Michael SpenceISEO2009

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Sustained High Growth DynamicsEngagement with the global economyHigh levels of public and private investmentResource mobility

the private sector competitive dynamics and structural change to work

the avoidance of policies that interfere with these productivity increasing micro-economics.

Stable financial and macro-economic environment Inclusiveness

protecting those adversely by the competitive micro dynamics, ex ante equality of opportunity and ex post management of the extent of income and wealth

differentials.Building over time an increasingly effective governmentPolitical leadership in representing inclusive values, choosing a strategic

framework, establishing a vision, building consensus among key stakeholders and making key intertemporal investment choices appears to be essential.

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Post Crisis Prospects

Global economy openness Advanced country growth Re-regulation of the advanced country financial systems Transmission mechanisms How to think about developing country financial sectors Transmission mechanisms Circuit breakers Global aggregate demand and the US consumer/saver The IMF and volatile capital flows Resilience and the capacity to withstand shocks The defenseless countries in the crisis Climate Change Negotiations

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Bad Ideas: Part 2 Assume (and plan accordingly) that the crisis is a mean reverting event and that

we will return to a pre-crisis pattern of growth, capital costs, trade and capital flows in the global economy.

Abandon the global economy market driven growth strategy because of the advanced countries financial sector failures even though the medium term returns in terms of growth may be lower.

Continue with the energy subsidies on the assumption that with the crisis induced decline of commodity price, the public sector costs are not as high.

Ignore the externalities from the financial system (functioning and stability) to the rest of the economy

Focus macro and monetary policy on real variables like inflation, employment, growth ignoring potential sources of instability from the balance sheet (asset prices, leverage, derivatives expose)

Buy assets whose risk characteristics are hard to understand. The high returns are likely to be accompanied by risk even though the latter may be hidden from view.

Ignore the distributional lessons of the commodity price spike and the crisis. Pre-built and quickly implementable transfer programs are of great value, especially if they have attractive incentive properties with respect to employment.

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IMF Growth Forecasts Declined Frequently Over the Last 8 Months: Here are the Latest Two

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Indian Rupee to Dollar

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Brazil SA Rand

Turkey Lira

Russia ruble

China Yuan to Dollar

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China Yuan to Dollar

13

40

50

60

70

80

90

100

110

120

Source: Bloomberg

Jun 97 October 22, 2003

Korean Won

Japanese Yen

Taiwan $

Thai Baht

Chinese Renminbi

This May Look Familiar: China During Currency Crisis 1997-1998

China has appreciated against the entire developing world and the pound. Flat against the dollar and slightly depreciated relative to the euro

China as the Asia IMF: Use of Reserves in East Asia

$95B of swap facilities to stabilize net capital flows of neighbors

Continuing distrust of IMF in Asia – legacy of 97-98 crisis

Stabilizing trading partner exchange rates is in their self-interest

Concern about dollar, US fiscal deficits and debt

Zhou Xiaochuan – super sovereign currency proposal in March

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China Fiscal Capacity

China Foreign Debt

Reserves

Chinese reserve accumulation Mostly reverse net inbound private capital flows Not mainly trade surpluses

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The Climate Change Challenge to Growth

G20 90% of global GDP 66% of population

In 50 years they will all be advanced countries: with consumption, energy use and carbon emission patterns like OECD

The question is can the world hit safe CO2 targets in 50-75 years with this growth.

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0

5

10

15

20

25W

orl

d

Safe

Le

vel

Un

ite

d S

tate

s

Can

ada

Ru

ssia

n F

ed

era

tio

n

Un

ite

d K

ingd

om

Ge

rman

y

Ne

the

rlan

ds

Ital

y

Spai

n

Fran

ce

Ch

ina

Egyp

t

Bra

zil

Vie

tnam

Ind

ia

Nig

eri

a

Ban

glad

esh

Tan

zan

ia

Eth

iop

ia

Tons per year

CO2 EMISSIONS PER CAPITA

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Population (millions)

2009 Per capita emisions (tons)

US, Canada and Australia 330 20Other Advanced 670 11High Growth Developing 3356 4.2Lower Growth Developing 2178 1

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0.000

5.000

10.000

15.000

20.000

25.00020

0920

1220

1520

1820

2120

2420

2720

3020

3320

3620

3920

4220

4520

4820

5120

5420

57

Per Capita Emissions with No Mitigation Effort

US

Other Advanced

Growing developing

Other developing

World

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0.00

10.00

20.00

30.00

40.00

50.00

60.00

2009

2013

2017

2021

2025

2029

2033

2037

2041

2045

2049

2053

2057

Total Global Emissions (Gigatons)

Total Global Emissions (Gigatons)

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0.0

5.0

10.0

15.0

20.0

25.0

2009

2012

2015

2018

2021

2024

2027

2030

2033

2036

2039

2042

2045

2048

2051

2054

2057

Per

capita

emissions

(

tons)

Year

PER CAPITA EMISSIONS ON PATH TO SAFE TARGET

US and Canada

Other Advanced

Growing Developing

Other Developing

Global Everage

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D(t) is the per capital emissions in the high growth developing countries without mitigation

E(t) is the “European” emissions

It is assumed that the mitigated emissions in the developing countries are M(t) as follows

T(t) is between one and zero,

is one at t=2009 and declines to 0 at t=2059.

Recall that D(t) converges to E(0) at the end of the period

𝑴ሺ𝒕ሻ= 𝑫ሺ𝒕ሻ× {𝑬ሺ𝒕ሻ𝑬ሺ𝟎ሻ× [𝟏 − 𝑻ሺ𝒕ሻ]+ 𝑻ሺ𝒕ሻ},

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0

0.2

0.4

0.6

0.8

1

1.220

0920

1120

1320

1520

1720

1920

2120

2320

2520

2720

2920

3120

3320

3520

3720

3920

4120

4320

4520

4720

4920

5120

5320

5520

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Transfer Lags for Advanced Country Technology

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0.00

2.00

4.00

6.00

8.00

10.00

12.00

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

2051

2053

2055

2057

2059

Per

capita

emissions

(

tons)

High Growth Developing Country Emissions with Various Transfer Lags

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0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.0020

0920

1220

1520

1820

2120

2420

2720

3020

3320

3620

3920

4220

4520

4820

5120

5420

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Gigatons

CO2 Output in Gigatons with Effective Mitigation

US

Other Advanced

Growing Developing

Other Developing

Global Total

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0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

2009

2012

2015

2018

2021

2024

2027

2030

2033

2036

2039

2042

2045

2048

2051

2054

2057

Percentage

SHARES OF TOTAL CO2 OUTPUT

US CANADA SHARE

OTHER ADVANCED SHARE

GROWING DEVELOPING SHARE

OTHER DEVELOPING SHARE

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Implementation Mechanisms

Global CCTS Advanced Country CCTS with cross border and graduation criterion Advanced country targets with cross border and graduation criterion

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Global CCTS

𝑴= 𝒕𝒉𝒆 𝒕𝒐𝒕𝒂𝒍 𝒈𝒍𝒐𝒃𝒂𝒍 𝒄𝒂𝒓𝒃𝒐𝒏 𝒄𝒓𝒆𝒅𝒊𝒕𝒔 𝒎𝒊 = 𝒕𝒉𝒆 𝒂𝒍𝒍𝒐𝒄𝒂𝒕𝒊𝒐𝒏 𝒐𝒇 𝒄𝒓𝒆𝒅𝒊𝒕𝒔 𝒕𝒐 𝒄𝒐𝒖𝒏𝒕𝒓𝒚 𝒊 𝒆𝒊 = 𝒕𝒉𝒆 𝒆𝒎𝒊𝒔𝒔𝒊𝒐𝒏𝒔 𝒐𝒇 𝒄𝒐𝒖𝒏𝒕𝒓𝒚 𝒊 𝒄𝒊(𝒆𝒊) = 𝒕𝒉𝒆 𝒄𝒐𝒔𝒕 𝒇𝒖𝒏𝒄𝒕𝒊𝒐𝒏 𝒇𝒐𝒓 𝒆𝒎𝒊𝒔𝒔𝒊𝒐𝒏𝒔 𝒇𝒐𝒓 𝒄𝒐𝒖𝒏𝒕𝒓𝒚 𝒊 𝒙𝒊 = 𝒑𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔 𝒐𝒇 𝒄𝒓𝒆𝒅𝒊𝒕𝒔 𝒃𝒚 𝒄𝒐𝒖𝒏𝒕𝒓𝒚 𝒊 𝒑= 𝒕𝒉𝒆 𝒑𝒓𝒊𝒄𝒆 𝒐𝒇 𝒄𝒂𝒓𝒃𝒐𝒏

𝒙𝒊𝒊 = 𝟎

𝒙𝒊 = 𝒆𝒊 − 𝒎𝒊 31

𝒆𝒊𝒊 = 𝒎𝒊𝒊 = 𝑴

𝒄𝒊ሺ𝒆𝒊ሻ+ 𝒑(𝒆𝒊 − 𝒎𝒊)

𝒄𝒊′(𝒆𝒊) + 𝒑= 𝟎

𝒎𝒋 = 𝒄𝒋(𝒆𝒋)𝒑 + 𝒆𝒋 32

Advanced Country CCTS

𝒏𝒊𝒋 = 𝒕𝒉𝒆 𝒎𝒊𝒕𝒊𝒈𝒂𝒕𝒊𝒐𝒏 𝒄𝒐𝒏𝒅𝒖𝒄𝒕𝒆𝒅 𝒃𝒚 𝒂𝒅𝒗𝒂𝒏𝒄𝒆𝒅 𝒄𝒐𝒖𝒏𝒕𝒓𝒚 𝒊 𝒊𝒏 𝒅𝒆𝒗𝒆𝒍𝒐𝒑𝒊𝒏𝒈 𝒄𝒐𝒖𝒏𝒕𝒓𝒚 𝒋

𝑵𝒋 = 𝒏𝒊𝒋 = 𝒕𝒉𝒆 𝒕𝒐𝒕𝒂𝒍 𝒎𝒊𝒕𝒊𝒈𝒂𝒕𝒊𝒐𝒏 𝒊𝒏 𝒅𝒆𝒗𝒆𝒍𝒐𝒑𝒊𝒏𝒈 𝒄𝒐𝒖𝒏𝒕𝒓𝒚 𝒋𝒊𝝐𝑨

𝒆𝒋 = 𝒂𝒋− 𝑵𝒋

𝒙𝒊 = 𝒆𝒊 − 𝒏𝒊𝒋𝒋𝝐𝑫 − 𝒎𝒊 33

𝒄𝒊′ሺ𝒆𝒊ሻ+ 𝒑= 𝟎

For cross border activity in developing country j, the benefit of an additional unit of

mitigation is p, because of the credit and the reduce purchases. The cost is −𝒄𝒋′(𝒂𝒋− 𝑵𝒋)

Thus when all the potential cross border mitigation that reduces advanced country costs has

been undertaken, 𝒄𝒋′൫𝒂𝒋− 𝑵𝒋൯+ 𝒑= 𝟎

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If E is the total advanced country emissions, N is total mitigation in all developing countries

and M is the total carbon credits, then because net purchases have to sum to zero, it follows

that

𝑬= 𝑴+ 𝑵

That is if S=E0-E, the actual mitigation in advanced countries, then with cross border options

𝑺+ 𝑵= 𝑬𝟎 − 𝑴

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Advanced Country Targets

𝒙𝒊 = 𝒆𝒊 − 𝒏𝒊𝒋𝒋𝝐𝑫 − 𝒎𝒊 Becomes

𝑻𝒊 = 𝒆𝒊 − 𝒏𝒊𝒋𝒋𝝐𝑫

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