Author: Ben Debski

The global economy is experiencing a major growth challenge. Many advanced countries are attempting to revive sustainable growth in the face of a decelerating global economy. But the challenges across countries are not the same. In particular, the tradable and non-tradable parts of a range of economies differ in important ways.

In the non-tradable sector (60-70 percent of the economy in advanced countries), the main growth inhibitors are weak demand, as in the US following the financial crisis, and structural and competitive impediments to productivity, as in Japan. In the tradable sector, growth depends on a country’s productivity relative to incomes and competitiveness. At the global level, there can also be a shortage of aggregate demand on the tradable side.

The Nobel laureate economist Robert Solow has shown that growth comes from three sources: the working population, capital investment, and technological progress. A growing young population helps to maintain fiscal balance and ensure intergenerational equity, but it does not by itself increase incomes. On the other hand, economic growth below the sum of growth in the working population and the labour-saving part of technological change fuels unemployment.

Developing countries, once they enter rapid-growth mode, generate growth from capital deepening via investment – in a sense making up for past underinvestment. And it is possible for advanced countries to fall behind by under-investing, particularly in the public sector, relying instead on less sustainable debt-fuelled means of generating demand.

Splurge or save?
However, as Solow noted, investment has its limits, owing to diminishing marginal returns. Often, these limits are not binding, but, once capital deepening is exhausted, technological progress, which makes inputs more productive in creating final value, is the long-run driver of growth.

The challenge is to apply these insights in a world characterised by global economic interdependence, major imbalances, and a worsening growth and employment problem. It is a world in which economies are connected directly in the tradable sector of the global economy, and indirectly through the demand and employment linkages between the tradable and non-tradable sectors of individual economies. In the short run, the non-tradable sector is, by definition, subject to domestic-demand constraints. A shortfall in non-tradable demand inevitably limits growth on that side of the economy.

Governments can, of course, bridge the gap via deficit spending (preferably focused on employment-generating investment that enhances future growth). But the advanced countries are, to varying degrees, fiscally constrained by relatively high and rising public debt, largely owing to fiscal imbalances that were hidden from view until defective growth models broke down in the crisis of 2008.

Just how fiscally constrained these countries are remains debatable. Italy and Spain are clearly constrained by the absence of private capital in their respective sovereign-debt markets, with rising yields threatening their fiscal stability and reform programmes. They need the eurozone core and the International Monetary Fund as temporary lenders of last resort until they restore policy credibility and regain investors’ confidence. The US sovereign-debt market shows no similar evidence of having reached a limit yet. But bond markets do not issue many early warning signals: witness the sudden run-up of yields in Italy and Spain a year ago.

Narrowing constraints  
The more complex growth issues have to do with the tradable part of the global economy, where global aggregate demand – and the derived demand that lands in various places in global supply or value-added chains – is the target of competition. Total demand and its growth do matter, but so does market share. Given the growth patterns across advanced and developing countries prior to the crisis, and then the large negative shock, it is likely that there is a shortfall of tradable global aggregate demand, impeding an important component of global growth.

But, for individual economies, relative productivity versus income levels determines the share of global tradable aggregate demand that is accessible. Unlike the non-tradable side of the economy, the domestic component of global tradable demand is not an absolute constraint on growth; nor is the rate of growth of global tradable demand an absolute constraint, given the possibility of increasing share.

Of course, not everyone can gain share at the same time. Fortunately, if countries increase productivity with the aim of boosting relative productivity and growth potential on the tradable side, this will increase incomes and accelerate the growth of global aggregate demand. It may look like a zero-sum game, but it is not.

When incomes get significantly out of line with productivity levels (as they have recently), reviving growth requires resetting the terms of trade, which can be done with exchange rates, whether managed or set by markets.

In the eurozone, where countries with competitiveness problems do not have the exchange-rate adjustment mechanism, restrained income growth and productivity-boosting reforms are probably needed, as was the case in Germany between 2000 and 2006, and now in several southern European countries.

Supplying opportunities
What is true for countries on the tradable side is also true for workers, who are differentially affected by the evolution of global supply chains. The efficient integration of global supply chains has created employment opportunities in developing countries and in the higher value-added sectors of advanced countries. But it has also reduced employment options for a subset of middle-income people in the tradable sectors of advanced economies.

Many countries are struggling to adapt their growth patterns to the new challenges they face in a slowing global economy. To be effective, policies need to include an accurate diagnosis of growth potential and impediments in both tradable and non-tradable parts of the economy. Focusing on one – say, the competitiveness problem in the tradable sector – to the exclusion of the other – perhaps a serious non-tradable demand shortfall or stagnant productivity – will not be enough.

(c) Project Syndicate 2012

Great social change occurs in several ways. A technological breakthrough – the steam engine, computers, the internet – may play a leading role. Visionaries, such as Mahatma Gandhi, Martin Luther King Jr., and Nelson Mandela, may inspire a demand for justice. Political leaders may lead a broad reform movement, as with Franklin Roosevelt and the New Deal.

Our own generation urgently needs to spur another era of great social change. This time, we must act to save the planet from a human-induced environmental catastrophe. Each of us senses this challenge almost daily. Heat waves, droughts, floods, forest fires, retreating glaciers, polluted rivers, and extreme storms buffet the planet at a dramatically rising rate, owing to human activities. Our $70trn-per-year global economy is putting unprecedented pressures on the natural environment. We will need new technologies, behaviours, and ethics, supported by solid evidence, to reconcile further economic development with environmental sustainability.

UN Secretary-General Ban Ki-moon is taking on this unprecedented challenge from his unique position at the crossroads of global politics and society. At the political level, the UN is the meeting place for 193 member states to negotiate and create international law, as in the important treaty on climate change adopted at the Rio Earth Summit in 1992. At the level of global society, the UN represents the world’s citizenry, “we the peoples,” as it says in the UN Charter. At the societal level, the UN is about the rights and responsibilities of all of us, including future generations.

Chance to act
In the past two decades, governments have come up short on solutions to environmental threats. Politicians have failed to properly implement the treaties adopted at the 1992 Earth Summit. Ban knows that strong government action remains vital, but he also recognises that civil society must also play a larger role, especially because too many governments and politicians are beholden to vested interests, and too few politicians think in time horizons that extend past the next election. To empower global society to act, Ban has launched a bold new global initiative, for which I am grateful to volunteer. The UN Sustainable Development Solutions Network is a powerful effort to try and mobilise global knowledge to save the planet. The idea is to use global networks of knowledge and action to identify and demonstrate new, cutting-edge approaches to sustainable development around the world. The network will then work alongside and support governments, UN agencies, civil-society organisations and the private sector.

Humanity needs to learn new ways to produce and use low-carbon energy, grow food sustainably, build liveable cities, and manage the global commons of oceans, biodiversity, and the atmosphere. But time is running very short.

Today’s mega-cities, for example, already have to confront dangerous heat waves, rising sea levels, more extreme storms, dire congestion, and air and water pollution. Agricultural regions already need to become more resilient in the face of increased climate volatility. And as one region in one part of the world designs a better way to manage its transport, energy needs, water supplies, or food supplies, those successes should quickly become part of the global knowledge base, enabling other regions to benefit rapidly as well.

Partners in order
Universities have a special role to play in the new UN knowledge network. Exactly 150 years ago, in 1862, Abraham Lincoln created America’s “land-grant” universities to help local communities to improve farming and the quality of life through science. Today, we need universities in all parts of the world to help their societies face the challenges of poverty reduction, clean energy, sustainable food supplies, and the rest. By linking together, and putting their curricula online, the world’s universities can become even more effective in discovering and promoting science-based solutions to complex problems.

The world’s corporate sector also has a significant role to play in sustainable development.

Now the corporate sector has two faces. It is the repository of cutting-edge sustainable technologies, pioneering research and development, world-class management, and leadership in environmental sustainability. Yet at the same time, the corporate sector lobbies aggressively to gut environmental regulations, slash corporate-tax rates, and avoid their own responsibility for ecological destruction. Sometimes the same company operates on both sides of the divide.

We urgently need far-sighted companies to join the Sustainable Development Solutions Network. These companies are uniquely placed to move new ideas and technologies into early-stage demonstration projects, thereby accelerating global learning cycles. Equally important, we need a critical mass of respected corporate leaders to press their peers to cease the anti-environmental lobbying and campaign-finance practices that account for the inaction of governments.

Defining a legacy
Sustainable development is a generational challenge, not a short-term task. The reinvention of energy, food, transport, and other systems will take decades, not years. But the long-term nature of this challenge must not lull us into inaction. We must start reinventing our productive systems immediately, precisely because the path of change will be so long and the environmental dangers are already so pressing.

At the Rio+20 Summit this past June, the world’s governments agreed to adopt a new set of goals on sustainable development for the period after 2015, to build upon the Millennium Development Goals’ success in reducing poverty, hunger, and disease. In the post-2015 era, the fight against poverty and the fight to protect the environment will go hand in hand, reinforcing each other. Secretary-General Ban Ki-moon has already initiated several global processes to help establish the new post-2015 goals in an open, participatory, and knowledge-based way.

The Secretary General’s launch of the Sustainable Development Solutions Network is therefore especially timely. Not only will the world adopt a new set of goals to achieve widespread sustainable development, but it will also have a new global network of expertise to help achieve those vital objectives.

(c) Project Syndicate 2012

When President Richard Nixon proclaimed in the early 1970s that he wanted to secure national energy independence, the US imported a quarter of its oil. By the decade’s end, after an Arab oil embargo and the Iranian Revolution, domestic production was well in decline, Americans were importing half their petroleum needs at 15 times the going price, and it was widely believed that the country was running out of precious natural gas.

Energy shocks contributed to a lethal combination of stagnant economic growth and inflation, and every US president since Nixon likewise has proclaimed energy independence as a goal. But few people took those promises seriously.

Today, energy experts no longer scoff at this prospect. By the end of this decade, according to the US Energy Information Administration, nearly half of the crude oil that America consumes will be produced at home, while 82 percent will come from the US side of the Atlantic. Philip Verleger, a respected energy analyst, argues that, by 2023, marking the 50th anniversary of Nixon’s “Project Independence,” the US will be energy independent in the unimaginable sense that it will export more energy than it imports.

Verleger argues that energy independence “could make this the New American Century by creating an economic environment where the United States enjoys access to energy supplies at much lower cost than other parts of the world.” Already, Europeans and Asians pay four to six times more for their natural gas than Americans do.

Changing strategies
What happened? The technology of horizontal drilling and hydraulic fracturing, by which shale and other tight rock formations at great depths are bombarded with water and chemicals, has released major new supplies of both natural gas and oil. America’s shale-gas industry grew by 45 percent annually from 2005 to 2010, and the share of shale gas in America’s overall gas production grew from four percent to an impressive 24 percent.

The US is estimated to have enough gas to sustain its current rate of production for more than a century. While many other countries also have considerable shale-gas potential, problems abound, including water scarcity in China, investment security in Argentina, and widespread environmental restrictions in several European countries with promising supplies.

The American economy will benefit in a myriad of ways from its change in energy supply. Hundreds of thousands of jobs are already being created, some in remote, previously stagnating regions. This additional economic activity will boost overall GDP growth, yielding significant new fiscal revenues. In addition, the lower energy-import bill will cause America’s trade deficit to narrow and its balance-of-payments position to improve. Some US industries, such as chemicals and plastics, will gain a significant comparative advantage in production costs.

Indeed, the International Energy Agency estimates that the additional precautions needed to ensure shale-gas wells’ environmental safety – including careful attention to seismic conditions, properly sealed shafts, and appropriate waste-water management – add only about seven percent to the overall cost.

With respect to climate change, however, the effects of greater reliance on shale gas are mixed. Because natural-gas combustion produces fewer greenhouse gases than other hydrocarbons, such as coal or oil, it can be a bridge to a less carbon-intensive future. But the low price of gas will impede the development of renewable energy sources unless accompanied by subsidies or carbon taxes.

Liberated power
At this stage, one can only speculate about the geopolitical effects. Clearly, the strengthening of the US economy would enhance American economic power – a scenario that runs counter to the current fashion of portraying the US as being in decline.

But one should not jump to conclusions. A balance of energy imports and exports is only a first approximation of independence. As I argue in my book The Future of Power, global interdependence involves both sensitivity and vulnerability. The US may be less vulnerable in the long run if it imports less energy, but oil is a fungible commodity, and the US economy will remain sensitive to shocks from sudden changes in world prices.

In other words, a revolution in Saudi Arabia or a blockade of the Strait of Hormuz could still inflict damage on the US and its allies. So, even if America had no other interests in the Middle East, such as Israel or nuclear non-proliferation, a balance of energy imports and exports would be unlikely to free the US from military expenditures – which some experts estimate run to $50bn per year – to protect oil routes in the region.

Constraining capacity
At the same time, America’s bargaining position in world politics should be enhanced. Power arises from asymmetries in interdependence. You and I may depend on each other, but if I depend on you less than you do on me, my bargaining power is increased.
For decades, the US and Saudi Arabia have had a balance of asymmetries in which we depended on them as the swing producer of oil, and they depended on us for ultimate military security. Now the bargains will be struck on somewhat better terms from America’s point of view.

Likewise, Russia has enjoyed leverage over Europe and its small neighbours through its control of natural gas supplies and pipelines. As North America becomes self-sufficient in gas, more fuel from various other regions will be freed up to provide alternative sources for Europe, thereby diminishing Russia’s leverage.

In east Asia, which has become the focus of US foreign policy, China will find itself ever dependent on Middle Eastern oil. American efforts to persuade China to play a greater role in regional security arrangements may be strengthened, and China’s awareness of the impending vulnerability of its supply routes to US naval disruption in the unlikely event of conflict could also have a subtle effect on each side’s bargaining power.

A balance of energy imports and exports does not produce pure independence, but it does alter the power relations involved in energy interdependence. Nixon got that right.

(c) Project Syndicate 2012