Remaking Our World

It is just over two years since the leaders of countries representing over 80 percent of global GDP and world trade and some two thirds of the global population, stood with their backs to the wall at the G20 meeting in London and acted in unison to prevent a catastrophic implosion of the global economy.

What have we learned from the greatest financial crisis since the Great Depression? Not much, to judge by what we have done to correct what pushed us to the edge.

The Financial Crisis and Response: The crisis was triggered by (i) structural imbalances – Asian savings surpluses and excessive US consumption; (ii) misaligned incentives and an obsession with short-term profits; and (iii) neglect of the need for controls to curb herd behavior.

Coordinated monetary easing and fiscal stimuli averted a catastrophe. The G20 called for new rules for the capital adequacy and liquidity of banks, and new institutions to address systemic risk, but containing regulatory arbitrage and discouraging migration to a shadow banking system pose challenges. Paul Volcker, Chairman of the US Economic Recovery Advisory Board, called for separation of tightly regulated and protected commercial banks, and institutions that engage in “trading, speculation and financial innovation.” The latter, said Mr. Volcker, should not be bailed out when they fail.

The tension between the need for stimuli to sustain a tentative recovery, and that for higher interest rates to contain inflation, is unresolved. Stimuli have continued and interest rates remain low.

Not surprisingly, interbank lending and the US dollar carry trade triggered new asset bubbles in equities, gold and commodities, and inflationary pressured in Emerging Markets (EMs). By December 2010 the Dow Jones was above 10 000. The S&P 500 rose from March that year by almost 60 percent, the NASDAQ by 70 percent, and the MSCI by 100 percent. But the surge in equity markets did not then, and does not now, reflect the real economy; credit for SMEs is still tight and few jobs have been created after massive cuts.

Emerging markets, especially in Asia, have led the recovery: Sixteen economies had positive GDP growth in 2009, 15 were Ems, nine Asian. Australia – neither an EM, nor Asian – owed its growth to China! But China’s $1.2 trillion monetary stimulus and $600 billion fiscal stimulus, exacerbated by the US dollar carry trade, caused domestic inflation.

Eighteen months later, with the financial crises in Greece, Ireland and Portugal having tested Europe’s unity, with demonstrations in Madrid’s main square reflecting the social tensions wrought by unemployment above 20 percent, and revolts across the southern Mediterranean coast and the Arabian peninsula, recovery is far from assured. Further tensions lie ahead. The structural imbalances that led to the crisis still exist, sovereign debt in Japan and the West is exceptionally high, leaving no margin for new bail-outs. Fiscal imbalances in the US and Britain are unsustainable, and banking sector consolidation has exacerbated the moral hazard of “too big to fail.”

Copenhagen’s damp, but dangerous, squib: The outcome of the Copenhagen COP 15 meeting in December 2009 confirmed our inability to deal with big global challenges. The International Panel on Climate Change (IPCC) – representing the best scientific insight we have at present – estimates that to hold global mean temperature to no more than 2º C above pre-industrial levels, we must stabilize long-term atmospheric concentrations of greenhouse gases at no more than 450 parts per million (ppm) of CO2 equivalents (CO2e).

This means that emissions must be below 44 billion tons of CO2e by 2020 – 3 billion tons less than 2005. On December 9, 2009 leading researchers warned:

“To have a reasonable chance of limiting global warming to 2°C, or lower…[we shall have]…to go significantly above the…targets…under discussion…. Achieving th[is]…will …require strong financial and technology support for developing countries. If anything less…is achieved… it may not be possible to catch-up later….

“… even if the high-end of current proposals plus additional reductions are locked-in, more work will be required. …a gap in mitigation may remain…. …a Copenhagen agreement must… include a “review and strengthen” clause where countries review progress against the latest scientific evidence and…adjust their commitments…; the first such review should end no later than 2015 and draw upon the next [IPCC] assessment… due…in 2014.”

Nothing close to this was agreed in December that year. With failure threatening, leaders from the US, China, Brazil, India and South Africa cobbled together a “Copenhagen Accord” on December 18. The Conference “noted” it a day later. Signatories agreed to declare national emission targets, but would incur no legal obligations.

Britain’s Climate Minister at the time, Ed Miliband, now the Leader of the Opposition, dubbed the Conference “a chaotic process dogged by procedural games,” and called for major reform. Western leaders and the UN secretary general agree on the need for a binding pact.

But converting the Accord into a Treaty has proven difficult. The procedural disputes in Copenhagen masked substantive disagreements. The US and Europe, which have shaped international diplomacy since 1945 and liberalised global trade and financial flows, no longer call the shots. Other states, notably China and India – but also Brazil, Indonesia, South Africa and others – have come of age, and are asserting their national interests. Only very modest progress was achieved in Cancun, and little more is expected in Durban this year. Meanwhile, exceeding 450 ppm CO2e threatens whole ecosystems and perhaps human survival, through non-linear impacts on water, food and health.

A dangerous moment: How did we get into this mess? Over the past three decades, we have connected the world and celebrated consumerist values, relying on free markets, and disregarding equity and eco-systemic balance. Any system pushed to its limit, behaves chaotically. We are reaping what we have sown.

In the past 50 years, we have lost half the earth’s topsoil and a third of its forest cover, and caught over 60 percent of the fish in the sea. Each month we extinguish 2,000 species through agriculture and urban growth. The tension between a rising population with expanding needs and desires, and a finite stock of natural capital, is not sustainable! Widening demands for wasteful “Western” lifestyles are pushing us past the tipping point. Climate change may trigger the inflection that threatens our survival.

As most population growth is among the very poor in rural areas and in shantytowns around huge cities, more weak governments will fail, prompting huge migratory waves, threatening global comity and our integrated global economy. Political and cultural tensions will sharpen. Nothing short of reorienting our ethos and realigning our global structures and systems will contain the threat to our survival.

Creating the Future: In his review of the reasons for the success and failure of different civilisations over history [Collapse: How Societies Choose to Fail or Succeed], Jared Diamond concluded that societies have failed for four reasons:
• Some failed to anticipate a problem;
• some did not perceive it after it had arisen;
• some did not try to resolve it after they recognised it; and
• some failed in their attempts to solve it.

The first, second and fourth reasons for failure are excusable: we are human and thus neither omniscient, nor infallible. The third is indefensible, but it characterises our behaviour today. We know that our present course is unsustainable, but we choose to continue on it, and blind ourselves to the consequences.

Successful societies have always balanced individual freedom with community responsibility and respect for the ecosystem on which all depend for survival.

It’s time to recognise that the metaphorical global village is a fig leaf. We have created a global economy, but global society is deeply fissured and we have no global polity. Weak governance leaves us vulnerable. Systemic risks demand integrated responses.

Present political paradigms that encourage states to maximise national interests, and economic policies that prioritize short-term profit over sustainability, are outdated. It’s time for a new paradigm. We dare not plunge this generation into debt to pay the costs of excess, while mortgaging the future of our children and grandchildren.

Governments – and firms – must align their economic interests with socially and environmentally sustainable behaviour. Three initiatives would advance this:

o A Global Charter on International Security, Ecological Responsibility and Social Justice: Privileged trade, financing and collective security arrangements for states that commit to the Charter would transform international relations.

o A Global Security Regime buttressing regional mutual security arrangements with a global Rapid Deployment Force: Collective defence must underpin mutual security if we are to discourage arms races, facilitate nuclear disarmament and reallocate funding to productive investment.

o A Global Growth Fund for Social Equity and Environmental Sustainability, to address poverty and ecologically irresponsible growth. Sharply increased investment in health, education and environmentally viable infrastructure in the developing world would drive global growth. A $1 trillion, multi-year, Global Growth Fund could deploy some of the Asian structural surpluses that contributed to the financial crisis.

Acting now will allow us to build a sustainable future. Failure will squander the chance.

Al Arabiya News