CEA Nageswaran says energy transition may endanger global macro stability

"The production of these rare earths and critical minerals is concentrated in a few countries but the processing of them happens exclusively in one country," Nageswaran said, alluding to China.

"You might say Indonesia exports nickel, but most of those Indonesian nickel mines are owned by Chinese companies. The same thing in Congo, Argentina, and Chile, etc. So are we really de-risking? Are we moving from an integrated to a more fragmented world or are we becoming embroiled or entrenched in a more concentrated world when it comes to trade or even renewable energy?" he said.

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"In fact, I would even argue that the shift from fossil fuels to renewable energy takes the world away from de-risking towards re-risking because you are going to depend on one single source for many of these critical minerals and rare earths. So therefore, if we interpret macroeconomic stability in a broader sense, we probably are creating the conditions for more instability rather than less."

Over the years, the production of rare-earth metals outside of China has fallen sharply. According to the US Geological Survey, production of rare-earth metals in China increased from 38 percent of the world output in 1993 to 97 percent by 2011.

More recently, in December, China banned the export of technology to extract and separate these materials, essentially cementing its virtual monopoly when it comes to refining these materials even as other nations, including India, try to step-up efforts on their domestic processing abilities.

Fragmented is better?

According to Nageswaran, a "slightly more fragmented world" would be more "desirable" from a financial stability perspective.

"In truth, even now, when it comes to financial markets, there is one country, one economy, one market, one monetary policy, and one currency, which is the United States and the US dollar, Federal Reserve," the chief economic adviser said, noting that the American consumer remains the "first and last resort" for many countries and had helped prevent a global recession post-Covid.

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"So in that sense, the financial world is not just integrated, it just depends on one country and its monetary policy trajectory. And therefore its currency movement impacting other countries. Therefore, I would love to see more fragmentation," he added.

It is for this reason that monetary policy cycles across the world are synchronised, with the US Federal Reserve's actions being followed by other central banks, Nageswaran said .

As such, while central banks of advanced countries are able to set policies for their domestic economic agenda, emerging market and developing economies are not, resulting in lack of policy autonomy. In this context, Nageswaran asked whether capital controls of some sort should be considered to maintain macroeconomic and financial stability.

"Should it (capital controls) need to come back into policy vocabulary and discourse and discussions, let alone policy formulation? What are the various tools to enhance your policy autonomy, and capital controls is a legitimate such instrument of policy autonomy," he said.