Howard F. Rosen argues that exports are a key to US economic recovery but that export-led growth will require public and private investment.

Steve Weisman: Improving exports is key to the future of the United States’ economic recovery. This is Steve Weisman at the Peterson Institute for International Economics with Howard Rosen, resident visiting fellow at the Institute, to talk about how and why the United States can improve that performance. Howard, thanks for joining us.

Simon Johnson argues that President Obama’s proposed bank tax is a step forward but the financial system is still distorted by flawed incentives. 

Steve Weisman: What does the United States do about banks and financial institutions that are believed too big to fail? This is Steve Weisman at the Peterson Institute for International Economics with Simon Johnson, senior fellow at the Institute, professor at MIT, and blogger extraordinaire on this subject. Welcome, Simon. Simon, this week the Financial Crisis Inquiry Commission heard from a lot of the marquee names in banking on that very issue. You’ve been addressing this yourself for many months. Have we moved the ball with their testimony and with some new proposals for bank taxes and the discussion in Congress about compensation?

Simon Johnson: Yes, the ball has moved; the ball is moving, I think, in the right direction. There is now recognition, really, for the first time this week I would say, Steve, from the top level, from the president himself, that we have a problem with reckless risk taking in our financial system, particularly by the biggest banks. So the tax, which I’m not a huge fan of for various reasons, but it’s skewed toward the biggest firms, which is sensible, and it’s skewed toward the firms that take the most risk—the investment banks, if you like, rather than the boring old state commercial banks, which is also a sensible principle. So, now we’ve started to move, the question is how far can we go and how quickly.

Steve Weisman: One interesting thing to me about the testimony was that all of the leading banking executives who testified agreed that there should not be financial institutions that are too big to fail. But did they offer any particularly interesting approaches to how to deal with that?

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Opinions and comments on RGE EconoMonitors do not necessarily reflect the views of Roubini Global Economics, LLC, which encourages a free-ranging debate among its own analysts and our EconoMonitor community. RGE takes no responsibility for verifying the accuracy of any opinions expressed by outside contributors. We encourage cross-linking but must insist that no forwarding, reprinting, republication or any other redistribution of RGE content is permissible without expressed consent of RGE.       

Uniquely BRICs (Brazil, Russia, India, and China) has become a political grouping after having been invented by Jim O'Neill at Goldman Sachs. In June 2009, Russia organized the first BRIC summit, but will it hold?

The emerging economies will soon account for most of the world economy. We are at a crossroads of world history, as Oswald Spengler caught in his pessimistic 1918 book Der Untergang des Abendlandes or Paul Kennedy in his 1988 book The Rise and Fall of the Great Powers.

Jeffrey J. Schott says carefully targeted sanctions could impede Iran’s nuclear program and energy infrastructure, but they are unlikely to change Iranian leaders’ political agenda.

Steve Weisman: A deadline for Iran to comply with a request to suspend its uranium enrichment has come and gone as of January 2010. This is Steve Weisman at the Peterson Institute for International Economics, with Jeffrey Schott, senior fellow at the Institute, to discuss what comes next on sanctions against Iran. Thanks for joining us, Jeff.

Jeffrey Schott: Thank you, Steve.

Steve Weisman: Iran’s failure to comply with the demands of the United States, Europe, and a host of other countries has raised the possibility of tighter sanctions against Iran by the United States— possibly by the United Nations Security Council. Jeff, you’ve studied this issue for many years. What’s in the offing?

Jeffrey Schott: Well, the politicians will insist on doing something, and the response will be to ratchet up the sanctions that have been in place for more than 25 years. The difficulty will be to develop a sanctions regime that actually has some impact on Iranian policy. And so far, that has been a very difficult thing to do.

Steve Weisman: Have the sanctions had an economic effect and placed pressure on Iran in the last 25 years? 

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Opinions and comments on RGE EconoMonitors do not necessarily reflect the views of Roubini Global Economics, LLC, which encourages a free-ranging debate among its own analysts and our EconoMonitor community. RGE takes no responsibility for verifying the accuracy of any opinions expressed by outside contributors. We encourage cross-linking but must insist that no forwarding, reprinting, republication or any other redistribution of RGE content is permissible without expressed consent of RGE.      

Nicholas R. Lardy says relations with China are deteriorating over climate change, Iran, and the possible return of global current account imbalances.

Steve Weisman: It’s early 2010 and China is increasingly the focus of news on several fronts including climate change, the possibility of sanctions in Iran, and the future of the global economy. This is Steve Weisman at the Peterson Institute for International Economics with Nicholas Lardy, senior fellow at the Institute, to sort through some of these developments. Thanks for joining us, Nick.

Nicholas Lardy: Thank you, Steve.

Steve Weisman: China is not only in the news but it seems to be increasingly the focus of criticism in Europe and the United States for its policies in these areas. Let’s start with climate change. After Copenhagen, criticism in Europe has been especially fierce that China allegedly prevented an agreement, or something like an agreement, from taking place there. What’s your sense of the justice or injustice of that criticism?

Nicholas Lardy: I think it’s easy to criticize China’s policy but I think the reality is that it was known months and months in advance that China had certain goals that were not compatible with reaching a binding agreement. And I think those who were most closely involved in negotiating in a run-up to Copenhagen with the Chinese recognized the unwillingness of the Chinese to move forward on a number of really critical issues.

Steve Weisman: Is there any hope that in coming months they can achieve a consensus, if not in terms of a treaty or binding set of obligations?

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In his speech at the American Economic Association on Sunday, Ben Bernanke, chairman of the Fed, said that monetary policy played at most a small role in the US housing bubble and that financial regulatory policy is the appropriate tool for preventing harmful asset price bubbles in the future.  I agree with these conclusions, but I suspect that many do not, even within the world of central banking.

Michael Mussa says the latest improved employment figures are consistent with his forecast of 5 percent growth next year, but it is still too early to say the recovery will accelerate to that pace.

Steve Weisman: This is Steve Weisman at the Peterson Institute for International Economics with Michael Mussa, senior fellow at the Institute, to discuss the latest information about jobs and the economic recovery. Thanks Mike.

Michael Mussa: My pleasure.

Steve Weisman: In early December, a lot of people expressed surprise that the unemployment rate dropped from 10.2 percent to 10 percent. Were you surprised?

Michael Mussa: I wasn’t particularly surprised. We had a large four-tenths of 1 percent increase month-over-month the preceding month. And these are numbers that—since they are based on a survey—have a kind of statistical sampling error. So, the thought that it might come down one- or two-tenths is not, I think, surprising and also not particularly reassuring just in and of itself.

Steve Weisman: Why?

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Opinions and comments on RGE EconoMonitors do not necessarily reflect the views of Roubini Global Economics, LLC, which encourages a free-ranging debate among its own analysts and our EconoMonitor community. RGE takes no responsibility for verifying the accuracy of any opinions expressed by outside contributors. We encourage cross-linking but must insist that no forwarding, reprinting, republication or any other redistribution of RGE content is permissible without expressed consent of RGE. 

How should climate change goals be met to ensure that developing countries’ energy needs are not sacrificed?

In a previous posting on RealTime Economic Issues, Meera Fickling offered a different view on an issue posed earlier by Nancy Birdsall and me in our article “Forget Emissions, Focus on Research” in the Financial Times.

In this Vox EU piece Nancy Birdsall, Dan Hammer, and I explain how to achieve the goal of meeting both the objectives of climate change and development. Based on a research paper, we argue that fairness would imply that basic energy needs of consumers in developing countries should not be different from those enjoyed by consumers in industrial countries at a comparable stage in their development.

However, the manner in which these needs are met—i.e., the technologies that are used—should be the latest available. Our calculations suggest that the only way that energy needs can be met equitably is through a carbon technology revolution. Facilitating this revolution should be the focus of national and international efforts going forward.

Opinions and comments on RGE EconoMonitors do not necessarily reflect the views of Roubini Global Economics, LLC, which encourages a free-ranging debate among its own analysts and our EconoMonitor community. RGE takes no responsibility for verifying the accuracy of any opinions expressed by outside contributors. We encourage cross-linking but must insist that no forwarding, reprinting, republication or any other redistribution of RGE content is permissible without expressed consent of RGE. 

In a recent op-ed in the Financial Times, Nancy Birdsall and Arvind Subramanianasserted that rich countries were unfairly blaming the developing world for contributing to global warming, and they called for a shift away from focusing on emissions and toward exploiting “the latest available clean technologies” for poor countries. Unfortunately, their recommendation dangerously downplays the importance of developing country carbon emissions in causing climate change. It is critical that the importance of these emissions be recognized, lest climate change cause additional misery for the poor in the decades to come.

Birdsall and Subramanian’s piece implies that developed countries are asking developing countries to make immediate emissions reduction commitments as part of a climate agreement at Copenhagen or in other negotiations. But US and other climate negotiators merely expect major developing countries, such as China and India, to take steps in that direction. Leading up to Copenhagen, China has offered a 40–45-percent emissions intensity reduction by 2020, and India a 20–25-percent reduction. While these concessions do not represent absolute emissions reductions in the near term, they will stem the acceleration of greenhouse gas (GHG) emissions and build capacity to make reductions in the future.

Birdsall and Subramanian’s claim that “emissions are not the primary issue” in climate negotiations does not make sense. The whole point of climate negotiations is to drastically reduce the amount of global GHG emissions in order to avoid catastrophic climate change. To be sure, there currently exists a huge gap in emissions per capita between developed and developing countries. Whereas the average American emits over 20 tons of GHGs per year, the average Chinese emits 5.5 tons, the average Brazilian emits 5.4 tons, and the average Indian emits 1.7 tons.¹ Developing countries are thus justified in calling for developed countries to reduce absolute emissions levels first.

But despite the developed countries’ historical responsibility for global warming, the reality is that developed countries alone cannot reduce global GHG emissions to a sufficiently low level. David Wheeler, senior fellow at the Center for Global Development, has calculated that under business as usual, cumulative Southern emissions will surpass Northern emissions by 2025. In order to avoid a climatic disaster, India, China, and Brazil need to reduce emissions growth now and absolute levels within a few decades.

It is true as a political reality that many in the United States Congress say they will not sign on to limits on emissions if there is no similar commitment in the developing world. But developing countries need to limit emissions growth, not in order to appease the developed world, but rather to ensure their own growth and prosperity. William R. Cline, senior fellow at the Peterson Institute for International Economics, estimates that without efforts to slow or reverse current trends, climate change will reduce net agricultural revenue by over 90 percent per hectare in India’s northeastern region by 2080. Without carbon fertilization, developing countries overall would lose about 20 percent of agricultural output potential.² In addition, 80 percent of those who live less than 5 meters above sea level are in developing countries. Even a one-meter sea rise—on the low end of what is possible—would cause 60 million environmental refugees.

In this context, Birdsall and Subramanian’s emphasis on parity of energy access misses the point. The goal should be to promote a high standard of living for all but at the same time not to promote use of energy. Birdsall and Subramanian hint at this in their op-ed when they advocate technology and energy efficiency improvements, but some of the amenities that they cite as basic energy services are actually not that basic. A car, for example, is not necessary for a first-world lifestyle. Transportation can be accomplished more cleanly and effectively through public transit.

To be sure, certain amenities cannot be gained without use of fossil fuels. It is true that “in the developing world, billions of people are now cooking over health-harming wood fires in shanty towns (rather than receiving piped gas and electricity), [and] doing backbreaking hoe farming (not operating tractors).” But it is misleading to say that “cutting emissions would push them from just above subsistence back, literally, to the dark ages.” In fact, provision of stoves could actually be boons for the climate as well as development. Wood-burning cookstoves are the biggest sources of black carbon in Africa and Asia. Black carbon currently contributes to 18 percent of global warming and could contribute to almost half of Arctic warming. Replacement of these cookstoves with stoves powered by electricity—especially solar power, as nongovernmental organizations (NGOs) in India are currently trying to do—could reduce overall GHG emissions while improving human health.

In any case, Birdsall and Subramanian ignore the real source of developing-country GHGs. It’s not the poor using electricity to power their stoves; it’s carbon-intensive manufacturing. In China, the industrial sector comprises 81 percent of electricity use; in India, this number is 65 percent.³

Birdsall and Subramanian suggest that countries should abandon a focus on emissions for developing countries and simply accelerate development of clean technology in order to come as close to equality with the advanced world in energy services as possible. This solution is flawed for two reasons. First, it would seem to fly in the face of their assertion that a 50-percent global reduction in GHGs by 2050 is necessary to avert catastrophe. Without carbon pricing or regulatory constraints specifically designed to curb emissions, it is highly unlikely that sufficient progress will be made.

Second, Birdsall and Subramanian imply that the clean technology required to develop sustainably is far off in the future. It is true that technologies such as carbon capture and sequestration and electric cars are not yet commercially viable. But countries such as India and China are not even using the technologies available today. Both countries’ carbon intensities of manufacturing are several times higher than those of US and European manufacturing sectors.

Developing countries need to take advantage of their ability to “leapfrog” from already-developed technologies to installation of clean energy and transportation infrastructure now so that expensive changes to this infrastructure are not necessary in the future. McKinsey estimates that China can limit its emissions increase to 10 percent over 2005 levels by 2030—50 percent below business as usual—by adopting technologies that have already been technically developed [pdf]. The same report warns that these technologies must be adopted in the next five to ten years in order to avoid lock-in of carbon-intensive infrastructure.

It is apparent in the paper on which the op-ed is based that Birdsall and Subramanian are aware of the necessity to reduce global GHGs. And in fact, their suggestion of emissions intensity targets makes sense, provided that these targets are calibrated to produce eventual cuts in emissions. But this suggestion seems to run counter to the authors’ earlier dismissal of carbon emissions as the main problem. If it is true that a focus on emissions is the source of acrimony in international climate negotiations, it is hard to see how emissions’ intensity targets improve the situation.

Yes, the need for more equitable distribution of energy in developing countries is desperate. According to the Energy and Resources Institute, nearly half of India’s population still has no access to reliable electricity, and access often comes with major outages. The developed world has a moral imperative to aggressively promote clean energy worldwide. China has already made an excellent start to developing clean energy infrastructure, with a huge “green stimulus” package passed this year and a vehicle fuel efficiency standard surpassing that of the United States. But the focus should not be taken off emissions, which if not curbed could prevent developing countries’ economies from growing and thus swell the poverty rolls in the world’s poorest countries.

Meera Fickling is a research analyst at the Peterson Institute for International Economics.

Notes

1. Climate Analysis Indicators Tool, World Resources Institute, 2009.

2. William Cline. 2007. Global Warming and Agriculture: Impact Estimates by Country. Washington: Peterson Institute and Center for Global Development.

3. Residential electricity use amounts to 12 percent of total electricity use in China and 24 percent of electricity use in India. These are significant percentages, but they include the electricity use of the rich and the middle class.

Posted in Global Financial Crisis | View comments | Permalink | Send comments Tags: China, climate change, developing countries

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