How can education be the antidote to a world prone to fracture along environmental, social, and economic fault lines?
Since 1960, the world’s population has more than doubled. Average life expectancy increased by 50 percent and income per person tripled. The share of people living in extreme poverty declined from 54 percent to 10 percent (data are available through 2018, pre-pandemic). Technology revolutionized how we communicate, how we travel, and even what we eat. For people in China and India, the changes have been especially dramatic.
This progress didn’t result from miracle—it was through investment in education, research, and development. It came because most governments dedicated themselves to the idea—framed in the Universal Declaration of Human Rights—that “everyone has a right to education.” So, even as the world’s population grew quickly, so did educational attainment, and people’s capacity to produce, build institutions, invent, and adapt (Figure 1).
Figure 1. World population (in millions) by level of education, 1960-2020
1960
1990
2020
Source: Wittgenstein Centre Human Capital Data Explorer Version 2.0, Wittgenstein Centre for Demography and Global Human Capital.
At the same time, we have been living hard on the planet. In 1960 about 60 percent of the earth’s surface was wilderness, and today it’s only 35 percent. The rate at which biodiversity is being lost due to human activity rivals the five mass extinctions in the earth’s history. Annual C02 emissions have quadrupled. Inequality has reached intolerable levels. And tragically, the number of armed conflicts has risen, many of which are driven by extreme ideologies or competition for resources.
Can education be the antidote to a world prone to fracture along environmental, social, and economic fault lines? Can education systems incorporate new insights into how children learn, cultivate scientific thinking, and become more inclusive of people pushed to the margins?
In considering these questions, it is important to note that investments in education have a delayed effect. Children entering school today will be fully functioning adults only 15-20 years from now. To shape the world of 2050, we need to act now.
The stakes are high. As challenges of sustainability become obvious, so does the need for better education. An increasingly large fraction of the decisions people will need to make involve science and technology. They need to “think like experts,” as Stanford University Professor Carl Wieman says, on the day-to-day issues raised by global warming, public health, and technology. Education is the first best way for people and societies to thrive.
It’s also important to note that the majority of the next generation is growing up in the most resource-constrained countries in the world. By 2050, 57 percent of the world’s youth will be in sub-Saharan Africa and South Asia. Many countries in these regions are struggling to build a qualified and motivated teaching force, create a rich learning environment in schools, and develop the infrastructure for technologies that could enhance learning.
Achieving a “rapid development scenario” for the next generation
With startling effect, Wolfgang Lutz and Claudia Reiter at the Wittgenstein Centre for Demography and Global Human Capital simulate what the world’s population might look like in 2050 under various scenarios in a human capital data explorer. In a “stalled development scenario,” where there would be very limited new investment in education and health in the poorest parts of world and high barriers to migration, world population would likely top 10 billion by 2050 (Figure 2). A substantial number of people would have no education or only a primary school education—insufficient to sustain growth and development. In a “rapid development scenario” where countries make substantial progress to meeting the Sustainable Development Goals on education and health by 2030, world population would likely be 8.6 billion by 2050. And perhaps more significantly, younger adults would be substantially better educated and prepared to face the challenges of their time. It would be a different world—one with more opportunities for people to thrive and potentially less pressure on the planet.
Figure 2. World population by level of education in 2050
Stalled development
Rapid development
Source: Wittgenstein Centre Human Capital Data Explorer Version 2.0, Wittgenstein Centre for Demography and Global Human Capital.
How do we increase the chances of achieving the rapid development scenario? A new report by the Wittgenstein Centre, commissioned by the Yidan Prize Foundation, suggests a few priorities:
Recognize that education begins before schooling. Focusing on the learning experience of early childhood can have profound and lasting impact on a child’s physical and intellectual development.
Provide at least 10-12 years of schooling for all. Primary education alone is not enough to bring a poor country out of poverty.
Employ more and better trained teachers. No other factor will increase the learning success of children more than good, motivated, and motivating teachers.
Make use of technological innovations that can help teachers provide good education almost for free, even in the most remote corners of the earth.
Encourage lifelong learning. Recognize that education does not only happen during school and job training, but that it is a lifelong necessity to help people remain physically, mentally, and economically active as they live longer lives.
In an increasingly complex and globalized world, the education of the next generation in all corners of the globe needs to be everyone’s concern. We should support education like our lives depend on it.
Africa in the news: Eswatini protests, upgrades to Rwanda’s health system, and energy and environment updates
Eswatini citizens protest for democracy
On Tuesday, June 29, SABC News reported that King Mswati III had fled Eswatini for South Africa, amid protests for democracy throughout the country. However, as of this writing, the location of King Mswati III of Eswatini remains unclear, as the government denies that the king has left the country: Following the allegations, the government of Eswatini tweeted: “His Majesty King Mswati III is in the country and continues to lead in working with the government to advance the Kingdom’s goals.”
The ongoing pro-democracy protests started in May following the death of law student Thabani Nkomonye allegedly at the hands of the police. Protesters are demanding democratic reforms and accuse the king of repression. In Mazini, the country’s largest city, there have been reports of protesters barricading roads and setting fires at businesses owned or linked to the royal family. In response, on Tuesday, the government of Eswatini imposed a dusk-to-dawn curfew. The military and police were also deployed, which resulted in violent clashes between authorities and protesters. According to Amnesty International, political activism has been consistently suppressed in the Kingdom of Eswatini—the last absolute monarchy on the African continent—due to repressive laws in the country. These laws include the 1938 Sedition and Subversive Activities Act (SSA Act) and 2008 Suppression of Terrorism Act (STA). Political parties were banned in 1973. Moreover, the current status of political parties is unclear under the 2006 constitution.
The controversial King Mswati III has been in power since 1986, and many Africa experts have criticized him in the past for his extravagant lifestyle. See, for example, former AGI Director Mwangi S. Kimenyi’s 2012 commentary, “The Human Development Cost of the King of Swaziland’s Lifestyle and his ‘Bevy’ of Wives.”
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Rwanda receives EU funding to bolster vaccine production capacity
On Thursday, Rwanda and the European Union (EU) signed a $3.6 million deal to assist the East African country in upgrading its laboratory capacity, acquiring modern laboratory equipment, and attracting investors to manufacture mRNA COVID-19 vaccines. The deal also earmarks funding to bolster the Rwanda Food and Drug Administration’s quality control capacity for medical products, specifically enabling the country’s medical regulator to qualify for World Health Organization (WHO) certification. The WHO certification, a necessary qualification for producing vaccines, will also build investor confidence in Rwanda’s manufacturing and regulatory capacity. The Rwanda-EU deal follows a joint EU-G-20 Global Health Summit initiative to allocate $1.1 billion in funding for African vaccine manufacturing capacity, as well as improvements in health technology and vaccine access.
In other Rwanda news, on Thursday, the country’s legislature legalized the use of medical cannabis. The new ministerial order outlines the legal criterion for growing, processing, importing, exporting, researching, and using cannabis for medical purposes. The Rwandan government anticipates the new high-value agriculture and agro-processing sector will generate substantial employment opportunities and export revenue. The Africa Regional Hemp and Cannabis Report in 2018 valued Africa’s cannabis market at $37.8 billion and estimates that the continent accounts for 11 percent of the world’s legal cannabis market. Recreational consumption of the drug remains illegal.
Nigeria passes oil-industry reform bill, and South Korea signs energy agreement with AfDB
On Thursday, July 1, the Nigerian Senate passed an oil-industry reform bill aimed at overhauling nearly every aspect of oil and gas production in the country. The bill has now passed both chambers but still awaits being signed into law by President Muhammadu Buhari.
The Petroleum Industry Bill (PIB) has been under debate for nearly two decades and, according to the Senate president’s spokesman, is a “landmark feat,” meant to provide new fiscal incentives, as well as simplify taxes and royalties for oil companies working in Nigeria. The PIB also aims to help local underdeveloped communities dealing with environmental damage from oil production by allotting communities hosting an oil facility 3 percent of the facility’s operating budget. A report by Financial Derivatives Company Limited argues that this bill can save Nigeria over $15 billion annually as it might again attract past potential investors that instead have approached other countries.
In other energy news, on Tuesday, the Korean Ministry of Economy and Finance and the Export-Import Bank of Korea signed a $600 million agreement with the African Development Bank to co-finance various energy projects throughout Africa. The agreement was arranged through the Korea-Africa Energy Investment Framework pact and will direct funding toward the generation, transmission, and distribution of renewable energy. Specific projects within the agreement focus on deploying off-grid, mini-grid, and solar home systems in an effort to accelerate rural electrification. The Korean Ministry of Economy and Finance stated that the agreement “is expected to help African countries transition to green energy while simultaneously improving access to energy.”
Meanwhile, as Ghana’s capital Accra battles extensive plastic pollution, a plastic manufacturing firm called Nelplast has begun building homes with bricks made out of plastic. Since their debut in 2019, plastic bricks serve as a more durable and affordable alternative to cement. The company aims to utilize discarded plastic—particularly plastic bags, which were blamed for causing a flood by clogging the city’s storm drains in 2015. According to Nelson Boateng, CEO of Nelplast, the new prototype house built from plastic can address Ghana’s housing deficit, allowing low-income earners to have affordable housing. Notably, the effort also provides employment opportunities for women: About 98 percent of Nelplast’s employees are women.
Protecting forests: Are early warning systems effective?
Forests play an indispensable role in bolstering biodiversity, supporting a stable climate, and providing sustainable livelihoods. Yet, the earth is rapidly losing its forests. In the last 30 years, the world has lost 180 million hectares of forest—greater than the total area of Libya. Forests, especially tropical rainforests, are often cleared by illegal operators to acquire open land for large-scale farming and mining operations, which poses a serious threat to global efforts to reduce deforestation.
Early detection is a critical element of deforestation control efforts. Artificial satellites have played a crucial role here. Using regularly updated optical satellite data, such as LANDSAT, which captures the reflection of sunlight from the ground surface, several early warning systems (EWS) for deforestation have been launched since the 2000s to provide timely information on forest changes for regulators and civil society groups. EWS are now widely used in tropical countries to monitor forest protection. The Global Land Analysis and Discovery (GLAD) laboratory in the Department of Geographical Sciences at the University of Maryland maintains one EWS with publicly available deforestation data. Unfortunately, there is a severe drawback to optical satellite data. As we discuss in our chapter in the forthcoming book “Breakthrough: The Promise of Frontier Technologies for Sustainable Development,” detecting deforestation by optical satellites is substantially harder during the rainy season when cloud coverage is high. This is a serious problem because most of the illegal destruction takes place during the rainy season in the Brazilian Amazon to avoid detection, according to the Brazilian regulatory agency for illegal deforestation.
One solution is to use “radar eyes” in place of “optical eyes.” Radar satellites capture the image of the earth’s surface by catching the reflection of radar waves that the satellite itself generates. These waves can penetrate thick clouds, allowing researchers to identify whether trees exist on land regardless of cloud coverage. Japan’s ALOS-2 radar satellite, for example, can detect 1.5 to 10 times more deforestation than optical satellites during the rainy season in the Amazon area (November to March). Building on these technological advances, a new EWS called JJ-FAST (JICA-JAXA Forest Early Warning System in the Tropics), utilizing the ALOS-2 radar data, was launched in 2016 to provide data on deforestation in tropical countries.
While radar-based EWS can capture deforestation more timely and accurately during the rainy season, has it reduced tropical deforestation? To answer this question, we look at data from the Brazilian Amazon, the only county to date which has used radar-based EWS for deforestation monitoring. We hope that the quantitative evidence provided here will motivate other countries to employ this method to help combat deforestation.
Figure 1 conceptualizes how radar satellite EWS can help prevent deforestation. Suppose there are two forest areas of similar size in the Amazon. In the last three months, say February to April, Area 1 and Area 2 had the same amount of deforestation, measured by area, according to optical data (GLAD). However, images provided by radar data (JJ-FAST) indicate that Area 1 had more extensive deforestation than Area 2. When forest agencies analyze the data, Area 1 is likely to attract more attention, which means that the illegal operators in Area 1 face a higher probability of arrest, incentivizing illegal operators to stop logging and escape. As a result, the deforestation of Area 1 should be smaller in May. Therefore, if radar-based EWS reduces deforestation, there should be a negative correlation between the amount of deforestation detected by radar (JJ-FAST) and deforestation in the subsequent months.
Figure 1. Early warning systems and legal enforcement
Source: Authors
Our data comes from three raster images covering the Brazilian Amazon in 2019—monthly radar data (JJ-FAST), monthly optical data (GLAD), and average monthly cloud cover.
Figure 2.1. GLAD Alerts raster image
Figure 2.2. JJ-FAST raster image
Note: Two images above show the raster data of deforestation by GLAD and JJ-FAST for the same part of the Amazon in February 2019 (rainy season). Cells with darker colors contain larger detected deforestations.Source: Authors
To investigate whether we can observe a statistically significant negative correlation between the deforestation detected by radar satellite and the deforestation in the following month(s), we estimate the following equation using OLS (ordinary least squares):
Where Yjt is the deforestation area in cell j in month t, reported by GLAD. JJjs is the deforestation detected by the JJ-FAST in the month of s in cell j. GLADjs is the deforestation recorded by GLAD. CLOUDjt is the cloud coverage. Our coefficient of interest is β, which is the correlation between JJ-FAST’s deforestation during three preceding months of t and Yjt. If β is negative and statistically significant, this means that the cells with higher deforestation recorded by JJ-FAST in the past three months have systematically lowered the deforestation record in the current month.
Table 1 reports the results. In sum, we observe that JJ-FAST monitoring significantly reduces deforestation in the Brazilian Amazon. The first column shows the results of the OLS estimation. As expected, the estimate on the effect of cloud coverage, δ, is negative and significant, indicating that higher cloud coverage is associated with a lower record of deforestation by GLAD. The estimate of β implies that a 1 km2 increase in deforestation, as detected by JJ-FAST, in the preceding three months reduces deforestation in the current month by 0.024 km2. To confirm the robustness of these results, we also report fixed effects results at the cell in the second column. With the fixed-effect estimation, the magnitude of the impact of JJ-FAST increases to 0.120.
Our quantitative investigation suggests that radar based EWS effectively reduces deforestation in the Brazilian Amazon. Although further analysis using data from other geographies is needed, our results highlight the important role new technologies can play in protecting global public goods.
Capturing Africa’s insurance potential for shared prosperity
Among the drivers of economic growth and development in emerging countries, insurance is often overlooked in favor of flashier sectors like technology or infrastructure. In fact, though, insurance is a behind-the-scenes factor driving growth at all levels of society, from family life to massive infrastructure projects to technology development. As discussed in my new report, expanding Africa’s lucrative insurance market may be key to creating inclusive prosperity in the region.
Notably, increased penetration rates for insurance throughout African markets are directly connected to Africa’s overall development: Indeed, as Das, Davies, and Podpiera (2003) show, insurance can have positive effects on growth through six mechanisms: improving financial stability for businesses and households; mobilizing savings for public and private investment; reducing pressure on the government to provide public goods such as pensions; encouraging trade and entrepreneurship; mitigating risks and enhanced diversification; and improving social living standards. Other scholars have identified insurance premium thresholds associated with positive economic growth in Africa. Studies of Rwanda’s Universal Health Coverage (UHC) found that increased enrollment was accompanied by higher utilization of health facilities as well a higher presence of skilled-birth attendants.
Expanding Africa’s lucrative insurance market may be key to creating inclusive prosperity in the region.
Despite these advantages, Africa’s aggregate insurance penetration rate in 2019 was only 2.78 percent, compared to the global average insurance penetration rate of 7.23 percent. With increased entry, participation, and expansion from traditional insurance companies and new microinsurance companies (as well as reinsurance companies), the potential for growth across the continent is immense. Recent disruptive events—including an increasing number of natural disasters, political upheavals, and economic disruptions from current and future pandemics—will continue to increase demand and foster rapid growth throughout this sector, particularly of digital insurance platforms.
What does Africa’s insurance market look like now?
The insurance sector is comprised of three subcategories: life insurance, nonlife insurance, and reinsurance. African countries have grown in each of these market segments at varying paces, following their own diverse growth patterns. For example, South Africa’s market is dominated by life insurance premiums, while other countries, like Kenya, Nigeria, and Tunisia, have a much higher volume of nonlife insurance premiums than life ones.
These patterns are suggestive of future trends and point to vast, untapped markets for companies seeking to deliver insurance products that are both affordable and well suited to the mass market. Indeed, just five countries house about 84 percent of the estimated $68.15 billion total value of the continent’s insurance market. South Africa is the leader with about 70 percent of the total market share, followed by Morocco, Kenya, Egypt, and Nigeria. In most other African markets, though, the penetration rate remains below 2 percent.
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More specifically, life insurance market penetration has been slow because of the demand for specialized risk-management capacities and heavy investment in security and information gathering, which has left the sector fragmented and dependent on foreign investment. Five countries (South Africa, Morocco, Namibia, Kenya, and Egypt) comprise 92 percent of the life insurance market on the continent. Although McKinsey expressed concern about South Africa’s life insurance market losing ground given the COVID-19 crisis, low market penetration combined with expected increased consumer and business spending by 2030 will continue to create plenty of opportunities in less developed markets across the continent.
Key to the sector’s growth and expansion is the region’s rapidly growing middle class, who can particularly find greater household stability with life insurance. As this segment of the population becomes increasingly aware of the value insurance provides to their households and businesses, they will be more inclined to spend more of their disposable incomes on insurance: In fact, according to an Ernst and Young 2016 survey of African insurance companies, increased earnings in households and businesses were the leading driver of increased insurance premiums.
The pandemic affords an opportunity in the form of consolidation: Unsustainable and inefficient players may be forced out of the market, facilitating innovation, healthy competition among thriving companies, and better coverage. Other experts suggest that commercial insurance for businesses will outpace the growth of individual insurance coverage over the next year, partly because of increasing reinsurance rates. The pandemic has also accelerated the digitalization of local insurance companies, opening the door for a more accessible and inclusive insurance industry in the long term, which could be fostered by a conducive policy environment.
Technology adoption and innovation are the keys to growth in the African insurance industry. Microinsurance could also change the name of the game, as it can reach Africa’s rising middle class through small-scale, low-cost, low-risk products. MicroEnsure, which partners with telecommunications firms, is an example of a successful microfinance venture that offers basic health and life insurance coverage through a free add-on to customers’ existing mobile phone services. Furthermore, micro-health insurance products like Jamii have also entered the market, bringing affordable coverage to low-income populations. Similarly, health financing has been radically changed by mobile and online platforms: M-Tiba facilitates digital management of both public and private health insurance policies through partnerships with governments and providers.
Policy recommendations for managing risks
Recognizing the role the insurance market can play in development, African governments are also working to improve the regulatory climate for insurance investors. Diversification, partnership, and cross-collaboration among insurers and banks is the foundation required to create economies of scale and increase revenues for both sectors. These partnerships, coupled with accelerated digitization to online and mobile platforms, have the potential to increase cost efficiencies and profit margins throughout Africa’s insurance sector—completely transforming the insurance industry.
Africa’s underdeveloped insurance market represents an opportunity both for players in the insurance sector and for African societies in general.
While opportunities abound, there are also risks and challenges for the industry to overcome, including COVID-19 and future pandemics; a decentralized cross-country market with regulatory barriers; gaps in regulatory enforcement; a shortage of technical human capital; low demand for insurance; and market volatility. Thankfully, investment mitigation strategies can help overcome these hurdles: For example, companies will need to invest in both human capital (training and developing qualified staff) and information technologies, adapt to trends in the market, and pursue innovative strategies. Partnerships between companies need to be focused on improving product differentiation, working with government to fill regulatory gaps and barriers, and increasing product awareness in the marketplace.
Africa’s underdeveloped insurance market represents an opportunity both for players in the insurance sector and for African societies in general. The first credible and convenient insurance providers will reap enormous rewards as this sector develops—becoming pioneers in the region. Moreover, African households and businesses can benefit from the reduced risks and increased stability that insurance products can provide.
Remittances: One more thing that economists failed at predicting during COVID-19
Remittances—the flow of capital from immigrants to their families and friends back home—are a crucial source of income for many countries, representing over 20 percent of the GDP in nations such as Tonga, Tajikistan, Haiti, Honduras, and El Salvador, among others. As of 2019, remittances reached an unprecedented level of about $550 billion, becoming the largest financial flow in the world, surpassing official development assistance (ODA).
Hence, when COVID-19 became a global pandemic in the second quarter of 2020, policymakers worried about the resilience of remittance flows. The World Bank projected that remittances would drop by nearly 20 percent, falling by over $100 billion in 2020 compared to 2019. The intuition was clear. The largest remittance-sending country in the world is the United States (sending over $70 billion as of 2019), whose economy was predicted to shrink significantly due to reduced mobility as people, businesses, and policies responded to COVID-19. Many immigrants working in service industries were especially hard hit so it was logical to project a sharp decline in remittance flows.
Turns out, however, the unexpected happened. We now know that the global flow of remittances during 2020 reached about $540 billion, about 2 percent short of the 2019 record high. Remittance inflows into Latin America and the Caribbean actually grew by about 6.5 percent in 2020. While they dropped in other regions (namely, East Asia and the Pacific, Europe and Central Asia, and sub-Saharan Africa), the overall dynamics defied expectations. It turns out that remittances were (and perhaps will continue to be) an extremely resilient flow.
The global flow of remittances during 2020 reached about $540 billion, about 2 percent short of the 2019 record high.
How can we make sense, ex post, of this yet another failed prediction by economists? Well, we certainly will need some more data to understand what exactly happened. But here I offer a few possible explanations, hoping more in-depth research will disentangle between them in the not-so-distant future.
First, there is probably a lot of heterogeneity among the type of immigrants sending remittances, particularly in cases where outflows grew. Immigrants are a very diverse group of people. And while remittance outflows might have decreased among immigrants more vulnerable to the economic downturn, they probably increased among immigrants that have a steadier source of income.
But, why would remittances increase (as opposed to remaining steady) at times when it is difficult for everyone? This is where human resilience and empathy enter the equation. In the U.S., for instance, the economic recovery is an unexpectedly quick one, whereas it was clear from the beginning that in the developing world COVID-19 would hit emerging markets especially hard. Thus, it is likely that immigrants living in the U.S. decided to make an extra effort to send some more funds to their friends and families to make sure they will have extra income in the uncertain times ahead. In other words, by foreseeing that the economic downturn would be relatively worse in their home countries, immigrants stepped up to make sure their families would be financially more comfortable. In fact, economic research on remittances finds evidence that these flows—as opposed to foreign investment, for instance—are countercyclical for the country of origin of the immigrant. In other words, when times are hard in the home country, immigrants would send more funds to make sure their families and friends back home have enough funds to thrive during the downturn.
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Second, evidence suggests that many immigrants were able to dip into their savings to continue to support their families abroad—even for immigrants that faced difficulties in terms of their employment. Several pieces of empirical work (reviewed here) show that many immigrants accumulate savings which they typically use to invest if and when they return.
Third, while it is clear that for many immigrants in the U.S. things became really difficult economically (health-wise, too, as minorities had a higher morbidity rate than the average American), immigrants are also thought to be very resilient people given their risk-taking behavior. Early on, immigrants in the U.S., alongside other minorities, were a driving force of the lockdown economy, as many of them were working in fundamental occupations. Many immigrants, knowing that returning to their home countries was not an option during the pandemic—and in many cases without any guarantees that they could count on government assistance—would respond to hardships by finding creative ways to remain employed, like switching industries or occupations or working extra hours. All in order to support their families, including those left behind. It is this resilience of immigrants that makes them such an asset to host countries in general.
Thus, even if it is too early to understand the insights that a more rigorous analysis using data would give us to explain how during a global recession remittances stayed pretty much untouched, just the fact that it happened suggests that humanity and resilience are at the core of this phenomenon.
Addressing youth unemployment in Ghana by supporting the agro-processing and tourism sectors
As elsewhere in Africa, the issue of jobless growth in Ghana has become a major concern, particularly due to rising unemployment among the youth. Services have emerged as the driver of growth in Ghana, contrary to the experiences in East Asia and other newly industrialized countries where manufacturing exports led growth and added capacity to absorb low- to medium-skilled workers. In fact, in Ghana, manufacturing has performed abysmally, with an average growth rate of 3.2 percent between 2008 to 2017.
Despite the generally strong performance of the Ghanaian economy over the last two decades, (albeit with a slowdown in recent times), there is a disconnect between GDP growth and employment—a trend that has persisted for many years, as the country has averaged an employment-to-growth elasticity of 0.5 over the last two decades. However, recent evidence points to the role of emerging high-productivity sectors, such as agro-processing, tourism, and horticulture, among others, that share characteristics with manufacturing (particularly in the employment of low- to medium-skilled workforce), in solving the youth unemployment challenge through the generation of decent jobs in Ghana.
Thus, to examine how Ghana might best leverage recent growth trends for job creation, we recently published a paper identifying which of these sectors might play this role in Ghana. This research is part of a larger, multicountry project on policies for enabling “industries without smokestacks” (IWOSS) to both grow and absorb low-skilled labor. (For more on this project, see “Exploring new sources of large-scale job creation: The potential role of Industries Without Smokestacks.”)
The state of the Ghanaian economy
The Ghanaian economy’s strong performance over the last two decades has not translated into job creation nor improvements in employment conditions, especially for the country’s growing youth population (Figure 1). Moreover, the country’s traditional reliance on primary commodities—notably gold, cocoa, and, more recently, oil—for exports has exposed it to international commodity price fluctuations, making the need for diversification and structural transformation more urgent.
Figure 1. GDP growth and employment in Ghana
Source: Authors’ illustration based on data from WDI.
With an average national unemployment rate of about 6 percent, unemployment among the youth (persons aged 15-35) is much higher at 12.1 percent with an additional 28 percent out of the labor force as discouraged workers. In the absence of unemployment benefits in the country, unemployment is simply not an option for most people, particularly the youth who often turn to the informal sector to earn an income. In fact, 1 in 3 young people in Ghana are self-employed in the nonagricultural sector as own-account workers in vulnerable jobs.
Employment projections show IWOSS sectors will dominate employment in the future
In our paper, we find that IWOSS sectors—particularly agro-processing and horticulture, transport and storage, hotels and restaurants (tourism), and construction—will contribute a little above 50 percent to total employment by 2035 (see Table 1).
Table 1. Employment in IWOSS and non-IWOSS (2017-2035)
Note: This table is a truncated version of Table 20 in the full paper.Source: Authors’ calculations based on National Income Accounts (published by the Ghana Statistical Service), GLSS V and GLSS VI, National Budget and Economic Policy Statements. See Appendix C for the Methodology used in the projections to 2035.
The job creation potential of agro-processing and tourism
In our research, we identify agro-processing and tourism as the IWOSS sectors best poised to address this challenge in Ghana because of their high employment generation potential and the demand for low to moderate skills—a feature that is consistent with the skills spectrum of the unemployment pool in the country. Indeed, the prospects for both agro-processing and tourism sectors in Ghana are high in terms of growth and other positive spillover effects with opportunities for job creation. The agro-processing industry is dominated by micro and small firms involved in value-addition along the agricultural value chain in horticultural products, vegetables, roots and tubers, and palm oil for both domestic and foreign markets. In the area of tourism, Ghana has several natural, cultural, and heritage resources (e.g., historical forts and castles), national parks, a beautiful coastline, and unique art and cultural traditions that can be a source of great attraction to the international community.
1 in 3 young people in Ghana are self-employed in the nonagricultural sector as own-account workers in vulnerable jobs.
Moreover, these IWOSS sectors have been strategically targeted under the government’s flagship industrial transformation program to address challenges of job creation, promote import substitution, increase revenues from exports, and boost rural income generation.
What skills are required to develop the IWOSS sectors?
Despite this promise, though, a number of obstacles stand in the way of these sectors’ growth and ability to absorb jobs. Prominent among these challenges is the persistent skills gap among the youth: Our projections generally suggest that low-skilled jobs (i.e., those requiring less than secondary education) will continue to dominate, and their importance may decline only marginally. Thus, we find that deliberate public effort is required to ensure the youth can be absorbed in the IWOSS sectors, which requires upskilling.
To better understand the nuances of these gaps, we conducted a survey with a sample of firms in agro-processing and tourism in which we inquired into requisite skills for potential employees. Results from the survey show that most employees possess basic and social skills, which conveniently meet the needs of employers. Conversely, system skills—developed capacities used to understand, monitor, and improve sociotechnical systems and also sorely needed by employers—were found to be lacking in both tourism and agro-processing firm employees. Figure 2 reveals the differences between the current skill level of workers and employers’ expectations.
Figure 2. Skills deficit in tourism and agro-processing firms
Source: Authors’ calculations based on survey data.
Importantly, given that surveyed firms largely reported that digital skills like data management and analytics, production management, mobile transactions, and social selling (in agro-processing), and online communication and mobile transactions (in tourism) will be vital to future employees, policymakers must strive to better incorporate such capacity building into curricula.
Unlocking growth potential of IWOSS and overcoming skills gaps
In order to unearth the employment generation capacity of IWOSS sectors, key constraints that inhibit the growth of these sectors have to be addressed. In the case of firms in tourism, such constraints include tax rates, policies, and administration; access to credit; and electricity supply. For firms in the agro-processing sector, these constraints include electricity supply, access to credit, unfair practices of informal competitors, and customs and trade regulations.
First, we recommend an overhaul of the overall policy environment toward the training of young people in the requisite skills to be productive in all sectors of the economy. More specifically, the government must prioritize and increase enrollment into technical and vocational education and training (TVET) for hands-on employable skills to support growth and provide a pathway for sustainable employment for young people.
Second, the establishment of industrial parks, which is based on the positive spillover effects and upstream and downstream linkages associated with clustering and agglomeration, is often acknowledged to be essential for industrial development. Support to the private sector by the Ghana Free Zones Authority and Ghana Investment Promotion Centre for the establishment of industrial park infrastructure and special economic zones is anchored on such potential benefits.
Third, we recommend the strategic development of infrastructure as a critical stimulus to the drive for diversification and industrialization in the country. Fourth, government should intensify efforts at providing long-term financing to support the value chains of these sectors and upgrade them to address the issue of IWOSS firms not being well advanced, with a relatively low degree of value-addition by all firms at various stages.
In the end, we find that the agro-processing and tourism sectors can be critical for addressing the country’s jobless growth challenges, if interventions like improved infrastructure, better access to long-term financing, and enhanced digitization, among others, can be implemented. These efforts must be complemented with various incentives to local firms as well as institutional arrangements to increase local demand. (See the paper for a full list of policy recommendations.) Finally, given the increasing importance of technologies in both agro-processing and tourism, the country must invest in complementary digitalization for actors to adapt and be competitive in the changing nature of work globally.
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Africa in the news: A COVID-19 third wave, solar energy in Togo, and security updates
Africa faces third wave, COVAX’s limitations, and vaccine technology transfer hub in South Africa
As the third wave of COVID-19 sweeps through the continent, African governments are struggling to contain the virus, with only 1.12 percent of the African population vaccinated. With the virus’s rapid surge, the World Health Organization (WHO) projects the virus will outpace cases from the second wave by early July. DNA sequencing by the WHO of recent COVID-19 cases in the DRC and Uganda revealed most cases were tied to the Delta variant of the virus. The Delta variant has also been identified in 12 other African countries. With at least 20 nations entrenched in a third wave of the pandemic, many countries are reporting severe oxygen shortages—an essential component of treating high-risk cases—which are causing preventable deaths. African CDC Director John Nkengasong expressed concern regarding the severity of the third wave, stating, “We are not winning in Africa this battle against the virus.”
The COVAX program, a global vaccine-sharing scheme devised by the WHO, is facing shortages in the midst of the heightened need by African countries. COVAX has “delivered 90 million doses to 131 countries”—40 million of which have been administered in Africa—but many of these countries have already or nearly exhausted their supplies. Facing uncertainty about vaccine supplies, many COVAX-participating countries are halting or slowing their vaccination efforts to ensure their citizens are not left partially vaccinated. The Biden administration, hoping to accelerate the pandemic’s end, has responded by announcing a donation of 500 million doses of the Pfizer vaccine to low-income countries.
In a bid to resolve longstanding vaccine shortages in Africa, the WHO announced Monday that it is negotiating the development of a technology transfer hub in South Africa. The hub will provide companies from low- and middle-income countries with the knowledge and licenses to manufacture mRNA COVID-19 vaccines, but relies on a consortium of companies with the mRNA technology, such as Pfizer and Moderna, to participate in the technology transfer.
Largest solar plant in West Africa opens in Togo; Mozambique receives grant for agro-processing enterprises
The largest solar plant in Western Africa opened on June 24 in Togo. The plant, which is located in the Centrale Region of Togo, will provide electricity to 158,333 households given its 50-megawatt capacity. Any electricity that is not consumed locally will be diverted to parts of Ghana and Nigeria. The plant is also the country’s first private utility solar park and was built by Dubai-based AMEA Power. The company chose Togo because of the country’s “renewable-friendly” regulations that allowed the project to be completed in just 18 months. AMEA Power was given further assurance when the project was supplied with $8 billion in pre-funding from Togo’s National Development Plan. The project also provided local training and job opportunities, as 80 percent of the construction workforce was Togolese.
In other news, the African Development Bank (AfDB) announced the approval of a $1 million grant on June 24 that will support small- and medium-sized agro-processing enterprises in Mozambique. The grant, which is financed by the Italian Technical Cooperation Fund, will assist approximately 300 businesses to boost their productivity and improve quality control. The project also seeks to enable transformative infrastructure growth and agriculture transformation, two strategic pillars outlined in the AfDB’s Mozambique’s Country Strategy Paper. Italian Ambassador Gianni Bardini commented that the grant improves bilateral relations and “can act as a catalyst to extend it to the private sector where it exists a huge and largely untapped potential.”
Ethiopia holds elections amid violence; combating terrorism in Mozambique and the Sahel region
Ethiopia held elections this past Monday despite ongoing violence in the Tigray region and all regions not participating in the vote. The day after the elections, dozens of people were killed in a government airstrike that hit a market in Tigray, one of the deadliest events in an ongoing war that first broke out in November 2021 and that has continued to create instability and now famine in the region. As of this writing, there are no preliminary results from the election. This is the first test of Abiy Ahmed’s power since the war started due to the election being delayed twice.
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In other news, leaders from 16 southern African nations have agreed to send troops to Mozambique on Wednesday with the goal to “combat terrorism and acts of violent extremism.” In addition, an EU military mission to Mozambique could be approved next month with the aim of training Mozambican troops to tackle the ongoing insurgency. The EU hopes to have the mission up and running within the next several months after countries in addition to Portugal (which has already supplied some troops) offer military aid.
Reports of attacks linked to Al-Qaeda and the Islamic State are on the rise throughout the Sahel region—despite the presence of U.N peacekeepers. In Burkina Faso, a police unit was ambushed late on Monday leaving 11 polices officers dead, and according to Reuters, about 1.2 million people in the nation have been displaced by violence. In Nigeria, since attacks escalated 12 years ago, nearly 350,000 people have died as a result of conflict with insurgents, according to the United Nations Development Program (UNDP). Projections by UNDP suggest that if the conflict continues to 2030, more than 1.1 million people may die.
Will Biden deliver for rural America? The potential of the proposed Rural Partnership Program
While the American Rescue Plan, the $1.9 trillion relief and stimulus, was designed to help communities claw back from the worst ravages of the pandemic, the Biden administration’s proposed American Jobs Plan (AJP) is the opening salvo in an envisioned economic transformation. Forming the basis of its negotiations with Congress on infrastructure, the AJP seeks to put communities on a path to long-term prosperity that distributes opportunity and economic mobility more fairly while mitigating climate change.
With an orientation on “place” (its companion, the American Families Plan, focuses primarily on people), the AJP’s proposals provide ample opportunity to target specific kinds of communities. The word “rural” gets 29 mentions, reflecting an earnestness to follow through on the president’s pledge to “build a new rural American economy for our families and the next generation.”
As we showed in a recent analysis, what currently passes for rural policy at the federal level is really a vast collection of programs that is fragmented, incoherent, and often unfriendly to rural realities. The wide range of investments in the AJP that could benefit rural America—from $100 billion in support for broadband and $10 billion for a new community revitalization fund to $5 billion to clean up brownfields and $10 billion to transition rural electric cooperatives to clean energy—raises questions of how the administration will avoid adding to the confusion and ensure that rural communities can package and maximize the use of these resources to meet their long-term needs.
The Rural Partnership Program: Redefining the Social Compact with Rural America
One answer lies with the proposed new Rural Partnership Program (RPP). The president’s budget codifies this proposal with a $5 billion FY2022 request, with outlays over five years, placing the RPP within the Rural Development division of the U.S. Department of Agriculture (USDA-RD).
This would represent both a significant modernization and financial boost to USDA-RD’s capabilities for facilitating equitable community and social development: For comparison, the FY2021 program level for USDA-RD’s Rural Business-Cooperative Service (the office focused on economic development) is a little over $1.5 billion based on $319 million of budget authority.
Envisioned to “help rural regions, including Tribal Nations, build on their unique assets and realize their vision for inclusive community and economic development,” the RPP seeks to match the diversity of rural places across the U.S. and invest in local leaders, organizations, and strategies, giving communities a fighting chance to build resilience and prosperity on their own terms. The flexibility, size, and time horizon of its resources would fill a gaping void in the federal architecture.
Yet the devil, as they say, is in the details. A successful RPP will hinge on its ability to stay true to some key principles:
1. Put capacity-building at the core
While politicians spar about different uses of the word “infrastructure,” it is clear to local leaders in rural places that one of the key challenges they face, even in the face of 400+ federal programs, is a severe lack of investment in the “software” that makes a community run—staff capacity and training; technical expertise; strong and healthy nonprofits, community associations, and public administration; and connected networks and trusted relationships among different constituencies who are communicating and collaborating.
If the RPP is to recognize local leadership and strategies as the starting point for successful, equitable rural prosperity, strengthening this type of community and civic infrastructure must be central to its mission. That will require putting scaffolding in place at the national, regional, and local levels.
The U.S. Department of Housing & Urban Development’s (HUD) Section 4 program on capacity building for community development offers one model that might be adapted to enable a set of national intermediaries focused on rural. Regional rural development hubs are well-positioned to help communities, towns, counties, or states collaborate across geographies and leverage regional differences to their comparative advantage. And local, grassroots efforts require flexible and direct investments to increase and upgrade their human and organizational capital.
2. Modernize the metrics of success
RPP is an opportunity to rethink how successful, equitable rural development is measured. The standard focus of federal economic development programs on jobs created and retained, infrastructure projects completed, or funds and financing invested does not provide a full picture of rural well-being nor creates healthy incentives. Changing this will require investing in high-quality rural data, especially in communities of color, and adopting a holistic, outcomes-based approach. Evaluation policies and metrics from international development programs (USAID, Millennium Challenge Corporation (MCC), USDA Foreign Agricultural Service) and asset-based development approaches (such as Wealth Works) will provide useful models. RPP could be a catalyst to modernize USDA-RD’s technical expertise and staff capacity.
3. Aim for long-term, lasting community impact
RPP should be positioned as an “on ramp” for communities to achieve long-term improvements in their economic resilience and well-being, offering flexible and substantial grants with long-term time horizons. The MCC five-year “compact” provides a model, as compacts are locally developed yet rigorously define a small set of clear, mutually agreed priorities that promise the highest return on investment. Some of the communities that could use the investment most—especially in persistently poor counties—may be the least equipped. This means that RPP will have to consider how to balance and serve communities across a spectrum of “readiness.” Given the administration’s priorities, it is likely that RPP would prioritize those communities and entities that are able to deliver on an integrated approach, ensuring that cross-cutting issues such as climate mitigation and racial equity are woven into projects to improve facilities and infrastructure, expand business activity or start-ups, improve delivery of services, or invest in human capital.
While it is a tiny portion of the overall investment portfolio suggested in the American Jobs Plan, the RPP displays important recognition that federal policy must shift to unlock the full potential of rural America. It signifies a change in approach, and represents a first step toward redefining the federal government’s role and strategic orientation in responding to the pressures and headwinds facing many rural communities. It will be important to ensure that this first step does not become the last one.
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Figure of the week: The rise of African tech startups
Technology startups and the venture capital ecosystem that transforms ideas and fledgling companies into disruptive businesses are growing globally—a phenomenon that the Boston Consulting Group (BCG) explores in a recent report on the expansion and maturation of African tech startups. According to the authors, Africa enjoys a fertile environment for tech entrepreneurs due to the continent’s youthful and growing population, rising internet penetration, and the application of emerging technologies that have the potential to improve access to healthcare, financial services, education, and energy. As such, the research paper focuses on the meteoric growth of tech startups throughout the continent, persistent challenges and structural barriers stymying these firms’ further growth, and policy recommendations to overcome these obstacles and develop Africa’s innovation hubs.
Securing venture capital funding, according to BCG, is an important milestone for startups and is an important step that enables them to scale and develop novel products. In the study, BCG found that the number of African tech startups accomplishing this significant step experienced exponential growth between 2015 and 2020. In fact, over that time period, growth in the volume of African tech startups receiving financial backing was nearly six times faster than the global average (Figure 1).
Figure 1. Number of tech startups securing funding in Africa
Source: “Overcoming Africa’s Tech Startup Obstacles,” Boston Consulting Group, 2021.
The trends in financing, though, do not reflect the overall performance of startups, as the continent’s record of scaling up and sustaining such businesses is not as promising. As shown in Figure 2, the vast majority of African tech startups do not survive beyond Series B venture capital funding—the second round of venture capital financing and the third stage of start-up financing (typically initiated by pre-venture seed and angel investor funding). As an indicator of their underperformance versus startups in industrialized countries, such as the United States, this trend suggests that African startups suffer from long-term instability, according to the authors. Indeed, compared to the United States, a greater proportion of African tech startups have yet to progress beyond early-stage seed funding—a trend that remained constant between 2014 and 2019. Figure 2 also reveals that, since 2014, some African tech startups have managed to progress beyond Series B VC funding—a positive trend that signals the maturation of African tech startups. However, as seen in Figure 3, only a few (though growing) African tech startups have successfully evolved into mature companies, as BCG’s analysis indicates venture capital investment in Africa suffers from relatively low average returns compared to other regions.
Figure 2. Percentage of startups receiving venture capital funding, by funding stage, in Africa and the United States
Source: “Overcoming Africa’s Tech Startup Obstacles,” Boston Consulting Group, 2021.
Figure 3. Average return for venture capital investors after five years – by region
Source: “Overcoming Africa’s Tech Startup Obstacles,” Boston Consulting Group, 2021.
According to the authors, a variety of factors make Africa an inhospitable startup environment, as the continent’s business environment is marred by pervasive structural barriers such as:
Low consumer purchasing power
Complex and inconsistent regulations
Inadequate data communications infrastructure
A fragmented marketplace of 54 countries
Scarce capital and digital talent
In addition to these structural barriers, startups face strong competition from large, established national firms and state monopolies. According to BCG, this concurrence of the continent’s structural barriers and entrenched competition risks “depriving [African countries and competing businesses] of crucial sources of innovative technologies, products, and business models.”
In order to unleash innovation that drives job creation, economic opportunities, and expansive access to finance, education, and health care throughout Africa, BCG advocates for corporate partnerships and government reform to generate strategic alliances with local startups. From the perspective of the private sector, strategic partnerships with local tech startups can introduce cutting-edge digital technologies and novel business models that benefit the firm, the startup enterprise, and consumers. From the perspective of the public sector, financial incentives for investors and large national companies to nurture and collaborate with fledgling startups have the potential to develop innovation hubs that draw foreign investment and talent to the country. In addition, BCG calls on African governments to improve the regulatory environment so that countries can better cultivate hospitable investment ecosystems for startups and venture capitalists.
For more on investment in Africa, read “Figures of the week: Venture capital trends in Africa,” “Figure of the week: Trends in mergers and acquisitions in Africa,” “Placing investment at the center of Africa’s development strategy,” and Africa Growth Initiative (AGI) Senior Fellow Landry Signé’s book, “Unlocking Africa’s Business Potential.”
Fiscal policies for a low-carbon economy
Global warming is real and climate disasters are believed to be occurring with higher frequency. The heightened risks and sizeable setbacks can move economies onto trajectories characterized by lower growth rates, greater financial and fiscal instability, and even poverty traps. This is especially true for more vulnerable developing countries. Our recent report, Fiscal Policies for a Low-Carbon Economy, suggests how a mix of carbon taxation and green bonds can address climate-related risks, improve economic recovery plans, and facilitate a transition to a low-carbon economy.
Research on climate economics finds that green bonds can accelerate a low-carbon transition, may have a positive impact on aggregate output and employment, help to advance renewable energy technology, address better the issue of fair transition, and be a stabilizing force on the financial market compared to conventional, in particular fossil fuel-based, assets. Our research confirms these findings.
Figure 1. Global renewable energy investment and green bond issuance, 2004-2019
Source: Bloomberg and Bloomberg New Energy Finance.
The growth of green bonds
New green bond issues reached over $250 billion globally in 2019, up from about $30 billion in 2014 and now on par with global renewable energy investment (Figure 1). The impressive increase in and diversification of green bonds since the first issuance by the World Bank in 2008 confirms the potential of this instrument to help finance the low-carbon transition. These assets are in high demand in many countries: Oversubscriptions, for example, were reported in 2020 for German as well as Egyptian green sovereign bonds and in 2019 for Chilean green bonds.
Green bonds help meet the financing requirements of the low-carbon transition but can also help accelerate the transition itself. In practice, green bonds can mobilize private capital and act as bridge financing at the project level to increase the availability of low-carbon technologies, filling the gap until carbon pricing initiatives can be sufficiently scaled up. One of the largest solar plants in the world, Noor-Ouarzazate Solar Power Station, leveraged more than $2.5 billion in financing, in part through green bonds. This project will substantially help Morocco reach its climate targets, increasing the share of renewable energy in its total energy mix to more than 40 percent with 2624 GWh of clean energy generation. By providing additional financing, green bonds can accelerate the mitigation process. This mobilization has been the most impressive in China, where the green bond market has grown to about $120 billion, quadrupling in size over four years.
Green bonds also have several characteristics that make them attractive to financial market investors and issuers. In particular, green bonds can act as a stabilizing force on the financial market compared to conventional (e.g., fossil fuel) assets. The report presents initial evidence that issuing green bonds may have favorable effects on risk control for asset and portfolio holdings, as well as broaden and diversify the investor base. For example, Figure 2 shows that a larger share of green bonds leads to lower variance in portfolio returns during recessions (or negative oil price shocks), confirming their benefit as a hedging instrument, in particular in recessions or periods of declining fossil fuel prices.
Figure 2. Portfolio variance of different shares of green and fossil fuel bonds
Source: Author calculations based on S&P data.
But while Figure 1 shows that green bond issuance has increased together with renewable energy investment in recent decades, green bonds still represent a tiny share of financial market assets.
Price carbon better, and add green finance
To accelerate the low carbon transition, carbon pricing has been widely proposed, with many researchers and policymakers supporting this approach. Carbon pricing supports a low carbon transition by making fossil fuel energy more expensive and subsidizing renewable energy production and use. In practice, carbon pricing has come in different forms such as an Emission Trading Scheme (ETS) and a carbon tax.
Financial market instruments have also been used to encourage the growth of renewable energy to achieve climate objectives. There has been an extensive flow of financial equity funds geared toward climate mitigation and adaptation policies, for example through alternative energy Exchange Traded Funds (ETFs). There is evidence that green assets have recently outperformed carbon-intensive assets (Figure 3). The report adds evidence confirming the benefits of issuing green bonds and investigates the combination of carbon taxes (e.g., a Pigouvian tax imposed on carbon-intensive goods and services) with green bonds (a market debt instrument to fund low-carbon investments).
Figure 3. Market performance of MSCI financial market indices
Source: MSCI.
There are three benefits of combining carbon tax and climate bonds to accelerate climate mitigation and adaptation efforts:
Carbon pricing relies on substitution effects, but substitutes may not be currently available and need to be produced through private or private-public partnership investments. Green bonds can work as bridge finance for low carbon substitutes.
Whereas carbon taxes can reduce negative externalities (and incentivize investments to reduce them), green bonds help to generate positive externality effects – both appear to be needed.
Green bonds can bring about more financial stability when held as an asset class in portfolios and reduces the problem of “stranded assets.”
But in developing countries, carbon pricing and green bond initiatives are still in the initial stages (see Figure 4).
Figure 4. Countries with carbon pricing initiatives or green bonds
Source: Bloomberg Terminal data and World Bank Carbon Pricing Dashboard.Note: Data for 2017-2020. Countries in green are those which have implemented both green bonds and carbon pricing at the federal or local level; countries in light blue have implemented green bonds only; countries in dark blue have implemented carbon pricing only.
The demand for green bonds is quickly rising in middle-income countries, but there are significant roadblocks for green investment even in advanced countries such as short-termism, small markets, liquidity, and governance problems. The report finds, however, that sustainable finance in the form of green bonds is on a steep learning curve and is potentially complementary to carbon pricing—in particular to carbon taxation.
The market is still learning
The green bond portion of the asset market is still small, market participants are heterogeneous, and people are still learning. Though green bond performance depends on many factors—such as the issuer, rating, currency, bond maturity, and sector—our report provides some encouraging messages:
Green bonds appear to be less volatile than conventional bonds and assets, in particular those based on fossil-fired energy). Green bonds also appear to sell at a (negative) premium (see Kapraun and Scheins, 2019), while their Sharpe Ratio (the return-risk trade-off) is similar or even higher than that of conventional or fossil fuel-based bonds.
The literature and our study suggest a strong co-movement between oil price fluctuations and carbon-intensive security returns. Green bonds exhibit lower volatility and little co-movement with fossil fuel-based asset prices and returns, and can therefore be a good hedge for investors.
Lower volatility and yields may provide private as well institutional investors with superior asset diversification opportunities and steady returns for the investors, as well as lower capital costs for issuers. Whereas with fossil fuel-backed assets, co-movement with oil price fluctuations makes carbon-dependent countries’ income vulnerable and increases financial volatility in certain sectors and countries.
Given the potential benefits of green fiscal instruments, governments should consider including them in their economic recovery plans. The combination of carbon taxes with green bonds allows long-run climate externalities to be addressed, and possibly even incentivizes the emergence of positive externalities. Though, during business cycle downturns a carbon tax levy might be less advisable while green bonds (and green assets in general) appear to be a useful portfolio and macroeconomic stabilizer.