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The Climate Series

Part 2: Transition Economies

We have written extensively about a green transition in Europe, which has been accelerated by Russia’s invasion of Ukraine. More globally, the green transition is a switch to a zero-carbon economy, and it is a change that impacts a nation’s entire economy, from infrastructure to land demands to planning to investment to technology to HR. This transition will not be easy for any nation, but it will be especially disruptive for a small minority of countries that are dependent, or better said, “organised around” fossil fuel extraction. There are currently 21 countries where coal, petroleum, and natural gas account for more than half of exports (and in 6 of those countries, they represent 90%). For these nations, a green transition will be more like a green transformation.

When economists see a future puzzle ahead, they often look at past solutions to similar, analogous problems. Here, the recent models we have for this type of transition come from the many examples of a centrally planned economy transforming into a market-based system. When the Soviet Union fell, income in transition economies contracted somewhere between 10 and 50 per cent during the first few years of the transition. The pain points were not just economic, but also political and social. Similarly, output dropped drastically across transition economies, and such drops can be expected in the 21 majority fossil fuel exporters mentioned earlier.

Growing Pains

These exporters will also have to experience many of the growing pains seen in post-Soviet nations. They will likely have to redefine what the role of the state/central government is in the broader economy, and part of that means ending price controls and subsidies in the energy sector. This may sound simple, but it effectively means rewriting the social contract in each of those nations, and there is nothing but complexity coming with such an endeavour. The Asian nations that transitioned from planned to market-based economies embraced a slower, more gradual approach to the transition. Despite consensus among contemporary economists that an abrupt approach was superior, data from Eastern Europe does not support that claim.

While fossil fuel exporters suffer during this transition, there are other countries that will benefit: those whose non-renewable natural resources are essential for the green transition. After all, there are many precious minerals and metals needed for renewable energy production, transmission, and storage. Will they too suffer from a resource curse? Those metals and minerals are much more geographically concentrated than fossil fuels; then again, proven reserves are currently insufficient to meet forecasted demands for net zero on the global level. This implies that these resource-rich nations will wield considerable power. But tech may be the answer: for many of the earth metals, there is no genuine scarcity, it is just that companies have not invested much into proving reserves exist because they are not yet as profitable as they will be in the future. For these reasons, Mr Chandy posits that “natural resource wealth in precious minerals and metals is unlikely to play a determining role in the future fortunes of developing economies—or exert the same economic power that oil wealth does today”.

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