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Why ministers of finance are critical in the fight against climate change

Experts warn that limiting global warming to 1.5ºC will require “rapid, far-reaching and unprecedented” action coupled with money and the commitment from governments to implement these actions.

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Recent studies indicate that bold climate action could trigger about $26 trillion in economic benefits by 2030, create over 65 million new jobs and avoid 700,000 premature deaths.

These are staggering statistics that call for ambitious, far-reaching reforms, new governance arrangements, innovative financing and cooperation on sharing technology. While it will take all of us to make this happen, one kind of entity plays a more critical role than any other. Without the active cooperation of ministries of finance, the world will fall short in the battle against climate change.

Experts warn that limiting global warming to 1.5ºC will require “rapid, far-reaching and unprecedented” action coupled with money and the commitment from governments to implement these actions.

Implementing Nationally Determined Contributions (NDCs) – a commitment made by countries to cut carbon emissions by a specific amount – and boosting these targets requires political will and leadership. The single most critical government body, the ministry of finance, has the power to influence national development and economic policies, in the way that determines where public and private finances are spent.

Image: United Nations Development Programme (UNDP) Cambodia

So a deep commitment from ministries of finance across the globe is a must if the ambitions of the Paris Agreement, NDCs and the Sustainable Development Goals (SDGs) are to be achieved. And this type of commitment is unlikely to be secured solely through advocacy.

The ability to gather the right information to assess the impact of climate change locally – in towns and villages – is essential to put climate change at the heart of fiscal decision-making. The economics of climate change is a relatively new and often complicated field, and developing countries face major capacity constraints. But things are evolving, with dynamism and improvisation coming from unlikely corners of the world.

Cambodia adopted a Climate Change Financing Framework in 2014, laying out financial needs for the climate-change response, with support from Sweden, the European Union (EU) and the UN Development Programme (UNDP).

The framework identified potential sources of funding and actions required to improve the effectiveness and efficiency of climate finance. Since 2012, it has led the Ministry of Economy and Finance (MEF) to conduct annual climate public-expenditure reviews.

Image: Cambodia Climate Change Alliance

More recently, Cambodia was the first country to develop and apply a Climate Economic Growth Impact Model (CEGIM), released in April 2018. CEGIM is a simple economic model that aims to distill key features of the most widely used models on the economic impact of climate change. It was developed by a team that included staff from the Ministry of Economy and Finance and the National Council for Sustainable Development and UNDP.

The CEGIM model played a major role in the inclusion of climate change as a key pillar of the government’s new development strategy – Rectangular Strategy 2018-2023 – which lays out Cambodia’s development agenda, including implementation of NDCs and achievement of the SDGs.

The model looks at Loss and Damage (L&D) from climate change, and groups these into three categories: loss of income, mostly from declining natural resource productivity; reduction in labour productivity arising from heat stress; and damage to assets. CEGIM is calibrated by triangulating all these sources and then integrating them into a single analytical framework.

Without climate change, CEGIM projects that real GDP would grow at an average of 6.9% per year from 2017 to 2050. Climate change reduces average GDP growth to 6.6% and absolute GDP by 0.4% in 2020, 2.5% in 2030 and 9.8% in 2050. The CEGIM shows that in Cambodia the most significant impact of climate change is in a reduction in labor productivity due to heat stress.

What has made this process special?

It responds to a clear demand from the Ministry of Economy and Finance to explore how climate change will impact the Cambodian economy over time.

By using CEGIM, Cambodia has found a way to generate data that is trusted by policymakers…

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Asean

Assessing the economic impacts of COVID-19 on ASEAN countries

All ASEAN countries are dependent on tourism flows but Thailand is probably the most dependent.

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Author: Jayant Menon, ISEAS–Yusof Ishak Institute

The COVID-19 pandemic is first and foremost a human tragedy. Measures introduced to deal with the pandemic could save lives but are having wide-ranging economic effects and inducing economic contagion.

There are already studies estimating the economic impact of the virus. But greater focus is needed on the transmission mechanisms of the economic contagion and in critiquing how assessments of the economic impacts are made, concentrating on the ASEAN region.

The effects of COVID-19 are hitting ASEAN economies at a time when other risk factors, such as a global growth slowdown, were already rising.

COVID-19 is disrupting tourism and travel, supply chains and labour supply

Uncertainty is driving negative sentiment. This all affects trade, investment and output, which in turn affects growth. Tourism and business travel, as well as related industries, especially airlines and hotels, were the first to be affected. And the conditions are worsening as more countries go into shutdown.

The supply disruptions emanating mostly from China will reverberate throughout the value chain and disrupt production. Since China is the regional hub and accounts for 12 per cent of global trade in parts and components, the cost of the disruption in the short run will be high.

The negative effects of quarantine arrangements on labour supply could also be high depending on duration and sector. Manufacturing has been hit harder than service industries, where telecommuting and other technological aids limit the fall in productivity.

All these disruptions will lead to sharp declines in domestic demand. And their impact on economic growth will further propagate these disruptions. This compounding effect can magnify and extend short-run effects into the long run.

The highest economic cost could come from the intangibles

The effects of negative sentiment about growth and general uncertainty — which is already affecting financial markets — will feed into reduced investment, consumption and growth in the long run.

Rolling recessions around the world now appear inevitable, despite the stimulus measures being contemplated. If so, there will be sharp increases in unemployment and poverty. Some degree of decoupling from China, or de-globalisation in general, may also be a permanent reminder of this pandemic.

Among ASEAN countries, Singapore, Malaysia and Thailand are heavily integrated in regional supply chains and will be the most affected by a reduction in demand for the goods produced within them. Indonesia and the Philippines have been increasing supply chain engagement and will also not be immune.

Vietnam is the only new ASEAN member integrated into supply chains with China and is already suffering severe supply disruptions.

Given time, supply-side adjustments will alter trade and investment patterns. The main adjustment will involve relocating certain activities along the supply chain from China to ASEAN countries. Although the pandemic will disrupt the relocation phase, ASEAN countries can benefit from the new investments, mitigating overall negative impacts.

Thailand is probably the most tourism dependent Asean country

All ASEAN countries are dependent on tourism flows but Thailand is probably the most dependent. Cambodia and Laos receive most of their investment and aid from China, and a marked growth slowdown in China will affect them the most.

The Philippines and Mekong countries have large overseas foreign worker populations and restrictions on their movement or employment prospects as COVID-19 spreads will affect sending and receiving countries. Brunei and Malaysia are net oil exporters and the price war indirectly induced by the pandemic will hit them hard. Others will benefit from lower oil prices, as will the struggling transport sector.

In measuring the impacts of COVID-19, it is important to separate its marginal impact from observed outcomes. This is important because the remedy may vary depending on the cause of the disruption. This requires an analytical framework that can measure deviations from a baseline scenario that incorporates pre-existing trends. A model-based analysis, rather than casual empiricism, is required to reduce the problem.

Even before the outbreak, risks of a global growth slowdown were rising

The restructuring of regional supply chains had started, driven initially by rising wages in China and accelerated by the US–China trade war. While COVID-19 may further hasten the pace and extent of the restructuring, it is only partly responsible for what may happen. It would be misleading to attribute all of the current disruption to COVID-19. Had the trade war not preceded it, COVID-19 may have resulted in greater disruption to supply chains.

Any assessment of impacts must recognise that the spread of COVID-19 is unpredictable, and so too the response by governments. It is difficult to estimate the impacts of a shock that is uncertain in itself. This reiterates the need for rigorous modelling and scenario analyses. The current trend points to risks rising, often accelerating, as with previous epidemics. This uncertainty underscores the need for caution in assessing, and regular recalibration in producing assessments.

Jayant Menon is a Visiting Senior Fellow in the Regional Economic Studies Programme at the ISEAS–Yusof Ishak Institute, Singapore.

A version of this article first appeared in ISEAS Commentary.

This article is part of an EAF special feature series on the novel coronavirus crisis and its impact.

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Asean

Coronavirus’ economic impact in East and Southeast Asia

The ASEAN+3 Macroeconomic Research Office (AMRO) estimates that the COVID-19 epidemic could deduct as much as half a percentage point from the economic growth of some regional economies in 2020.

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As the number of coronavirus cases continues to rise around the world, there are deep concerns over the potential economic impact of the virus.

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Asean

Trade War Incentive Schemes flourishing in ASEAN

Countries such as Thailand, the Philippines, Malaysia, and Indonesia have unveiled an array of incentive packages to entice businesses affected by the US-China trade war.

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Governments across ASEAN have been unveiling an array of incentive packages to entice businesses affected by the US-China trade war.

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