Economic Slowdown, Stimulus Packages, and Green Growth

4.1 Environmental Component of Stimulus Packages

The only way the economies of the region avoided more severe slowdown was the unprecedented intervention of governments and central banks by formulating stimulus programs, industrial bailouts, and near zero interest rates. The collapse in demand through falling exports and the inability of the private sector to generate growth have led most Asian governments to strive to expand domestic demand by introducing stimulus measures, as shown in Table 2 [ PDF 22.2KB | 1 page ].

This strong government response was unprecedented because of its unusually large size, wide scope, and the number of countries involved. Japan had the largest stimulus package, both in total size and as a percentage of the GDP (US$774 billion, 16.4%), followed by the PRC (US$586 billion, 14%) and the Republic of Korea (US$86 billion, 12.8%). These three countries are comprehensive in tackling the environmental problems, and substantial parts of the packages were devoted for greening the economy. Malaysia, Singapore, and Viet Nam also had sizeable stimulus packages, indicating the severity of the economic contraction (Abidin 2009)

Japan announced a number of stimulus packages which totaled 16% of GDP. However, Japan's stimulus package may have been less effective because it was announced in small doses every three to four months. The first package was introduced in August 2008 and amounted to US$107.5 billion, equivalent to 2.2% of Japan's GDP. This package comprised mainly nongreen measures such as lower road tolls, fuel subsidies, loans to businesses, assistance to farms, and help for part-time workers to find better jobs.

The second stimulus package was announced in October 2008, in which US$51 billion (out of US$275 billion) was new spending. More than US$20 billion, or around 40% of the total new spending, was for a bank rescue plan and another US$20 billion was distributed in US$600 handouts to every household of four. The third package amounted to US$255 billion, of which 44% went to tax breaks and public financing, such as a corporate tax cut from 22% to 18% for SMEs. The other 56% or US$144 billion went to capital injections. A fourth package, amounting to US$154.55 billion, equivalent to 3.2% of GDP, was announced in April 2009. The measures were aimed at stimulating the “green economy,” creating 4 million new jobs in the economy, helping corporate finance, and developing strategies to reinforce Japan's environmental competitiveness.

The PRC announced the largest single fiscal stimulus package, which was equivalent to 14% of its GDP, in November 2008. Slightly more than 86% of its stimulus package went to infrastructure spending, out of which 45% was for roads, rails, and airports; 30% was for improving electricity, water, and roads in rural areas; and 7% for low-income housing and reconstruction of towns devastated by the May 12, 2008 Sichuan earthquake. The remainder of the loans went to healthcare and education, ecological and environmental protection, and technical innovation loans.

The Republic of Korea announced three stimulus packages in quick succession. The US$26 billion stimulus in December 2008 was called the “2009 Budget and Public Fund Operation Plan to Overcome Economic Difficulties” and focused on infrastructure. It included projects to advance the metropolitan economy and provincial traffic network expansion. The country's second stimulus package was called the “Green New Deal Job Creation Plan” and it also had infrastructure spending on green transportation networks and clean water supplies, carbon reduction and stable supply of water resources, and new industrial and information infrastructure and technology development.

Malaysia first stimulus package was introduced in November 2008 and the second in March 2009. Nearly 43% of the first package was for infrastructure, for example upgrading, repair, and maintenance of public amenities, including schools, hospitals, roads, quarters for police and armed forces, police stations, the building of more low-cost houses, more public transport, and the implementation of high-speed broadband Internet service. The second package comprised four different parts assisting the private sector in tackling the crisis, building capacity for the future, easing the burden on the people, and reducing unemployment and increasing employment opportunities (3%).

Singapore introduced a US$13.8 billion stimulus package in January 2009. Of this amount, 21% was for public sector infrastructure, such as mass rail transit and roads, basic amenities such as drainage and sewerage, and education and health infrastructure. The spending is also intended to develop suburban nodes that will decentralize economic activity and rejuvenate old public housing neighborhoods. US$1 billion is targeted to be spent from 2009 through 2014 on sustainable development initiatives supporting programs such as energy efficiency for industry and households, green transport, clean energy, and the greening of living spaces. US$4 billion is targeted for healthcare infrastructure.

Indonesia introduced a US$6.1 billion stimulus package in February 2009, of which 17% is to be spent on infrastructure. The bulk of the stimulus package will be delivered via tax breaks for individuals and companies.

Philippines announced a US$6.5 billion package in January 2009. This includes infrastructure spending such as repair and rehabilitation of roads, hospitals, bridges, irrigation facilities, schools, and government buildings.

Thailand has two stimulus packages, announced in January and March 2009. The first US$3 billion package included infrastructure measures, social safety nets for the unemployed and those working below a certain wage level, and tax measures to boost real estate, SMEs, and the tourism industry. The second US$42 billion stimulus package will spend 80% on infrastructure and 16% on farm irrigation and water supplies to industry. However, financing for the second stimulus package has yet to be finalized. The government needs to borrow B800 billion outside the normal fiscal process to help finance the three-year package. Half of this amount is to be financed by domestic borrowing, mostly through new issues of government bonds and treasury bills, between now and the end of 2010. The other B400 billion will require more time to implement, as it requires a legislative bill to approve domestic borrowing.

Viet Nam announced its first stimulus package of US$960 million in December 2008, and it included interest subsidies on loans, reduction in corporate income tax to SMEs, and exemptions from personal income tax. About 10% was for small-scale infrastructure programs for 61 of the poorest districts. Its second stimulus package was for US$17.6 billion and was announced in March 2009, but financing for it has yet to be confirmed. Vietnamese law forbids the central bank to print money to finance the state budget deficit. Viet Nam has a large budget deficit and its second stimulus package was the equivalent to 22% of GDP, making it one of the largest in East Asia in relative terms. It is reported that the Vietnamese government's budget deficit reached 8% of GDP in 2009.

4.2 Employment Opportunities are Extensive in Stimulus Packages

As with other elements of the stimulus packages, some of the environmental measures governments are taking to spur growth will also help create new green employment opportunities and sustainable livelihoods as displayed in Figure 7 [ PDF 32KB | 1 page ]. Some areas of renewable energy production, as well as implementation of energy efficiency measures in buildings, are quite labor intensive across a wide spectrum of job skills compared with fossil fuel–based energy production. As such, measures to move toward a low-carbon economy may help stimulate sustained employment, although their implications for productivity also need to be taken into account. Policies to promote green employment effects across the economy are more uncertain over the long term and should be carefully assessed.

Generation of employment through emergence of service enterprises will not only improve people's livelihood conditions but also provide promising energy efficiency solutions. Energy servicing enterprises in rural and urban centers can help their clients to improve their carbon performance by doing energy audits, designing and installing energy-efficient equipment, financing energy-efficient projects, and providing risk guarantees for energy savings. The growth of energy servicing activities is notable in the PRC, India, Malaysia, Philippines, and Thailand and is catalyzing economic opportunities in the competitive energy markets

A number of countries are emphasizing employment creation with respect to the environmental measures in their recovery packages. For example, the Korean government hopes to create nearly one million jobs over the next four years starting from 2009 in green technology and industry as a result of its “Green New Deal” economic stimulus package, which includes investments in environment-related infrastructure as well as in R&D, and a range of tax breaks or loans to help households move toward less environmentally damaging consumption choices. In Japan, employment in environmental industries is expected to double to 2.8 million people by 2020. The PRC is developing its low-carbon industrial strategy, with the aim of realizing a step-by-step change in energy efficiency, a low-carbon energy infrastructure, and the development and production of low-carbon vehicles as well as developing new skills.

4.3 Green Recovery Is Not a Panacea

Investments in energy production, buildings, and transport infrastructure will stay with us for decades to come. It is important to ensure that stimulus packages do not lock in inefficient or polluting energy technologies, or dirty modes of production and consumption. Over the long term, these investments would impose a cost to the economy in terms of poorer health and other impacts of pollution, resource depletion, and climate change. In this context, countries should undertake strategic environmental assessments of policies and environmental impact assessments of projects included in economic stimulus packages. Some of the major construction projects that could be started earlier with support from the recovery packages are likely to have environmental assessments available or under way. Other measures can be taken to speed up such assessments in order not to unduly slow the planned investments, which will aggravate the poverty incidences. In the Republic of Korea, for example, the government is working to streamline the addressing of potential environmental and other impacts of eco-projects, as well as fast-tracking review and approval to get projects started sooner.

Many of the measures introduced in the stimulus packages are aimed at supporting infrastructure building, tax rebates, or switching to hybrid cars, and the overall environmental consequences of these measures need to be carefully assessed. In some cases, these measures may lead to increased emissions and pollution, although if carefully designed they can be environmentally neutral or even beneficial. In order to address these concerns, the Japanese and Korean rescue packages are designed to support more environmentally friendly vehicles and appliances. The PRC is also putting in place financial compensation schemes to prompt businesses to discard or scrap old cars. While these measures can help to remove older, less efficient vehicles from the roads, they may also encourage greater material consumption, vehicle use, and ultimately increased emissions, thus offsetting the environmental benefits. Measures aimed to support eco-products also can generate interand intrasectoral distortions, and can act as trade protectionist measures. Thus, the economic, trade, and environmental impacts of these measures should be carefully assessed.

The economic slowdown also poses a risk to ensuring efficient and effective environmental policies and to international cooperation to tackle global environmental challenges. It has often been difficult to introduce economic instruments for environmental policy because industries have argued that such measures would put them at a disadvantage with foreign competitors. Despite study results indicating that the effects of environmental policies on competitiveness are often quite small, this is a major concern to many countries, and one that is likely to increase in the economic downturn. A rapid transition toward low-carbon green growth, accompanied by short-term flanking measures to smooth the transition for affected workers or households, could help to address these concerns.

As mentioned in section 3, it is also important to understand how different policy instruments interact in the stimulus packages. Except where mutual reinforcement between instruments is likely, or when the instruments address different dimensions of a given problem, the introduction of overlapping instruments should be avoided. For example, while setting quantitative targets on renewables in the energy mix can help to create a framework for private investments and innovation in renewable energies, these regulated targets may overlap poverty reduction targets. This can result in an increase in the costs of action, without necessarily leading to any additional emission reductions unless governments use the higher renewables penetration as an opportunity to more rapidly generate employment. Thus, the use of potentially overlapping policy instruments should be limited to situations where they can be justified on other grounds, for instance to boost innovation and technology deployment, or to improve energy security.

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