Unfortunately, those Western governments with decision making power and resources to help vulnerable countries respond to the polycrisis are not inclined to use it, given domestic cost-of-living crises in G7 countries, the ongoing conflict in Ukraine, and limited domestic political appetite for international initiatives.
In October, the International Monetary Fund (IMF) published what is perhaps its most bleak economic outlook in a decade, forecasting that the world economy will grow by only 2.7 percent in 2023 and warning that “the worst is yet to come.” Not since the global financial crisis of 2007–2008 have we seen such pressure on vulnerable countries grappling with what Carnegie scholar Adam Tooze describes as “polycrisis.” Climate change, food and energy price inflation, debt distress, and an ongoing pandemic have created a dynamic where, in Tooze’s view, “the whole is even more dangerous than the sum of the parts.”
This constellation of crises demands that G20 leaders design a new global financial architecture that delivers urgent liquidity for vulnerable countries, a solution for countries facing debt distress, and long-term financing at an order of magnitude greater than currently available—all while giving those vulnerable countries a more meaningful voice in the design of that architecture.
This polycrisis comes to its most acute head within the twenty-five countries that, according to Bloomberg, are most vulnerable to debt distress. Home to 1.5 billion people, they range from middle-income countries like Pakistan and Egypt to low-income countries like Ethiopia. And while the UN’s Food Price Index has retreated from the all-time highs that appeared immediately in the wake of Russia’s invasion of Ukraine, food prices remain higher than they were during the crises in 2008 and 2010—the latter of which precipitated unrest in more than forty countries as well as contributing to the Arab Spring protests. This is happening against a backdrop of increasing extreme weather events—from historic drought in the Horn of Africa to devastating floods in Pakistan that displaced 33 million people. In the first half of this year, extreme weather events cost an estimated $65 billion in damages globally.
Such an unprecedented cocktail of volatility is systemic in nature and is, in part, created by the collective inability of the world’s most powerful governments to build a multilateral system more resilient to these shocks. At a minimum, it warrants an unprecedented response from the international community. Unfortunately, those Western governments with decisionmaking power and resources to help vulnerable countries respond to the polycrisis are not inclined to use it, given domestic cost-of-living crises in G7 countries, the ongoing conflict in Ukraine, and limited domestic political appetite for international initiatives.
A DANGEROUS MYOPIA ON THE PART OF WESTERN LEADERS
Taking a step back, if leaders from Europe and North America have thus far been reluctant to meet the current crisis moment, this is myopic for two reasons.
First, helping vulnerable countries avoid widespread hunger, mitigate debt distress, and build resilience to climate shocks is not charity but enlightened self-interest. It will contribute to stability in those nations and help avert the challenges created when large populations migrate to flee conflict and famine in search of economic opportunity. Europe’s so-called migration crisis in 2016, which helped fuel a wave of populism on the continent, was catalyzed in part by instability in Libya and Syria.
Second, Western countries are increasingly aware that their relationships with countries in the Global South are not what they assumed. A succession of UN General Assembly resolutions condemning Russia’s actions in Ukraine, most recently on October 12, 2022, saw many African countries abstain (see figure 1). While there are a number of reasons for such nonalignment, it is clear that some African countries want to be free to chart their own path and choose their own partnerships—and that the choice of partners depends in part on what the partner country can bring to the table.
In this regard, the West risks falling behind. Russia, the largest supplier of weapons to Africa, now provides 44 percent of major arms to the region. China committed about $160 billion in infrastructure financing in Africa between 2000 and 2020 in comparison with $153.4 billion in official development assistance from the United States1. In June, China announced a restructuring of some African countries’ debts amid concerns of debt sustainability and agreed to co-chair Zambia’s creditor committee to address the restructuring of the country’s debt.
In contrast, leaders from the Global South at UN General Assembly meetings both in public and private have disparaged European countries for stepping back from their role as custodians of the multilateral system, for their lack of support during the coronavirus pandemic, and for a litany of promises that remain unfulfilled. While they are more positive that the United States is in listening mode, as reflected in the recently published U.S. Strategy Toward Sub-Saharan Africa, they remain wary that U.S. domestic politics could see a shift of administration in two years’ time.
A study of developing countries’ attitudes compiled by Rosa Balfour, Lizza Bomassi, and Marta Martinelli at Carnegie Europe demonstrated the disconnect between how Europe thinks it is perceived and how it is actually perceived in key countries of the Global South. In many cases, the role of Europe’s development programming remains invisible to citizens of these countries, while steps to use the EU’s market access to enforce human rights and environmental standards, viewed at home as a positive impact of Europe in the world, are perceived elsewhere as simple market protectionism.
Likewise, a large-scale survey of African youth conducted by the Ichikowitz Family Foundation shows that in 2022, China overtook the United States as the geopolitical superpower viewed most favorably—in part because its actions on the continent are so visible. Analysis from Afrobarometer (see figure 2) presents a similar trend.
THE WEST’S CRISIS RESPONSE IS FUELING MISTRUST IN THE GLOBAL SOUTH
There is a growing perception among Africans that African countries are victims of crises created in and by other regions. This view is rooted in fact: the global financial crisis began in the U.S. housing market, the coronavirus pandemic began in China, and industrialized countries in the Global North caused the climate crisis (Africa has contributed just 4 percent to historical carbon emissions). In each case, Western countries’ policy responses to these crises further disadvantage African countries.
During the pandemic, Western countries have monopolized vaccine supply, and the current response to the climate crisis sees some Western governments seek to limit the ability of African countries to exploit natural gas to support economic and social development—while those Western countries continue to use natural gas themselves.
Not only is inflation greater in African countries, but it also has a more devastating impact on ordinary people. Analysis in a new data portal from the ONE Campaign, where the author is executive director for global policy, shows that, in comparison to higher-income countries, a larger proportion of Africans’ income is spent on food and other essential goods, leaving them more vulnerable to inflation (see figure 3).
Yet the current inflationary challenges illustrate the failure of global economic governance institutions to prevent macroeconomic policy decisions by major powers from spilling over to the wider world and harming vulnerable nations
The U.S. Federal Reserve’s steep interest rate hikes in recent months to quell inflation in the United States will greatly impact other countries, particularly those with heavy debt burdens. The U.S. dollar is the world’s reserve currency. About half of international trade is invoiced in dollars, about half of all international loans and global debt securities are denominated in dollars, and dollars are involved in 90 percent of foreign exchange transactions. As a result, increases in interest rates are hitting vulnerable countries in a number of ways.
But while African countries’ fortunes are shaped by these global events, they have limited agency over the response, thanks in part to an outmoded global economic architecture created after the Second World War—before most African countries gained independence.
The Bretton Woods institutions—the International Monetary Fund and the International Bank for Reconstruction and Development (now part of the World Bank Group)—were established in 1944 to safeguard the stability of the international financial system and finance postwar reconstruction. But their governance remains archaic.
Under a long-standing “gentleman’s agreement,” Europe gets to choose the managing director of the IMF and the United States chooses the World Bank president. The voting shares of these institutions are highly unequal, since they are pegged to the size of shareholders’ economies. As a result, the United States, with a population of 330 million people, controls roughly 16 percent of the voting power at the IMF and World Bank, while Africa’s fifty-four countries—accounting for 1.4 billion people—collectively have a voting share of roughly 7 percent. Per capita, an American’s vote is worth twenty times as much as a Nigerian’s at the IMF, and sixty-four times that of an Ethiopian. And even on its own terms, current quota shares disproportionately benefit wealthy countries—particularly Europe—at the expense of emerging economies.
Increasingly, countries in the Global South are demanding a meaningful seat at the table of international institutions. These calls were particularly prominent at this year’s UN General Assembly. Indian Minister for External Affairs Subrahmanyam Jaishankar described the current architecture as “anachronistic and ineffective.”
We need to reform a morally bankrupt global financial system. This system was created by rich countries to benefit rich countries. Practically no African country was sitting at the table of the Bretton Woods Agreement; and in many other parts of the world, decolonization had not yet taken place. It perpetuates poverty and inequalities. We need to balance the scales between developed and developing countries and create a new global financial system that benefits all.
These increasingly emphatic statements are no longer general calls for reform. Instead, leaders from the Global South have an agenda and are putting specific proposals on the table.
In April, following Russia’s invasion of Ukraine, members of the Africa High-Level Working Group on the Global Financial Architecture, coordinated by the UN Economic Commission for Africa, proposed a specific set of measures to create fiscal space to help them respond to the invasion, including the recycling of $100 billion in special drawing rights, a renewed debt service suspension initiative, and a liquidity and sustainability facility to reduce the cost of African borrowing on capital markets.
Since then, Barbados’s Prime Minister Mia Mottley has proposed the Bridgetown Initiative, which seeks to address immediate fiscal concerns and proposes a more structural set of reforms to help vulnerable countries become resilient to economic, climate, and pandemic shocks.
Yet debates about Bretton Woods reform risk becoming fragmented in a political environment in which achieving the necessary consensus for reform is challenging. Furthermore, in an era of great power competition, G20 countries are unlikely to voluntarily give up some of their power in these institutions.
AS A RESULT, A FOCUSED AGENDA IS MORE LIKELY TO GAIN TRACTION.
Firstly, G20 countries should urgently take steps to provide the necessary liquidity to help vulnerable countries weather the economic storm and build resilience for the future. They should reinstate the debt service suspension initiative, which helped free up fiscal space during the coronavirus pandemic, and make good on their promise, made in October 2021, to provide emergency liquidity in the form of $100 billion in special drawing rights. To date, $81 billion has been pledged (including $21bn from the US that is yet to be appropriated by Congress) to this target but very little has been disbursed. These funds should be urgently committed to the IMF’s Poverty Reduction and Growth Trust, the IMF’s newly established Resilience and Sustainability Trust, and multilateral development banks (MDBs), enabling vulnerable countries to draw down these resources.
Second, the polycrisis requires long-term resourcing that is an order of magnitude greater that what is currently on the table. There is hope on this front. In October, ahead of the IMF and World Bank annual meetings, U.S. Treasury Secretary Janet Yellen signaled U.S. government support for the reform of MDBs relating both to how they lend and to how much they lend. Australia, Canada, France, Germany, Italy, Japan, the Netherlands, Switzerland, the United Kingdom, and the United States then announced an “evolution roadmap” for the World Bank to address its investment in cross-border challenges such as pandemic preparedness and climate change (in addition to its current model of bilateral lending to countries), and support for more risk-taking to more effectively leverage the World Bank’s balance sheet.
According to a G20-commissioned expert group, MDBs (including the World Bank) could mobilize up to an additional $1 trillion without risking their AAA credit ratings. The boards of the MDBs (largely composed of G7 finance ministers) should lay out a roadmap for implementing these recommendations and increasing the speed and flexibility of lending to vulnerable countries.
Finally, there are increasing calls for Global South countries to have a meaningful seat at the decisionmaking table. Establishing a permanent African Union seat at the G20 would send an important signal, and the IMF’s 2023 quota review could provide an opportunity for the creation of a new African chair on the IMF’s board as well as an increase in quota or a change in quota distribution in favor of African countries.
These specific steps would signal that Western countries are listening to countries in the Global South, provide urgent finance at a scale needed to address the current challenges, and catalyze a broader debate about the kinds of international institutions needed in the twenty-first century.
All of this could be accomplished without significant investments of domestic budgets or political capital. In this respect the usual explanations for inaction do not stand.
1 Author’s calculations of statistics from the Development Assistance Committee of the Organisation for Economic Cooperation and Development. See Organisation for Economic Cooperation and Development, Query Wizard for International Development Statistics (accessed October 18, 2022), https://stats.oecd.org/qwids/.
The world is, according to most, losing the climate change battle, but Algeria losing no hope is gearing up and can lead the way to combat climate change. It is a Fight against global warming for the collective effort of Africa.
COP 27: Algeria’s actions in the Fight against global warming for the collective effort of Africa.
By Dr Abderrahmane MEBTOUL
The temperature record is likely to become the norm, and not the exception and scientists continue to warn about global warming and call for emergency measures. Aware of the dangers threatening our planet, Algeria will be present at COP 27, which will take place in Egypt from 6 to 18 November 2022. The President of the Republic, Abdelmadjid TEBBOUNE, recently presented an ambitious plan for the fight against global warming in Africa. The goal unanimously adopted by the Organization of African Union (OAU) proposed the establishment of the Support Fund for Measures to Combat the Negative Impacts of Climate Change. It had been endorsed by the Peace and Security Council (PSC), urging developed countries to fulfil their commitments to limit climate deterioration.
1.-The context of the holding of COP 27 in Egypt
This crucial meeting engages the world’s security where UN reports predict an unprecedented drought between 2025 and 2030, with fires, a shortage of fresh water and, therefore, a food crisis. It is in an alarming context, with the last two years, 2021 and 2022, marked by extreme weather events such as mega-fires in the Amazon, California or Greece, drought in North Africa and Europe, continued deforestation in the Amazon, and floods in Pakistan. Fundamentally, if we fail to transition to a low-carbon world, it will threaten the integrity of the global economy.
Because the climate is a vast, interconnected system, any action in a specific area of the globe impacts the rest of the world. Since 1850, our planet has already warmed by an average of 1.1°C. According to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC), global warming could reach 1.5°C to 4.4°C by 2100. IPCC experts say global warming should be contained to +1.5°C by 2100 to prevent our climate from spiralling away. This limitation will be out of reach unless immediate, rapid and massive reductions in greenhouse gas emissions are achieved through carbon neutrality by 2050. Global warming has several adverse effects that threaten global security. Global warming is having disastrous consequences on the planet. It leads to rising sea levels, changing the oceans, amplifying extreme weather events and causing water to evaporate, which changes rainfall patterns. Global warming threatens plants and animals as the growth cycles of wild and cultivated plants are altered. Global warming is also disrupting human living conditions and increasing health risks: heat waves, cyclones, floods, and droughts, facilitated the spread of diseases and disruption of the distribution of natural resources, their quantity and quality, and agricultural yields and fishing activities. Thus, government commitments would only achieve 20% of the necessary emission reductions by 2030. Achieving the goals would require an investment of up to $4 trillion annually over the next decade, with most of these investments directed to developing economies. Global warming is not a vision of the mind being a global threat, and the highest Algerian authorities have become aware, especially with, on the one hand, torrential rains and, on the other hand, fires more and more frequent with sometimes criminal acts. But it is a question of distinguishing short-term actions in the face of emergencies from medium- and long-term measures that exceed the means of a single country; the efforts must be collective.
2.- Algeria’s actions against global warming: the national climate plan 2020-2030
For Algeria, a semi-arid country, the significant impacts of climate change are fires destroying thousands of hectares of forests, sometimes with many victims, not to mention material damage – as in 2021 in Kabylia and 2022 in the east of the country. A shortage of water resources, the degradation of water quality, the intrusion of marine waters at aquifers and the deterioration of infrastructure are caused mainly by water tables flooding. Algeria has adopted an ambitious plan against global warming because it has experienced, over the last century, a temperature increase of 0.3 ° C per decade as well as a rainfall deficit of 15%, requiring another water policy not unique to Algeria, which can lead to wars in the world. Algeria has opted for seawater desalination units throughout the country, particularly on the coasts where more than 80% of the population is concentrated. In Algeria, there are losses of up to 30% due to old pipes, making investments urgent as well as in water recycling units, another policy for agriculture by encouraging dripping, for example. The Albian aquifer is the enormous groundwater table in the world, with about 50,000 billion cubic meters, straddling three countries, Algeria, Libya and Tunisia. 70% of the water table is in Algerian territory in the country’s southeast. A pipeline has been built between In Salah and Tamanrasset for its supply, and a reasonable policy without breaking the ecosystem (these aquifers are non-renewable) can boost agriculture. Algeria is committed to the fight against climate change. In 2015, it ratified the Paris Climate Agreement (COP 21). Long before, in June 1992, Algeria signed the United Nations Framework Convention on Climate Change (UNFCCC) and ratified it in June 1993, having participated in the Conference of the Parties to the United Nations Framework Convention on Climate Change (COP 25), which took place in Madrid (2-13 December 2019). The Green Economy Recovery Plan aims to encourage recycling and promote green processing industries by establishing tax incentives for industrial companies that commit to reducing the emission of gases and chemical waste. In the field of gas flaring, efforts have made it possible to reduce gas flaring by 500 million m³ during 2020-2021. Sonatrach Oil and Gas Group has signed the Zero Routine Flaring by 2030 initiative, launched in 2015 by the Secretary-General of the United Nations and the President of the World Bank Group, to end routine flaring by 2030. Recently, Algeria has set up a National Climate Plan 2020-2030 covering 155 projects to reduce greenhouse gas emissions, adapt to the negative impacts of climate change, and support climate governance. It has committed to reducing its greenhouse gas emissions by 7%, a rate that could rise to 22% by 2030 if it can receive support for significant projects to adapt to climate change. Algeria has adopted a program to convert vehicles to LPG while creating national structures to implement strategies for producing clean energy. It includes green hydrogen, and the revival of the Green Dam project with a view to its expansion to an area of 4.7 million hectares in the coming years is part of this strategy to fight against global warming.
3.- Algeria’s solidarity potential
But it is mainly thanks to its great solar potential (3000 hours) that Algeria is in an excellent position to produce electricity. Having an ambitious program for renewable energies to combine thermal for export and photovoltaic solar panels for the domestic market. In mid-July 2011, Algeria took delivery of the hybrid power plant at Hassi R’mel, with a total capacity of 150 MW, including 30 MW from the combination of gas and solar. This is an exciting experience. Combining 20% gas, cleaner than coal and oil, and 80% solar seems essential to reduce costs and master the technology. The Algerian program consists of installing a renewable power of nearly 22,000 MW by 2030/2035, of which 12,000 MW will be dedicated to covering national electricity demand and 10,000 MW for export. According to the Ministry of Energy, in 2030, the goal is to produce 40% of its electricity needs from renewable energies. The amount of public investment devoted by Algeria to the realization of its renewable energy development program by 2030 was initially set (between 2019/2020) at 60 billion dollars, requiring a national and international public-private partnership. Recently, the delegation led by the European Commissioner for Energy, visiting Algiers, committed to promoting investment in renewable energies and green hydrogen, the power of the future 2036/2040; this segment, in partnership with Algeria through interconnections, there is an opportunity to export to Europe. But other partnerships are possible, especially with China investing in these niches.
In conclusion, the irony of history, according to a recent UN 2022 report, in its worst projection, a warming of the temperature of the planet beyond 4 ° C under the title “threat to the Nile”, one of its jewels is threatened with disappearance where with the rise in sea level caused by global warming,
“The sea will rise by one meter, consequently engulfing a third of the very fertile land of the Nile Delta and historic cities; the coastal city of Alexandria could be underwater by 2050.” It also threatens all coasts of the world, including the Algerian coast. Peace in this region is essential for calmly addressing the strategic subject of global warming and, therefore, the irreversible energy transition that will change the world’s energy and economic power between 2025/2030/2040. However, with the war in Ukraine and the energy crisis, many countries have come to fall back on fossil fuels massively. Like most developing countries, Algeria is caught because air pollution is not their responsibility. the main culprits are the developed countries, China and Russia, and their commitments still need to be fulfilled under the second period of the Kyoto Protocol. It is the responsibility which lies primarily with the developed countries, significant polluters, with a catastrophic impact on developing countries, particularly in Africa where the commitments of COP 21 of the aid of 100 billion dollars have been very partially implemented. And the significant problem to be solved, a complicated equation, is to reconcile the legitimate development aspiration and the fight against global warming presupposing progressive adaptation strategies with the help of developed countries to achieve this transition. Let us hope this umpteenth meeting will propose concrete solutions to global warming.
Dr Abderrahmane MEBTOUL, University Professor, International Expert Doctor of State 1974
Director of Studies Ministry of Industry and Energy 1974/1979-1990/1995-2000/2006-2013/2015
Chairman of the Energy Transition Commission of 5+5+ Germany in June 2019
Life in the MENA region is challenging from the outset, with many countries naturally experiencing very warm and dry conditions relative to other parts of the world. However, what is happening now is anything but natural.
The Washington Post published an Analysis by Michael Robbins and Amaney Jamal on how in the MENA, people are worrying about food.
In the Middle East and North Africa, people are worrying about food
Five things to know from Arab Barometer’s latest survey
What do people across the Middle East and North Africa think about food security, gender equality, democracy, climate change and China? Arab Barometer, the largest and longest-standing public opinion survey covering the MENA region, provides insights.
The new seventh wave includes more than 26,000 face-to-face interviews covering 12 MENA countries. The survey, conducted October 2021 to July, is the largest public opinion survey in the region since the coronavirus pandemic. Here are some takeaways.
Food insecurity has hit alarming levels
In half of the countries surveyed, a majority of citizens reported that they have often or sometimes run out of food within the previous 12 months. And most citizens in three-quarters of the countries surveyed say they worried that they would run out of money before they could afford more food, over the same period.
The bulk of these surveys were carried out before the Russian invasion of Ukraine, which means the results don’t capture the full extent of the subsequent jump in food costs and shortages of food across much of the region. The growing sense of food insecurity is of particular concern beyond the clear human cost. Salma al-Shami explains in a new report how the lack of food is linked to a lower commitment to democracy, a higher desire to emigrate and diminished concerns about addressing climate change and other critical issues facing the region.
Citizens want democracy — but realize it’s not perfect
In previous Arab Barometer survey waves, the vast majority of respondents affirm that democracy remains the best system of governance. This seventh wave is no exception — but there have been dramatic changes in the perception of democracy overall. In the past few years, MENA publics have become far more likely to say that the economy runs poorly under democracy, that democracy leads to instability and that democracy is indecisive.
These outcomes could reflect the broader global retrenchment of democracy. Or perhaps these shifts are the result of MENA citizens reflecting on the recent challenges experienced by countries in the region such as Tunisia, Lebanon and Iraq — three countries where governments have changed as a result of elections in the past decade. Regardless, the results make clear that citizens value democracy, though many have updated their views of how democracy works.
MENA countries are far from achieving gender equality
Arab Barometer surveys asked respondents whether men and women should play equal roles in public and private life. In most of the surveyed countries, majorities responded that men are better political leaders and that men should have the final say over decisions in the family. However, new analysis by MaryClare Roche demonstrates how these views are changing across much of the region.
In the case of Tunisia, over the past four years, Arab Barometer surveys show a 16-point decline in the perception that men are better at politics. And in Lebanon, surveys note a 16-point drop in the perception that men should have the final say within the household, compared with the 2018 survey. This recent survey wave found smaller but meaningful declines on these perceptions in a number of countries, suggesting that the region is moving toward a greater acceptance of women’s equality.
China remains more popular than the United States, but that might change
Arab citizens are more positive toward China than toward the United States, but views of America have improved, while views of China are rapidly changing. In Jordan and the Palestinian territories, citizens are now 20 points less likely to want closer economic ties with China than in 2018-2019. In Sudan, Morocco, Libya and Lebanon, Arab Barometer found a decline of at least five points on this same question. And none of the countries surveyed showed a meaningful increase in citizen support for closer economic links with China over this period.
China’s relative decline probably comes down to a closer familiarity with Beijing’s foreign policies. Arab Barometer also looked at perceptions of Chinese economic investment in local infrastructure. Although MENA publics largely see Chinese investment as the most affordable option for infrastructure projects, they also perceive these projects as low-quality investments that pay lower salaries to the local workforce than companies from other countries would probably pay.
Ultimately, most publics appear more likely to prefer investment from a U.S. or European company vs. a Chinese company. As China continues to pursue economic engagement in the region, these findings suggest that views of China might not improve as a result of this strategy.
Citizens worry about climate change but rank other concerns higher
The global COP27 meeting in Egypt will take place in November. New questions developed for this wave reveal that many MENA citizens think climate change is a critical issue and they want their governments to do more to address the problem. When asked about their primary environmental concerns, the primary issue is water — water scarcity, pollution of drinking water and pollution of their country’s waterways.
Citizens are also likely to assign equal blame the government and their fellow citizens for the lack of progress on environmental issues. Majorities in all the countries surveyed say that both parties are responsible for existing environmental challenges.
The survey also finds that levels of recycling or reusing basic items varies widely across the region. However, questions that asked why respondents recycle reveal that few cite the environment. Instead, the primary personal motivations behind recycling are cost savings and convenience. In short, concerns about the environment take a back seat when compared with other issues, but MENA publics are aware of environmental challenges and want action.
Michael Robbins is director and co-principal investigator at Arab Barometer.
Amaney Jamal is dean of the School of Public and International Affairs at Princeton University and co-principal investigator of Arab Barometer.
Arab Barometer data and data analysis tools are freely available online thanks to our funders, including the Middle East Partnership Initiative, USAID, the National Endowment for Democracy, the Carnegie Corp. of New York and the BBC Arabic.
Time and time again, financial approaches have worked to fix economic problems. Raising interest rates has acted to slow the economy and lowering them has acted to speed up the economy. Governments overspending their incomes also acts to push the economy ahead; doing the reverse seems to slow economies down.
What could possibly go wrong? The issue is a physics problem. The economy doesn’t run simply on money and debt. It operates on resources of many kinds, including energy-related resources. As the population grows, the need for energy-related resources grows. The bottleneck that occurs is something that is hard to see in advance; it is an affordability bottleneck.
For a very long time, financial manipulations have been able to adjust affordability in a way that is optimal for most players. At some point, resources, especially energy resources, get stretched too thin, relative to the rising population and all the commitments that have been made, such as pension commitments. As a result, there is no way for the quantity of goods and services produced to grow sufficiently to match the promises that the financial system has made. This is the real bottleneck that the world economy reaches.
I believe that we are closely approaching this bottleneck today. I recently gave a talk to a group of European officials at the 2nd Luxembourg Strategy Conference, discussing the issue from the European point of view. Europeans seem to be especially vulnerable because Europe, with its early entry into the Industrial Revolution, substantially depleted its fossil fuel resources many years ago. The topic I was asked to discuss was, “Energy: The interconnection of energy limits and the economy and what this means for the future.”
In this post, I write about this presentation.
The major issue is that money, by itself, cannot operate the economy, because we cannot eat money. Any model of the economy must include energy and other resources. In a finite world, these resources tend to deplete. Also, human population tends to grow. At some point, not enough goods and services are produced for the growing population.
I believe that the major reason we have not been told about how the economy really works is because it would simply be too disturbing to understand the real situation. If today’s economy is dependent on finite fossil fuel supplies, it becomes clear that, at some point, these will run short. Then the world economy is likely to face a very difficult time.
A secondary reason for the confusion about how the economy operates is too much specialization by researchers studying the issue. Physicists (who are concerned about energy) don’t study economics; politicians and economists don’t study physics. As a result, neither group has a very broad understanding of the situation.
I am an actuary. I come from a different perspective: Will physical resources be adequate to meet financial promises being made? I have had the privilege of learning a little from both economic and physics sides of the discussion. I have also learned about the issue from a historical perspective.
World energy consumption has been growing very rapidly at the same time that the world economy has been growing. This makes it hard to tell whether the growing energy supply enabled the economic growth, or whether the higher demand created by the growing economy encouraged the world economy to use more resources, including energy resources.
Physics says that it is energy resources that enable economic growth.
The R-squared of GDP as a function of energy is .98, relative to the equation shown.
Physicists talk about the “dissipation” of energy. In this process, the ability of an energy product to do “useful work” is depleted. For example, food is an energy product. When food is digested, its ability to do useful work (provide energy for our body) is used up. Cooking food, whether using a campfire or electricity or by burning natural gas, is another way of dissipating energy.
Humans are clearly part of the economy. Every type of work that is done depends upon energy dissipation. If energy supplies deplete, the form of the economy must change to match.
There are a huge number of systems that seem to grow by themselves using a process called self-organization. I have listed a few of these on Slide 8. Some of these things are alive; most are not. They are all called “dissipative structures.”
The key input that allows these systems to stay in a “non-dead” state is dissipation of energy of the appropriate type. For example, we know that humans need about 2,000 calories a day to continue to function properly. The mix of food must be approximately correct, too. Humans probably could not live on a diet of lettuce alone, for example.
Economies have their own need for energy supplies of the proper kind, or they don’t function properly. For example, today’s agricultural equipment, as well as today’s long-distance trucks, operate on diesel fuel. Without enough diesel fuel, it becomes impossible to plant and harvest crops and bring them to market. A transition to an all-electric system would take many, many years, if it could be done at all.
I think of an economy as being like a child’s building toy. Gradually, new participants are added, both in the form of new citizens and new businesses. Businesses are formed in response to expected changes in the markets. Governments gradually add new laws and new taxes. Supply and demand seem to set market prices. When the system seems to be operating poorly, regulators step in, typically adjusting interest rates and the availability of debt.
One key to keeping the economy working well is the fact that those who are “consumers” closely overlap those who are “employees.” The consumers (= employees) need to be paid well enough, or they cannot purchase the goods and services made by the economy.
A less obvious key to keeping the economy working well is that the whole system needs to be growing. This is necessary so that there are enough goods and services available for the growing population. A growing economy is also needed so that debt can be repaid with interest, and so that pension obligations can be paid as promised.
World population has been growing year after year, but arable land stays close to constant. To provide enough food for this rising population, more intensive agriculture is required, often including irrigation, fertilizers, herbicides and pesticides.
Furthermore, an increasing amount of fresh water is needed, leading to a need for deeper wells and, in some places, desalination to supplement other water sources. All these additional efforts add energy usage, as well as costs.
In addition, mineral ores and energy supplies of all kinds tend to become depleted because the best resources are accessed first. This leaves the more expensive-to-extract resources for later.
The issues in Slide 11 are a continuation of the issues described on Slide 10. The result is that the cost of energy production eventually rises so much that its higher costs spill over into the cost of all other goods and services. Workers find that their paychecks are not high enough to cover the items they usually purchased in the past. Some poor people cannot even afford food and fresh water.
Increasing debt is helpful as an economy grows. A farmer can borrow money for seed to grow a crop, and he can repay the debt, once the crop has grown. Or an entrepreneur can finance a factory using debt.
On the consumer side, debt at a sufficiently low interest rate can be used to make the purchase of a home or vehicle affordable.
Central banks and others involved in the financial world figured out many years ago that if they manipulate interest rates and the availability of credit, they are generally able to get the economy to grow as fast as they would like.
It is hard for most people to imagine how much interest rates have varied over the last century. Back during the Great Depression of the 1930s and the early 1940s, interest rates were very close to zero. As large amounts of inexpensive energy were added to the economy in the post-World War II period, the world economy raced ahead. It was possible to hold back growth by raising interest rates.
Oil supply was constrained in the 1970s, but demand and prices kept rising. US Federal Reserve Chairman Paul Volker is known for raising interest rates to unheard of heights (over 15%) with a peak in 1981 to end inflation brought on by high oil prices. This high inflation rate brought on a huge recession from which the economy eventually recovered, as the higher prices brought more oil supply online (Alaska, North Sea, and Mexico), and as substitution was made for some oil use. For example, home heating was moved away from burning oil; electricity-production was mostly moved from oil to nuclear, coal and natural gas.
Another thing that has helped the economy since 1981 has been the ability to stimulate demand by lowering interest rates, making monthly payments more affordable. In 2008, the US added Quantitative Easing as a way of further holding interest rates down. A huge debt bubble has thus been built up since 1981, as the world economy has increasingly been operated with an increasing amount of debt at ever-lower interest rates. (See 3-month and 10 year interest rates shown on Slide 14.) This cheap debt has allowed rapidly rising asset prices.
The world economy starts hitting major obstacles when energy supply stops growing faster than population because the supply of finished goods and services (such as new automobile, new homes, paved roads, and airplane trips for passengers) produced stops growing as rapidly as population. These obstacles take the form of affordability obstacles. The physics of the situation somehow causes the wages and wealth to be increasingly be concentrated among the top 10% or 1%. Lower-paid individuals are increasingly left out. While goods are still produced, ever-fewer workers can afford more than basic necessities. Such a situation makes for unhappy workers.
World energy consumption per capitahit a peak in 2018 and began to slide in 2019, with an even bigger drop in 2020. With less energy consumption, world automobile sales began to slide in 2019 and fell even lower in 2020. Protests, often indirectly related to inadequate wages or benefits, became an increasing problem in 2019. The year 2020 is known for Covid-19 related shutdowns and flight cancellations, but the indirect effect was to reduce energy consumption by less travel and by broken supply lines leading to unavailable goods. Prices of fossil fuels dropped far too low for producers.
Governments tried to get their own economies growing by various techniques, including spending more than the tax revenue they took in, leading to a need for more government debt, and by Quantitative Easing, acting to hold down interest rates. The result was a big increase in the money supply in many countries. This increased money supply was often distributed to individual citizens as subsidies of various kinds.
The higher demand caused by this additional money tended to cause inflation. It tended to raise fossil fuel prices because the inexpensive-to-extract fuels have mostly been extracted. In the days of Paul Volker, more energy supply at a little higher price was available within a few years. This seems extremely unlikely today because of diminishing returns. The problem is that there is little new oil supply available unless prices can stay above at least $120 per barrel on a consistent basis, and prices this high, or higher, do not seem to be available.
Oil prices are not rising this high, even with all of the stimulus funds because of the physics-based wage disparity problem mentioned previously. Also, those with political power try to keep fuel prices down so that the standards of living of citizens will not fall. Because of these low oil prices, OPEC+ continues to make cuts in production. The existence of chronically low prices for fossil fuels is likely the reason why Russia behaves in as belligerent a manner as it does today.
Today, with rising interest rates and Quantitative Tightening instead of Quantitative Easing, a major concern is that the debt bubble that has grown since in 1981 will start to collapse. With falling debt levels, prices of assets, such as homes, farms, and shares of stock, can be expected to fall. Many borrowers will be unable to repay their loans.
If this combination of events occurs, deflation is a likely outcome because banks and pension funds are likely to fail. If, somehow, local governments are able to bail out banks and pension funds, then there is a substantial likelihood of local hyperinflation. In such a case, people will have huge quantities of money, but practically nothing available to buy. In either case, the world economy will shrink because of inadequate energy supply.
Most people have a “normalcy bias.” They assume that if economic growth has continued for a long time in the past, it necessarily will occur in the future. Yet, we all know that all dissipative structures somehow come to an end. Humans can come to an end in many ways: They can get hit by a car; they can catch an illness and succumb to it; they can die of old age; they can starve to death.
History tells us that economies nearly always collapse, usually over a period of years. Sometimes, population rises so high that the food production margin becomes tight; it becomes difficult to set aside enough food if the cycle of weather should turn for the worse. Thus, population drops when crops fail.
In the years leading up to collapse, it is common that the wages of ordinary citizens fall too low for them to be able to afford an adequate diet. In such a situation, epidemics can spread easily and kill many citizens. With so much poverty, it becomes impossible for governments to collect enough taxes to maintain services they have promised. Sometimes, nations lose at war because they cannot afford a suitable army. Very often, governmental debt becomes non-repayable.
The world economy today seems to be approaching some of the same bottlenecks that more local economies hit in the past.
The basic problem is that with inadequate energy supplies, the total quantity of goods and services provided by the economy must shrink. Thus, on average, people must become poorer. Most individual citizens, as well as most governments, will not be happy about this situation.
The situation becomes very much like the game of musical chairs. In this game, one chair at a time is removed. The players walk around the chairs while music plays. When the music stops, all participants grab for a chair. Someone gets left out. In the case of energy supplies, the stronger countries will try to push aside the weaker competitors.
Countries that understand the importance of adequate energy supplies recognize that Europe is relatively weak because of its dependence on imported fuel. However, Europe seems to be oblivious to its poor position, attempting to dictate to others how important it is to prevent climate change by eliminating fossil fuels. With this view, it can easily keep its high opinion of itself.
If we think about the musical chairs’ situation and not enough energy supplies to go around, everyone in the world (except Europe) would be better off if Europe were to be forced out of its high imports of fossil fuels. Russia could perhaps obtain higher energy export prices in Asia and the Far East. The whole situation becomes very strange. Europe tells itself it is cutting off imports to punish Russia. But, if Europe’s imports can remain very low, everyone else, from the US, to Russia, to China, to Japan would benefit.
The benefits of wind and solar energy are glorified in Europe, with people being led to believe that it would be easy to transition from fossil fuels, and perhaps leave nuclear, as well. The problem is that wind, solar, and even hydroelectric energy supply are very undependable. They cannot ever be ramped up to provide year-round heat. They are poorly adapted for agricultural use (except for sunshine helping crops grow).
Few people realize that the benefits that wind and solar provide are tiny. They cannot be depended on, so companies providing electricity need to maintain duplicate generating capacity. Wind and solar require far more transmission than fossil-fuel-generated electricity because the best sources are often far from population centers. When all costs are included (without subsidy), wind and solar electricity tend to be more expensive than fossil-fuel generated electricity. They are especially difficult to rely on in winter. Therefore, many people in Europe are concerned about possibly “freezing in the dark,” as soon as this winter.
There is no possibility of ever transitioning to a system that operates only on intermittent electricity with the population that Europe has today, or that the world has today. Wind turbines and solar panels are built and maintained using fossil fuel energy. Transmission lines cannot be maintained using intermittent electricity alone.
Basically, Europe must use very much less fossil fuel energy, for the long term. Citizens cannot assume that the war with Ukraine will soon be over, and everything will be back to the way it was several years ago. It is much more likely that the freeze-in-the-dark problem will be present every winter, from now on. In fact, European citizens might actually be happier if the climate would warm up a bit.
With this as background, there is a need to figure out how to use less energy without hurting lifestyles too badly. To some extent, changes from the Covid-19 shutdowns can be used, since these indirectly were ways of saving energy. Furthermore, if families can move in together, fewer buildings in total will need to be heated. Cooking can perhaps be done for larger groups at a time, saving on fuel.
If families can home-school their children, this saves both the energy for transportation to school and the energy for heating the school. If families can keep younger children at home, instead of sending them to daycare, this saves energy, as well.
A major issue that I do not point out directly in this presentation is the high energy cost of supporting the elderly in the lifestyles to which they have become accustomed. One issue is the huge amount and cost of healthcare. Another is the cost of separate residences. These costs can be reduced if the elderly can persuaded to move in with family members, as was done in the past. Pension programs worldwide are running into financial difficulty now, with interest rates rising. Countries with large elderly populations are likely to be especially affected.
Besides conserving energy, the other thing people in Europe can do is attempt to understand the dynamics of our current situation. We are in a different world now, with not enough energy of the right kinds to go around.
The dynamics in a world of energy shortages are like those of the musical chairs’ game. We can expect more fighting. We cannot expect that countries that have been on our side in the past will necessarily be on our side in the future. It is more like being in an undeclared war with many participants.
Under ideal circumstances, Europe would be on good terms with energy exporters, even Russia. I suppose at this late date, nothing can be done.
A major issue is that if Europe attempts to hold down fossil fuel prices, the indirect result will be to reduce supply. Oil, natural gas and coal producers will all reduce supply before they will accept a price that they consider too low. Given the dependence of the world economy on energy supplies, especially fossil fuel energy supplies, this will make the situation worse, rather than better.
Wind and solar are not replacements for fossil fuels. They are made with fossil fuels. We don’t have the ability to store up solar energy from summer to winter. Wind is also too undependable, and battery capacity too low, to compensate for need for storage from season to season. Thus, without a growing supply of fossil fuels, it is impossible for today’s economy to continue in its current form.
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