Sus­tain­able de­vel­op­ment eco­nomics

Financial Mirror (Cyprus) - - FRONT PAGE -

Two schools of thought tend to dom­i­nate to­day’s eco­nomic de­bates. Ac­cord­ing to free-mar­ket econ­o­mists, gov­ern­ments should cut taxes, re­duce reg­u­la­tions, re­form la­bor laws, and then get out of the way to let con­sumers con­sume and pro­duc­ers cre­ate jobs. Ac­cord­ing to Key­ne­sian eco­nomics, gov­ern­ments should boost to­tal de­mand through quan­ti­ta­tive eas­ing and fis­cal stim­u­lus. Yet nei­ther ap­proach is de­liv­er­ing good re­sults. We need a new Sus­tain­able De­vel­op­ment Eco­nomics, with gov­ern­ments pro­mot­ing new types of in­vest­ments.

Free-mar­ket eco­nomics leads to great out­comes for the rich, but pretty mis­er­able out­comes for ev­ery­one else. Gov­ern­ments in the United States and parts of Europe are cut­ting back on so­cial spend­ing, job cre­ation, in­fra­struc­ture in­vest­ment, and job train­ing be­cause the rich bosses who pay for politi­cians’ elec­tion cam­paigns are do­ing very well for them­selves, even as the so­ci­eties around them are crum­bling.

Yet Key­ne­sian so­lu­tions – easy money and large bud­get deficits – have also fallen far short of their promised re­sults. Many gov­ern­ments tried stim­u­lus spend­ing after the 2008 fi­nan­cial cri­sis. After all, most politi­cians love to spend money they don’t have. Yet the short-term boost failed in two big ways.

First, gov­ern­ments’ debt soared and their credit rat­ings plum­meted. Even the US lost its AAA stand­ing. Sec­ond, the pri­vate sec­tor did not re­spond by in­creas­ing business in­vest­ment and hir­ing enough new work­ers. In­stead, com­pa­nies hoarded vast cash re­serves, mainly in tax-free off­shore ac­counts.

The prob­lem with both free-mar­ket and Key­ne­sian eco­nomics is that they mis­un­der­stand the na­ture of mod­ern in­vest­ment. Both schools be­lieve that in­vest­ment is led by the pri­vate sec­tor, ei­ther be­cause taxes and reg­u­la­tions are low (in the free-mar­ket model) or be­cause ag­gre­gate de­mand is high (in the Key­ne­sian model).

Yet pri­vate-sec­tor in­vest­ment to­day de­pends on in­vest­ment by the pub­lic sec­tor. Our age is de­fined by this com­ple­men­tar­ity. Un­less the pub­lic sec­tor in­vests, and in­vests wisely, the pri­vate sec­tor will con­tinue to hoard its funds or re­turn them buy­backs.

The key is to re­flect on six kinds of cap­i­tal goods: business cap­i­tal, in­fra­struc­ture, hu­man cap­i­tal, in­tel­lec­tual cap­i­tal, nat­u­ral cap­i­tal, and so­cial cap­i­tal. All of th­ese are pro­duc­tive, but each has a dis­tinc­tive role.

Business cap­i­tal in­cludes pri­vate com­pa­nies’ fac­to­ries, ma­chines, trans­port equip­ment, and in­for­ma­tion sys­tems. In­fra­struc­ture in­cludes roads, rail­ways, power and wa­ter sys­tems, fiber op­tics, pipe­lines, and air­ports and sea­ports. Hu­man cap­i­tal is the ed­u­ca­tion, skills, and health of the work­force. In­tel­lec­tual cap­i­tal in­cludes so­ci­ety’s core sci­en­tific and tech­no­log­i­cal know-how. Nat­u­ral cap­i­tal is the ecosys­tems and pri­mary re­sources that support agri­cul­ture, health, and ci­ties. And so­cial cap­i­tal is the com­mu­nal trust that makes ef­fi­cient trade, fi­nance, and gov­er­nance pos­si­ble.

Th­ese six forms of cap­i­tal work in a com­ple­men­tary way. Business in­vest­ment with­out in­fra­struc­ture and hu­man cap­i­tal can­not be prof­itable. Nor can fi­nan­cial mar­kets work if so­cial cap­i­tal (trust) is de­pleted. With­out nat­u­ral cap­i­tal (in­clud­ing a safe cli­mate, pro­duc­tive soils, avail­able wa­ter, and pro­tec­tion against flood­ing), the other kinds of cap­i­tal are eas­ily lost. And with­out univer­sal ac­cess to pub­lic in­vest­ments in hu­man cap­i­tal, so­ci­eties will suc­cumb to ex­treme in­equal­i­ties of in­come and wealth.

In­vest­ment used to be a far sim­pler mat­ter. The key to de­vel­op­ment was ba­sic ed­u­ca­tion, a net­work of roads and power, a func­tion­ing port, and ac­cess to world mar­kets. To­day, how­ever, ba­sic pub­lic ed­u­ca­tion is no longer enough; work­ers need highly spe­cialised skills that come through vo­ca­tional train­ing, ad­vanced de­grees, and ap­pren­tice­ship pro­grammes that com­bine pub­lic and pri­vate fund­ing. Trans­port must be smarter than mere gov­ern­ment road build­ing; power grids must re­flect the ur­gent need for low-car­bon elec­tric­ity; and gov­ern­ments ev­ery­where must invest in new kinds of in­tel­lec­tual cap­i­tal to solve un­prece­dented prob­lems of pub­lic health, cli­mate change, en­vi­ron­men­tal degra­da­tion, in­for­ma­tion sys­tems man­age­ment, and more.

Yet in most coun­tries, gov­ern­ments are not lead­ing, guid­ing, or even shar­ing in the in­vest­ment process. They are cut­ting back. Free-mar­ket ide­o­logues claim that gov­ern­ments are in­ca­pable of pro­duc­tive in­vest­ment. Nor do Key­ne­sians think through the kinds of pub­lic in­vest­ments that are needed; for them, spend­ing is spend­ing. The re­sult is a pub­lic-sec­tor vac­uum and a dearth of pub­lic in­vest­ments, which in turn

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div­i­dends

or holds back nec­es­sary pri­vate-sec­tor in­vest­ment.

Gov­ern­ments, in short, need long-term in­vest­ment strate­gies and ways to pay for them. They need to un­der­stand much bet­ter how to pri­ori­tise road, rail, power, and port in­vest­ments; how to make in­vest­ments en­vi­ron­men­tally sus­tain­able by mov­ing to a low-car­bon en­ergy sys­tem; how to train young work­ers for de­cent jobs, not only low-wage ser­vice­sec­tor em­ploy­ment; and how to build so­cial cap­i­tal, in an age when there is lit­tle trust and con­sid­er­able cor­rup­tion.

In short, gov­ern­ments need to learn to think ahead. This, too, runs counter to the eco­nomic main­stream. Free-mar­ket ide­o­logues don’t want gov­ern­ments to think at all; and Key­ne­sians want gov­ern­ments to think only about the short run, be­cause they take to an ex­treme John May­nard Keynes’ fa­mous quip, “In the long run we are all dead.”

Here’s a thought that is anath­ema in Wash­ing­ton, DC, but wor­thy of re­flec­tion. The world’s fastest grow­ing econ­omy, China, re­lies on five-year plans for pub­lic in­vest­ment, which is man­aged by the Na­tional De­vel­op­ment and Re­form Com­mis­sion. The US has no such in­sti­tu­tion, or in­deed any agency that looks sys­tem­at­i­cally at pub­lic-in­vest­ment strate­gies. But all coun­tries now need more than five-year plans; they need 20-year, gen­er­a­tion-long strate­gies to build the skills, in­fra­struc­ture, and low-car­bon econ­omy of the twen­ty­first cen­tury.

The G-20 re­cently took a small step in the right di­rec­tion, by plac­ing new em­pha­sis on in­creased in­fra­struc­ture in­vest­ment as a shared re­spon­si­bil­ity of both the pub­lic and pri­vate sec­tors. We need much more of this kind of think­ing in the year ahead, as gov­ern­ments ne­go­ti­ate new global agree­ments on fi­nanc­ing for sus­tain­able de­vel­op­ment (in Ad­dis Ababa in July 2015); Sus­tain­able De­vel­op­ment Goals (at the United Na­tions in Septem­ber 2015), and cli­mate change (in Paris in De­cem­ber 2015).

Th­ese agree­ments prom­ise to shape hu­man­ity’s fu­ture for the bet­ter. If they are to suc­ceed, the new Age of Sus­tain­able De­vel­op­ment should give rise to a new Eco­nomics of Sus­tain­able De­vel­op­ment as well.

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