“In the long run, we will all be dead”; maybe earlier – 08/18/2021 – Latinoamérica21

“In the long run, we’ll all be dead” is probably the best-known phrase of the famous economist JM Keynes, with which he wanted in 1923 to draw attention to the urgency of abandoning the gold standard and avoiding thus depression. Measures were needed in the short term; the long term didn’t matter.

But circumstances change and meanings change. Since the start of 2020, a date that could well define the start of the new millennium, humanity has been facing another crisis, this time caused by a pandemic with effects that extend beyond the economic sphere. However, the problems associated with any crisis – unemployment, rising poverty, etc. – are pale in comparison to the consequences the world could suffer if the global average temperature rises above 2 ° C.

We would therefore be in the presence of new problems: a domino effect with considerable consequences. The uncertainty is deep and we can see unforeseen and disruptive phenomena emerging, with impacts of all kinds. And it would be pointless to look for answers in the past, because traditional models would not guide us.

Climatic phenomena involve strong physical risks with wide economic repercussions. Although the explanations seem unnecessary, consider a contractor whose factory is located in an area prone to tornadoes or any other weather event. The consequences are obvious: the deterioration or loss of your fixed asset (stock) would affect your sales (flow).

From a broader perspective, the effects of climate change are increasingly devastating for national economies. It affects macroeconomic variables such as employment, investment or the balance of payments, influences the financial system – increased risks, financial costs, stability – and also impacts public finances via tax revenues, debt or the prices of sovereign bonds.

Reduce the risk of losses

Accelerating progress to reduce the risk of climate change would, in turn, reduce the risk of loss. In the medium term, this could be achieved through technological advancements, lower costs of renewable equipment, the implementation of rules and regulations and green consumption.

However, moving in this direction increases the financial risk associated with the problem of sunk assets: the loss of value of carbon-intensive assets. Obviously, this type of situation is also detrimental to businesses, reducing the profitability of carbon-intensive producers who end up finding it more profitable to produce with less capacity or to shut down the plant altogether.

The emergence of this problem also has macroeconomic repercussions on employment, investment, GDP and the balance of payments, severely affecting oil and gas exporting countries. Obviously, a drop in foreign sales would affect public funds and the stability of the financial system.

Increasingly, investors already consider that these risks must be internalized in their decisions. Policymakers must also take this into account, as they jeopardize the macroeconomic stability of countries, as well as any possibility of future development. And if the macro-financial risks of the transition are not taken into account and the process ends up being imposed by major trading partners, the losses could be even greater.

Latin America and the exploitation of natural resources

Latin America follows a global integration model based on the exploration of natural resources, with oil exploration being one of the key industries in several countries. It doesn’t matter which political orientation, who appropriates the rents, or whether they are neoliberal or neo-developmental governments, as both are committed to fossil fuels as a source of foreign exchange. Whether in Colombia, Venezuela, Brazil, Argentina, Peru, Ecuador or Guyana, all governments continue to focus on hydrocarbons.

Despite signals from major trading partners, governments in the region continue to compete for exploration areas, whether offshore, as in the case of Argentina, or in the Amazon, as in the case of Argentina. Ecuador. These investments, the profitability of which depends on subsidies, will inexorably lose all their value in the not so distant future. And this situation is not taken into account in the macroeconomic forecasts of analysts.

Such an inconsistency prevents the authorities from seeing the serious trade balance problems that lie ahead, the jobs crisis that will arise among those who continue to rely on oil exploration, or the need to spend tax resources to mitigate the approaching financial crisis.

The threat of climate change gives new meaning to JM Keynes’ phrase and forces us to look at macroeconomics from a different perspective. The grave situation in which we find ourselves due to the pandemic requires clear strategies to emerge from the crisis, but without binding ourselves to objectives contradicting the conceptions of the transition. We must act now, considering the future consequences of our actions.

We cannot think of a recovery strategy without considering the objective of zero emissions in the medium term. If we ignore this, we will drive our societies to extinction, not in the long term.

www.latinoamerica21.com, a plural media committed to disseminating critical and truthful information about Latin America. Follow us on @ Latinoamerica21

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