February 21, 2010

The New Business Agenda (2): The Need for New, True Pricing Paradigms

Fundamental to the new agenda for business is the willingness to invest in long term gains for the collective over short-term returns.  One of the key elements of classic economics is the fact that we have accounted for natural capital at its extraction cost, not at its renewal or replenishment cost.  Depletion costs are an externality in this analysis and thus the cost of natural resources is set to be at or near zero, essentially free.  

True pricing includes these externalities whether they be applied to forest, land use, mineral or oil reserves, appropriately requires that a new perspective on discount rates also be incorporated into the new business agenda.     One can argue that typical (under 10%) discount rates do not fairly value the future and lead to decisions that favor short term profit maximization.  Therefore, true discounts rates are in fact much higher.

Getting the pricing right may in fact be possible for assets where there are clear property rights, the the asset is owned or controlled by individual or corporate entities.  The issues gets much muddier when dealing with the commons where pricing mechanisms or markets don't exist and complex issues of social equity/justice become large considerations. These factors are what makes the issues of climate change, conservation and environmental stewardship so complex.

The need for new pricing paradigms is not universally accepted, this change will not come easily.  Over the next 5 years, I expect continued economic and social turmoil along with moves toward both significantly increased balkanization along with increased rhetoric toward multilateralism without much progress toward resolution. During this period of turmoil in another 5 years or so when the consequences of inaction are more evident will our collective behavior change.  Hopefully, it will happen before the tipping point is reached.  

February 18, 2010

The New Business Agenda (1): The Need for a Strong, Sustainable, Balanced Economic Growth

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

February 15, 2010

I am 3,996,308,755 people old

According to UN estimates, global population is expected to increase from 6.9 billion to more than 9 billion by 2050. Roughly the same increase in population as since I was born in 1956. I find it hard to relate to these figures as they feel rather abstract but when juxtaposed against life events, as in the chart below, they seem much more concrete. Using UN population estimates, I was born when the world population was about 2,834,078,230 people. With the current world population estimate at 6,830,386,985, that makes me now about 3,996,308,755 people old.



What I Do and Why

As a teacher across two departments; one which focuses on issues of Policy, Law & Ethics and the other on issues of Strategy, Innovation & Entrepreneurship, you can say I live at the intersection of two worlds. That is my nature. Within that intersection, that confluence of thoughts, ideas, principles and disciplines, I concentrate on what I feel are the most important policy, strategy and development problems of the world today. At a time when society, individuals and education are becoming ever more specialized, I pursue the development of “the mind” at a time when great business minds are desperately needed.

We live in an age of great political, social and economic challenge on one hand and seemingly insurmountable opportunities on the other. To paraphrase Bill Clinton, the challenge before us in the 21st century is:

“… whether the 21st century will be marred by scarcity, deprivation, environmental degradation, terrorism and conflict of all kinds or whether it becomes the most peaceful and prosperous time the world has ever known.”

My ambition is to create the latter.

As Thucydides suggested in the fifth century BC, “The events which happened in the past will at some time or other and in much the same way be repeated in the future.”. The past can suggest much about the future – the nature of change, progress and its impact on society and our environment, and the interplay among human societies in times of peace and conflict. While much will change, human nature
being what it is will continue to be a driving force in the affairs of the world. We must work with this nature, these instincts, not against this them in shaping the future.

The challenges faced demand the best from us as individuals, organizations and as a society. Solutions will require integrative, systemic thinking, the ability to take on and reconcile seemingly intractable problems combined with the confidence to lead change and act amidst great uncertainty. Quoting Einstein,
"We can't solve problems by using the same kind of thinking we used when we created them." Thus our current challenges demand the development of great minds, engaged minds, minds with the awareness of, understanding of and commitment to solve the challenges before us. This is why I do what I do.

Dare we be optimistic about the future? To answer the question with a question, "Is there any other choice?". To address the question directly, my answer is a resounding yes.

February 13, 2010

Shifting Gears: Moving Beyond Copenhagen

In 2050, just 40 years from now, it is estimated the some 30%, about 3 billion, more people will be living on this planet. For classic growth-oriented development, the good news is that this growth will deliver billions of new consumers who want a better lifestyle. For sustainable development, the bad news is that shrinking natural resources, environmental degradation, and climate change will limit the ability of all 9 billion of us to attain or maintain the consumptive lifestyle that is commensurate with the middle class in today’s affluent markets. To resolve this conflict one must redefine the political, economic and social agenda where the global population is not just living on the planet, but living well and within the limits of the planet. “Living well” describes a standard of living where people are secure and have equitable access to and the ability to afford education, healthcare, mobility, the basics of food, water, energy and shelter, and consumer goods. “Living within the limits of the planet”, means living in such a way that this standard of living can be sustained with the available natural resources and without further harm to biodiversity, climate and other ecosystems.

Areas of focus toward a vision of a sustainable economy in 2050:

  • Population growth, migration/urbanization and demographics shifts.
  • Evolutionary economics the toward structural/behavioral true-value economics that include true cost of the classic externalities of natural resource depletion and environmental impact.
  • Property ownership rights of both hard assets (primary property vis-à-vis De Soto) and intellectual property.
  • The definition of State, the boundaries of sovereignty, the effectiveness of governance and the role of existing and emerging multilateral institutions.
  • The social and economic drivers of conflict and terrorism.
  • The systemic and integrated (co-dependent) nature of economic and the food, water, energy and environmental ecosystems.
  • The social systems of healthcare, education, social services and urban development.
  • Globalization opportunities, threats and regulation related to trade systems, financial markets, healthcare (pandemic), environmental impact, wealth creation and social/cultural diversity.
  • Social and technological creativity, breakthrough invention and disruptive innovation related to products services and business models and their diffusion.
  • Entrepreneurship and risk capital as an engine of sustainable development in both developed and developing economies.
  • Empowerment of individuals, particularly women and youth in the developing world, the development of leaders to create radically more eco-efficient solutions for improved business competitiveness, enhanced social equity and sustainable economic development.
Each area unto itself is technically challenging, socially complex, and presents potential intractable problems. Even understanding these problems requires the integration of diverse perspectives, insight into the interconnectedness and interdependencies and the factors that amplified or attenuate efforts to implement change.

This is the path we are about to embark upon. Hope you enjoy the journey.

Copenhagen Accord Update: Good News and Bad News

The good news first:

More than 50 nations including major greenhouse gas emitters China and the United States have submitted voluntary commitments for greenhouse gas emissions under the Copenhagen Accord's January 31, 2010 deadline.











The bad news:
While the Copenhagen Accord reaffirms the goal of limiting the rise in global temperatures to below 2 degrees Celsius above pre-industrial levels, analysis of the voluntary commitments submitted will miss this goal by a wide margin. Pledges submitted to the UNFCC would allow a temperature increase to 3.9 degrees Celsius (7.0 degrees Fahrenheit) by 2100.

Much work remains to be done before COP16 in Mexico later this year.