Economic development in the age of climate change
This paper explores how climate change is transforming the pursuit of economic development: the transformation of poor economies and their populations into prosperous economies.
This is not the first attempt to align the climate agenda with the economic development agenda. The UN Sustainable Development Goals (SDGs) are significant because they set a dual agenda in which development goals for people and the planet coexist in a unifying framework. Many comments focus on the compatibility of the two agendas. A radical and specious view presents progress on climate change and economic development as strictly substitutable, calling for nothing less than the cancellation of economic development to save the planet. Cooler heads, on the other hand, emphasise their complementarity: the critical role of economic development in supporting adaptation and the realisation that investment in the green transition will boost the economy rather than sacrifice living standards.
In contrast, this essay assumes that the goals and locus of economic development are immutable. The question that arises is how the pursuit of economic development changes in a world gripped by climate change. The essay argues that climate change will force three major shifts: a reassessment of the causes and prospects of development, the resurgence of transition economics, and a reframing of the problem that development seeks to solve. A final section asks what these changes might mean for international security and for the community of national and global actors that shape policy and strategy in this area.
Why are some countries richer or poorer than others? This is the question that motivates the study of development economics. A vast literature seeks to identify the ‘deep determinants’ that best explain comparative economic performance over the long term. This research has increasingly focused on geography and institutions. The geography of a country influences its economy through various channels, including agricultural productivity, disease vectors and proximity to markets. A country’s institutions, defined here as the rules and norms that govern society – including those imposed by external actors – influence the incentives for individuals to engage individually or collectively in production. Which of the two factors is the dominant one cannot be determined empirically conclusively and is therefore partly a matter of opinion. However, the majority opinion and the weight of evidence are in favour of institutions.
Could climate change turn the tide in favour of geography? Recent research looking specifically at the impact of climate change on average temperatures points in this direction. Temperature has been shown to affect income through agricultural crops, the physical and cognitive performance of workers, energy demand and the incidence of crime, unrest and conflict. At the beginning of the 21st century, an average temperature increase of 1°C in a given country in a given year led to an average decrease in per capita income of 1.4%.
Subsequent studies have shown that the relationship between temperature changes and income is not linear. Thus, while global warming may lead to higher economic productivity in countries with low average annual temperatures, countries with already warm climates can expect increasingly dramatic productivity losses as temperatures rise.
These studies suggest that future analyses of the underlying determinants of economic performance may find geography playing a greater role in determining the economic fortunes of countries in the current and future era of climate change. Furthermore, they point out that the economic prospects for today’s poor countries will worsen disproportionately as these countries begin with higher average temperatures and are expected to experience particularly high temperature increases.
The effects of climate change on economic performance are not limited to the impact of average temperatures. Other extreme weather events, such as droughts and fires, as well as changes in sea level, appear to be just as important, if not more so. One way to think about these impacts is to consider how extreme weather events will affect ‘growth episodes’. Medium- to long-term economic performance is episodic for all but the richest countries, which remain at the technological frontier. Virtually all countries have experienced periods of rapid economic growth and periods of low growth. The comparative performance is explained by the superior ability of some countries to sustain growth; poor countries tend to reverse course. In other words, shocks and the way they are handled play an important role in explaining comparative economic performance.
If climate change predicts a world of more frequent and more intense shocks, sustained episodes of rapid economic growth – so-called growth miracles – will become increasingly difficult to realise. The result will be that fewer poor countries will be able to converge to the income levels of rich countries than would be the case in a world without climate change. This happens at a time when convergence has become more common since the beginning of the 21st century.
The weaker prospects for economic convergence are exacerbated by the institutional weakness that characterises today’s poorer countries. Institutional weakness goes hand in hand with a greater slowdown in growth, which means that poorer countries face a more difficult path to recovery after a shock.
One offsetting factor that could improve the economic situation of poor countries is the long-term possibility of a ubiquitous and abundant energy supply, provided that the marginal cost of electricity from renewable sources continues to fall. This would reduce the cost of doing business in poor economies, as well as significantly improve people’s lives. A prerequisite for this outcome is investment in renewable energy infrastructure and access to renewable energy technologies for developing countries.
All countries today face the challenge of the green transition: the move to a zero-carbon economy, with its far-reaching implications and demands on land, planning, infrastructure, investment, technology, employment and social justice. The associated disruptions will extend over the coming decades, in addition to the disruptive effects of climate change.
For a minority of countries whose economies are centred on fossil fuel extraction, more radical changes lie ahead. There are twenty-one economies where coal, oil and gas account for a large share of merchandise exports; in six of these countries, fossil fuels account for more than 90 per cent of these exports, and even in a world where non-renewable energy production will continue, the economic models of these countries will have to be reinvented. This will prove to be a key project for economic development in the coming years.
Here, the transition economy, which describes the metamorphosis of dozens of economies from a centrally planned to a market-based system at the end of the 20th century, provides a partial analogy and a game plan.
Central to this analogy is the expectation of a drastic reduction in income. In the countries of the former Soviet Union, the economic decline in the early years of the transition was between 10 and 50 per cent, marking a painful period of adjustment with social, political and psychological dimensions. 21 Countries exporting fossil fuels must expect a decline in production of a similar magnitude, albeit over a longer period of time.
Fossil fuel exporters are expected to implement some of the same reforms required of transition countries. This includes redefining the role of the state in the economy from a source of growth and profit skimming by state-owned enterprises to a role that allows for greater liberalisation, including the removal of price controls and subsidies to the energy sector. In fossil fuel exporting economies, on average 3% of annual income is spent on pre-tax fuel subsidies, compared to less than 1% in all other countries; in Libya, this share is a staggering 17.5%. Together with the expected drop in incomes, these reforms imply the need to raise the social threshold to an affordable level and to redefine the social contract.
Such reforms are not easy to achieve. The prevailing wisdom that faster policy adjustment is better has been challenged by the relative success of incremental reforms in East Asia, compared to the ‘big bang’ approach favoured and adopted in Eastern Europe. The slow recovery from transition in many countries has led analysts to emphasise more strongly the importance of institution-building to support economic development, although the lack of practical policies to support institution-building is telling. The impending transition for fossil fuel exporters is likely to involve a similarly daunting and poorly reported trajectory.
As fossil fuel exporters reduce their dependence on non-renewable natural resources to fuel their economies and generate export revenues, a new generation of countries will take their place: those with significant natural wealth in minerals and precious metals, critical for renewable energy generation, transmission and storage.How should we assess their prospects in the context of the green transition?
The extractive industry offers irresistible revenue opportunities, but also poses inescapable governance challenges. This is all the more true when the natural resource in question is easily transportable and really scarce, so that it can produce large economic gains, as in the case of oil. Such resources can lead to enormous geo-economic power or a resource curse for countries.
On the surface, this seems to apply to many of the metals and minerals involved in the intensification of the green transition to renewable energy. The production of many of these metals and minerals is geographically more concentrated than that of fossil fuels, and in many cases proven reserves are insufficient to meet the expected demand in a global zero-emissions economy.
However, a closer look reveals a different picture. Several technological avenues are open for the production and storage of renewable energy, which should allow for some substitution between one natural resource and another. At least in the case of rare earth metals, geographical concentration does not reflect actual scarcity, but rather limited commercial interest in extraction and processing. Furthermore, unlike fossil fuels, ores and metals are recyclable. On this basis, the abundance of minerals and precious metals is unlikely to play a decisive role in the future destiny of developing countries, or to wield the same economic power as the abundance of oil does today.
FROM DEPRIVATION TO INSECURITY
The last three decades have been an era of historic progress in development. This progress is commonly illustrated by the change in the percentage of the world’s population living in extreme poverty, which has become a universal measure and indicator of global economic development. This indicator stood at 38% in 1990 and has since fallen to just 8%.
The previous sections indicate that climate change will slow down economic development, but this does not mean that the global fight against poverty must stop.
Although climate change may reduce the economic performance of poor countries, this effect is measured against the counterfactual of a world without climate change; other factors may outweigh the effects of climate change, so the net effect remains continued economic progress. Moreover, we may have reached a structural tipping point that challenges this conclusion.
Climate change indicates a fundamental shift in what is understood as the central challenge of economic development. In the past, this challenge was deprivation. Families, communities or governments lacked the resources to meet people’s basic needs and enable them to live well. Today, the challenge is increasingly uncertainty. As shocks, local or global, become more frequent and more intense, families, communities and governments lack the means to protect themselves and the resources they have accumulated.
We see some signs of this change in different – and seemingly contradictory – trends as climate change takes effect. Over the past decade, the percentage of people living in extreme poverty has continued to decline, albeit at a slower rate than in the previous two decades. At the same time, the proportion of people living in severe food insecurity – that is, going without food or going a day or more without meals – and in need of life-saving humanitarian assistance has increased. As of 2018, the percentage of people experiencing severe food insecurity exceeded the percentage of people living below the global poverty line.
Deprivation and insecurity are naturally linked. A significant portion of extreme poverty in the world is transient; in Africa, transient poverty is 50% more common than chronic poverty. In 2010, an estimated 97 million people – or 1.4 per cent of the world’s population – were pushed into extreme poverty by health spending alone. By 2030, the number of people living in extreme poverty is expected to increase by 32 million to 132 million due to climate change.
However, the impact of climate change on poverty may turn out to be one of its less obvious features – and quantifying this impact should not be necessary to confirm the importance of climate change for understanding economic development. Rather, the emergence of climate change should force a reassessment of the indicators we rely on to track development progress and the policies that are prioritised to promote it.
IMPLICATIONS FOR INTERNATIONAL SECURITY
The previous sections have described how climate change will alter the pursuit of economic development in poor countries. These changes have implications that go far beyond poor countries themselves and the field of global development. In the following, seven hypotheses are put forward describing possible impacts on international security. They are intended to stimulate discussion rather than be conclusive, but indicate both the magnitude of these impacts and their importance to the international security community.
⦁ A growing sense of discontent among the world’s poor countries pits the winners and losers of climate change against each other. This could include the re-emergence of the Non-Aligned Movement and the Group of 77 as prominent factions in the multilateral system.
⦁ Increasing importance of failed states, which are considered unable to develop due to climate change and therefore inaccessible to foreign investment. Failed states are a source of global instability that overlaps with climate change.
⦁ Spheres of global risk are more determined by geography. Risk management strategies must respond to this by taking weather patterns and cross-border interdependencies more into account.
⦁ Instability of economies whose exports are dominated by fossil fuels. The green transition in these countries is expected to lead to economic, political and social upheavals, the effects of which could extend beyond national borders.
⦁ Power relies less on the control of natural resources and more on the control of renewable energy transmission routes and intellectual property of green technologies. The rules for the use of green intellectual property are not yet defined and will determine whether or not this power will materialise.
⦁ A more regular deployment of national and international security forces to support crisis-affected communities. The normalisation of post-disaster reconstruction, together with humanitarian relief efforts, will increase the demands on security forces and make their work more visible to the civilian population.
⦁ Increasing use of methods and tools (such as scenario planning and risk management) of the security sector in economic planning and global development. This promises to bring the two policy areas closer together.
