A green techno-economic paradigm

– NISCHAL Dhungel The opinion piece originally appeared in The Kathmandu Post on 4 Jan 2022. Please read the original article here. Globally, there has been a shift toward a low-carbon economy and a developing green “techno-economic paradigm.” British economist Chris Freeman and British-Venezuelan scholar Carlota Perez coined the term “techno-economic paradigm,” an innovation-based theory […]

– NISCHAL Dhungel

The opinion piece originally appeared in The Kathmandu Post on 4 Jan 2022. Please read the original article here.

Globally, there has been a shift toward a low-carbon economy and a developing green “techno-economic paradigm.” British economist Chris Freeman and British-Venezuelan scholar Carlota Perez coined the term “techno-economic paradigm,” an innovation-based theory of economic and societal development that remains at the centre of the capitalist development process. Least developed countries (LDCs) like Nepal face enormous challenges pivoting towards green techno-economic transformation compared to advanced economies. Although LDCs have contributed the least to climate change, they are at the forefront of the crisis—over the past 50 years, LDCs accounted for 69 percent of all deaths resulting from climate-related disasters.

Compared to pressing infrastructure and poverty alleviation demands in LDCs, a robust pro-climate agenda may seem counterproductive and anti-development. At the same time, there is a developing transition toward a low-carbon economy, which some authors have referred to as a “green techno-economic paradigm.” There is a shift of productive resources from high-emission industries (sunset industries) to lower-emission ones (sunrise industries). LDCs are often condemned to be technological laggards, with the development of modern technologies remaining strikingly concentrated in advanced economies. Sunrise industries may encourage productivity and strengthen intersectoral productive lineages due to the formation of a new green-techno-economic paradigm, which may offer new and more sustainable pathways to LDCs and developed countries. Nepal, for instance, can emulate India’s growth in the renewable energy sector.

Nepal contributes roughly 0.1 percent of global greenhouse gas (GHG) emissions. Most of Nepal’s energy comes from hydroelectricity, a remarkable achievement that has created a strong base for future climate-smart prosperity. One of the richest water-resource countries in the world with more than 6,000 rivers and rivulets, Nepal can become the bedrock of energy security for South Asia, using renewable means. The country can significantly uplift one-third of South Asia from non-renewable to renewable energy consumption, reducing approximately 3.5 percent of the total GHG emissions worldwide by 2040.

Green structural transformation

It is high time LDCs shifted toward strengthening resilience, moving away from fossil fuel, and aligning national objectives for sustainable green structural transformation. The Doha Programme of Action reflects the continued importance of structural change and productive capacities for LDCs. Despite placing greater emphasis on increasing production capacity and facilitating economic diversification, most LDCs have made little progress in changing the structure of their economies. The disastrous effects of Covid-19 on trade, investment and production in LDCs, and its broader economic and social effects have further slowed progress.

The prospects of structural transformation are available to LDCs through internal structural change, targeted policy decisions, or exogenous changes in the international setting. The structural transformation occurred in developed or emerging economies shifting from agriculture to manufacturing to the service sector. In Nepal, a structural transformation occurred directly, shifting from agriculture to the service sector following the contribution to Gross Domestic Product (GDP). Agriculture, which accounts for two-thirds of the workforce and one-third of GDP, has to undergo reforms to increase productivity, reduce poverty and free up labour for new sources of economic growth. The broad-based reforms Nepal implemented between 1986 and 1996 made a positive impact on the economy. The share of industry in GDP and exports, as well as the share of manufacturing, virtually doubled. This led to an increase in the economy’s openness and diversification. Compared to the manufacturing and agriculture sectors, the structural restructuring of Nepal’s economy over the previous decade has resulted in tremendous growth in the service sector. Besides, a knowledge-based economy cannot be sustained without the support of an expanding manufacturing industry.

Remittance is the mainstay of Nepal’s economic activities and the largest source of foreign exchange earnings for the country. According to the Nepal Rastra Bank (NRB), the country received 1.007 trillion rupees in remittances in 2021, or 20.8 percent of its GDP, and it is expected to increase to 22 percent in 2022. Given the noticeable increase in remittances, they are probably the main driver of the improvement in living standards seen in Nepal, directly (households receiving remittances) and indirectly (increased labour income of those that remained). To escape the out-migration and remittance trap, a clear set of plans and policies to increase domestic employment should be the top priority of the federal, provincial and local governments. Large-scale migration is a symptom of underlying, long-standing issues rather than a sign of strength. It is a monumental task switching from foreign to domestic employment. Without rethinking its development model, Nepal cannot prosper or graduate into a middle-income country. More human capital must be put to productive use for Nepal to continue on a more robust and sustainable growth path.

The structural change could be strengthened by accelerating the development of productive capacities, which will trigger an organic process whereby investment (i.e. capital expansion) is accompanied by a gradual shift of labour and production inputs towards more advanced and higher-value-added industries. A virtuous cycle of catching up with advanced economies could result from a structural process, which could increase labour productivity within the industry and through structural change, and reinforce the profit-investment nexus. Nepal’s plan for industrial growth and how trade, infrastructure, exchange rates, and other economic policies can help with industrial development is still not clear.

In their book Creating A Learning Society, Noble Laureate Joseph Stiglitz and Columbia University professor Bruce C Greenwald stressed that a nation’s comparative advantage is influenced by the products it creates. Governments must constantly evaluate how well their industrial policies are working and whether they are being “captured” by special interests. Governments must also continuously work to implement industrial policies more effectively, and industrial policy design must reflect the capacities and capabilities of the government. For example, LDCs can employ the same technologies (computerisation, information technology), labour management, and inventory control procedures (such as just-in-time production) that maximise productivity growth in different sectors.

One crucial thing to take away from developed nations like the USA is that they have institutionalised learning as they go along. For instance, in July 2022, the US Congress passed the CHIPS Act to address new challenges, supply chain disruption on semiconductors arising from the Covid-19 pandemic and the Russia-Ukraine war. The Act aims to strengthen US domestic semiconductor manufacturing, design and research. Industrial policies that function in one environment and at one level of development do not function in another. LDCs should learn a lesson from developed countries to enact and implement policies targeting a specific sector that maximises productivity growth.

The biggest market failure the world economy is currently dealing with is arguably climate change. With rare exceptions, it has proven challenging to persuade nations to enact carbon pricing or cap and trade, which would prevent people and businesses from considerably reducing their carbon emissions. Industrial policies that promote renewable energy and dissuade carbon-intensive companies and technologies can help developing nations decrease their carbon emissions. Lastly, creating green jobs in the industrial sector of the LDCs is a step in the right direction toward replacing carbon-intensive industries.