Green Growth and the Balance-of-payments Constraint

Abstract

The notion of green growth emphasizes environmental and climate policies that make economic activities more sustainable while contributing to higher growth. In developing countries, the ability of such policies to help solve the most pressing economic challenges is essential for green growth to be a viable concept. Notably, current account deficits, foreign exchange shortage and external debt accumulation are serious obstacles to economic development. The analysis in this article therefore approaches green growth from a new perspective. With a focus on energy, the article estimates the impact of the transition from fossil fuels to renewable energy on the balance-of-payments constrained growth of energy-importing developing and emerging economies. It assumes that their current economic structure otherwise remains the same. Since renewable energy production is more efficient than fossil fuel combustion and reduces import dependence, the energy transition increases the annual balance-of-payments constrained growth rate of the selected countries by up to 2.5 percentage points on average in a scenario from the present until 2050. This means that policies in favour of renewable energy allow those countries to grow faster without accumulating foreign debt or even triggering currency crises. Consequently, staying with the current fossil fuel-based energy system implies missing a significant potential for growth and development.