China & India will end up complying with US demands on greenhouse gas mitigation

The current environmental situation in countries such as China and India is poor – China’s citizens are getting richer but increasingly living in a rubbish dump. But, with respect to climate change and other environmental problems, China is altering its policy view towards being much more environmentally protective. I don’t think it has altered its commitment to mainly pursuing ‘no regrets’ policies – it is just coming to understand that climate change will severely damage its agricultural sector. No regrets options now include contributing towards the global mitigation effort.

To quote The Economist:

‘The vast and sparsely populated Tibetan plateau is the origin of the great river systems of China, South-East and South Asia: the Yangzi and Yellow Rivers, the Brahmaputra, the Indus, the Mekong and the Salween. The Ganges rises on the Indian side of the plateau's Himalayan rim. These rivers, fed by thousands of Himalayan glaciers, are an ecological miracle. They support some 1.3 billion people.

But the glaciers are retreating. Chinese experts predict that by 2050 the icy area on their side of the Himalayas will have shrunk by more than a quarter since 1950. Predictions for the Indian side are gloomier still’.

China sees its agricultural output as declining 5-10% by 2030. In India the figure is estimated to be closer to a catastrophic 30-40%. China now recognises its role as the major contributor to greenhouse gas emissions and is committed to cutting emissions. India is dragging its feet partly because half its population is still not linked to electricity supplies and there are widespread fuel subsidies.

The attitude of India is foolish if understandable: A senior official in the India’s foreign ministry characterises the US line of urging developing countries to cut their emissions as: “Guys with gross obesity telling guys just emerging from emaciation to go on a major diet.”

This is foolish logic because, irrespective of the ‘rights’ of developing countries to damage the global environment to the same extent as the US, they will suffer much greater damages from failing to mitigate. The local benefits from mitigation are much greater in India and China than they are in the US.

Indeed, whatever the moral arguments advanced the US is in the box seat in terms of bargaining options for negotiating a global greenhouse agreement post-Kyoto. It will insist on developing country mitigation efforts and will get them.

Update: Of course the optimism about China must be tempered with some statistical realities - it has just extended its lead as the world's largest CO2 emitter. Last year it provided 2/3 of the worl'd increased CO2 emissions.

Amartya Sen on food shortages

Amartya Sen argues that droughts such as that being experienced in Australia, high economic growth in some developing countries as well as the diversion of grains into biofuelds servicing the needs of the wealthy has created a surge in the demand for foods that has driven up food prices and endangered the world's poor.

Its a sensible argument - in my own household I have felt the increase in food prices clearly in terms of its impact of our household budget - it is a real impact but as a household we spend less much less than one third of the budget on food. At most I might have to cancel that mid-winter holiday and forgo that new set of golf clubs! For families already spending most of their low incomes on food the issue is of life-threatening seriousness - particular since high food prices are seen as likely for at least another decade. In South America alone 71 million extremely poor people face hunger as a consequence of rising food prices. Globally 850 million people suffer from hunger caused by poverty.

Global economic development has been a success story in recent decades. This should not induce complacency. While levels of absolute poverty have fallen dramatically it is important not to forget those 1 in 10 people of the world's population who are left behind and who suffer the adverse effects of economic growth on such things as food prices.

Middle class welfare as a strategy to help poor countries develop

I attended a seminar today given by Michael Carter on ‘Poverty Traps and Social Protection’ that is available in full online. Carter suggests that, because of poverty traps, ‘needs based’ targeting may lead to higher levels of long-term poverty than a modestly regressive targeting of those vulnerable to falling into poverty that is based on critical asset thresholds subject to risk. If they do fall into poverty and a poverty trap arises there may be large irreversible costs. It may be preferable from some standpoints to stop 'at-risk' middle class families from falling into a state of poverty than it is to focus purely on assisting the current poor – particularly those with low skills - for whom aid might be ill-advised for triage reasons. There are tradeoffs between preventing poverty and preventing transfers into it. If programs are purely ‘needs based’ then more immediate poverty may be eliminated at the expense of greater long-term poverty as middle class people fall into poverty traps. Then, over time, this means that today’s poor will be worse off in the sense that dollars to relieve their poverty will need to be spread around more thinly.

Carter is seeking to implement this type of policy in northern Kenya. That surprised me for an argument that is entirely a priori. If I was a policy-maker I wouldn’t buy these specific policy prescriptions at all. Instead, maybe investing in the education of those at the bottom of the skill/wealth scale is an option that should at least be assessed. Presumably providing aid to people who are barely surviving has large social payoffs – don’t we get a kick out of seeing people being saved from starvation? In addition, capital market development that might enable poor but highly skilled people to realise their potential and generally devoting resources to simple institutional reform seems a good way to move.

I am sceptical of ‘poverty trap’ arguments generally – when I went to university as an undergraduate this was the way all developing countries were seen – they were ‘basket cases’ caught up in a poverty trap. Over the past 30 years this was seen to be wrong.

Maybe Carter is right but I found his arguments unconvincing.

Emerging economies increasingly decoupled from the US?

I have been thinking about the RBS's interest rate policies and their drive to deflate inflationary expectations in Australia when all the evidence suggests that the US economy is probably already experiencing recession as well as emerging inflation.

The catch is that the interest rate hikes that have occurred in Australia over the past few years impact on aggregate demand with a long lag - perhaps 12 to 18 months. By the time they impact Australia may be experiencing the direct effects of a US slowdown and the indirect effects of such a slowdown on the Chinese economy which directs 21% of its exports to the US. A decline in US import demands would trigger a decline in demand for our raw material exports to China.

The double wammy of a policy-induced local interest rate hike coupled with a global slowdown might well drive the Australian economy into a policy-induced recession. It is a fear that needs to be balanced against the urgent need to retqain RBA credibility at controlling the commodity cost driven inflation that Australia is now experiencing as well as the biggest investment boom Australia has experienced in 20 years.

The empirical question here vis the extent to which events in the US will drive events in Australia or, to put it another way, the extent to which the Australian economy is coupled with or decoupled from the US economy.

This article in The Economist studies the decoupling debate. One approach to the decoupling issue is to say that with increasing economic integration and interdependence decoupling is less likely. Empirical evidence from developing countries however suggests they are more decoupled than in the past. While the US economy has been stumbling countries such as China have reduced their exports to the US but substantially increased their exports to other emerging countries - half of China's exports now go to emerging economies.

Moreover in the face of a US decline consumption and investment spending in many emerging economies has continued to grow strongly. In China this is so because less than 15% of total investment is linked to exports - over half is in infrastructure and property.

A recent IMF study by Cigdem Akin and Ayhan Rose finds that decoupling can proceed alongside globalisation. Growth seems to have become more synchronised among developing countriesw and among developede countries but developed countries as a group have decoupled (increasingly diverged) from developing countries as a group. Again the reason seems to be that emerging countries are increasingly trading among themselves.

The Economist concludes:

A severe recession in America could still have a nasty impact on the developing world if commodity prices collapsed and if it caused stockmarkets to fall more steeply, depressing global consumer and business confidence. A sharper fall in the dollar could also further squeeze emerging economies’ exports.

But for perhaps the first time ever, developing countries would be able to make full use of monetary and fiscal policy to cushion their economies. In the past, when they were net foreign borrowers, capital inflows tended to dry up during global downturns as foreign investors shunned risky assets. This forced governments to raise interest rates and tighten fiscal policy.

Economies with large external deficits are still vulnerable, but most emerging economies now have a current-account surplus and large foreign reserves; many have a budget surplus or are close to balance, leaving ample room for a fiscal stimulus if necessary.

Perhaps the best support for decoupling comes from America itself. Fourth-quarter profits of big companies, such as Coca-Cola, IBM and DuPont, were better than expected as strong sales growth in emerging markets offset a sharp slowdown at home. Bits of American business are rising above their own economy. With luck, the world economy can rise above America’s.

This is perhaps good news in terms of the indirect effects of a US recession on Chinese demands for Australian exports. We will still cop the coupled direct effects but the indirect effects will be muted because much Chinese demand for our raw materials is not export related and, in any event, China is increasingly diversifying its exports away from dependence on the US.

Affordable cars for 1.1 billion

1.1 million Indians potentially gain access to a $2500 car - ignoring those that might be exported. One can take, as I do, the elitist view that this is environmentally damaging in terms of its contribution to global warming – it is difficult to see it as a positive - and it will certainly add to congestion problems in India even if it does make automotive transport more readily available to the Indian masses. Others will argue that environmental criticisms of the car are misplaced – Indians have the same right to destroy the earth’s climate as rich westerners.

Two facts:

• Currently, only 8 Indians per 1000 own a car compared to 750 per 1000 in the US.
• By 2020 China may have a larger car market than the US.

Apart from Asia, South America, much of the former Soviet and the Arab countries are developing rapidly. Even the African basket case is looking promising despite genocidal conflicts related to barbarous tribalism. But, with current technologies and current populations, environmental constraints related to energy and food supplies mean the whole world cannot live like mass consumption Westerners. Hence development of poor countries will be thwarted, living standards of affluent countries will fall or concomitant with economic development must go technological changes or sustained population reductions.

Every silver lining is potentially just the interior of a dark cloud. Maybe its the Melbourne heat today (40 degrees C) but the usually half-full glass seems half-empty today.

Update: there is a long-meandering discussion of this post at Catallaxy.