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.