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Michael Spence
ISEO
2009
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Sustained High Growth Dynamics
 Engagement with the global economy
 High levels of public and private investment
 Resource 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 government
Political 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. Prebuilt 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
Turkey Lira
SA Rand
Russia ruble
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China Yuan to Dollar
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China Yuan to Dollar
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This May Look Familiar: China During Currency Crisis
1997-1998
120
110
Japanese Yen
Chinese Renminbi
100
90
Taiwan $
80
70
Korean Won
60
50
Thai Baht
40
Jun 97
Source: Bloomberg
October 22, 2003
 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
China Reserves Year End
2400
1900
1400
China Reserves Year End
900
-100
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
400
 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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World
Safe Level
United States
Canada
Russian Federation
United Kingdom
Germany
Netherlands
Italy
Spain
France
China
Egypt
Brazil
Vietnam
India
Nigeria
Bangladesh
Tanzania
Ethiopia
CO2 EMISSIONS PER CAPITA
Tons per year
25
20
15
10
5
0
20
US, Canada and Australia
Other Advanced
High Growth Developing
Lower Growth Developing
Population
(millions)
330
670
3356
2178
2009 Per capita
emisions (tons)
20
11
4.2
1
21
25.000
Per Capita Emissions with No Mitigation Effort
20.000
US
15.000
Other Advanced
10.000
Growing developing
Other developing
5.000
World
2009
2012
2015
2018
2021
2024
2027
2030
2033
2036
2039
2042
2045
2048
2051
2054
2057
0.000
22
Total Global Emissions (Gigatons)
60.00
50.00
40.00
30.00
Total Global Emissions
(Gigatons)
20.00
10.00
2009
2013
2017
2021
2025
2029
2033
2037
2041
2045
2049
2053
2057
0.00
23
25.0
e
m
i 20.0
s
s
i 15.0
o
n
s
10.0
Other Advanced
Growing Developing
Other Developing
(
c
a
p
i
t t
a o
n
s
US and Canada
Global Everage
5.0
)
2057
2054
2051
2048
2045
2042
2039
Year
2036
2033
2030
2027
2024
2021
2018
2015
2012
0.0
2009
P
e
r
PER CAPITA EMISSIONS ON PATH TO SAFE TARGET
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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
𝑴 𝒕 = 𝑫 𝒕 ×{
𝑬𝒕
𝑬𝟎
× [𝟏 − 𝑻 𝒕 ] + 𝑻 𝒕 },
 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
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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
1.2
Transfer Lags for Advanced Country Technology
1
0.8
0.6
0.4
0.2
0
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12.00
10.00
t
o
n
s
8.00
6.00
)
4.00
2.00
0.00
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
(
P
e
e
m
r
i
s
c s
a
i
p
o
i
n
t
s
a
High Growth Developing Country Emissions with Various
Transfer Lags
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35.00
CO2 Output in Gigatons with Effective Mitigation
30.00
25.00
US
20.00
Other Advanced
15.00
Growing Developing
10.00
Other Developing
Global Total
5.00
0.00
2009
2012
2015
2018
2021
2024
2027
2030
2033
2036
2039
2042
2045
2048
2051
2054
2057
G
i
g
a
t
o
n
s
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70.00
SHARES OF TOTAL CO2 OUTPUT
60.00
50.00
40.00
US CANADA SHARE
OTHER ADVANCED SHARE
30.00
GROWING DEVELOPING SHARE
OTHER DEVELOPING SHARE
20.00
10.00
2057
2054
2051
2048
2045
2042
2039
2036
2033
2030
2027
2024
2021
2018
2015
2012
0.00
2009
P
e
r
c
e
n
t
a
g
e
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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
𝒙𝒊 = 𝟎
𝒊
𝒙 𝒊 = 𝒆𝒊 − 𝒎 𝒊
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𝒆𝒊 =
𝒊
𝒎𝒊 = 𝑴
𝒊
𝒄𝒊 𝒆𝒊 + 𝒑(𝒆𝒊 − 𝒎𝒊)
𝒄′𝒊 (𝒆𝒊) + 𝒑 = 𝟎
𝒄𝒋 (𝒆𝒋 )
𝒎𝒋 =
+ 𝒆𝒋
𝒑
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Advanced Country CCTS
𝒏𝒊𝒋 = 𝒕𝒉𝒆 𝒎𝒊𝒕𝒊𝒈𝒂𝒕𝒊𝒐𝒏 𝒄𝒐𝒏𝒅𝒖𝒄𝒕𝒆𝒅 𝒃𝒚 𝒂𝒅𝒗𝒂𝒏𝒄𝒆𝒅 𝒄𝒐𝒖𝒏𝒕𝒓𝒚 𝒊 𝒊𝒏 𝒅𝒆𝒗𝒆𝒍𝒐𝒑𝒊𝒏𝒈 𝒄𝒐𝒖𝒏𝒕𝒓𝒚 𝒋
𝑵𝒋 =
𝒏𝒊𝒋 = 𝒕𝒉𝒆 𝒕𝒐𝒕𝒂𝒍 𝒎𝒊𝒕𝒊𝒈𝒂𝒕𝒊𝒐𝒏 𝒊𝒏 𝒅𝒆𝒗𝒆𝒍𝒐𝒑𝒊𝒏𝒈 𝒄𝒐𝒖𝒏𝒕𝒓𝒚 𝒋
𝒊𝝐𝑨
𝒆𝒋 = 𝒂𝒋 − 𝑵𝒋
𝒙 𝒊 = 𝒆𝒊 −
𝒏𝒊𝒋 − 𝒎𝒊
𝒋𝝐𝑫
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𝒄′𝒊 𝒆𝒊 + 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
−𝒄′𝒋(𝒂𝒋 − 𝑵𝒋)
Thus when all the potential cross border mitigation that reduces advanced country costs has
been undertaken,
𝒄′𝒋 𝒂𝒋 − 𝑵𝒋 + 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 −
𝒏𝒊𝒋 − 𝒎𝒊
𝒋𝝐𝑫
Becomes
𝑻𝒊 = 𝒆𝒊 −
𝒏𝒊𝒋
𝒋𝝐𝑫
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