Greening Industrial Policy
With the consent of Oxford University Press, Professor Emeritus John Mathews is sharing a copy of his chapter in the forthcoming handbook The Oxford Handbook of Industrial Policy. The Handbook is now available for pre-order at: https://global.oup.com/academic/product/the-oxford-handbook-of-industrial-policy-9780198862420?q=industrial%20policy&lang=en&cc=au#.
Abstract
The scope of industrial policy is broadened in this chapter to encompass energy, materials, and finance. Given the unprecedented scale of the industrialization of India, China, and the late latecomers in Africa, Asia, and Latin America, the traditional options of fossil fuels, linear economy, and generic finance have been found wanting, for reasons of immediate environmental spoliation but also to do with countries running up against geopolitical limits. The greening of industrial policy presents itself as a solution, involving the shift to renewables, to a circular economy, and to the greening of finance (green bonds and green loans from development banks), encompassed under the rubric of green growth. The details of these new, green options are explored, and contrasted with traditional green industrial policy. The case is made that far from being a special case, the greening of industrial policy promises to become the core development strategy, and the general case in industrialization, as the twenty-first century unfolds. Keywords renewable energy; circular economy; green finance; fossil fuels; green growth; learning curve; urban mining
Chapter 10
Greening Industrial Policy
John A. Mathews
10.1 WHY GREEN INDUSTRIAL POLICY?
It is widely agreed that the West grew wealthy through its mastery of the novel processes of industrialization, when fossil fuels were harnessed to provide abundant energy in new factory settings that liberated production from age-old constraints. Industrial capitalism underpinned the prosperity of Europe and North America, before diffusing East to Japan in the twentieth century, and then in the second half of that century diffusing to the East Asian Tigers (Korea, Taiwan, Singapore, and Hong Kong), utilizing developmental states as means of catch-up. Now in the twenty-first century the process encompasses China, followed by India and many other industrializing giants looking to enjoy their time in the sun. But no sooner do these emergent industrializing giants begin the same process of burning fossil fuels and wasting resources as practised by their industrialized predecessors than they are confronted with an inconvenient truth: their business model for industrialization will not scale.
These industrializing giants have to confront the reality that they cannot rely on the conventional fossil-fuelled pathway, nor on the traditional linear pathway of resource usage (extracting resources from nature, and then dumping the residues in nature at the end of the process), if they wish to see their industrialization through to completion. Consider these traditional or conventional pathways from the perspective of energy and resource security. The burning of fossil fuels (whether coal in power generation and industry or oil in transport) at the scale involved in China or India (with their total current population of 2.8 billion) creates so much urban particulate pollution that the air becomes unbreathable. China has already paid a terrible price in terms of this urban pollution, and India will do so as well as the scale of its fossil-fuel burning rises. Similarly, the linear exploitation of resources, extracting them from nature at one end of the industrial process and dumping them back in nature at the other, creates unmanageable waste issues and shortages of key resources like water. Even more significantly, the huge appetite for fossil fuels and virgin resources brings these industrializing giants up against political and economic limits (and ultimately military limits) of what can be allowed within a densely populated planet. The Western powers evaded these geopolitical limits through colonization and imperialism—but such a strategy is not open to China, India, and other industrializing giants. How then are they to secure the energy and resource inputs needed by their quest for industrialization at a scale never before attempted? What are the industrial policies that would bring them the fruits of modernization?
The answer to this conundrum is provided by green growth, or the greening of the industrial growth process—balancing growth against sustainability. China stumbled on this solution in the early years of the twenty-first century, as it was engaging in tearaway growth. While continuing to burn a lot of coal, oil, and gas, it has found that its energy security is enhanced by relying more and more on renewables—to the point that it now has targets for renewables usage that dwarf those of other countries and have already turned China into a renewables superpower. And this for the very good reason that renewables are products of manufacturing, and as such are subject to cost reductions achieved through the learning curve. While fossil-fuel extraction is subject to arbitrary cost increases or decreases, the costs of manufacturing renewables devices (wind turbines, solar PV cells, batteries) are diminishing relentlessly, in accordance with the learning curve.
As costs fall, markets expand—and so the process opens up and expands markets for renewables devices, in a process that can be expected to lead to fossil fuels being superseded as energy sources by the middle of the century, if not before. In most parts of the world electric power generated from renewables is already cheaper than thermal power generated from burning fossil fuels—and the costs of renewable power will only continue to fall. Figure 10.1 shows that costs of solar PV have been falling by 28.5 per cent for every doubling of production, which has occurred every two to three years. The chart takes the story up to 2020 when solar PV power generation will approach 1 trillion watts, opening up the terawatt era in solar power. Why would any country wish to continue burning fossil fuels, given their rising and fluctuating costs, their heavy burden on the balance of payments, and their geopolitical unreliability?
Figure 10.1 Learning curve associated with solar PV power
Source: BNEF
China has discovered a radical solution to the problem of resource security by introducing circular flows of materials in place of the linear flows of conventional industrialization. The recirculation of resources is based on manufacturing (or rather, ‘demanufacturing’ or disassembling) and is subject likewise to diminishing costs, so that the costs of recirculated materials can be expected to continue to fall, eventually falling below the cost of virgin materials (indeed they are already lower in cost in some activities such as ‘urban mining’ of electrical and electronic waste in Chinese cities). The recirculation of resources solves not only the problem of resource accessibility, but also the problem of waste accumulation. It provides a sustainable solution to the problem of dealing with geopolitical limits to resource extraction. As China expands its adoption of a circular economy to enhance its own resource security, so it creates markets and technologies that can be adopted by other industrializing countries, starting with India, and encompassing late latecomers in Africa, Asia, and Latin America.
This perspective on greening views the process as fundamentally driven by the quest for energy security and resource security necessitated by the unprecedented scale at which China and India are industrializing. It is a very different perspective from the one that informs almost all commentary on green industrial policy, which begins with a concern over global climate change and deduces from this the need for a low-carbon economy (and in more extreme versions, for a zero-growth economy as well). Such a perspective can only result in industrializing giants facing energy and resource choices that compel them to confront the ethical and moral challenges of decarbonization; little wonder that this perspective is resisted by late industrializers like India, given that it would condemn them to abandoning their search for industrialization before it has started, and with it the search for increased wealth and income to bring them closer to the levels enjoyed by Western industrialized countries. And they were not responsible for climate change in the first place.
Consider the impact of switching to renewables to drive power generation, industry, and transport for reasons of energy security. Security is enhanced by such a move because renewables are products of manufacturing, and as such come under the control of the country implementing the policy. A green choice entails a process of decarbonization—the only known solution to the problem of rising carbon levels. As the industrializing giants like China and India switch over to renewables, leaving behind the fossil fuels of an earlier era, so they are led to achieve the very results anticipated by a ‘climate change’ perspective on greening. Likewise, choosing recirculating resources for reasons of resource security decouples industrial activity from natural processes, reduces the materials footprint of industrial activity, and allows the Earth to begin to reclaim its natural processes and cycles. The aspirational goal of zero-growth advocates is thus achieved through green growth rather than zero growth.
It is considerations like these that have led international agencies like UNEP to argue that the greening of economies ‘is not generally a drag on growth but rather a new engine of growth’.[1] The discourse on developing countries and green industrial policy is thus moving away from ‘burden sharing’, where the costs of renewables or circular flows are viewed as higher than in conventional fossil-fuelled or linear flows. Countries are now discovering profitable opportunities associated with a green shift—notably the falling costs of solar PV (as shown in Figure 10.1) and the complementary cost reductions found in wind turbines, batteries, electric vehicles, and other instances of the global green shift.
Green growth is not so much a response to market failure (as in the standard account of neoclassical economics) as a response to market opportunities opened up by the Schumpeterian creative destruction of the incumbent fossil-fuelled energy systems and linear resource flows by renewables and recirculated resources, with the new industries driven by green finance. These are the real-world industrial dynamics of the greening of industrial policy.[2]
This chapter develops the argument that in a wider technoeconomic setting, as compared to the narrower economic setting of traditional industrial policy, it is the energy and resource choices made by industrializing countries that will come to be central. Indeed, they will determine the success or failure of the industrialization aspirations of the emergent giants like China and India, and following them, the late latecomers in Africa, Asia, and Latin America. The material and energy foundations of these industrialization strategies constitute the core of green growth industrial policies.[3]
10.2 GENERAL FEATURES OF THE GREENING OF INDUSTRIAL POLICY
The core of industrial policy concerns the strategies deployed to shift an economy from lower- to higher-productivity sectors, and within sectors, from lower value-added to higher value-added activities. These strategies inevitably focus on manufacturing, where such productivity improvements can be concentrated, while manufacturing itself can be concentrated in clusters, or industrial hubs, where an export orientation can be pursued. These strategic choices by successful industrializers (in particular those in East Asia) now characterize the choices made by smart late latecomers around the world.[4]
The greening of industrial policy broadens the canvas to encompass the energy and materials/resources aspects of manufacturing activities—widening the scope from economic to technoeconomic considerations. As soon as this wider perspective is taken, the material underpinnings of industrialization begin to exert powerful effects. Let us consider the fundamental aspects of these technoeconomic policy choices, spanning green energy, green resources, and the green finance that drives the choices being made in energy and resources.[5]
10.2.1 Energy
Energy choices are a principal aspect of the greening of industrial policy. A worldwide green transition is underway, shaped initially by the choices made by China and India, and now diffusing to encompass the choices made by countries in Africa, Asia, and Latin America.[6]
In the energy domain, the move towards renewables like solar and wind has the great advantage that the resource is free, and marginal costs of generating power from these free resources are correspondingly low—lower than burning expensive fuel. The renewable resources are diffuse, meaning that they are available almost everywhere, and to everyone, countering the trends towards centralization and gigantism in the traditional fossil-fuelled industry. Renewables-based industries tend to be labour-intensive (think of installing rooftop solar modules) and generate jobs in rural and regional areas. And of course renewable energy is clean, in the sense that it carries no pollution risks (in contrast to the filth associated with coal mining and burning, or the radiation risks associated with nuclear power), and poses no security dilemma, as in the ever-present risk that civil nuclear power industries could be converted to military use virtually overnight. The renewables industries favour small and medium-sized firms as protagonists, basing their competitive dynamics on innovation as much as on imitation. By contrast, how much innovation has there been in the automotive industry over the past century (until the appearance of electric vehicles)?
10.2.2 Materials/Resources
The circular economy emerges as an alternative to the traditional linear economy in the resources or materials domain. The fundamental attribute of circular resource flows is that they enhance resource security as more and more resources are extracted from circular flows rather than as virgin resources (think of water recycling and treatment). Resource extraction thus becomes a branch of manufacturing (or ‘demanufacturing’)—as in ‘urban mining’—and its pursuit becomes a goal of industrial policy. Recirculated resources have declining costs, as demanufacturing generates its own learning curve and the market for recirculated resources enlarges—to the point where costs of recovered resources dip below the costs of extracting virgin resources.[7] Capturing circular flows by closing industrial loops generates rich linkages between industrial sectors and multiplies opportunities for capturing increasing returns. For an industrializing economy, the shift to circular flows saves on resources, saves on waste, generates abundant business opportunities, and creates jobs in rural and regional areas. What is there not to like?
10.2.3 Finance
What drives these shifts in energy and resources/materials flows is finance, which, as Schumpeter correctly observed, is the ‘engine room’ of capitalism. Here we introduce another departure from the usual treatment of greening of industrial policy. In the way that the issues are typically framed by United Nations agencies, finance means creating funds from the resources of governments, meaning taxpayers’ funds.[8] But this approach to finance ignores the central feature of capitalism, namely that it runs on credit—and credit is created in capital markets. The issue becomes: how to create instruments of credit that draw from the vast capital markets created by capitalism?
One solution to this issue is to target the bonds markets, which globally are double the size of equity (stocks) markets. Banks and financial institutions have found that they can attract the interest of professional investors—managers of wealth funds, hedge funds, insurance funds, and pension funds—with bonds targeted at green investments, or green bonds. Ever since the Korean Export-Import Bank first floated a green bond successfully on global bond markets in March 2013, raising US$500 million in funds to be invested in green projects by Korean firms around the world, the idea has caught on in a big way. China in particular has taken to green bonds, viewing them as a way of tapping global capital markets to fund its green operations both at home and abroad (under the Belt and Road Initiative). Green bonds are diffusing to late latecomers around the world. The Bank Windhoek in Namibia, for example, issued a green bond in 2018 targeted at renewable energy projects as well as at reducing carbon emissions from fossil-fuel activities (a controversial aspect).[9] The scale of green bond issuances continues to grow, reaching US$167 billion in 2018, and US$117.8 billion in the first half of 2019.[10]
The other way that industrializing countries can channel finance towards green growth initiatives—both energy and resources/materials aspects—is through development banks. China is at the forefront, with its two principal development banks, the China Development Bank (CDB) and the China Exim Bank, both providing Chinese green shift companies with long credit lines in the billions of dollars to sustain them in international competition against less well-endowed competitors. Brazil too has been able to finance green projects throughout the country through the operations of the Brazilian Development Bank (BNDeS) which has grown to be larger than the World Bank.
How then are the leading industrializing countries today putting these green initiatives to work in driving green growth, or greening industrial policy?
10.3 EFFECTIVE INDUSTRIAL POLICY/GREEN GROWTH INITIATIVES IN INDIA AND CHINA
10.3.1 Green Industrial Policy in India and its Impact on Trade
Let us start with India, which is not only about to become the world’s most populous country (expected to overtake China by the mid-2020s) but is actively pursuing green projects across the board.[11] The hallmarks of India’s newfound green growth zeal (emulating China’s strategies with a lag of perhaps a decade) can be found in the National Solar Mission, designed to achieve solar PV capacity in India of 100 GW by 2022, and in the corresponding target for wind power of 60 GW, again to be achieved by 2022. As shown in Figure 10.2, the National Solar Mission was steadily driving the uptake of solar power—until it met the unexpected obstacle of trade barriers created by the advanced countries.
The Indian case reveals the hypocrisy of the West in advancing the concept of decarbonization as a means of mitigating climate change, and yet opposing it as soon as a country like India starts to take practical steps to build its own green industries. Emulating China’s great success with building a wind-power industry in the early 2000s utilizing the instrument of local content requirements (LCRs) (see section 10.3.2), as part of the National Solar Mission India stipulated that there should be steadily rising proportions of domestic manufactures in the national solar PV output and in the solar PV installation sector.[12] These requirements, while universally recognized as necessary to build a new industry in an industrializing country, are technically in breach of WTO rules, and India was duly taken to the WTO for disciplinary action by the United States in a case that started in 2010.[13] India defended its policies on the grounds that they were needed to enable India to meet its clean-tech targets under its Paris commitments, but these arguments were rejected by the panel put in place to hear the case and upheld by the highest WTO authority, an Appellate Court, in 2018. By 2019 the expansion of India’s world-beating solar PV industry was moderating. This is the perverse result of a global system where the WTO and the UNFCCC are dangerously out of alignment.
Figure 10.2 India’s solar PV installed capacity, 2010‒2019
Source: Author
The data on India’s solar PV generation in Figure 10.2 tell the story: rapidly growing PV generation up to the year 2019, when it started to decline under the impact of India having to dismantle the LCR aspects of the National Solar Mission, on pain of expulsion from the WTO.
10.3.2 Green Industrial Policy in China and its Impact on Trade
While there is ample documentation on China’s vast consumption of coal and its growing involvement in oil and gas production and consumption (its black economy), much less attention is paid to the serious greening that has been under way in China over the course of the past decade.[14] The green shift in the electric power sector, where the trends are concentrated, is clearly shown in Figure 10.3.
Figure 10.3 China: Rising proportion of electric power sourced from water, wind, and sun, 1990‒2018
Source: Author
Figure 10.3 reveals in striking detail how China effected a switch to dependence on renewable sources (water, wind, and sun) around 2007, and has since been pursuing this green shift as fast as is practicable (given the vast scale of the electric power system). In terms of capacity (upper line) the proportion of electric power capacity sourced from water, wind, and sun (WWS) reached 37 per cent by 2018, rising from 22 per cent in 2008—a 15 per cent green shift in just one decade. If this green shift is maintained through consistent green industrial policy for the next decade, China’s WWS capacity could reach more than 50 per cent before 2030, meaning China’s electric power system (the largest in the world) would have reached the tipping point where it is more green than black, with a corresponding impact across wider industrial and transport sectors. The data in terms of actual electricity generated show the same trend, if not the same absolute values (because of varying capacity factors across different generating sources).
China has judiciously utilized all the tools of green industrial policy to effect this green transition in its electric power sector. The new industries of wind power (encompassing a manufacturing value chain for wind turbines, and the operation of huge wind farms like the Gansu 10 GW farm) and solar PV power have been carefully nurtured. China utilized LCRs and foreign direct investment (FDI) to build its wind-turbine industry in the first decade of the twenty-first century, artfully deploying graded increases in LCRs and (once they had achieved their objective) dismantling them before a protest could be lodged at the WTO in Geneva. The emerging wind-turbine giants like Goldwind were equipped with long credit lines by CDB, and leveraged latecomer technology to good effect to acquire new technologies like permanent magnet direct drive (PMDD), which facilitated the expansion of the wind-power industry offshore. The solar PV industry also expanded, with new entrants like Suntech Power, founded in Wuxi by young entrepreneur Dr Shi Zhengrong in 2001, scaling up production of PV modules to a degree never before attempted, and driving down costs as they did so.
Of course it was not all plain sailing. Because China opened up the solar PV industry as an exemplary case of unrestricted growth, there was a rapid build-up of over-capacity, resulting in many bankruptcies. Rather than being seen as a failure of industrial policy, this should be viewed instead as a success, in that the PV industry was exhibiting ‘normal’ industrial dynamics of free entry and free exit via bankruptcy or corporate acquisition. Suntech Power itself was one of the casualties. China’s power grid proved incapable of accepting all the renewable power generated from the new wind and solar PV sources, and much of the power was wasted in a process called ‘curtailment’. But this in itself stimulated rapid innovation, with the grid upgraded as a vehicle of transmission and distribution (T&D) and the State Grid Corporation of China leapfrogging world electrical engineering leaders with the introduction of new T&D technologies such as ultra-high voltage (UHV) transmission. The new UHV transmission lines built over the second decade of the twenty-first century have enabled China to generate vast amounts of power from renewable sources in inland provinces and then transport the electrical energy to the eastern seaboard with minimal losses and enhanced reliability. This was a major achievement, revealing China’s rapid passage from imitation to innovation in a critical sector.[15]
An unheralded aspect of China’s green energy shift over the course of the past decade is that as the scale of its wind and solar PV markets expanded, so efficiencies improved and costs were driven down spectacularly, as evidenced in Figure 10.1. These cost reductions have not been confined to China, but through globalization they have diffused to the rest of the world. The result has been an unprecedented boom in building renewable energy industries in newly industrializing countries, particularly in those pursuing ‘late’ latecomer development strategies.
10.4 OPPORTUNITIES FOR LATE LATECOMERS TO APPLY GREEN INDUSTRIAL POLICIES TO DRIVE DEVELOPMENT
An excellent example of a green economy initiative in a ‘ate’ latecomer that makes abundant economic and business sense may be found in Ethiopia, a country that is industrializing fast, as the ‘China of Africa’. The country has a clear industrial policy focused on manufacturing, which is concentrated on a series of industrial parks located around the country. There are clear strategies in place to have these parks linked to logistical infrastructure, such as the new (Chinese-financed) railway from the capital Addis Ababa to the port of Djibouti on the Red Sea, which serves as a conduit to the outside world for the landlocked country.
These industrial parks offer investors many advantages, including shared capital infrastructure and common provision of energy and resources inputs. For textile and clothing firms (the majority of invested enterprises in the industrial parks) water is a critical resource—and some of the parks are offering an advanced zero liquid discharge facility, or otherwise advanced water treatment and recycling facilities that come with park admission. In one park, water is treated both physically and chemically to remove pollutants and impurities in the form of a sludge that is solar dried and then transported off-site to a local cement plant, where it is absorbed as an input. This creates linkages across manufacturing centres as well as closure of a loop linking the textiles and cement industries. And from the perspective of the firms involved in the industrial parks, it reduces the costs of water as input, since the water utilized in the park is 90 per cent recycled, providing ‘grey water’ for all enterprises at costs well below those that would apply to water drawn from underground supplies or from local lakes and rivers. And the country is saved the environmental damage that would flow from otherwise ‘free’ discharge of polluted water into local waterways.[16]
This is an example of an environmental initiative that enhances the water security of the country, utilizing a technologically advanced water treatment and recycling system that is as yet found in few advanced countries. It is thus a case of a government agency (in this case, the Industrial Parks Development Corporation) acting as a public entrepreneurial agent and introducing technoeconomic ‘leapfrogging’ as a matter of industrial policy in Ethiopia. And once installed and operational, the initiative can be replicated by other late late developers elsewhere in Africa, Asia, or Latin America. The more it is replicated, the more the costs can be expected to decline, through the enhanced efficiencies and specialization that flow from market expansion. Far from a cost that must be imposed on a developing country through an ethic of ‘zero growth’, it is in fact a business opportunity that offers profits in one country after another through saving water as a precious resource by recirculating and treating the waste water as it is generated. As a resource-saving initiative it recovers its public investment through the exports facilitated by firms locating their operations in the industrial park involved. This is the circular economy in action.
10.5 WHY WOULD ANY COUNTRY WISH TO CONTINUE WITH FOSSIL-FUELED DEVELOPMENT?
Compare the gains to be won through the greening approaches discussed above with maintaining the status quo based on fossil fuels and the linear economy. To pursue a conventional fossil-fuel pathway, a country would have to jeopardize its energy security by maintaining dependence on oil, gas, or coal imports, at arbitrary prices and as an increasing burden on the balance of payments. As the world approaches peak oil or peak gas in individual oil and gas fields (as it has done repeatedly in successive fields) so the demands for more extreme, dangerous, and costly extraction and transport processes multiply. As everyone knows, oil and gas deposits are arbitrarily scattered around the world, and the discovery of deposits represents a windfall opportunity. By contrast, the absence of these fossil-fuel resources (as in the case of Japan) makes the country excessively dependent on imports from a few sensitive countries, thus reducing energy security. In the case of Japan in the 1930s, America’s tightening grip on Japan’s oil supplies eventually led to the Pearl Harbor attacks and the bloodbath of the Pacific War. Oil wars were the curse of the twentieth century, and they promise to be an even worse curse in the twenty-first unless industrializing countries succeed in weaning themselves off fossil fuels and shifting decisively towards renewable energy sources. And then there is the huge environmental and pollution load associated with the oil and fossil-fuel industries themselves—the dirtiest industries on the planet. Oil leakages are the bane of oil production everywhere, quite apart from the shocking oil pollution episodes involved in tanker collisions and accidents, of which the Exxon Valdez oil spill may be taken as exemplary.
One common refrain in the anti-renewables discourse is that it would cost too much, or require too many resources, to build a manufacturing-based energy system to match the reach and scale of the existing fossil fuel-based system. Given the costs and suicidal trends associated with continuing with fossil fuels, this is a strange argument. But let us meet it head on. Would the costs of building manufacturing industries to produce all the solar PV cells, all the wind turbines, and all the batteries needed for a 100 per cent transition to a renewables future exceed the costs involved in continuing to invest in refineries, mines, oil drilling platforms, tankers, pipelines, and distribution systems as at present? And don’t forget to add in the hospital and health care costs incurred in treating the victims of fossil fuel-related toxic poisoning and death––including lung cancer, bronchitis, and other debilitating conditions.
Several research projects have been devoted to proving that the costs—both financial and resource-based—of building a 100 per cent renewables-based energy system are containable—and that the transition is therefore feasible and practicable.[17] No further credibility can be attached to fears that we might run out of silicon, or that we would have to cover the world’s deserts with black silicon panels. No such estimates are available as yet of effecting a global transition from the linear economy to the circular economy—but they should be conducted as a matter of public urgency.[18]
Viewed from this perspective, one has to wonder why any country would wish to persevere with the fossil fuel and linear economy status quo. And then reason dawns: this is not a rational choice made by well-informed countries, but an outcome of the incumbents continuing with their ‘business as usual’ and their extraction of rents from their past investments. It is good to know that our future is in such safe hands.
10.6 GREENING AS ENHANCING ENERGY AND RESOURCES SECURITY: WORKING WITH THE DIFFERENTIAL PRINCIPLE
If both a ‘climate perspective’ and a ‘green growth perspective’ end up favouring the decarbonization of the economy and reducing its ecological footprint, what then is the difference between them? This is an important and legitimate question—to which there is an important and legitimate answer. The ‘climate perspective’ sets a standard of zero carbon emissions as the ultimate goal, so that any single step towards this goal has to be viewed as minor, until the goal is close. Or it sets a standard of ‘zero growth’ in order to reduce the economy’s ecological footprint—so that, again, any individual step towards reducing growth has to be viewed as a minor achievement.
By contrast, the green growth strategy is all about the process of greening, not the end result. So even a small initiative to shift the energy system towards renewables can be counted as a positive move that, for example, improves energy security and generates local employment, which of course are positives in themselves and help to cement support for the overall green growth strategy. Likewise, a move towards recirculating resources, such as finding a way to turn an unwanted output into an input to another industrial process (closing an industrial loop) can be counted as a positive move that enhances resource security and reduces the waste generation problem, while also boosting manufacturing linkages, employment, and profitability.
So, while China is continuing to burn a lot of coal—as numerous articles remind us—the fact is that China is moving its energy system in a profoundly green direction, one step at a time. It is the moving edge that is greening, with the energy system as a whole slowly moving to become greener until a tipping point can be expected to be reached where the entire system would be greener rather than blacker. China’s resource productivity is also low (meaning that it generates a lot of waste). But China is taking active steps to improve resource productivity, with moves to close industrial loops contributing to construction of a circular economy. And a tipping point will be reached when the circular flows outnumber the linear flows, and the whole economy becomes more resource conserving (through circularity) than resource wasting.
In my 2015 book Greening of Capitalism I discussed this issue under the heading of the ‘differential principle’.[19] In mathematical terms, complex systems are described by their differential equations, and the ‘point of change’ is captured by the differential. The most succinct way of capturing how the system is changing is to find an expression for the differential. If a change in the system dynamics is required, the simplest way to effect it is via a change in the expression for the differential. So, translating these ideas into real-world examples of complex physical or technoeconomic systems involves focusing change efforts on the point where the system is already undergoing change—which in technoeconomic systems means focusing on the point where investment is occurring.
One can try to change a large, complex system by means of an absolute change—one whole system replaced by another. Or one can try (with more likelihood of success) to change the system at the point of change, where the forces of change are already in evidence. Once business and technological systems have been built, they are highly resistant to change. But at the point where investment is being contemplated, change can occur by substituting one plan for another, with a stroke of the pen.
So one approach to greening industrial strategy is to focus on a system-wide absolute, like carbon emissions, and uphold zero carbon emissions (the clean energy economy) as the goal. This might be a legitimate goal—but as such it is quite unachievable, because complex technoeconomic systems can change only in small steps. And this lack of achievability of the absolute goal undermines confidence and support—which is why we have seen so little overall progress in meeting global climate targets. Another system-wide absolute might be to aim for the steady state (zero growth)—which again is a non-achievable goal in any practical sense. But that does not prevent zero-growth advocates from protesting about a large country’s inability to conform to their absolutist expectations.
By contrast the green growth strategy has more modest goals which are in fact achievable. As the steps towards achieving them accumulate, so the system starts to change in discernible ways that attract more and more support. Investment in one small change, when viewed as a step in the right direction, attracts more such investment.
This is indeed the huge advantage of the capitalist business system. It allows change to occur incrementally, one investment at a time. The big changes needed are the province of the state—as in the case of the developmental state. There is no harm in reminding ourselves why the capitalist system has achieved unrivalled supremacy in the modern world.
10.7 CONCLUDING COMMENTS
In this chapter, I have argued that by extending the scope of industrial policy from narrow economic to broader technoeconomic considerations, encompassing energy and resource flows, the restructuring of industrializing economies may be accelerated and at the same time brought closer to a state of balance between economy and ecology. Using examples from India, China, and late latecomers from around the world, the case has been made that at the scale of transformation now under way, traditional reliance on the fallback options of fossil fuels and linear resource flows is no longer feasible. These traditional options run into problems of severe environmental spoliation: in the energy domain, through particulate pollution as well as the pollution associated with continuing extraction of fossil fuels; and in the materials/resources domain through resource exhaustion and waste accumulation. Worse still, these traditional options run up against geopolitical limits when, for example, countries seek to extend their supply lines utilizing countries that are subject to social conflict or even civil war. These geopolitical limits to growth now outweigh the physical limits that were so much in vogue when the world was wrestling with ‘limits to growth’ in the 1970s.[20]
Green initiatives being taken in India, China, and late latecomers, far from being viewed as ‘special cases’, should be viewed as the general case that all countries industrializing in the twenty-first century must engage with. There is a common view that ‘advanced’ countries constitute the general case in economics, and ‘developing’ countries a special case. But as argued by Dudley Seers in the 1960s, and by Storm in the 2000s, the general case is in fact the one where structural shifts are under way, and where dynamics have greater salience than statics.[21] In advanced countries, incumbents are concerned to protect rents—but in the developing countries, particularly very large countries like India and China, latecomer firms are seeking to create profits by emulating and replicating the patterns of activity observable in the advanced world—and to do so at lower cost.
In the case of greening, there are countless examples of such imitation and emulation, with latecomers drawing on the huge pool of knowledge and technology available in the advanced world. Think of Chinese firms scaling up solar PV wafer production to a mass production industry for the first time, on their way to becoming world leaders in this sector. Or Chinese wind-turbine manufacturers like Goldwind adopting such innovations as PMDD and scaling them up for the first time, thus facilitating the global expansion of wind power from onshore to offshore. There are also cases of leapfrogging, where the industrializing countries see market opportunities and grasp them, even when this means going beyond imitation to innovation. The case of China going it alone to UHV grid operation as a means of transporting vast quantities of electric power from the interior of the country to the eastern seaboard comes to mind as an outstanding example.
Indeed, there is a case for abandoning the term ‘greening’ altogether, once it is understood that the initiatives involved in enhancing energy security and resource security are in fact well-recognized cases of industrial strategy at work. The perspective adopted in this chapter is that greening initiatives are going to accumulate, driven by cost reductions and Schumpeterian creative destruction, until the point where almost all technoeconomic initiatives are, axiomatically, regarded as green. At that point, there will indeed be no need to discuss ‘green’ industrial policy as a special case—because by then it will have become the general case.
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[1] See UNEP (2011) for the Green Economy report. [2] For accounts of green industrial policy, which generally start with the challenge of decarbonization to mitigate climate change, see such works as Shadikhodjaev (2018), Altenburg and Rodrik (2017), Ambec (2017), Padilla (2017), Fay et al. (2015), Schmitz et al. (2015), Luetkenhorst et al. (2014), Rodrik (2014), Cosbey (2013), Hallegatte et al. (2013), or Karp and Stevenson (2012). [3] For my own contributions to these topics, see Mathews (2020) to Mathews (2015) in reverse order. [4] For a sophisticated account of East Asian industrialization strategies and the reasons for their success, see Storm and Naastepad (2005). [5] The alternative approach is to discuss various contingent instances of green industrial policy, spanning such instruments as carbon taxes, cap and trade schemes and emission allowances, energy subsidies (and reduction of fossil-fuel subsidies), environmental labelling, and WTO-related instruments such as exemptions under GATT Article XX. For recent discussion of some of these instruments, see Shadikhodjaev (2018). [6] The rise in renewables is relentless. Total renewables capacity reached 2.4 trillion watts in 2018, according to REN21’s report ‘Renewables 2019’. We are now well into the ‘terawatt’ era of the renewables transition. [7] See the study of urban mining in Beijing conducted with my Chinese collaborators, Dr Zeng and Professor Li (Zeng et al., 2018). [8] Consider, for example, the UN-inspired Green Climate Fund, established following the 2015 Paris Climate Agreement: https://www.greenclimate.fund/who-we-are/about-the-fund. [9] See characterization of the Namibian green bond from Climate Bonds Initiative: https://www.climatebonds.net/files/files/2018-12%20NA%20Bank%20Windhoek.pdf. [10] See the reports from Climate Bonds Initiative at: https://www.climatebonds.net/resources/reports/green-bonds-market-summary-h1-2019. [11] The literature on India’s development has recently been throwing off its ‘cultural cringe’ with respect to Western industrialization, and is now reclaiming India’s strong economic performance right up to the nineteenth century before colonial depredations dismantled its sources of competitiveness. See, for example, Bagchi (2010) or Parthasarathi (2011). On India’s pursuit of green policies, see the description and analysis by Simran Talwar and myself as at November 2017, ‘India’s green shift to renewables: How fast is it happening?’, Energy Post, 22 November 2017, at: https://energypost.eu/indias-green-shift-to-renewables-how-fast-is-it-happening/. [12] On India’s National Solar Mission, see recent treatments such as Akoijam and Krishna (2017) or Kumar, Kumar, and Majid (2019). [13] See the description of the case (as at 28 Feb 2018) by the WTO, at: https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds456_e.htm. [14] On China’s greening of its energy system, with emphasis on the way that green additions to the power system now outrank black additions, see the successive articles by myself and Hao Tan in Asia-Pacific Journal, including the most recent update, ‘The Greening of China’s Energy System Outpaces its Further Blackening: A 2017 Update’, by John Mathews and Carol X. Huang, with comments from Mark Selden and from Thomas Rawski, 1 May 2018, at: https://apjjf.org/2018/09/Mathews.html. [15] See the account of China’s UHV innovation as leapfrogging strategy in Xu (2019). [16] The author visited this industrial park, Bole Lemi Phase II, in Addis Ababa, in October 2019, at the invitation of the IPDC.