Monday, November 14, 2016

International cooperation, ethics and climate change


In pursuing meaningful sustainable development, and investing in conservation and redressing the environmental damage caused by decades of neglect, we need to better explore and understand the role of international cooperation and why human values and ethics are central to this debate.

International cooperation. A key ingredient for generating a sustainable development path will have to be a significant strengthening of the current mechanisms of international cooperation, which have turned out to be insufficient to meet the global challenges that we face. The process of globalization is unfolding in the absence of equivalent international institutions to support it and harness its potential for good.

There is no global environmental authority, for instance. Policy on the climate change front is being done via ad-hoc approaches involving elements of international cooperation, voluntary compliance, and large doses of hope. In the absence of a body having jurisdiction over the global environment with corresponding legal enforcement authority, the international community has, de facto, abdicated management of the world’s environment to chance and the actions of well-meaning states. Even the 2015 Paris Agreement, bringing together 175 countries pledging reductions in emissions, if implemented in full, will not prevent a warming in excess of 2°C, the threshold recognized by climate scientists as necessary to avoid “potentially devastating consequences” (Stern 2016).

Whether we focus our attention on climate change or other global challenges, the fact is that major planetary problems are being neglected because we do not have the mechanisms and institutions strong enough to deal with them.

Effective, credible mechanisms of international cooperation, that are perceived to be legitimate, and capable of acting on behalf of the interests of humanity—rather than those of a particular set of countries—are essential if the world is to meet the challenge of striking the correct balance between concern for the environment and the policies that must underpin such concern, on the one hand, and the need to ensure that the global economy develops in a way that provides opportunities for all, particularly the poor and the disadvantaged, on the other.

It is an open question whether the existing system of sovereign nation states is capable of achieving this level of cooperation, or if such a system will require a more fundamental restructuring involving greater levels of national accountability to ensure outcomes that will better serve present and future generations.

Ethics and human values. Finally, no strategy aimed at fostering the emergence of a sustainable development path would be complete without a fundamental rethinking of the human values that have driven much of the development process during the past century. A considerable body of academic research in recent years has examined the issue of the correlation between growing income and human happiness. The question itself might have appeared slightly quaint a couple of decades ago, when economists in academia and policymakers in government and international financial organizations more or less accepted as an article of faith that higher growth and income would always be desirable and would increase human welfare, and along with it, happiness.

Several insights, however, have contributed to a gradual change of perspective. First, the realization that, however beneficial might have been the several decades of robust post-war economic growth in improving living standards, the global economy was beginning to run up against environmental constraints which could actually be measured.

Second, psychologists, newly empowered with analytical tools developed in other sciences, were able to show that human happiness was correlated with income only up to a certain level. Money seemed to be crucially important for happiness when basic material needs had not been met. But once these had been satisfied, the sources of happiness shifted to other concerns, reflecting deeper spiritual aspirations, including friendship, relationships, a sense of purpose in life, security, among others.

The above observations suggest the need to broaden the definition of what constitutes “well-being” and investigate more closely the relationship between increasing market activity and the welfare of the people participating in the economic system. One starting point would be to establish a clearer mental demarcation between the concepts of “growth” and “development.”

The first is essentially a quantitative concept which captures the expansion in the scale of the economic system, while the latter refers to qualitative changes in this system and in its relationships with the environment and other aspects of life in the community. Properly understood, economics should concern itself less with how to add to the physical dimension of the economic system and more with the long-term welfare of the community whose interests the “system” is ultimately intended to serve.

Monday, August 1, 2016

Ensuring a sustainable development path

I’ve suggested recently that although high economic growth in recent decades has greatly improved average life expectancy, infant mortality, and other leading indicators policymakers and development practitioners were still worried about the sustainability of these trends and whether people in developing countries would eventually enjoy the high standards of living of high-income countries. This, against the background of a planet under increasing stress, particularly as a result of climate change. In this blog, I explore some of the actions needed to sustain our global economy.

Climate change risks. A key finding of the latest scientific work on climate change is that the annual cost of introducing control measures for greenhouse gases is far smaller than the potential cost of uncontrolled climate change. Duly aware of the margins of uncertainty associated with such calculations, the UN’s Intergovernmental Panel on Climate Change (IPCC) has, in the past, provided estimates suggesting that stabilizing greenhouse gases by 2030 would slow global economic growth by slightly more than 0.1 percentage points per year.

The risks of inaction, however, are huge. It has proved difficult for computer models to deliver robust cost estimates for scenarios that lie outside the range of recent human experience. A rise in temperatures of 3°C with respect to pre-industrial levels, for instance, has not been seen on the planet in the last 1 million years, though this is the envisaged increase consistent with the pledges made by 175 countries in Paris in 2016.

So, one central element of the solution will be implementing a transition to a low carbon economy that will involve the use of cleaner fuels, including solar-photovoltaic and onshore-wind technologies, which have become increasingly competitive and which will have a number of other collateral benefits, such as preventing 2 million premature deaths in India and China every year linked to air pollution.

We will also need to invest in energy infrastructure, to replace aging capacity, and meet growing global energy demand, but also to boost efficiency. More generally, it is estimated that over the next 20 years global investment in infrastructure will be in the region of $5-6 trillion per year, three quarters of which will be new infrastructure in the developing world. Since well over half of total greenhouse emissions stem from investment in and use of various infrastructures, there is an overwhelming need, going forward, for all new such investments to be clean and green, as called for by Stern (2016) and others.

Conservation. We will also have to invest in conservation and in redressing some of the damage done to the environment through decades of neglect.  According to the Earth Policy Institute something like US$100 billion should be spent annually to protect topsoil in croplands, to stabilize water tables, to restore fisheries, and protect biological diversity. This sum of money is small in relation to the size of the global economy and it is certainly very small in relation to the trillions made available by governments in some of the largest countries to deal with the short-term effects of the last global financial crisis.

Energy subsidies. Another key dimension of this debate concerns the need for better utilization of existing resources, to promote opportunity and shared prosperity, particularly in the developing world, rather than to create distortions and worsen income distribution. An eloquent example of this is provided by a recent IMF study (2015), which factors in the cost of negative externalities from energy consumption (e.g.,  global warming, pollution) according to which energy subsidies (for petroleum, electricity, natural gas and coal) amount to some $5.3 trillion per year.  This astronomical sum is equivalent to about 6.5 percent of global GDP or somewhere between 5-35% of total government revenues, depending on the region.

The benefits of gasoline subsidies are the most regressively distributed in the world, with over 60 percent of the total accruing to the richest 20 percent of households.  If such subsidies were removed, the authors of the IMF study estimate that it could lead to a 21 percent reduction in CO2 emissions.  It could also generate positive spillover effects by reducing global energy demand and thus have a tangible impact on mitigating the effects of climate change.  Indeed, it would be difficult to come up with a public policy that is more socially and environmentally destructive than subsidizing energy consumption.

Technology. Obviously, technology can also play a key role. More efficient use of energy has reduced the size of energy consumption in global GDP by more than 30 percent in the past 25 years. Much more can be done in this area, particularly by resort to new technologies of energy conservation and renewable energy, including—as noted earlier—greater use of solar power, wind, and alternative fuels.

Simultaneously, a number of studies are underway in leading research centers to identify a range of human interventions which could either remove CO2 from the atmosphere or reduce the amount of sunlight that comes to the earth, under the general heading of “geo-engineering.” Some scientists think that, over the longer term, they could play a necessary, complementary role to other measures aimed at precipitating the necessary changes in human behavior which have been too slow in coming. For now, however, the consensus seems to be that putting too much emphasis on “technological fixes” could result in complacency, since politicians will always be receptive to solutions which do not, in the end, involve sacrifices on the part of voters, such as, for instance, higher carbon taxes or—God forbid—changes in patterns of consumption or lifestyles.

While this technological potential undoubtedly exists in the long term, its development will require global institutional arrangements, efficiencies of governance, financial resources and a culture of change in political and social systems, all of which are lacking at the present time. The immediate issue for sustainability is less one of ultimate limits and technological possibilities, but rather our present slow pace of change when faced with growing social and environmental challenges.

We have technological solutions for most our environmental problems, but are not applying them at anywhere near the speed necessary to avoid future crises. In the next (and last) blog on the sustainability of our development path I will address two important issues: the role of international cooperation and why human values and ethics are central to this debate.

Monday, June 27, 2016

Are we travelling on a sustainable development path?

Global development as a universal objective to improve people’s social and economic wellbeing is a relatively recent concept.

It was first embodied in the United Nations Charter, signed in San Francisco 71 years ago this week, which stated: “the United Nations shall promote higher standards of living, full employment, and conditions of economic and social progress and development.” In time, at least among practicing economists in academia and policymakers in government, “development” came to be seen as improved economic opportunity through the accumulation of capital and rising productivity.

The implicit assumption here was that economic growth would lead to rising living standards, increases in life expectancy, reduced mortality, and a reduction in the incidence of poverty.

And so, between 1950 and 2014, as world GDP per capita expanded at an annual average rate of 2.1 percent, this trend was associated with a remarkable evolution in three key indicators of human welfare. In the half-century between 1960 and 2014, infant mortality fell from 121 to 34 per 1000 live births; average life expectancy at birth rose from 52 to 71 years, a 36 percent increase which is nothing short of spectacular; and adult illiteracy fell from 53 to 16 percent. Equally impressive was the sharp drop in the incidence of poverty: data show that between 1990 and 2015 the number of people living in extreme poverty fell from about 2 billion to slightly over 700 million.

In parallel to the encouraging trends in development, a growing number of economists and scientists began to ask if the processes and policies underlying our development path were sustainable. Among environmentalists, in particular, the focus has been on climate change, biodiversity loss and pollution. That the earth has self-correcting mechanisms, that the physical processes underpinning changes in the environment have huge inertia, has not hidden the growing consensus in the scientific community that current trends are not sustainable.

Let me suggest several examples: global carbon dioxide emissions from fossil fuels have sharply accelerated over the last several decades, reflecting a quickening in the pace of growth of the global economy, a sharp rise in energy consumption in China and the weakening of natural carbon sinks, such as forests and seas. Not surprisingly, large volumes of the Arctic ice have melted along with parts of the Greenland glaciers contributing to a rise in sea levels. Satellite observations of the Arctic ice cap show a significant reduction in the ice cover, with a record reduction in 2012 to less than half the area typically occupied four decades ago. In 1996, the volume of ice melted in Greenland was 92 cubic kilometres. By 2005, this figure had risen to 221 cubic kilometres and the latest figures show 373 cubic kilometres per year.

Even when world economic growth came to a halt in 2009 because of the global financial crisis, these perturbing trends were not reversed, as world economic growth quickly resumed. But even beyond purely environmental concerns, there are other forces at work which are already having a major impact on our system’s institutional underpinnings, and which have been at the center of the progress achieved during the past half century. Key among these are population growth and the corresponding pressures on resources. According to the International Energy Agency, energy demand will grow by a third by 2035, reflecting the addition of some 2 billion people to the world's population and the corresponding needs for housing, transportation, heating, illumination, food production, waste disposal, and the push for sustained increases in the standards of living. Because the mothers that will bear these 2 billion children are already alive today, this expected increase in the world’s population—barring some unexpected calamity—will materialize and will be largely concentrated in urban environments in developing countries.

Beyond the inevitable pressures on resources, rapid population growth in the next couple of decades will lead to a broad range of challenges for governments, businesses, and civil society. For instance, in the Middle East and North Africa, high fertility rates and the highest rates of population growth in the world will put enormous strains on labor markets. These countries already suffer from the highest rates of unemployment in the world.  Simply to prevent these rates from rising further it will be necessary to create well over 100 million new jobs within the next decade and a half, an extremely tall order. The failure to do so has already led to political and social instability in the region. In sharp contrast, the populations of countries such as Italy, Russia, Japan, and others in the industrial world will continue to shrink, a demographic trend which, in turn, will put huge pressures on public finances.

Powerful demonstration effects are also at work: the spread of instant communication and the Internet have led billions of people in China, India, Latin America, and other parts of the developing world to aspire to lifestyles and patterns of consumption similar to those prevailing in the industrial world. Furthermore, these populations are often unwilling to postpone such aspirations and increasingly expect their governments to deliver rising levels of prosperity, implicitly pushing for a more equitable distribution of the world’s resources.

As if these demand pressures were not enough, there are emerging supply constraints as well. World cereal production per person has been on a downward trend since the late 1980s. It is estimated that by 2025 the number of people living in regions with absolute water scarcity will have risen to some 1.8 billion. Climate change, soil erosion, and overfishing are expected to dampen food production and will put upward pressures on food prices.

As a result, the fundamental development question which we now face is how to reconcile the legitimate aspirations of citizens in developing countries to recreate for themselves the high living standards that they see in the developed world, with all the challenges of an economic system and a global environment under severe stress as a result of the pressures put on it by the meteoric economic growth of the post-war years?

In my next blog, I will explore some practical answers to this fundamental question of whether we can sustain our current development pathway.

Sunday, June 19, 2016

Why would Brexit be a blunder of historical proportions?

Since the vast majority of the problems which humanity faces today are global in nature, the world needs more, not less international cooperation. Major planetary issues are being neglected—we are failing massively and risking being overwhelmed by a broad range of problems the solutions to which require effective “problem solving” mechanisms and institutions. The list of inherently global issues that are insoluble outside a framework of global collective action involving most nations of the world is long and includes: climate change, biodiversity loss, the depletion of tropical forests and fisheries, nuclear proliferation, widening income disparities, a flawed global financial architecture, illegal drugs, the rise of terrorism and the still high levels of poverty and deprivation afflicting much of the developing world, to name a few.

Against this background, those who argue that the United Kingdom would be better off outside the EU do not seem to understand the extent to which economic integration has been a key driver of prosperity during the past half a century and the extent to which membership in a body such as the EU is a way to magnify a country’s voice and influence, as we rise to the challenge of helping resolve the above global problems.

EU membership has been highly beneficial to the United Kingdom. It has contributed to a huge increase in trade and to gains in productivity and economic output. It has given its politicians the opportunity to influence and shape EU policies in areas that have had a major impact in the world, such as the enlargement of the EU to Central and Eastern Europe that took place after the collapse of the Soviet Union and that did so much to transform these countries’ institutions and policies. Because the EU is the world’s largest trading bloc, it has huge clout when it comes to opening other countries’ markets and, as a member, the United Kingdom has greatly benefited from these efforts. Furthermore, contrary to the assertions of supporters of Brexit, the United Kingdom has not been prevented by EU membership from carving out approaches to particular issues that better suited its own preferences and interests. So, it has a very flexible labor market, which has contributed to lower levels of unemployment than in the rest of the EU, it has a friendly business environment that tends to be less overregulated than the rest of the EU (Denmark and the UK have the highest rankings in the EU in the World Bank’s Doing Business report), it has maintained its own currency, and it has developed active, profitable trade relations with countries outside of the EU.

Over the past several decades there have been massive shifts in the structure of the global economy. High economic growth rates in countries like China, India and other parts of the developing world have drastically reduced the relative size of countries like the United Kingdom. Because political power and influence are highly correlated with economic size, the United Kingdom, as an active member of the EU, has managed to maintain a degree of influence in global affairs that has gone well beyond its actual (and relatively declining) economic size.

It is highly irresponsible to argue that outside the EU the United Kingdom will be anything other than a minor power in a world of emerging economic and political powerhouses. This process will be accelerated if, as is widely expected, Scotland opts to stay in the EU by claiming independence.  The EU will remain, for the foreseeable future, the United Kingdom’s most important trade partner. But because trade with the EU is far more important to the United Kingdom than trade with the United Kingdom is for the EU, it will be the case that the EU will largely dictate the terms of access to its enlarged market. That access, by virtue of Brexit, will, of course, be less preferential than for full EU members. Indeed, negotiating the terms of separation and the features of the UK’s new relationship with the EU is likely to create a long period of uncertainty for the economy, with exporters in the country asking themselves: how long?, on what terms? and not having ready answers to such vital questions. It is also naïve to think that, outside the EU, London will retain its unique position as one of the world’s two largest financial centers (together with New York). To the extent that finance has been an engine of economic growth over the past several decades, leaving the EU will have a permanently contractionary effect on the UK economy.

Indeed, all that the United Kingdom can hope for is an eventual relation with the EU that is similar to that which Norway and Switzerland have and which involve, ironically, largely accepting the bulk of EU laws, without having a say in their formulation, including, of course, the free movement of people.

One final word on migration. The sooner we find creative ways to live in a multinational, multiethnic world, the better. It is not only large income disparities that create incentives for people to move. There are other forces at work that are likely to remain with us for some time to come and that could turn migration into one of the main development challenges of our time.

One of them is the shrinking of our planet fueled by rapid changes in technology and globalization. Our societies are far more mobile today than used to be the case. The real cost of travel has fallen precipitously in recent decades and people feel far less rooted to their place of birth than in the past. More and more people, particularly the young feel like global citizens, very much at ease with the concept that

“The earth is but one country and mankind its citizens.”

More importantly, we live in a world in which we face a broad range of global problems for which we do not seem to have the adequate institutions to find workable solutions. And the sense of insecurity that these problems feed can often act as a powerful additional incentive for people to want to move, to seek opportunities and a better life elsewhere, since many of these global problems have had and will continue to have a disproportionately larger impact on the developing world. Furthermore, in coming decades, with rising sea levels linked to global warming, we are likely to have to deal with the problem of “environmental refugees”; potentially dozens of millions of people who will have to be resettled in other parts of the world.

So, to those who argue that by leaving the EU Great Britain will be able to turn itself into Little England, isolated from the rest of the world: dream on. It is not going to happen. Migration has been, over the past several hundred years, one of the most powerful engines of economic growth, innovation and prosperity. All we can hope to do is to manage it in a way that enhances its benefits and smooths out its at times destabilizing effects.

So, where will all of this end? One possible scenario: Britain will spend three years trying to get out and the next three trying to get back in, when it fully realizes the magnitude and ramifications of its blunder.