the present and future climate damages per ton of carbon dioxide or equivalent. This is where the pick-a-number imperative of cost-benefit analysis introduces the greatest distortion: huge uncertainties in damages should naturally translate into huge uncertainties in the SCC, not a single point estimate.

Frank Ackerman is principal economist at Synapse Energy Economics in Cambridge, Mass., and one of the founders of Dollars & Sense, which publishes Triple Crisis. 

The next post in this series will examine the debates about the SCC, showing that there are indeed large uncertainties in its value, no matter how inconvenient that may be for economists and their models.

[1] Adaptation, or expenditure to reduce vulnerability to climate damages, is also important but may not be effective beyond the early stages of warming. And some adaptation costs are required to cope with warming that can no longer be avoided – that is, they have become sunk costs, not present or future policy choices.

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