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Abstract

  1. Top of page
  2. Abstract
  3. INNOVATING FOR THE FUTURE
  4. THE ROLE FOR POLICY INTERVENTION
  5. THE CURRENT MACROECONOMIC OPPORTUNITY
  6. TIMELY, TEMPORARY, AND TARGETED INVESTMENT IS PREFERABLE, BUT INSUFFICIENT
  7. ESTIMATING SPENDING MULTIPLIERS
  8. THE ALL-IMPORTANT C-WORD: ‘CONFIDENCE’
  9. CONCLUSION
  10. REFERENCES

Macroeconomic conditions make this a relatively favorable time to kick-start investments necessary to transition to a resource-efficient economy. There is no lack of private money, just a perceived lack of opportunity. Resource costs are low and the potential to crowd out alternative investment and employment is greatly reduced. It is often argued that the short-term macroeconomic merit of an investment, in terms of what constitutes a good economic stimulus, can be judged against established criteria. These include tests on whether an investment is timely, temporary, and targeted. Although these are important, the evidence presented here suggests that a more important criterion for a sustainable economic impact is the ability to generate private sector confidence in profitable and enduring new markets. The world is likely to transition to a resource-efficient, low-carbon economy over this century and managing this transition has early pay-offs. Clear and credible green policies have the potential restore confidence and generate growth. Providing credible early incentives to invest in resource-efficiency could generate investment and growth in the long and the short run. WIREs Clim Change 2014, 5:7–14. doi: 10.1002/wcc.256

Conflict of interest: The author has declared no conflicts of interest for this article.

For further resources related to this article, please visit the WIREs website.


INNOVATING FOR THE FUTURE

  1. Top of page
  2. Abstract
  3. INNOVATING FOR THE FUTURE
  4. THE ROLE FOR POLICY INTERVENTION
  5. THE CURRENT MACROECONOMIC OPPORTUNITY
  6. TIMELY, TEMPORARY, AND TARGETED INVESTMENT IS PREFERABLE, BUT INSUFFICIENT
  7. ESTIMATING SPENDING MULTIPLIERS
  8. THE ALL-IMPORTANT C-WORD: ‘CONFIDENCE’
  9. CONCLUSION
  10. REFERENCES

The world is likely to transition to a resource-efficient, low-carbon economy over this century. Managing this transition—which has already begun—is not only compatible with growth; it may be a prerequisite for it in the long run, and could positively drive it in the short run. The present economic crisis and need for private investment, as well as the pressing requirement to limit dependency on scarce resources and fossil fuels afford a great opportunity. The current crisis has been perpetuated by risk aversion. Waning confidence has undermined investment and record private net saving has in turn driven real risk-free interest rates to zero and below. The current macroeconomic environment offers governments across the world the ideal opportunity to unlock private investment for which finance is readily available, because resource costs are low and the potential to crowd out alternative investment or employment is minimal.

This article argues that perceptions of government-induced policy risk, driven by mixed and muddled signals and quarrels about the need for such an economic transformation are currently holding back low-carbon investment in the energy sector and other parts of the global economy. Reducing policy risk by committing to credible, resource-efficient policy frameworks can instil private confidence. There is evidence that such investments meet many of the criteria necessary for an effective economic stimulus, and that although there are competing demands for economic investment, the potential to induce long-term investment and innovation in a scaled-up global transformation make such investments particularly attractive.

THE ROLE FOR POLICY INTERVENTION

  1. Top of page
  2. Abstract
  3. INNOVATING FOR THE FUTURE
  4. THE ROLE FOR POLICY INTERVENTION
  5. THE CURRENT MACROECONOMIC OPPORTUNITY
  6. TIMELY, TEMPORARY, AND TARGETED INVESTMENT IS PREFERABLE, BUT INSUFFICIENT
  7. ESTIMATING SPENDING MULTIPLIERS
  8. THE ALL-IMPORTANT C-WORD: ‘CONFIDENCE’
  9. CONCLUSION
  10. REFERENCES

To understand the potential for low-carbon policies to drive short-run investment, it is necessary to comprehend the likely scale and nature of the global economic transition. In the long run, harnessing innovation to allow growth through the use and re-use of fewer and fewer resource inputs improves economic efficiency and is likely to open up market opportunities in fast-growing green sectors. This process, which economists term growth in total factor productivity growth, already drives rich country growth.

The market remains the most efficient means to coordinate information and match scarce resources with consumer demands. But global integration and accelerating consumption have led to a number of large-scale market failures and missing markets which require carefully considered, but appropriately limited, market intervention.[1] For example, without properly valuing natural assets owned as part of the commons, it is hard to prevent over-consumption and the depletion of scarce resources such as soil, unpolluted air, water, or fish in the ocean. At the same time, market failures relating to information and ownership mean investors fear that they will fail to capture the full returns to risky long-term innovation where the knowledge spill-over is free, and so underinvest in its development. There are also a growing number of network externalities. These occur where the value of joining a network depends on how many others are on it, as is the case with telephones, public transport, fast broadband, and electricity grids. In all these cases, private and public costs and benefits diverge and coordination and information problems limit the degree of investment in energy efficiency and waste reduction.

Intervention needs to be carefully designed in order to avoid replacing market failure with policy failure.[2, 3],1 Expectations play a crucial role in influencing investor behavior and establishing credibility takes time, so it is critical that policymakers think carefully about policy design. It is inherently difficult to establish credibility when the private returns are dependent on governments not succumbing to time inconsistent behavior, yet long-term credibility also requires an acknowledgment of uncertainty. Technologies, institutions, and scientific findings will evolve in often unexpected ways and policy must adapt to reflect this. The private sector is well equipped to take on risk, but policy risk can be minimized through clearly understood, flexible, and transparent policy frameworks (e.g., a pre-announced mechanism for periodic review of feed-in tariffs to account for the evolution of technology costs).

Policies should be as neutral as possible, to allow a broad range of technologies to emerge and compete, and to avoid the problem of so-called ‘picking winners’. For example, price signals limit scope for rent-seeking by avoiding discrimination between technologies and processes, while encouraging competition within sectors. However, governments cannot avoid making strategic choices,[5, 6] given that there are a range of technological options that will be available over the coming decades with specific barriers and opportunities that may require targeted assistance.[7] So choices should be well-informed, open and transparent, in collaboration with civil society and the private sector.

In contrast mixed or muddled policy signals will put off investors and raise project costs. This is true at the best of times, but these are not the best of times. The potential to deter nervous investors is particularly acute in an uncertain economic environment like the present. The flip side is that a clear, credible, and long-term green strategy can lower risk premiums and galvanize private investment.

THE CURRENT MACROECONOMIC OPPORTUNITY

  1. Top of page
  2. Abstract
  3. INNOVATING FOR THE FUTURE
  4. THE ROLE FOR POLICY INTERVENTION
  5. THE CURRENT MACROECONOMIC OPPORTUNITY
  6. TIMELY, TEMPORARY, AND TARGETED INVESTMENT IS PREFERABLE, BUT INSUFFICIENT
  7. ESTIMATING SPENDING MULTIPLIERS
  8. THE ALL-IMPORTANT C-WORD: ‘CONFIDENCE’
  9. CONCLUSION
  10. REFERENCES

Many will accept the argument for green investment to overcome market failures in ‘normal times’, but will argue now is not the time to make costly interventions; instead, the focus now should be on jobs and growth and keeping energy bills low. In fact, the economically most sensible time to act is now.

To understand this, it is worth recalling the macroeconomic history of the last 5 years. After the financial crash, a slowdown in business and household spending in many developed economies was the necessary and unavoidable response of households and companies seeking to restore net worth by replenishing balance sheets. But when everyone retrenches simultaneously, fear of extended recession becomes a self-fulfilling prophecy. This is precisely what has happened. A lack of confidence in economic prospects has led companies, households, and banks to squirrel away private saving into ‘risk-free’ assets such as solvent sovereign bonds. As a result, annual private sector surpluses—the difference between private saving and investment—have swollen to record levels over the past few years, amounting to around 6% of US and UK GDP (Figure 1).

image

Figure 1. Sector financial balances (net lending). (a) United States. (b) United Kingdom. Source: Bureau of Economic Analysis/Office of National Statistics, data to second quarter of 2012.

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As private spending and incomes collapsed, fiscal revenues slumped while welfare spending rose, fuelling a symmetrical surge in global public sector deficits. With the public sector mostly borrowing from the private sector, net borrowing from abroad (defined as the current account balance) has in most major economies remained little changed. Many countries may already have been running structural budget deficits in the public sector, but the recent volatile swing to record actual public deficits has been cyclical—the result of surging private saving leaving the public sector left to pick up the tab. This suggests that any attempt to restore health to the public finances is destined to fail in the absence of a recovery confidence within the private sector.

The ex post proof that the causality for the swings in financial balances ran from private surplus to public deficit, and not the other way around, is the collapse in interest rates. As desired saving exceeded desired investment in many advanced economies, global real ‘risk-free’ interest rates for the next 20 years have been pushed to zero and below. The collapse in US Treasury bill rates offers the benchmark for ‘risk free’ returns (Table 1) but UK gilts and German Bunds are equally unprofitable assets. Pension funds and financial institutions are effectively paying governments to borrow; a truly perverse state of affairs given the need for productive investment. These low rates cannot, and naturally do not reflect a collapse in the underlying returns to capital; instead they reflect desperately depleted confidence.[8]

Table 1. Daily United States Treasury Yield Curve Rates
Date1 month3 months6 months1 year2 years3 years5 years7 years10 years20 years
  1. Source: United States Treasury.

March 1, 20130.070.110.120.160.250.350.751.231.862.68

The corollary of this retrenchment has been the stagnation of many major economies for almost half a decade. Growth requires investment. But investment has slumped to record lows as a proportion of GDP in the US, euro area[9] and UK mainly because households, businesses, and banks are nervous about future demand (Figure 2).

image

Figure 2. Fixed investment. (a) United States. (b) United Kingdom. Source: Bureau of Economic Analysis/Office of National Statistics, quarterly data to second quarter of 2012.

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Gross fixed capital formation (total investment) in the euro area fell to 18.7% of GDP in 2010, the lowest level in more than 40 years and has barely recovered since. Assets have been ‘sweated’ as borrowing conditions have tightened. This means maintaining the quality of assets sufficient to see growth expanding will require significant investments in Europe's productive assets (such as renewable energy infrastructures) over the coming decades.[10]

The problem is that once sentiment collapses, economies can enter a downward spiral that is hard to escape. This is the mirror image of the hubristic confidence that fuelled the previous bubble. Where 10 years ago the talk was of a ‘new economy’ which would secure noninflationary growth, now it seems the rich world is destined for decades of slow Japanese style growth recession. In reality, the underlying productive capacity (and trend growth) of the economy is likely to have been affected by the scrapping of capital and the loss of long-term employment skills. However, the trend output path may well have changed far less over the last 5 years than the wild swings in sentiment may imply.

With short-term interest rates close to zero, the effectiveness of monetary policy to stimulate growth is reaching its limits. Yet when confidence is lacking, a clear strategic vision with supporting policies can guide investors. In the past, we have seen the Tennessee Valley Authority, Roosevelt's ‘New Deal’, or rearmament for war. Historians may debate the relative importance of these measures versus, for example, changes in monetary and foreign exchange policies, but the important point is that a mix of credible complementary policies was adopted. Today, recognizing the inevitable transition to a low-carbon economy, and helping to drive forward investment in resource-efficient, innovative sectors, could both restore growth and leave a lasting legacy. As well as achieving energy security, tackling climate change, and saving consumers and businesses costs in the long run, these sectors offer long-term returns for investors. Of course, resources must be paid for. Investment and employment costs are ultimately borne by consumers, but they are part of the necessary process of generating economic surplus and restoring economic health. And it is worth recalling that the simultaneous attempt to cut costs by households, businesses, and banks is precisely what has prolonged this recession.

But why green rather than alternative investment, such as schools, housing, and hospitals? The answer is that many forms of investment will have short-run stimulus properties, but it makes sense to prioritize those that are credible enough as long-term markets to leverage private investment with minimal call on the public purse. Firstly, because it covers energy, transport, buildings, and other sectors, green policies have the scale to galvanize substantial investment. In addition, it makes sense to start early to avoid locking into costly, resource-intensive infrastructures, institutions, and behaviors that will need replacing or retrofitting once the recession is over. This should not be hard. Most major investment opportunities have varying degrees of resource intensity. For example, in most rich countries, the bulk of infrastructure investment is in energy with the second largest being transport (in many European and Asian economies rail accounts for a largest portion of this investment, in many instances larger than roads and air combined).[11] This investment contains private and public sources. But the key advantage is that green investment is likely to require less public spending than many alternatives. Much of the investment will be private, for example driven by changing price signals or standards and regulations relating to efficiency. Indeed, shifting the tax base toward materials and resources can raise revenues, which can be used to lower other distortionary taxes such as those on intellectual activity. There is also a greater case for past under-provision to be made good in the green sector, relative to conventional investment; given that low-carbon investment has not kept pace, emerging new threats and challenges associate with climate stabilization.

Indeed, it is because resource-efficient investment is so transformational in scale, covering all major sectors of the economy (from transport to energy, buildings to industry and land use to ICT networks), that profitable new markets can attract private investors provided there is a credible public steer. The scale of the necessary transformation underlies the long-term opportunity. HSBC value the green market at £2 trillion worldwide.[12] Two of the world's fastest growing economies, South Korea and China, have understood this and moved decisively to embrace high technology low-carbon growth. Policies to encourage low-carbon investment would provide new business opportunities and generate income for investors precisely because they address growing global resource challenges.

TIMELY, TEMPORARY, AND TARGETED INVESTMENT IS PREFERABLE, BUT INSUFFICIENT

  1. Top of page
  2. Abstract
  3. INNOVATING FOR THE FUTURE
  4. THE ROLE FOR POLICY INTERVENTION
  5. THE CURRENT MACROECONOMIC OPPORTUNITY
  6. TIMELY, TEMPORARY, AND TARGETED INVESTMENT IS PREFERABLE, BUT INSUFFICIENT
  7. ESTIMATING SPENDING MULTIPLIERS
  8. THE ALL-IMPORTANT C-WORD: ‘CONFIDENCE’
  9. CONCLUSION
  10. REFERENCES

It is often argued that the short-term macroeconomic merit of an investment, in terms of what constitutes a good economic stimulus, can be judged against established criteria.2 These include tests on whether an investment is timely, temporary, and targeted. The criterion of timeliness reflects the need for fiscal policy to be counter-cyclical: if spending is delayed, then it may inadvertently have the exact opposite effect to that intended, fuelling an unsustainable cyclical upturn.

For infrastructure spending in particular, timeliness may be difficult to achieve due to the occasional long lead times in project development and multiyear construction schedules. A lot of green and conventional infrastructure spending is inherently slow, because of planning processes and the need to undertake pilots (though even these processes generate jobs and activity). However, while more immediate means of injecting cash into the economy do exist—for instance, through tax cuts or literal cash hand-outs, as, for instance, used by Australia in the early stages of the Global Financial Crisis in 2009[15]—these are also problematic: it is likely that cash-in-hand measures will lead to a lesser increase in spending and greater cash hoarding than spending channelled through infrastructure projects. Nevertheless, important considerations include how long a project takes to get off the ground from scratch, including development and approval time, and how many projects are ‘shovel-ready’. Consequently, it is important that policymakers move quickly.

The next key criterion for stimulus is that a measure is temporary. This reflects not only the narrow public sector desire to limit public spending obligations, but the broader and more relevant macroeconomic desire not to ‘crowd out’ alternative productive investment when the economy is operating close to capacity. The latter applies to both public and private investment.[16] 3 Many green infrastructure investments involve a large up-front capital cost and lower running costs than conventional alternatives, precisely because they are designed to be more resource-efficient in operation. Naturally, resource-efficient infrastructure spending typically involves some degree of upkeep costs, though these may be relatively low compared to capital expenditure costs. For example, operating costs for offshore wind projects include operation and management services from wind suppliers, labor costs, vessel hire and other operation and management support, grid charges, and insurance.

Yet concerns about timeliness and temporariness can be overstated. Most current estimates of developed world output gaps suggest that resources will continue to be underutilized for at least the next half decade in many developed economy.4 Indeed, had commentators and policymakers spent less time worrying over the last 4 years about the ‘shovel-readiness’ of projects, and more time actively driving investment, economic prospects in 2013 might have looked brighter than they do. Moreover, the confidence impact associated with the sum of an ambitious programme to encourage investments is greater than the individual parts—more on this later. Also, there is a limit to the gains from ensuring investment is timely and temporary—the requirement that some projects be timely and temporary is likely to reduce their multiplied impact as permanent measures have a larger effect on reducing risk-averse saving and on stimulating spending.

The final criterion for an effective stimulus is that the spending is appropriately targeted at areas where the investment will have maximum benefits in terms of its multiplier effect. Calculating the relevant multipliers is not straightforward: there are methodological issues related to time frame (short- versus long-term multipliers) and coverage (sector versus project multipliers), as well as difficulties in obtaining sufficiently detailed data. It is important also to recognise that long-run investment multipliers can be expected to be significantly smaller than those which apply in a demand-deficient environment.

There are a wide range of estimates of fiscal multipliers in the empirical literature. Freedman et al.[17] noted that the multiplier is likely to vary according to the type of fiscal action. Government infrastructure spending is likely to have a bigger multiplier than a tax cut if households save a portion of their extra income. Tax cuts or spending increases aimed at poorer households are likely to have a larger impact on spending than ones targeting the rich, as lower income households tend to spend a higher share of their income. As Romer and Bernstein identified, certain industries, such as construction and manufacturing, are likely to experience particularly strong job growth under a recovery package that includes an emphasis on infrastructure, energy, and repair.[18] Multipliers also tend to be higher for more closed economies, where extra spending is less likely to leak into imports.[19] 5

ESTIMATING SPENDING MULTIPLIERS

  1. Top of page
  2. Abstract
  3. INNOVATING FOR THE FUTURE
  4. THE ROLE FOR POLICY INTERVENTION
  5. THE CURRENT MACROECONOMIC OPPORTUNITY
  6. TIMELY, TEMPORARY, AND TARGETED INVESTMENT IS PREFERABLE, BUT INSUFFICIENT
  7. ESTIMATING SPENDING MULTIPLIERS
  8. THE ALL-IMPORTANT C-WORD: ‘CONFIDENCE’
  9. CONCLUSION
  10. REFERENCES

Empirical analysis of previous fiscal stimuli also provide a wide range of estimates for multipliers, which is not surprising given the difficulty of isolating the impact of a specific fiscal policy. Microeconomic case studies of consumer behavior in response to tax changes in America, find that permanent cuts have a bigger impact on consumer spending than temporary ones and that consumers who find it hard to borrow, such as those close to their credit card limit, tend to spend more of their increased income. But such case studies fail to measure the overall macroeconomic impact of tax cuts or spending increases on output, which rely on a cascade effect of additional demand in an economy undergoing excess desired net saving.

The size of the multiplier also varies according to economic conditions. For an economy operating at full capacity, the fiscal or investment spending multiplier would be expected to approximate to zero. Since there are no spare resources, any increase in government (or any other) demand for a sector's output would serve to displace output elsewhere. Hiring labor would be expected to push up wages in a tight market which crowds out employment elsewhere, while additional investment would be expected to raise real interest rates which crowds out alternate investment. The policy relevant multiplier is likely to be close to zero. But in a demand-deficient recession, with underutilized resources, a spending boost can drive a multiplied increase in overall demand by helping overcome the paradox of thrift.

In such an environment the confidence effect is likely to ‘crowd in’ private investment. But if fiscal sustainability is seen as under threat by policy action, interest rates on bonds could rise in response to government borrowing. Moreover, if consumers expect higher future tax demands to finance today's additional government borrowing, or lower productivity as a result of the government action, they could spend less today and save more—a process known as Ricardian equivalence. These factors would all lower the fiscal multiplier. The response of the monetary authorities also needs consideration—if additional spending is seen to raise inflationary pressure, policy rates might be pushed higher in order to offset the fiscal stimulus. For example, Cwik et al.[21] use models in which interest rates and taxes rise more quickly in response to higher public borrowing limiting the size of the multipliers.

But the likelihood that households will behave in a ‘Ricardian’ manner is limited when spending is held back because of lack of confidence about demand, rather than because of concerns about balance sheets. This is especially true where the financial crisis has left households and business facing borrowing constraints.6 Moreover, in an environment (such as the present) where policy rates are close to the zero bound, the assumption that monetary authorities will actively offset a fiscal stimulus seems unfounded. Christiano et al. and Almunia et al.[22, 23]7 argue that, whenever the zero bound on nominal interest rates is binding, the government spending multiplier is much bigger than one. Using US data, Auerbach and Gorodnichenko[24] found that fiscal multipliers associated with government spending fluctuate from near zero when the economy is operating close to capacity to about 2.5 during recessions. De Long and Summers also note that government spending in a slump not only generates positive benefits, it also prevents negative hysteresis effects on future supply, whereby capital is scrapped and labor skills are lost as a result of protracted under-utilization.[25] Consequently, traditional estimates of long-run fiscal multipliers are of only limited use in the current environment. This offers a proximate explanation as to why a variety of fiscal austerity plans had proved so demonstrably ineffective at reviving growth and confidence.[26]

The evidence suggests that extra spending will boost the economy in the current environment in the short run. The key question is whether such spending will be targeted, timely, and temporary and leave a favorable long-term legacy. The risk is that poorly planned spending commitments might prove hard to reverse or act as a drain on long-term efficiency and growth. Resource-efficient investment scores well against both these criteria: it can provide a large-scale economic stimulus, even though other investments which provide a less productive legacy might be timelier in their multiplied impact and provide an even larger short run boost to aggregate spending. Policymakers may decide this is price worth paying, especially considering the limited fiscal call of green policies, their focus on leveraging private investment, and the alternative consequence of not implementing any growth and investment strategy.

THE ALL-IMPORTANT C-WORD: ‘CONFIDENCE’

  1. Top of page
  2. Abstract
  3. INNOVATING FOR THE FUTURE
  4. THE ROLE FOR POLICY INTERVENTION
  5. THE CURRENT MACROECONOMIC OPPORTUNITY
  6. TIMELY, TEMPORARY, AND TARGETED INVESTMENT IS PREFERABLE, BUT INSUFFICIENT
  7. ESTIMATING SPENDING MULTIPLIERS
  8. THE ALL-IMPORTANT C-WORD: ‘CONFIDENCE’
  9. CONCLUSION
  10. REFERENCES

Making accurate assessments of multipliers in individual sectors is likely to be of limited value. But preliminary estimates of the likely first-round multiplier effects of different projects can be assessed on the basis of key parameters. Attempts to assess multiplier effects of individual projects are therefore at best illustrative, but they do point to projects that have a large up-front labor intensity, particularly in creating low income jobs (for example in construction, which is a labor market sector with excess slack currently) have limited import content and which are perceived as permanent. These are likely to have a higher multiplier effect.

The evidence suggests that the short-term stimulus properties of green investment are not dissimilar to those of alternative investment measures, though they depend on the type of investment and a recognition that more timely but less sustainable stimulus investments are available. However, it should be noted that investments which are labor-intensive, especially in creating low-wage jobs, are also more likely to crowd out the creation of high-skill, innovative investment necessary to support productivity growth in the long-run. They are also more likely to require large sums of public spending (which will not be forthcoming in the current fiscal environment) being less able to generate confidence and credibility effects which stimulate private investment. And confidence is the key to addressing the macroeconomic challenge.

The global economy is currently hamstrung by a glut of private saving and inadequate private investment. This has prolonged the economic slowdown and driven the cyclical deterioration on the public finances. Digging ditches and repairing roads might be palliative stimulus options, but they are unlikely to drive large-scale business investment or address the root cause of the confidence crisis. They correspondingly make for a bad investment choice when there are so many other pressing long-run requirements. A green transformation, on the other hand, can capture investors' imagination given its potential global scale and application across all key sectors. It also benefits from the fact that driving profitable markets ultimately depends not on large fiscal outlays, but on small but credible policy signals.

CONCLUSION

  1. Top of page
  2. Abstract
  3. INNOVATING FOR THE FUTURE
  4. THE ROLE FOR POLICY INTERVENTION
  5. THE CURRENT MACROECONOMIC OPPORTUNITY
  6. TIMELY, TEMPORARY, AND TARGETED INVESTMENT IS PREFERABLE, BUT INSUFFICIENT
  7. ESTIMATING SPENDING MULTIPLIERS
  8. THE ALL-IMPORTANT C-WORD: ‘CONFIDENCE’
  9. CONCLUSION
  10. REFERENCES

Overall, the decision as to which sectors are most suitable for stimulus investment should be based not just on estimates of differential short-run multipliers, but on their long-term economic credibility and ability to galvanize private investment. The evidence so far is encouraging. The green sector is one of the few vibrant parts of the global economy at the moment. In the United Kingdom, for example, the Department for Business, Innovation and Skills value sales of the UK low-carbon and environmental goods and services sector at £116.8 billion in 2009–2010, growing 4.3% from the previous year.[27] South Korea and China have moved decisively to champion high technology low-carbon growth, in stimulus packages in 2008–2009 but also in China's 12th Five-Year Plan which sets strong targets.8 These countries recognize that investment flows to the pioneers of revolutions.[28] But the private sector is not investing as heavily as it could in green innovation and infrastructure because of a lack of confidence in future returns in this policy-driven sector. This is driven by sustained uncertainty surrounding the current energy and environment policy; uncertainly which is costing jobs and livelihoods.

Macroeconomic conditions make this a relatively favorable time to kick-start investment necessary to transition to a resource-efficient economy. There is no lack of private money, just a perceived lack of opportunity. Resource costs are low and the potential to crowd out alternative investment and employment is greatly reduced and is likely to remain so for several years as output gaps stay negative even as economies recover. Clear and credible green policies have the potential to restore confidence and generate sustainable growth. Providing credible early incentives to invest in resource-efficiency could generate investment and growth in the long and the short run.

NOTES
  1. 1

    For an account of the risks associated active strategic intervention see Ref [4].

  2. 2

    For a discussion of the use of fiscal policy as a tool for macroeconomic management in a demand-deficient environment see Refs [13, 14].

  3. 3

    Policymakers would, in fact, want to actively crowd out some non-green investment, even in the long run, in order to attain green growth objectives. More generally, Baxter and King[16] showed how productive public investment can enhance the productivity of private investment and significantly increase the long-run government spending multiplier.

  4. 4

    Defined as the period over which actual output is below the economy's noninflationary potential. See OECD Economic Outlook, Volume 2012, Issue 1, Annex Table 10. Output gaps.

  5. 5

    See Ref [20] which shows evidence that capital flows and fiscal policy tend to be pro-cyclical, exacerbating economic cycles.

  6. 6

    Lack of access to a poorly functioning financial system can lead consumption (investment) to depend more on current than on future income (profits), leading to larger multipliers.

  7. 7

    Christiano et al. and Almunia et al.[22, 23] have concluded that fiscal multipliers were about 1.6.

  8. 8

    Of the seven ‘Magic Growth sectors’ identified in the Twelfth Five Year Plan, three are low-carbon industries: clean energy, energy efficiency, clean energy vehicles; the others are high-end manufacturing.

REFERENCES

  1. Top of page
  2. Abstract
  3. INNOVATING FOR THE FUTURE
  4. THE ROLE FOR POLICY INTERVENTION
  5. THE CURRENT MACROECONOMIC OPPORTUNITY
  6. TIMELY, TEMPORARY, AND TARGETED INVESTMENT IS PREFERABLE, BUT INSUFFICIENT
  7. ESTIMATING SPENDING MULTIPLIERS
  8. THE ALL-IMPORTANT C-WORD: ‘CONFIDENCE’
  9. CONCLUSION
  10. REFERENCES
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    Freedman C, Kumhof M, Laxton D, Lee J. The Case for Global Fiscal Stimulus. IMF Staff Position Note 09/03, March; 2009.
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    Romer C, Bernstein J. The Job Impact of The American Recovery and Investment Plan. 2009. Available at: http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf.
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