Impact of climate change on poverty

Since a large chunk of the population in developing countries depends on agriculture sector for their livelihoods, they are the most vulnerable to the effects of climate change. They depend more on agriculture and other climate-sensitive natural resources for income and livelihoods. Calculating the impact of climate change on poverty is difficult due to complexities involved in the analysis. Mainly three methods are used by researches, according to Skoufias, Rabassa, Olivieri and Brahmbhatt (2011) in a latest economic brief: (i) economic growth models incorporating climate change impacts to work out various scenarios of how climate change affects the path of poverty over time; (ii) sector-specific channels through which climate change affects poverty, the intensity and heterogeneity of such impact, and appropriate policy responses; (iii) explore the impact of current climate variability on poverty and then the impacts of increased variability on future poverty.

The authors use three growth scenarios and estimate its impact on poverty using the Regional Integrated Model of Climate and the Economy (RICE) developed by Nordhaus (2010). The three scenarios are baseline scenario with a world without climate change, business as usual (BAU) scenario, and optimal abatement (an emission abatement path with full participation by all countries that maximizes global intertemporal economic welfare).

In a no climate change scenario, annual global per capita output growth rate would be 2.2% up to 2055, contributing to more than halving the world poverty rate at $2 a day level to 14.1% by 2055. Under BAU scenario with climate change, world GDP in 2055 would be 1.5% lower than in the baseline and the estimated number of poor people in 2055 would be modestly higher by 10 million (with most of the poor living in Africa and South Asia). Under the optimal abatement scenario, the expected number of poor people would rise by 9 million by 2055. This is because unlike in adaptation measures that benefit poor countries, most of the benefits under optimal abatement of emissions would accrue to higher-income countries.

This is the overall impact of climate change on poverty at the global level. However, its impact in and within countries is different. The heterogeneity of climate change impacts on poverty are linked to geographical location and specific household characteristics (if households are net producers or consumers of agricultural goods; income sources; types of assets owned; ability to adapt; and ability to access credit or safety nets).

Assuncao and Chein (2009) estimate that, on average, agricultural output per hectare could decrease by 18% by 2040 as a result of climate change, but at the municipality level, the impacts could range from a decease of 40% to an increase of 15% in Brazil.

Meanwhile, in India, increased mean surface temperature could lead to a 13% reduction in agricultural productivity by 2040 (Jacoby, Rabassa and Skoufias 2011). But, this would decrease average per capita consumption of rural households by only 6% as they derive more income from their labor endowment. For the Indian rural population as a whole, climate change could increase rural poverty between 1 and 6 percentage points by 2040 when compared to counterfactual of zero warming. Also, climate change’s impact falls more heavily on the poor than the rich. The authors also find that autonomous adaptation by Indian households (changes in cropping patterns, input use, and technology) reduces the average long-term loss in per capita consumption from climate change by about half (with weather shock the decline in per capita consumption is 11%; with autonomous adaptation, it is 6%).

The importance of core inflation

Larry Meyer quoted in The Economist’s Free exchange blog post about the importance of core inflation (general prices excluding energy and food prices). He argues that headline inflation tomorrow will converge to core inflation today. So, it is important to also focus on core inflation today to see where headline inflation will go in the future:

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“Why do we, as forecasters, and the FOMC in its own forecasts, focus on core inflation? The question should not be whether I buy groceries and gas, but whether headline or core inflation is a better measure of where headline inflation is likely to settle once overall prices have adjusted to the higher prices of energy and food. As forecasters, we want to know not only what (headline) inflation is today, but also, and much more importantly, where headline inflation is likely to be tomorrow (the medium term). Identifying a measure of underlying inflation gives us a good head start...

Our thesis, and the FOMC’s position, is that headline inflation converges to core, that is, headline inflation tomorrow will fall towards core inflation today. Whether or not this is a valid thesis is an empirical question...If you test whether higher oil prices raised core inflation over the 1970s and early 1980s (or in samples that include this period), the answer is a definitive “Yes” (higher oil prices pass through to core inflation). In this case, core inflation tomorrow will converge to headline today. However, if you test this hypothesis over the subsequent period, from the mid-1980s to today, the answer is “No” (no pass-through). In this case, headline tomorrow will converge to core today. This is the basis for our forecasts...

The Fed has built credibility over the last two decades: Long-term inflation expectations are stable, have been stable for more than a decade, and are likely to remain so. This means that spikes in food and energy prices do not get translated into expectations of higher inflation down the road and, thus, do not lead to a generalized increase in prices, today or tomorrow. So the critical question is whether inflation expectations are well anchored today—we believe that they are—and, more importantly, whether they are likely to remain so...”

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Per capita growth and children undernutrition

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“Lawrence Haddad, the director of the Institute of Development Studies at Sussex University, reckons that every 3-4% increase in a developing country’s income per head should translate into a 1% fall in rates of underweight children. In India the rate has barely shifted in two decades of growth. Per person, India eats less, and worse, than it used to. Mr Haddad calls the country the world’s Jekyll and Hyde: economic powerhouse, nutritional weakling. Over a third of the world’s malnourished children live there.”

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More in The Economist

Indian population at a glance, Census 2011

The Indian government has released provisional Census 2011 data. According to Census 2011, India has a population of 1.21 billion, up from 1.02 billion in 2001. Literacy rate in India is 74.04. Male literacy rate is 82.14 percent and female literacy rate is 65.46 percent. Population densticy is 382 persons per square kilometer. The sex ratio (females per 1000 males) is 940.

India's Census 2011
Population	Absolute
Total	1,21,01,93,422	1.21 billion
Males	62,37,24,248	623.72 million
Females	58,64,69,174	586.46 million
Decadal population growth, 2001-2011	Absolute	Percentage
Total growth	18,14,55,986	17.64
Males	9,15,01,158	17.19
Females	8,99,54,828	18.12
Population density (per sq. km.)	382
Sex ratio (females per 1000 males)	940
Population in age group 0-6	Absolute	% of total population
Total	15,87,89,287	13.12
Males	8,29,52,135	13.3
Females	7,58,37,152	12.93
Literates	Absolute	Literacy rate
Persons	77,84,54,120	74.04
Males	44,42,03,762	82.14
Females	33,42,50,358	65.46

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Links of interest (2011-03-30)

• Rameshore Khanal, an honest civil servant working as finance secretary of Nepal, resigned due to undue pressure from Deputy Prime Minister and Finance Minister Bharat Mohan Adhikary and his cronies (including businessmen who were about to be charged for tax evasion).  God knows how much Adhikary and the political parties are being paid by the crooked businessmen to oust Khanal from the finance ministry. This is corruption and dirty lobbying at its height. The morale of civil servants will further go down. The optimal solution right now is to take moral responsibility by Adhikary, resign immediately, and recall Khanal without any preconditions. He should also apologize to Khanal and to the nation for discouraging an honest and dignified civil servant from working to his fullest capacity. Meanwhile, Khanal writes on his facebook profile: “Paid Civil Service is not the only place where one can work for Change, Change for Good. There is a wider civil society where we can work together. We can work collectively for a change that our country needs.”
• South Asia and food crisis (About 75% of South Asia’s poor live in rural areas and agriculture sector employs about 60% of the labor force. With global food and fuel prices rising again, South Asia will be affected disproportionally. Regional inflation is already high and countries have limited fiscal space to maneuver.)
• Managing the food crisis in South Asia
• Exchange rate and trade regimes (Results suggest that both currency unions and direct pegs promote bilateral trade in Africa vis-à-vis more flexible exchange rate regimes, and that their effect is almost double for the region than that for an average country in the world sample.)
• Climate Change Risks and Food Security in Bangladesh
• The Middle East political crisis and remittances flows to South Asia (The small share of South Asian workers and limited remittance flows from Libya, Egypt, and Tunisia mean that direct and immediate impacts on remittance flows to South Asian countries overall will be limited. Gulf States employ more than 11 million expatriate workers, an estimated 8 million or more from South and East Asian countries. Saudi Arabia, the U.A.E, and Qatar are top destination for South Asian migrants and are main sources of remittance inflows.)

• Urgent actions needed to prevent recurring food crisis: Seven proposed initiatives by Shenggen Fan, Maximo Torero, and Derek Headey are as below:

1. Effective policies and technology investments to minimize food–fuel competition.
2. Social protection, especially social safety nets, for the most vulnerable groups.
3. Transparent, fair, and open global trade.
4. A global emergency physical grain reserve.
5. Policies and investments to promote agricultural growth, in particular smallholder productivity, in the face of climate change.
6. Investments by national governments in climate change adaptation and mitigation using the full potential that agriculture offers.
7. An international working group to regularly monitor the world food situation and trigger action to prevent excessive price volatility.

Energy crisis in Nepal

Declaring “energy crisis” for the next four and a half years, the Nepalese government launched a $275 million initiative to supply 2500 MW of electricity within that period. This drastic move comes after years of power outages (load-shedding) in a country that has one of the highest potentials of hydropower. Note that the previous UML-led government had set an ambitious target of generating 25,000 MW of hydroelectricity in the next two decades, much above the past Maoist-led government´s target of generating 10,000 MW of power in 10 years. Progress in this front is almost nil.

During fiscal year 2009/10 the annual peak demand reached 885.28 MW, a 8.96 percent growth over the peak demand in previous fiscal year. Annual energy demand recorded 4367.13 GWh out of which 3076.69 GWh was met by domestic power generation, 612.58 GWh was imported, and 667.860 GWh was managed through load-shedding (Nepal Electricity Authority 2010). Currently, power outages have reached up to 14 hours a day.

Since supply of electricity is trailing behind demand for electricity by over 50 percent (on an average the demand is 900 MW, but supply is around 450 MW), especially during dry season, it has affected pretty much everyone in the country. Due to acute power crunch cost of production of industries is going up, cost competitiveness of Nepalese products is decreasing, industries are closing down, production is being winded down, a shortfall in domestic production is leading to an increase in imports of even the most basic goods and services (contributing to widening trade deficit), and future growth potential is being severely crippled. It will take years to make up for the lost growth potential due to the ongoing energy crisis even if the power outages are solved in five years time.

Some of the strategies of the present government:

• Begin on a war footing the repair works at 39-megawatt multi-fuel plant in Duhabi, 14-megawatt diesel plant in Hetauda, and six-megawatt thermal plant in Biratnagar, and supply an additional 59 megawatt.
• Reduce the current electricity leakage form 26 percent to 20 percent.
• Encouraging the usage of CFL lamps, the customs duty in CFL import has been reduced from the current 15 percent to one percent.
• Add an additional 150 megawatt to 200 megawatt by repairing the powerhouses and increasing their capacities, and also by controlling leakages.
• Prioritize construction of one hydro project in each of the five development regions.
• Encourage the private sector to produce power from rubbish.
• Waive tax on private investors building new hydroelectric power plants.
• Provide special security for investors and introduce laws to make it a crime to hamper energy construction projects, punishable by five years in prison.

Few comments:

• While it is good to know that the government is getting serious about solving the power crisis, the latest moves are just an attempt to apply balm on a deep wound that needs a complete surgery of the whole structure/body. Grandiose plans had been put forth before as well, but in terms of implementation and action nothing substantial happened.
• Why is there such low investment even when there is high return to investment in this sector? Simple answer: business unfriendly policies, red tapes, politicization of both NEA and licensing procedure, and corruption, among others reasons. The power market in Nepal is deeply distorted (in terms of price, politics and socio-economic dimensions).
• Security of investment is a major concern among investors. Labor unions, politically-indoctrinated cadres, and affected villagers (who at least have genuine concerns about sharing outcomes and getting compensated for lost livelihoods and dwellings) are complicating security of investment.
• The purchasing agreement between NEA and producers is another contentious issue. NEA has been offering an average rate of Rs 4.50 per unit for private developers. However, the developers are demanding that the NEA purchase electricity at Rs 6 per unit. The NEA is importing electricity from India at Rs 9.80 per unit, which is double the rate offered to the private sector. How come NEA is willing to offer higher price per unit on imports than from that generated from domestic sources? Why such discrimination against domestic producers?
• About 26 hydro projects are ready to sign PPA but the developers are hesitating to negotiate purchase agreement at such a low price. Commercial banks have jacked up interest rates for hydropower projects to 13-14 percent, up from about 11 percent a few months ago. It means NEA should be offering higher price than the existing one to incentivize private sector to start investing in this underinvested sector. The late it is, the higher will be the cost of production as domestic bank loans will have higher interest rates due to their own problems, and construction machinery might be expensive as a result of increasing infrastructure investment in developing and emerging countries.
• Promoting the use of CFL bulbs and solar panels can only take us so far. It might encourage efficiency and reduce usage of hydroelectricity marginally, but it won’t address the main issue, which is the structural problems in NEA and politicization in the whole hydropower sector. Similarly, increasing electricity prices will also not help the nation overcome the underlying problems of this sector. It might just help NEA cover some of the losses (almost Rs 19 billion as of now) and save it from going fully bankrupt.
• The bottom line is that the power market in Nepal is deeply distorted, primarily due to excessive political interference and the corrupt, inefficient NEA, which has monopoly (and monopsony) over production, distribution, and purchase of electricity. Ironically, it is barred from adjusting electricity prices. The monopoly and monopsony powers of NEA should be axed. It should be given a supervisory/regulatory role only. Leave the rest to the private sector. The political interference in this sector should be outlawed.
• Nepal needs an impartial independent energy commission (something like the CIAA) with competent human resources and equipped with the latest technology to save the country from further plunging into darkness. NEA should be made just a regulator/supervisor of the energy sector. Political interference in this sector should be constitutionally outlawed. This might help Nepal overcome some of the hurdles in the power sector, but not all.
• Note that the lack of energy is one of the major binding constraints to economic activities in Nepal. For higher growth rate, enough power for households, enterprises and industries is a must.

Transplanting the Chinese model of growth

Here is a response from Justin Lin:

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“We can learn many lessons from other countries’ experiences. But I try never to expect to transplant other countries’ models to China, because the specific opportunities in China will be different from other countries. And you know, I think we cannot directly transplant China’s models to any other country, including other middle-income countries or developing countries, even less so in high-income countries. But there’s always something that we can learn from other people. As the Confucian saying goes, if you walk with two people, you can always draw inspiration from the successful one and avoid the mistakes of the unsuccessful one.”

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On replicating the process of structural transformation in China:

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“One is that economic development in any country is a process of continuous technological innovation, industrial upgrading and diversification, and structural transformation. Any country starts with more than 85 percent of its population living on agriculture when its income level is low. To become a high-income country, the population living on agriculture will reduce down to 10 percent or less. This structural transformation is inevitable. In this process, a well-functioning market will be necessary for improving resource allocation. But at the same time, the market alone will not be enough.

For example, at the agrarian stage, farmers produce mostly for their own consumption. Only a small amount of produce is traded in the nearby market with people known to each other. Under such a situation, the need for infrastructure—such as roads for transportation—is limited, and a legal system for contract enforcement is not required. When the production moves to manufacturing, the economies of scale become larger, and producers will mostly produce for other people and not for themselves any more. The market range will expand, and trading becomes arms-length. To facilitate the transaction, roads are needed for transportation, and legal contract enforcements are needed. Capital for equipment investment and maintaining operations will also increase with the improvement of technology and the increase in the size of the market. So to make the change in the structure of production feasible, the infrastructure, legal system, and financial system also need to be changed accordingly.”

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And, the role of the state:

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“No matter how smart they are, individual entrepreneurs will not be able to carry out all those changes by themselves. You need to have a state to help them—to coordinate those kinds of changes. The problem I see is that, to be successful in economic development, one needs to understand the nature of this process, and to allow the market to play a fundamental role. But at the same time you need to have a government to facilitate the workings of the market, in order to make this kind of technological innovation, as well as structural transformation, feasible—to help carry it out smoothly and rapidly. This is one lesson that we can learn from China.”

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