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Time to Sound Alarm Bells on Climate Change: An Economic Perspective

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The year 2020 marks the beginning of a new decade. The world as we see today has risen from the ashes of Global Financial Crisis of late 2000s and the hegemony of a few developed countries. The global economic and political landscape has endured a number of changes over the past decade- Fukushima Daiichi nuclear disaster, the Arab Spring of 2011, the rise and fall of ISIS, Refugee crisis sparked by people fleeing war persecution and poverty, the Ebola pandemic, European Sovereign Debt Crisis of 2012, BREXIT, discovery and commercialization of Shale in the USA, trade rivalry between the two behemoths- USA and China, China’s debt diplomacy through One Belt One Road (OBOR), Paris Climate Agreement of 2015 and the American fall out. 

Of all the themes that gripped the world in the recent memory, none deserves more attention than the spectre of a world ravaged by excesses of human greed and neglect of environment. The burning of Amazon rainforests and vast swathes of forests turning to ashes in Australia once again reminded the world of the pertinent need to focus on the challenge of climate change. More recently, the threat of a giant locust storm from the Horn of Africa to the farmlands in India is gripping the Eastern hemisphere. Studies have linked higher temperatures and higher than usual rainfall with more damaging locust swarms. According to Food and Agriculture Organisation, a square km sized swarm contains about 40 million locusts which eat as much food in one day as about 35,000 people. This threat to food security due to climate effect should send the alarm bells ringing in the high and mighty corridors of world powers. This article is an attempt to trace out the contribution and preparedness of comity of nations to deal with the challenges of climate change in terms of policy and the economic cost of not acting while we still have a chance at saving the humanity from the ferocity of nature.

The Earth’s temperature is maintained by an envelope of gases that traps the heat from the sun. However, when the concentration of these greenhouse gases increase in the atmosphere, the heat budget goes hay-wire and the temperature starts to rise. The heightened temperatures can lead to melting of ice caps, rise in sea levels, flooding of coastal cities (some of the world’s dense metropolitan areas are located on coasts), decline in soil productivity, fall in food production, increased pest attacks, increase in pathogen-related diseases, extreme weather events, desertification, famines, epidemics and the list goes on.  As the world is under the biggest ever lockdown due to COVID-19, the global community is struggling with crippling economies, and the writing on the wall is clear- the world is not prepared for such pandemics. An apposite question to ask here is, are we ready for the forthcoming challenges posed by climate change? Do we really have a feasible action plan in place to address the current and future challenges awaiting us?

In the 20th century, climate was neither the priority of developed nor the developing nations. Focus was on turning the wheels of economic growth as fast as possible. Climate change first made its entry in the global parlance as late as the 1970s. The UN Conference on Human Environment 1972, popularly known as the First Earth Summit, laid out the principles concerning environment and development and raised the issue of climate change for the first time. The First Scientific World Climate Conference was held in 1979 which eventually led to the creation of Intergovernmental Panel on Climate Change (IPCC) in 1988. The Second Scientific World Climate Conference 1990 considered the IPCC first assessment report highlighting the risk of climate change which paved the way for the United Nations Framework Convention on Climate Change (UNFCCC) at the Second Earth Summit in Rio de Janeiro in 1992. Enforcement of UNFCCC in 1994 formalised the climate change negotiations at the world level and from here began the string of Conference of Parties meetings with the latest being held in Madrid, Spain in 2019. Alongside the climate change negotiations, need for sustainable development has also caught the attention of the world leaders with the Rio Earth Summit of 1992, World Summit on Sustainable Development 2002, Rio+20 summit in 2012. The Brundtland Commission’s conception of sustainable development in 1987 marked a comprehensive shift in viewing development and environment as complements to one another. 

Though the scientific community highlighted the challenge of climate change late with the passage of more than a century since the industrial revolution, the world economies and leaders haven’t yet woken up from their slumber, notwithstanding an entire gamut of conferences and meetings mentioned above. The world has been pumping in greenhouse gases in the atmosphere ignoring the climate cost of growth.

The Kyoto Protocol was considered to be the ‘star’ agreement of the negotiations imposing binding emission reduction target of 5 percent below the 1990 levels over the 5-year period of 2008-12 on three-six industralised countries and the European Union. The Doha amendment of 2012 extended the commitment period to 2020. However, the year 2020 is here and only 137 parties have ratified against the requirement of 144 for the amendment to come into existence. This highlights the lax attitude of the world leaders to the challenge of climate change.

The climate scientists heaved a sigh of relief with the signing of Paris Climate Agreement in 2015, with both the North and the South coming together to contribute towards emissions reduction according to their ability laid out in Nationally Determined Contributions (NDC). However, the NDCs fall way short of achieving the target of limiting the global temperature rise to below 2 degree Celsius (preferably below 1.5 degree Celsius) above the pre-industrial levels by 2100. With the withdrawal of USA, the second largest carbon dioxide emitter in the world, the resolve of Paris Agreement has come under serious doubt.

The Earth is already 1.1 degree Celsius warmer compared to preindustrial times. As per the data of World Meteorological Organisation, 2019 was the second hottest year after 2016, and every decade since 1980s has become warmer than the previous one. Average temperatures for 2014-19 were the highest on record. According to WMO Secretary-General Petteri Taalas, we are well on our path to a 3-5 degree Celsius rise in temperatures by end of century with the current rate of emissions.

The economic cost of climate change has been hard to grasp for the world at large. According to a Working paper published by National Bureau of Economic Research in 2019, a continued increase in average global temperatures by 0.04 degree Celsius per year under “business as usual” approach can reduce global GDP per capita by as much as 7.22% by 2100. The hardest hit would be the least developed countries of tropics and no country would gain economically from global warming. As per World Bank, an additional 100 million people worldwide are at the risk of being pushed into poverty by 2030 due to climate change. Climate disasters also extract a cost in terms of damage to infrastructure such as road transportation and power generation to the tune of $18 billion annually in low and middle-income countries, with wider disruptions to households and firms costing atleast $390 billion a year. According to a WHO Report on Health in 2018, health complications due to air pollution in 15 countries that emit the most greenhouse gases are estimated to cost more than 4% of their GDP. Air pollution causes 7 million deaths globally annually, costing $5.1 trillion in welfare losses.

The Covid-19 pandemic has thrown at us first-of-many challenges of this century, wherein it has become pertinent for us to introspect the question “growth at the cost of what?”. As we continue to expand and encroach into fragile ecological regions of the planet in quest for growth, we are increasingly putting the health of our ecosystem in jeopardy. While Covid-19 has caught the world unawares and severely crippled its health infrastructure with more than 2 lakh deaths and counting, climate change is a hidden enemy lurking behind these ever often pandemics- earlier it was Ebola and now Covid-19. Failure to address climate change will threaten human lives, livelihood, and ecosystem in an unprecedented manner.

As countries plan to restart their economies post the Covid-19 pandemic, it’s time to channelize our resources to ‘building back better’. While rebuilding lives and creating livelihoods, the economic stimulus needs to focus on supporting sustainable business and personal practices. Air pollution levels have fallen across the major industrial cities of the world in the wake of the pandemic and subsequent lockdowns, there is a need to sustain this in the post-pandemic world. The nature is rebounding when the humans have retreated from the streets. Therefore, there is a need to devise sustainable strategies- be it work-from-home for the majority or giving up plastics or commuting on public transport. Every individual effort counts.

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GCC Countries Back on Path to Economic Growth after Contraction Due to the Pandemic

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Following a year of economic distress, Gulf Cooperation Council (GCC) economies are expected to return to an aggregate growth of 2.2% in 2021, according to the latest issue of the World Bank Gulf Economic Update (GEU) titled “COVID-19 Pandemic and the Road to Diversification”. This growth is buoyed by the global economic recovery, projected at 5.6% and the revival of global oil demand and international oil prices.

The COVID-19 pandemic and the decline in global oil demand and prices dealt the GCC countries a health crisis and a commodity market shock causing a GDP contraction 4.8% in 2020.  

Fiscal deficits are projected to persist for most over the forecast period, however.  The three countries with the largest deficits in 2020 – Kuwait, Bahrain, and Oman – are projected to remain in deficit throughout 2021-23, but at narrower ratios to GDP in 2023 than during the economic downturn in 2020.  

According to the GEU, the oil supply cutbacks and the four-year-low average oil price of US$41.30 per barrel slashed the group’s goods and services exports by 8.1% in real terms and turned the current account surplus of 6.8% of GDP in 2019 into a deficit of 2.9% of GDP in 2020.  

Non-oil GDP is proportionately larger now in all the GCC countries than it was 10 or 20 years ago, but much work remains to be done.  Many are still highly reliant on oil and gas exports, which remain over 70% of total goods exports in Kuwait, Qatar, Saudi Arabia and Oman, and on oil revenues, which exceed 70% of total government revenues in Kuwait, Qatar, Oman, and Bahrain. 

“While the GCC has done a lot in the last year to contain the effects of the pandemic on their economy, including procuring vaccinations early on, they must continue to reform their public sector finances,” said Issam Abousleiman, World Bank Regional Director of the GCC Countries. “The region needs to strengthen their competition policies to harness the benefits of telecommunications and the digitalization of economic activity.

The sixth issue of the GEU focuses on fiscal revenues and structural reforms including strategic investments in digitalization and telecommunications, which can help enable more economic diversification. 

Promoting private sector development remains at the core of national and regional economic diversification efforts. The GCC managed to complete only two state-owned enterprise privatization transactions and only two public-private partnership (PPP) agreements in 2020, but it was a difficult year for commerce and investment anywhere.  

Also, advancing the telecommunications frontier is a strategic investment sector for diversification and post COVID-19 recovery, that will serve the GCC well.  Past investments in the sector accorded the GCC sizable benefits during the pandemic as quarantines, lockdowns, and restrictions forced public health surveillance, wholesale and retail commerce, public and private education, banking and financial services, and private and government office work onto digital channels. Strategic investment in advanced telecommunications technologies, including 5G, is underway in the GCC. But beyond capital spending on infrastructure, the telecommunications sector would benefit greatly from improvements in the legal, regulatory, and competition frameworks under which service providers operate.

GCC Countries Outlook

Bahrain: Bahrain will continue to rely on fiscal support measures in 2021 to overcome the economic contraction in 2020. GDP growth is expected to reach 3.3% in 2021 and remain at the same pace during the medium-term. 

Kuwait: Oil exports will continue to drive Kuwait’s growth dynamics. Economic growth is forecast to rebound to a moderate 2.4% in 2021, before ramping up to an average 3.2% in 2022-23.

Oman: Oman’s economy is forecast to recover in 2021, albeit at a moderate 2.5% growth rate as a sizable infrastructure investment program gains momentum. Medium-term growth is projected to average 5.3% over the forecast period.

Qatar: Qatar is forecast to post a strong growth rebound with LNG demand in South and East Asia underpinning medium-term prospects. Qatar’s economy is projected to grow by 3% in 2021 before accelerating to 4.1% in 2022 and 4.5% in 2023. 

Saudi Arabia: Firmer global oil demand will support Saudi Arabia’s economic recovery in 2021 with GDP growth expected to reach 2.4% in 2021. Medium-term growth is projected to average 3% over the forecast period. 

United Arab Emirates: The UAE is expected to swing back to growth in 2021, estimated at 1.2%, before accelerating to 2.5% in 2022 and 2023 driven by government expenditures and the staging of Expo 2020 in October 2021. 

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Passing the Test of the Covid Pandemic

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For love of domination we must substitute equality; for love of victory we must substitute justice; for brutality we must substitute intelligence; for competition we must substitute cooperation. We must learn to think of the human race as one family.– Bertrand Russell

The only thing that will redeem mankind is cooperation.– Bertrand Russell

The COVID pandemic delivered a blow to the world economy through multiple channels. The labour supply was adversely affected by record high mortality rates, which may also deliver longer-term effects. With respect to economic policy, rather than stimulating greater cooperation the pandemic resulted in additional restrictions and greater proclivity towards self-sufficiency and self-reliance. Another channel was the negative impact on travel and labour mobility, as well as services and small business development.

More generally, the Covid pandemic proved to be a major test for the national, regional and international systems of governance. The international system as well as regional institutions proved to be unprepared and ill-equipped to address the blows of the crisis. At the national level the economic system was tested with respect to the governance system, the resiliency of the health care system as well as the trust of the population in the policies of the authorities (in particular the receptiveness of the calls for vaccination).

In the sphere of international cooperation the shortcomings of the current framework are illustrated by the lack of common efforts across countries in developing and providing vaccines to the global community. A straight-forward and sensible solution in the context of the current crisis would have been to widen the possibilities for the population to get access to a greater array of vaccines – this would in turn raise the participation rate of the population in vaccination. Equally as sensible would be joint efforts across countries in working on more effective vaccines. Instead, there is the intensifying “vaccine protectionism” and efforts to undermine trust in the vaccines created in “competitor countries”.

There is also a lot more that the international community could do to provide assistance to the least-developed economies. In 2020, official development assistance (ODA) by member countries of the Development Assistance Committee (DAC) (comprises developed economies, including the EU and the United States) amounted to USD 161.2 billion, representing 0.32% of their combined GNI. Initial estimates indicate that within total ODA, DAC countries spent USD 12 billion in 2020 on COVID-19 related activities. As a result, ODA assistance in 2020 increased by 3.5% compared to 2019 and reached its highest level ever recorded. Such an increase, while important in view of the challenges faced by developed economies themselves, falls short of the rising needs of the least developed countries that were hard-hit by the sharp fall in FDI and remittance inflows due to the pandemic-induced restrictions. It has to be noted also, that ODA levels declined in 13 out of 30 members of DAC in 2020.

One of the key initiatives in the context of the assistance of the G20 countries to heavily-indebted developing economies was the provision of debt-relief to cope with the shock of the COVID pandemic. According to the OECD the total debt relief extended by advanced economies in 2020 amounted to USD 541 mn. At the same time, according to China’s Ministry of Finance, the Export-Import Bank of China as well as the China International Development Cooperation Agency have suspended debt service payments from 23 countries totalling more than USD 1.3 bn. Overall, the total debt relief provided by China to developing countries under the G20 framework reached USD 2.1 bn, which is the highest among the G20 members in terms of the size of the deferred funds.

Apart from ODA and debt relief there are also gaps in areas such as trade policy, most notably with respect to the lingering (and at times rising) protectionism affecting least-developed economies during the outbreak of the pandemic. The recent World Bank study of the implications of restrictive trade policies during the COVID crisis underscored that least-developed economies could be among the hardest hit. The response of the international community needs to be focused on improving developing countries’ market access, as well as the supplies from developed economies of medical equipment and technologies for national healthcare systems.

In the end, “enlightened self-interest” and “invisible hands” as guiding principles have not served the global community well. If the challenge of the current pandemic is ever to be decisively surmounted, it is going to be through a joint response. The hope is that this common effort will be transformational for the global community and will lead to emergence of new pathways and institutions for international cooperation. The changing “superstructure” of technological and material advances will necessitate an evolution in the “base” of human values. The effects of the current pandemic as well as the rising pile of other global imbalances and vulnerabilities are a reflection of the disconnect between the heights of the technical and material advances/ambition and the shaky foundation of the weakening values of international cooperation.

The important point to realize in the context of the current crisis is that it is not a one-off stumbling block on the road to greater prosperity in the future. There are just too many vulnerabilities and road-bumps along the current path that necessitate an outright rethink of the development itinerary. This relates in particular to risks such as cyber-security, inequality and environment/energy security. These fragilities are the opposite side of the advances made by the global community in areas such as computer-science, economic modernization and higher rates of industrialization in the developing world. Further ambitions along these important trajectories will increasingly call for ways to strengthen ethical standards and international cooperation.

From our partner RIAC

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Half a Decade On – Reflecting on Russia’s Unsung Successes

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In 2016, as the incoming World Bank lead economist for Russia, I started writing about Russian economic issues. It is now time to bid goodbye. As a professional analyst of the Russian economy over the last 5 years, I can summarize my experience in one sentence: things in Russia are never as bad as they seem, but they are never as good as they can be, either.

Just in the last 6 years, Russia has managed to attain remarkable macro-stability. Inflation, which was in double digits, is in now in manageable territory. The country is less reliant on oil and gas today than 5 years back. These are no small achievements. On the other hand, as I – and many others have written – sagging potential growth holds progress back. But these issues are well-known. In this final column, I would like to recognize three lesser-known Russian developmental successes that often fly under the radar screen.

First is Russia’s increase in life expectancy – from 65.3 years in 2000 to 72.7 years in 2018. This has been mostly due to a drop in the number of deaths caused by non-communicable diseases (i.e. diseases that are not infectious or contagious such as heart attacks and stroke) and external causes (such as road accidents and homicides). Mortality rates for both adults and particularly children have also been decreasing since the 2000s. Even more recently, infant mortality decreased by 36 percent from 2011 to 2017 and maternal mortality decreased by 49 percent in the same period. While the pandemic engulfs us all, it is worth taking a longer-term perspective to recognize legitimate improvements in Russia’s life expectancy.

Second is Russia’s progress in financial literacy. Russia is no stranger to financial crises. While governments anywhere and everywhere have the primary responsibility in preventing and managing them, an important factor that is only being recognized is the need for individuals to become more informed about making financial decisions.

As an early adopter, Russia has recognized the benefits of financial literacy, and made remarkable strides in increasing literacy across both adult populations and school children. This is thanks to both top-down efforts by the Ministry of Finance and Central Bank of Russia, and bottom-up ones, which have included tapping into schools, libraries, and other community platforms to reach a large and diverse segment of the population. Indeed, Russia was ranked the first among 132 countries in the Child & Youth Finance International Global Inclusion Awards in 2016. It also ranks in the top 10 of G-20 countries for financial literacy.

Third is Russia’s progress in improving its tax administration. The history of taxes in Russia hark back to medieval times, with Prince Oleg imposing the first known “tribute” on dependent tribes. Catherine the Great is known to have said “Taxes for a government are same as sails for a boat. They serve to bring her faster into a harbor without flipping over by their burden”.

Building on lessons learnt over centuries, Russia today is at the global forefront of tapping technology and real-time source data and has managed to shift from a culture of tax evasion to tax compliance. Tax non-compliance, notably in value-added taxes, for instance, has shrunk from double digits a few years ago to less than 1 percent today, with minimal human involvement. Russia’s success in modernization of its tax services is not as well known as it ought to be, but global interest is slowly but steadily growing.

Surely, these achievements are not the end of the road. When it comes to life expectancy, male life expectancy is behind female life expectancy by almost 10 years, and this gap needs to be shrunk. Financial literacy, consumer protection, and safeguards for privacy and data protection need to keep pace as cryptocurrencies and digital fraud become more commonplace. And gains in tax administration may be washed out without complementary tax policies. Yet, these unsung successes deserve more recognition, both within and outside Russia.

One of the more unusual analysis the World Bank undertook was to figure out how wealthy is Russia. We found that Russia’s wealth lies not in its abundant natural resources (as important as they are), or its physical infrastructure (as mighty as some of it may be). Rather, Russia’s wealth derives from the ingenuity and creativity of its people. Indeed, almost half of all Russia’s wealth derives from its human capital — the cumulative experience, knowledge, and skills of Russians. Only then is it followed by physical capital (about a third), and natural capital (about a fifth). Anecdotally too, I can reaffirm that to be the case. In my interactions with students in various universities and high schools, I have witnessed their keen engagement, their sharp and pointed questions, their sense of humor, and above all, a passion to improve their country. I am indeed privileged to have played a small role in this journey.

PS: There is one other area I would like to draw your attention to, and that is climate change. While the politics are what they are, the science and economics are undeniable. In Russia, in addition to federal initiatives, it is encouraging to see positive signs emerging from within Russian regions, such as Sakhalin and Murmansk, which are vying to become carbon-free zones. As I had written earlier, the one mistake not to make about Russia is to treat it as a single unit of analysis. Doing so would be like being unaware that a Matryoshka doll is not empty! Indeed, Russian regions may be at the forefront of addressing climate change and we might be in for a (pleasant) surprise – this space is therefore worth keeping on an eye on.

First appeared in the Russian language on Kommersant.ru via World Bank

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