Clean energy: the next driver of global growth

RIYADH: Despite the French revolution, World Wars, Great Depression, Black Friday, Russian Default, IT Bubble, the world’s prosperity has continued to increase at a steady pace. Aggregate demand over time has been triumphed by our ability to produce much more than even our peak population growth of 1.7% annually since 1960, which is now on a decline of almost 1.2% per year.

Sure individual countries like Argentina have made a mess of growth through reckless fiscal and monetary policies but the world as a whole has been resilient. I cannot therefore help thinking that global monetary imbalances can probably be the story of the decade but not the future. To look beyond, we have to answer a much more critical question, where will the next supply-side revolution come from? The IT revolution seems limited after all the recent incremental benefit. We have fancier gadgets but overall productivity is decreasing.

Taking real GDP as a rough proxy for productivity growth, we see that the G-7 countries have shown growth of around 1.5% annually in the last 10 years while the emerging and developing economies grew incomes by 6% annually, according to International Monetary Fund. Therefore, it is clear that productivity in the developed world has run out steam, and world growth is now being driven by emerging economies.

However, environmental concerns and energy costs may present the most severe challenges for growth. Already global warming, reducing underground water levels for irrigation, massive deforestation, can have serious unforeseen effects such as climate change and destruction of the eco-system, factors which may quickly tighten noose on prosperity.

A potential game-breaker can therefore come in the form of cheap clean energy. Already we have hope in shale natural gas as its recoverable potential is expected to at least double the current world gas reserves and prices are already at an all-time low.

Therefore, I strongly believe that mankind’s next dare is to harness clean energy including wind, solar, and natural gas in ways which are economically feasible. If we do it, it would allow behemoths like China and India to keep escalating production without fear of rising energy prices feeding into inflation.

The writer works as an economist and portfolio manager.

Published in The Express Tribune, March 19^th, 2012.