By:-Eyasu Solomon
The ongoing global financial and economic crisis has the potential to usher in a period of a global recession that may seriously undermine all countries’ process of economic growth and transformation, and also jeopardize efforts to widen economic and social opportunities and improve the livelihoods of ordinary people everywhere. In particular, the crisis may put a brake on and also reverse efforts in developing countries and by the international community to assure development gains from trade, promoting achievement of internationally agreed development goals including the Millennium Development Goals (MDGs) by 2015. The crisis has triggered a slowdown in global economic growth that is manifesting itself in a demand-driven fall in international trade exacerbated by the deficit of
credit and trade finance; falling commodity prices; declining remittances; contracting foreign direct investment (FDI); and the potential of declining official development assistance (ODA). These effects have been superimposed onto the ongoing global food crisis, volatile energy prices, and climate change challenges. The aggregate impact is such that most developing countries are being heavily hurt through declining exports, rising unemployment, and thus falling family incomes, bringing millions of people back into poverty or aggravating the conditions of those in extreme poverty. This has given rise to the most significant challenge facing the global community today – how to focus on buttressing development and poverty-reduction efforts globally and in developing countries, and on setting in place the conditions that will avert future crises and facilitate a sustainable process of economic transformation for all countries.
By virtue of globalization, the moment the financial crisis hit the real economy and became a global economic crisis, it was rapidly transmitted to many developing countries through a contraction in trade finance and a slowdown in demand affecting bilateral trade flows. These transmission channels were particularly visible in sectors composed of global production and supply chains.
As most developing countries are heavily dependent on developed country markets, the slump in demand from latter due to the crisis has had an adverse impact on the former.
The world economy is currently facing a severe global crisis that spilled from financial sector to the real economy in the last quarter of 2008, leading to steep falls in industrial production and a rapid decrease in international trade, and to a slowdown in foreign direct investments and potentially in development assistance. The crisis has brought about a slump in economic growth in most countries, and has been accompanied globally by increases in unemployment. The current global crisis – preceded by the food crisis, volatile energy prices and climate change challenge – is a major blow to attaining the MDGs for developing countries. Addressing the dampening impact of the crisis on international trade and investment to restore growth, and reviewing development policies and partnerships to create sustainable practices and greater resilience to future shocks, must be key priorities in the multilateral agenda.
Most developing countries are now closely linked with the global economy by trade and foreign direct investment flows, and their economies are more sensitive to falling international demand (and
conversely to expanding demand). The degree of exposure and integration of developing countries’ economies to external markets has greatly increased in recent years. Developing countries’ exports on average accounted for more than half of their gross domestic product (GDP) in 2007, up from about a quarter of GDP in 1995.
The ongoing reduction of trade and investment flows is starting to restrain the development prospects of developing countries. They are currently seriously hurt through falling commodity prices, demand driven drops in exports exacerbated by the deficit of credit and trade finance, capital outflows, declining remittances, and contracting investment. The prospects are more dire for export-oriented developing countries, especially those with a small domestic economy, where the reduction in international demand is more likely to raise unemployment. In some developing countries, workers are shifting out of dynamic export-oriented sectors into lower-productivity activities. Potentially, all these effects could bring millions of people back into poverty.
The decrease in merchandise trade appears to be affecting all developing regions and most types of goods. Moreover, South–South trade, which has been the most dynamic component of world trade for over a decade, is declining too, especially intra-Asian trade. The quick contraction of developing countries’ manufacturing trade is largely due to today’s highly globalized production and marketing schemes. Among the most affected sectors are automotive products, office and telecommunications equipment, and electronics, as well as textiles and clothing.
Many commodity exporters, particularly those in West Asia, Africa, and countries with economies in transition that benefited from the commodity price boom with considerable terms-of-trade gains, are now facing the downside of their commodity dependence, manifested in a substantial shrinking of export revenues. More than 90 developing countries earn at least 50 per cent of their exports from commodities (47 of them being non-fuel commodity exporters). Most developing countries are now closely linked to the global economy by trade and FDI flows. As a consequence of the crisis, the significant reduction of these flows is starting to restrain their development perspectives. Developing countries are currently seriously hurt through falling commodity prices, demand driven drops in exports exacerbated by the deficit of credit and trade finance, capital outflows, declining remittances, and contracting investment. The prospects are more dire for export-oriented developing countries, especially those with a small domestic economy, where the reduction in international demand is more likely to curtail their exports and raise unemployment. As observed in some developing countries, workers are increasingly shifting out of dynamic export oriented sectors into lower-productivity activities (and moving out of urban areas back into rural areas).
UNCTAD currently estimates world merchandise trade to fall between 6 and 8 per cent in 2009. Exports from developing countries and countries with economies in transition could potentially decline in the range of 7 to 9 per cent in volume, in 2009. Developed countries’ exports are projected to decline by up to 8 per cent this year. The trade contraction in value would be much greater.
The crisis is also spreading to trade in services and to service sectors in general. Maritime transport is particularly affected, as are tourism and construction services. There is also a growing reduction in the employment levels of migrant workers from developing countries. This is expected to lead to a further fall in remittance inflows to developing countries, which began to slow down in 2008. Conversely, trade in ICT-enabled services appears to be less influenced by the economic downturn, as companies see the offshoring of services as one method of enhancing their competitiveness.
The crisis has translated into a sharp decline in FDI inflows, both for developed and developing countries. UNCTAD estimates that global FDI inflows declined by 15 per cent in 2008. An outright decline in FDI inflows to developing countries is very likely in 2009. FDI flows to financial services, automotive industries, building materials, intermediate goods and some consumption goods are among the most significantly affected, but so is FDI into activities ranging from the primary sector to non financial services. FDI outflows from the South are also set to slow down, but to a lesser degree than those from the North. Thus the share of developing countries in global FDI outflows continues to rise, highlighting an increasing presence of transnational corporations (TNCs) from the South.
Multilateral policy responses are required to achieve a sustained global economic recovery. These need to address developing countries’ concerns and enable them to continue to grow through trade, investment, remittances, aid, and technological innovation. Strategic intervention by governments is also required to provide new directions in order to achieve the United Nations MDGs.
At the international level, restoring trade finance and mitigating the risk of increased protectionism are immediate challenges. Concluding the World Trade Organization (WTO) Doha Round on balanced and pro-development terms will help, as well as harvesting some of the key development deliverables such duty-free and quota-free treatment for least developed countries (LDCs). Maintaining and increasing ODA, including through aid for trade, will be important too, especially to build and strengthen productive capacities of developing countries, and related trade-efficiency and facilitation infrastructure.
At the interregional and regional levels, expanding and diversifying South–South cooperation is a viable solution to support and to increase developing countries’ trade and investment performance.
The crisis offers opportunities for strengthening South–South trade and investment linkages, including through reshaping the existing production supply chains (and creating more regional demand).
Available policy instruments such as the Global System of Trade Preferences among Developing Countries (GSTP) and more comprehensive and effective regional trade and investment agreements should be consolidated and enhanced.
At the national level, the crisis has made it timely to review development strategies so as to make them more sustainable against future external shocks, focused on delivering broad-based and inclusive development, and responsive to the imperatives of preserving the environment, while also providing new economic opportunities. Developing countries need to continue to address income inequality and to invest more in education, training, trade-adjustment assistance, health care, community development and tax policy. The role of the state in promoting development has increased in light of the crisis, and there is a need to reflect on how this role can be effectively articulated.
A major challenge for developing countries is to continue to attract foreign investment during the crisis to stimulate economic activities, especially for such investment that serves long-term development goals and enhances competitiveness. Public investment programmes can help. Public–private partnerships are also important. Bilateral and regional investment agreements can encourage FDI. However, national efforts to maintain and attract foreign investment must not result in “race to the bottom” policies.
The United Nations – and in particular UNCTAD – has a special role to play in monitoring the impact of the crisis on trade and development, suggesting coping policies and measures, and building a new consensus on sound and suitable strategies at the national, regional and global level. Given the global span of the crisis, inter-agency collaboration will be crucial.
These impacts are being combined with the effects of the ongoing food crisis, volatile energy prices, and the climate change challenge
1). Many
developing countries are also dependent on ODA, which may shrink during the crisis. Potentially, the aggregate of all these effects could bring millions of people back into poverty,2 and worsen the conditions of those presently living in extreme poverty. This threatens to stall and reverse many years of efforts to achieve internationally agreed development goals, including the MDGs.
The global crisis and its lessons will be subject to extensive in-depth analyses as it progresses. There are many challenges to be addressed, but there are also policy areas which countries can develop – nationally and globally – to sustain trade and development. One challenge is to analyse specific development implications of the crisis, and suggest policy proposals to cope with its detrimental impacts in the short term and rethink development policy for the medium-to-long term. Significantly, signs are emerging of fundamental shifts in the way market economies operate and in the role of governments in economic activities. The crisis affecting development may require rethinking of the whole economic and social paradigm that has prevailed over the last decades and has nurtured the process of liberalization and globalization. It may involve the articulation of ideas on trade and trade-related policies and sectors that have shown some resilience to the crises and can serve as a bulwark on which to restore confidence, build recovery and foster inclusive development. For the moment, however, it is still too early to assess the real depth of the crisis and its likely duration, and also the effectiveness of the mitigating measures being undertaken by various governments.
Countries are responding to the global crisis. At the national level, some countries, both developed and developing, have undertaken national stimulus packages to mitigate the detrimental impact, especially by providing credit, supporting affected domestic industries, and promoting jobs. At the level of the G20, leaders of the G20 countries met in London in April 2009 and pledged to undertake and promote measures to restore credit, growth and jobs in the world economy. At the global level, the United Nations General Assembly has agreed to convene “a United Nations conference at the highest level on the world financial and economic crisis and its impact on development” from 1 to 3 June 2009. This provides an opportunity for the United Nations as a whole to reflect on the causes of the crisis, assess the impacts on all countries, and suggest adequate responses to avoid a recurrence of the crisis and to restore global economic stability. The preparatory process and the conference will draw upon the report of the Commission of Experts of the President of the General Assembly on Reforms of the International Monetary and Financial System. These, and other initiatives, are indicative of the commitment of countries and the international community to comprehensively addressing the crisis and preventing it from ushering in a sustained period of global recession.
Chinese Investment in Ethiopia: Developmental Opportunity or Deepening China’s New Mercantilism?
Asayehgn Desta (Ph.D), Sarlo Distinguished Professor of Business
Economics, Dominican University of California
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Contrary to Western debt and assistance marked by various forms of economic and political overtones, China, using the South-South Cooperation, is in the process of bestowing a mix of loans with generous terms, debt forgiveness, infrastructure development, and other assistance to African nations so that they could be relieved from Western cultural, political, and economic hegemony. African governments have appreciated and responded enthusiastically to this new source of bottom-up, multiple, bilateral investment, trade, and aid because China has professed a willingness to ignore the political, conditional terms that characterize Western assistance.
China’s deepening involvement across Africa can be viewed from two perspectives. The protagonists of political warfare theory argue that China’s policy in Africa is a nonviolent instrument of grand strategy. It involves coordinated activities that could precipitate in tangible effects on intended targets such as economic aid and development assistance, as well as training, equipping, and arming military and security forces to achieve political and economic influence. The South-South development cooperation school of thought, on the other hand, views China’s increased aid, trade, and investment in Africa as a means to foster Africa’s self-sufficiency and sustainable development in the 21st century.
Therefore, the empirical part of this study will attempt to advance the understanding and rationalization of the various Chinese investments in Ethiopia. More specifically, the central motive of this study was to investigate if the Ethio-Chinese investments indicate a win-win strategy. The South-South cooperative win-win ventures are supposed to bring proportional benefits through trade flows, foreign domestic flows, technology transfer, and integration in global value chains, in addition to aid flows, which otherwise the partners would not have access to before entering into these relations. The four case studies seriously challenge the argument of political warfare theorists that China’s investment in Ethiopia would perpetuate underdevelopment through exploitation, extraction, and destruction of Ethiopia’s resources and industrial capacity. Except for the negative environmental externalities caused by the Sino-Ethiopian investments, the case studies have demonstrated that Ethiopia has substantially benefited from the Chinese cooperative investments. The Chinese investments in Ethiopia are not complementary but appear to be aligned very closely with the South-South cooperative strategies and goals.
(The entire manuscript can be obtained from the author.)
Summary and Conclusion
As the Chinese economy booms, Chinese multinational corporations are embarking on an acquisition drive to capture the oil, natural resources, and unexploited markets of Africa to sustain its rapid economic growth. Based on the current Chinese investments and co-development projects existing in Africa, supporters of Chinese investment in Africa argue that the recent increase in Africa’s gross domestic product is because of Chinese investment. The roads, bridges, and dams built by Chinese firms in Africa are low cost, good quality, and completed in a fraction of the time. Unlike the Western investments in Africa, the Chinese state-owned enterprises provide human and capital assistance to Africa without any conditionality.
Critics on the other hand argue that China has shipped entire workforces across to Africa for many of its projects. In addition, China has flooded the African markets with cheap consumer goods and devastated the local textile and other consumer product industries. In addition, some of the Afro-pessimistic intellectuals argue that yet there is little evidence whether China’s renewed, and most probably lasting involvement in Africa will serve the continent better than the decades of aid from Western governments, which have scarcely delivered on their promises. Lumumba-Kasongo argues that under the pretext of the SSC model China has introduced the “Beijing Consensus,” which is to a large extent based on China’s self-representation as Africa’s help-mate rather than the “Washington Consensus,” “which is the dogma of White House, Pentagon, the Bank, International Monetary Fund, and multinationals representing the interest of big private business (2007).”
Contrary to the two diametrically opposed perspectives of the Chinese engagement in Africa as presented above, the point of view of Holstag (2006) is eclectic. According to Holstag, China’s vision on its economic relations with Africa is beckoned with sweet carrots largely tailored to derive goodwill and permit it to do business suavely (2006).
The three perspectives of the Chinese engagement in Africa are very instructive. But in order to have a clear picture, the three points of view need to be rigorously analyzed from the point of view of an actual African country. For example, for the last five years, Ethiopia has achieved a high and sustained rate of growth. The presence and conduct of China’s foreign direct investment in Ethiopia since 2000 is fast becoming one of the fronts in reshaping Ethiopia’s economic architecture. Given the fact that Ethiopia has been the major beneficiary of Chinese investment and cooperative development projects, the question that needs to be pondered is: can some of Ethiopia’s spectacular growth rate be attributed to the Chinese investments? More specifically, have the Chinese cooperative investment footprints enabled the Ethiopian economy to master highly valued technology and generate productive employment or have the various Chinese investments destined Ethiopia’s economy to be dependent on the Beijing Consensus model?
The Chinese investors seem to have carefully engineered their entry strategy into Ethiopia. With considerable oscillation and no discernible trend before 1991, China devised trade and biddings on government sponsored contractual projects, mainly infrastructural landscape, to gain access and expand into Ethiopia’s downstream resources. With a wave of privatization and structural reforms that gained momentum in Ethiopia spurred a flurry of various types of foreign direct investments that originated from the Southern Countries (i.e., China, India, South Africa, etc.). For example, from 1992 to 2005, Chinese investments in Ethiopia got organized under the wholly owned type of organizational structure (i.e., 86 percent wholly-owned compared to 12 percent in joint-ventures) in order for Chinese companies to acquire upstream assets (See Table 3). In recent years, the presence and conduct of China’s foreign direct investment in Ethiopia is fast becoming one of the prominent features of the Ethiopian economic landscape either by infrastructure in exchange for access to natural resources or by denoting Chinese development assistance or providing favorable lending and capital contribution.
However, though Ethiopia intends to use Chinese cooperative investment as means of enhancing its regional development, the inflow of Chinese investment has not been equally shared. Geographically, most of the Chinese Cooperative investments are located within the Addis Ababa and Oromia Regional State. While 78 of the wholly owned Chinese companies are located in the Addis Ababa Regional Zone and about 9 percent are situated in the Oromia Regional State, without any significant catching up by the other regional zones. In addition, of the 103 joint-venture companies, 53 percent are situated within the Addis Ababa region while 30 percent are reside within the Oromia Regional State. In addition, 22 percent of the small- and medium-size state-owned Chinese Enterprises operating in Ethiopia are fully operational while the remaining 78 percent (647/828) are partially or yet to be fully implemented. To fully implement the various investments, the Chinese investors have employed 44 percent (52,714/119,670) as full-time workers and 56 percent (66,956/119,670) as temporary workers.
Ethiopia’s main objectives for allowing Chinese investment to operate in country are to have access to high technology, to increase employment, to acquire know-how, to increase foreign exchange through export, and to benefit from both backward and forward linkages. Thus, the four Sino-Ethiopian Cooperative Investment case studies given above are analyzed in terms of their effects on 1) Ownership and Human Capital 2) Production Management and Operations, 3) Export effects 4)Technological Transfers 5) Efficiency 6) Foreign Exchange effects7) Local Content requirements and spillover effects, and 8) Environmental effects of the Sino-Ethiopian investments. However, since the analysis is based on four case studies, it needs to be underlined that the results of these case studies are anecdotally based and are not sufficient to generalize about characteristics of the entire Sino-Ethiopia Cooperative investments. Also, it needs to underlined that host countries will not be able to capture the full benefits associated with foreign direct investment until they reach a certain threshold level in terms of educational attainment, provision of infrastructure services, local technological capabilities, and development of local financial markets, thus the analytical outcome of this study needs to considered tentative.
In terms of ownership and human capital, most of the Chinese investments are wholly owned. When Chinese enter a joint-venture or create a wholly owned subsidiary, they send experienced managers or top specialists from abroad. Based on the four case studies, while the CEOs of the three wholly owned Chinese companies are Chinese, the CEO of the Sino-Ethiopia Associate Africa joint-venture company is an Ethiopian. Given the Chinese investors in Ethiopia are unfamiliar with cultural makeup of the local situation and the Ethiopian labor laws that pertain to wages, holidays, housing and other benefits, in the solely owned Chinese firms and the joint venture firm, Ethiopian employees seemed to be in charge of the human resources management. In view of this, it can be assumed that there exists a smooth cross-cultural communication within the enterprises and between the enterprise and its external suppliers and customers.
The process of inviting foreign investors to developing countries is a means to increase the valued-added exports of the host country. Based on the Sino-Ethiopia Associate Africa pharmaceutical joint venture company, it is possible to argue that both partners handle the international marketing sector. Since the Chinese marketing officers are well versed in some aspects of the international marketing, they might have trained local employees in export management and foreign marketing strategies. Also, it is possible that local firms could have acquired international marketing techniques by hiring some of the Ethiopian workers who might have left the Sino-Ethiopian joint venture to start their own businesses. Nevertheless, since the three wholly owned enterprises mostly produce for the domestic market, it is very likely that they might have facilitated some type of interaction with local suppliers and domestic customers. It is likely that the wholly owned enterprises mostly produce for the Ethiopian domestic market and have done little to integrate Ethiopian products to the global value chain. Thus based on the three cases, it is possible to ascertain that the Chinese wholly owned companies don’t seem to act as a platform for exports and their goal is to seek for themselves efficiency in their production process by taking care of Ethiopia’s factors of endowment. The wholly owned Sino-Africa produces leather products that are designed to compete in the international market—it does not seem to crowd out the low quality local products. The Sino-Ethiopia pharmaceutical joint venture enterprise is of higher quality base and is more efficient; therefore, it is complementary and generates foreign exchanges indispensable for the country. Nonetheless, since the Ethiopian employees do not receive the necessary training in international marketing know-how, the leather products seem to be totally dependent on the Chinese joint venture partners in order to promote and distribute their products in overseas markets. In addition, as argued by GebreEgzibher, “The major types of products exported to China are agricultural products which are unprocessed or semi-processed. These include skins, leather and leather products, oil seeds, pulses, coffee, and tantalum. The bulk of leather, skin, and hides are semi-processed. Ethiopia has huge potential in other products which are allowed to be exported to China. These include coffee, natural gum, bee wax, edible oil, horticultural and textile products, precious stones, and other organic products.” (2006)
Typically, the Chinese PLCs arrive in Africa with their work force. In line with this, the project managers, engineers, and technicians working in Ethiopian government project contracts and wholly owned enterprises are mostly Chinese. Even in the Sino-Ethiopia Associate Africa joint firm, research and product design is forged in the headquarters rather than basing it on an equity ratio to include the Ethiopian partner. In terms of efficiency, since more than 50 percent of input materials executed by the Sino-Ethiopian firms come from China, it is very difficult to ascertain the contribution of efficiency to the new products made by the Sino-Ethiopian investments.
Most of the foreign exchange generally used for the Chinese investments in Ethiopia originates from the China’s EXIM and China’s development banks. For instance, Export-Import Bank of China has been granting long-term and short-term loans to companies investing abroad to purchase Chinese equipment and technology necessary to build factories abroad (Zhaoxi, 2009). Thus, the projects in Ethiopia have enabled it to conserve the foreign exchange, which it could have spent on establishing these projects, and helped it to acquire the necessary foreign exchange by selling some of the Sino-Ethiopian investment products in the overseas market.
While the dependency school theory views foreign investment from developed countries at the core of the world economic system as harmful to the long-term economic growth of developing countries out in the periphery, other studies seem to demonstrate that foreign direct investors can potentially benefit domestic firms through spillover effects. Spillover effects are therefore regarded as a very important conduit through which foreign direct investment promotes economic growth in the host country. Though the spillover effect of FDI on the productivity growth of local firms does not occur automatically (See, JBIC, 2002), based on the incentives given by the Ethiopian Government to Chinese investors, the four case studies utilize local content. Adhering to backward linkages, the Chinese investors purchase their factors of production from local suppliers. In addition, since they mostly sell their outputs in the domestic market, they have contributed to forward linkages. The four case studies act in creating complementary activities rather than “crowding out” domestic firms. In short, the Sino-Ethiopian foreign investments have forced local firms to restructure themselves to be more competitive and adequately fulfill the domestic demand, thereby maintaining their market shares. Thus, the Chinese investments have contributed to positive productivity spillovers to the Ethiopian economy.
Since the 1992 Earth Summit in Rio de Janeiro, the environmental and social dimensions of foreign investment have become a matter of intense controversy between certain home and host countries. For example in Ethiopia, to attract the Chinese investors, the Ethiopian government seems to covertly relax the enforcement of the environmental standards. The Chinese contractual-based projects, wholly owned, and the joint venture cases analyzed in this paper are by and large operating in ecologically sensitive regions. They are facing serious environmental problems because the Ethiopian Government seems to have prioritized its short-term economic growth over the achievement of environmentally sustainable economic growth in the long run. Ethiopian environmental protection officers at each level of the political system do not seem to fine Chinese investors for their transgressions or for negatively imprinting their environmental footprints on the country, or they fail to encourage the Chinese investors to adopt production techniques that are less harmful to the Ethiopian environment. Unlike other international financial institutions, the Chinese investors and financiers (such as the Export-Import Bank of China) fail to undertake their environmental guidelines when lending the concessional loans as part of the country’s official development assistance program (See, Bosshard, 2008). Undoubtedly, Chinese investments in Ethiopia are an indispensable part of the economic system (they have contributed to infrastructural development, provide capital, new technologies, modern management know- how, and enhanced demonstration effects). Nonetheless, little or no attention is paid by the Ethiopian Government to check the environmental implications of most of the undertaken Sino-Ethiopian investment case studies.
It needs to be underlined here that host countries will not be able to capture the full benefits associated with foreign direct investment until they reach a certain threshold level in terms of educational attainment, provision of infrastructure services, local technological capabilities and development of local financial markets. As an essential element of avoiding economic and social disparities among the different regions, the Ethiopian government needs to enhance the attractiveness of Ethiopia’s hinterland and other relatively neglected regions by 1) undertaking fundamental infrastructural development (i.e., electricity, water, good transport, and telecommunications), 2) improving and encouraging labor mobility to the undeveloped regions by creating schools, hospitals, parks, etc., 3) create local development agencies to promote FDI in each region. In short, further work is necessary to untangle the effects of social responsibility, to enforce environmental safeguards, to train local labor, and to transfer the technology of the Chinese cooperative investments into the Ethiopian economy.
Though anecdotally focused, the modest contributions upon which we hope other researchers will build is that more case studies need to be collected to analyze if Chinese investments in Ethiopia are politically motivated or are meant to fulfill the ideals of the SSC investments. Nonetheless, based on Lummumba-Kasongo’s argument that according to the win-win approach theory, the SSC ventures are supposed to induce “…liberal economic cooperation through trade flows (export and import relations), foreign domestic flows, technology transfer and integration in global value chains, and aid flows, should bring proportional benefits, which otherwise the partners would not have access to before entering into these relations” (2007); it is possible to ascertain that in the short term Ethiopia has substantially benefited from the Chinese cooperative investments. Thus, the argument of the proponents of political warfare theory—that China’s investment in Ethiopia would perpetuate underdevelopment through exploitation, extraction, and destruction of Ethiopia’s resources and industrial capacity—needs to be challenged at this juncture. As outlined by China’s politico-diplomatic “African Strategy,” it is quite obvious that China has shown its strategic interest in Africa and has particularly mapped out its interest in Ethiopia. Except for their significant negative environmental effects it is perpetuating on the Ethiopian soil at this juncture, it possible to assert that China’s investment in Ethiopia is closely aligning with the SSCs stated goals. In assessing the environmental impact, it should be noted that some of the negative externalities could have been easily corrected if the Ethiopian authorities had proactively asked the Chinese enterprises to adhere to the Chinese domestic environmental policy (See, Bosshard, 2008). Thus, the tentative conclusion we can arrive at from the four case studies is that by using its new standards of economic diplomacy China is slowly gaining ground in Ethiopia. Nevertheless, it looks farfetched to make assertions like the proponents of “New Mercantilism” school of thought—that “China’s rise confirms the current position of African countries: that of a commodity supplier and a modest consumer’s market” (Holslang, 2006).
Endnotes:
Bosshad, P. (2008). “China’s Environmental Footprints in Africa.” China in Africa Policy. China in Africa Project of the SA Institute of International Affairs (SAIIA), No. 3, April 2008.
GebreEgziabher, T. “The Developmental Impact of China and India on Ethiopia with Emphasis on Small Scale Footwear Producers.” Development Policy Research Unit, Johannesburg, South Africa (October 18-20, 2006).
Holslag, J. (2006). “China’s New Mercantilism in Central Africa.” African and Asian Studies, Vol. 5, No. 2, 15-16.
Lumumba-Kasongo, T. (2007). “China-Africa Relations in the Post-Cold War Era: Dialectics of Rethinking South-South Dialogue.” CODESRIA Bulletin, No. 1 & 2, 8-16.
Zhaoxi, L. (2009). “China’s Outward Foreign Direct Investment.” Chinese Multinationals, Jean-Paul Larcon [ed], Singapore: World Scientific Publishing, Co. Pte. Ltd., 49.
Economics, Dominican University of California
--------------------------------------------------------------------------------
Contrary to Western debt and assistance marked by various forms of economic and political overtones, China, using the South-South Cooperation, is in the process of bestowing a mix of loans with generous terms, debt forgiveness, infrastructure development, and other assistance to African nations so that they could be relieved from Western cultural, political, and economic hegemony. African governments have appreciated and responded enthusiastically to this new source of bottom-up, multiple, bilateral investment, trade, and aid because China has professed a willingness to ignore the political, conditional terms that characterize Western assistance.
China’s deepening involvement across Africa can be viewed from two perspectives. The protagonists of political warfare theory argue that China’s policy in Africa is a nonviolent instrument of grand strategy. It involves coordinated activities that could precipitate in tangible effects on intended targets such as economic aid and development assistance, as well as training, equipping, and arming military and security forces to achieve political and economic influence. The South-South development cooperation school of thought, on the other hand, views China’s increased aid, trade, and investment in Africa as a means to foster Africa’s self-sufficiency and sustainable development in the 21st century.
Therefore, the empirical part of this study will attempt to advance the understanding and rationalization of the various Chinese investments in Ethiopia. More specifically, the central motive of this study was to investigate if the Ethio-Chinese investments indicate a win-win strategy. The South-South cooperative win-win ventures are supposed to bring proportional benefits through trade flows, foreign domestic flows, technology transfer, and integration in global value chains, in addition to aid flows, which otherwise the partners would not have access to before entering into these relations. The four case studies seriously challenge the argument of political warfare theorists that China’s investment in Ethiopia would perpetuate underdevelopment through exploitation, extraction, and destruction of Ethiopia’s resources and industrial capacity. Except for the negative environmental externalities caused by the Sino-Ethiopian investments, the case studies have demonstrated that Ethiopia has substantially benefited from the Chinese cooperative investments. The Chinese investments in Ethiopia are not complementary but appear to be aligned very closely with the South-South cooperative strategies and goals.
(The entire manuscript can be obtained from the author.)
Summary and Conclusion
As the Chinese economy booms, Chinese multinational corporations are embarking on an acquisition drive to capture the oil, natural resources, and unexploited markets of Africa to sustain its rapid economic growth. Based on the current Chinese investments and co-development projects existing in Africa, supporters of Chinese investment in Africa argue that the recent increase in Africa’s gross domestic product is because of Chinese investment. The roads, bridges, and dams built by Chinese firms in Africa are low cost, good quality, and completed in a fraction of the time. Unlike the Western investments in Africa, the Chinese state-owned enterprises provide human and capital assistance to Africa without any conditionality.
Critics on the other hand argue that China has shipped entire workforces across to Africa for many of its projects. In addition, China has flooded the African markets with cheap consumer goods and devastated the local textile and other consumer product industries. In addition, some of the Afro-pessimistic intellectuals argue that yet there is little evidence whether China’s renewed, and most probably lasting involvement in Africa will serve the continent better than the decades of aid from Western governments, which have scarcely delivered on their promises. Lumumba-Kasongo argues that under the pretext of the SSC model China has introduced the “Beijing Consensus,” which is to a large extent based on China’s self-representation as Africa’s help-mate rather than the “Washington Consensus,” “which is the dogma of White House, Pentagon, the Bank, International Monetary Fund, and multinationals representing the interest of big private business (2007).”
Contrary to the two diametrically opposed perspectives of the Chinese engagement in Africa as presented above, the point of view of Holstag (2006) is eclectic. According to Holstag, China’s vision on its economic relations with Africa is beckoned with sweet carrots largely tailored to derive goodwill and permit it to do business suavely (2006).
The three perspectives of the Chinese engagement in Africa are very instructive. But in order to have a clear picture, the three points of view need to be rigorously analyzed from the point of view of an actual African country. For example, for the last five years, Ethiopia has achieved a high and sustained rate of growth. The presence and conduct of China’s foreign direct investment in Ethiopia since 2000 is fast becoming one of the fronts in reshaping Ethiopia’s economic architecture. Given the fact that Ethiopia has been the major beneficiary of Chinese investment and cooperative development projects, the question that needs to be pondered is: can some of Ethiopia’s spectacular growth rate be attributed to the Chinese investments? More specifically, have the Chinese cooperative investment footprints enabled the Ethiopian economy to master highly valued technology and generate productive employment or have the various Chinese investments destined Ethiopia’s economy to be dependent on the Beijing Consensus model?
The Chinese investors seem to have carefully engineered their entry strategy into Ethiopia. With considerable oscillation and no discernible trend before 1991, China devised trade and biddings on government sponsored contractual projects, mainly infrastructural landscape, to gain access and expand into Ethiopia’s downstream resources. With a wave of privatization and structural reforms that gained momentum in Ethiopia spurred a flurry of various types of foreign direct investments that originated from the Southern Countries (i.e., China, India, South Africa, etc.). For example, from 1992 to 2005, Chinese investments in Ethiopia got organized under the wholly owned type of organizational structure (i.e., 86 percent wholly-owned compared to 12 percent in joint-ventures) in order for Chinese companies to acquire upstream assets (See Table 3). In recent years, the presence and conduct of China’s foreign direct investment in Ethiopia is fast becoming one of the prominent features of the Ethiopian economic landscape either by infrastructure in exchange for access to natural resources or by denoting Chinese development assistance or providing favorable lending and capital contribution.
However, though Ethiopia intends to use Chinese cooperative investment as means of enhancing its regional development, the inflow of Chinese investment has not been equally shared. Geographically, most of the Chinese Cooperative investments are located within the Addis Ababa and Oromia Regional State. While 78 of the wholly owned Chinese companies are located in the Addis Ababa Regional Zone and about 9 percent are situated in the Oromia Regional State, without any significant catching up by the other regional zones. In addition, of the 103 joint-venture companies, 53 percent are situated within the Addis Ababa region while 30 percent are reside within the Oromia Regional State. In addition, 22 percent of the small- and medium-size state-owned Chinese Enterprises operating in Ethiopia are fully operational while the remaining 78 percent (647/828) are partially or yet to be fully implemented. To fully implement the various investments, the Chinese investors have employed 44 percent (52,714/119,670) as full-time workers and 56 percent (66,956/119,670) as temporary workers.
Ethiopia’s main objectives for allowing Chinese investment to operate in country are to have access to high technology, to increase employment, to acquire know-how, to increase foreign exchange through export, and to benefit from both backward and forward linkages. Thus, the four Sino-Ethiopian Cooperative Investment case studies given above are analyzed in terms of their effects on 1) Ownership and Human Capital 2) Production Management and Operations, 3) Export effects 4)Technological Transfers 5) Efficiency 6) Foreign Exchange effects7) Local Content requirements and spillover effects, and 8) Environmental effects of the Sino-Ethiopian investments. However, since the analysis is based on four case studies, it needs to be underlined that the results of these case studies are anecdotally based and are not sufficient to generalize about characteristics of the entire Sino-Ethiopia Cooperative investments. Also, it needs to underlined that host countries will not be able to capture the full benefits associated with foreign direct investment until they reach a certain threshold level in terms of educational attainment, provision of infrastructure services, local technological capabilities, and development of local financial markets, thus the analytical outcome of this study needs to considered tentative.
In terms of ownership and human capital, most of the Chinese investments are wholly owned. When Chinese enter a joint-venture or create a wholly owned subsidiary, they send experienced managers or top specialists from abroad. Based on the four case studies, while the CEOs of the three wholly owned Chinese companies are Chinese, the CEO of the Sino-Ethiopia Associate Africa joint-venture company is an Ethiopian. Given the Chinese investors in Ethiopia are unfamiliar with cultural makeup of the local situation and the Ethiopian labor laws that pertain to wages, holidays, housing and other benefits, in the solely owned Chinese firms and the joint venture firm, Ethiopian employees seemed to be in charge of the human resources management. In view of this, it can be assumed that there exists a smooth cross-cultural communication within the enterprises and between the enterprise and its external suppliers and customers.
The process of inviting foreign investors to developing countries is a means to increase the valued-added exports of the host country. Based on the Sino-Ethiopia Associate Africa pharmaceutical joint venture company, it is possible to argue that both partners handle the international marketing sector. Since the Chinese marketing officers are well versed in some aspects of the international marketing, they might have trained local employees in export management and foreign marketing strategies. Also, it is possible that local firms could have acquired international marketing techniques by hiring some of the Ethiopian workers who might have left the Sino-Ethiopian joint venture to start their own businesses. Nevertheless, since the three wholly owned enterprises mostly produce for the domestic market, it is very likely that they might have facilitated some type of interaction with local suppliers and domestic customers. It is likely that the wholly owned enterprises mostly produce for the Ethiopian domestic market and have done little to integrate Ethiopian products to the global value chain. Thus based on the three cases, it is possible to ascertain that the Chinese wholly owned companies don’t seem to act as a platform for exports and their goal is to seek for themselves efficiency in their production process by taking care of Ethiopia’s factors of endowment. The wholly owned Sino-Africa produces leather products that are designed to compete in the international market—it does not seem to crowd out the low quality local products. The Sino-Ethiopia pharmaceutical joint venture enterprise is of higher quality base and is more efficient; therefore, it is complementary and generates foreign exchanges indispensable for the country. Nonetheless, since the Ethiopian employees do not receive the necessary training in international marketing know-how, the leather products seem to be totally dependent on the Chinese joint venture partners in order to promote and distribute their products in overseas markets. In addition, as argued by GebreEgzibher, “The major types of products exported to China are agricultural products which are unprocessed or semi-processed. These include skins, leather and leather products, oil seeds, pulses, coffee, and tantalum. The bulk of leather, skin, and hides are semi-processed. Ethiopia has huge potential in other products which are allowed to be exported to China. These include coffee, natural gum, bee wax, edible oil, horticultural and textile products, precious stones, and other organic products.” (2006)
Typically, the Chinese PLCs arrive in Africa with their work force. In line with this, the project managers, engineers, and technicians working in Ethiopian government project contracts and wholly owned enterprises are mostly Chinese. Even in the Sino-Ethiopia Associate Africa joint firm, research and product design is forged in the headquarters rather than basing it on an equity ratio to include the Ethiopian partner. In terms of efficiency, since more than 50 percent of input materials executed by the Sino-Ethiopian firms come from China, it is very difficult to ascertain the contribution of efficiency to the new products made by the Sino-Ethiopian investments.
Most of the foreign exchange generally used for the Chinese investments in Ethiopia originates from the China’s EXIM and China’s development banks. For instance, Export-Import Bank of China has been granting long-term and short-term loans to companies investing abroad to purchase Chinese equipment and technology necessary to build factories abroad (Zhaoxi, 2009). Thus, the projects in Ethiopia have enabled it to conserve the foreign exchange, which it could have spent on establishing these projects, and helped it to acquire the necessary foreign exchange by selling some of the Sino-Ethiopian investment products in the overseas market.
While the dependency school theory views foreign investment from developed countries at the core of the world economic system as harmful to the long-term economic growth of developing countries out in the periphery, other studies seem to demonstrate that foreign direct investors can potentially benefit domestic firms through spillover effects. Spillover effects are therefore regarded as a very important conduit through which foreign direct investment promotes economic growth in the host country. Though the spillover effect of FDI on the productivity growth of local firms does not occur automatically (See, JBIC, 2002), based on the incentives given by the Ethiopian Government to Chinese investors, the four case studies utilize local content. Adhering to backward linkages, the Chinese investors purchase their factors of production from local suppliers. In addition, since they mostly sell their outputs in the domestic market, they have contributed to forward linkages. The four case studies act in creating complementary activities rather than “crowding out” domestic firms. In short, the Sino-Ethiopian foreign investments have forced local firms to restructure themselves to be more competitive and adequately fulfill the domestic demand, thereby maintaining their market shares. Thus, the Chinese investments have contributed to positive productivity spillovers to the Ethiopian economy.
Since the 1992 Earth Summit in Rio de Janeiro, the environmental and social dimensions of foreign investment have become a matter of intense controversy between certain home and host countries. For example in Ethiopia, to attract the Chinese investors, the Ethiopian government seems to covertly relax the enforcement of the environmental standards. The Chinese contractual-based projects, wholly owned, and the joint venture cases analyzed in this paper are by and large operating in ecologically sensitive regions. They are facing serious environmental problems because the Ethiopian Government seems to have prioritized its short-term economic growth over the achievement of environmentally sustainable economic growth in the long run. Ethiopian environmental protection officers at each level of the political system do not seem to fine Chinese investors for their transgressions or for negatively imprinting their environmental footprints on the country, or they fail to encourage the Chinese investors to adopt production techniques that are less harmful to the Ethiopian environment. Unlike other international financial institutions, the Chinese investors and financiers (such as the Export-Import Bank of China) fail to undertake their environmental guidelines when lending the concessional loans as part of the country’s official development assistance program (See, Bosshard, 2008). Undoubtedly, Chinese investments in Ethiopia are an indispensable part of the economic system (they have contributed to infrastructural development, provide capital, new technologies, modern management know- how, and enhanced demonstration effects). Nonetheless, little or no attention is paid by the Ethiopian Government to check the environmental implications of most of the undertaken Sino-Ethiopian investment case studies.
It needs to be underlined here that host countries will not be able to capture the full benefits associated with foreign direct investment until they reach a certain threshold level in terms of educational attainment, provision of infrastructure services, local technological capabilities and development of local financial markets. As an essential element of avoiding economic and social disparities among the different regions, the Ethiopian government needs to enhance the attractiveness of Ethiopia’s hinterland and other relatively neglected regions by 1) undertaking fundamental infrastructural development (i.e., electricity, water, good transport, and telecommunications), 2) improving and encouraging labor mobility to the undeveloped regions by creating schools, hospitals, parks, etc., 3) create local development agencies to promote FDI in each region. In short, further work is necessary to untangle the effects of social responsibility, to enforce environmental safeguards, to train local labor, and to transfer the technology of the Chinese cooperative investments into the Ethiopian economy.
Though anecdotally focused, the modest contributions upon which we hope other researchers will build is that more case studies need to be collected to analyze if Chinese investments in Ethiopia are politically motivated or are meant to fulfill the ideals of the SSC investments. Nonetheless, based on Lummumba-Kasongo’s argument that according to the win-win approach theory, the SSC ventures are supposed to induce “…liberal economic cooperation through trade flows (export and import relations), foreign domestic flows, technology transfer and integration in global value chains, and aid flows, should bring proportional benefits, which otherwise the partners would not have access to before entering into these relations” (2007); it is possible to ascertain that in the short term Ethiopia has substantially benefited from the Chinese cooperative investments. Thus, the argument of the proponents of political warfare theory—that China’s investment in Ethiopia would perpetuate underdevelopment through exploitation, extraction, and destruction of Ethiopia’s resources and industrial capacity—needs to be challenged at this juncture. As outlined by China’s politico-diplomatic “African Strategy,” it is quite obvious that China has shown its strategic interest in Africa and has particularly mapped out its interest in Ethiopia. Except for their significant negative environmental effects it is perpetuating on the Ethiopian soil at this juncture, it possible to assert that China’s investment in Ethiopia is closely aligning with the SSCs stated goals. In assessing the environmental impact, it should be noted that some of the negative externalities could have been easily corrected if the Ethiopian authorities had proactively asked the Chinese enterprises to adhere to the Chinese domestic environmental policy (See, Bosshard, 2008). Thus, the tentative conclusion we can arrive at from the four case studies is that by using its new standards of economic diplomacy China is slowly gaining ground in Ethiopia. Nevertheless, it looks farfetched to make assertions like the proponents of “New Mercantilism” school of thought—that “China’s rise confirms the current position of African countries: that of a commodity supplier and a modest consumer’s market” (Holslang, 2006).
Endnotes:
Bosshad, P. (2008). “China’s Environmental Footprints in Africa.” China in Africa Policy. China in Africa Project of the SA Institute of International Affairs (SAIIA), No. 3, April 2008.
GebreEgziabher, T. “The Developmental Impact of China and India on Ethiopia with Emphasis on Small Scale Footwear Producers.” Development Policy Research Unit, Johannesburg, South Africa (October 18-20, 2006).
Holslag, J. (2006). “China’s New Mercantilism in Central Africa.” African and Asian Studies, Vol. 5, No. 2, 15-16.
Lumumba-Kasongo, T. (2007). “China-Africa Relations in the Post-Cold War Era: Dialectics of Rethinking South-South Dialogue.” CODESRIA Bulletin, No. 1 & 2, 8-16.
Zhaoxi, L. (2009). “China’s Outward Foreign Direct Investment.” Chinese Multinationals, Jean-Paul Larcon [ed], Singapore: World Scientific Publishing, Co. Pte. Ltd., 49.
President Issayas lectures the World, masquerading as defender of Ethiopia Unity
(MOFA 05/22/09):- President Issayas is taking the opportunity of Eritrea’s 16th anniversary of independence (May 24) to offer the region, Africa and the Middle East, his thoughts on world and regional problem, and at length. In a whole series of interviews, with regional media and those in the Middle East, and more widely, he has been telling the region, Africa, and indeed the world, how to behave and pointing out where they have all been going wrong. Every night for weeks, viewers of Eritrean TV have been able to hear their President’s thoughts at considerable length.
President Issayas finds little to welcome in the world or even in Eritrea. The words that most commonly appear are challenge, conspiracy, hostility, sacrifice, hard work and yet more hard work. The rewards are all far in the future; and Eritrea is always the target. “The United Nations, including the Security Council, has become an unjust and inequitable tool of a few nations” indulging in “illegal and unconstructive” positions, as well as baseless slanders against Eritrea over the supply of arms to Al-Shabaab and opponents of the Somali Government, although the Somali Prime Minister said only this week that the Somali Government had detailed evidence of arms flights arriving from Eritrea. President Issayas told Egyptian State TV this week that the problems in Somalia mainly emanate from the illegal actions of the UN Security Council itself. In a comprehensive attack on the Council, President Issayas claimed it had taken illegal and unconstructive positions, breaching the UN Charter and international law. This, he claimed, had caused the present vacuum in Somalia and become the source for piracy and other activities. He said a government “imposed” from outside had further aggravated the problem. In this context he told Kenyan TV that IGAD was a tool in the service of foreign agendas and was the source of the problem in Somalia. Eritrea, he said, expected nothing good from such an impotent organization and this was why it had suspended its membership.
The African Union came in for similar strictures as doing nothing more useful than “talking about a vacuum”. He referred to the behaviour of its leaders as corrupt and despicable, and in this connection he had much to say about democracy and the media in Africa. According to President Issayas, (talking to SABC TV at the weekend) Africa needs “genuine” democracy. Surprisingly, in view of South Africa’s recent Presidential election, he specifically noted that the South African experience proved that one cannot speak of real democracy when holding elections in which there is no equitable distribution of resources and where the majority of the population lived below the poverty line. President Issayas’ version of democracy, which ignores elections or political parties, does not equate with other peoples’ views. He is against such “meaningless exercises or manifestations of ostentatious behaviour”. In fact, democracy is an ideal and a set of institutions of practices. As an ideal it involves the concept that members of a group should have the determining control over rules and policies, and that members of the group should treat each other as equals. In a modern state this ideal is realized through a framework of citizens' rights, institutions for representative and accountable government (in particular through a freely elected parliament), an active civil society and a number of mediatory elements of which the most obvious are political parties and an independent media. None of these are present in Eritrea and President Issayas specifically rejects most of these, even claiming, in defiance of Eritrea’s still unimplemented constitution that the people of Eritrea do not want either political parties or an independent media. It was in an interview with Al-Jazeera last year that the President actually put a time frame on elections. Eritrea would have, he said, to wait three or four decades before it held elections, and possibly longer. On the media, President Issayas claimed there was no free press any where in the world today. However the Eritrean people, he claimed, possessed media organs that served as forums for expressing their views and opinions as well as providing them with correct and objective information. Eritrea, of course, has had no independent media outlets since they were all closed down abruptly in 2001 and at least two dozen journalists detained and dozens more exiled.
Few international bodies or countries have escaped President Issayas’ attacks: “conspiracies and hostilities weaved in the name of regional, international and non-governmental organizations,…under the pretext of free press or [humanitarian activities] or…charity are some of the instruments of neo-colonialism masterminded by intelligence agencies.” The US has been one of the President’s main targets. He said it has a strategy of domination through creating problems and crises with the aim of strengthening US influence throughout the region. He attacked the CIA for encouraging and sponsoring human trafficking and encouraging Eritrean youth to flee their country. Hundreds of Eritreans cross into Ethiopia and Sudan every months to avoid conscription and repression. President Issayas told Asharq Alawat newspaper that lying was the culture of the CIA and the “baseless” anti-Eritrean defamatory campaign currently including allegations of Israeli and Iranian bases in Eritrea was no more than a continuation of this historic activity.
Uganda and Burundi are attacked for sending forces for AMISOM in Somalia. They are categorized as far from stable countries, experiencing civil unrest as well as internal opposition. These governments should, said President Issayas, concentrate on their own problems rather than meddle elsewhere. Indeed, the only viable solution for Somalia, said President Issayas was for outsiders to stop meddling in its affairs. He did not include Eritrea in this however. Eritrea’s support for the Somali people was, he said, a moral and legal obligation; and peace and stability could only be achieved by creating a conducive ground for the Somali people to resolve the issue themselves. Kenya was held responsible for the disappearance of three Eritrean journalists in Mogadishu and President Issayas added, ominously, that Eritrea would never overlook the issue. Last weekend it was the turn of long-time ally, the Sudanese Peoples Liberation Movement. President Issayas, claiming he had the right to criticize the organization, attacked it for failing to fulfill its commitments to the people of Sudan, for corruption and for failing to be definitive on unity or separation.
Perhaps, most bizarrely, in one four hour interview with what claims to be an Ethiopian website though undoubtedly in the pay of the Eritrean Government, President Issayas even tried to portray himself as a defender of Ethiopian unity. The interview indeed appears designed to allow President Issayas to appear in this guise. The truth of the matter is that no other person has worked so tirelessly for the demise of Ethiopia as a country. This is by no means an exaggeration. President Issayas has never been supportive of Ethiopian unity as his current efforts at destabilization make all too clear. Ethiopian officials, of course, are privy to what President Issayas was telling many African leaders during the war between Eritrea and Ethiopia (1998-2000): there is no such thing as Ethiopia and what there is, is no more than a shadow of a country – a country that cannot be taken seriously as a state. In terms of historical background, we would remember what President Issayas told an American, Paul Henze, on 11th March 1991, before he entered Asmara:
“The only reason that there is an Ethiopia is that the US needed it for the Cold War, and recreated it, otherwise it would have disappeared at the end of World War II.”
President Issayas finds little to welcome in the world or even in Eritrea. The words that most commonly appear are challenge, conspiracy, hostility, sacrifice, hard work and yet more hard work. The rewards are all far in the future; and Eritrea is always the target. “The United Nations, including the Security Council, has become an unjust and inequitable tool of a few nations” indulging in “illegal and unconstructive” positions, as well as baseless slanders against Eritrea over the supply of arms to Al-Shabaab and opponents of the Somali Government, although the Somali Prime Minister said only this week that the Somali Government had detailed evidence of arms flights arriving from Eritrea. President Issayas told Egyptian State TV this week that the problems in Somalia mainly emanate from the illegal actions of the UN Security Council itself. In a comprehensive attack on the Council, President Issayas claimed it had taken illegal and unconstructive positions, breaching the UN Charter and international law. This, he claimed, had caused the present vacuum in Somalia and become the source for piracy and other activities. He said a government “imposed” from outside had further aggravated the problem. In this context he told Kenyan TV that IGAD was a tool in the service of foreign agendas and was the source of the problem in Somalia. Eritrea, he said, expected nothing good from such an impotent organization and this was why it had suspended its membership.
The African Union came in for similar strictures as doing nothing more useful than “talking about a vacuum”. He referred to the behaviour of its leaders as corrupt and despicable, and in this connection he had much to say about democracy and the media in Africa. According to President Issayas, (talking to SABC TV at the weekend) Africa needs “genuine” democracy. Surprisingly, in view of South Africa’s recent Presidential election, he specifically noted that the South African experience proved that one cannot speak of real democracy when holding elections in which there is no equitable distribution of resources and where the majority of the population lived below the poverty line. President Issayas’ version of democracy, which ignores elections or political parties, does not equate with other peoples’ views. He is against such “meaningless exercises or manifestations of ostentatious behaviour”. In fact, democracy is an ideal and a set of institutions of practices. As an ideal it involves the concept that members of a group should have the determining control over rules and policies, and that members of the group should treat each other as equals. In a modern state this ideal is realized through a framework of citizens' rights, institutions for representative and accountable government (in particular through a freely elected parliament), an active civil society and a number of mediatory elements of which the most obvious are political parties and an independent media. None of these are present in Eritrea and President Issayas specifically rejects most of these, even claiming, in defiance of Eritrea’s still unimplemented constitution that the people of Eritrea do not want either political parties or an independent media. It was in an interview with Al-Jazeera last year that the President actually put a time frame on elections. Eritrea would have, he said, to wait three or four decades before it held elections, and possibly longer. On the media, President Issayas claimed there was no free press any where in the world today. However the Eritrean people, he claimed, possessed media organs that served as forums for expressing their views and opinions as well as providing them with correct and objective information. Eritrea, of course, has had no independent media outlets since they were all closed down abruptly in 2001 and at least two dozen journalists detained and dozens more exiled.
Few international bodies or countries have escaped President Issayas’ attacks: “conspiracies and hostilities weaved in the name of regional, international and non-governmental organizations,…under the pretext of free press or [humanitarian activities] or…charity are some of the instruments of neo-colonialism masterminded by intelligence agencies.” The US has been one of the President’s main targets. He said it has a strategy of domination through creating problems and crises with the aim of strengthening US influence throughout the region. He attacked the CIA for encouraging and sponsoring human trafficking and encouraging Eritrean youth to flee their country. Hundreds of Eritreans cross into Ethiopia and Sudan every months to avoid conscription and repression. President Issayas told Asharq Alawat newspaper that lying was the culture of the CIA and the “baseless” anti-Eritrean defamatory campaign currently including allegations of Israeli and Iranian bases in Eritrea was no more than a continuation of this historic activity.
Uganda and Burundi are attacked for sending forces for AMISOM in Somalia. They are categorized as far from stable countries, experiencing civil unrest as well as internal opposition. These governments should, said President Issayas, concentrate on their own problems rather than meddle elsewhere. Indeed, the only viable solution for Somalia, said President Issayas was for outsiders to stop meddling in its affairs. He did not include Eritrea in this however. Eritrea’s support for the Somali people was, he said, a moral and legal obligation; and peace and stability could only be achieved by creating a conducive ground for the Somali people to resolve the issue themselves. Kenya was held responsible for the disappearance of three Eritrean journalists in Mogadishu and President Issayas added, ominously, that Eritrea would never overlook the issue. Last weekend it was the turn of long-time ally, the Sudanese Peoples Liberation Movement. President Issayas, claiming he had the right to criticize the organization, attacked it for failing to fulfill its commitments to the people of Sudan, for corruption and for failing to be definitive on unity or separation.
Perhaps, most bizarrely, in one four hour interview with what claims to be an Ethiopian website though undoubtedly in the pay of the Eritrean Government, President Issayas even tried to portray himself as a defender of Ethiopian unity. The interview indeed appears designed to allow President Issayas to appear in this guise. The truth of the matter is that no other person has worked so tirelessly for the demise of Ethiopia as a country. This is by no means an exaggeration. President Issayas has never been supportive of Ethiopian unity as his current efforts at destabilization make all too clear. Ethiopian officials, of course, are privy to what President Issayas was telling many African leaders during the war between Eritrea and Ethiopia (1998-2000): there is no such thing as Ethiopia and what there is, is no more than a shadow of a country – a country that cannot be taken seriously as a state. In terms of historical background, we would remember what President Issayas told an American, Paul Henze, on 11th March 1991, before he entered Asmara:
“The only reason that there is an Ethiopia is that the US needed it for the Cold War, and recreated it, otherwise it would have disappeared at the end of World War II.”
Tilahun-The Hale Comet
Tilahun-The Hale Comet
Do you ever find out that some words lost their magic when you need them most?
That is how I felt now. Tilahun is too big to fit in adjectives like the well known, legendary, the king, the renowned etc. He is just larger than life. But let me call him the king as most people do. Yes, the king is dead. The king that reigned in Ethiopian music scene for the last five decades is dead. Now he had gone for good. But he will remain with us for long as he reigned in our heart for half a century. And he will live in the heart of the coming generation too since he left behind masterpieces that can transcend generations to come.
Tilahun is a household name in Ethiopia. Who else is there in Ethiopia that doesn’t know who Tilahun is? He lived with us in every situation; he lived with us in our ups and downs, in our joy, in our sorrow, in our political turmoil, in our social instability. What subject matter is there that we lived and that Tilahun didn’t sing about? Nothing! Tilahun was there in our personal life that we consider unforgettable. How many of us are there who remember our first love when we listen his songs! How many of us are there who remember the hours we spent in tea- rooms of Addis in our youth listening his songs! How many of us cried longing for our motherland listening Tilahun singing “Selamtaye Yidress”! How many of us courted our would be wives listening his songs! How many of us named our kids after his name to show that we are his loyal fans!
Tilahun was a walking history that embodied the narrative of 5 decades of our lives in his songs. There is nothing that Tilahun did not touch in our life-say it politics, economy, patriotism, love, sorrow etc. Let’s just see some of the songs that reflect the milestones that shaped our political and social history. Tilahun sang almost about all of them directly or indirectly. Just remember the 1953 coup d’etat. What song comes to your mind? “Selechegn, Merergn Enen”(I can’t stand it anymore”) Yes, he paid the price for that song. He was imprisoned because that song was interpreted as a song that embodies a political message. Yes, Tilahun was reflecting in that song the mood of the people at that time. You may not think that Tilahun sang a song about the World War II experience. What about the song entitled “Korea Mezmeten Betam Ewodewalehu”. This song was about the experience of Ethiopian soldiers deployed to Korea.
You remember when nature turn it’s back on us in 1974? I am sure you remember the hunger named the Wollo Dirk. He was there with us, crying on television, singing about the suffering of his people. Just listen again the song “waye waye silu”(“calling for help”). You will watch him paining the pain of his countrymen.
What about the song entitled “Eyaleh Kalhone Keleleh Yelehim”(If you don’t have, You are done)? Was this song just about the universal truth of the power of money or is there any other meaning when we consider the period he sang. Mind you, the 1975-76 was the period we were warming up to learn eating rice. What about his songs about patriotism, love of country. Considering the above mentioned and other great songs of him don’t we have a ground to say he lived and wrote the past half-century’s Ethiopian history in his songs? That is how I feel and think. Tilahun didn’t get the chance to sing these songs, to be loved and admired by the public simply because he has a sweat voice. His unique ability to interpret songs is the main reason that makes him special. The unsung Heroes of the time, lyrics and melody writers Solomon Tesema, Major Girma Hadgo, Captain Afework Yohannes etc prefer to give their lyrics and melodies to Tilahun because of his unmatched voice command to deliver the message of his songs. It should not be surprising if every lyric and melody writer wishes Tilahun to sing his songs.
Tilahun was not simply a singer. He was a performer-singer. There are singers you prefer to listen only their recordings. The professionals call them studio artists. There are singers that you simply watch them. There are singers that create a miracle on stage. And he is one of the miracle makers. Yes life is unfair. Nature favor few people. He was among the favored one. He has everything that a singer need to have- the voice, the look, the charisma, and stage magnetism. Is there any one like Tilahun that has stage presence in Ethiopian music history? No one! That makes him unique. Tilahun is a singer you need to watch and listen. Why? Because he has extraordinary body language to communicate with audiences. Each and every of tilahun’s gesture interpret his song amazingly. Even the way he looks at camera at some points of a song, do convey his message. Go and watch his Sudanese Song that he sang in Khartoum many years back. You will see him making you feel that he is singing personally to you. This much is amazing the king!
Tilahun is a kind of singer that language barrier would not stop you to listen to him. Come on! Does one need to know Oromifa to listen “Selmaeka Yagene? Is there any kind of wall that stop listener to listen his masterpiece “Akam Neguma Feyuma”? Not at all! We don’t have a tradition of biography writing. When we begin that tradition, he will be a gold mine for future biographers. Biographers would dig about his each and every song; they will study about the songs, the period and the situation in which he played them. He is a gold mine for future biographers.
I hope they will study his each and every song, how he sing them, when, the period and their implication. And through studying his songs, they will keep a record about the history of Ethiopian modern music that he dominantly shaped.
One of Tilahun’s extremely popular songs is “Chuhet Ayaskefam, Sileyu Tewado” Let me borrow the first two lines (stanza) of the lyric and use them to express my sorrow to our lose:
Chuhet Ayaskefam It is OK to cry
Sileyu Tewado when the king dies
Kezih Yebelete there is no sad news
Keyet Yimta Merdo bitter than this.
Let his soul rest in peace
Do you ever find out that some words lost their magic when you need them most?
That is how I felt now. Tilahun is too big to fit in adjectives like the well known, legendary, the king, the renowned etc. He is just larger than life. But let me call him the king as most people do. Yes, the king is dead. The king that reigned in Ethiopian music scene for the last five decades is dead. Now he had gone for good. But he will remain with us for long as he reigned in our heart for half a century. And he will live in the heart of the coming generation too since he left behind masterpieces that can transcend generations to come.
Tilahun is a household name in Ethiopia. Who else is there in Ethiopia that doesn’t know who Tilahun is? He lived with us in every situation; he lived with us in our ups and downs, in our joy, in our sorrow, in our political turmoil, in our social instability. What subject matter is there that we lived and that Tilahun didn’t sing about? Nothing! Tilahun was there in our personal life that we consider unforgettable. How many of us are there who remember our first love when we listen his songs! How many of us are there who remember the hours we spent in tea- rooms of Addis in our youth listening his songs! How many of us cried longing for our motherland listening Tilahun singing “Selamtaye Yidress”! How many of us courted our would be wives listening his songs! How many of us named our kids after his name to show that we are his loyal fans!
Tilahun was a walking history that embodied the narrative of 5 decades of our lives in his songs. There is nothing that Tilahun did not touch in our life-say it politics, economy, patriotism, love, sorrow etc. Let’s just see some of the songs that reflect the milestones that shaped our political and social history. Tilahun sang almost about all of them directly or indirectly. Just remember the 1953 coup d’etat. What song comes to your mind? “Selechegn, Merergn Enen”(I can’t stand it anymore”) Yes, he paid the price for that song. He was imprisoned because that song was interpreted as a song that embodies a political message. Yes, Tilahun was reflecting in that song the mood of the people at that time. You may not think that Tilahun sang a song about the World War II experience. What about the song entitled “Korea Mezmeten Betam Ewodewalehu”. This song was about the experience of Ethiopian soldiers deployed to Korea.
You remember when nature turn it’s back on us in 1974? I am sure you remember the hunger named the Wollo Dirk. He was there with us, crying on television, singing about the suffering of his people. Just listen again the song “waye waye silu”(“calling for help”). You will watch him paining the pain of his countrymen.
What about the song entitled “Eyaleh Kalhone Keleleh Yelehim”(If you don’t have, You are done)? Was this song just about the universal truth of the power of money or is there any other meaning when we consider the period he sang. Mind you, the 1975-76 was the period we were warming up to learn eating rice. What about his songs about patriotism, love of country. Considering the above mentioned and other great songs of him don’t we have a ground to say he lived and wrote the past half-century’s Ethiopian history in his songs? That is how I feel and think. Tilahun didn’t get the chance to sing these songs, to be loved and admired by the public simply because he has a sweat voice. His unique ability to interpret songs is the main reason that makes him special. The unsung Heroes of the time, lyrics and melody writers Solomon Tesema, Major Girma Hadgo, Captain Afework Yohannes etc prefer to give their lyrics and melodies to Tilahun because of his unmatched voice command to deliver the message of his songs. It should not be surprising if every lyric and melody writer wishes Tilahun to sing his songs.
Tilahun was not simply a singer. He was a performer-singer. There are singers you prefer to listen only their recordings. The professionals call them studio artists. There are singers that you simply watch them. There are singers that create a miracle on stage. And he is one of the miracle makers. Yes life is unfair. Nature favor few people. He was among the favored one. He has everything that a singer need to have- the voice, the look, the charisma, and stage magnetism. Is there any one like Tilahun that has stage presence in Ethiopian music history? No one! That makes him unique. Tilahun is a singer you need to watch and listen. Why? Because he has extraordinary body language to communicate with audiences. Each and every of tilahun’s gesture interpret his song amazingly. Even the way he looks at camera at some points of a song, do convey his message. Go and watch his Sudanese Song that he sang in Khartoum many years back. You will see him making you feel that he is singing personally to you. This much is amazing the king!
Tilahun is a kind of singer that language barrier would not stop you to listen to him. Come on! Does one need to know Oromifa to listen “Selmaeka Yagene? Is there any kind of wall that stop listener to listen his masterpiece “Akam Neguma Feyuma”? Not at all! We don’t have a tradition of biography writing. When we begin that tradition, he will be a gold mine for future biographers. Biographers would dig about his each and every song; they will study about the songs, the period and the situation in which he played them. He is a gold mine for future biographers.
I hope they will study his each and every song, how he sing them, when, the period and their implication. And through studying his songs, they will keep a record about the history of Ethiopian modern music that he dominantly shaped.
One of Tilahun’s extremely popular songs is “Chuhet Ayaskefam, Sileyu Tewado” Let me borrow the first two lines (stanza) of the lyric and use them to express my sorrow to our lose:
Chuhet Ayaskefam It is OK to cry
Sileyu Tewado when the king dies
Kezih Yebelete there is no sad news
Keyet Yimta Merdo bitter than this.
Let his soul rest in peace
A cyber tiger Diaspora Versus a lionized Meles Zenawi
By: Dilwenberu Nega, 03/17/09
In the feral world of backbiting malice, veiled threats, liars and blackmailers of the Ethiopian vociferous Diaspora, endless attempts have been made to bury Meles Zenawi under an avalanche of invectives and spurious criticisms. And anyone who had the guts to challenge the wayward behaviour of the vocal Diaspora’s high-command was ‘stripped’ of their Ethiopian nationality and demonised as a traitor and a glutton. But the ferocious attack of the deluding diaspora neither prevented Teflon Meles from ploughing ahead with his developmental plans for Ethiopia, nor did it make his supporters bury their head in shame.
Vocal opponents of Meles Zenawi got up on Monday, March 16th 2009 with a bout of nausea as they heard of the presence in London of Premier Meles Zenawi. The immediate cause of the bout of the nausea was two-fold. First was the timing. Meles jetted in to London close on the heels of a much trumpeted but poorly attended anti- Meles demonstration outside the American Embassy in early March. You might be tempted to raise a legitimate question: why did the anti-Meles demonstrators chose the American Embassy as opposed to 10 Downing Street which is home to incumbent British prime ministers. The truth of the matter has to be told so that Ethiopians in the Homeland and Abroad are fed not an omelette of rumour, but a pancake of truth. Tough-talking officials at the British Foreign and Commonwealth Office – sick and tired of the endless fabrications of the confused and confounded Ethiopian Diaspora in the United Kingdom – had made the position of Her Majesty’s Government crystal clear. “Don’t come to us with your pack of lies about an Ethiopia on fire.” This slap on the face by the Foreign and Commonwealth Office turned the vocal diaspora ballistic so much so that it made attention-seeker Andargatchew Tsiege fulminate: “Downing Street is Woyane Street!”
The second reason for the early morning nausea that struck the deluding opponents of Meles, was the fact that Meles’ visit came at a time when a small band of feral Ethiopian diaspora was frantically trying to father the idea of pulling resources from the ‘gullible’ diaspora for yet another attempt to derail the democratic process in Ethiopia. As usual the blogosphere, too, was inundated with manuals on how best to overthrow a legitimate government. Its focal point provided guidelines on how best to come up with a mosaic of lies which in due course will force the International Criminal Court to issue a warrant for the arrest of Meles Zenawi. The problem here, you see, stems from the fact that the wishful thinking of a self-deluding diaspora not only defies rationale, but also international boundaries. But the irony of it all is the fact that such a nonsensical plan is churned out from the very people who have made blood-stained former cadres of the Derg their political bedfellows.
Much to the delight of the silent majority of admirers of pragmatist Meles, and much to the chagrin of the movers and shakers of the politics of hate, Meles is basking in the limelight as the wise and the great of the world economy queue up to tap his great mind. Sober-minded Ethiopians both in the Homeland and Abroad view Meles’ gradual rise to pole position in the international arena, as proof of his tried and tested leadership. Meles is proving to be an asset not only to Ethiopia, but also to Africa. EPDRF would be naive if it were not to realise that Meles Zenawi’s “use by date” is a galaxy away.
In the feral world of backbiting malice, veiled threats, liars and blackmailers of the Ethiopian vociferous Diaspora, endless attempts have been made to bury Meles Zenawi under an avalanche of invectives and spurious criticisms. And anyone who had the guts to challenge the wayward behaviour of the vocal Diaspora’s high-command was ‘stripped’ of their Ethiopian nationality and demonised as a traitor and a glutton. But the ferocious attack of the deluding diaspora neither prevented Teflon Meles from ploughing ahead with his developmental plans for Ethiopia, nor did it make his supporters bury their head in shame.
Vocal opponents of Meles Zenawi got up on Monday, March 16th 2009 with a bout of nausea as they heard of the presence in London of Premier Meles Zenawi. The immediate cause of the bout of the nausea was two-fold. First was the timing. Meles jetted in to London close on the heels of a much trumpeted but poorly attended anti- Meles demonstration outside the American Embassy in early March. You might be tempted to raise a legitimate question: why did the anti-Meles demonstrators chose the American Embassy as opposed to 10 Downing Street which is home to incumbent British prime ministers. The truth of the matter has to be told so that Ethiopians in the Homeland and Abroad are fed not an omelette of rumour, but a pancake of truth. Tough-talking officials at the British Foreign and Commonwealth Office – sick and tired of the endless fabrications of the confused and confounded Ethiopian Diaspora in the United Kingdom – had made the position of Her Majesty’s Government crystal clear. “Don’t come to us with your pack of lies about an Ethiopia on fire.” This slap on the face by the Foreign and Commonwealth Office turned the vocal diaspora ballistic so much so that it made attention-seeker Andargatchew Tsiege fulminate: “Downing Street is Woyane Street!”
The second reason for the early morning nausea that struck the deluding opponents of Meles, was the fact that Meles’ visit came at a time when a small band of feral Ethiopian diaspora was frantically trying to father the idea of pulling resources from the ‘gullible’ diaspora for yet another attempt to derail the democratic process in Ethiopia. As usual the blogosphere, too, was inundated with manuals on how best to overthrow a legitimate government. Its focal point provided guidelines on how best to come up with a mosaic of lies which in due course will force the International Criminal Court to issue a warrant for the arrest of Meles Zenawi. The problem here, you see, stems from the fact that the wishful thinking of a self-deluding diaspora not only defies rationale, but also international boundaries. But the irony of it all is the fact that such a nonsensical plan is churned out from the very people who have made blood-stained former cadres of the Derg their political bedfellows.
Much to the delight of the silent majority of admirers of pragmatist Meles, and much to the chagrin of the movers and shakers of the politics of hate, Meles is basking in the limelight as the wise and the great of the world economy queue up to tap his great mind. Sober-minded Ethiopians both in the Homeland and Abroad view Meles’ gradual rise to pole position in the international arena, as proof of his tried and tested leadership. Meles is proving to be an asset not only to Ethiopia, but also to Africa. EPDRF would be naive if it were not to realise that Meles Zenawi’s “use by date” is a galaxy away.
The New Global Growth Path: Implications for Climate Change Analysis and Policy
Peter Sheehan
Centre for Strategic Economic Studies
Victoria University
In recent years the world has moved to a new path of rapid global growth, largely driven by the developing countries, which is energy intensive and heavily reliant on the use of coal – global coal use will rise by nearly 60% over the decade to 2010. On unchanged policies global CO2 emissions from fuel combustion are likely to nearly double their 2000 level by 2020 and continue to rise beyond 2030. Neither the SRES marker scenarios nor the reference cases assembled in recent studies using integrated assessment models capture this abrupt shift to rapid growth based on fossil fuels and centered in key Asian countries. An international effort to develop new, realistic projections to 2030, with a range of scenarios beyond that time, is urgently required.
Recognition of this path as a realistic possibility will have significant effects on the
impact and damage estimates in an unchanged policy case, on the analysis of achievable stabilisation paths and on estimates of the costs of achieving stabilization at a given GHG concentration level. Finally, such recognition means that, if widely desired stabilisation goals are to be achieved, policies with an immediate effect on emissions, perhaps such as price, tax and regulatory measures to reduce energy use and the rapid diffusion of existing non-fossil fuel technologies, will be required, together with greater knowledge about the effectiveness and the economic costs of such policies.
The new global growth path
For more than two decades the world economy has been changing rapidly, with that
change driven by two different but related factors: successive waves of new computing and communications technologies and an expanding process of liberalisation of national and international markets, in areas such as trade, finance, technology and labour. This process has entered a new stage in recent years,\ especially since the entry of China into the World Trade Organisation in 2001 and the
strong growth being achieved in India. Global economic growth has been higher than expected for some years and energy demand has been very strong, much greater than anticipated by markets, providers and analysts.
summary information on trends in global GDP and energy use over 1972–2006. While there was considerable variation within them, in each of the three decades from 1972–2002 the average annual growth of world GDP (in constant purchasing power parity prices) was 3.5%, with per capita GDP growth at around 2%.
By contrast, over the four years 2002–06 the global growth rate was 4.9%, with per capita GDP growth at 3.7%, a very high rate in historical terms. The growth in primary energy use over 2002–06 (3.3%) was more than twice that over 1992–2002 (1.5%), while the share of coal in primary energy use rose strongly, from 25.5% in 2002 to 28.4% in 2006. Indeed, while over the 1972–2002 period coal use grew less rapidly than all other energy sources, over the last four years this has been reversed, with coal use growing by 6.1% per annum, more than twice the rate of all other energy sources (2.3%). Thus coal consumption has provided nearly half of the increase in total primary energy consumption in the last four years, with the absolute increase in coal consumption over 2002–06 (653 mtoe) greater than the increase over the whole of the two decades 1982–2002 (583 mtoe).
The quite different outcomes shown for 2002–06 relative to the previous three decades might well be dismissed as cyclical fluctuations. But it is now widely accepted that fundamental, long term factors are at work: the sustained emergence of China and India as economic powers, more rapid growth in other developing countries, the revival of Japan from its stagnation over a decade or more, better economic prospects in Russia and other CIS states, and more generally an open world economy with low inflation. Reflecting both current demand and revised expectations for the future, global market prices for oil, coal and resources have risen sharply and large scale investment plans for energy and resource development have been put in place, both in key markets such as China and India and in supplier countries such as Australia, Brazil and Russia. This new global economic path has led to a flurry of activity by governments and businesses around the world, as they seek to reassess their position in a world in which China and India are major economic powers.
As a result, longer-term growth forecasts from both private groups and public agencies are being revised upwards. For example, summarises the aggregate forecasts for GDP (in constant purchasing power parity prices) from the IMF World Economic Outlook published in April 2007, using a ten-year moving average annual growth rate. The IMF’s projected global growth rate over 2002–2012 is 4.9%, the same as the actual growth rate for 2002–06. This is not driven by the advanced countries, whose overall growth is projected to slow gradually, but by accelerating growth in all other countries, expected to reach 7.1% per annum over 2002–2012.
The climate implications arise not only from the likelihood of higher long term rates of world economic growth, but from two key facts about this growth path: that energy use and CO2 emissions continue to increase in the developed countries and that many of the developing countries driving growth, such as China and India, rely heavily on coal for their energy needs. As an example within the developed countries, the 2007 projections from the US Department of Energy’s Energy Information Agency for the
USA, still the largest user of energy in the world, show energy use and CO2 emissions from fuel combustion growing at 1.1% and 1.2% per cent per annum respectively from 2005–2030, with energy use and emissions from coal use both growing at 1.6% per cent per annum (DOE, 2007). In the second half of 2006, 140 new coal-fired power stations were in planning or construction in the US (Romero, 2006). In terms of the reliance on coal in key developing countries, in 2004 coal provided 71% of total primary energy supply (excluding biomass and waste) in China and 55% in India, by comparison with 17% for the rest of the world (IEA, 2006). As noted above, increased use of coal is already evident in the historical data – world coal consumption has risen by 30% between 2000 and 2006, about the same as the total percentage increase over the previous two decades, and growth of nearly 60% over the decade to 2010 seems inevitable.This paper aims to document the reality of the new growth path and to explore its implications for climate analysis and policy, without embarking on the major task of providing a detailed projection and/or scenario consistent withThe impact of China and India on global trends
The shift to rapid growth in energy use in China
There has been widespread discussion in recent years about the rapid rate of economic
growth taking place in China, and about the impact of that development on world markets for coal, oil and natural gas. Energy use has indeed grown very rapidly – over the five years 2001–06 total energy consumption grew by 71.5% (11.4% per annum), with GDP growth of 10.0% per annum. This explosive growth in energy use was in sharp contrast with earlier trends. From the ‘opening to the market’ in 1979 to 2001 energy use grew at a much lower rate than GDP, with average rates of growth of 4.1%
and 9.7% for energy use and GDP respectively, with the energy intensity of China’s GDP falling continuously through to 2001 and the elasticity of energy use with
respect to GDP being only 0.42. This decline in energy intensity was especially marked in the second half of the 1990s, so that the shift to rates of growth in energy use in excess of GDP growth after 2001 had profound and unexpected implications in energy markets, and led to severe shortages in 2003 and subsequent years.
The decline in energy intensity in China over 1979–2001 was highly unusual for a developing country,4 but most existing projections of China’s future energy use assume an early reversion to an energy elasticity of 0.5–0.7%, For example, the most
well known projections internationally are those of the International Energy Agency (IEA), published biennially in its World Energy Outlook. In the 2006 edition, with an
assumed average growth rate of GDP (in constant purchasing power parity prices) of
5.5% per annum over 2004–30, the IEA projected growth of only 3.2% per annum in
it or exploring the elasticity of energy use with respect to GDP of 0.58, and that the rate of growth of China’s energy use over 2004–2030 will be little more than half its rate over 1971– 2002 (5.5%).
Of the existing published projections the most realistic, in terms of the trends that have emerged over 2001–06, is the unchanged policy case contained in China’s National Comprehensive Energy Strategy and Policy (NDRC, 2004; see also Dai and Zhu, 2005). The unchanged policy scenario in this report projects annual average growth in energy use and CO2 emissions over 2000–2020 of 4.7% and 4.6% respectively. These growth rates are reasonably close to the outcomes for 1971–2002 noted above, and well above the IEA 2006 growth rate estimates for 2002–2030.
Nevertheless, shows clearly that energy use in the Chinese economy is expanding much more rapidly than envisaged in scenario A. In terms of the main aggregate indicator, primary energy use, the actual figure for 2006 is about 15% greater than the projected figure for 2010, and electricity generating capacity in 2006 was 11% above the projected level for 2010. The demand for coal has been extremely strong, with the 2006 actual being 18.5% above the projected figure for 2010. The demand for oil was broadly in line with projections in 2006, as higher oil prices impacted on demand and led to fuel substitution, and usage of natural gas is also within the projection range. In terms of total energy use, and in particular coal use, the Chinese economy is on a path well above that in the 2004 official Chinese projections, which in turn are well above the IEA 2006 projections.
one of the main reasons for growth in energy demand ahead of the projection. It shows the actual output data for 2006 for four energy intensive industries for which output projections were provided in the NDRC report (2004). Output is running well ahead of expectations in these industries: for two industries (iron and steel and cement) output in 2006 was ahead of the 2020 projected level; paper production in 2006 was closer to the 2020 than to the 2010 projection, while ethylene output is also somewhat ahead of the projection. Consistent with these data, many observers (e.g., CASS, 2007) believe that a structural shift towards energy intensive industries is the main reason for rapid growth in energy use since 2001.
The Chinese Government has expressed concern about the economic, environmental
and social impact of continuing high rates of growth of energy demand. In the 11th Five Year Plan (2006–10) the Government included as a priority target a reduction of 20% in energy use per unit of real GDP over the five-year period (Wen Jiabao, 2006). The precise implications of this target for the growth in energy use and the energy elasticity of GDP depend on the rate of growth of GDP achieved, but the implied elasticities range from 0.41 with 8% per annum GDP growth to 0.52 with 10% growth. Thus the current target also implies a return to the elasticity levels achieved over the 1979–2001 period. Issues concerning the shift from an energy elasticity of GDP of less than 0.5 over 1979–2001 to a value greater than one over 2001–06, together with the prospects of reverting to earlier levels in the near future, are thus critical to understanding the future path of China’s energy use. The reasons for the low elasticity over 1979–2001 have been analysed in an extensive literature (e.g., Sinton and Levine, 1994; Lin and Polenske, 1995; Garbaccio et al., 1999; Sinton et al., 1998; Zhang, 2003; Andrews- Speed, 2004) but limited scholarly attention has as yet been given to the post-2001 trends. In terms of the declining aggregate energy intensity up to 2001, there is strong evidence that this reflected a widespread fall in sectoral energy intensities and took place in spite of an ongoing shift to a more energy intensive economic structure. The fall in sectoral intensities was in turn due to a combination of energy conservation programs and technological change being driven by a planned economy with energy rationing, with rising relative energy prices also playing a significant role in the 1990s. Sheehan and Sun (2007) conclude that, now that energy supplies are abundant, the enforcement mechanisms of the command economy no longer available and rapid growth in energy intensive industries is continuing, an elasticity of significantly less than one will be difficult to achieve, and will require sustained and integrated policy implementation.
Consistent with this analysis, Sheehan and Sun (2007) use a simple but disaggregated model to project China’s energy use and emissions out to 2030. They conclude that, on the policies in force in 2005, China’s energy use and CO2 emissions from fuel combustion are likely to grow by more than 6% per annum over 2005–30. This would imply emissions from energy use (excluding cement production) of 6.2 GtC in 2030, by comparison with an overall global figure in 2004 of 7.2 GtC. Their simulations indicate that achieving major reductions will be difficult, but that a sustained new policy implementation process, involving use of the full range of instruments, could reduce China’s energy use and CO2 emissions by about 35% relative to this projected level by 2030, implying a growth rate over 2005–30 of 4% per annum.
The sustained rise of India
India’s growth has been accelerating since the late 1970s, and reached 5.5% in the Ninth Plan period, 1997–2002. The preliminary GDP growth rate outcome for the
Tenth Plan period, 2002–07,5 is 7.6% per annum, by comparison with a target of 8.1%, and growth in the last two years of the plan period averaged 9.2%. The Planning Commission (PC) has set a growth rate target of 9% for the Eleventh Plan period, 2007–12, with sectoral growth rates of 4.1% for agriculture, 10.5% for industry and 9.9% for the service sector (PC, 2007).
India’s growth has traditionally been driven by services rather than industry, but a notable feature of recent trends has been an increase in the growth of secondary industry (and especially manufacturing) relative to the overall growth of GDP. The target growth rate for real value added in manufacturing is 12% per annum.
The energy elasticity of GDP (excluding energy from biomass) for India was 1.15 over the period 1971–2005, although it was lower over 1990–2002 than in the earlier period. Energy use in India has been limited to date by a focus on service industries and by supply shortages, and half the country’s population remains without electricity (PC, 2007). But industrial and household demand is increasing and sustained efforts are being made to increase electricity generation, primarily through coal-fired power stations. The Planning Commission projects that the demand for coal will rise by 7.6% per annum between 2005–06 and 2011–12 (PC, 2007). India has also been highly dependent on energy from biomass and waste. But with expansion possibilities limited in these traditional areas, growing demand for energy will need to be increasingly met from commercial sources.
The major forward-looking study of India’s energy requirements is the Report of the Expert Committee on Integrated Energy Policy, prepared for the Planning Commission and published in August 2006 (Parikh, 2006). This report outlines both India’s growing energy needs in the context of rapid growth and the programs that are being put in place to ensure that they are met. On the demand side, and on the basis of a range of assumptions about growth rates and the energy elasticity of GDP, it projects growth in commercial energy demand in India between 5.6% and 7.2% per annum over 2006–07 to 2031–32. On the supply side the authors run eleven alternative scenarios, starting from an existing policy case in which the least cost energy sources are developed (scenario 1) through a cascading series of policy scenarios in which the potential of non-fossil energy sources and of energy savings are maximised. In scenario 11 all such policies are implemented simultaneously. For their preferred case of 8% GDP growth, scenario 1 projects an increase in commercial
energy use of 6.0% per annum over 2006–07 to 2031–32, while for scenario 11 the figure is 5.1% per annum. In scenario 1 CO2 emissions from energy use are expected to rise about 7% per annum to 1.5 GtC by 2031–32, while projected emissions by that date are about one third lower in scenario 11 at 1.0 GtC, a growth rate of about 5.5%.
An indicative quantification of the implications of the new growth path
The purpose of the preceding discussion is to provide evidence, for two major countries, on emerging trends in GDP growth and energy use. The new growth path will, of course, impact on many other countries in different ways. But it is important to note the scale of developments in China and India: if, in the light of the trends reviewed above, CO2 emissions from fuel combustion and cement production are assumed to grow by 6% per annum in both China and India over 2004–30, the additional emissions in 2030, over and above the IEA (2006) projection for that year,
amounts to 52.5% of global energy demand in 2004. That is, these revised assumptions alone produce a further increase of over 50% in global emissions relative to the 2004 level, in addition to the increase of 59% already envisaged in the IEA 2006 projections, by 2030.
Short of an authoritative international projection of the implications of the new growth path being available, the strategy of Sheehan, Jones et al. (2007) is adopted here to provide an indicative quantification for working purposes. They start from the IEA (2006) projections, but adjust them to take account of the trends discussed above
in China and India, and in a number of other rapidly developing countries in East Asia, but otherwise adopt the IEA (2006) assumptions and results. The methodology and detailed assumptions used are described in that paper while the results, for CO2 emissions from fuel combustion and cement, are provided in. Emissions in 2030 are 120% above the 2004 level (and 150% above the 2000 level), and still growing at over 2% per annum at that time. First, in recent years the world has moved to a new path of rapid global growth, largely driven by the developing countries, which now comprise 40% of world GDP. This growth path remains energy intensive and heavily reliant on the use of coal – global coal use will rise by nearly 60% over the decade to 2010. Second, if the key developing countries in Asia continue to drive growth after 2010, albeit at a more subdued pace, then on unchanged policies global CO2 emissions from fuel combustion are likely to double their 2000 level by about 2020 and continue to rise beyond 2030. This must be considered a realistic, though of course not inevitable, unchanged policy outcome. Third, the SRES marker scenarios, finalised in 1998, do not capture this abrupt shift to rapid growth based on fossil fuels and centered in key Asian countries, and no longer provide a
realistic guide for climate change analysis. The reference cases assembled in recent studies using integrated assessment models also fail to recognise this new reality. An international effort to develop new, realistic projections to 2030, with a range of scenarios beyond that time, is urgently required. Fourth, recognition of this new emissions path as a realistic possibility is likely to have a significant effect on the impact and damage estimates from an unchanged policy case, on the analysis of achievable stabilisation paths and on estimates of the costs of achieving stabilization at a given GHG concentration level. Finally, recognition of this new growth path also means that policy must focus on the short-run dynamics of emissions, and on measures with immediate impact. For example, if stabilisation is to be achieved at 550 ppm CO2e a significant reduction in global emissions relative to the reference path is needed in the next ten years. This in turn will require an emphasis on policies with an
immediate effect on emissions, perhaps such as price, tax and regulatory measures to reduce energy use and the rapid diffusion of existing non-fossil fuel technologies, together with greater knowledge about the effectiveness and the economic costs of such policies.
Centre for Strategic Economic Studies
Victoria University
In recent years the world has moved to a new path of rapid global growth, largely driven by the developing countries, which is energy intensive and heavily reliant on the use of coal – global coal use will rise by nearly 60% over the decade to 2010. On unchanged policies global CO2 emissions from fuel combustion are likely to nearly double their 2000 level by 2020 and continue to rise beyond 2030. Neither the SRES marker scenarios nor the reference cases assembled in recent studies using integrated assessment models capture this abrupt shift to rapid growth based on fossil fuels and centered in key Asian countries. An international effort to develop new, realistic projections to 2030, with a range of scenarios beyond that time, is urgently required.
Recognition of this path as a realistic possibility will have significant effects on the
impact and damage estimates in an unchanged policy case, on the analysis of achievable stabilisation paths and on estimates of the costs of achieving stabilization at a given GHG concentration level. Finally, such recognition means that, if widely desired stabilisation goals are to be achieved, policies with an immediate effect on emissions, perhaps such as price, tax and regulatory measures to reduce energy use and the rapid diffusion of existing non-fossil fuel technologies, will be required, together with greater knowledge about the effectiveness and the economic costs of such policies.
The new global growth path
For more than two decades the world economy has been changing rapidly, with that
change driven by two different but related factors: successive waves of new computing and communications technologies and an expanding process of liberalisation of national and international markets, in areas such as trade, finance, technology and labour. This process has entered a new stage in recent years,\ especially since the entry of China into the World Trade Organisation in 2001 and the
strong growth being achieved in India. Global economic growth has been higher than expected for some years and energy demand has been very strong, much greater than anticipated by markets, providers and analysts.
summary information on trends in global GDP and energy use over 1972–2006. While there was considerable variation within them, in each of the three decades from 1972–2002 the average annual growth of world GDP (in constant purchasing power parity prices) was 3.5%, with per capita GDP growth at around 2%.
By contrast, over the four years 2002–06 the global growth rate was 4.9%, with per capita GDP growth at 3.7%, a very high rate in historical terms. The growth in primary energy use over 2002–06 (3.3%) was more than twice that over 1992–2002 (1.5%), while the share of coal in primary energy use rose strongly, from 25.5% in 2002 to 28.4% in 2006. Indeed, while over the 1972–2002 period coal use grew less rapidly than all other energy sources, over the last four years this has been reversed, with coal use growing by 6.1% per annum, more than twice the rate of all other energy sources (2.3%). Thus coal consumption has provided nearly half of the increase in total primary energy consumption in the last four years, with the absolute increase in coal consumption over 2002–06 (653 mtoe) greater than the increase over the whole of the two decades 1982–2002 (583 mtoe).
The quite different outcomes shown for 2002–06 relative to the previous three decades might well be dismissed as cyclical fluctuations. But it is now widely accepted that fundamental, long term factors are at work: the sustained emergence of China and India as economic powers, more rapid growth in other developing countries, the revival of Japan from its stagnation over a decade or more, better economic prospects in Russia and other CIS states, and more generally an open world economy with low inflation. Reflecting both current demand and revised expectations for the future, global market prices for oil, coal and resources have risen sharply and large scale investment plans for energy and resource development have been put in place, both in key markets such as China and India and in supplier countries such as Australia, Brazil and Russia. This new global economic path has led to a flurry of activity by governments and businesses around the world, as they seek to reassess their position in a world in which China and India are major economic powers.
As a result, longer-term growth forecasts from both private groups and public agencies are being revised upwards. For example, summarises the aggregate forecasts for GDP (in constant purchasing power parity prices) from the IMF World Economic Outlook published in April 2007, using a ten-year moving average annual growth rate. The IMF’s projected global growth rate over 2002–2012 is 4.9%, the same as the actual growth rate for 2002–06. This is not driven by the advanced countries, whose overall growth is projected to slow gradually, but by accelerating growth in all other countries, expected to reach 7.1% per annum over 2002–2012.
The climate implications arise not only from the likelihood of higher long term rates of world economic growth, but from two key facts about this growth path: that energy use and CO2 emissions continue to increase in the developed countries and that many of the developing countries driving growth, such as China and India, rely heavily on coal for their energy needs. As an example within the developed countries, the 2007 projections from the US Department of Energy’s Energy Information Agency for the
USA, still the largest user of energy in the world, show energy use and CO2 emissions from fuel combustion growing at 1.1% and 1.2% per cent per annum respectively from 2005–2030, with energy use and emissions from coal use both growing at 1.6% per cent per annum (DOE, 2007). In the second half of 2006, 140 new coal-fired power stations were in planning or construction in the US (Romero, 2006). In terms of the reliance on coal in key developing countries, in 2004 coal provided 71% of total primary energy supply (excluding biomass and waste) in China and 55% in India, by comparison with 17% for the rest of the world (IEA, 2006). As noted above, increased use of coal is already evident in the historical data – world coal consumption has risen by 30% between 2000 and 2006, about the same as the total percentage increase over the previous two decades, and growth of nearly 60% over the decade to 2010 seems inevitable.This paper aims to document the reality of the new growth path and to explore its implications for climate analysis and policy, without embarking on the major task of providing a detailed projection and/or scenario consistent withThe impact of China and India on global trends
The shift to rapid growth in energy use in China
There has been widespread discussion in recent years about the rapid rate of economic
growth taking place in China, and about the impact of that development on world markets for coal, oil and natural gas. Energy use has indeed grown very rapidly – over the five years 2001–06 total energy consumption grew by 71.5% (11.4% per annum), with GDP growth of 10.0% per annum. This explosive growth in energy use was in sharp contrast with earlier trends. From the ‘opening to the market’ in 1979 to 2001 energy use grew at a much lower rate than GDP, with average rates of growth of 4.1%
and 9.7% for energy use and GDP respectively, with the energy intensity of China’s GDP falling continuously through to 2001 and the elasticity of energy use with
respect to GDP being only 0.42. This decline in energy intensity was especially marked in the second half of the 1990s, so that the shift to rates of growth in energy use in excess of GDP growth after 2001 had profound and unexpected implications in energy markets, and led to severe shortages in 2003 and subsequent years.
The decline in energy intensity in China over 1979–2001 was highly unusual for a developing country,4 but most existing projections of China’s future energy use assume an early reversion to an energy elasticity of 0.5–0.7%, For example, the most
well known projections internationally are those of the International Energy Agency (IEA), published biennially in its World Energy Outlook. In the 2006 edition, with an
assumed average growth rate of GDP (in constant purchasing power parity prices) of
5.5% per annum over 2004–30, the IEA projected growth of only 3.2% per annum in
it or exploring the elasticity of energy use with respect to GDP of 0.58, and that the rate of growth of China’s energy use over 2004–2030 will be little more than half its rate over 1971– 2002 (5.5%).
Of the existing published projections the most realistic, in terms of the trends that have emerged over 2001–06, is the unchanged policy case contained in China’s National Comprehensive Energy Strategy and Policy (NDRC, 2004; see also Dai and Zhu, 2005). The unchanged policy scenario in this report projects annual average growth in energy use and CO2 emissions over 2000–2020 of 4.7% and 4.6% respectively. These growth rates are reasonably close to the outcomes for 1971–2002 noted above, and well above the IEA 2006 growth rate estimates for 2002–2030.
Nevertheless, shows clearly that energy use in the Chinese economy is expanding much more rapidly than envisaged in scenario A. In terms of the main aggregate indicator, primary energy use, the actual figure for 2006 is about 15% greater than the projected figure for 2010, and electricity generating capacity in 2006 was 11% above the projected level for 2010. The demand for coal has been extremely strong, with the 2006 actual being 18.5% above the projected figure for 2010. The demand for oil was broadly in line with projections in 2006, as higher oil prices impacted on demand and led to fuel substitution, and usage of natural gas is also within the projection range. In terms of total energy use, and in particular coal use, the Chinese economy is on a path well above that in the 2004 official Chinese projections, which in turn are well above the IEA 2006 projections.
one of the main reasons for growth in energy demand ahead of the projection. It shows the actual output data for 2006 for four energy intensive industries for which output projections were provided in the NDRC report (2004). Output is running well ahead of expectations in these industries: for two industries (iron and steel and cement) output in 2006 was ahead of the 2020 projected level; paper production in 2006 was closer to the 2020 than to the 2010 projection, while ethylene output is also somewhat ahead of the projection. Consistent with these data, many observers (e.g., CASS, 2007) believe that a structural shift towards energy intensive industries is the main reason for rapid growth in energy use since 2001.
The Chinese Government has expressed concern about the economic, environmental
and social impact of continuing high rates of growth of energy demand. In the 11th Five Year Plan (2006–10) the Government included as a priority target a reduction of 20% in energy use per unit of real GDP over the five-year period (Wen Jiabao, 2006). The precise implications of this target for the growth in energy use and the energy elasticity of GDP depend on the rate of growth of GDP achieved, but the implied elasticities range from 0.41 with 8% per annum GDP growth to 0.52 with 10% growth. Thus the current target also implies a return to the elasticity levels achieved over the 1979–2001 period. Issues concerning the shift from an energy elasticity of GDP of less than 0.5 over 1979–2001 to a value greater than one over 2001–06, together with the prospects of reverting to earlier levels in the near future, are thus critical to understanding the future path of China’s energy use. The reasons for the low elasticity over 1979–2001 have been analysed in an extensive literature (e.g., Sinton and Levine, 1994; Lin and Polenske, 1995; Garbaccio et al., 1999; Sinton et al., 1998; Zhang, 2003; Andrews- Speed, 2004) but limited scholarly attention has as yet been given to the post-2001 trends. In terms of the declining aggregate energy intensity up to 2001, there is strong evidence that this reflected a widespread fall in sectoral energy intensities and took place in spite of an ongoing shift to a more energy intensive economic structure. The fall in sectoral intensities was in turn due to a combination of energy conservation programs and technological change being driven by a planned economy with energy rationing, with rising relative energy prices also playing a significant role in the 1990s. Sheehan and Sun (2007) conclude that, now that energy supplies are abundant, the enforcement mechanisms of the command economy no longer available and rapid growth in energy intensive industries is continuing, an elasticity of significantly less than one will be difficult to achieve, and will require sustained and integrated policy implementation.
Consistent with this analysis, Sheehan and Sun (2007) use a simple but disaggregated model to project China’s energy use and emissions out to 2030. They conclude that, on the policies in force in 2005, China’s energy use and CO2 emissions from fuel combustion are likely to grow by more than 6% per annum over 2005–30. This would imply emissions from energy use (excluding cement production) of 6.2 GtC in 2030, by comparison with an overall global figure in 2004 of 7.2 GtC. Their simulations indicate that achieving major reductions will be difficult, but that a sustained new policy implementation process, involving use of the full range of instruments, could reduce China’s energy use and CO2 emissions by about 35% relative to this projected level by 2030, implying a growth rate over 2005–30 of 4% per annum.
The sustained rise of India
India’s growth has been accelerating since the late 1970s, and reached 5.5% in the Ninth Plan period, 1997–2002. The preliminary GDP growth rate outcome for the
Tenth Plan period, 2002–07,5 is 7.6% per annum, by comparison with a target of 8.1%, and growth in the last two years of the plan period averaged 9.2%. The Planning Commission (PC) has set a growth rate target of 9% for the Eleventh Plan period, 2007–12, with sectoral growth rates of 4.1% for agriculture, 10.5% for industry and 9.9% for the service sector (PC, 2007).
India’s growth has traditionally been driven by services rather than industry, but a notable feature of recent trends has been an increase in the growth of secondary industry (and especially manufacturing) relative to the overall growth of GDP. The target growth rate for real value added in manufacturing is 12% per annum.
The energy elasticity of GDP (excluding energy from biomass) for India was 1.15 over the period 1971–2005, although it was lower over 1990–2002 than in the earlier period. Energy use in India has been limited to date by a focus on service industries and by supply shortages, and half the country’s population remains without electricity (PC, 2007). But industrial and household demand is increasing and sustained efforts are being made to increase electricity generation, primarily through coal-fired power stations. The Planning Commission projects that the demand for coal will rise by 7.6% per annum between 2005–06 and 2011–12 (PC, 2007). India has also been highly dependent on energy from biomass and waste. But with expansion possibilities limited in these traditional areas, growing demand for energy will need to be increasingly met from commercial sources.
The major forward-looking study of India’s energy requirements is the Report of the Expert Committee on Integrated Energy Policy, prepared for the Planning Commission and published in August 2006 (Parikh, 2006). This report outlines both India’s growing energy needs in the context of rapid growth and the programs that are being put in place to ensure that they are met. On the demand side, and on the basis of a range of assumptions about growth rates and the energy elasticity of GDP, it projects growth in commercial energy demand in India between 5.6% and 7.2% per annum over 2006–07 to 2031–32. On the supply side the authors run eleven alternative scenarios, starting from an existing policy case in which the least cost energy sources are developed (scenario 1) through a cascading series of policy scenarios in which the potential of non-fossil energy sources and of energy savings are maximised. In scenario 11 all such policies are implemented simultaneously. For their preferred case of 8% GDP growth, scenario 1 projects an increase in commercial
energy use of 6.0% per annum over 2006–07 to 2031–32, while for scenario 11 the figure is 5.1% per annum. In scenario 1 CO2 emissions from energy use are expected to rise about 7% per annum to 1.5 GtC by 2031–32, while projected emissions by that date are about one third lower in scenario 11 at 1.0 GtC, a growth rate of about 5.5%.
An indicative quantification of the implications of the new growth path
The purpose of the preceding discussion is to provide evidence, for two major countries, on emerging trends in GDP growth and energy use. The new growth path will, of course, impact on many other countries in different ways. But it is important to note the scale of developments in China and India: if, in the light of the trends reviewed above, CO2 emissions from fuel combustion and cement production are assumed to grow by 6% per annum in both China and India over 2004–30, the additional emissions in 2030, over and above the IEA (2006) projection for that year,
amounts to 52.5% of global energy demand in 2004. That is, these revised assumptions alone produce a further increase of over 50% in global emissions relative to the 2004 level, in addition to the increase of 59% already envisaged in the IEA 2006 projections, by 2030.
Short of an authoritative international projection of the implications of the new growth path being available, the strategy of Sheehan, Jones et al. (2007) is adopted here to provide an indicative quantification for working purposes. They start from the IEA (2006) projections, but adjust them to take account of the trends discussed above
in China and India, and in a number of other rapidly developing countries in East Asia, but otherwise adopt the IEA (2006) assumptions and results. The methodology and detailed assumptions used are described in that paper while the results, for CO2 emissions from fuel combustion and cement, are provided in. Emissions in 2030 are 120% above the 2004 level (and 150% above the 2000 level), and still growing at over 2% per annum at that time. First, in recent years the world has moved to a new path of rapid global growth, largely driven by the developing countries, which now comprise 40% of world GDP. This growth path remains energy intensive and heavily reliant on the use of coal – global coal use will rise by nearly 60% over the decade to 2010. Second, if the key developing countries in Asia continue to drive growth after 2010, albeit at a more subdued pace, then on unchanged policies global CO2 emissions from fuel combustion are likely to double their 2000 level by about 2020 and continue to rise beyond 2030. This must be considered a realistic, though of course not inevitable, unchanged policy outcome. Third, the SRES marker scenarios, finalised in 1998, do not capture this abrupt shift to rapid growth based on fossil fuels and centered in key Asian countries, and no longer provide a
realistic guide for climate change analysis. The reference cases assembled in recent studies using integrated assessment models also fail to recognise this new reality. An international effort to develop new, realistic projections to 2030, with a range of scenarios beyond that time, is urgently required. Fourth, recognition of this new emissions path as a realistic possibility is likely to have a significant effect on the impact and damage estimates from an unchanged policy case, on the analysis of achievable stabilisation paths and on estimates of the costs of achieving stabilization at a given GHG concentration level. Finally, recognition of this new growth path also means that policy must focus on the short-run dynamics of emissions, and on measures with immediate impact. For example, if stabilisation is to be achieved at 550 ppm CO2e a significant reduction in global emissions relative to the reference path is needed in the next ten years. This in turn will require an emphasis on policies with an
immediate effect on emissions, perhaps such as price, tax and regulatory measures to reduce energy use and the rapid diffusion of existing non-fossil fuel technologies, together with greater knowledge about the effectiveness and the economic costs of such policies.
Rising food prices: policy options and World Bank
Background note for the Development Committee
Rising food prices: trends and determinants
The rising trend in international food prices continued, and even accelerated, in 2008.U.S. wheat export prices rose from $375/ton in January to $440/ton in March, and Thai rice export prices increased from $365/ton to $562/ton. This came on top of a 181 percent increase in global wheat prices over the 36 months leading up to February 2008, and a 83 percent increase in overall global food prices over the same period.
Increased bio-fuel production has contributed to the rise in food prices. Concerns over oil prices, energy security and climate change have prompted governments to take a more proactive stance towards encouraging production and use of bio-fuels. This has led to increased demand for bio-fuel raw materials, such as wheat, soy, maize and palm oil, and increased competition for cropland. Almost all of the increase in global maize production from 2004 to 2007 (the period
when grain prices rose sharply) went for bio-fuels production in the U.S., while existing stocks were depleted by an increase in global consumption for other uses. Other developments,
such as droughts in Australia and poor crops in the E.U. and Ukraine in 2006 and 2007, were largely offset by good crops and increased exports in other countries and would not, on their own, have had a significant impact on prices. Only a relatively small share of the increase in foodA production price (around 15%) is due directly to higher energy and fertilizer costs.
The observed increase in food prices is not a temporary phenomenon, but likely to persist in the medium term. Food crop prices are expected to remain high in 2008 and 2009 and then begin to decline as supply and demand respond to high prices; however, they are likely to remain well above the 2004 levels through 2015 for most food crops. Forecasts of other major organizations (FAO, OECD, and USDA) that regularly monitor and project commodity prices are broadly consistent with these projections. Predictions of high food price in the medium run are further strengthened when we factor in the impact of policies aimed at achieving energy security and reduced carbon dioxide emissions, which may present strong trade-offs with food security objectives.
Impact on countries and households
Rising global food prices are contributing to high food inflation in many countries. The pass-through of rising global prices does not translate into an immediate and proportionate rise in domestic price levels, due to various factors such as a weakening dollar, domestic infrastructure and price stabilization policies. While the extent of global price transmission varies, over the past year there have been significant surges in domestic food price inflation in countries such as Sri Lanka (34%), Costa Rica (21%), and Egypt (13.5%). In many countries
and regions, food price inflation is higher than aggregate inflation and contributing to underlying inflationary pressures. For example, in Europe and Central Asia overall inflation in 2007 averaged 10%, food inflation 15% and bread and cereals inflation 23%.4 This compares to 6% overall inflation and 6.4% food inflation in 2006.
The terms-of-trade effects of these higher food prices have generally been mitigated by rising non-food commodity prices, although these averages mask significant balance of payments impacts for certain countries. When all primary commodity price changes are considered, the terms-of-trade impacts become large and positive for resource rich countries as exports of oil and other commodities more than compensate for higher food prices. Countries with the largest negative terms-of-trade impact include Lesotho, Eritrea and Gambia.
The distributional impacts of rising food prices can be serious even in countries where the balance of payments has not been adversely affected. While some households benefit from higher prices, others are hurt by them, depending on whether they are net producers or consumers of the food staple and the extent to which wages adjust to higher food price inflation. In general poor people, especially in urban areas, suffer due to rising food prices. Using a sample of household data for eight low income countries, a recent paper5 analyzes the impacts of higher prices of key staple foods on poverty, taking into account direct impacts from changes in commodity prices, and impacts through changes in wage rates for unskilled labor. The results show that, in six of the eight countries considered, price increases for staple foods were associated with a significant rise in poverty.
Averaging across these eight countries, the increase in food prices between 2005 and 2007 is estimated to have increased poverty by 3 percentage points. A recent assessment in Indonesia shows that over three-fourths of the poor are net rice buyers, and an increase in the relative rice price by 10 percent will result in an additional two million poor people (or 1% of the population). Analysis using an alternative price index weighted according to the consumption patterns of the poor in Latin America suggests that in most countries of the region, the effective inflation rate faced by the poor is higher than the official rate by 3 percentage points.
For many countries and regions where progress in reducing poverty has been slow, the negative poverty impact of rising food prices risks undermining the poverty gains of the last 5 to 10 years, at least in the short term. For example, in the case of Yemen, estimates show that the doubling of wheat prices over the last year could reverse all gains in poverty reduction achieved between 1998 and 2005. Over the long term, the impact on poverty of higher food and other commodity prices is less clear and depends partly on how overall economic growth responds to increased wealth accumulation and investment by net food-selling rural
households.
What can governments do?
Policy interventions can be divided into three broad classes: (i) interventions to ensure household food security by strengthening targeted safety nets; (ii) interventions to lower domestic food prices through short-run trade policy measures or administrative action, and (iii) interventions to enhance longer-term food supply. Within all three categories of policies there are ‘first best’ or preferred options that are more effective and equitable, and introduce fewer distortions.
Ensuring household food security via targeted safety nets First best options to address food insecurity include targeted cash transfers to vulnerable groups. These support the purchasing power of the poor without distorting domestic incentives to produce more food, and without reducing the incomes of poor food sellers. Examples include cash or near-cash transfers7 that are conditional upon meeting a requirement (such as low income, location or occupation) or engaging in a mandated behavior (such as sending children to school). The scale, targeting efficiency and value of such transfer programs tend to be directly related to overall levels of development, given the administrative complexities and fiscal costs
entailed. They are not always a feasible option in low-income countries with weak administrative capacities.
Various kinds of cash transfer programs are currently used in Brazil, China, Ethiopia, Egypt, Indonesia, Mexico, Mozambique, South Africa, Sri Lanka, and Tunisia. Several of these countries are adjusting current programs in response to the rise in food prices. For example, in Ethiopia, where food price inflation in February 2008 was 23 percent (year on year), the Government has raised the cash wage rate of the largest cash-for-work program by 33%.
A number of countries, including Bangladesh, Madagascar, Cambodia, and India, are using self-targeted8 foodfor- work programs, while others, including Afghanistan and Angola, use emergency food aid distribution to ensure food security for vulnerable groups. The food-for-work program in Bangladesh has been expanded recently due to both natural disasters and the rise in food prices. While self-targeting reduces the costs involved in administrative targeting, the physical transfer of food is itself costly and can lead to leakages. Food aid can also have growing disincentive effects on local production if it becomes entrenched beyond the initial emergency or is not tied to a work requirement. Still other countries, including Burkina Faso, Brazil, China, Kenya, Honduras, Mexico and Mozambique, make effective use of school feeding programs to improve the food intake of school-age children and their families. South Africa is expanding allocations to its school nutrition program to keep pace with the rate of food inflation.
On the downside, school-based programs do not typically address child malnutrition at its most critical point – when children are in their infancy.
Rising food prices also risk derailing recent gains in reducing malnutrition. Between 1990 and 2005, the share of children under five with moderate and severe stunting fell from 33.5 percent worldwide to 24.1%.9 While food prices are not the main driver of malnutrition, they do affect nutritional outcomes through their impact on real incomes and household purchasing behavior. In compensating for rising food prices, vulnerable households may substitute towards less food, or cheaper, but less nutritious, substitutes for current diets.
Ensuring household food security by lowering domestic food prices First best options to lower domestic prices include reducing tariffs and other taxes on key staples. Many countries impose tariffs on food imports, both to encourage domestic production and boost domestic revenue. In times of sharply increasing prices, reductions in tariffs and taxes can provide some relief to consumers, albeit at a fiscal cost. The revenue loss from reducing tariffs can be significant and the fiscal implications of combining this with additional social protection expenditures may well require cutbacks in lower priority areas. Some
twenty-four of fifty-eight countries sampled have recently reduced import duties and VAT in the wake of rising food inflation. Others, such as the Philippines, continue to maintain high tariffs to protect domestic producers in– yet these high tariffs adversely affect the large majority of the poor, who are net consumers. Several countries (mainly in the Middle East-North Africa region) have a long history of using bread or grain subsidies specifically targeted to the poor to cope with household food insecurity. Others have introduced consumer subsidies for staples following the recent rise in food prices. For example, the Government of Yemen is supplying wheat in select markets at subsidized rates following a sharp rise in food prices. In early 2008 the Government of Pakistan announced that it was reviving a ration card system to distribute subsidized wheat. The risk with such measures is that they can become entrenched, incurring high fiscal costs. Moreover, if consumer subsidies are met by measures to keep producer prices low, this can create disincentives for domestic food producers, and end up being counterproductive. The one exception is when price controls are explicitly introduced as a temporary measure and are widely felt to be justifiable in terms of a higher social goal. In such cases, the risks of entrenchment will be minimized, as observed in recent interventions to limit price increases for staples during Ramadan in Morocco. For countries that are grain exporters, there may be political pressures to ban or tax grain exports in high price years. Unfortunately, several countries have now implemented these types of measures. These policies tend to have a limited impact on domestic price levels and a significant negative effect on earnings for domestic producers and exporters. They can also lead to sharp price fluctuations in countries that depend on imports, proving harmful to the global system. In the 1970s and 1980s, many countries implemented a grain buffer stock policy to physically carry over grain surpluses (domestic or imported) from low price years to high price years. In practice, this policy tended to entail high fiscal costs with difficult management and governance issues, while the benefits it yielded for household food security were unclear. Furthermore, world markets could be relied on to provide a steady supply of relatively cheap grain imports when needed. More recently, however, the stock-holding policies of several large producers—such as the U.S., E.U. and China—have changed, contributing to the present situation of very low global grain stocks and increased global price volatility. As a consequence, a number of developing countries, such as Indonesia, are considering reverting to this form of price management, particularly after experiencing the impact of export bans in key export countries.
Measures to stimulate a medium-term food grain supply response While higher grain prices are clearly a burden to poor net purchasers of food, they also present an opportunity to stimulate foodgrain production and enhance the contribution of agriculture to mediumrun growth. For example, higher prices weaken the rationale for costly floor prices or import tariffs for grain, and may facilitate the implementation of politically difficult trade reforms. Higher grain prices can also help to reverse a generally declining trend in government, private sector and donor investment in the agricultural sector. Agricultural producers such as Brazil, Malaysia and Thailand have made significant progress in agricultural commercialization in recent years, and have increasingly undertaken investments in research and extension necessary to promote increased agricultural productivity and reduced agricultural risk.
However, some of the short-run policy options discussed above may limit the scope for longer-term solutions. For example, policy responses that seek to control markets through mandated grain prices, export restrictions, forcible procurement, or direct government involvement in marketing activities are likely to lower the food supply response over the medium term. In contrast, alternative measures such as the piloting of market based risk management tools in Malawi, and the improvement of publicly accessible market information systems in India and Mali, are all likely to mobilize significant new resources in the private sector to cut marketing costs and improve efficiency of grain markets over the medium term.
For many low-income countries, transport and logistics costs are a key component of food prices and are generally far higher than OECD benchmarks of around 9 percent. While countries can do little to reduce ocean shipping costs (which for high volume, relatively low value goods such as grains and edible oils represent a significant part of the final price), they can act to lower the overall cost of domestic distribution. The importance of strengthening inland transport links in mitigating price spikes was recently underscored in Congo Republic. Improvements in transport capacity stemmed the rise in food price inflation that was experienced in 2006, and further investments in transport links with Brazzaville are expected to be an important part of controlling price spikes. Investments in basic transport infrastructure have a proven record in reducing prices, particularly in remote locations in countries such as Nepal. Moreover, improvements in customs facilitation, logistics performance, and efficient grain storage can also have significant benefits for consumers, while generating a favorable supply response
Measures to handle the ‘spillover’ effects of the above-mentioned policy responses
Many of the policy responses discussed in the previous two sections have significant fiscal implications.In the case of Ethiopia, for example, the total additional costs of combined measures to raise the wage on the cash-for-work program, lift the VAT on food grains, and distribute wheat to the urban poor at a subsidized price, are likely to exceed 1% of GDP. The macroeconomic consequences of higher spending depend largely on how they will be financed. Where additional budgetary costs are financed via higher domestic borrowing, this may lead to higher overall inflation. An alternative is to transfer costs to non-poor taxpayers, which may or may not
be feasible depending on country-specific revenue-raising capacities and political economy considerations. Diverting resources from other social sector spending or from other core public investments to finance shortterm responses may have medium and long-run opportunity costs. On the other hand, addressing food security priorities may provide an opportunity to reduce lower priority expenditures and reallocate these resources. Given the potentially important economic and political costs of not addressing food security, a temporary increase in budget deficits may be warranted.
Not all countries have the same capacity to accommodate and execute additional safety net and food policy spending. Using comparable data from the World Bank’s Country Policy and Institutional Assessment indicators, developing countries can be classified into four categories, depending on the extent of fiscal and balance of payments imbalances: (1) those in which initially weak public finances and fiscal management capacity has been further undermined by adverse terms-of-trade shocks (e.g. Burundi, Eritrea, Grenada, Haiti, Jamaica, and Nepal); (2) those in which somewhat stronger initial positions have been weakened by the terms-of-trade shocks (e.g. Burkina Faso, Ethiopia, and Honduras) and/or compounded by political crises (e.g. Kenya and Pakistan); (3) those in which there is weak fiscal capacity to effectively execute the additional food policy spending even in the face of favorable terms-of-trade movements (e.g. Mongolia and Zambia); and (4) those with stronger initial fiscal and balance of payment indicators, in which there is greater scope for mitigating the adverse impact of rising food prices (e.g. Indonesia, Mexico, and Tunisia).
The design of public policies to address rising food prices is conditioned by political economy factors.
The strength of different interest groups is a critical factor in influencing policy choices and determining what solutions are feasible. Even in cases where countries are net suppliers of food to world markets, governments may face strong incentives to put in place protective measures. Sound policy choices will seek to implement those solutions which are economically most efficient, yet reflective of political economy considerations and in line with the country’s fiscal space and institutional capacity. In some cases, first or even second best policies may not be feasible or may involve difficult political choices. In general, government policy choices are likely to be better accepted and understood if accompanied by a transparent and effective communications strategy on the causes of high food prices and accompanying policy measures.
Just-in-time policy advice to address immediate concerns. There is strong demand for Bank advice on the design and expansion of safety net programs and food market interventions to help protect vulnerable groups. In Indonesia, the World Bank’s work has played a significant role in informing discussion of the impact of rice prices on poverty and on the usefulness of various policy instruments, for example cash transfers.10 In Egypt, the Bank helped bring together Mexican officials with experience of conditional cash transfer programs to share with Government officials. In Ethiopia, wage rate analysis carried out by the Bank was the basis of adjusting the cash transfer element of the country’s largest safety net program. There has also been demand for advice on market interventions to smooth supply and lower food prices. An intensified dialogue on food stocks (which addresses optimal stock amounts, fiscal trade-offs, and implementation challenges) is being held in several countries, including Indonesia and Burkina Faso. In the Philippines, the Bank is advising the Government on the best strategy for reducing rice import tariffs. A high level forum is being organized in Morocco to discuss various reform options of the fuel and food subsidy programs.
Several countries have sought policy advice from the Bank to cope with the macroeconomic implications of rising food prices. Several policy notes have been prepared for partner countries on the causes of high food price inflation (e.g. Bangladesh and China) and options to manage rising inflation rates (e.g. Morocco). At the request of a number of Latin American Central Banks, the World Bank is organizing a workshop in Peru in May 2008 to discuss the use of inflation targeting. Several governments are asking for information on global trends and prospects to better understand the structural nature of the rise in food prices, as well as for information on responses adopted by other countries. Bank staff will be meeting with the Ministers of Finance of Central American countries to share Bank knowledge on food price trends and policies.
Meeting short-run financing needs. The immediate fiscal impacts of rising food prices vary across countries, as many food importers have been compensated by rising commodity export prices. It is still too early to assess the extent to which countries will turn to the Bank to contribute to emerging financing gaps. However, a few countries are actively considering increasing the size of forthcoming Development Policy Loans (e.g. Burkina Faso’s PRSC 7).
In the short run, the World Bank could scale up financing in existing programs and ongoing investment projects for safety net and agricultural programs. In Latin America, where many countries have comprehensive safety nets providing support to vulnerable groups, the Bank stands ready to scale up financial support to many of these programs. Additional Bank support can help expand and improve existing programs by providing: technical assistance to improve targeting and coverage, programmatic financing for strengthening social protection systems, and contingent financing for budgetary flexibility in the face of large-scale shocks. In Jamaica, the Bank is currently preparing a social protection project, which could be expanded to increase its coverage. In other cases, existing lending programs are being modified to improve the efficiency of safety net programs. For instance, in the Middle East-North Africa region, a number of DPLs are supporting the reform of food subsidies.
While most of its agricultural projects are geared towards medium-term policy and institutional reforms to increase productivity, the Bank also designs interventions to boost short-term food staple production, storage and distribution. For instance, an additional $15 million supplemental credit for an existing agricultural project is being prepared in Burundi in order to finance the distribution of crop inputs for the forthcoming agricultural season.
Expanding and improving access to safety nets and risk management instruments. Improving the quality of and access to safety nets will be a priority for protecting vulnerable households in the face of continued uncertainties in global food markets – at least for the foreseeable future. The Bank can help countries build stronger and more flexible safety nets to cope with shocks, with clear targeting and programmatic frameworks that can be quickly scaled up to protect vulnerable households. In addition, expanding programs to ensure basic nutrition, particularly for infants, and improved access to health and education systems will also help minimize the likelihood that income shocks reduce demand and damage human capital accumulation. Finally, the Bank is
also investing to help develop modern risk management systems such as crops and disaster insurance.
Support for an international agenda
The impacts of the recent surge in food prices are reverberating across key dimensions of the development agenda, including poverty alleviation, macroeconomic stability, investment incentives and energy security/climate change policies. Because it is capable of weaving together the economic, poverty, social, agricultural and environmental perspectives, the Bank is well-placed to catalyze global action and influence the international agenda. Three such issues where the Bank can seek to improve global outcomes are discussed below, many of which are of direct consequence for middle-income countries.
First, the Bank is working closely with countries and other donors to minimize the adoption of policies with negative spillover effects for others. High levels of trade tariffs and subsidies create major negative externalities. Agricultural tariffs and subsidies in developed countries cost developing countries annually the equivalent of about five times the current levels of overseas development assistance to agriculture. Export bans also bring about negative externalities, particularly for countries that are heavily dependent upon imports. They can create price spikes in importing countries and political pressure for domestic food self-sufficiency.
Second, the Bank’s climate change agenda seeks to inform the global debate on bio-fuels through analysis, monitoring and balancing of competing needs for energy and food security. Concerns over increasing energy use, climate change, and carbon dioxide emissions from fossil fuels make switching to lowcarbon fuels a high policy priority at both the global and country levels. Bio-fuels are a potential low-carbon energy source, although whether bio-fuels offer carbon savings depends on how they are produced. Secondgeneration bio-fuels produced from waste products, in particular, can avoid land use change and some of the emissions associated with current bio-fuel programs, and may hence offer significant environmental and social benefits. These benefits, however, have to be weighed against the potential costs of rising food prices. According to a recent IFPRI study, most scenarios of increased use of bio-fuels imply substantial trade-offs with food prices. These trade-offs are dampened, although not eliminated, when technological advances in bio-fuel and crop production are considered. Trade-offs between energy security, climate change and food security objectives need to be carefully monitored and integrated into both food and bio-fuel policy actions.
Third, the increase in food prices creates an opportunity for the global community to refocus on investments in agriculture and social protection. The structural shift in food prices creates an opportunity for the Bank and other donors to work with partner countries to build the political coalitions and mobilize the necessary financial support to reverse a perennial problem of under-investment in agriculture and to build better safety nets to help the poor cope with their endemic high levels of risk.
Rising food prices: trends and determinants
The rising trend in international food prices continued, and even accelerated, in 2008.U.S. wheat export prices rose from $375/ton in January to $440/ton in March, and Thai rice export prices increased from $365/ton to $562/ton. This came on top of a 181 percent increase in global wheat prices over the 36 months leading up to February 2008, and a 83 percent increase in overall global food prices over the same period.
Increased bio-fuel production has contributed to the rise in food prices. Concerns over oil prices, energy security and climate change have prompted governments to take a more proactive stance towards encouraging production and use of bio-fuels. This has led to increased demand for bio-fuel raw materials, such as wheat, soy, maize and palm oil, and increased competition for cropland. Almost all of the increase in global maize production from 2004 to 2007 (the period
when grain prices rose sharply) went for bio-fuels production in the U.S., while existing stocks were depleted by an increase in global consumption for other uses. Other developments,
such as droughts in Australia and poor crops in the E.U. and Ukraine in 2006 and 2007, were largely offset by good crops and increased exports in other countries and would not, on their own, have had a significant impact on prices. Only a relatively small share of the increase in foodA production price (around 15%) is due directly to higher energy and fertilizer costs.
The observed increase in food prices is not a temporary phenomenon, but likely to persist in the medium term. Food crop prices are expected to remain high in 2008 and 2009 and then begin to decline as supply and demand respond to high prices; however, they are likely to remain well above the 2004 levels through 2015 for most food crops. Forecasts of other major organizations (FAO, OECD, and USDA) that regularly monitor and project commodity prices are broadly consistent with these projections. Predictions of high food price in the medium run are further strengthened when we factor in the impact of policies aimed at achieving energy security and reduced carbon dioxide emissions, which may present strong trade-offs with food security objectives.
Impact on countries and households
Rising global food prices are contributing to high food inflation in many countries. The pass-through of rising global prices does not translate into an immediate and proportionate rise in domestic price levels, due to various factors such as a weakening dollar, domestic infrastructure and price stabilization policies. While the extent of global price transmission varies, over the past year there have been significant surges in domestic food price inflation in countries such as Sri Lanka (34%), Costa Rica (21%), and Egypt (13.5%). In many countries
and regions, food price inflation is higher than aggregate inflation and contributing to underlying inflationary pressures. For example, in Europe and Central Asia overall inflation in 2007 averaged 10%, food inflation 15% and bread and cereals inflation 23%.4 This compares to 6% overall inflation and 6.4% food inflation in 2006.
The terms-of-trade effects of these higher food prices have generally been mitigated by rising non-food commodity prices, although these averages mask significant balance of payments impacts for certain countries. When all primary commodity price changes are considered, the terms-of-trade impacts become large and positive for resource rich countries as exports of oil and other commodities more than compensate for higher food prices. Countries with the largest negative terms-of-trade impact include Lesotho, Eritrea and Gambia.
The distributional impacts of rising food prices can be serious even in countries where the balance of payments has not been adversely affected. While some households benefit from higher prices, others are hurt by them, depending on whether they are net producers or consumers of the food staple and the extent to which wages adjust to higher food price inflation. In general poor people, especially in urban areas, suffer due to rising food prices. Using a sample of household data for eight low income countries, a recent paper5 analyzes the impacts of higher prices of key staple foods on poverty, taking into account direct impacts from changes in commodity prices, and impacts through changes in wage rates for unskilled labor. The results show that, in six of the eight countries considered, price increases for staple foods were associated with a significant rise in poverty.
Averaging across these eight countries, the increase in food prices between 2005 and 2007 is estimated to have increased poverty by 3 percentage points. A recent assessment in Indonesia shows that over three-fourths of the poor are net rice buyers, and an increase in the relative rice price by 10 percent will result in an additional two million poor people (or 1% of the population). Analysis using an alternative price index weighted according to the consumption patterns of the poor in Latin America suggests that in most countries of the region, the effective inflation rate faced by the poor is higher than the official rate by 3 percentage points.
For many countries and regions where progress in reducing poverty has been slow, the negative poverty impact of rising food prices risks undermining the poverty gains of the last 5 to 10 years, at least in the short term. For example, in the case of Yemen, estimates show that the doubling of wheat prices over the last year could reverse all gains in poverty reduction achieved between 1998 and 2005. Over the long term, the impact on poverty of higher food and other commodity prices is less clear and depends partly on how overall economic growth responds to increased wealth accumulation and investment by net food-selling rural
households.
What can governments do?
Policy interventions can be divided into three broad classes: (i) interventions to ensure household food security by strengthening targeted safety nets; (ii) interventions to lower domestic food prices through short-run trade policy measures or administrative action, and (iii) interventions to enhance longer-term food supply. Within all three categories of policies there are ‘first best’ or preferred options that are more effective and equitable, and introduce fewer distortions.
Ensuring household food security via targeted safety nets First best options to address food insecurity include targeted cash transfers to vulnerable groups. These support the purchasing power of the poor without distorting domestic incentives to produce more food, and without reducing the incomes of poor food sellers. Examples include cash or near-cash transfers7 that are conditional upon meeting a requirement (such as low income, location or occupation) or engaging in a mandated behavior (such as sending children to school). The scale, targeting efficiency and value of such transfer programs tend to be directly related to overall levels of development, given the administrative complexities and fiscal costs
entailed. They are not always a feasible option in low-income countries with weak administrative capacities.
Various kinds of cash transfer programs are currently used in Brazil, China, Ethiopia, Egypt, Indonesia, Mexico, Mozambique, South Africa, Sri Lanka, and Tunisia. Several of these countries are adjusting current programs in response to the rise in food prices. For example, in Ethiopia, where food price inflation in February 2008 was 23 percent (year on year), the Government has raised the cash wage rate of the largest cash-for-work program by 33%.
A number of countries, including Bangladesh, Madagascar, Cambodia, and India, are using self-targeted8 foodfor- work programs, while others, including Afghanistan and Angola, use emergency food aid distribution to ensure food security for vulnerable groups. The food-for-work program in Bangladesh has been expanded recently due to both natural disasters and the rise in food prices. While self-targeting reduces the costs involved in administrative targeting, the physical transfer of food is itself costly and can lead to leakages. Food aid can also have growing disincentive effects on local production if it becomes entrenched beyond the initial emergency or is not tied to a work requirement. Still other countries, including Burkina Faso, Brazil, China, Kenya, Honduras, Mexico and Mozambique, make effective use of school feeding programs to improve the food intake of school-age children and their families. South Africa is expanding allocations to its school nutrition program to keep pace with the rate of food inflation.
On the downside, school-based programs do not typically address child malnutrition at its most critical point – when children are in their infancy.
Rising food prices also risk derailing recent gains in reducing malnutrition. Between 1990 and 2005, the share of children under five with moderate and severe stunting fell from 33.5 percent worldwide to 24.1%.9 While food prices are not the main driver of malnutrition, they do affect nutritional outcomes through their impact on real incomes and household purchasing behavior. In compensating for rising food prices, vulnerable households may substitute towards less food, or cheaper, but less nutritious, substitutes for current diets.
Ensuring household food security by lowering domestic food prices First best options to lower domestic prices include reducing tariffs and other taxes on key staples. Many countries impose tariffs on food imports, both to encourage domestic production and boost domestic revenue. In times of sharply increasing prices, reductions in tariffs and taxes can provide some relief to consumers, albeit at a fiscal cost. The revenue loss from reducing tariffs can be significant and the fiscal implications of combining this with additional social protection expenditures may well require cutbacks in lower priority areas. Some
twenty-four of fifty-eight countries sampled have recently reduced import duties and VAT in the wake of rising food inflation. Others, such as the Philippines, continue to maintain high tariffs to protect domestic producers in– yet these high tariffs adversely affect the large majority of the poor, who are net consumers. Several countries (mainly in the Middle East-North Africa region) have a long history of using bread or grain subsidies specifically targeted to the poor to cope with household food insecurity. Others have introduced consumer subsidies for staples following the recent rise in food prices. For example, the Government of Yemen is supplying wheat in select markets at subsidized rates following a sharp rise in food prices. In early 2008 the Government of Pakistan announced that it was reviving a ration card system to distribute subsidized wheat. The risk with such measures is that they can become entrenched, incurring high fiscal costs. Moreover, if consumer subsidies are met by measures to keep producer prices low, this can create disincentives for domestic food producers, and end up being counterproductive. The one exception is when price controls are explicitly introduced as a temporary measure and are widely felt to be justifiable in terms of a higher social goal. In such cases, the risks of entrenchment will be minimized, as observed in recent interventions to limit price increases for staples during Ramadan in Morocco. For countries that are grain exporters, there may be political pressures to ban or tax grain exports in high price years. Unfortunately, several countries have now implemented these types of measures. These policies tend to have a limited impact on domestic price levels and a significant negative effect on earnings for domestic producers and exporters. They can also lead to sharp price fluctuations in countries that depend on imports, proving harmful to the global system. In the 1970s and 1980s, many countries implemented a grain buffer stock policy to physically carry over grain surpluses (domestic or imported) from low price years to high price years. In practice, this policy tended to entail high fiscal costs with difficult management and governance issues, while the benefits it yielded for household food security were unclear. Furthermore, world markets could be relied on to provide a steady supply of relatively cheap grain imports when needed. More recently, however, the stock-holding policies of several large producers—such as the U.S., E.U. and China—have changed, contributing to the present situation of very low global grain stocks and increased global price volatility. As a consequence, a number of developing countries, such as Indonesia, are considering reverting to this form of price management, particularly after experiencing the impact of export bans in key export countries.
Measures to stimulate a medium-term food grain supply response While higher grain prices are clearly a burden to poor net purchasers of food, they also present an opportunity to stimulate foodgrain production and enhance the contribution of agriculture to mediumrun growth. For example, higher prices weaken the rationale for costly floor prices or import tariffs for grain, and may facilitate the implementation of politically difficult trade reforms. Higher grain prices can also help to reverse a generally declining trend in government, private sector and donor investment in the agricultural sector. Agricultural producers such as Brazil, Malaysia and Thailand have made significant progress in agricultural commercialization in recent years, and have increasingly undertaken investments in research and extension necessary to promote increased agricultural productivity and reduced agricultural risk.
However, some of the short-run policy options discussed above may limit the scope for longer-term solutions. For example, policy responses that seek to control markets through mandated grain prices, export restrictions, forcible procurement, or direct government involvement in marketing activities are likely to lower the food supply response over the medium term. In contrast, alternative measures such as the piloting of market based risk management tools in Malawi, and the improvement of publicly accessible market information systems in India and Mali, are all likely to mobilize significant new resources in the private sector to cut marketing costs and improve efficiency of grain markets over the medium term.
For many low-income countries, transport and logistics costs are a key component of food prices and are generally far higher than OECD benchmarks of around 9 percent. While countries can do little to reduce ocean shipping costs (which for high volume, relatively low value goods such as grains and edible oils represent a significant part of the final price), they can act to lower the overall cost of domestic distribution. The importance of strengthening inland transport links in mitigating price spikes was recently underscored in Congo Republic. Improvements in transport capacity stemmed the rise in food price inflation that was experienced in 2006, and further investments in transport links with Brazzaville are expected to be an important part of controlling price spikes. Investments in basic transport infrastructure have a proven record in reducing prices, particularly in remote locations in countries such as Nepal. Moreover, improvements in customs facilitation, logistics performance, and efficient grain storage can also have significant benefits for consumers, while generating a favorable supply response
Measures to handle the ‘spillover’ effects of the above-mentioned policy responses
Many of the policy responses discussed in the previous two sections have significant fiscal implications.In the case of Ethiopia, for example, the total additional costs of combined measures to raise the wage on the cash-for-work program, lift the VAT on food grains, and distribute wheat to the urban poor at a subsidized price, are likely to exceed 1% of GDP. The macroeconomic consequences of higher spending depend largely on how they will be financed. Where additional budgetary costs are financed via higher domestic borrowing, this may lead to higher overall inflation. An alternative is to transfer costs to non-poor taxpayers, which may or may not
be feasible depending on country-specific revenue-raising capacities and political economy considerations. Diverting resources from other social sector spending or from other core public investments to finance shortterm responses may have medium and long-run opportunity costs. On the other hand, addressing food security priorities may provide an opportunity to reduce lower priority expenditures and reallocate these resources. Given the potentially important economic and political costs of not addressing food security, a temporary increase in budget deficits may be warranted.
Not all countries have the same capacity to accommodate and execute additional safety net and food policy spending. Using comparable data from the World Bank’s Country Policy and Institutional Assessment indicators, developing countries can be classified into four categories, depending on the extent of fiscal and balance of payments imbalances: (1) those in which initially weak public finances and fiscal management capacity has been further undermined by adverse terms-of-trade shocks (e.g. Burundi, Eritrea, Grenada, Haiti, Jamaica, and Nepal); (2) those in which somewhat stronger initial positions have been weakened by the terms-of-trade shocks (e.g. Burkina Faso, Ethiopia, and Honduras) and/or compounded by political crises (e.g. Kenya and Pakistan); (3) those in which there is weak fiscal capacity to effectively execute the additional food policy spending even in the face of favorable terms-of-trade movements (e.g. Mongolia and Zambia); and (4) those with stronger initial fiscal and balance of payment indicators, in which there is greater scope for mitigating the adverse impact of rising food prices (e.g. Indonesia, Mexico, and Tunisia).
The design of public policies to address rising food prices is conditioned by political economy factors.
The strength of different interest groups is a critical factor in influencing policy choices and determining what solutions are feasible. Even in cases where countries are net suppliers of food to world markets, governments may face strong incentives to put in place protective measures. Sound policy choices will seek to implement those solutions which are economically most efficient, yet reflective of political economy considerations and in line with the country’s fiscal space and institutional capacity. In some cases, first or even second best policies may not be feasible or may involve difficult political choices. In general, government policy choices are likely to be better accepted and understood if accompanied by a transparent and effective communications strategy on the causes of high food prices and accompanying policy measures.
Just-in-time policy advice to address immediate concerns. There is strong demand for Bank advice on the design and expansion of safety net programs and food market interventions to help protect vulnerable groups. In Indonesia, the World Bank’s work has played a significant role in informing discussion of the impact of rice prices on poverty and on the usefulness of various policy instruments, for example cash transfers.10 In Egypt, the Bank helped bring together Mexican officials with experience of conditional cash transfer programs to share with Government officials. In Ethiopia, wage rate analysis carried out by the Bank was the basis of adjusting the cash transfer element of the country’s largest safety net program. There has also been demand for advice on market interventions to smooth supply and lower food prices. An intensified dialogue on food stocks (which addresses optimal stock amounts, fiscal trade-offs, and implementation challenges) is being held in several countries, including Indonesia and Burkina Faso. In the Philippines, the Bank is advising the Government on the best strategy for reducing rice import tariffs. A high level forum is being organized in Morocco to discuss various reform options of the fuel and food subsidy programs.
Several countries have sought policy advice from the Bank to cope with the macroeconomic implications of rising food prices. Several policy notes have been prepared for partner countries on the causes of high food price inflation (e.g. Bangladesh and China) and options to manage rising inflation rates (e.g. Morocco). At the request of a number of Latin American Central Banks, the World Bank is organizing a workshop in Peru in May 2008 to discuss the use of inflation targeting. Several governments are asking for information on global trends and prospects to better understand the structural nature of the rise in food prices, as well as for information on responses adopted by other countries. Bank staff will be meeting with the Ministers of Finance of Central American countries to share Bank knowledge on food price trends and policies.
Meeting short-run financing needs. The immediate fiscal impacts of rising food prices vary across countries, as many food importers have been compensated by rising commodity export prices. It is still too early to assess the extent to which countries will turn to the Bank to contribute to emerging financing gaps. However, a few countries are actively considering increasing the size of forthcoming Development Policy Loans (e.g. Burkina Faso’s PRSC 7).
In the short run, the World Bank could scale up financing in existing programs and ongoing investment projects for safety net and agricultural programs. In Latin America, where many countries have comprehensive safety nets providing support to vulnerable groups, the Bank stands ready to scale up financial support to many of these programs. Additional Bank support can help expand and improve existing programs by providing: technical assistance to improve targeting and coverage, programmatic financing for strengthening social protection systems, and contingent financing for budgetary flexibility in the face of large-scale shocks. In Jamaica, the Bank is currently preparing a social protection project, which could be expanded to increase its coverage. In other cases, existing lending programs are being modified to improve the efficiency of safety net programs. For instance, in the Middle East-North Africa region, a number of DPLs are supporting the reform of food subsidies.
While most of its agricultural projects are geared towards medium-term policy and institutional reforms to increase productivity, the Bank also designs interventions to boost short-term food staple production, storage and distribution. For instance, an additional $15 million supplemental credit for an existing agricultural project is being prepared in Burundi in order to finance the distribution of crop inputs for the forthcoming agricultural season.
Expanding and improving access to safety nets and risk management instruments. Improving the quality of and access to safety nets will be a priority for protecting vulnerable households in the face of continued uncertainties in global food markets – at least for the foreseeable future. The Bank can help countries build stronger and more flexible safety nets to cope with shocks, with clear targeting and programmatic frameworks that can be quickly scaled up to protect vulnerable households. In addition, expanding programs to ensure basic nutrition, particularly for infants, and improved access to health and education systems will also help minimize the likelihood that income shocks reduce demand and damage human capital accumulation. Finally, the Bank is
also investing to help develop modern risk management systems such as crops and disaster insurance.
Support for an international agenda
The impacts of the recent surge in food prices are reverberating across key dimensions of the development agenda, including poverty alleviation, macroeconomic stability, investment incentives and energy security/climate change policies. Because it is capable of weaving together the economic, poverty, social, agricultural and environmental perspectives, the Bank is well-placed to catalyze global action and influence the international agenda. Three such issues where the Bank can seek to improve global outcomes are discussed below, many of which are of direct consequence for middle-income countries.
First, the Bank is working closely with countries and other donors to minimize the adoption of policies with negative spillover effects for others. High levels of trade tariffs and subsidies create major negative externalities. Agricultural tariffs and subsidies in developed countries cost developing countries annually the equivalent of about five times the current levels of overseas development assistance to agriculture. Export bans also bring about negative externalities, particularly for countries that are heavily dependent upon imports. They can create price spikes in importing countries and political pressure for domestic food self-sufficiency.
Second, the Bank’s climate change agenda seeks to inform the global debate on bio-fuels through analysis, monitoring and balancing of competing needs for energy and food security. Concerns over increasing energy use, climate change, and carbon dioxide emissions from fossil fuels make switching to lowcarbon fuels a high policy priority at both the global and country levels. Bio-fuels are a potential low-carbon energy source, although whether bio-fuels offer carbon savings depends on how they are produced. Secondgeneration bio-fuels produced from waste products, in particular, can avoid land use change and some of the emissions associated with current bio-fuel programs, and may hence offer significant environmental and social benefits. These benefits, however, have to be weighed against the potential costs of rising food prices. According to a recent IFPRI study, most scenarios of increased use of bio-fuels imply substantial trade-offs with food prices. These trade-offs are dampened, although not eliminated, when technological advances in bio-fuel and crop production are considered. Trade-offs between energy security, climate change and food security objectives need to be carefully monitored and integrated into both food and bio-fuel policy actions.
Third, the increase in food prices creates an opportunity for the global community to refocus on investments in agriculture and social protection. The structural shift in food prices creates an opportunity for the Bank and other donors to work with partner countries to build the political coalitions and mobilize the necessary financial support to reverse a perennial problem of under-investment in agriculture and to build better safety nets to help the poor cope with their endemic high levels of risk.
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