A Critique of the current Debate

While in the past, development polices were mainly concerned with increasing the supply of energy and providing the necessary energy infrastructure to stimulate economic growth, attention has now more and more shifted to the previously outlined socio-economic and environmental aspects of energy use. Unsustainable, inefficient and unclean energy consumption is meanwhile widely recognised as an essential characteristic of poverty in most developing countries and consequently, there is an emerging consensus among policy-makers and international organisations that the provision of modern energy services represents a major challenge to eradicate poverty. This is well reflected in the political declarations made at recent international conferences (e.g. at the WSSD and Renewables 2004) and in the growing number of initiatives addressing insufficient energy provision. In my view, the continuing poverty-energy debate should be welcomed for broadening and stimulating international efforts in fighting poverty. Even though future studies and publications will shed additional light on the various nexuses between poverty and energy and in some cases will certainly refine or alter previous made findings, the current analysis provides a good picture of most of the essential linkages between energy provision and poverty.

25 All relevant information on the conference outcomes including the International Action Programme and the press releases are to be found on the conference website: www.renewables2004.de

Chapter 2: The Energy-Poverty Nexus However, the present debate is not completely unbiased. When it comes to the socio-economic costs of prevailing energy patterns in developing countries, the analysis is mainly restricted to the rural or household level. On the whole, little detailed investigations have been made in the energy-poverty debate about the structural economic costs associated with current energy consumption patterns. This is especially the case for the great majority of developing countries which do not possess significant commercial energy resources and therefore heavily rely on fossil fuel imports to meet part or all of their commercial energy needs. Since the oil price shocks of the 1970s and the following Third World Debt Crisis scores of development studies have elaborated on the macroeconomic problems arising from fossil fuel (especially oil) import-dependency. Surprisingly, present publications dealing with the linkages between energy and poverty tend to make little reference to these problems or do not mention them at all. When reference is made, the analysis is mainly limited to a narrow set of country examples and a short description of the following key problems:

• Energy – Foreign Exchange Nexus: Developing countries often spend a large portion of their foreign currency earnings on fuel imports. In many cases, merchandise export earnings are largely eaten up by the costs of fuel imports. This reduces foreign currency reserves, which are urgently needed to purchase other important goods and services from abroad (e.g. food, vaccines, capital goods, manufactured goods etc.) or to pay for debt services (UNDP 1997: 2.3.2, Scheer 2002: 136-137, Altvater 2004: 20-21)

• Energy – External Debt Nexus: Since fossil fuel imports tend to account for a large portion of total imports, increasing import costs for fossil fuels can lead to a sharp deterioration of the balance of trade (Goldemberg 2004: 6, US Congress 1991: 7). In the absence of equivalent increases in exports or sufficient foreign currency reserves, developing countries are compelled to finance the resulting trade deficit by borrowing. In some countries, payments for oil imports even exceed payments for external debt servicing (UNDP 2000: 1-18).

• Energy – Demand Side Nexus: High costs for imported energy sources may change consumption patterns on the demand side, thereby undermining efforts to persuade poor households to use cleaner and more efficient fuels, like imported kerosene or LPG. This may also apply to the use of electricity generated through the combustion of imported oil, gas or coal. As a result, poor households may quickly return to the use of cheaper traditional biomass sources, thus putting increased pressure on fragile ecosystems and speeding up deforestation (UN 1999: IV 14).

Chapter 2: The Energy-Poverty Nexus

• Energy – Macroeconomic Performance Nexus: Energy prices –especially the oil price–

are important macroeconomic variables. A surge of energy prices can inflict substantial damage on fuel importing economies and lead to economic recessions due to increased production costs, lower investment levels and inflationary pressure (for a detailed analysis see Agarwal et al. 1983: 55-68). Developing countries also suffer from the secondary effects of energy price induced recessions in industrialized countries. A general slump in demand in high income countries has negative consequences on the import volumes from developing countries, thereby reducing vital financial incomes from foreign trade (UNDP 1997: 2.3.2). Recently, the IEA in collaboration with the OECD Economics Department and the IMF Research Department tried to gauge the macroeconomic effects of a sustained

$10 per barrel oil price increase from $25 in 2001 to $35 at the beginning of 2004 (IEA 2004). The prospected effects for 2004 are summarized in Table 2.3-1 below.

Table 2.3-1: Oil-Importing Country Macroeconomic Indicators in Sustained Higher Oil

Price Case after One Year by Region/Country (Deviation from $25 base case in %) Real GDP Inflation Trade Balance (% of GDP) OECD Countries²⁶ -0.4 (-0.4) 0.5 (0.6) -$32 billion (-$42 billion)

Asia -0.8 1.4 -1.0

China -0.8 0.8 -0.6

India -1.0 2.6 -0.6

Malaysia -0.4 2.0 0.0

Philippines -1.6 1.6 -2.0

Thailand -1.8 0.8 -3.0

Latin America (including Mexico) -0.2 1.2 0.0

Argentina -0.4 0.2 0.2

Brazil -0.4 2.0 -0.4

Chile -0.4 2.0 -1.4

Highly indebted poor developing countries -1.6 n.a. n.a.

Source: IEA 2004: Table 1 (p.7) and Table 2 (p. 10)

Even though the above mentioned publications acknowledge fossil fuel import dependency as a serious problem for developing countries, they fail to make it a central part of their analysis.

The above cited IEA study is a good example. Although, the study is helpful to better grasp the appalling macroeconomic effects provoked by the current hike-up in oil prices, it falls short in questioning the underlying dependency structures of the global energy system and analysing the potential benefits of reduced import dependency for developing countries.

Previous publications of the IEA are equally symptomatic for this wide-spread negligence. In a report on renewable energies in 2001, the IEA declares that “the potential contribution of renewables towards the diversification of the energy portfolio is of key importance towards

26 The IEA study provides additional data for OECD countries in 2005. The data is to be found in the parenthesises. With regard to the trade balance effects in OECD countries, the study projects absolute changes in dollar terms and not relative changes as for the other country groups.

Chapter 2: The Energy-Poverty Nexus the goal of energy security. At the same time, such diversification can have additional social benefits especially in energy importing countries – both developed and developing. Funds that are normally used for the purchase of imported fuels can be used for local development projects” (IEA 2001: 10). However, the IEA failed to further elaborate on the advantages of reduced energy import dependency. One year later, the IEA dedicated one chapter of its flagship publication, the World Energy Outlook, to the relationship between energy use and poverty. This could have been an excellent opportunity to take up the above quoted statement in order to explore how developing countries are affected by high expenditures on imported fuels and what impact this might have on the living conditions of the poor. But this chance was once again missed. The IEA mainly preferred to describe current and prospective energy consumption patterns in developing countries and to outline the well-known linkages between energy use and productivity, health, environment and so forth. With regard to economic costs, the IEA confined its analysis to the nexus between household incomes and fuel transition. The present and future mix of energy sources, their origin and the associated purchase costs were not substantially questioned. Instead, the IEA stressed the need for further capital investments, market liberalisation and increased competition in the power sector to improve the availability and affordability of modern energy sources in developing countries.

Even more deplorable is the total lack of reference in various international key documents and declarations on energy and development. For example, there is no mention about the problems related to high fuel import expenditures in the frequently cited UNDP publications

“Energy as an Instrument for Socio-Economic Development” (1995) and “Energy for Sustainable Development: A policy agenda” (2002). Similarly, this issue is neither included in the goals of the World Bank’s “Energy Programme for Poverty Reduction, Sustainability and Selectivity” (2002) nor in the objectives of the “European Energy Initiative for poverty eradication and sustainable development” (2003). The same holds true for almost all UN conference declarations addressing issues of sustainable development, poverty reduction and energy since the Rio conference in 1992. As far as I know, the only exception is the “Global Conference on the Sustainable Development of Small Island Developing States” held in Barbados in 1994. Section 35 in Chapter VII (“Energy Resources”) of the “Programme of Action” points out that “small island developing states are currently heavily dependent on imported petroleum products, largely for transport and electricity generation, energy often accounting for more than 12 per cent of imports” (UN 1994: VII 35). Among the recommended actions to overcome this dependency is the “development and promotion of

Chapter 2: The Energy-Poverty Nexus new and renewable sources of energy, including wind, solar, geothermal, hydroelectric, wave and biomass energy, and ocean thermal energy conversion” (UN 1994: VII B (ii)). In 1999, the UN released a progress report on the implementation of the “Programme of Action” and concludes that “the almost total dependence of Small Island developing States on imported petroleum for their commercial energy needs continues to cause severe imbalances in trade.

Increased use of fuelwood has led to much deforestation. To arrest those adverse developments, Small Island developing States will need to increase their efforts in the development and use of indigenous renewable energy resources”. In the annexes, the progress report provides a detailed and comprehensive overview of the share of petroleum imports in total merchandise imports and exports for 41 island states. Table 2.3-2 lists the data for some island states with high petroleum import shares in total exports.

How come that the issue of fuel import dependency is largely left out in the international energy-poverty debate?

I venture to think that the negligence can partly be explained by the fact that international organisations are often bound to balance the diverging views and

energy policies of their member states. Likewise, the success of international summits mainly hinges on the ability to find a common denominator. This fosters concurrence-seeking behaviour and the exclusion of controversial energy issues in the course of negotiations.

There is still a deep divide on issues of sustainable energy development between major fuel-exporting and fuel-importing countries. While the former benefit from the fossil nature of the global energy system, the latter normally have an interest in reducing energy import expenditures by diversifying supply and harnessing indigenous energy sources - including renewable energies. The fruitless diplomatic haggling to find common agreement on the Kyoto Protocol and the failure to agree on binding renewable energy targets at the Johannesburg Summit exemplify this divide. A substantial reduction of fossil fuel consumption by energy-importing countries would hit the vested interests of fuel-exporting countries and multinational energy companies alike. It therefore seems easier to convince the beneficiaries of fossil fuel trade to support renewable energy targets – implying a guaranteed share of renewable energy use in a growing energy pie while leaving the future growth potential of fossil fuel export revenues untouched – than to embark on the slippery slope of

Table 2.3-2: Data on selected Island States (1995) Petroleum Imports as a % of Total Imports Total Exports

Bahamas 26.12 184.5

Cape Verde 5.00 87.0

Cuba 35.65 62.9

Samoa 5..3 56.0

Dominican Rep. 13.92 54.2

Seychelles 8.26 36.3

Source: UN 1999: Table 2 ( pp. 7-9)

Chapter 2: The Energy-Poverty Nexus discussing fossil fuel reduction policies, which could lead to a decreased total share of fossil fuel use in the same energy pie.

In the next chapter, I will offer an additional explanation why energy import dependency is not among the high priority topics on the international development agenda. According to my findings, the relative economic burden of energy import dependency is on average far smaller in industrialized countries than in most net fuel-importing developing countries. I assume that industrialized countries still tend to be more interested in securing a steady supply of fossil fuels and in keeping energy input prices low than to pursue tangible import reduction policies.

First, such policies would immediately stipulate a painful restructuring of many energy intensive economic sectors and the entire transport sector. Especially air traffic and individual motor car traffic are delicate national policy issues. Second, the curtailing of fuel imports would stand in strong contradiction to the widely accepted political goal of intensifying global market integration through promoting the free flow of goods and services. Third, import reduction policies could severely strain the political and economic relations with net energy exporting trade partners²⁷.

In the following, I would like to bridge the obvious discrepancy between the repeated acknowledgment of energy import dependency as being a severe problem for developing countries and the lack of a thorough and comprehensive structural analysis how import dependency and underdevelopment are linked. In particular, I will calculate import dependency indicators for up to 166 countries by making use of World Bank and United Nations statistical data and in this context will elaborate on the following questions:

• How has “energy import dependency” previously been defined and measured?

• Which countries are most severely dependent on the import of foreign energy sources? In particular, are there any significant structural differences in energy import dependency between industrialized and developing countries?

• What are the opportunity costs of energy import dependency in developing countries, especially in terms of forfeited expenditure opportunities on health care, public education and poverty eradication?

27 Energy importing and exporting countries often maintain mutual beneficial trade relations. Germany, for example, obtains roughly one third of its total oil and gas imports from former Soviet Union countries, mainly from Russia (BMWi 2003: 19, 23). At the same time, Germany is the most important single trade partner for most of these countries. In 2003, Germany provided more than 8 percent of Russia’s total imports (see country data on Russia in the CIA World Factbook available online at www.cia.gov/cia/publications/factbook).