The New Macroeconomic Reality
A shift is beginning to decouple economic growth from ecosystem destruction, natural resource depletion and material consumption toward a concept of sustainable economic development where environmental externalities (true costs) are incorporated and prosperity and societal wellbeing are the goals and define success. In future months, look for structural/behavioral economics to become increasing prominent in the discussion.
The G8's "RESPONSIBLE LEADERSHIP FOR A SUSTAINABLE FUTURE" declares:
"The interlinked challenges of climate change, energy security and the sustainable and efficient use of natural resources are amongst the most important issues to be tackled in the strategic perspective of ensuring global sustainability. A shift towards green growth will provide an important contribution to the economic and financial crisis recovery. We must seize the opportunity to build on synergies between actions to combat climate change and economic recovery initiatives, and encourage growth and sustainable development worldwide."
Recently, France, Germany and Australia as pushing the G20 to adopt a new framework for sustainable growth, the G20 Sustainable Growth Accord. At the same time, the field of economics is moving beyond its 500 year old roots in classical/neoclassical macroeconomics to embrace new models and methods.
The focus at the recent G20 meeting in Pittsburgh, Pennsylvania was on the current financial crisis including much discussion on the issue of sustainable growth. The following is an output of the Pittsburgh meeting on this topic:
G-20 Framework for Strong, Sustainable, and Balanced Growth*
1. Our countries have a shared responsibility to adopt policies to achieve strong, sustainable and balanced growth, to promote a resilient international financial system, and to reap the benefits of an open global economy. To this end, we recognize that our strategies will vary across countries. In our Framework for Strong, Sustainable and Balanced Growth, we will:
- implement responsible fiscal policies, attentive to short-term flexibility considerations and longer-run sustainability requirements.
- strengthen financial supervision to prevent the re-emergence in the financial system of excess credit growth and excess leverage and undertake macro prudential and regulatory policies to help prevent credit and asset price cycles from becoming forces of destabilization.
- promote more balanced current accounts and support open trade and investment to advance global prosperity and growth sustainability, while actively rejecting protectionist measures.
- undertake monetary policies consistent with price stability in the context of market oriented exchange rates that reflect underlying economic fundamentals.
- undertake structural reforms to increase our potential growth rates and, where needed, improve social safety nets.
- promote balanced and sustainable economic development in order to narrow development imbalances and reduce poverty.
2. We recognize that the process to ensure more balanced global growth must be undertaken in an orderly manner. All G-20 members agree to address the respective weaknesses of their economies.
- G-20 members with sustained, significant external deficits pledge to undertake policies to support private savings and undertake fiscal consolidation while maintaining open markets and strengthening export sectors.
- G-20 members with sustained, significant external surpluses pledge to strengthen domestic sources of growth. According to national circumstances this could include increasing investment, reducing financial markets distortions, boosting productivity in service sectors, improving social safety nets, and lifting constraints on demand growth.
3. Each G-20 member bears primary responsibility for the sound management of its economy. The G-20 members also have a responsibility to the community of nations to assure the overall health of the global economy. Regular consultations, strengthened cooperation on macroeconomic policies, the exchange of experiences on structural policies, and ongoing assessment can strengthen our cooperation and promote the adoption of sound policies. As part of our process of mutual assessment:
- G-20 members will agree on shared policy objectives. These objectives should be updated as conditions evolve.
- G-20 members will set out their medium-term policy frameworks and will work together to assess the collective implications of our national policy frameworks for the level and pattern of global growth, and to identify potential risks to financial stability.
- G-20 leaders will consider, based on the results of the mutual assessment, and agree any actions to meet our common objectives.
4. We call on our Finance Ministers to develop our process of mutual assessment to evaluate the collective implications of national policies for the world economy. To accomplish this, our Finance Ministers should, with the assistance of the IMF:
- Develop a forward looking assessment of G-20 economic developments to help analyze whether patterns of demand and supply, credit, debt and reserves growth are supportive of strong, sustainable and balanced growth.
- Assess the implications and consistency of fiscal and monetary policies, credit growth and asset markets, foreign exchange developments, commodity and energy prices, and current account imbalances.
- Report regularly to both the G-20 and the IMFC on global economic developments, key risks, and concerns with respect to patterns of growth and suggested G-20 policy adjustments, individually and collectively.
These are important steps in addressing the financial crisis and moving toward strong, sustainable, balanced growth. Despite the current fiscal challenges it is possible to make significant strides towards these goals if nations are effective in execution of policies. The OECD has done extensive work and shown there is clear benefit in job creation and growth when policies incorporate sustainability components. OECD studies have found reforming education systems could raise living standards significantly. In one finding, an additional year of education can raise GDP/capita by 4 and 7 per cent through increasing the labour supply. This directly impacts standard of living, is a coordinated program of job creation is also put in place to create a virtuous cycle of growth.
Where will the growth and jobs comes from? ALong with the G20 frame work above. The G8 Declaration “Responsible Leadership for a Sustainable Future” includes significant and detailed language along the following theme:
"New sources of growth will have to be supported by investments in infrastructure, innovation and education to facilitate productivity growth, while ensuring sustainable use of resources in a greener economy, within a context of open markets."
While the OECD “Declaration on Green Growth” recognizes and specifically targets the opportunities for tackling global financial, environmental and social crises together in transparent and accountable ways. Specifically:
"The OECD can, through policy analysis and identification of best practices, assist countries in their efforts to respond to the growing policy demands to foster green growth and work with countries to develop further measures to build sustainable economies.
DECLARE that we:
STRENGHTHEN our efforts to pursue green growth strategies as part of our response to the current crisis and beyond, acknowledging that “green” and “growth” can go hand-in-hand.
ENCOURAGE green investment and sustainable management of natural resources. In this respect, we are resolved to make further efforts to use efficient and effective climate policy mixes, including through market-based instruments, regulations and other policies, to change behaviour and foster appropriate private sector responses. We will consider expanding incentives for green investment, in particular in areas where pricing carbon is unlikely to be enough to foster such private sector responses. Such areas may include smart, safe and sustainable low-carbon infrastructure and R&D technologies that can contribute to building a sustainable low-carbon society. Approaches to recognise the value of biodiversity should be encouraged through appropriate instruments and consistent with relevant international obligations. We are resolved to share information on green investment flows and policies, and best practices.
ENCOURAGE domestic policy reform, with the aim of avoiding or removing environmentally harmful policies that might thwart green growth, such as subsidies: to fossil fuel consumption or production that increase greenhouse gas emissions; that promote the unsustainable use of other scarce natural resources; or which contribute to negative environmental outcomes. We also work towards establishing appropriate regulations and policies to ensure clear and long-term price signals encouraging efficient environmental outcomes. We call on other major economies to follow the OECD countries’ lead.
ENSURE close co-ordination of green growth measures with labour market and human capital formation policies. We note that these can support the development of green jobs and the skills needed for them, and ask that work on implementing the Reassessed OECD Jobs Strategy pays due attention to this objective."
* Source: Leaders' Statement: The Pittsburgh Summit, September 24 – 25, 2009
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