Download Fabian Pfeiffer, 9th December 2014 Global Economy: Assignment 3

Fabian Pfeiffer, 9th December 2014
Global Economy: Assignment 3
The global income and wealth is unevenly distributed. The average income in high-income
countries (developed countries), such as the United States or Germany, is higher than the
average income in all of the other countries (developing countries) together. At the same time
does the population of high-income countries only represent a small part of the global
population. In addition to that, the inequality in global population will increase because lowincome countries have the highest population growth rates. With a growing population in lowincome countries also the rate of poor people increases. A factor which threats to make the
situation worse is climate change caused by carbon emission. That is because the poorest in
the world are the most vulnerable to climate change due to their dependency on a stable
climate for agriculture or water availability. A civilization which cannot provide food for their
population cannot survive. People living in unequal standards are not likely to share the same
interests which can lead to conflict, for instance war. The just mentioned global problems can
be narrowed down and applied to India. As a lower middle income country India has a high
income inequality and a high number of poor people. Moreover, India’s population is growing
and its economy is threatened by the impact of climate change, both factors which can lead
more people into poverty and increase inequality. I will describe these problems more in
detail in the next section of this article. To decrease inequality and in addition taking
population growth and climate change into account a solution is needed which pay attention
to all these factors. For that I will describe how that could be possible with a type of carbon
emission cap and trade policy in the following text. The purpose of this policy is to close the
gap between the richest and the poorest in India to avoid conflict and violence.
The difference of income between high-income countries and low-income
countries is significant. The World Bank, an international organization with 188 member
countries working with economic development (World Bank), has classified countries into
categories based on their GNP per capita. GNP (Gross National Product) per capita can be
calculated by summarizing all economic incomes made in a country and by transactions with
other countries in a single year divided equally in the population. In 1999 the World Bank
classified countries with a GNP per capita less than $765 as low-income and countries with a
GNP per capita more than $9,386 as high-income country. The significant difference in
income gets visible by comparing the GNP per capita of India, which was $340, and the
United States, where it was $26,980 in 1999. Moreover, do high-income countries only
represent a small part of the global population with 15 percent in 1999. However, what GNP
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per capita does not show is how equal the income is distributed within the countries (World
Bank). What is illustrated here is the unequal allocation of money in the world and India’s
place in this categorization. Furthermore, is it possible to apply the problem of inequality
within India. Because what GNP per capita not shows is the inequality within a country which
I therefore will describe.
Accordingly to the described low GNP per capita of India it can be concluded that there
are living a large amount of poor people. The OECD (Organization for Economic Cooperation and Development), an international organization that has thirty four country
members and works with economic issues, has provided a paper where it among others has
investigated inequality in India (OECD, 2011). According to the OECD, India as one of the
most populated countries in the world had forty two percent of people living on less than
$1.25 per day in 2008 (OECD, 2011, 2). However, according to the World Bank this number
has decreased to 24.7 percent in 2011 which corresponds to 304 million people. 95.1 percent
lived on less than five dollars per day in the same year (World Bank). In addition to the large
amount of poor people, India has an increasing rate of inequality. According to OECD’s
investigation the GINI coefficient of India has increased since 1990, although the economy
has expanded (OECD, 2011, 5). The GINI index measures how equal income or consumption
is distributed among individuals and expresses how far away these are from a perfect equal
distribution. While a calculated GINI coefficient of zero expresses perfect equality, 100
express the opposite (World Bank). The increasing inequality includes regional disparities
between rural and urban, gender inequality and unequal access to education which is a factor
for lower income (OECD, 2011, 3-4). While India’s economy was growing, the highest
increase of income was in the population’s upper class (OECD, 2011, 6). The richest ten
percent have a twelve time higher income than the poorest ten percent. That means that
income inequality has doubled since 1990 where it was six times higher (OECD, 2011, 11).
Furthermore, there is an inequality of how the different states of India benefit from economic
growth. The already rich states profit most while the poor and high populated states get poorer
which contributes to widen the gap between rich and poor (OECD, 2011, 7). Another survey,
by Pal & Gosh, also comes to the conclusion that the gap between the poorest and richest
states got wider since 1990 and in addition to that urban inequality increased for whole India
while the North-East of the country suffered most with beyond rural inequality (UN, 2007,
27). The unequal distribution of wealth within India is a factor which also is responsible for
the high rate of people living with less than $1.25 per day. Another distribution of the wealth
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or in other words, closing the gap between rich and poor in India could higher the income of
the poorest.
A factor which could increase poverty and thereby widen the gap between rich
and poor further, are the consequences of climate change, for instance global warming, a
process which was testified by the NASA scientist James Hansen in 1988 (McKibben, 2010,
11) and is created through mankind burning fossil fuels (McKibben, 2010, 28). Because
climate change affect essential resources for living, such as water and food, the poorest,
directly dependent on them, will suffer most. Furthermore, can the poor not afford to
compensate for loss of food or water supply through climate related disasters (UNDP). For
instance is according to the World Bank sixty percent of India’s agriculture rain-fed which
make it dependent on ground water which level could fall although it is already overexploited
by fifteen percent. At the same time, demand for water increases because of the growing
population (World Bank). Because the poor in India, especially them living with less than
$1.25 a day, are already living on the edge of surviving, they are vulnerable to deteriorations
of the conditions. While climate change can increase poverty, so too can poverty increase
climate change because the poor have to use resources in an unsustainable way only to
survive (Raworth, 2012, 16). As I have described the problems of inequality, poverty and
climate change it becomes clear that they cannot be seen fully separately, but instead as
factors which influence each others. However, in my solution I want to focus on inequality in
India while also taking into account climate change.
The solution which I am proposing and will describe is a Carbon emission cap and trade
per capita policy which could be implemented in India. In addition, policies could have to
determine, for what the profit made of Carbon emission cap and trade per capita, will be
invested. Carbon emission cap and trade is not a new idea and operates in theory as follows.
In a cap and trade policy a maximum limit of carbon emission is determined. Than permits to
emit are allocated, which in total do not exceed the maximum limit. If a company emits
carbon gases it has to have the allowance set by the number of permits it owns. In addition to
the allocated permits, more can be obtained by trading. A usual way to distribute permits has
been the so called “grandfathering” in which the basic permits awarded are free. Companies
which reduce their pollution can in that way benefit because they need fewer permits (Tashini
& Hicks, 2013). With the implementing of a Carbon emission cap and trade per capita policy,
the significant roll of economy in politics becomes visible. That is because the policy gives an
economic incentive to companies and individuals to reduce their emissions by comparing cost
and benefit of emission strong and weak fuels (Economic reasoning, 18). Incentives are a
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powerful tool for achieving politic goals because they can control people’s behavior, such in
this case by even out inequality and reduce carbon emission (Mankiv, 2011, 7). Such as
already described I want not only propose a cap and trade policy which focus on the
environment, but also targets inequality because they can be mutually reinforcing. The
targeting of inequality is made possible by a per capita distribution of carbon emission
permits and a policy which makes sure that the profit will be used for development of the
poor. Therefore the solution I propose can be seen as a new approach of the already existing
principle of carbon emission cap and trade. Firstly, it would be established as a policy within
India. That means it will be targeting inequality and carbon emission within the country. The
major difference to the usual cap and trade will be the distribution of the free permits, which
is done per capita. For this, India’s regions can be categorized in different districts which can
be managed by civil servants. Depending on the districts number of population it will receive
tradable carbon emission permits. In addition, another policy should determine for what the
profit received through the trading will be used. Possible targets for funding could be to make
welfare projects stronger and to make education accessible better (OECD, 2011, 4). An equal
distribution of emission permits would be fair because carbon emission by companies is an
externality, which means that all people, not responsible, are negatively affected and by
trading with their permits are compensated by the emitters (Mankiw, 2011, 11). The extra
amount of money for the poor, could have a large impact in making India more equal.
According to Raworth would 0.2 percent of the worlds’ income be enough to raise the poorest
out of poverty (Raworth, 2012, 19). To furthermore, have success in reducing carbon
emissions, the cap must be decreased gradually.
There are several opinions on the general principle of cap and trade which explain both
the positives and negatives. An example which shows that a Cap and trade policy has been
successful implemented is given by Stiglitz.in his book “Making Globalization Work”. The
United Stated for instance established such a policy for trading and reducing sulfur dioxide
emissions (Stiglitz, 2004, 170). However, the success of the US in reducing sulfur dioxide
emissions by cap and trade is criticized by Patel because it was not the trade but the cap which
was of significant. Moreover he is critical to the whole principle of cap and trade because
companies depending on high emissions will fight for a higher amount of free permits from
the government and also because it is cheaper for them to buy permits than to upgrade to
technology with less emissions (Patel, 2009, 160-161). Also, the principle is another
instrument for privatization and deregulation which may not end well when thinking of the
financial meltdown in the 2000’s as a result of financial deregulations (Patel, 2009, 158). In
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contrast in his book “Eaarth”, McKibben maintains that pricing carbon emission is the
solution on which also environmentalists around the world are working on. However, has the
price to be high enough to give an incentive (McKibben, 2010, 56). Also according to Stern,
emission trading is one part of the solution to decrease climate change. He complicates it
further that the already existing international carbon trade should be linked together for the
benefit of developing countries (Stern, 9). Another view is given by Raworth who describes
that an International carbon market has been implemented, although with negative effects.
Companies and individuals were given the possibility to buy carbon emission permits, with
the money going into investments for reducing carbon emission. The permits can be earned by
for example planting trees which was done by companies themselves, which prevented the
low-income class to benefit from the trade. In contrast the low-income class was harmed
(Raworth, 2012, 16). Although I agree with Patel about the point that companies that are
dependent on high carbon emissions will fight for getting more free permits I think that
problem can be solved by stricter policies and also I do not accept his other points. While he
may be right that it is the cap and not the trade which contributes to decreasing carbon
emission, trade could be an important factor when the poor benefit from it when distributing
emission permits per capita. And even if it would be cheaper for companies to buy permits
instead of upgrading to newer technology the poor people would benefit. Even more, a per
capita distribution would be an incentive for companies with high carbon emission to buy
permissions only to maintain their business as usual which according to Patel still is cheaper
than to upgrade technology. In contrast to Patel, both McKibben and Stern think that pricing
carbon and trading with it is a solution. I agree with both because I think using the economic
system, such as markets and trade, is significant for the success of both reducing carbon
emission and decreasing inequality. A minimum of money and markets are still a factor for
living a good life, for instance for buying essentials like food. The problem which Raworth
describes could be solved by only distribute permits through a per capita system. Had that
been the case, the low-income class would have benefited because the forest company would
have bought the permits from them instead. Although my proposed policies could solve some
problems which exists with the usual cap and trade principle, other problems such as
corruption could decrease the efficiency of the policy (OECD, 2011, 4).
As I have showed India has significant problems with inequality and poverty. In
addition to that climate change, caused through carbon emissions, can intensify these
problems. Therefore I have proposed a solution which takes into account both. While the
usual principle of cap and trade mainly focus on reducing carbon emissions, a policy which
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adds the distribution of free permits per capita can help the poor to higher their income, by
trading with the permits and using the profit for development purposes. But inequality and
climate change is not only a concern in India but also a global. Indeed, it is a similar situation
in which the richest ten percent have fifty seven percent of global income and the poorest
twenty one percent nearly nothing (Raworth, 2012, 19). That should be a global concern
because according to Daly, inequality is likely to lead to conflicts, such as war, because the
upper and the bottom class in a society will not have many common interests (Daly).
Moreover, according to Ehrlich & Ehrlich a society in which people do not get enough
nutrition is in risk of collapsing. Agriculture, which is essential for people in India, is
threatened through climate change. As the collapse of other civilizations, such as that of the
Maya or Easter Island, shows, environment can be a factor (Ehrlich & Ehrlich, 1-2). While
cap and trade already exists and has been implemented in some places it could develop in
having a focus on equity.
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Bibliography:
http://www.worldbank.org/en/about/history
http://www.worldbank.org/depweb/english/beyond/global/chapter2.html
http://www.oecd.org/about/history/
http://www.oecd.org/els/soc/49170475.pdf
http://povertydata.worldbank.org/poverty/country/IND
http://data.worldbank.org/indicator/SI.POV.GINI
http://www.un.org/esa/desa/papers/2007/wp45_2007.pdf
http://www.in.undp.org/content/india/en/home/ourwork/environmentandenergy/climate_chan
ge/
http://www.worldbank.org/en/news/feature/2013/06/19/india-climate-change-impacts
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