Green Spending in Times of Economic Hardship

• In Event: Climate Crises, Violence and Governance

Abstract

In the aftermath of the 2008 Global Financial Crisis (GFC) and the 2020 COVID-19 pandemic, a burgeoning body of academic literature has begun to explore the role of economic crises as potential catalysts for transformative climate policy. This discourse centers around the concept of green growth, and the idea that governments can leverage periods of economic downturn to shift their economies away from reliance on fossil fuels through strategic stimulus spending.

Amid worsening climate change impacts, some governments have allocated significant portions of their economic recovery packages toward emissions-reducing causes. A striking example is South Korea, which allocated over 60% of its GFC stimulus funds to carbon emissions-reducing initiatives. South Korea’s COVID-19 stimulus also included a high share of emissions-reducing spending items. This paper investigates the economic and political drivers behind such substantial green stimulus spending.

Our analysis compares the economic recovery spending of South Korea and Mexico during both the 2008 GFC and the 2020 COVID-19 crisis. Leveraging a novel dataset on green recovery spending in 40 of the world’s largest economies, along with expert interviews and process tracing, we examine the green fiscal policies of South Korea and Mexico in detail. To explain variance in spending outcomes, our analysis centers on explanatory variables related to economic and political structures, such as the presence of entrenched fossil-fuel interests and the degree of state capacity and autonomy.

Theoretically, we argue that countries with minimal fossil-fuel interests and high state capacity are likelier to prioritize green spending, while those with significant fossil-fuel interests and limited state capacity tend to engage in fossil spending. Countries that exhibit a mix of these characteristics present a less predictable pattern in their green spending, warranting closer examination.

South Korea, with its high state capacity yet substantial fossil-fuel interests, represents a puzzling case, particularly considering its record green spending in 2008. Mexico, characterized by lower state capacity and strong fossil-fuel interests, offers a useful contrasting case. By comparing these two countries, this paper aims to deepen our understanding of the political and economic determinants influencing green stimulus spending.

Despite similarities in their integration within the global economy and relative economic sizes, South Korea and Mexico diverge notably in terms of state capacity. South Korea's government-business relations are state-led, reflecting its developmental state legacy. In contrast, Mexico experiences significant industry influence on policy, and is more liable to regulatory capture.
We argue that this difference in political structure largely accounts for the variance in green stimulus spending between South Korea and Mexico. While South Korea has consistently devoted a high proportion of economic stimulus packages to green causes, Mexico’s efforts have been comparatively modest. Although Mexico increased its green stimulus share in 2020 compared to 2008, in both cases it also provided significant fiscal subsidies to its state-owned petroleum company, PEMEX. Contrary to the prevalent view that economic interests are the primary barrier to climate legislation, our findings underscore the critical role of state capacity in countering fossil-fuel lobby pressures. The case of South Korea shows that even economies deeply entrenched in fossil fuels can allocate significant portions of their economic stimulus towards green growth, provided they possess the requisite state capacity to resist industry influence.

This research contributes to debates about the trade-offs between economic growth and climate policy, shedding light on the circumstances under which economic crises can be strategically used to further environmental objectives. Our work also contributes to emerging literatures on strategic state capacity and green industrial policy, by showing when and how policymakers are able to advance climate policy goals against external resistance. The divergent cases of South Korea and Mexico offer insight into the complex interplay between state capacity, vested interests, and climate policy outcomes in times of economic crisis.

Authors

• Jon Hovi, University of Oslo

• RyuGyung Park, UC Davis

• Vegard Tørstad, University of Oslo