Academic Year 2013-2014
Lectures on:
Economics of Sustainable Development
Prof. Alessandro Vercelli
Objectives:
Critical introduction to
the theory of Sustainable Development
and its application to the Global Economy
in the light of the Great Recession
Recommended prerequisites:
basic notions of macroeconomics, microeconomics and statistics
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Contents
The lectures focus on the sustainability of global development connecting
theory, methodology and the analysis of the empirical evidence
In particular the lectures will analyse in some detail the following themes:
-the “subprime” financial crisis as a consequence of unsustainable
development
-globalization and sustainable development
-the Kuznets curve and social sustainability
-the environmental Kuznets curve and environmental sustainability,
-globalization and health,
-happiness, health and sustainability
-the sustainability gap of the energy system and climate change,
-corporate social responsibility (CSR) and the sustainable firm,
-the co-evolution of economic liberalism and the globalization of markets,
-the policy strategies towards the sustainability of global development
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Reading list: main references
Main references:
-Borghesi, S. and A. Vercelli, 2008, Sustainable Globalization. Social
and Environmental Conditions, Basingstoke and New York,
Palgrave Macmillan
-Stiglitz, J.E, 2012, The Price of Inequality, Allen Lane. London, 2012
See also:
-Stiglitz, J.E., 2006, Making globalization work, New York, Norton
-Stiglitz, J.E., 2010 (2nd updated edition), Freefall. Free markets and
the Sinking of the global Economy, London, Penguin Books
-Krugman, P., 2012, End this Depression Now!, Norton, New York
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Type of exams
• No partial examination
• Final examination: written
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Audience
•
Magisterial degrees
•
(1° year) Economia dell’Ambiente e dello Sviluppo: 9 credits
•
(1° year) Management and Governance
(curriculum Accounting and Management): 6 credits
•
(2° year) Finance: 6 credits
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Venue and timetable
Wednesday
10.00-12.00
lecture room 11
Thursday
10.00-12.00
lecture room 5
18.00-20.00
lecture room 3
added until Thursday 17 of April
Friday
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10.00-12.00
lecture room 9
6
Economics of sustainable development
2013
Lecture 1
Prologue:
SUSTAINABLE DEVELOPMENT AND THE
GREAT RECESSION
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Main thesis
The Great recession is the expression of the unsustainability of the
development model prevailing in the last 30 years
Occasion to modify this model radically enough to make it sustainable
Otherwise the process of development will become even more
unsustainable and we are condemned to further crises bound to be
even more destructive and uncontrollable
We can break this vicious circle only by modifying immediately this
vicious circle without waiting for the end of the crisis
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The Great recession (2007-?):
an epoch-making crisis
Deep crisis of the “neo-liberal” cycle (1979-2010?)
This is recognized also by some of the protagonists:
“… the Reagan-Thatcher model, which favored finance over domestic
manufacturing, has collapsed…the mutually reinforcing rise of
financialization and globalization broke the bond between American
capitalism and America’s interests”
(Greenspan in late 2008, Governor of Fed from 1987 to 2006)
Awareness of the gravity of problems → no safe return to BAU in the
economy and in economic theory
also in the language: the usual name “subprime crisis” betrays a clumsy
attempt to minimize scope and responsibilities of the crisis:
→ I will call it Great Recession
This terminology emphasizes that the crisis is not yet over
(↑ U and global recession in 2009 and again since 2010 in Europe)
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The costs of the crisis
Huge costs:
April 2008: 10% of US GDP
IMF itself
{
} only the costs for IF
April 2009: 30% of US GDP
All the DMs should reflect on responsibilities:
financiers, industrialists, policy authorities, economists …
Many elude responsibilities shifting them on an extremely unlikely and
unpredictable combination of exogenous shocks and policy errors:
black swan sighted “once in a century” (Greenspan)
In my opinion the causes are mainly endogenous: flawed and unsustainable
model of development
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Long cycles in finance, USA, 1900-2008
the neoliberal cycle: 1979-?
US Stock market valuation
Source: Martin Wolf FT, 26.11.08 from Robert Shiller et al.
CAPE = cyclically adjusted price-earning ratio
Q = cyclically adjusted Tobin Q (stock-exchange value/net worth)
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Unsustainable lightness
I focus on neo-liberalism as a macroeconomic policy strategy
overconfidence in the self-regulating virtues of unfettered markets
→ aims to shift the boundaries market/state in favor of markets by pursuing
♠ public expenditure: ↑privatization and ↓welfare state
♣ regulation and supervision: ↑deregulation
light
{
♥ concern for the social capital: ↑inequality and ↑poverty
♦ concern for the natural capital: ↑scarcity and ↑pollution
this lightness proved to be unbearable:
→ model of growth without development that is unsustainable from
the economic, financial, social and environmental points of view
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The emergence of the NL paradigm
Typically, the ruling policy strategy is blamed for a severe and
persistent crisis
remove the causes of the crisis
→new policy strategy to {
emerges
avoid new crises
This is what happened in the period from the late 1960s-early
1970s (workers and students struggles) and during the
following stagflation in the rest of the1970s
Economic NL in the version of NCEcs emerged as winner of a long
and hot struggle against the Keynesian policy strategy
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The fight against Keynesianism
The Keynesian policy strategy considered as inconsistent with
equilibrium and thus efficiency:
• Real equilibrium suboptimal: excessive interference of the state
excessive public expenditure
countercyclical policies
discretionary monetary policies
• Monetary equilibrium: inflationary bias in the real economy
full employment policies
countercyclical policies
deficit spending
→ Phillips curve as a menu of policy choices
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Phillips curve in the
late 1960s and 1970s
∆w/w
U
U*
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Recipes to sustain the optimum equilibrium
Accept a vertical Phillips curve at the natural rate of unemployment
full employment policies
Forsake {
countercyclical policies
rigid monetary policy rule
Adopt fixed policy rules {
budget equilibrium
Focus on structural policies to shift economic decision power from the
state to the market: privatization and deregulation
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4 Phases
1979 Mrs Thatcher
The neoliberal policy strategy adopted since {
1980 Reagan administration
4 phases:
A) The Great Disinflation: 1979-1987
B) The Roaring 1990s: 1990-2000 (Krueger and Solow, 2002; Stiglitz, 2003)
C) The Zero Years: 2000-2007 (Krugman, 2009: the big zero decade)
D) The Great recession: 2007-2014?
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A) The Great Disinflation: 1979-1987
A)
The Great Disinflation: monetarist phase (inspired by the monetary
equilibrium business cycle of Lucas)
Initiated and pursued by Paul Volker (chairman of FED 1979-1987)
trade unions
strict monetary policy → weakening
{
producers of raw materials
labor market and industrial relations
→ deregulation
{
international markets (in particular financial markets)
inflationary tensions in real markets overcome → “Great Moderation”:
better monetary policy
stability of w and p even during the booms {
↑ flexibility of labor market
→downward shift and flattening of the Phillips curve
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Phillips curve in the late
1980s
∆w/w
“Great Moderation”
U
U*
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Collateral effects: increasing inequality
Praised as great success of NL policies (not by the workers);
however the same structural reforms immediately produced collateral
effects:
1° collateral effect: ↑ inequality of income distribution within countries
→ inversion of a downward trend persisting since WW1
this occurred in all the OECD countries
while in many developing countries that deviated from NL
precepts this did not occur (e.g. Brazil)
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Inequality in the U.K., 1939-1996 (%)
56
52
48
44
Gini index
40
36
32
28
24
20
16
1985
1945
1955
1965
1975
1935
1995
1970
1990
1940
1950
1960
1980
2000
Source: Brandolini (2002)
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Fig. 5
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Inequality in the USA, 1929-1996
56
52
48
44
Gini index
40
36
32
28
24
20
16
1915 1925
1985 1995
1955
1965 1975
1935 1945
1970
1990 2000
1920 1930
1940 1950 1960
1980
Source: Brandolini (2002)
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Fig. 6
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Collateral effects: increasing poverty
2° collateral effect: acceleration in the number of poor people
Contrary to the “Pareto law” and “Bhagwati hypothesis” the increase
in inequality since the beginning of modernization played a crucial
role in the increase of poverty
“had the world distribution of income remained unchanged since
1820, the number of poor people would be less than 1/4th than it is
today and the number of extremely poor people would be less than
1/8th of what is today”
(Bourguignon and Morisson, 2002, p.733)
Further increase of the poor and malnutrition in consequence of the
Great Recession
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Poverty trends (< $2 per diem)
POVERTY
3000.0
100.0%
90.0%
2500.0
80.0%
60.0%
1500.0
50.0%
40.0%
1000.0
headcount (percents)
headcount (millions)
70.0%
2000.0
30.0%
20.0%
500.0
10.0%
0.0
0.0%
1820
1850
1870
1890
1910
1929
poverty
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1950
1960
1970
1980
1992
poverty %
Source: Bourguignon and Morisson (2002)
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Collateral effects: slowdown of growth
3d collateral effect: slowdown of the trend of GDP growth
• ↑ inequality and poverty →↓ of growth trend of aggregate demand
and thus also of GDP
↓ growth trend
Consequences{
↓growth in OECD countries more than in developing
countries less intoxicated by the NLPS
therefore both the change in trend and the worse trend of OECD
countries may be explained as a consequence of NL policies
(applied more systematically in OECD countries)
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B) The roaring 1990s (1): 1987-2000
Since 1987 change in monetary policy (Greenspan, 1987-2006)
preceded by a change in theory: from the monetary equilibrium business
cycle of Lucas to the real business cycle of Kydland and Prescott (1982)
“Greenspan put”: floor to the price of financial assets without a ceiling
→ the real inflationary bias replaced by a financial inflationary bias
→ Greenspan put: alters the relative price, risk and expectations of
financial/real investment :↓ real investment →↓ growth →↑ U
Consequence 1) doping of growth:
↑ indebtment of households to sustain aggregate demand
↑ deficit spending by the Reagan, Bush1 and 2 Administration
-investment bubbles fed by excess liquidity and the implicit insurance of
financial assets value (e.g. the “new economy” bubble)
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B) The roaring 1990s (2)
→ ↓ risk perception
→↑ financial instability
Consequence 2) {
→ ↑ financial fragility
→ environment liable to financial bubbles: increase in financial instability
of the 18 main financial crises identified by Kaminsky and Reinhart (1999) in the
second half of the past century (all post-deregulation):
3 occurred in the 2° half of the 1970s, 7 in the 1980s, 8 in the 1990s
not global: circumscribed to a particular institution (LTCM, 1998),
sector (US saving and loan associations, 1984), or
country (Italy 1990, UK 1991, Japan 1992 …)
All these episodes happened after specific acts of deregulation (Kaminsky-Reinhart)
the prompt and generous bail-out of big FIs under financial stress paved the way for
the global crises of the years ’00
1997 Asian crisis may be considered as the first global financial crisis (as it hit also the
USA and Japan) but its center was not in the core of the system
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C) The Zero Years: 2000-2007
The process of increasing financial stability culminates in the zero decade:
two major global crises originated within the core of the system
new economy crisis 2001: serious warning of a major disaster approaching
but its structural causes were neglected → BAU
also in this case monetary policy succeeded in thwarting the crisis sooner
than expected, strengthening the confidence in the omnipotence of the
invisible hand (helped by the Greenspan’s visible hand)
Speculation shifted from immaterial ICT goods to brick-and-mortar goods:
first wave of the 2° global crisis:
→ bubble of the housing sector (US, UK, Spain, etc.)
detonator
→ crisis of subprime and ARM mortgages
{
propagation of implosion
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The Great Recession: 2007-?
the detonator of the first wave
-housing crisis: decline of prices in the 2nd half of 2006
→ soft landing expected
Detonator {
-price of oil: from $63 in December 2006 to $147 in July 2008
→ cost inflation
→ notwithstanding the emerging crisis, central banks reacted as usual
from 2% in May 2004
by increasing the discount rate: Fed {
to 6.25% in August 2008
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Oil production world summary
(source: Energy Watch Group, 2007)
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The end of the “great moderation”
Perverse interaction between financial, economic and environmental
problems (in particular those related to the energy system based on fossil
fuels) that makes clear the unsustainability of the NL growth regime
→ this brought to an end the era of “great moderation”:
in the financial sector
dual inflationary bias {
in the real sector
not ↑ wages (as in the Bretton Woods Era) but ↑ p resources
This has been partly masked by the ongoing recession and the North-Africa
and Middle-East turmoil, but cost-inflation will accelerate immediately with
recovery jeopardizing its viability:
the price of food and resources started to increase again in the second
semester of 2009
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The propagation mechanism
The structural causes underlying the propagation mechanism have increased
further its destructive potential
In the Bretton Woods period the propagation mechanism was strong mainly
within the real side of the economy:
conflict on income distribution→ leapfrogging:
steep Phillips curve shifting upwards
→ stop-and-go fluctuations, accelerating inflation, stagflation…
Since the late 1970s deep transformation of the propagation process:
→ propagation effects mainly through the financial side of the economy
in consequence of the structural transformations
started in the early 1980s
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Structural Changes in the neoliberal era (1)
a) Globalization: growing global interconnection among DMs
financial (immediate): → sale to ↓D/Y → ↓p → ↓ Y
(wealth effect) → ↑ D/Y: panic accelerating the process
contagion{
real (rapid): ↓ demand→↓ production → ↓ employment →↓
demand → interaction with financial contagion
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Structural Changes in the neoliberal era (2)
b) Securitization: propagation of systemic risk through the market
assets
→ generalized moral hazard: no one responsible for evaluation {
risk
alibi provided by NL economists: “market knows better”
Derivatives: OTC from 10% (1980) to > 90%
e.g. Mortgage-backed securities: spread risk in an unknowable way,
Credit Default Swaps: the financial system cannot insure itself
c) Shadow banking: propagation of systemic risk and financial fragility in
an opaque way as they depend on off-balance sheets operations
FIs too big to fail → transmission of financial fragility to the state
→powerful and dangerous propagation process
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Second wave
-shock: speculation on sovereign debt in the Eurozone
2nd wave {
-policy response: severe austerity measure
the shock triggering the 2nd wave has been produced by the policy
response to the first wave: 2nd stage of the same Great Crisis:
“…finance was rescued, only to turn and bite its rescuer” (RMF 1, p.2)
Blame on Keynesian policies of deficit spending but the historical record
suggests the opposite
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Source: IMF, GFSR, Apr. 2010
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The hegemony of finance
After the first major wave huge unprecedented bail-out of distressed big FIs
composition and retribution of top management
without conditions {
support of the real economy
Rescue plan of the EU in May 2010 ostensibly meant to rescue the sovereign debt of
PIIGS but the main concern was in fact the protection of the balance sheets
of heavily exposed banks of core countries (Germany and France)
shifting the burden on taxpayers, public sector workers, and citizens at large
(increase of unemployment, deterioration of pensions, services and so on)
In the meantime bankers are set for record pay and bonuses for second year
US: ↑4% in 2009 (J.P. Morgan); e.g.:
Goldman Sachs projections 2010: revenue ↓ 13.5% while compensation ↑ 3.7 %
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the revival of NLPS by the “deficit hawks”
•
“Ricardian equivalence” → the multiplier of fiscal stimulus m = zero:
Barro: ↓ current private E anticipating ↑ tax burden = ↑ public E
RE and efficient financial markets: counter-factual
Criticisms {
1<m≤2 in the US and is higher when U is higher
•
large fiscal D/Y → ↑ r and inflation: this is false in current conditions while in
the longer period it depends crucially on the dynamics of Y
Blanchard-Perotti (2002): 1% ↑ Y growth →↓ D/Y = 2.1% in the U.S.
•
“Treasury view”: crowding out of private E, but lack of effective demand
Jayadev-Konczal (2010) vs Alesina-Ardagna (2010) in growing economies
•
Deterioration of expectations : worsened not because of state intervention
but because of the austerity measures (BoE surveys)
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The errors of economic policy 1:
deregulation
neoliberals: errors of economic policy authorities + shocks
Hot debate
{
critics: market failures
responsibilities deriving from a common cause:
market fundamentalism
→ errors of policy as permissive factors
repeal (1999) of the Glass-Steagall Act (1933)
Deregulation
{
OTC (Over The Counter) derivatives
all the postwar financial crises after deregulation of financial markets
(Kaminsky and Reinhart)
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The errors of economic policy 2:
monetary policy
“Greenspan put” (1987-2006)
Monetary policy
{
“Bernanke put” (2006- ?):
illusion that a financial crisis may be thwarted cheaply
↓ perception of risk
by flooding the system of liquidity {
↑ moral hazard
in the short period
→ Stabilization {
but de-stabilizes in the long period (Minsky)
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The errors of economic policy 3:
structural policies
↑ inequality
→ ↓ aggregate demand
- Dismantlement of the welfare state{
↑ poverty
-housing: Fanny Mae, Freddy Mac
- Debt of households encouraged {
-credit cards, consumption credit
Effects: growing financial fragility {
- firms (mainly FI)
- households
- state
→ vulnerability to shocks (oil, raw materials, food, climate...)
N.B.: all these behaviors encouraged by market fundamentalism
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The causes of the crisis: market failures
exogenous factors
We cannot attribute all the blame
{
policy errors
Fundamental factor: endogenous propagation mechanism
-housing: endogenous
Also the detonator {
-oil price: unsustainable model of development
Macroscopic market failures:
it does not exist (Stiglitz)
-the invisible hand is invisible because {
-coerced by visible hands
In any case the real market is quite different from the perfect-competition one
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The unsustainability of the existing
development model
Nexus between social-environmental-financial-economic conditions:
↓ welfare state and ↑ flexibility/precariousness of labor →↑ inequality and
poverty → ↓ growth of per capita income → ↓ aggregate demand→ ↓ PIL
industrialists banks and governments supported the growth of GDP
encouraging the indebtedness of households and firms → ↑
→ ↑ D/Y → ↑ financial fragility of banks, firms and households
exogenous: ↑ oil price ← scarcity
→ ↓ vulnerability to shocks {
endogenous: ↑ discount rate
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The unsustainability of the existing
development model
↑ production of biofuels and climate change → ↑ price of food
→ further ↑ inequality and poverty → ↑ financial fragility → ↑
→ ↑ financial crisis → ↑ real crisis → ↑ recession → ↑ unemployment →
↓ reduction of the oil p → ↓ investment in renewable energy sources → ↑
climate change
→ economic recovery → ↑ oil price → ↑ stagflation
→ also the future growth will be unsustainable unless we radically modify
the model of development → sustainable development
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The ultimate cause of the crisis
The ultimate cause of the crisis is the unsustainability of the model of development
supported and promoted by toxic ideologies:
•
Fetishism of the market: securitization, indebtedness, laxity of supervisors,
weakening of regulation, dismantling of the welfare state, flexibility and
precariousness of labor, and so on
→ escape the pendulum between state and market through apt reforms meant to
revive the participation of citizens and stakeholders
•
Fetishism of market-led growth: shared by classical and Keynesian (Ben
Friedman) economists, entrepreneurs and unions, right-wing and left-wing parties
→ transition towards sustainable development that may go on even with
a low rate of growth
•
Fetishism of market-led innovation: not always beneficial to citizens; in particular
in finance often to elude controls and increase short-term profits
→ transition towards a model of sustainable innovation
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