imf studyguide, banmun 2014

8/10/2019 IMF StudyGuide, BANMUN 2014

1/31


2/31

Page 2 of 31

Foreword

We would like to take the opportunity to welcome all the honorable Delegates of the IMF toBangladesh Model United Nations, Dhaka, Bangladesh. We're glad that you are able to join usand hope that this conference is both rejuvenating and educational.

We have full agenda during the next few days, so please take a few minutes to read through thisDelegate Guide. It includes our topics of dialogue, itinerary and other important information. Wetried to provide you with much information about the topics as possible.

We look forward for each and every Delegate to take part in the discussions and make it livelier.If we can do anything to make the conference more amusing, please let us know. Thank you for

joining.

Lubzana AfrinCo-Chair

Zunayeed Noor Alam

Chair.


3/31

Page 3 of 31

ContentsInternational Monetary Fund ............................ 4

i. History ......................... ........................ 5

ii. Mandate ....................... ........................ 5

iii. Functions .......................... ................... 6

Surveillance over Members Economic Policies 6Financing Temporary Balance of Payments Needs 7Combating Poverty in Low-Income Countries7Strengthening the International Monetary System 7Increasing the Global Supply of InternationalReserves ....................... .......................... ....... 7Building Capacity through Technical Assistance andTraining ....................... .......................... ....... 7Dissemination of Information & Research ..... 7

iv. Collaboration with the WB & WTO ..... 8

Collaboration with the World Bank ........ ..... ..... 8

Collaboration with the World Trade Organization 8

v. Governance & Decision-making ..... ..... ..... ... 8

Agenda 1: Fiscal Challenges & Climate Change9

i. Overview .......................... ................. 10

Climate, Environment, & the IMF ......... ..... . 10Fiscal implications ......................... ............. 10Designing a response .......................... ......... 10

Financing responses to climate change ...... .. 10Macroeconomic Challenges ..... ..... ..... ..... ..... 11Other environmental work in IMF ....... ..... ... 11

ii. Climate Change as a Public Finance Issue 11

Climate change is an externality problem . 11but a particularly complex one ................. 12

iii. Fiscal Instruments for Mitigation ..... ... 12

iv. Innovation ......................... ................. 12

Distortions in fossil fuel extraction ........ ..... . 13The limits of carbon pricing......................... 13

v. Instrument Choice Taxes, Cap-and-Trade,Hybrids ........................ ......................... ......... 14

vi. Current Carbon Pricing Policies ..... ..... 14

Incoherencies ........................ ...................... 14The Importance of Auctioning Permits ........ 15Addressing deforestation ............................. 15

International Coordination ..... ..... ..... ..... ..... .. 16vii. Fiscal Implications of Adaptation ..... .. 16

Balancing adaptation and mitigation ..... ..... .. 16Public goods and adaptation ........................ 16Dealing with fiscal risks .............................. 17

viii. Assessing the Fiscal Costs of Adaptation17ix. Climate Finance ........................... ...... 18

x. Closing Notes ....................... .............. 18

About the Chair................................... ........... 19

Agenda 2: South Asia Economy and Future . 20

Overview ................................ ....................... 21

Asias growing influence ............................. 21i. The current demographic scene ..... ..... . 21

ii. Historical and current economic situation22

iii. Changing age structure ..... ..... ..... ..... ... 23

Change .................................... .................... 24Is there a connection? ........................... ....... 24Savings. ............. ......................... ................ 25

iv. Caveat lector: Demography is not destiny26

Productive employment is the key ...... ..... .... 26Human Capital ................................ ............ 26Government Policies ........................ ........... 26

v. Two potential impediments to realizing thedemographic dividend .................................... 26

vi. Population aging ........................... ...... 27

vii. Key aspects of the Funds engagement 28

Economic monitoring and advice ..... ..... ..... .. 28Technical assistance and training ..... ..... ..... .. 28Strengthening safety nets ............................. 28Sharing of knowledge .................................. 28Lessons from the Asian crisis ...................... 28

viii. The future for South Asia and the IMF 29South Asias contribution to th e Fund .......... 29IMFs presence in the region ... .................... 29

ix. Conclusion ........................... .............. 29

References ......... ......................... ................ 30About the Co-Chair .......................... .............. 31


4/31

Page 4 of 31

InternationalMonetary Fund


5/31


6/31


7/31

Page 7 of 31

Financing Temporary Balance of PaymentsNeedsThe Articles of Agreement enable the IMF to lend tomember countries that have a balance of payments needto provide temporary respite and enable countries to putin place orderlycorrective measures and avoid a

disorderly adjustment of the external imbalance. Suchlending is usually undertaken in the context of aneconomic adjustment program implemented by the

borrowing country to correct the balance of paymentsdifficulties, which also safeguards IMF resources. Inaddition to providingdirect financing to its member countries, the IMF playsan important catalytic role in helping member countriesto mobilize external financing for their balance of

payments needs.

Combating Poverty in Low-IncomeCountriesThe IMF provides concessional loans to low-incomemember countries to help support these countries effortsto eradicate poverty. In this venture, the IMF worksclosely with the World Bank and other development

partners. In this area the IMF also plays a criticalcatalytic role to mobilize external financing and donorsupport for the countries balance of payments anddevelopment needs. The IMF also participates in two

international initiatives to provide debt relief: theHeavily Indebted Poor Countries (HIPC) Initiative andthe Multilateral Debt Relief Initiative (MDRI).

Strengthening the International MonetarySystemThe IMF is the central institution in the internationalmonetary system. It serves as a forum for consultationand collaboration by members on international monetaryand financial matters, and works with other multilateral

institutions to devise international rules that wouldfacilitate the prevention and orderly resolution ofinternational economic problems.

Increasing the Global Supply of InternationalReservesThe IMF is authorized to issue an internationalreserve asset called the Special Drawing Right (SDR) if

there is a global need to supplement existing reserveassets. These allocated SDRs are part of the netinternational reserves of members and can be exchangedfor convertible currencies. They are not a claim on theIMF. The SDR is also the IMFs unit of account for allfinancial transactions with members.

Building Capacity through Technical Assistance and Training

Technical assistance and training are provided in thecore areas of IMF expertise to help member countriesdesign economic policies and improve economicmanagement capabilities, which in turn can help reducethe risk of poli cy failures and the countries resilience toshocks, and facilitating program design andimplementation. These activities are particularlyimportant in developing countries, where resources arescarce and institutions often weak.

Dissemination of Information & ResearchThe IMF is a premier source for economic analysis of itsmember co untries economic policies and statisticalinformation. Information is disseminated through itsnumerous economic reports and research studies onmember countries, as well as specialized statistical

publications. The IMF also conductsresearch in areas relevant to its mandate andoperations, mainly to improve its economic analysis andits advice to member countries.


8/31


9/31

Page 9 of 31

Agenda 1: Fiscal Challenges &Climate Change


10/31

Page 10 of 31

i. Overview

Climate, Environment, & the IMFStabilizing atmospheric concentrations of greenhousegases will require a radical transformation of the globalenergy system over coming decades. Fiscal instruments

(carbon taxes or similar) are the most effective policiesfor reflecting environmental costs in energy prices and

promoting development of cleaner technologies, whilealso providing a valuable source of revenue (e.g., forlowering other tax burdens). Fiscal policies also have akey role to play in addressing other environmentalchallenges, like poor air quality and urban congestion.

Responding to climate change has become one of theworlds foremost policy challenges. In line with itsmandate and expertise, the IMF focuses on the fiscal,financial, and macroeconomic challenges of climatechange. The IMF also provides advice on the appropriatedesign of fiscal reforms to promote greener growth more

broadly, particularly with regard to the practicalities ofgetting prices right in energy and transportation systems.

Fiscal implicationsBroad-based charges on greenhouse gas emissions, suchas a carbon tax, are the most effective instruments forreducing emissions throughout the economy. They

promote widespread changes in behavior, encouraging businesses and individuals to reduce energy use andswitch to cleaner fuels.

Carbon taxes can also raise substantial amounts ofgovernment revenue. Fiscal challenges created bycurrent economic difficulties provide an opportune timeto consider these types of innovative environmentalcharges. Cap-and-trade systems are another option, butgenerally they should be designed to look like taxesthrough revenue-raising and price stability provisions.

Designing a responseThere are many issues to consider in designing fiscal

policies to mitigate climate change:he appropriate tax level and base, and the treatment

of traded goods;

such as cleantechnology research, development, and deployment

policies;

financi ng the governments budget and how to use theadditional revenues;

The treatment of forestry and other non-energyemissions; and

How to address impacts on vulnerable households andfirms.

These and other issues are discussed at length in a recentIMF book, Fiscal Policy to Mitigate Climate Change: AGuide for Policymakers. In 2014 the IMF (with theBrookings Institution and Resources for the Future) will

publish an edited volume focused specifically on thedesign of a U.S. carbon tax in the context of broaderfiscal reform.

Financing responses to climate changeThere is broad agreement that substantial financialassistance is needed for climate adaptation andmitigation projects in developing countries. In 2011, theIMF, in collaboration with the World Bank and others,undertook a study for the G-20 on the effectiveness,revenue potential, and administration, of a wide range offiscal options for climate finance.

This included analysis of potential charges forinternational aviation and maritime emissionsand domestic (carbon-related and other) fiscalinstruments.

An IMF staff proposal for a Green Fund would facilitatefinancial flows to developing countries to assist in theirefforts on climate change adaptation and mitigation. TheGreen Fund would be neither created nor managed bythe IMF itself. It would play an important role as aframework to mobilize resources, and could be the first


11/31

Page 11 of 31

step toward a binding global agreement on reducinggreenhouse gas emissions.

Macroeconomic ChallengesClimate change mitigation policies affect countrieseconomic growth, saving and investment levels, capitalflows, and exchange rates. But IMF analysis suggeststhese costs are manageable if policies are well designed.In particular, policies should be credible and providelong-term price stability, flexible enough to be able toadjust to emerging information and changing economicconditions, and implemented as broadly and equitably as

possible.

Other environmental work in IMFThere is also ample scope for reforming tax systems todeal much more effectively with broader environmentaland related problems that can be a significant drag oneconomic growth, such as the health and productivityimpacts of poor air quality, and severe congestion ofmajor urban centers. The key challenges are torestructure existing energy tax systems to directly targetthe source of environmental harm (e.g., by taxingemissions or driving on busy roads rather than electricityconsumption or vehicle sales), to better align taxlevels with the scale of environmental harm, and toovercome practical challenges of higher energy and

transportation costs.

Earlier IMF papers lay out core principles of green taxdesign and focus on case studies for Chile and Mauritius.And an IMF report (to be published in summer 2014 andcovering over 150 countries) provides estimates fortaxes on fossil fuel products to reflect pollution andother environmental impacts associated with energy useand underscores the large environmental, health, andfiscal benefits from tax reform.

A recent IMF paper and book published in September2013 put the magnitude of subsidies for fossil fuelenergy sources at about $2 trillion worldwide in 2011,including both direct fiscal costs and implicit subsidiesfrom the failure to charge for environmental damages ortax energy at the same rate as other consumption

products. The paper and book draw on case studies to

provide practical guidance (e.g., on better targetedinstruments commonly available to protect the poor) forimplementing energy price reform. In the case of

petroleum products for example, reducing subsidiescould significantly reduce greenhouse gas emissions inmany countries, while at the same time reducing fiscaldeficits. The IMF is also involved in regular monitoringof fuel pricing policies in response to volatileinternational fuel prices. Another recent study definesand measures the concept of green investment andexplains recent trends.

ii. Climate Change as a Public FinanceIssue

Climate change will have indirect effects on the publicfinances that may amplify the wider challenges it poses.Countries heavily dependent on tourism or on sellingfishing rights, for example, or experiencing reducedagricultural productivity, may face significant reductionsin tax revenues. More fundamentally, however, taxesand spending instruments have a purposive role to playin mitigating and adapting to climate change, and it isthese that are the focus of the paper. This section starts

by setting out key structural features of climate changeviewed from a public finance perspective.

Climate change is an externalityproblem Emitters of greenhouse gases (GHGs) fail to recognizethe aggregate damage they cause, so emit more than iscollectively desirable. Attaining a long-run atmosphericCO2 target of 550 parts per million, by many scientistsconsidered necessary, requires slowing and then (startingin 2020 40) cutting global emissions (by 60 80

percent). But each country would prefer others toshoulder the costs of doing so a classic free -rider

problem. Indeed a unilateral reduction in emissions byone country reduces the marginal benefit of abatement to


12/31


13/31


14/31

Page 14 of 31

v. Instrument Choice Taxes, Cap-and-Trade, Hybrids

Carbon pricing can be implemented through carbontaxation, cap-and-trade, or hybrids of the two. A carbontax is simply one levied at the same specific rate on allemissions, whatever their source. Since carbonemissions are proportional to fossil fuel use (for a givenfossil-fuel type, and in the absence of carbon capture andstorage technologies), this could be charged not directlyon emissions but on the use of fossil fuels oil, gas, andcoal themselves.

Under cap-and-trade, some fixed total of emission rightsis issued, and firms trade to hold thepermits they need.The price paid for the permit is then, in effect, a carbon

price. Hybrids let the carbon price vary (like cap-and-trade) but also allow some flexibility in aggregateemissions (like a tax): this might involve, for instance,cap-and-trade with a maximum price (at which unlimited

permits would be issued).

More generally, since no tax or emissions limit wouldremain unchanged forever, any scheme will in practice

be some form of hybrid. Variants include a cap-and-trade scheme in which countries are allocated emissionrights corresponding to business-as-usual and a centralauthority, financed by direct country contributions,controls emissions by purchasing and retiring them(Bradford, 2002). Investigating the relative merits ofthese instruments is a central challenge for the publicfinance of climate change and has received considerableattention.

Tax and cap-and-trade schemes can be 6 equivalent in terms of aggregate emissions and

government revenue if emission rights are auctioned,

the structure of abatement costs is known; and there is perfect competition in the markets for fossil fuels. Anyoutcome under some carbon tax can then also beachieved by cap-and-trade: auctioning permits in an

6 Can b e rather than are because equivalence also requires, forinstance, effective competition in both product and permit markets.

amount equal to the level of emissions under the carbontax will result in an equilibrium permit priceequal to that initial carbon tax; so each firm will emit thesame amount and the governmentwill collect the same revenue. In practice, of course,these conditions rarely hold, andinstrument choice becomes a real issue.

vi. Current Carbon Pricing Policies

Incoherencies Fully comprehensive carbon tax regimes, uniform acrossemission and sectors, are very few. The cleanestexamples are Australia, which plans such a tax (intransition to a trading scheme) from 2012, Mauritius andBritish Columbia. Denmark, Norway and Sweden were

early actors in the area, though in each case there aresignificant exemptions. Cap-and-trade schemes aresomewhat more common: in New Zealand, the RegionalGreenhouse Gas Initiative covering ten U.S. states, and,most extensive, the greenhouse gas Emissions TradingScheme of the EU (EU-ETS). The last covers only about45 percent of GHG emissions in the EU region, althoughits expansion to new sectors including internationalaviation and gases such as Nitrous Oxides is planned forthe next phase.

More widely, however, a wide variety of taxes, generallydesigned with other considerations more paramount,affect emissions. The most obvious are the excises orsubsidies on petroleum products (differing fromsystematic carbon taxation in that they are not calibratedto the varying carbon contents of the various fossilfuels), but there are typically many others. Emissionsfrom transportation, for example, may be affected by thetax treatment of company cars, or by the import dutieson cars, progressive in vehicle weight and motor size,

common in some European countries (includingDenmark and Norway). And regulatory provisions haveeffects in some respects akin to carbon charging. Infossil fuel producing countries, fiscal arrangements alsoimpact extraction and hence emissions.


15/31

Page 15 of 31

Not least, fuel used in international aviation andshipping which collectively account for 6 or 7 percentof global carbon emissions is essentially uncharged.While carbon pricing is, as ever, the preferredinstrument, particular obstacles arise in each case. Forinternational aviation, treaty commitments and bilateralair service agreements may impede effective carbon

pricing; ticket; less well targeted ticket taxes may thenhave a role, also helping address distortions arising fromthe typical exclusion of international air travel from salestaxation. In international shipping, the extraordinarymobility of the tax base large ships can travel theworld on a single bunker of a fuel make widespreadinternational cooperation essential for an effectivecharging scheme, with many developing countriesfearing the impact that this would have on them

absence explicit compensation. Keen and Strand(2007) and IMF and World Bank (2011) review theseissues and possible solutions.

The Importance of Auctioning PermitsRealizing the fiscal benefits of cap-and-trade requiresthat rights be purchased by emitters, not allocated tothem for free. In the first stage of the EU-ETS, forinstance, at least 90 percent of permits were allocatedfree of charge.Looking forward, while future allocationrules remain subject to some uncertainty, the share ofemissions rights to be auctioned under the EU ETS isexpected to increase after 2012, to perhaps around 50

percent of the total allocation by 2020 or so (althoughthe industrial sector is expected to continue to receivevirtually all permits free at least until 2015).

However, overall revenue losses due to incompleteauctioning for EU governments may not diminishsubstantially, given expected increases in permit values

(under a tighter cap) and broader coverage of thescheme. Similar trends appear to be emerging in theUnited States, where recent draft legislation implied thatgovernment effectively would forego $670 billion of the$850 billion in emissions quota value projected for2011 19.7

7 CBO (2009).

Addressing deforestationEstablishing incentives for reduced deforestation--accounting for about 20 percent of emissions, and often

presumed to be a particularly cheap form of abatement remains a priority. This market was outside the scope ofthe Kyoto Protocol, due to both the conceptualchallenges posed and problems in forestry governance.Some progress is now beginning to be made: the WorldBanks Forest Carbon Partnership Facility, for example,is providing capacity building support and pilotingincentive schemes. T he Copenhagen Accord of 2009highlights reduced emissions from deforestation anddegradation as central to future internationalcooperation; Norway, for instance, has pledged $1

billion each in support for reduced deforestation in

Indonesia and Brazil.

However, significant carbon market reform is likely to be needed in order to deliver on these objectives.Extending formal emissions trading to forestry markets,for example, or allowing firms to meet their capsthrough purchase of international deforestationoffsets could help subject to the necessarymonitoring and verification assurances on the supplyside to mobilize finance for forest preservation indeveloping countries on a larger scale than could beachieved from public funds. However, restrictions on theimportation of forestry credits are currently anticipatedon deforestation offsets on firms regulated under thenext phase of the EU ETS. Accelerated efforts to reducerelevant administrative concerns in host countries,and limit any residual risks for example through some(albeit not complete) import restrictions, and/or marketsegmentation, seem needed.


16/31

Page 16 of 31

International CoordinationA fully coordinated approach would involve a uniformcarbon price in all countries, with cross-country transfersaddressing any fairness concerns but a range ofnational fiscal concerns impede such a cooperativeoutcome. 8

Perhaps most fundamentally, a dominant concern in fuel pricing at the heart of the free-rider problem in relationto implementing climate policy is each countrys fearthat unilateral action would disadvantage producers ofenergy-intensive products (such as aluminum, paper,steel, and international transport) in world markets; aconcern exacerbated by the perception that much of the

burden of this would fall on developing countries not

responsible for the buildup of greenhouse gases.

Exporters of fossil fuels have an incentive to resistcarbon prices to the extent that these mayimpact their rents 9 (and, by the same token, an incentiveto impose and collect such charges themselves, if theyare to be imposed at all). Energy security concerns could

point in the same direction, but may relate more to thediversity of supply than to the level of demand.

8 In the absence of international transfers, it is worth noting, uniform

carbon pricing across countries may be not only inequitable (Sandmo,2005) but Pareto inefficient. This follows from the results of Keenand Wildasin (2004).

9Conversely, importers of fossil fuels have a collective incentive touse carbon taxes or tariffs to extract rent from exporters; andexporters have a corresponding incentive to manipulate supply. Thenet outcome could, in principle, be carbon taxes that, from a globalclimate perspective, are too high rather than too low (Strand, 2008).Of course, given the likely damage projected under BAU, this is notthe dominant effect at work.

vii. Fiscal Implications of Adaptation

Balancing Adaptation & MitigationAdaptation and mitigation are, by and large,substitutes: 10 the more mitigation is done, the lessclimate change there is to adapt to. Since each is costly,there is thus a trade-off to be made between them. And,also by and large, mitigation is (or should be) primarily a

potential source of government revenue while the most prominent fiscal responses to adaptation as will beseen involve additional public spending. How best tomake that trade-off thus depends on wider fiscalcircumstances: broadly speaking, the greater isgovernments need for revenue for its wider purposes themore attractive will be using carbon pricing

to limit climate damage rather than public spending toadapt to it.

Public goods and adaptation Uncertainties and irreversibilities require balancing

precautionary spending on adaptation against the risk ofundertaking costly expenditures that may proveunnecessary. The considerations discussed in SectionII.B point to gradualism and flexibility in incurring sunkcosts to deal with inherently uncertain climate

challenges. This is essentially a matter of project design: for example, in identifying efficientadaptation options for coastal zones (IPCC, 2007). As anexample of this real options approac h, World Bank(2010) cites dealing with the possibility that aircraft willneed longer take-offs in hotter climates not by buildingnow a long enough runway to provide for possible needs

but a shorter one combined with an option to purchaseadditional land as needed. Much of this is essentiallycommon sense which of course is not so common in

practice. The analytical point is simply that where publicinvestments involve heavy sunk costs, the option valueof waiting can be high; a point already referred to inSection II above and studied e g by Pindyck (2000).

10 See, in particular, Tol (2005). This is however not always thecase planting mangrove in coastal areas both protects againststorms and sequesters carbon, for instance but is the generaltendency.


17/31

Page 17 of 31

Dealing with fiscal risksIntervention may be appropriate to facilitate privateinsurance. Insurance does not reduce the physicaldamage from climate change (and through moral hazard

effects could worsen it). But it can reduce theconsequent welfare losses, including by reducingimplicit fiscal risks. One response to the Samaritansdilemma, for instance, is to make purchasing insurancemandatory. In many developing countries, however,market insurance may be unavailable or unaffordable forlarge groups at actuarially fair rates. There may then bescope for public intervention to provide or facilitateaccess to risk markets: in Malawi, for instance, theWorld Bank and donors provide drought insurance. 11

Recent financial innovations point to new ways ofcoping with some climate-related fiscalrisks. 12 The Caribbean Catastrophe Risk InsuranceFacility (CCRIF), for example bringing togetherCARICOM countries and launched with donor supportin 2007 pays out in the event of parametric trigger

points (such as hurricane wind speeds) beingexceeded. 13

It is estimated to offer premia about 40 percent belowmarket rates, and provides rapid payment if disaster

strikes. The scheme is limited in several respects:verification has proved more contentious than expected,for instance, and pooling among countries subject tocorrelated shocks limits the benefits from risk-spreading.

11 See Syroka and Musifora (2010).

12 IMF (2008b) provides a more general discussion of the role offinancial markets in dealing with climate change.

13 See http://www.ccrif.org/

viii. Assessing the Fiscal Costs of Adaptation

Evidence on the likely aggregate direct public costs ofappropriate adaptation measures in general and fiscalcosts in particular remains scant and patchy, andmarked by important uncertainties. But some broadimpressions are beginning to emerge. For advancedeconomies, two points stand out from the review ofestimates for the EU in Osberghaus and Reif (2010).

The first is that some elements of warming will easerather than burden the public finances: through reducedheating bulls for public buildings, for instance, andlower health care costs. The other is that the aggregatecosts seem modest: focusing on the upper limits, the

implied aggregate cost in mid-century appears to bearound 16 billion (in 2005 prices), 14 the main items

being flood protection and strengthening transportinfrastructures. Uncertainty on some items remainslarge, however: the cost of flood protection for WesternEurope is put at between 137 million and 4 billion.

Assessing the fiscal challenges from adaptation indeveloping countries requires a far better understandingof their likely country-specific magnitude. It is currentlyhard to judge where and when these costs rise to levelsof macroeconomic significance relative to the widevariety of other fiscal risks that countries face. A stepahead is recently made through a series of, admittedly

preliminary and incomplete, country studies ofadaptation costs by the World Bank in conjunction withrespective authorities, for Bangladesh, Bolivia, Ethiopia,Ghana, Mozambique, Samoa, and Vietnam, usingavariety of tools including both partial and computablegeneral equilibrium analyses.

14 Figure 1 of Obsterghaus and Reif (2010).


18/31

Page 18 of 31

ix. Climate FinanceA strong case can be made, on grounds of both historicalresponsibility 15 and developmental needs Stern (2007)and UNDP (2007) stress, for instance, that climatechange potentially jeopardizes achievement of theMillennium Development Goals for developedeconomies to shoulder a substantial part of the realincome loss that mitigation and adaptation are likely toimpose on developing countries. On the latter,signatories to the UNFCCC are explicitly committed tohelping developing countries that are particularlyvulnerable to the adverse effects of climate change inmeeting costs of adaptation to those adverse effects.

More generally, developed countries committedthemselves in the Copenhagen Accord and Cancunagreements to mobilize new and additional resources for

climate change activities in developing countries of $30 billion for the period 2010-12 and $100 billion per year by 2020, through a Green Climate Fund set up for this purpose, conditional on particular mitigationand adaptation actions by developing countries. 16

Achieving this raises a host of practical issues: preciselyhow, for example, to define (and monitor)climatefinance, and ensure additionality, given thesynergies between climate-related and other type ofdevelopment spending. But the central climate financequestion increasingly prominent in climatenegotiations issue is simply: Where is this money tocome from?

x. Closing NotesClimate change is, very largely, a fiscal problem and tosome also a fiscal opportunity. The literature has indeed

produced powerful insights, crisp on mitigation andtechnology policies, helpful if inevitably fuzzier on

adaptation. It stresses, above all, the importance of

15 The argument is made, for instance, in UNDP (2007).

16 This compares with current bilateral development assistance formitigation of around $9.4 billion per year in 2008-9, and multi-donorfunds with cumulative pledges of around $10 billion (World Bankand others, 2011). Conditions are that developing countries undertakeso-called Nationally Appropriate Mitigation Actions (NAMAs), inaddition to the adaptation actions to be supported by the GreenClimate Fund.

comprehensive carbon pricing, at least by the mainemitters, as the cornerstone of coherent climate policies.With some exceptions, the impact on practical policy,however, has surely been disappointing.

The current agreement, following the Durban meeting ofDecember 2010, to begin in 2015 negotiating acoordinated approach to mitigation, for implementationin 2020, hardly shows the urgency that many have hopedfor. It has proved easier to explain the difficulty ofeffective action in this area than to facilitate it. Perhapsthe urgent need for fiscal consolidation in manycountries will change things. If not, continued delay willmake addressing more radical approaches developinglast-resort technologies or, suggested by Barrett (2006),a focus in designing climate treaties not on mitigation

but instead on common efforts to develop new andradical energy technologies, whose development will incase make fossil fuels obsolete increasingly important.


19/31


20/31

Page 20 of 31

Agenda 2: South Asia Economy and Future


21/31

Page 21 of 31

O verviewWhat do we foresee for South Asia in 2060, in light ofthe significant changes it has undergone in the past fewdecades? India has experienced rapid economic growth,

but continues to suffer widespread, extreme poverty aswell.

Afghanistan, Nepal, and Sri Lanka have seen majorconflicts, with Pakistan always seeming on the verge ofa major eruption. Nepal and Sri Lanka finally seem tohave moved toward peace. As elsewhere, the regionsmany developments and crosscurrents make reliable

predictions difficult, but one relatively neglected set offactors demographic change may shed some light onthe regions future.

Throughout the world, falling mortality rates and

declining birth rates have been predictive of growing per-capita incomes, and theoretical reasoning and relatedevidence are sufficiently compelling to think that thelinks may indeed be causal. In this vein, this essayexplores South Asias economic prospects through ademographic lens. In addition, as we will see, there aresome similar demographic trends across the countries ofSouth Asia, but there are also a number of extremedifferences. Regional heterogeneity bears on thequestion, to what extent is South Asia a coherent

region?

Asias growing influence Asia emerged from the global financial crisis with itsstanding strengthened, and is expected to become thelargest economic region within the next two decades.This reflects its high degree of integration into globaltrading and financial systems, and a growing internalmomentum.

Given its rise, it is natural that Asia should increase itsinfluence in global economic and financial discourse.This trend is already well underway. Six of the Group ofTwenty (G-20) economies are from the Asia-Pacificregion. Once the 2010 IMF quota and voice reforms areimplemented, Asia will hold well over 20 percent of theFunds voting shares .

This will bring Asias representation at the Fund moreclosely into line with its position in the world economy.Asias increasing influence is also being reflected in thecomposition of the IMF management team. Two of itsfour Deputy Managing Directors are from Asia: NaoyukiShinohara from Japan, and Min Zhu from China. Inaddition, the 2012 Annual Meetings of the IMF/WorldBank Group were held in Tokyo, in recognition of theeconomic importance of Asia, and on the 60thanniversary of Japans membership of the IMF andWorld Bank.

i. The current demographic sceneDemographically, South Asia is a diverse region of 1.64

billion people (24 percent of the worlds population).The infant mortality rate (IMR the number of children

under age 1 who die in a given year out of 1,000children born in that year) varies by an order ofmagnitude, from 152 in Afghanistan to 15 in Sri Lanka.

The total fertility rate (TFR the average number ofchildren a woman of childbearing age will haveassuming no change in current age-specific rates) rangesfrom a high of about 6.5 in Afghanistan to a low of 2.0in Maldives.

Life expectancy at birth (the average age at death ofthose born in a given year, assuming no change in age-specific mortality rates) is three decades higher in SriLanka (74.5) than in Afghanistan (44.5). The populationgrowth rate also shows dramatic differences acrosscountries: from 3.3 percent per year in Afghanistan (adoubling time of about 21 years) to 0.8 percent per yearin Sri Lanka (a doubling time of nearly 90 years).

And most obviously, the countries of South Asia vary bysize from India (1.2 billion) to the Maldives (300,000),

which is one four-thousandth as large.The demographiccircumstances prevailing in South Asia today reflect thechanges that have occurred as part of South Asiasdemographic transition: the shift from high rates ofmortality and fertility to low ones.

These changes have been dramatic. For example, theregional average IMR fell from 168 per 1,000 in the


22/31

Page 22 of 31

early 1950s to 53 today. TFR began to decline soon afterthe onset of IMR decline, with the regional averagegoing from 5.9 children per woman in the late 1960s to2.8 today. Life expectancy, which averaged 39 years inthe early 1950s, has risen to nearly 65 years today. Theregions total population has more than tripled since1950, when it stood at 481 million.

Many countries exhibit a similar pattern to that of SouthAsia, in which improvements in child survival (due forexample to increased access to safe water, sanitation,and healthcare), subsequently lead to lower fertility, asfamilies begin to see that fewer children are needed toachieve target family size. (In addition, numerous otherfactors influence family size.

For example, womens increased educational attainment

has a powerful effect, as do womens increasedopportunities in the labor market. Increased urbanization

which takes place as people move from rural to urbanareas, as rural areas grow to become urban, and as urbanareas expand to encompass formerly rural areas bringsgreater economic opportunities for both men andwomen, and the consequent increased economic value of

peoples time leads to lower fertility.)

The key point here, however, is that the initial mortalitydecline leads to a baby boom, since fewer babies die and

because fertility has not yet fallen.

ii. Historical and current economicsituation

Consistent with widespread poverty in South Asia, grossdomestic product (GDP)/capita in the region is low. At$2,484 in 2008 (in purchasing power parity (PPP) termsand constant 2005 international dollars), the region liesat almost exactly half the income per person of theWorld Banks low - and middle-income countries.

The economically best-off countries in the region areMaldives ($5,169), Bhutan ($4,395), and Sri Lanka

($4,215). In the second tier lie India ($2,721) andPakistan ($2,344). Bangladesh ($1,233), Nepal ($1,020),and Afghanistan ($1,019) are by far the poorest. Beyondthis diversity of incomes, there are also wide ranges ofeconomic well-being within the various countries. Percapita income growth rates have varied dramaticallyacross countries and over time. Figure 1 shows thesegrowth rates for South Asia and individual countries.

The region as a whole has been growing fastereconomically since the 1980s, a fact that is heavilyaffected by Indias high share (74 percent i n 2010) of

South Asias population,coupled with Indiaseconomic growthtrajectory. South AsiasGDP per capita growthwas low in the 1970s,higher in the 1980s and1990s, and higher still inthe 2000s.


23/31


24/31

Page 24 of 31

At the opposite end of the spectrum, Afghanistan canexpect its ratio to still be climbing in 2050, when it will

be 1.7. Of course, all of these estimates depend on theactual path of fertility rates, mortality rates, and lifeexpectancy patterns that are often subject to a range offactors, including government policies.

Based on the demographic changes cited in the United Nations (UN) data, it is clear that the region will be verydifferent demographically in 2050. With respect to agestructure, our central measure of progress through the

demographic transition, South Asia was quitehomogeneous in 1970, with the ratio shown in Figure 2ranging only from 1.10 to 1.31. Today this ratio rangesfrom 1.08 to 2.17. UN projections for 2050 show ratiosranging from 1.57 to 2.13. That is, there will be someconvergence across the countries of the region, but thiswill occur slowly.

ChangeLinking demographic changeand economic growth: thedemographic dividendUnderstanding thesignificance of thesedemographic changesrequires an examination ofthe economic history of theregion.

In particular, the data shownabove on the growth rate of

GDP/capita are obviouslyrelevant to a discussion of a

possible interaction betweendemographic change andeconomic growth.

Two facts stand out from the previous discussion: The ratio of the working -age to non-working age

population in South Asia has been rising since 1965. The regions GDP per capita has been rising during thelast 30 years of this period.

Is there a connection?For many years, rapid population growth was thought to

be detrimental to economic growth. Thomas Malthushypothesized that a rapidly growing population wouldinevitably outstrip any societys capacity to produceenough food, resulting in mass starvation and humanmisery.

In the 1980s, a new idea, population neutralism, cameto the fore. Adherents of this view marshaled evidence toshow that population growth was neither helpful nordetrimental to economic growth.


25/31

Page 25 of 31

More recent studies (Bloom and Canning 2008; Bloom,Canning, and Sevilla 2002) have focused on the possibleeffects on economic growth of the age structure of a

population. This body of research has found that, ceteris paribus, cross-country differences in age structure tendto translate into cross-country differences inmacroeconomic performance.

Specifically, a rise in the ratio of working-age to non-working-age population corresponds, in general, toincreases in the rate of per-capita economic growth.Roughly one- third of East Asias economic miraclemay have come about because of the rapid demographicchanges that the region has undergone (Bloom andWilliamson 1998). Propelled by similar demographicchanges, Ireland also benefited economically, becomingthe Celtic tiger (Bloom and Ca nning 2003).

This phenomenon has come to be known as thedemographic dividend. First, a baby boom cohortarises because of a decline in mortality rates that isfollowed, with a delay, by a decline in fertility rates.This relatively large cohort gradually enters the typicalworking ages beginning when the leading edge of the

baby boom enters its teens. A few decades later, the baby boom results in there being a disproportionatelyand historically large share of working-age individualsin a population the pattern discussed above for SouthAsia.

A rising, and relatively large, share of working-age people can be economically consequential because of thefollowing factors:

Labor force size. A rise in the share of working-age people means that a countr ys productivecapacity is larger than it was in the past.

A higher share of people working, and acorrespondingly lower share of children, allows

a country to increase its per-capita economicoutput.

The fact that there are fewer children per familyallows more women to enter the workforce.Although women still bear a disproportionate

burden of child-raising, they are neverthelessmore likely to enter the workforce when thereare fewer children to take care of. Womens

increased participation in the commercialeconomy can be highly significant in raisingoutput per capita. Such participation is typicallymore possible and more remunerative than inthe past because an increasing share of the

population lives in urban areas, where earningsare higher than in rural areas.

Savings.Savings may rise for two reasons, and increased savingsare channeled into increased investment via the financialsystem. A preponderance of working-age people canlead to increased savings rates, because this age groupsaves more than the young or the old.

Because the demographic transition is accompanied by

longer lifespan, workers also have an incentive to savemore, in anticipation of longer periods of retirement.Changed use of capital. At both the family and thenational level, resources can be redirected to spureconomic growth.

Families with fewer children can spend more on thehealth and education of each child without increasingtheir total expenses. Healthier children attend schoolmore regularly, learn more while there, and are poised to

become more productive workers.At the national level, there are relatively fewer childrento feed, clothe, and educate. Even with continuedconstruction of schools, a higher share of financialresources can be directed toward investments that yieldreturns in the short run via the creation of greater

physical capital factories, roads, and other types ofinfrastructure.


26/31

Page 26 of 31

iv. Caveat lector: Demography is notdestiny

Realization of a demographic dividend, via themechanisms listed above, is far from automatic. Acountrys ability to capture the dividend depends onmany factors and policies:

Productive employment is the keyAn economy can grow even if employment is stagnant,

but inclusive economic growth, i.e., growth that benefitsall sectors of society, requires the implementation of

policies and practices that draw a large portion of theworking-age population into the labor force. If largenumbers of working-age people are unemployed, theywill constitute an economic burden on those who dohave jobs. Moreover, high unemployment orunderemployment can become a major source ofdiscontent.

Human Capital Particularly important is a countrys ability to nurture itshuman capital. An educated labor force is much morelikely to be able to work productively and to be able toadapt to the rapidly changing demands of an ever moreglobal economy. Similarly, a healthy workforce will be

more productive, and it may be better able to attractforeign direct investment.

Government Policies Carefully chosen and well-implemented policies and

practices in other areas, such as governance,macroeconomic management, trade, and social

protection, are essential.

Good relations with neighboring countries, trading

partners, and international institutions are important.Tense relations often lead to high military expenditures and even wars that detract from investments in

physical or human capital that can more directly benefitthe population at large. Internal peace is usuallyimportant for economic growth. Without it, a countrywill have a more difficult time ensuring a high level ofemployment.

To date, South Asias economies have been improving,in response to many factors, quite possibly including theregions rising share of working -age people. Based onthe East Asian experience, the fact that South Asia is

soon to see a further rise in the share of working-age people augurs well for increased per-capita incomes inthe coming decades. To be clear, this prediction is anall -things-equal statement. Demographic change maywell operate as a significant factor in strengthening theregions economies, but (a) policies need to be in placeto ensure widespread productive employment, and (b)factors completely apart from demographics may ofcourse play a decisive role.

v. Two potential impediments torealizing the demographicdividend

Considerations similar to those discussed above applywithin countries. The various states of India, forexample, lie at very different points along thedemographic transition (see Figure 3).

The demographic heterogeneity of these states suggeststhat their future economic trajectories may differsignificantly from each other.

Thus, demographic heterogeneity may undermine theinclusivity of economic growth. In Indian states, as inthe countries of the region, policies will need to befocused on specific measures that can promote

productive employment.


27/31


28/31

Page 28 of 31

In the last few decades, several newly prominent factorshave begun to affect population health, including thehealth of the elderly. Diets in many countries have

become less healthy, as the availability of processed and packaged foods expands. Urban living, because of acombination of pollution, slums, and in some instancesan increase in sedentary jobs, is encouraging asignificant increase in obesity and related chronicdisease.

Furthermore, the need to respond to chronic diseasescomes while many developing countries are still dealingwith the unfinished agenda of conquering infectiousdiseases.

vii. Key aspects of the Fundsengagement

The recent global financial crisis and reforms underwayat the IMF suggest that the Fund has much to offer in theregion. Benefits include:

Economic monitoring and advice The Funds surveillance work is being enhanced tostrengthen its regional focus, including on Asia. Thisincludes an annual report on the regional economicoutlook for Asia. With its global perspective and

enhanced focus on vulnerabilities and potentialspillovers, Fund surveillance can deepen the analysis ofindividual countries and regions. In addition, by workingin cooperation with Asia and other regional groupings,the Fund can help inform peer group assessments suchas those undertaken by the APEC (Asia-PacificEconomic Cooperation) and the ASEAN+3 (Associationof Southeast Asian Nations plus China, Japan, andKorea). Asian countries also participate in theFunds Financial Sector Assessment Program, established in 1999, to provide a comprehensive analysis

of a country's financial sector.

Technical assistance and training The Fund has increasingly adopted a regional approachto the delivery of technical assistance (TA) and training.As well as providing technical assistance to individualcountries, it operates eigh tregional technical assistancecenters, including one in the Pacific the Pacific

Financial Technical Assistance Center that deliverstechnical assistance and training to 16 Pacific Islandcountries. In addition, the establishment, in 2012, of theThailand Technical Assistance Office for Lao P.D.R.and Myanmar (TAOLAM), will help tailor the FundsTA for these countries. The Fund also runs regionaltraining programs in China and Singapore.

Strengthening safety netsAs part of its efforts to support countries during the

global financial crisis, the Fund expanded its lendingcapacity and is continuing to seek ways to furtherenhance its lending facilities. Also, building on therecent experience of lending in cooperation with partnersin Europe, the Fund is exploring the scope for greatercollaboration with other regional financing

arrangements, including the Chiang Mai Initiative inAsia.

Sharing of knowledgeAsia will need to build on its robust structuralfoundations and policy frameworks to address near andlong-term challenges. Leveraging the know-howacquired from many countries and regions, the Fund canassist Asia in the process of transformation and smoothintegration into the global economy. In return, the Fund

benefits from its dialogue with Asian member countries,including on how best to work with regional institutions.

Lessons from the Asian crisisMany people in the region experienced considerablehardship during the 1997 98 Asian Financial Crisis. Atthe time, the Fund and others extended large financingarrangements to provide breathing room forimplementation of deep but necessary reforms.

Since then, many of the economies that suffered fromthe crisis h ave performed remarkably well. Asiasresilience during the recent global financial crisis istestament to the enduring benefits of the often-difficultreforms undertaken during the past 15 years.
http://www.imf.org/external/np/exr/facts/surv.htmhttp://www.imf.org/external/pubs/ft/reo/2010/APD/eng/areo0410.htmhttp://www.imf.org/external/pubs/ft/reo/2010/APD/eng/areo0410.htmhttp://www.imf.org/external/np/exr/facts/fsap.htmhttp://www.imf.org/external/np/exr/facts/tech.htmhttp://www.imf.org/external/np/exr/facts/afritac.htmhttp://www.imf.org/external/np/exr/facts/afritac.htmhttp://www.imf.org/external/np/exr/facts/afritac.htmhttp://www.imf.org/external/np/exr/facts/afritac.htmhttp://www.imf.org/external/np/exr/facts/tech.htmhttp://www.imf.org/external/np/exr/facts/fsap.htmhttp://www.imf.org/external/pubs/ft/reo/2010/APD/eng/areo0410.htmhttp://www.imf.org/external/pubs/ft/reo/2010/APD/eng/areo0410.htmhttp://www.imf.org/external/np/exr/facts/surv.htm


29/31

Page 29 of 31

The Fund learned important lessons from the Asiancrisis. In particular, the Fund recognized that while deepeconomic problems require substantial measures,theconditions accompanying its programs should bemore selective and focus more narrowly on the problemsat hand. Moreover, the Fund has become more attuned tothe social impact of its programs. It has sought to applythese and other lessons to its more recent lending

programs around the world.

viii. The future for South Asia and theIMF

South Asias contribution to the Fund The commitment of major Asian countries to the Fundwas highlighted during the global financial crisis.Several Asian countries agreed to bolster the Fundslending capacity. Japan was the first, providingUS$100 billion in bilateral borrowing. China, India,Korea, and Singapore also agreed to increase theircontributions to the New Arrangements to Borrow(NAB), and the Central Banks of Malaysia, thePhilippines, and Thailand also agreed to join the NAB.In the context of the 2009 Low-Income-CountryFinancing Package to boost the Funds concessionallending capacity, a number of Asian countries provided

loan resources and subsidy resources to the PovertyReduction and Growth Trust.

IMFs presence in the region The Fund is committed to fostering a closer dialogue andtwo-way engagement with Asia to develop a sharedvision that will promote sustained economic growth inAsia and the world. As part of that commitment, theFunds Asia and Pacific Department established aregional advisory group comprising renowned economicexperts from Asia.

Another dimension of that engagement involves thegreater presence of the Fund in the region, through amajor regional office in Tokyo and local ResidentRepresentative offices (a new Resident Representativeoffice will be opened in Myanmar in 2013), as well asthrough the co-hosting of conferences with regional

partners.

ix. ConclusionCurrent demographic trends indicate that SouthAsia will be very different in the coming decadesthan it is today. Mortality and fertility rates will belower, and life expectancy will be higher.Population growth will have slowed substantially.Of greatest note, the regions ratio of working ageto non-working-age population will have risen,

peaked, and begun to fall.

Economic predictions are much more difficult tomake, as they depend on a much wider array offactors. But the coming demographic changes offermost of South Asia an opportunity to benefit from ademographic dividend. Policies that successfully

promote productive employment are essential if this

dividend is to be realized.

Other factors are likely to play even larger roles indetermining the regions economic future, butattempting to take advantage of thedemographically driven opportunity is a wisemove especially because expanding workopportunities and enhancing the populations healthand education are beneficial in their own right andwould be good policy choices even in the absenceof a demographic spur.

As the regions economies improve, therelationship between demographic change andeconomic growth suggests that the variouscountries economic ranking within South Asia maychange. Indeed, this has already happened. In 1980,Indias GDP per capita, in PPP terms, was only 73

percent as large as Pakistans. It stayed at roughlythat level until the latter half of the 1990s, standingat 89 percent of Pakis tans level in 2000. By 2005,India had surpassed Pakistan by 2 percent, and in

2008, it was leading by 16 percent.

The demographic comparison here is striking:Indias TFR has fallen much faster than Pakistans,and to a lower level (2.6 vs. 3.8). Its working-age tonon-working age ratio began to rise earlier than didPakistans (1970 vs. 1985),and it has reached ahigher level (1.8 vs. 1.5). More generally, thecountries of South Asia are somewhat out of phase
http://www.imf.org/external/np/exr/facts/conditio.htmhttp://www.imf.org/external/np/exr/facts/protect.htmhttp://www.imf.org/external/np/exr/faq/contribution.htmhttp://www.imf.org/external/np/exr/faq/contribution.htmhttp://www.imf.org/external/np/exr/faq/contribution.htmhttp://www.imf.org/external/np/exr/faq/contribution.htmhttp://www.imf.org/external/np/exr/faq/contribution.htmhttp://www.imf.org/external/np/exr/facts/protect.htmhttp://www.imf.org/external/np/exr/facts/conditio.htm


30/31

Page 30 of 31

with respect to their demographic trajectories,which will create a tendency for their economictrajectories to be out of phase. This raises the

possibility of other income crossovers andcorresponding reordering of economic power.

It is apparent from this examination that there is

considerable demographic and related economicheterogeneity both across countries and within themin South Asia. That heterogeneity has been and willcontinue to be a powerful driver of economicinequality. In addition, one might project that thelack of common circumstances suggests that SouthAsian leaders will continue to voice widelydisparate interests. This poses a challenge to SouthAsias coherence as an economic and po litical

power.

References Bloom, David E. (2011). Population Dynamics

in India and Implications for EconomicGrowth, in Ghate, Chetan, ed.,The Handbookof the Indian Economy. Oxford UniversityPress, forthcoming.

Bloom, David. E., and David Canning (2003).Contraception and the Celtic Tiger, Economicand Social Review, Winter, Vol. 34, No. 3, 229

247. Bloom, David E., and David Canning (2008).Global Demographic Change: Dimensions andEconomic Significance, Population andDevelopment Review,Vol. 33, 17-51.

Bloom, David E., David Canning, and JaypeeSevilla (2002). The Demographic Dividend: A

New Perspective on the EconomicConsequences of Population Change, RAND,MR-1274, Santa Monica, Calif.

Bloom, David E., and Jeffrey Williamson(1998). Demographic Transitions andEconomic Miracles in Emerging Asia, WorldBank Economic Review, Vol. 12, No. 3, 419 455.

United Nations (2009). World PopulationProspects: The 2008 Revision. New York:United Nations Population Division.

World Bank (2010). World DevelopmentIndicators 2010. Washington: The World Bank.


31/31

About the Co-Chair

Lubzana Afrin a student of IBA Dhaka University who plans to major in Human Resources Management andMarketing is one of the young leaders who is with theMUN fraternity from the very beginning in Bangladesh.

She always believed in th e saying: Dont go where the path may lead you, rather go where there is no path andleave a trail. She believes in creating examples, believein making differences. She looks for challenges andaccepts them whole heartedly.

Lubzanas objective is therefore, to make a difference, tocreate a new example, to leave a trail for others tofollow. And, of all, learn something new, everyday.

MUN attended:I. Organized and participated in the first National

MUN in Bangladesh for high-school levelstudents, BANMUN 2013.

II. Organized and participated in DUNMUN 2013as the Director of World Trade Organization.

III. Organized and participated in the first NationalMUN of University of Dhaka, DUNMUN 2012as the Director of Economic and Financialcommittee.

IV.

Participated in Harvard National Model United Nations as the delegate of Belarus in HGA 1993.V. The delegate of Israel under SOCHUM

Committee in Brainwiz MUN 2013, DhakaCouncil.

VI. Participated in first ever International ModelUnited Nations Conference, BiMUN 2012 atUniversity of Dhaka as the delegate of USAunder UN Security Council

imf studyguide, banmun 2014

Documents