What does 5% of global GDP mean?

2009-07-01

in Economics, Politics, The environment

Over at FiveThirtyEight.com (the pollster site made famous by the Obama election), there is an interesting response to Jim Manzi’s opposition to climate change action. Manzi argues that climate change will ‘only’ cost 5% of global GDP, 100 years from now, so we shouldn’t worry too much about this. The obvious responses to this are that the consequences of business-as-usual emissions will be much more severe than that, profoundly threatening our current way of life. The FiveThirtyEight post takes a different approach, enumerating what the loss of 5% of global GDP would mean, if concentrated in relatively poor states.

Eliminating 4.99997% of global GDP is akin to eliminating 81 countries, with a total population of 2,865,623,000 – 43% of the world’s total:

We’ve gotten rid of almost all of Sub-Saharan Africa, destroyed the entire Indian subcontinent, created a big lake in South America, turned El Salvador into an island, and solved a lot of our problems in the Middle East. I suspect we could also have nuked North Korea, by the way, except that the IMF didn’t publish information for them.

There are, of course, flaws with this way of looking at things. That being said, it is a nice illustration of how abstract economic figures can become disconnected from the real world consequences they represent. As the post’s illustration demonstrates, even climate change that only cost 5% of global GDP could still be an extremely serious problem.

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{ 4 comments… read them below or add one }

Tristan July 2, 2009 at 9:17 am

It depends how you look at it. I would not be surprised if something like 5% of global GDP is consumed by less than 1% of the population. Reducing inequality could make this a non-problem.

To put inequality in perspective, some fund managers made 350 million dollars in salary last year. How worse off would they and their clients be if they only made 1 million? I’d venture to say not very.

The problem is basically the neutrality of a market economy with respect to orders of magnitude. Market incentives work basically the same in situations where wages are driven up to 350 million, or driven down to a few thousand a year. In both cases its just benefit and scarcity that determine what the market is willing to pay, right? But, this distribution totally fails at anything like maximizing benefit over all – the next dollar to someone making 350 million is likely worth a hundred or more times less than the next dollar to someone who can’t feed their family.

Talking about inequality is relevant here lest we assume that the 5% must somehow be paid by the poorest 81 countries, or by the poorest 5% of the population. Which, isn’t a bad assumption considering there are certainly forces which would like to see it happen that way.

. July 2, 2009 at 9:55 am

Inequality a problem in itself?
* October 19, 2006

Executive pay
* January 25, 2007

The Landlord’s Game
* February 9, 2007

Milan July 2, 2009 at 9:57 am

When we are considering the 5% of GDP most likely to be wiped out by climate change, it seems probable that it will be the income of poor people. As such, it would likely increase rather than decrease inequality and (which is a lot more important) cause considerable harm to overall welfare. The people who will be worst off will probably be those who see their agriculture turn marginal, and who aren’t welcome in any more productive areas.

Byron Smith November 15, 2010 at 7:58 am

The costing of climate change also doesn’t (as far as I’m aware) factor in any of the second order geopolitical implications. What would the cost of a war over water between nuclear Pakistan and India be? Or the cost of China reasserting control over parts of Siberia? Or of millions more refugees from Mexico crossing the US border? How many of these are included in the 5% figure?

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