Global Trends by Martin Khor

Monday 22 October 2018

Global factors will affect the 11th Malaysia Plan targets

The Eleventh Plan Mid-term Review was tabled last week, and whether its targets are met will depend as much on external factors as on domestic measures.


New alarm over climate change and a looming financial crisis were two themes hitting the headlines recently.

Scientists warned in a new report that the climate situation is worse than previously thought, and there is very little time left to avoid devastation.   

Alarm bells were also sounded by ultra conservative financial institutions, the International Monetary Fund and the Bank of International Settlements, of a possible new Great Depression, and this time there are no medicines to cure the sick patient. 

Meanwhile in Malaysia, the Mid-term Review (MTR) of the 11th Malaysia Plan was launched. 

Amidst the good measures to make public institutions more accountable, and the society more inclusive and equal, there was also a sombre message. 

The government has to cut back on its expenditure in the next two years to control its massive debt, and it is relying on private consumption and investment and exports to attain the economic growth target of 4.5% to 5.5%.  However, the global economy’s prospects are far from bright and may not be supportive of this strategy. 

A very interesting point in the Prime Minister’s MTR speech in Parliament was that a carbon tax is being explored as part of actions against climate change.   Such a tax if adopted would be a major boost to Malaysia’s climate change mitigation plan, besides being a novel way to raise revenue.  

The two global trends of climate change and financial turmoil will have a significant impact on the 11th Malaysia Plan and beyond.  At the same time, Malaysia also has to formulate policy responses to these global problems.

On climate change, the new predictions were made in a summary of a report by the intergovernmental panel on climate change (IPCC). The scientists were asked what would be the effects if the global temperature rises by 1.5°C above the pre-industrial level?

Until now, most scientific work had focused on the effects of a 2°C rise. The temperature has already risen by 1°C, and if current trends continue, the 1.5°C level is likely to be breached between 2030 and 2052 – as early as 12 years from now.

Though less severe than a 2°C level, the world at 1.5°C warming is grim, with the IPCC report giving details of heavier rainfall, floods, sea level rise, infrastructure damage, species loss and extinction, negative effect on forests, increased ocean acidity and decreased ocean oxygen levels, loss of Arctic sea ice cover, loss of coastal resources, reduction of coral reefs, reduced fisheries, reduced yields for food crops, greater water scarcity, and serious impacts on health, livelihoods and incomes. 

Since we are now already experiencing many extreme and negative weather events, even with a 1 degree warming, the situation at 1.5°C will be devastating.  And it will come soon, as early as 2030, with conditions worsening till then and after that.

For a 66% chance of limiting global warming to 1.5°C, the atmosphere can only absorb another 420 gigaton of carbon dioxide. But we are emitting around 42 gigaton per year.  At this rate, the carbon budget of 420 gigaton will be exhausted in 10 years.

There is thus need to quickly reduce emissions.  But on 17 October, the International Energy Agency announced global carbon dioxide emissions in the energy sector (which accounts for 80% of the total) will go up again this year to a record high. Total emissions rose in 2017 by 1.4% after remaining flat for the previous three years. 

The IPCC report calls for “rapid and far reaching transitions in energy, land, urban and infrastructure, and industrial systems”.   These would be “unprecedented” in scale and “imply deep emissions reductions in all sectors and a wide portfolio of mitigation options.”

Tun Dr Mahathir Mohamad in his MTR speech said that to fulfil Malaysia’s Paris Agreement commitment, “a national mitigation action plan will be formulated and the implementation of carbon tax will be explored”.   

The carbon tax is one of the most effective ways of limiting emissions.  It has become a fashionable measure. By February 2017, 24 countries or provinces (including Japan, Korea, India, Singapore, UK, Sweden, Canada, Brazil) had adopted or planned to adopt a carbon tax, according to a World Bank report.

The carbon tax works by putting a price on GHG emissions, for example US$40 a tonne of emissions, and obliging the emitting producer to pay a tax on its emissions.   In 2015, the tax rate ranged from US$5 in Chile and US$6 in India to US$16 in the United Kingdom, US$31 in France, US$87 in Switzerland and US$132 in Sweden, according to the World Bank.

To avoid or reduce the tax, the producer switches to more efficient practices or chooses cleaner fuels and consumers change their lifestyles. Carbon taxes are part of the set of climate change policies that may also include research grants, renewable energy subsidies, and standards for energy and fuel efficiency.   

The revenues were used in various countries for the general budget, to support public transport, renewable energy, clean energy and environment, and assist the poor. 

The carbon tax needs preparation and it is too late for it to be included in the Budget to be presented on 2 November.  Hopefully it can be introduced the following year.

As to the global economy, the IMF shocked the world when its Financial Stability Report, released on the eve of the annual IMF meeting in Bali, stated that “large challenges loom for the global economy to prevent a second Great Depression.”

Earlier, the Bank of International Settlements warned that the global economy faces a potential relapse of the Lehman shock of 2008.  Its chief economist Claudio Borio said:  “There’s little left in the medicine chest to nurse the patient back to health or care for him in case of a relapse.”  

In a summary of what happened in Bali, the Financial Times (15 October) said “there were fears that financing problems in emerging markets were spreading from specific countries to become generalised capital flight and that global institutions did not have the cohesiveness to deal with the problem as they arise.”

And Indonesian President Joko Widodo remarked that “relations between the major economies are looking more and more like the Game of Thrones”, with a tragic price to be paid by all.

This is the sombre backdrop that all countries now have to work within.   Global realities will interface with national plans and aspirations.  Whether the Midterm Review’s economic targets can be realised will depend as much on external factors as on domestic measures.