A world haunted by the spectre of a seemingly never-ending pandemic has been mobilizing trillions of US-dollars to prop up its ailing economies. Now, as a historically unprecedented roll out of vaccines raises the hopes of a swift end to the tragedy, further fiscal and monetary tools are being deployed to path the way for a swift and – at least so it is being heralded by the general chorus – sustainable recovery. Indeed, “building back better” has become a catch phrase in political circles, not only here, but also overseas. Many governments around the world have yet to deliver on their promises and pledges, though. Otherwise, we risk squandering a – what is likely to be a – once-in-a-generation opportunity to create an environmentally, socially and economically more sustainable production and consumption system.
Indeed, we risk missing out on a unique opportunity to avert an even greater threat to mankind than Covid-19, i.e. global warming, while tackling not only those economic challenges that have been caused, directly or indirectly, by the pandemic, but also those that have been undermining the long-term sustainability of the economic system well before the advent of the crisis. For decades, the working and middle classes in Western societies have been suffering from stagnating or even declining disposable incomes. Secular shifts in the economy have led to a greater concentration of the upside of any economic activity, while its cost and downside risk is increasingly being borne by the broad masses. Major calamities such as the 2008-9 Financial and Economic Crisis and the Covid-19 pandemic have further aggravated this situation as the quantity and quality of income prospects have declined in the wake of major layoffs, restructuring, fixed-term contracts, and misguided austerity policies, while the tab that the taxpayer had to pick up in the form of bailouts has increased manifold. The rise of parties on both extremes on the political spectrum over the last couple of years pointed already to some of the major rifts caused by such developments to the fabric of society. These are only to worsen unless the underlying disequilibria are not appropriately addressed. The economic system itself suffers from such disequilibria, because a severely weakened consumption sector cannot support the demand required for economic growth, and we cannot borrow from the future indefinitely.
In other words, the world is currently facing multiple, yet interlinked, challenges that require a well-coordinated, multi-dimensional, systemic approach (i.e., a focus on illusory one-dimensional metrics such as GDP and the current performance of major stock market indices simply won’t do(!)). The urgency of these matters, and the window of opportunity afforded by the current political situation makes immediate action imperative, while their nature necessitates that we get it immediately right to minimise the chance and negative impacts of any unintended consequences. Let’s begin with surveying the current situation: The full economic damage inflicted by the Covid-19 pandemic needs yet to be fully determined. Recent estimates put the figure for the economic contraction at around 3.5% (IMF, 2021). Further, amidst widespread business closures and extensive job losses, poverty increased for the first time in over two decades (UNDP, 2020), while income and wealth disparities has skyrocketed. So, what has been done so far to address the situation? The world’s fifty largest economies have pledged around USD14.6tn (excl. the commitments by the EC; if those were included, total spending would approach USD17tn) in fiscal measures since 2020, of which approximately USD 11.1tn have been directed to more immediate economic support efforts, while USD1.9tn has been pledged to long-term recovery measures. Findings by Oxford University suggest, however, that only a very small percentage of that spending is likely to promote climate-friendly economic growth (e.g., only 18% of recovery spending and 2.5% of total announced spending is estimated to reduce GHG emissions). It seems, that the world is squandering a major opportunity to transition to an environmentally sustainable growth path. It might also be forfeiting economically attractive investment opportunities, as a growing body of evidence (e.g., Hepburn et al., 2020), suggests that ‘green’ fiscal spending can deliver stronger economic returns than traditional spending alternatives.
The thinking of decision-makers thus seems to be stuck in those type of old, one-dimensional patterns that have traditionally focused on the maximisation of some – entirely inadequate – metric such as GDP growth or the recent surge of some major stock market index that even fail to accurately gauge the state of the economy itself, never mind the state of our society and of the environment.
Supported by the IMF and GIZ, Oxford University, UNEP and their partners have made an important first step toward addressing this one-dimensional and short-termist approach that risks further exacerbating socio-economic and environmental crises long-term through the creation of the Global Recovery Observatory, which aims to significantly increase the transparency of such policy decisions by tracking the fiscal rescue and recovery spending programs of the world’s fifty largest economies. The greater transparency will hopefully push governments around the world to adopt the type of longer-term and systemic approach that is urgently required if we want to successfully navigate the treacherous waters between Scylla and Charybdis in order to meet the long-term economic, social and environmental objectives in alignment with the 2030 Agenda for Sustainable Development and the UNFCCC Paris Agreement.
Greater (financial) commitments and pledges will, however, not suffice to ensure a successful transition. It is crucial to thoroughly understand the nature and dimension of the task at hand: The cyclopean task involves no less than the restructuring of major parts of the production and consumption system as we know it, a system that has evolved under the pressures and incentives of the purely economic imperative created by the respective socio-technical and institutional frameworks. No financial or technological silver bullet solution exists for the problems that the world is currently facing. In fact, technological solution in the cleantech sector might even face major uphill battles as they are often targeting large, well-established markets (e.g., energy markets) that are dominated by powerful companies with vested interests. Further, the risks associated with the development and commercialization of such technologies are often too great for the private sector to assume, particularly as their introduction often requires significant complementary and add-on investments, e.g., infrastructure. For instance, electric cars need a network of charging stations. Besides, these assets are not always of a tangible nature. Sometimes, significant investments in intangibles are required that only the public sector might be capable to stem (e.g., research funding) and to protect (e.g., via patent laws). Also, the existing institutional framework might be underdeveloped. The transition therefore won’t occur through market forces alone. In fact, in several instances, markets might have to be created in the first instance (e.g., feed-in tariffs in the early stages of solar energy). The role that the state needs to play for this transition to be successful will therefore extend beyond its role as a provider of money and lender of last resort. It needs to play a greater role in coordinating the activities of the relevant stakeholders, to support the development and commercialization of new technologies, to assume risks where necessary, to create new markets where required, to tackle market failure and to ensure an equitable distribution of the economic benefits of the transition.
Written by Dr. Norman Ebner, CRES strategic advisor