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From Green Shoots to Green Economy

Hans Timmer's picture

Almost a year ago the free fall in production and trade stopped (albeit at very depressed levels) and financial markets normalized. That spring of 2009 motivated many pundits to exhaust the metaphor of green shoots. They continued to do so till at least metaphysically the shoots were completely sapped.

Now almost a year (and a cold winter in the Northern Hemisphere) later, the global recovery is still fragile and discussions still focus on to what extent policy makers should continue to nurture the green shoots. Is more fiscal stimulus needed? How long can monetary policy remain unprecedentedly loose? Or are policies becoming part of the problem instead of part of the solution? Are the worries that the Greece government could default and that real estate prices in emerging Asia are out of control harbingers of broader fiscal problems and new bubbles in the world economy?  We are in the middle of the famous exit strategy discussion.

However important the timing of the exit strategy is, it is not the only and perhaps not even the crucial problem at the moment. Government stimulus has been very effective in stopping the global collapse, but several quarters into the recovery it is clear that sustainable restoration of confidence and solid medium-term growth cannot come from traditional stimulus alone. New growth opportunities are needed to bring dynamism back in global investments.

Source: World Bank

The green economy (and I recognize the trouble with economic metaphors) is one of the candidates of new engines of growth. If policy makers can decide on firm, predictable, and reliable green policies, then private investors are eager to explore the new opportunities and push up investments once again.

Development and implementation of energy-saving technologies seem mainly opportunities for high-income countries. That is where after the crisis traditional sectors are threatened by competition from emerging economies, where responsibility should be taken for climate change, and where high-tech solutions are more readily available. In fact, climate change policies, which will trigger green technologies, are often seen as a threat to future growth in developing countries. Limiting the use of fossil fuels would limit their development potential.

My colleagues Aaditya Matto, Dominique van der Mensbrugghe, and Jianwu He, together with Arvind Subramanian from the Peterson Institue for International Economics, argued recently in two papers, Can global de-carbonization inhibit developing country industrialization? and Reconciling Climate Change and Trade Policy, that carbon restrictions or carbon taxes in developing countries would hurt manufacturing, with substantial growth costs.

I think very well the opposite could be true. If developing countries don’t encourage energy saving, their growth potential will soon face once again hard restrictions. Confidence in strong growth dynamics in the developing world will require less dependence on fossil fuels. It is interesting that the argument for such an observation can be found in these very same papers. If only high-income countries limit the emission of CO2, then (according to a simulation presented in the second of the two papers; Appendix table 5) developing countries are pushed into the production of energy-intensive manufacturing and pushed out of the production of other manufacturing.


Source: World Bank

That is not a position a developing economy wants to be in. Scarcity of energy supply had become one of the binding factors at the end of the boom that was suddenly interrupted by the global financial crisis. When you try to rekindle strong medium-term growth, you don’t want to be pushed into an artificial comparative advantage in energy-intensive production.

This is the time to focus on drivers of medium-term growth. For developing countries it is key to alleviate constraints to future growth and limited energy supply is obviously an important constraint. For that reason it would be useful if developing countries take the driver’s seat in the design of climate change policies, as they can combine climate targets with growth targets and the need to achieve energy security.