Wednesday, 25 February 2009

Economic crisis complicates climate crisis in more ways than one

California is a leader in the United States when it comes to environmental regulation. But the economic crisis threatens to undermine its climate-friendly plans. The New York Times gives the example of CalPortland, a cement company in Colton, which is struggling to find the resources to retrofit its plant to reduce CO2 emissions. Whereas lawmakers had estimated it would cost $200 million to upgrade all eleven cement plants in the state, now it looks like that much would be needed just for the Colton plant. And with the economic crisis, cement prices have fallen to levels that force a revision of the cost-benefit calculus for climate-related investments.

I think the bigger lesson is that the economic crisis presents policymakers with a "double distributive" burden: the distribution of costs and benefits resulting from a process of decarbonising our economies, complicated further by the loss of jobs and economic opportunities during a severe recession. It's one thing to claim that 'green' jobs can be created; quite another when the pressure of job losses in other sectors builds up. Any economic restructuring would involve distributive questions; this time it's just doubly challenging.

Which brings me to my final point: what happens when developing countries try to reduce their emissions? One feasible pathway for countries like China and India is to increase the efficiency of their coal-fired power plants, using already available improved technologies (more on those details in a few days). While improved efficiency would have economy-wide benefits, it is hard to find good estimates of how the incremental costs of upgrading plants would affect individual sectors of the economy (power generation, cement, iron and steel, etc.). Without such estimates, it would be harder still to measure the distribution of costs and benefits across sectors. And, more importantly, it would undermine developing countries' efforts to secure guaranteed financing from rich countries for technological upgrades.

Sunday, 15 February 2009

The anger - Part II

We've read so much and heard so much about the financial crisis, the banking crisis and the economic crisis. But it's usually a pundit confusing us with more jargon and less clarity.

I wrote last week about the inequality - and the anger - that has pervaded the U.S. economy. But this article is a must-read. This one, The Blow the Working Class Saw Coming, seems more to the point than anything else I've read. And it's by a working class bloke, the people we don't tend to listen to. Iain's article is full of economic insights, disguising the anger that is simmering under the surface. I picked out seven pointers that the pundits ought to be listening to:

1. If you drive through a town after a big factory layoff, you'll notice peeling paint and weeds, the first signs of a community's economic distress, the lesions that warn of troubles to come.

2. The working poor always see it coming, well before the Wall Street analysts and the Federal Reserve wonks. Mark knows that when he makes $8 an hour, and gets a flyer in the mail telling him that he has guaranteed approval on a $40,000 SUV, there is something amiss in the world of finance, a disruption in the force.

3. The people for whom [the crisis] really is urgent have stopped listening [to the TV pundits], and not just because the cable is getting cut off. The problems are simply too immediate for them to pay attention to people who talk about economic theories, about bailouts and tariffs and gross domestic product. In this world, there are actual sheriffs with actual eviction notices. Something needs to be done now, today.

4. This time around [as compared to the Great Depression], we appear to have a class of individuals who think that they should not have to suffer with the rest. Circuit City, currently liquidating all its stores and laying off thousands, asked a bankruptcy court judge to let it give bonuses to executives to convince them to stay for the "wind-down process."

5. I earned $3.35 an hour at my first job washing dishes in 1981, and today, 28 years later, the minimum wage has barely doubled. Congress voted not to raise it for nearly 10 years, while members awarded themselves pay raises on a nearly annual basis. And during the years that the minimum wage was stalled, the pay of a CEO swelled to hundreds of times the wage of an average worker.

6. The people I work with have an arcane belief that money comes from somewhere, that value is added when things are made, and that the only real way to acquire money is to work.

And here's the best one:

7. The people who understand money the best are the ones who don't have it.

Monday, 9 February 2009

When the economy is heading south, where are the young heading?

Two recent news items, one from China and one from India, showcase the challenge of employing millions of graduates in the world's fastest growing, although now much slowed down, economies.

The IMF has revised its growth forecasts for Asian economies in 2009 at just 2.7% (just two months ago it had predicted 4.9% for Asia). China and India are now expected to grow at 6.7% and 5%, respectively. Given that expected growth rates have halved in a year, both countries face severe employment challenges. Already factory closures have meant that 20 million migrant workers in China have been forced to head back into the countryside. India also has to deal with thousands of retrenched workers returning from the Middle East (already some 30,000 have been sent back).

At the same time, skilled workers are not finding it any easier. The story from China is that the government has developed plans to send college graduates into rural areas. Unemployment among recent college graduates is at 12%, nearly triple the national average. So, in Shanghai the government is promising to pay off student loans if they sign up to work in the countryside: 78,000 students have agreed. Beijing municipality says an additional 3,000 will work as village officials this year. The tasks range from working as librarians, handing out health notices, conducting agricultural surveys, or helping to build the local Communist Party organisation. In reality, the young engineers and other skilled professionals have little say in village governance. Despite the boredom, they hope to collect brownie points for future civil service exams. Moreover, they have no other option: the moneyed jobs in the city are fewer and far between.

In contrast to the state-led programmes in China, the story from India points to a growing demand among business school graduates for non-profit work. Investment banks, the graduates' top choice until last year, were offering salaries up to $200,000 a year. Now, among the firms still hiring, offers are 25% lower and there is no guarantee that the students will retain their jobs for any significant length of time. So, business schools are encouraging more students to take up entrepreneurial ventures. But many are also opting for pay cuts and are seeking work in NGOs or volunteering their time with charities. The Financial Times says that the 'mad pursuit of money' has started to slow in India.

Money might not be the sole motivation anymore but that is because there is little to go around in the current crisis. But whether young, skilled workers are being driven into 'development' work by the state (China) or because of their own choices (India), there is an opportunity to harness the talents of the youth for a range of public policy issues. The challenge would be to channel skills into the right jobs; if the only outcome is temporary 'CV-building', then the opportunity would have been lost.

Sunday, 8 February 2009

The anger and the inequality

Two weeks after I wrote a blog on Slumdog Millionaire, I was struck by an op-ed in today's New York Times titled Slumdogs Unite. The article, by Frank Rich (who has been a columnist for the Times since 1994), tries to capture the seething populist anger within the United States against the double standards of Washington. The anger is directed against bankers who continue to receive large bonuses; officials like Tom Daschle who had to withdraw his nomination for Secretary of Health due to overdue taxes; or others like Timothy Geithner, the new Treasury Secretary, who also had a tax issue. But more importantly, the anger could be directed against Obama too if his rhetoric is not matched by his deeds and that of his deputies. Rich makes his point clear:

The public's revulsion isn't mindless class hatred...But we do know that the system has been fixed for too long. The gaping income inequality of the past decade — the top 1 percent of America’s earners received more than 20 percent of the total national income — has not been seen since the run-up to the Great Depression. This is why “Slumdog Millionaire,” which pits a hard-working young man in Mumbai against a corrupt nexus of money and privilege, has become America’s movie of the year.

As I wrote earlier, everyone would like to make good on opportunities. That is the basis of a meritocratic society. Americans are angry because they do not see the merit in the vast inequalities that have developed on the weak foundations of dodgy banker-created paper assets. And even in America, inequalities are not restricted to income: 45 million Americans lack health insurance, African American children are twice as likely to die before their first birthday compared to white children, and there is wide divergence in the life chances of babies born to rich and poor families.

Adam Smith wrote, 'No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.' America is not India, but the anger over unequal opportunities and, worse, over undeserved rewards seems increasingly universal.