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Economic restructuring in response to climate change - theory and practice

(LLCT) - Climate change poses serious impacts on every field of social and economic life, especially in developing countries. Thus, coping with climate change, mitigating its negative impacts, and co-existing with it require joint efforts and co-ordination of all nations, regions, and sectors/areas. Of note, economic restructuring in response to climate change is an appropriate and interdisciplinary solution.

It is because economic transformation will lead to changes in labor structure, the allocation of investment in industries, regions and economic sectors. Economic restructuring to bring into full play comparative advantages of industries, localities/regions/nations, decrease the number of industries which are severely impacted by climate change, and increase industries’ capacity to cope with climate change has been drawing the attention of many nations, regions and territories.

1. Researchs on the relationship between economic structure, economic restructuring and climate change

Climate change poses certain impacts on tendencies for economic restructuring

The transformation of the economy in general and of economic structure in particular is a natural and objective movement. Nevertheless, economic transformation is also influenced by numerous elements including market demand, speculation and policy. As it increasingly becomes complicated and unforeseeable and has certain impacts on most of socio-economic facets, climate change is considered a significant factor exerting great impacts on tendencies for economic restructuring, and deciding the efficiency of economic structural change as well as of human resource allocation. An economic structure built without careful consideration of the impact of climate change will work inefficiently, and fail to make any marked contributions to economic growth and development.

However, it is essential to assess the impacts of climate change on economic sectors, economic structure and tendencies of economic restructuring to enable the economic restructuring to adapt to climate change, and to build a green economic structure. The assessment is conducted through the assessment of direct or indirect impacts of climate change on the inputs and outputs of each economic sector as well as the whole national economy.

Firstly, climate change reduces the quantity and quality of inputs of economic sectors, eventually lowering their productivity, quality, and contribution to GDP (Bildoff et al. 2007). On the other hand, it changes the structure and role of each economic sector in the whole system, as well as the mutual relationship among economic sectors.

 Climate change affects the productivity of economic sectors due to its impacts on the quantity and quality of the inputs, and on the productivity and quality of the outputs of sectors, especially agriculture.

Domestic and foreign studies indicate that climate change influences economic sectors, in which agriculture is most-affected because it relies most on nature. Ricardo’s growth theory attributes three factors to climate exert direct impacts on growth, namely capital (K); labor (L) and land (R), in both quantity and quality. Meanwhile the quantity and quality of land play a decisive role in economic growth.

Sea level rise and salinization as a consequence of climate change will affect agricultural land as well as soil quality, thus affecting crop productivity and outputs of the agricultural sector.

Temperature increase also affects the quality of aquatic species and crop varieties, giving rise to epidemic diseases and affecting water resources, and consequently, the productivity and quality of the seafood industry.

In addition, climate change influences the quantity and quality of labor in agriculture due to climate extremes.

The United States Climate Change Science Program (CCSP) 2008 on “The Effects of Climate Change on Agriculture, Land Resources, Water Resources and Biodiversity in the United States” points out that climate change (i) has direct effects on crop productivity due to decreased coverage of agricultural land and indirect effects on the change of water availability for irrigation due to temperature increases and altered precipitation; (ii) has direct effects on water resources. Concurrently, climate change also influences food price, output and demand.

For the processing and mining industries, climate change also affects their production capacity as a result of reduced quantity and quality of their inputs, or increased input costs due to scarcity.

Study results reveal that 0.31% (194,309 sq.km) of the territory of 84 developing countries is likely to be affected when sea level rises by 1 meter. Flooding is projected to increase to 1.2% if sea level rises by a further 5 meters. Although the percentage is modest, if sea level rises by 1 meter, as many as 56 million people (equal to 1.28% of the total population) in 84 countries would be affected. The effect of sea level rise is slightly higher on GDP than on population. Inundated areas will also experience remarkable impacts even though sea level rises by just 1 meter. An estimated 7.3% of inundated areas in 84 countries would be affected as sea level rises by 5 meters.

Climate change affects the structure of sectors and the intra-sector structure of the economy

The structure of sectors and the intra-sector structure of an economy will change under the influence of climate change. The economic structure is presented through the quantity and contribution of the sectors which are largely affected by climate change. Thus, sectors which are heavily impacted by climate change must be reduced or restructured in the direction of adapting to climate change. 

+ The quantity of sub-sectors in agricultural, industrial and services sectors will change

+ Contributions of economic sectors to GDP will alter

+ Investment capital in economic sectors will either increase or decrease

+ Sub-sectors in combined sectors, i.e. sub-sectors which suffer considerable impacts from natural, weather and climate conditions, will have less contributions to GDP.

Secondly, climate change influences the tendencies of restructuring sectors and intra-sector change

Climate change leads to sector and intra-sector restructuring in the direction of gradually enhancing the adaptive capacity of sectors whilst mitigating negative effects of climate change on spontaneous development of the sectors or under policy impacts.

Climate change leads to change of the planning of socio-economic development in general and sectors in particular in the direction of interweaving climate change with development strategies.

Climate change leads to altered contribution of sectors in the direction of reducing the contribution of economic sectors which largely depend on nature and heavily employ non-renewable resources and cause environmental pollution whilst increasing the contribution of sectors of high adaptivity to impacts of climate change, sectors that use high technologies, green technologies such as information technology, wind power, nuclear power, and solar energy.

In each specific sector, the intra-sector structure also alters depending on the levels of impact of climate change and responsibility of each sub-sector.

Climate change will cause changes to labor structure (in both quantity and quality) in the direction of reducing laborers in sectors which have low adaptive capacity to climate change, and moving laborers into sectors of high adaptive capacity to climate change. Furthermore, besides training activities to improve the quality of human resources that are capable of using new technologies, laborers should be equipped with knowledge of climate change so as they will be able to respond to impacts of climate change.

Climate change will lead to changes in the level of capital investment in economic sectors which are likely to increase costs for the maintenance and repair of irrigation and other industries infrastructure, as well as costs for renovating the way of land use and its efficiency.

Climate change will change expenditure on new sciences and technologies and gradually increase the contribution of science and technology to the growth of sectors and of the whole economy.

In agriculture, there will be a need for selection of plant varieties which are strongly resistant to impacts of climate change, and can generate higher yields from a similar area of farming land as before.

Thirdly, climate change affects economic growth and development through impacts on economic structure

Climate change impacts on economic growth and development are among matters of concern in the whole world, which acknowledge that climate change is real and caused by human beings, and considerably affects human beings in all three areas: economy, society and environment. Economic studies on the impacts of climate change by Samuel Franmauher and Richard S.J.Tol (2004), Stern (2006) and Mendelsohn (2009) indicate that: (i) areas which are most likely to become vulnerable under the influence of climate change are agriculture, forestry, tourism, water resource, and sea resource; (ii) some countries, especially developing ones, will become more vulnerable under the influence of climate change because the contribution of the two sectors, agriculture and forestry - which are most vulnerable to the impacts of climate change - in developing countries is relatively high in the national economic structure; and (iii) climate change will reduce social welfare, consequently, lower the living quality of human beings. Despite showcasing differences in calculating and forecasting damages caused by climate changes, the above-mentioned studies assert that climate change will pose serious impacts on production, life and the environment globally, thus slowing down the economic growth of countries affected by climate change, especially developing ones, and their progress to achieve the Millennium Development Goals. Thus, policies in response to climate change in the world mostly focus on shifting to an economy with less carbon dioxide emissions as well as on ensuring a society that can effectively adapt to the impacts of climate change (Tran Tho Dat, 2013).

The report “The Economics of Climate Change” submitted by economist Nicholas Stern (2006) to the British Government asserts that climate change is a result of the greatest and widest-ranging market failure that the world has ever seen. The report maintains that without effective mitigation measures, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, whereas the costs of reducing greenhouse gas emissions can be limited to around 1% of global GDP each year. In addition, costs could even be lower than that, if there are major gains in efficiency, or if strong co-benefits are measured. In contrast, costs will be higher (could rise to 20% of global GDP), if innovation in low-carbon technologies is slower than expected (Tran Tho Dat and Vu Thi Hoai Thu, 2013).

Drawing on models assessing global economic effects, studies indicate that climate change will have severe impacts on productivity and output, and slow growth rates in countries which are strongly affected by climate change, especially developing ones. Recent studies have revealed that, the average economic growth rate in developing countries which are strongly affected by climate change will drop between 1% and 2.3% per year. A study by DARA International (2012) points out that damage by climate change and environmental pollution as a result of high greenhouse gas emissions makes up around 1.7% of global GDP in 2010 and is estimated to rise to 3.2% of global GDP by 2030 if we lack effective actions to deal with climate change. Developing countries suffered a loss of around 11% of GDP as a result of climate change and environmental pollution from greenhouse gas emissions in 2010, which is expected to cost an additional 40% of GDP by 2030 if there is not any action to mitigate climate change.

Economic structure affects the scope and level of impacts caused by climate change

Economic structure has corresponding adaptive capacity to impacts including climate change impacts. As a matter of fact, different regions/localities suffer from a similar natural disaster (storm, flood, drought, sea level increase, salinization of land, and coastal landslides, etc) will bear varied social and economic losses as well as demonstrate different recovery abilities. An economic structure that has a high adaptive capacity to climate change will mitigate and narrow damages caused by climate change, and take advantage of opportunities it can bring about, and vice versa. Under the influence of climate change, sectors that showcase weak adaptive capacity or inadequate structure will suffer from a higher level of vulnerability. Consequently, costs for dealing with and mitigating damage will increase.

The third report by IPCC indicates that adaptive capacity is a function which consists of wealth, technology, institution, information, infrastructure and social capital. Of them, sensibility is understood as exposure of both positive and negative climate change impacts. Eventually, exposure manifests climate change

as well as fluctuation of frequency and degrees of weather phenomenon (Sorogon report, 2010). Vulnerability is a function

of numerous socio-economic elements, natural and physical conditions presented through three factors mentioned above: exposure, sensitivity and adaptive capacity. Vulnerability = f (exposure, sensitivity, adaptive capacity).

The greater the exposure or sensitivity, the greater is the vulnerability. So, the greater the adaptive capacity, the lesser is the vulnerability.         

2. Impacts of climate change on Viet Nam’s economy and society

With a coastal line stretching more than 3,260 sq.km, and sea surface area within its territorial waters about 1 million sq.km, three times bigger than the land area, Viet Nam is one of the countries which suffer most severe impacts of climate change, particularly coastal localities suffer most significant impacts.  The impacts of climate change on Viet Nam are increasingly severe, which is demonstrated through the increased average temperature which will rise by 30C in 2100; increased frequencies of storms and the altered storm directions to the South; and fiercer flooding and droughts whilst saltwater has encroached kilometers upon land area, seriously damaging cultivation; and sea level rises between 2.5cm and 3cm in 10 years and is expected to reach 1 meter by 2100.

- Losses of human beings, property and money as a result of climate change

Considering greenhouse gas emission scenarios, at the end of 21st century, the average sea level in Viet Nam may increase by 78 - 95cm. If sea level rises by one meter, about 39% of the Mekong River delta area, and over 10% of the Red River delta would be flooded. It is estimated that as many as 22 million people will lose their houses with damage up to 10% of GDP. The Government’s Party Civil Affairs Committee (2013, p. 5) concludes that in the past 15 years natural disasters such as storm, flood, flash flood, landslide, inundation, drought, salinity intrusion and other natural disasters have causes considerable losses of human beings and property. Between 2005 and 2014, on average Viet Nam experienced 649 natural disasters annually, including flooding, hail, storm, flash flood, tornado, and landslide. In which, flooding was the most frequent, accounting for 49% of the total natural disasters, whereas storms made up about 13%. During this period of time, as many as 469,526 houses were destroyed, 174,653 ones were damaged, and more than 10,711 people died or went missing. On average, there were about three million people suffering from losses, either big or small, due to natural disasters. In regard to economic losses, between 10 years from 2005 to 2014, Viet Nam lost about US$5.2 billion each year on average. On average, natural disasters have caused a loss of 1.5% of GDP annually over the past 15 years (Monre, 2012).

In addition, DARA report on vulnerability due to climate change indicates that climate change might cause Viet Nam a loss of about US$15 billion each year, equal to 5% of GDP. Specifically, each year, Viet Nam suffers a loss of US$4 billion due to sea level rise, a crop loss of US$8 billion and an additional US$500 million loss in the agricultural sector, and US$200 million due to flooding and landslide; and an expenditure worth US$150 million on reducing temperature increase. If Viet Nam does not take proper responses, damages might reach 11% of GDP by 2030 (DARA International 2012).

Another study co-conducted by the Central Institute for Economic Management (CIEM), the Institute for World Development Research and University of Copenhagen (2012) asserts that, if Viet Nam’s economy continues to grow by 5.4 % annually in the 2007-2050 period, the growth rate impacted by climate change (specifically, storm) may stand between 5.32% and 5.39%, which means the growth rate will decrease but slightly. If Viet Nam’s GDP reaches more than US$500 billion by 2050, damages by climate change by 2050 will likely to be US$40 billion, a considerable loss which will only be reduced if Viet Nam makes appropriate and efficient responses (CIEM, DOE and UN University, 2012).

Therefore, it is pressing to seek for solutions to deal with climate change. Here, the renovation of growth models in association with economic restructuring, integration of climate change into development strategies and plans of the whole economy as well as of each locality, and selection of economic restructuring models in compatibility with climate change are considered an important and urgent task by Viet Nam’s Party and State.

3. The Party’s and State’s guidelines on conomic restructuring in response to climate change

The Government has approved the Agenda 21 for sustainable development in Viet Nam, Sustainable Development Strategy, Green Growth Strategy, Action Plan in response to climate change. The Party Central Committee also adopted Resolution 24-NQ/TW on June 23rd, 2013 entitled “Actively respond to climate change, and strengthen natural resource management and environmental development”. Accordingly:

+ In agriculture: (i) To reduce the contribution of crop cultivation (depending on nature), to increase capital investment and scientific and technological applications to husbandry; to develop large-scale farms in the direction of commodity production; (ii) To shift the structure of plant and animal varieties that are resilient to droughts (such as the cases in south central provinces), with saltwater intrusion (such as cases in the Mekong River delta); (iii) To develop agricultural service sectors; (iv) To invest advanced technologies (biogas) in dealing with agricultural pollution, and so on; (v) To increase plant and animal productivity, as well as labor productivity in each sector; (vi) To improve soil and apply drip irrigation technology to save water, and to efficiently invest in agricultural infrastructure, to be well-prepared for urgent response to climate extremes.

+ In forestry: To reduce forest deforestation whilst increasing reforestation as well as forest coverage.

+ In aquiculture: (i) To gradually reduce the contribution of the fishing sector whilst increasing aquiculture, especially hi-technology, multi-level aquiculture; to interweave crop seasons with aquiculture to improve soil and increase land use capacity; (ii) To apply advanced technologies to aquiculture and fishing activities; (iii) To enhance the investment of science and technology in the seafood service sector.

+ In the industry and construction sectors: (i) To review and remove polluting industries out of residential areas and to limit granting licenses to pollution-intensive industries; (ii) To intensify investment in the industry and energy sectors which use renewable resources such as wind power and solar power, and to limit granting licenses to hydropower industries; (iii) To invest in irrigation works to ensure enough water for agriculture; (iv) To increase the contribution of high-quality food processing industry, and so on.

+ In the service sector: (i) To strongly develop responsible tourism (especially community-based tourism and eco-tourism) and hi-tech service sector.

Nevertheless, there remain some limitations:

- The restructuring of economic sectors remains slow, unstable and inadequate without taking into consideration advantages of each locality. Economic restructuring in a more environmentally friendly direction and in making advantages of tourism and agricultural potential to deal with climate change remains non-synchronous among localities, failing to take advantage of regional linkage whilst the contribution from industries which employ green energy is still low, despite the fact that contribution of industries has changed remarkably as compared to the past. There hasn’t been any comprehensive and full report on economic restructuring.

- The restructuring rate of industries remains uneven whilst the rate of shifting is not the same for different sectors, the scale of planting trees on bare hills has failed to meet the actual demand, irrigation for agriculture has only met two-thirds of the actual requirement, which eventually lowers the quantity and quality

of crops.

- Pollution in husbandry and aquiculture remains relatively high.

- High-quality human resources for economic restructuring in response to climate change and policy communication are still weak and insufficient.

Therefore, the plan for economic restructuring in response to climate change in the coming years is as follows:

- To actively integrate climate change into the socio-economic development strategies of the whole nation, each region and locality. Climate change has comprehensive and inter-disciplinary impacts, thus, if development strategies, policies and plans do not take into consideration the linkage among sectors, fields as well as impacts of climate change, they cannot bring about satisfactory results and utilize comparative advantages.

- To strengthen the evaluation of the impacts of climate change in each sector to have timely response schedules.

- To sustainably develop economic sectors based on the contribution of scientific and technological elements and total-factor productivity (TFP), on the development of sectors which consume less energy and more green energy, and on limited environmental pollution, in conformity with characteristics of each region and locality. Economic restructuring based on comparative advantages of each region and locality, on the chain linkage of high added value and on the interests of participating individuals will contribute to restricting fragmented production and to increasing economies of scale and efficiency.

- To review and complete the policy system for the development of sectors and regions, concerning land, public investment, financial policy, tax, subsidy, science and technology, education and training, and so on, in order to develop sectors of high value added and high-tech industries.

- To seek for and efficiently mobilise financial resources both at home and abroad for economic restructuring in response to climate change, lessening pressure on the state budget through improved international cooperation, society-involvement and communication.

 

Dr. Truong Thi My Nhan

Ho Chi Minh National Academy of Politics

Dr. Le Thi Thuc

Ho Chi Minh National Academy of Politics

 

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