Impacts of the Past Asian Economic Crisis and Current Global Financial Crisis

Much has been written about the Asian financial crisis and the lessons learned for the financial and housing sectors, so that it is not necessary to discuss it here at length. The beginning of the 1997 crisis is usually associated with the floating of the Thai baht, leading to substantial devaluation and the rapid spread of economic slowdown to the Republic of Korea, Malaysia, Indonesia, and several other ASEAN countries. After years of high economic growth rates, these countries found their gross domestic product (GDP) growth rates slowed down considerably (Figure 1 [ PDF 28.2KB | 1 page ]).

In some cases, it showed even negative growth. This situation improved somewhat during 1999, and a return to modest growth was observed until the current global financial crisis. As shown in Table 1 [ PDF 28.2KB | 1 page ], a number of research institutes now project lower growth up to 2010 and beyond.

The recession has highlighted the role of major players in the world economy. For decades, the US consumers have been the primary driver of global growth. The inherent dangers of such dependence on one source have long been obvious, and the Asian producers are trying to find replacements. But this lowering of the anticipated economic growth rate in many countries of Asia has implications for energy use and for related environmental impacts, as discussed in the following sections.

2.1 Impact of the Economic Slowdown on Energy Use

As mentioned earlier, the fairly good correlation between economic activity and energy consumption has been known for some time. During the 1990s and 2000s, it has become clearer that for countries that have moved beyond the industrial era to become information societies, energy use grows much more slowly than GDP. This can also be true for industries that depend on services for growth. For countries beginning to industrialize, the rate of growth for energy use is close to that of GDP, and may even exceed it for some time, if energy efficiency measures are not undertaken. Figure 2 [ PDF 27.5KB | 1 page ] shows the changes in energy consumption during the first crisis period.

The rate of growth in energy consumption is lower than that of GDP for Japan, and somewhat higher than that of GDP for most other countries. The exceptions are the PRC and India, which have a low energy-to-GDP ratio. This is due to factors including the substantial increase in energy efficiency in the PRC, along with the rapid growth in the services sectors.

Since the beginning of 2009, in energy, there has been a steady stream of announcements of cutbacks in capital spending and project delays and cancellations, mainly as a result of lower prices and cash flow. Estimates by the International Energy Agency (International Energy Agency [IEA] 2009)indicate that global upstream oil and gas investment budgets for 2009 have already been cut by around 21% compared with 2008, a reduction of almost $100 billion. Between October 2008 and the end of April 2009, over 20 planned large-scale upstream oil and gas projects, valued at a total of more than $170 billion and involving around 2 million bbl/day of oil production capacity and 1 billion ft3/day of gas capacity, were deferred indefinitely or cancelled. A further 35 projects, involving 4.2 million bbl/day of oil capacity and 2.3 billion ft3/day of gas capacity, were delayed by at least 18 months. It is likely that the upstream industry will reduce spending on exploration most sharply in 2009, largely because most spending on development projects is associated with completing projects in Canada, accounting for most of the postponed oil capacity. The drop in upstream spending is most pronounced in the regions with the highest development costs and where the industry is dominated by small players and small projects.

Power investment is expected to be severely affected by financing difficulties, as well as by weak demand. The IEA (2009) estimates that global electricity consumption could drop by as much as 3.5% in 2009, the first annual contraction since the end of the Second World War. Asian countries show weaker demand: in the PRC, for example, demand fell by 7.1% in the fourth quarter of 2008 and by a further 4% in the first quarter of 2009. Weak demand growth is reducing the immediate need for new capacity additions. At the same time, commercial borrowing has become more difficult and the cost of capital has risen markedly; venture capital and private equity investment have fallen sharply. If a recovery takes longer than expected, and energy prices remain lower than recent peaks, a shift to coal- and gas-fired plants at the expense of nuclear and renewable resources could be seen, although this will depend on the policies and support mechanisms individual countries and regions have in place.

The outlook for 2010 investment in renewable-based power projects is mixed, depending on the policy framework, but is generally falling proportionately more than in other types of generating capacity. The IEA (2009) estimates that for 2009 as a whole, investment in renewable resources could drop by as much as 38%, although the stimulus provided by government fiscal packages can probably offset some of this decline. Investment in renewable energy assets has surged in the first decade of the 21st century, recording year on year growth of 85% in 2007. But activity slowed in 2008 as sources of financing contracted and lower fossil-fuel prices reduced the economic incentive for new investment, particularly in the last few months of the year. Preliminary data for the first quarter of 2009 indicated that the slump in investment has accelerated, with spending 42% lower than in the previous quarter. In most regions, investment in bio-refineries has all but dried up due to lower ethanol prices and scarce financing.

Asian industry surveys suggest investment in coal could drop by 40% in 2009 compared to 2008. Nonetheless, this drop is from very high levels reached in 2007 and 2008, which were exceptionally profitable: coal companies used free cash flows to increase their investments, as well as pay out large dividends to shareholders. Expected reductions in capital spending in 2009 are most marked among high-cost producers, especially those supplying export markets, such as in the US and Australia. In contrast, Indonesian coal producers continue to enjoy high margins with little apparent disruption to planned expansions.

The economic slowdown has also depressed almost all energy-consuming sectors, particularly steel, automobiles, and construction. The reduced demand for energy has led to corresponding reductions in overall energy consumption. In the Republic of Korea, for example, the total energy consumption during the first crisis period was about 8.1% lower than in the preceding years, according to the Korean Energy Economics Institute (2000). The reduction in overall energy consumption, most of which is in the form of fossil fuels, has resulted in a decline in carbon emissions, a major cause of global warming.

This influences local environmental problems also. Pollutants such as total suspended particulates, sulfur dioxide, and nitrogen dioxide are also closely correlated with power generation, industrial activities, and transportation. A reduction in energy consumption will be accompanied by reduced emissions of air pollutants. Thus the economic slowdown is reducing the emissions of air pollutants in the short term and is improving the health and livelihood conditions of the urban poor. The combustion of fossil fuels and woody biomass by rural poor also results in haze and acid precipitation, frequently across national borders.

2.2 Impact of Economic Slowdown on Trade and Embedded Emissions

The emissions of carbon dioxide due to combustion of fossil fuels in Asian countries have increased dramatically, now exceeding those from Europe and the US. Three of the six largest emitters–the PRC, Japan, and India–are in Asia. From 1990 to 2006, emissions from the PRC increased by 37 times, from Japan by 12 times, and from India by 13 times. Other emerging economies like Indonesia, Thailand, and Viet Nam, which very much depend on exports to drive their economies, also had increases in emissions. And hence most of the emissions are embedded. The late 1990s Asian economic slowdown affected the trade volumes of these countries (Figure 3 [ PDF 26.6KB | 1 page ]) in varying degrees.

The growth rate of trade volume slightly decreased, but energy use growth still remained positive. However, the embedded emissions of Indonesia, Thailand, and the Republic of Korea actually declined during the Asian crisis as both the energy use and trade volume declined during 1998. Given the lower economic and energy growth rates, one could say that the economic slowdown will be good for the global environment.

The economic slowdown resulted in reducing the oil imports too. Most oil and goods are transported over the oceans. A decline in oil and goods shipped should result in lower transport-related emissions and marine pollution.

2.3 Impact of Economic Crisis on Land Use

Among the Asian countries, poverty affects large populations in India (44% of the rural population), the PRC (26%), Indonesia (24%), Philippines (23%), and Viet Nam (21%) in 2009 (United Nations Economic and Social Commission for Asia and the Pacific [UNESCAP] 2010; International Fund for Agricultural and Development 2009; Palanivel 2009: United Nations Environment Programme [UNEP] 2009). In addition, some of these countries have a very high population density. One would thus predict that in countries that combine high poverty levels with dense populations, the economic recession could trigger additional pressures on rural natural resources, including forest habitats, originating in subsistence households.

Many of the rural poor still rely heavily on traditional fuels such as agricultural and animal wastes and forest wood for energy. Even though their reliance on traditional fuels has declined in most Asian countries, this has been due more to an increase in amount of commercial energy used, rather than less biomass. Bangladesh, Myanmar, and Viet Nam still obtain about half or more their energy requirements from traditional fuels. India, Indonesia, Pakistan, Philippines, and Thailand still rely on these fuels for at least 20% of their total energy needs.

The need for energy as well as for agricultural land in highly populated Asian countries of the region has been the prime factor in the changes in land use patterns. As shown in Figure 4 [ PDF 26.7KB | 1 page ], for many countries, the loss of forests sometimes exceeds 2–3% of total forest area each year, as in Philippines, Thailand, and Indonesia. For other countries such as the PRC and India, the rate of forest loss has declined considerably. The reason for this disparity varies from one country to another.

2.4 Overall Impacts of Recession on Energy Security, Environment, and Poverty

Falling energy and environmental investment will potentially affect climate change and energy poverty, depending on how governments respond. Cutbacks in investment in energy infrastructure will only affect capacity over several years at most. So in the early 2010s at least, weaker demand is likely to result in an increase in spare or reserve production capacity. But sustained lower investment in supply could lead to a shortage of capacity and another spike in energy prices later in the 2010s, when the economy is recovering. The faster the recovery, the more likely that such a scenario will happen.

The impact on greenhouse gas emissions will depend on how the crisis affects investment in different types of energy technology. In the short term, slower economic growth will curb growth in emissions. But in the medium and longer term, the crisis may lead to higher emissions, as weak fossil fuel prices and financing difficulties curb investment in clean energy technologies, increasing reliance on fossil fuel capacity. At the same time, investors will remain risk averse, so that funding for clean energy projects will be available primarily for proven technologies in attractive markets. Once the recession is over, the likely burst of economic growth or “catch-up effect” may also cancel out any short-term emissions benefit.

Cutbacks in energy investment will impede access by poor households to electricity and other forms of modern energy—a vital factor in pulling people out of poverty. There are an estimated 900 million people across Asia still lacking access to electricity. This figure may grow as a result of increasing unemployment (Figure 5 [ PDF 30.1KB | 1 page ]) due to the financial crisis, as some households that previously had access are no longer able to afford electrical service, and financial problems limit the ability of service providers to connect new customers at lower costs.

However, environmentally friendly growth without economic slowdown could reduce carbon emissions too. The reason for this is that many measures to improve environmental quality, such as the replacement of less energy-efficient equipment by more efficient equipment, and more rapid introduction of natural gas and nonfossil fuels instead of continued reliance on coal and oil, would be deferred during a protracted economic slowdown. Thus, the global environment and local environment would benefit from the ending of the financial crisis earlier rather than later.

The economic slowdown is likely to delay the ability of many countries to provide alternative sources of energy to the rural poor who currently depend on traditional fuels. As the populations of these areas and their demand for energy increase, they will have to rely even more on their traditional sources of energy. The additional cutting of forests will result in emissions of carbon when this additional energy could otherwise have been supplied by renewable energy sources such as hydropower, solar energy, and wind energy. In this way too, the current recession is likely to harm the environment and the poor.

The above discussions lead to the conclusion that there are some short-term benefits to the global environment from the economic slowdown. Such benefits include reduction in the rate of air and water pollution from reduced energy use, which directly influences the urban poor's health. At the same time, the continued economic slowdown is leading to deferment of plans in many Asian countries to replace inefficient equipment with more efficient and nonpolluting equipment, and to build the infrastructure to use clean fuels such as solar and wind energy as well as restructuring of polluting industries.

The economic slowdown is likely to degrade land use patterns by increasing the pressure to clear forests for firewood, timber, or agricultural purposes–the livelihood opportunities available with the rural poor. Further, many countries' likely delays in building effluent treatment plans for limiting the discharge of pollutants into the rivers is expected to harm the water environment. Thus on balance, the modest benefits to global and local environments arising from the economic slowdown are likely to be much smaller than the costs associated with deferment of many environmental conservation measures for improving the quality of life for the poor.

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