The Perfect Storm: Economics, Finance and Socio-Ecology. A Commentary

The world is at an inflection point. A convergence of themes – seemingly disconnected – is integral and urgent to our very survival. Our world is headed into a Perfect Storm of an interconnected financial, ecological and social crisis. Almost all forward-looking assessments demonstrate that business as usual and incremental improvements will not be sufficient to take us to a future world blessed by equitable prosperity, safety, security and contentment.

And time is not on our side. The decisions we take over the coming decade will shape our common future for us and for our children. There may be threats in the gathering clouds of our perfect storm, but we have opportunities to shape, reshape and move an agenda towards a better tomorrow.

The warning signs are for all to see. Within the first decade of this Millennium we have seen five crises:

One: We have witnessed the moral crisis of a Planet with plenty, yet shared with so few. It remains indefensible that more than one third of our fellow humans remain in dire and absolute poverty. At the turn of the Century our world leaders pledged to halve world poverty by 2015. These goals will not be met.

Two: We remain in the midst of a global financial crisis: one that has affected millions of people throughout the world. What started as a series of largely containable national and regional banking crises from the 1970s onwards has transformed itself into a global crisis in the real economies of the world. Improved management and oversight of our financial systems have started, but the pace is glacial and the efforts remain woefully weak and sporadic.

Three: We have witnessed a food crisis as a result of the rapid growth in food commodity prices, and their impact on poor countries and poor people in those countries has resulted in many being pushed below the poverty line. The food crisis was due to many reasons: historic low prices that couldn’t continue; technological plateaus in productivity and competition for land use.

Four: We have witnessed a global ecological crisis that affects us now and well into the future. The consequences of not repairing and then effectively managing the Planet’s stock of natural capital will lead to unknown but potentially very dangerous outcomes. Fortunately, climate change has now moved to centre stage: so much so that it is easy to ignore other ecological issues such as the loss of forests, fisheries and biodiversity: all being lost at historic and unprecedented rates. To be sure, climate change will make matters worse, yet hopefully it also provides us with a greater sense of urgency.

Five: An unemployment crisis of global proportions is upon us now. There is uncertainty about the future levels of unemployment, currently estimated globally at over 200 million, with perhaps up to a billion people under-employed. Our inability to create jobs will consign many millions to poverty, induce social and political unrest, and will undermine any hopes for a more secure and sustainable world. Unemployment remains the single largest global failure.

1. The world we are moving towards
As we reflect upon the observations of this past decade it is worth considering for a moment the world of tomorrow. If we look forward to 2050: well within our children’s lifetime we can envisage a number of significant changes:

  • Population will likely grow from close to 7 billion to perhaps 9.5 billion (current estimates range from around 8 to 10.5 billion).
  • Global GDP is currently about US $60 trillion. Even at modest per capita growth rates in the emerging economies of the world to meet poverty targets we could easily see a world ( as we conventionally measure it today) of closer to US$200 trillion. Three worlds sitting on our present one world!
  • The current 20:80 split (20% population: earning 80% of national income) that has been consistent for the past two decades is starting to shift. This year (2010) represents an interesting watershed in terms of aggregate wealth: on a global GDP / Power Purchasing Parity (PPP) basis, the emerging economies are roughly now equal to the rich world — significant geo-economic shift and potentially an important geo-political shift.
  • Demand for goods and services are set to increase dramatically driven by population, rising per capita income, and the shift from current low per capita income consumption patterns. Demand for food is likely to more than double by 2050 and energy needs to increase threefold.
  • Demand for clean water will rise to meet the needs of the present one billion plus people who have no access to potable water or decent sanitation and to meet incremental demands from a growing population. Water resources will continue to be stretched, although globally water will not be scarce. However the costs of harnessing water will rise exponentially and discontinuously and place huge fiscal and economic burdens on countries to deliver water. Together with the provision of potable water, dramatic increases (fourfold or more) in water efficiency in the agricultural sector will be needed.
  • It is estimated that 27% of the world’s population is under the age of fifteen: for the future, a large, capable and ready work force in the making? Perhaps? Or a major source of social unrest? Possibly? Future numbers are unknown. However, what is known is that unemployment fuels discontent and social turbulence. A sustainable future is a Job-full future.

The wealth of our nations is changing dramatically; the shifts in wealth are reshaping our global body politic; those left behind are growing in numbers and strength; and the search for prosperity has all too easily become a search for economic growth on the assumptions that growth alone would solve our problems.

Clearly, all of us benefit from well functioning eco-systems; financially sound, well managed and regulated financial systems; and strong social and human capital that allow for safe, secure and content human communities. Most of us want to live in a happier, fairer and safer world. If we are to achieve this, we need to reset our planetary clock, assess the issues that will drive us towards greater contentment in an increasingly interconnected world, and re-calibrate the philosophies, metrics and design assumptions behind the changes we have recently observed. These issues belong to a broad-based dialogue with many disciplines: from engineers to economists, from health professionals to bankers; from activists to philosophers; from old to young; and from poor Africa to rich Europe.

2. The world we need
This note focuses on a small yet important sub-set of the above issues: the need to respond to the demonstrated failures we have observed in our economics and their translation into markets for goods, services and labour.

2.1 Our Economics are in need of an urgent overhaul

The foundations for modern economics rest on assumptions that may have been true for our distant past but are no longer valid for our immediate future. They are based on a time in history so fundamentally different from today: a world in which natural resources were plenty; a time when globalisation had not infiltrated into every aspect of our economic life; a time when physical capital was scarce and natural capital abundant; and a time when aspirations and expectations were fundamentally different from today.

Our understanding of economic growth and wealth creation has, all too easily, lulled us into a sense of complacency that, at best was illusory and, at worst, damaging. We have floundered on the assumptions that economic growth would produce wealth for all. It has not. Economics has become divorced from real values; and in doing so, relative prices of the various forms of capital and labour are seriously out of alignment.

Our measurement of wealth rarely takes into account the very things we truly value: safety, security, a clean environment, the strong social capital we enjoy. Neither does it measure the full economic costs of unemployment.

Our understanding of uncertainty is so rarely factored into our economic public policy-making, yet we live in a world with many unknowns and risks including the potential for non-linear events (such as in climate change). We need to assess and value the options we have for dealing with the risks we face.

Our economic measurements have managed to ignore the very form of capital we now recognize as being in short supply: natural capital. We value and account for the depletion of our natural capital at zero; a worse business decision is hard to imagine! As Herman Daly once noted “the current accounting system treats the earth as a business in liquidation”.

We need a new economics that measures real wealth and promotes real wealth creation and growth. Indices need to be created which reflect real values to society. Fortunately this issue is now occupying the time of a number of noteworthy economists such as Stiglitz, Sen, Daly, Constanza, Korten and others. We will see whether such thinking permeates the ministries of finance throughout the world and the global financial institutions they represent. So far rhetoric has been well ahead of reality.

Ian Johnson, Secretary General, Club of Rome.
*. Based on two speeches given at the University Of Liechtenstein at a conference on responsible investing in September 2010 and a conference on global finance given during the Annual Assembly of the Club of Rome in October 2010.

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