4.2 - Global Crises

Question 1

Crisis Diplomacy

Answer 1

Refers to negotiations between actors in the global political arena in response to an immediate crisis. Most commonly concerns conflicts and natural disasters, but also economic and health crises.

Question 2

International Cooperation

Answer 2

Refers to occasions when global actors work together to achieve common ideals and goals

Question 3

Unilateralism

Answer 3

Refers to the policy of a state acting alone, with little regard for the views or interests of other global actors, in pursuit of foreign policy objectives

Question 4

Impacts of Climate Change

Answer 4

• Threat multiplier – exacerbates pre existing political tensions
• Impacts living conditions, energy use, security, global economy and people movement
• Consequences – erratic and extreme weather, rising sea levels, inundated coastal areas, collapsing agricultural systems and mass extinctions
• Third agenda issue because it transcends statehood

Question 5

Causes of Climate Change

Answer 5

• Burning Fossil Fuels
  o Releases CO2 → increased greenhouse gas effect → traps heat in atmosphere
  o 85% of all energy comes from fossil fuels
  o Share of energy from low-carbon sources: Iceland (79%), Sweden (69%), Norway (66%), France (49%), Brazil (46%), China (15%), India (9%), South Africa (5%), Saudi Arabia, Oman and Kuwait (<1%)
• Deforestation
  o Double impact – depletes carbon sinks and causes emissions in process (burning or machinery)
  o Deforestation used for resources, including timber and palm oil, or to create space for farming, residences or mining
  o 18m acres lost each year
  o 15% of greenhouse gas emissions from deforestation (WWF) – 2nd largest source of climate change
• Agriculture
  o Livestock release Methane
  o Fertilisers release Nitrous Oxide
  o Farming responsible for 80% of deforestation

Question 6

Capitalism and Climate Change

Answer 6

• Capitalism encourages perpetual growth, which requires exploitation of resources (85% of all energy comes from burning fossil fuels, farming is responsible for 80% of land clearing)
• Connection between wealth and CO2 emissions
  o China: $3k GDP/pc with 2.5t/pc → $16k GDP/pc with 5t/pc

Question 7

IPCC Report 2022

Answer 7

• Coal must be phased out
• Methane emissions must be cut by a third
• Tree planting alone cannot do enough to compensate for emissions
• Investment in low carbon technology needs to be 6x higher
• Hydrogen fuel and carbon capture and storage will be needed

Question 8

Key Aspect of Climate Change:
Resource Exploitation

Answer 8

• Cause of climate change
• Extraction of resources used to fuel economic growth
• Three Types of Resource Exploitation:
  o Fossil fuels – used for 80% of world’s energy consumption
  o Subsoil minerals, including iron and aluminium
  o Forests
• Action of extraction responsible for:
  o 50% of world’s carbon emissions
  o 80% of diversity loss
• Consequences of Resource Exploitation:
  o Deforestation
  o Desertification – Gobi Desert growing at rate of 3,370 km2/year
  o Soil erosion – human activity has increased the rate of erosion by 10-40 times
  o Greenhouse gas emissions
  o Natural disasters – loss of natural buffers increases forest fires
  o Forced migration – expected to reach 150-200m by 2050

Question 9

Key Aspect of Climate Change:
National Interest

Answer 9

• Challenge to resolving climate change
• Used as a reason for not responding to climate change
• → Paris Climate Agreement mechanism was implementation is Nationally Determined Contributions
• Case Study: Trump:
  o Repeal of the Clean Power Plan to bring coal mining jobs back to struggling communities
  o Permitted construction of the Keystone XL oil pipeline, claiming it would create jobs and stimulate the economy
  o Withdrew US from Paris Agreement, arguing that US emission cuts were 20% of the deal, which would undermine the economy and sovereignty
• Case Study: Ukraine War and Coal in Europe:
  o 2021 – price of natural gas increased → 18% increase in electricity generated by coal in Europe, first annual rise since 2017
  o Ukraine War → EU ban on Russian coal, gas and oil imports
  o Cheaper for European states to purchase alternative coal than alternative gas
  o Italy and Germany sought to reopen old coal plants, and UK announced 3 plants expected to close in 2022 would remain online – therefore states backtracked on climate commitments due to cost

Question 10

Key Aspect of Climate Change:
Methods of Adapting to and Reducing Climate Change

Answer 10

• What responses to climate change need to do
• Adaption to climate change:
  o Methods to reduce vulnerability of social and biological systems and minimise damage
  o Responding to changes that have already occurred or are unavoidable
  o For example – flood protections, rainwater storage, acquisition of homes in flood prone areas, migration, alterations to agricultural practices, green rooftops
• Reducing climate change:
  o Limit climate change and reduce emissions or increase carbon sinks
  o For example – increasing energy efficiency, phasing out fossil fuels, switching to low carbon sources, reforestation and afforestation, carbon capture, emissions taxes and subsidies
• Need both approaches to prevent worsening climate change, while also addressing climate change that has already occurred

Question 11

Aim of UN Response - Paris Agreement

Answer 11

• Keep global temperatures ‘well below’ 2° and endeavour to limit to 1.5°
• Limit amount of greenhouse gasses emitted by human activity to the same levels that trees, soil and oceans can absorb naturally by some point between 2050 and 2100
• Conserve and enhance carbon sinks and reservoirs
• Review each country’s contribution to cutting emissions every 5 years, so they can scale up ambition
• Rich states to provide climate finance to poor states to adapt to climate change and switch to renewable energy = $100bn/year
• Have all states develop plans to adapt to the impacts of climate change

Question 12

Obligations from Paris Agreement

Answer 12

• Develop plans for adaption
• Develop a new NDC every 5 years that is more ambitious, in line with the goals of the agreement and a progression over time
• Provide climate finance

Question 13

Effectiveness of UN Response to Climate Change

Answer 13

• 193 states + EU have submitted 1st NDC; 166 states + EU have submitted 2nd (=91% of global emissions)
• On track for 4-5° warming by 2100 when Agreement was signed – now expected for 2.7° based on current policies or 2.4° based on current NDCs
• 74/139 2nd NDCs (=77% of global emissions) have a stronger target
• 88 states have a net zero pledge (=79% of global emissions)
• Loss and Damage Fund established at COP27
• Increase from ~$50bn (2013) to $83.3bn (2020) in climate finance
• Increased media coverage → able to influence public opinion and encourage firms and governments to take action

Question 14

Ineffectiveness of UN Response to climate change

Answer 14

• Nationally Determined Contribution → No mechanism to force a state to set a specific target by a specific date since states determine contributions themselves
• Contributions are non binding – only encouraged politically
• Emissions rose to record high in 2019
• Only 21/88 net zero targets enshrined in law
• Climate Action Tracker:
  o No NDCs from 40 analysed countries that are 1.5° compatible
  o 9/40 NDCs are 2° compatible based on policies
  o Only 6% of net zero targets are rated ‘acceptable’
• 95% chance of exceeding 1.5° based on 2030 targets
• $100bn finance goal never met – only $83.3bn given in 2020, which is the highest since 2013
• Need more than $100bn in finance – instead need $1.6tr - $3.8tr p.a.
• Approx $20bn of finance given for adaption while $50bn given for mitigation

Question 15

COP 26 Glasgow

Answer 15

• Issues Going into COP26:
  o Future of coal
  o Shortfall in climate finance
  o Carbon pricing
  o Lack of ambition in current pledges
  o Deforestation
  o Methane
  o Adaption
  o Agriculture
  o Net zero targets
• Outcomes
  o Focus on 1.5° instead of 2°
  o 130 states promised to stop deforestation by 2030 = 85% of world’s forests
  o 100 states agreed to cut methane emissions by 30% by 2030 – but China, Russia and India did not agree
  o 450 financial institutions, worth $130tr, promised to align portfolios with net zero by 2050
  o Finance of $500bn in 5 years
  o Double proportion of finance going to adaption
  o 40 states committed to ending investment in coal and phase out in 2030s, including Poland, Vietnam and Chile, but US, China, India and Australia did not sign up
  o Commitment to phase down coal use – first time COP has made direct reference to a fossil fuel

Question 16

Reasons for Ineffectiveness of UN Response to Climate Change

Answer 16

• Lack of commitment by states – national interest, non binding agreement
• Lack of detail of aims and requirements – states able to decide on own commitments

Question 17

Paris Agreement - Adaption Provisions

Answer 17

• Balance of climate finance between adaptation and mitigation
• Adaption needs to prioritise LDCs and Small island Developing States
• All parties must engage in adaptation planning and implementation through National Adaptation Plans:
  o Country driven, gender sensitive, participatory and fully transparent approach, considering vulnerable groups, communities and ecosystems
  o Guided by best available science and indigenous knowledge
  o Integrate adaptation into social, environmental and economic policies
  o Not prescriptive
• Commitment for $100bn/year in climate finance by 2020

Question 18

Progress on Adaption

Answer 18

• COP 26 – double adaptation finance from 2019 levels by 2025
• COP 27 supposed to define goal on adaptation, but could not do so
• Adaption Fund received $230m in pledges
• LDC Fund received $105m in pledges
• New fund for Small island Developing States established
• Sharm El-Sheikh Adaptation Agenda:
  o Aim to help 4bn people to become more resilient
  o Includes early warning systems, 15m ha of mangroves, $140-300bn of funding
• → recognition that adaption is key and lagging
• Only 84% of parties have NAPs
• Only 1/3 of NAPs have quantified and timebound targets → lack of accountability

Question 19

UN International Cooperative Initiatives (Paris Agreement)

Answer 19

• Engage subnational groups, non state actors, cities and businesses to reduce emissions → improved reputation
• Demonstrates impact of Paris Agreement on broader agenda → increased legitimacy
• 149 different initiatives
  o Global Covenant of Mayors – involved 9000 cities from 127 countries
  o Michael Bloomberg offered total of $200m to US cities able to illustrate a commitment to reducing emissions, and used Paris Agreement to assess applications

Question 20

2020 Climate and Energy Package – Strategies to Achieve Targets:

Answer 20

• Emissions Trading Scheme – covers aviation, power and industry (=45% of EU GHG emissions), target of 21% reduction on 2005 levels, raised €15.8bn, which 80% spent on climate and energy, uses market mechanism to incentivise change
• Effort Sharing Decision – covers sectors not included in ETS, binding targets for cut of 10% in emissions over total of EU
• Renewable Energy Directive – legally binding plan to increase renewable energy depending on starting point (10% for Malta to 49% for Sweden)
• Energy Efficiency Directive – regulation on energy efficiency of rented houses, public houses, household appliances and lighting
• Innovation and financing for low carbon technology – Horizon 2020 raised €40bn
• Regulation 443 (2009) on cars – limit emission to 130g/km (2015), reducing to 95g/km (2019) with fine of €95 for each gram over

Question 21

2020 Climate and Energy Package

Answer 21

• Set in 2007, implemented 2009
• 3 key targets:
  o 20% cut in greenhouse gas emissions based on 1990 levels
  o 20% of energy from renewables
  o 20% improvement in energy efficiency

Question 22

2020 Climate and Energy Package - Results

Answer 22

• 23% reduction in emissions from 1990 levels by 2016, while GDP grew 53% over the same period
• Carbon intensity halved between 1990 and 2016; however, global average of 58% decrease
• EU share of global emissions fell from 17% (1990) to 9% (2018)
• ETS emissions fell 26% (2005-16)
• Non ETS emissions fell 11% (2005-16)
• Not ETS emissions increased for second consecutive year in 2016
• 17% renewable energy by 2016, a 2/3rds increase from 2005

Question 23

2020 Climate and Energy Framework

Answer 23

• 3 key targets:
  o At least 40% cut in greenhouse gas emissions based on 1990 levels
  o At least 27% of energy from renewables
  o At least 27% improvement in energy efficiency

Question 24

2019 European Green New Deal

Answer 24

• Net zero by 2050
• 50% reduction in CO2 emissions by 2030
• Strategy includes:
  o Increased energy efficiency and renewable energy
  o Phase out unnecessary plastic
  o 40% of EU agriculture budget and 30% of EU fisheries subsidies to be directed to climate change
  o Tougher air quality requirements
  o More freight by rail and water
  o Only make trade deals with states that uphold Paris Agreement commitments
  o Carbon Border Adjustment Mechanism
  o Increased funding for EV charging points
  o Shipping included in ETS
  o €1tr investment program (increased to €1.75tr during COVID)

Question 25

Fit for 55

Answer 25

• Masterplan to reduce GHG emissions by 55% by 2030
• Aim:
  o Reduce reliance on fossil fuels
  o Expand use of renewable energy sources
  o Accelerate development of EVs
  o Clean energy options for aviation and shipping
• Key elements:
  o Include shipping, heating and road transport in ETS
  o Tougher Effort Sharing Decision targets
  o Target to remove >310m tonnes of CO2
  o Increase Renewable Energy Directive target to 40% by 2030
  o Energy Efficiency target increased to 39%
  o Ban of sale of internal combustion engine vehicles by 2035
  o Carbon Border Adjustment Mechanism – prevent EU efforts being undermined through relocation of production abroad → raises prices of imported goods that do not have climate protection costs

Question 26

PMI Response to Climate Change

Answer 26

• Good Agricultural Practices Program – all growers and producers must meet standards
  o 70% reduction in tobacco curing emissions from 2010 by 2020
  o 0% coal use for curing by 2020
  o 0% deforestation for plantations or curing by 2020
• 10% improvement in fuel efficiency (2010-15)
• Aim of 40% reduction in emissions from 2010 by 2030 – already achieved 36%
• 200 energy saving projects (2014-15)
• On CDP’s ‘A List’ for climate, water security and forests
• Provide monetary rewards for employees for meeting emissions reduction targets
• Emissions targets constitute part of annual performance objectives
• Environmental criteria applied to all purchases
• Internal price of carbon of US$17/tonne
• Rationale for Response:
  o Regulation, including EU ETS
  o Impact of climate change on tobacco leaf growing
  o Improve reputation, with increased shareholder interest in climate change
• PMI Assisting LDCs:
  o Mozambique drought – promoted food security, provided seeds, fertiliser, irrigation equipment and tools
  o Ethiopia drought – provided food and clean water to children and pregnant mothers

Question 27

Effectiveness of PMI Response to Climate Change

Answer 27

• Achieved 36% reduction in emissions from 2010 levels
• 200 energy saving projects (2014-15)
• On CDP’s ‘A List’ for climate, water security and forests
• Provide monetary rewards for employees for meeting emissions reduction targets
• Emissions targets constitute part of annual performance objectives
• Environmental criteria applied to all purchases
• Internal price of carbon of US$17/tonne

Question 28

Ineffectiveness of PMI Response to Climate Change

Answer 28

• Aims to achieve 2° warming – Glasgow → 1.5° adopted as preferred goal
  • Too small to make significant impact

Question 29

Catholic Church Response to Climate Change

Answer 29

• June 2015 Papal Encyclical, Laudato Si, challenged consumerism, called for greater support of developing states by developed ones, and for a stronger response to climate change → major reason for Poland and Latin American states joining Paris Agreement
• May 2017 – urged Trump to remain in Paris Agreement
• June 2018 – met with oil executives and urged change
• Divested in fossil fuels – equal to $7bn
• Speech at COP25 – highlighted need to reform development and need to place most vulnerable people at the heart of decisions

Question 30

Effectiveness of Catholic Church Response to Climate Change

Answer 30

• Major reason for Poland and Latin American states joining Paris Agreement
• Divested in fossil fuels – equal to $7bn

Question 31

Ineffectiveness of Catholic Church Response to Climate Change

Answer 31

• Unable to keep USA in Paris Agreement

Question 32

Challenge to Effective Resolution of Climate Change:
Complexity of Climate Change

Answer 32

• Belief that climate change is too hard to resolve so why bother
• Difficulty connecting cause and effect of climate change
• Hard to visualise far reaching effects of climate change
• → reduces incentive and motivation for action

Question 33

Challenge to Effective Resolution of Climate Change:
Public Opinion

Answer 33

• Public opinion impacts politicians, who then impact public opinion
• Concerns about jobs, economic growth and cost of fuel often outweigh concerns about environment
• Lack of public support for action → governments will lose elections if they take action
• Lack of public support to purchase environmentally friendly productions → businesses will lose money if they improve their products

Question 34

Case Study:
Public Opinion in Australia on Climate Change

Answer 34

• Support for action involving significant costs: 40% (2013) → 61% (2019) → 56% (2023)
• Oppose action involving costs: 16% (2013) → 9% (2017) → 11% (2023)
• 73% of Labor and Greens voters see reducing emissions as ‘extremely important’
• 26% of Liberal, LNP and National voters see reducing emissions as ‘extremely important’
• 80% of Australians view reducing emissions as ‘extremely important’ or ‘important’
• 39% of Greens voters, 21% of Labor voters and 3% of Liberal voters saw climate change as the ‘most important’ issue at 2019 election
• Only 33.3% of Liberal voters saw climate change as ‘most important’ or ‘important’ at 2019 election
• 90% supported subsidies for development of renewables (2022, Lowy Inst.)
• 77% supported more ambitious targets for 2030 (2022, Lowy Inst.)
• 65% supported reducing Australian coal exports (2022, Lowy Inst.)
• 64% supported ETS or carbon tax (2022, Lowy Inst.)
• 63% supported banning new coal mines (2022, Lowy Inst.)
• 15% of voters would accept a ‘significant cost’ to support climate action, and 57% would accept ‘some cost’ (2019)
  o 26% of progressive voters would accept ‘significant cost’
  o 5% of conservative voters would accept ‘significant cost’; 40% unwilling to accept any cost
• → Lack if prioritisation of climate impact when making electoral decisions

Question 35

Case Study:
Politics in Australia on Climate Change

Answer 35

• Liberal Party win in 2013 → repeal of Carbon Tax in 2014
• Turnbull’s National Energy Guarantee proposed reintroduction of price on Carbon → leadership spill and Morrison becoming PM
• 2019 Federal Election:
  o Labor proposed 45% emissions reduction, tax reform and electric car policy
  o ABC polling found environment was #1 issue – 29%
• Election → lack of prioritisation of climate impact when making electoral decisions
• 2022 Federal Election:
  o #1 reason for voting Teal was concern about climate
  o Labor proposed 43% emissions reduction, but no ban on new fossil fuels

Question 36

Case Study:
Public Opinion in USA on Climate Change

Answer 36

• 39% believe seriousness of climate change has been exaggerated; 36% believe it is underestimated; 25% believe it is generally correct (2023)
• 52% believe environment should be prioritised; 48% believe economic growth should be prioritised (2023)
• 67% of Democrats believe climate change should be a ‘top priority’ while 21% of Republicans believe so (2019)
• 55% oppose phasing out the production of new gasoline cars and trucks by 2035
• 53% view stricter environmental laws as worth the cost (2022) – down from 65% (2019)
• 90% support planting a trillion trees to absorb carbon emissions (2022)
• 72% support requiring power companies to use more energy from renewable sources (2022)
• 68% support taxing corporations based on their carbon emissions (2022)
• 67% support providing incentives to increase the use of hybrid and electric vehicles (2022)
• 49% believe Biden’s climate policies are taking the US in the right direction; 47% believe they are taking the wrong direction
  o 82% of Republicans believe it is the wrong direction
  o 79% of Democrats believe it is the right direction

Question 37

Case Study:
Politics in USA (Trump’s Response and Biden’s Response)

Answer 37

• Trump Administration:
  o Erased or loosened nearly 100 regulations on pollution
  o Approved oil and gas exploration, including Anwar, Alaska
  o Approved Keystone XL pipeline in 2017
  o Removed US from Paris Agreement
  o Appointed 3 conservative judges to Supreme Court
  o Expected to add 1.8bn tonnes of CO2 by 2035
  o However, domestic coal production at lowest level since 1978
  o French blocked $7bn deal to purchase US natural gas
  o Domino effect – created space for other states, including Brazil and Australia, to take little action
• Biden Administration:
  o Resigned Paris Agreement
  o Placed moratoriums on oil and gas activity in Arctic
  o Revoked Keystone XL permit
  o Goals of achieving carbon free electricity sector by 2035 and replacing Federal Government vehicles with zero-emission ones
  o Commitment to cut emissions by 50-52% by 2030 → net zero by 2050
  o 2022 Supreme Court Decision West Virginia vs EPA → ruled that Clean Power Plan extended beyond EPA’s mandate → limits scope of Biden’s planned regulations
  o Inflation Reduction Act – expected to reduce emissions by 40% of 2005 levels by 2030; includes $370bn in climate and clean energy investments

Question 38

Challenge to Effective Resolution of Climate Change:
Economy

Answer 38

• Cost of Action:
  o Hard to weigh up cost of dealing with climate change vs cost of not taking action
  o Easier to put off decision about who should pay and how much
  o Off shore tidal energy 3 to 6 times more expensive than fossil fuels
  o Politicians focus on impact to own economy → lack of political will
  o Focus on new technologies and workarounds to avoid action
• Dependence on Fossil Fuels:
  o Account for 80% of energy and 64% of electricity
  o Unable to exploit resources for profit – Nature suggests 60% of oil/gas and 90% of coal must remain untapped to avoid worst climate consequences
  o No other source as energy dense – batteries 100x less dense than gas (0.5MJ/kg for batteries vs 53MJ/kg for gas)

Question 39

Economic Instability and its Characteristics

Answer 39

• When a state is unable to regulate or control economic activity within their borders, as well as the flux of the markets and its effect on domestic living standards, employment and economic security
• Characteristics of Economic Instability:
  o Increased unemployment
  o Decreased consumer and business confidence
  o Bankruptcies
  o Decreased economic growth

Question 40

Key Aspect of Economic Instability:
Capitalism’s Boom and Bust Cycle

Answer 40

• Capitalism: economic system where capital and goods are owned by private individuals and businesses and production is based on supply and demand
• Boom and Bust Cycle: cyclical movement of economic activity over time
• Peak Stage:
  o High economic growth
  o High levels of inflation
  o Low levels of unemployment
  o Causes:
  □ High consumer and business confidence
  □ Low interest rates
  □ High levels of global economic growth
  □ High disposable income levels
  □ High government spending
• Contraction Stage:
  o Lower economic growth
  o Lower levels of inflation
  o Rising levels of unemployment
  o Causes:
  □ Lower consumer and business confidence
  □ Higher interest rates
  □ Lower levels of global economic growth
  □ Lower disposable income levels
  □ Lower government spending
  □ Capacity constraints
• Trough Stage:
  o Low economic growth
  o Low levels of inflation
  o High levels of unemployment
  o Causes:
  □ Low consumer and business confidence
  □ High interest rates
  □ Low levels of global economic growth
  □ Low disposable income levels
  □ Low government spending
  □ Capacity constraints
• Expansion Stage:
  o Higher economic growth
  o Higher levels of inflation
  o Lower levels of unemployment
  o Causes:
  □ Higher consumer and business confidence
  □ Lower interest rates
  □ Higher levels of global economic growth
  □ Higher disposable income levels
  □ Higher levels of government spending

Question 41

Market Failure

Answer 41

• When an unregulated market does not allocate resources efficiently or maximise living standards, resulting in either an under or over allocation of resources
• Elongates ‘boom’ period in the short term, and exacerbates the ‘bust’

Question 42

Key Aspect of Economic Instability:
Role of Global Actors in Stabilising Economy

Answer 42

• Economic Stabilisers: any institution or practice that serves to reduce fluctuations in the business cycle
• Stabilising practices include stimulus, changes to interest rates, bail outs, austerity and regulation
• Global actors include IMF, G20, EU and states
• Keynes – argues governments should provide stimulus during economic downturn
• Hayek – argues governments should stabilise boom to reduce impact of bust, and stimulus should be avoided since it encourages risky behaviour
• Friedman – argues government should use interest rates to encourage efficiency and low inflation

Question 43

Key Aspect of Economic Instability:
Globalisation

Answer 43

• Stable economy → spread of capital, increased trade and increased economic growth
• Unstable economy → spread of instability, lower investment and impacted supply chains
• No state has a completely independent economy
• Increase in intergovernmental organisations to coordinate responses to economic instability

Question 44

Causes of Economic Instability

Answer 44

• Exogenous shock – an event that happens outside of a state’s own economy
• Poor economic policy decisions
• Bubbles
• Excessive Debt
• Changing Commodity Prices
• Changing Consumer and Business Confidence
• Market Failure
• Political Uncertainty
• Black Swan Events – unforeseen events → impact supply and demand
• Unilateralism → states prioritising their own national interest over the interests of the international community
• High inflation
• Credit crunches
• Balance of payment crisis

Question 45

Current Economic Instability

Answer 45

• No shortage of cash
• Shortage of goods and services – hard for governments to resolve; requires reducing demand, which is politically unpalatable
• Demand grew faster than supply following lockdowns
• Shortage of workers
• Caused by reduction of supply from China due to zero COVID policy combined with War in Ukraine
• Has led to increases to prices

Question 46

Responses to Economic Instability

Answer 46

• Changes to Interest Rates:
  o Lower interest rates → incentivise borrowing and disincentivise saving; however, encouraged debt
  o Higher interest rates → disincentivise borrowing and incentivise saving; however, can reduce economic growth
• Bailouts: aim to provide stability and prevent contagion and unemployment; however, can create perverse incentives and increase government debt
• Stimulus: aim to boost economic growth through consumer spending; however, can increase government debt
• Austerity: aim to reduce government debt levels; however, can reduce economic growth
• Regulation: aim to address underlying causes of instability; however, can reduce economic growth

Question 47

US China Trade War

Answer 47

• Initiated in March 2018 when Trump implemented tariffs on steel and aluminium
• Causes:
  o US trade deficit of $419bn with China and growing → threatened national security and US jobs
  o Jobs in manufacturing declined 30%
  o Chinese government providing subsidies, which provided them with an unfair advantage
• Impact:
  o US economic growth estimated to slow by 0.3%
  o Chinese growth at slowest rate since 1992
  o Global economic output reduced by 0.8%
• Effectiveness:
  o 2018: Chinese exports to US increased $38bn (7%) while US exports to China decreased $10bn (8%)
  o US trade deficit increased 12% in 2018

Question 48

COVID-19 and Economic Instability

Answer 48

• Impact:
  o Global economic growth decreased by 3.4% to 7.6%
  o Global trade fell 5.3%
  o OECD government borrowing of $18tr (2020) – a 60% increase from 2019
  o 8.8% of global working hours lost
  o US – GDP fell 19.2% (Q1 and 2 2020) but grew 15.4% (Q3 and 4 2020)
  o UK – GDP fell 9.9% (2020)
  o EU – lost $2tr in GDP
  o Export volume of goods fell significantly less than services
  o Unemployment rose between 2019-20 from 11.9% to 13.4% (Brazil); 5.7% to 9.7% (Canada); 3.8% to 5.4% (UK); 3.1% to 4.3% (Germany)
  o Household consumption expenditure decreased between 2019-21 by 0.2% (US); 1.5% (Australia); 4.1% (Japan); 12.8% (UK)
• Impact on states varied depending on:
  o Pre-pandemic economic conditions
  o Ability for governments to respond with stimulus
  o Industries that dominate domestic economy

Question 49

Cost of Living Inflation Crisis

Answer 49

• Government stimulus during COVID → increased demand at a faster rate than supply → demand inflationary pressures
• 2022 – 75 central banks have increased interest rates, on average 3.8 times
• Global headline inflation at 8.7% (2022)

Question 50

Chinese Response to COVID-19 Economic Instability

Answer 50

• Spent ¥4.2tr (4.7% of GDP) on epidemic control, production of medical equipment, unemployment insurance, tax relief and public infrastructure investment
• Injected ¥1.8tr into the banking system to increase lending
• July 2021 – wound back pandemic spending; lockdowns continued until Dec 2022
• Outcomes:
  o First state to return to economic growth (June 2020)
  o Budget deficit reached record high of 3.6%
  o Government deft reached 54.4%
  o 2022 – 3% growth but below 5.5% target
  o Dec 2022 – 5.5% unemployment and 16.6% youth unemployment
  o Consumer confidence at all-time low of 85.5 (Nov 2022)
  o Slowest growth in per capita disposable income since 1991
  o Banks unwilling to lend to consumers → low domestic demand
• Challenges:
  o Health crisis – lockdowns and low vaccine uptake
  o Low growth in disposable income
  o Lack of lending
  o Cost of response

Question 51

US Response to COVID-19 Economic Instability

Answer 51

• Coronavirus Aid, Relief and Economic Security Act (CARES) - $2.2tr in tax rebates, unemployment benefits, food safety, bankruptcy prevention, small business loans and for hospitals
• Aug 2020 – executive order for extra $44bn in unemployment benefits
• Dec 2020 - $868bn for unemployment benefits, stimulus, funding for education, vaccines, testing and tracing
• March 2021 American Rescue Plan - $1.8tr for health response, assistance to families, communities and business, unemployment benefits and stimulus
• Lowered interest rates to below 0.25%
• Outcomes:
  o -19.2% growth (Q1/2 2020)
  o 15.4% growth (Q3/4 2020)
  o Economy larger than pre-pandemic by July 2021
  o 14.7% unemployment (Apr 2020) → 6% (Apr 2021)
  o 160% debt-to-GDP (end of 2020)
• Challenges:
  o 610k deaths

Question 52

German Response to COVID-19 Economic Instability

Answer 52

• $650bn Economic Stabilisation Fund (March 2020) – investment into emergency liquidity for business, public health response, childcare benefits, increased access to welfare and work-sharing wage subsidies
• June 2020 – VAT cut from 19% to 16%; investment in further stimulus, social security, aid to businesses, local government and schools
• Outcomes:
  o -1.8% growth (Q1 2020)
  o Household spending reduced 5.4%
  o Unemployment remained below 4% throughout
  o Debt level 68% (2020) → 79% (2021)
• Challenges:
  o Low consumer confidence

Question 53

UK Response to COVID-19 Economic Instability

Answer 53

• Cut interest rates to 0.1% (March 2020)
• Total stimulus of $575bn aimed at businesses
• Tax cuts for retailers
• Expanded access to government unemployment benefits
• Wage subsidies of up to 80%
• Deferred quarter of VAT
• Sales tax cut for 6 months from 20% to 5%
• ‘Eat Out to Help Out’ – discount to restaurant meals by up to $12.50
• $3.8bn for green infrastructure and $7.3bn for general infrastructure
• Outcomes:
  o Growth -10% (2020)
  o Growth 4.2% (Q2 2020)
  o Unemployment remained below 5.2%
  o Government debt at 144% (end of 2020)
• Challenges:
  o Uncertainty from Brexit

Question 54

Australian Response to COVID-19 Economic Instability

Answer 54

• Cut interest rate to 0.1%
• $223bn in relief and stimulus packages, including $85bn Jobkeeper, payments to those receiving government benefits and business subsidies
• $12.9bn in income tax cuts (Oct 2020)
• Outcomes:
  o Unemployment 7.5%
  o 97% debt rate (end of 2020) → 84% (2021)
  o Growth in Q3 and Q4 2020
  o Economy now larger than pre-pandemic

Question 55

Global Response to COVID-19 Economic Instability

Answer 55

• Economic stimulus equivalent to 25% of GDP
• Low Income states unable to increase public spending by more than approx. 1-2%
• 43 Low Income states spent more on servicing debt than public health
• Foreign investment in emerging economies dropped sharply
• States needed to borrow to cover expenses
• COVID cost global economy $12.5tr

Question 56

IMF Response to COVID-19 Economic Instability

Answer 56

• IMF provided:
  o Emergency funding to 89 states
  o Short term liquidity line to assist developed states deal with balance of payments issues
  o Grants for debt relief to 29 states (Apr 2020 – Oct 2021)
  o Special Drawing Rights of $650bn (Apr 2021)
  o Policy advice, including for a green recovery
  o Capacity development in 160 states – focussing on tax administration
• International Cooperation – IMF influenced G20 to suspend debt repayments to 73 states
• Attempted to address underlying cause of COVID-19:
  o Proposed $50bn to vaccinate 40% of global population by end of 2021 and 60% by end of June 2022,
  o Encourage developed states to share at least 1bn doses of the vaccine with developing states
• Response changed from past approaches:
  o 87/100 of these programs had low/no strings attached
  o Endorsed increased health spending
  o Encouraged protection of most vulnerable

Question 57

Ineffectiveness of IMF Response to COVID-19 Economic Instability

Answer 57

• By June 2021, only 100k vaccines were being delivered per day in LICs → worsened health crisis and thus the economic crisis
• 13/15 loans negotiated during 2021 required new austerity measures
• IMF had $1.2tr in available credit – but only 10% was used
• 80% of all lending went to 10 different states
• Limited uptake of IMF support:
  o Some governments ineligible for lending due to existing debt problems
  o Some governments refused loans due to political stigma and conditionality of loans
  o Governments reluctant to accept IMF loans as they would likely drive out private lenders
• IMF lent more in the year to Sept 2009 – despite GFC actually being caused by poor policy decisions
• Short term liquidity line had no take-up whatsoever – IMF believed it could by up to $50bn
• Debt burden of LICs increased by a record 12% (2020)
• Income per capita increased 5% in developed states but only increased 0.5% in developing states (2021)

Question 58

IMF Case Study:
Kenya

Answer 58

• $2.3bn loan (2021)
• Conditions: 3 year public sector pay freeze, increased taxes on gas and food
• Introduced despite acute hunger caused by drought, and nearly half of households having to borrow food or buy it on credit

Question 59

IMF Case Study:
Cameroon

Answer 59

• May 2020 – IMF approved $256m emergency loan to finance $105m health response plan
• Oct 2020 – IMF approved $156m loan to finance $825m three year package to support health system, businesses and households
• However, shortages of hospital goods remained

Question 60

IMF Case Study:
Ecuador

Answer 60

• May 2020 – IMF approved $643m loan
• Oct 2020 – IMF approved $6.5bn under Extended Fund Facility to support stabilisation of economy, expand social protections and strengthen domestic institutions
• Conditions of greater transparency and accountability

Question 61

IMF Case Study:
Egypt

Answer 61

• May 2020 – IMF approved $2.77bn Rapid Credit Facility
• June 2020 – IMF approved $5.2bn Stand By Agreement
• Used to finance $6.4bn package including $2.3bn in health spending

Question 62

IMF Case Study:
Nigeria

Answer 62

• Apr 2020 – IMF approved $3.4bn in emergency financial assistance
• June 2020 – Government used funding to finance $6bn in stimulus
• However, only 12.5% of the poorest quintile received access to food assistance (June 2020)
• Aug 2020 – 32% experiencing severe food insecurity, up from 14% in 2018

Question 63

Challenges to IMF Response to Economic Instability

Answer 63

• High existing debt levels → unable to increase spending for health and economic crisis
• Vaccine nationalism → economically vulnerable states experienced a worse health crisis → worse economic crisis

Question 64

Causes of Economic Instability in China

Answer 64

• Real estate constates approx. 25% of GDP
• Pre-pandemic housing construction was 30% greater than warranted → reduced price for houses
• Evergrande, Country Garden and Zhongrong Trust all defaulted
• Market supported by government through lax regulation and stimulus financing → perverse incentive to make risky investments
• Falling birth rate → reduced demand for housing in long term
• Low consumption

Question 65

Challenges to Resolving Economic Instability in China

Answer 65

• Local governments had not fully repaid debt from GFC and had been impacted by both COVID-19 and loss of revenue from reduced land sales → unable to stimulate
• Ageing population → reduced tax revenue and increased healthcare spending → unable to stimulate
• Changes to interest rates unable to resolve systematic problems in real estate and finance
• Unwilling to reduce interest rates significantly, as this would negatively impact banks
• Necessary reforms, including changes to tax structure, welfare, local government debt and income redistribution, are proving politically challenging

Question 66

Impact of China on World Economy

Answer 66

• Use 1/5th of the world’s oil
• Use ½ of the world’s refined copper, nickel and zinc
• Use 3/5th of the world’s iron ore
• Collapse in Chinese growth from 7% to -1% expected to lead to UK growth at -1.2%
• 200 largest multinationals made 13% of their sales in China (2021)
• Approx. 10% of German GDP from China (2020)
• Approx. 20% of Zambian commodity exports and approx. 10% of Chilean commodity exports are to China (2022)

Question 67

Economic Instability in China and Relationship between Boom and Bust Cycle and Economic Instability

Answer 67

• Exacerbation of boom through lax regulation and stimulus → market failure from oversupply → economic instability

Question 68

Effectiveness of EU Response to Climate Change

Answer 68

• 23% reduction in emissions from 1990 levels by 2016
• Carbon intensity halved between 1990 and 2016
• EU share of global emissions fell from 17% (1990) to 9% (2018)
• ETS emissions fell 26% (2005-16)
• Non ETS emissions fell 11% (2005-16)
• 17% renewable energy by 2016, a 2/3rds increase from 2005

Question 69

Ineffectiveness of EU Response to Climate Change

Answer 69

• Decrease to carbon intensity below global average of 58%
• Not ambitious enough – all targets met and exceeded
• Limited action on deforestation