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WARSAW – The global economy’s glory days are surely over. Yet policymakers continue to focus on short-term demand management in the hope of resurrecting the heady growth rates enjoyed before the 2008-09 financial crisis. This is a mistake. When one analyzes the neo-classical growth factors – labor, capital, and total factor productivity – it is doubtful whether stimulating demand can be sustainable over the longer term, or even serve as an effective short-term policy.
Consider each of those growth factors. Over the next 15 years, demographic changes will reverse, or at least slow, labor-supply growth everywhere except Africa, the Middle East, and South Central Asia. Europe, Japan, the United States, and eventually China and East Asia will face labor shortages.
Although large-scale migration from labor-surplus regions to deficit regions would benefit recipient economies, it would almost certainly trigger popular resistance, especially in Europe and East Asia, making it difficult to support. Increasing the labor-force participation rate, especially among women and the elderly, might ease tight labor markets, but this alone would be insufficient to counter the decline in working-age populations.
The world economy cannot count on higher investment levels either. The global investment/GDP ratio, especially in advanced economies, has been gradually declining over the past 30 years, and there is no obvious reason why it would pick up again in the medium to long-term. Until recently, falling investment in the developed world had been offset by rapid increases in investment in emerging markets, mostly in Asia. But high rates of investment there are also unsustainable. As in Japan, China’s investment rate (running at almost 50% of GDP since 2009) will decline as its per capita income rises.
The third engine of growth, total factor productivity, will also be unable to maintain the relentless gains witnessed from the late 1990’s to the mid-2000’s. During this time, the global economy benefited from the confluence of several unique developments: an information and communications revolution; a “peace dividend” resulting from the end of the Cold War; and the implementation of market reforms in many former communist and other developing economies. Moreover, global growth received a further boost from the completion of the Uruguay Round of free-trade negotiations in 1994 and the overall liberalization of capital flows.
It is difficult to point to any growth impetus of similar magnitude – whether innovation or public policy – in today’s economy. No new technological revolution appears to be on the horizon. The World Trade Organization produced only a limited agreement in Bali in December, despite 12 years of negotiations, while numerous bilateral and regional free-trade agreements might even reduce world trade overall.
Worse, in the wake of the 2008 financial crisis, sluggish growth and high unemployment in developed countries have fueled demands for more protectionism. Thus, the financial liberalization of the 1990’s and early 2000’s is also under threat.
The far-reaching macroeconomic and political reforms of the post-Cold War era also seem to have run their course. The easy gains have already been banked; any further structural change will take longer to agree and be tougher to implement.
Thus, with supply-side factors no longer driving global growth, we must reassess our expectations of what monetary and fiscal policies can achieve. If actual growth is already close to potential growth, then continuing the current fiscal and monetary stimulus will only create more bubbles, exacerbate sovereign-debt problems, and, by reducing the pool of global savings available to finance private investment, undercut long-term growth prospects.
Instead, policymakers should focus on removing their economies’ structural and institutional bottlenecks. In advanced markets, these stem largely from a declining and aging population, labor-market rigidities, an unaffordable welfare state, high and distorting taxes, and government indebtedness.
The list of growth obstacles in emerging markets is even longer: corruption and weak rule of law, state capture, organized crime, poor infrastructure, an unskilled workforce, limited access to finance, and too much state ownership. In addition, markets of all sizes and levels of development continue to suffer from protectionism, restrictions on foreign capital flows, rising economic populism, and profligate or poorly targeted welfare programs.
If these problems can be addressed, both globally and at the national level, we can end the dangerous fiscal and monetary expansionism on which the world economy has come to rely and allow growth to be sustained over the long term – though at lower rates than in recent years.
The acronym VUCA — Volatile, Uncertain, Complex, Ambiguous — may have its origins in the military, but it is increasingly clear that it applies to all aspects of our lives today. The fact is we operate in an age of fast-moving and increasingly unpredictable change. No one country, society, industrial sector or individual organisation is immune. We are all impacted. Navigating this new reality is made even more challenging by the increasingly interdependent nature of today’s world.
The issues and predicaments we face are linked inextricably as never before. There is no better or more dramatic illustration of this than the food, water, energy and climate nexus, so effectively highlighted over recent years by the World Economic Forum and others. How do we guarantee food security for a rapidly rising population in the face of growing water and energy constraints, many of them directly attributable to climate change? No wonder one leading scientist has warned of a ‘perfect storm’ of global events. Increasingly, business has found itself in the eye of this storm, mistrusted by large sections of society and seen, with some justification, as part of the problem and not part of the solution to many of today’s challenges. This has to change. Business can no longer afford to be a bystander, content to sit on the sidelines doing the minimum necessary to acquire its ‘licence to operate.’ The challenges require — and citizens demand — a different approach.
Permissible growth in the future has to be based on sustainable and equitable models. Having acquired a license to operate, it’s time for business to earn a license to lead. The military and defense officials who first identified the VUCA world used to speak of the need for ‘burden sharing’, for sovereign nations to spread more evenly the responsibility for defending freedoms around the world. It’s a military parallel that also has resonance today. For its part, business has to accept a much greater share of the responsibility for everything that goes on within the length and breadth of its value chain. Putting your own house in order is a necessary — but insufficient — condition for developing sustainable growth models.
This is the essence behind the Unilever Sustainable Living Plan, which gives expression to the company’s commitment to double its size while reducing its overall environmental footprint and increasing its positive social impact. It’s a plan that covers the entire value chain, from sourcing to manufacturing to the way consumers use our products.
This requires the kind of holistic, systems-based thinking that Andrea Bassi and Gilbert Probst argue needs to become mainstream, in their book Tackling Complexity: A Systemic Approach for Decision Makers. The book adopts systemic thinking to solve complex problems in socio-political as well as business environments, turning them into opportunities.
The main innovation that systemic thinking introduces — the emphasis on defining the problem-creating system, which is made up of interacting parts, rather than prioritizing events that need immediate fixing — can be used to better understand reality and its complexity. Tackling Complexity proposes a five-step technique with which to better understand problems and the context in which they arise, and tools to directly inform each step of the decision-making process. Practically, systemic thinking can be used to identify problems, analyze their boundaries, design strategies and policy interventions, forecast and measure their expected impacts, implement them, and monitor and evaluate their successes and failures.
If we get this right we can make a difference. However, the sheer size and scale of the challenges we face means that even the largest and most internationally dispersed businesses and organizations are limited in the scope of what they can achieve. System-wide changes rely on a critical mass of interested parties, all willing to enter into deep partnerships and collaborations, founded on new levels of trust and a commitment to action, not debate.
There is still a long way to go. We are far from reaching the tipping point that is needed, though the tide is certainly turning, in my view. The commitment to put an end to illegal deforestation and develop sustainable alternatives for commodities like palm oil and soy, for example, is an inspiring illustration of what can be achieved when governments and industry partners come together determined to bring about transformational market-wide changes. None of this is easy. Everything carries a risk. Taking the first step is often the most difficult. It takes courage and a willingness to focus on long-term horizons, not short-term results. Systemic changes therefore require new forms of leadership from men and women — and especially women — willing to be the vanguards of change. For them, Tackling Complexity provides an invaluable route map of what it takes to drive change and succeed in the VUCA world that is undoubtedly here to stay.
The Trans-Pacific Partnership has been described by negotiation countries as one of the most ambitious 21st century trade agreements. However, today’s leak of the agreement’s draft environment chapter reveals deeply concerning limits to that ambition. And it is these limits that could significantly undermine the sustainable use of the world’s resources as well as the long-term economic benefits of trade.
For nearly four years, a dozen nations including Canada, the U.S., Mexico, and a number of Pacific Rim countries have been quietly negotiating this deal. Last fall, WWF along with 23 other environmental organizations called for the inclusion of a number of critical measures to ensure the long-term sustainability of the world’s seafood and timber, and to curb the illegal trade of wildlife. Even though legally enforceable environmental provisions are a mandatory part of all U.S. trade agreements, that’s precisely where the leaked chapter (penned, it turns out, by Canada) fails. In short, the environmental provisions have no teeth.
The global environmental issues cited by WWF and others are implicit in this trade agreement. The countries included in the Trans-Pacific Partnership represent about one-quarter of the world’s global seafood catch (Canada is both a major exporter and importer of seafood). They account for 34 per cent of world’s timber and pulp production. And they include some of the globe’s largest consumers of illegal wildlife products. In other words, this agreement represents a once-in-a-generation opportunity to significantly address the overfishing of our oceans, the devastation of our forests, and the illegal poaching and trafficking that is driving rhinos, elephants, sharks and other species to the brink of extinction.
That’s what’s slipping through our fingers here. And the implications are far-ranging. Unsustainable resource trade weakens the ability of law-abiding businesses to compete, and threatens jobs in countries who follow the rules. Take “pirate” fishing for example (fishing that’s illegal, unregulated, and unreported). This global epidemic accounts for about 20 per cent of the world’s seafood catch, costing the industry as much as $23 billion per year. It’s also a major driver of overfishing, which includes unsustainable shark finning.
Canada has actually become an international leader in the fight against “pirate” fishing. Shouldn’t we be demanding that same level of leadership from others? Shouldn’t we be at the table pushing for an agreement that makes strong, legally-binding environmental legislation the foundation for a prosperous and sustainable global economy? Doesn’t that speak both to our historic role in international negotiations as well as to our values as Canadians?
Sadly, today’s leaked report shows us doing the opposite: standing in the way of proposals for stronger environmental enforcements. That, too, is a very disappointing missed opportunity — for Canada, for the world, and for our country’s our place in it.
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