Systemic Statecraft for Managing New Green Inclusive Growth

Institute for New Economic Thinking (INET) 14 April 2012

Andrew Sheng Asian Perspectives Global Issues �

Systemic Statecraft: Overview  

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1.  Free  Market  economics  ignored  institutional  aspect  of    economic  behaviour  

2.  Even  adding  Institutional  School  is  incomplete,  because  Environmental  impact  is  excluded  from  analysis.    

3.  A  Systemic  and  Systematic  approach  is  needed      –  current  crisis  is  twin  crises  with  one  origin:  

         Excess  Consumption  of  Global  Resources  6inanced  by  Excess  Leverage  

•  The  current  Westphalian  system  creates  collective  action  traps,  underfunding  of  Global  Public  Goods,  and  complex  feedback  mechanisms  that  can  end  up  in  a  race  to  the  bottom  -­  Arms  Race  or  Global  Burn.          

•  We  need  to  create  mindsets  and  framework  for  a  race  to  the  top  of  a  prosperous,  inclusive,  and  environmentally  sustainable  world.      

Conventional  Economic  Theory  is  Nlawed  EF  Schumacher:  Small  is  Beautiful  (1975)  

 “Economic  growth,  which  viewed  from  the  point  of  view  of  economics,  physics,  chemistry  and  technology,  has  no  discernible  limit,  must  necessarily  run  into  decisive  bottlenecks  when  viewed  from  the  point  of  view  of  environmental  sciences…p.27  “But  we  should  be  concerned  with  the  limits  of  economic  theory….the  judgment  of  economics..is  an  extremely  fragmentary  judgment…it  is  inherent  in  the  methodology  of  economics  to  ignore  man’s  dependence  on  the  natural  world.”…p.41  

Ancient  Chinese  Philosophy  -­  [天人合一]  Man  and  Nature  are  One    

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Buddhist  Economics…Schumacher  

•  Economists  themselves,  like  most  specialists,  normally  suffer  from  a  kind  of  metaphysical  blindness,  assuming  that  theirs  is  a  science  of  absolute  and  invariable  truths,  without  any  presuppositions.    P.51  

•  Buddhist  economics  must  be  very  different  from  the  economics  of  modern  materialism,  since  the  Buddhist  sees  the  essence  of  civilization  not  in  the  multiplication  of  wants  but  in  the  puriNication  of  human  character..p.53    

•  Sunzi  -­  知己知彼－ know  yourself  before  you  know  others  

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Qualitative Growth for world that is economically sound, ecologically sustainable, and socially just Fritjof Capra and Hazel Henderson September 2009

•  How can we transform the global economy from a system striving for unlimited quantitative growth, which is manifestly unsustainable, to one that is ecologically sound without generating human hardship through more unemployment?

•  “The major problems of our time — energy, the environment, climate change, food security, and financial security — cannot be understood in isolation. They are systemic problems, which means that they are all interconnected and interdependent.”

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Current  Consumption  through  Leverage  Model  is  Unsustainable  

•  As  5  billion  of  current  7  billion  global  population  move  from  poverty  to  middle-­income  consumption  per  capita,  resource  availability/ecology  is  unsustainable.    

•  China,  India  and  other  emerging  markets  beginning  to  change  their  growth  model  towards  green,  inclusive  direction  [12th  Five  Year  Plans]  

•  There  are  both  huge  growth  and  investment  opportunities,  as  well  as  risk.      

•  These  growth  model  changes  are  the  most  important  in  our  lifetimes  –  if  they  fail,  there  will  be  global  failure.    

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ABCD: Four Lenses for Looking at Development

Architecture of Markets Systemic topology that determines

structure, efficiency, and transaction costs

Development Policy Global, national, local frameworks,

incentives, and directions

Business Models How business organizes, operates, and

innovates: inter- and intra-

Context Resources, People,

Technology, Ecology

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Architecture of Markets

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Global  Markets  are  highly  inter-­connected  vulnerable  to  contagion  –  Crisis  is  systemic  failure   �

McKinsey  Global  Ins0tute（2009）  

Sustainability is Complex Feedback Interactions between Market, State, and Planet [systems within

systems with reflexive feedback] �

•  Market is self-organized incentive compatible system, in which people exchange and compete for goods and services (measurable in money terms) – Completely free market is fragile.

•  State is socially organized system (market) that exchanges and competes for power (corruption and money-politics are at intersection of two systems) - Completely authoritarian state is also fragile.

•  Both systems are subsystems with Architecture that shifts between concentration and diffusion (centrifugal vs. centripetal forces).

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Statecraft Determines Outcome of Qualitative Growth

•  Non-renewable resource consumption

•  Carbon footprint •  Pollution & waste •  Packaging

•  Business models •  Market competition •  Technology •  Consumption

lifestyle

•  Policy framework •  Taxation •  Regulatory

enforcement •  Fiscal

sustainability •  National interests Global Statecraft shapes outcomes.

Who funds Global Public Goods? 11  

Market, State, and Planet�

•  Current Crises end up with Unsustainable State Debt underwriting unsustainable finance and unsustainable consumption.

•  Inconsistency between current Global Markets and National State power ends up in collective action traps and blame games.

•  National bureaucracies have lost power to act due to complexity arising from fast feedback from social media, raised expectations and globalization. State is agent for citizens, but bureaucracy does not necessarily serve public interest [Ludwig von Mises’s Bureaucracy (1944)].

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Business Models

Economic  evolution  is  the  result  of  three  interlinked  processes  –  Eric  Beinhocker  (2005) �

1.  PT  –  Physical  Technology  2.  ST  -­    Social  Technology  3.  BD  -­    Business  Design  -­  a  process  of  differentiation,  

selection  and  ampliNication,  with  the  market  as  a  Ninal  arbiter  of  Nitness.  It  is  the  three-­way  co-­evolution  of  PT,  ST  and  BD  that  accounts  for  the  patterns  of  change  and  growth  in  the  economy.  

Systemic  Statecraft  requires  understanding  that  Business  Plans  game  State  policies  and  regulations  –  unless  incentives  are  changed  towards  appropriate  direction.  

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Financial  market  systemic  risks  originate  from  interac0ons  among  domes0c  and  global  par0cipants    

•  Each  Asian  economy  needs  a  well-­‐func0oning  ecosystem  of  finance  to  manage  the  systemic  risks.  Otherwise,  it  will  face  vola0le  asset  bubbles  and  exaggerated  price  cycles,  funded  by  hot  capital  inflows.  

Price  Upswing   Price  Downswing  

Source: UK Financial Services Authority

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Finance:  Engine  of  growth  or  bubble?  

Engine  of  Growth   Engine  of  Bubble  

Growth    Jobs  Value  

Distribu0on  +   -­‐  

Finance  Ecosystem  

   Money  &  Macro     Regula0on     External  

 Financial  structure     Others  

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Context

Economic  centre  of  gravity  is  shiTing  back  to  East  

Asian Century Scenario by Asian Development Bank (2011) •  Asia’s share of global GDP to double to 52% (US$174 trillion at market

exchange rates) in 2050 •  With a per capita GDP of US$40,800 (PPP), Asia would have incomes similar to

today’s Europe •  Asia would have roughly half of total global financial assets

Asian  Middle  Class  will  account  for  >  60%  of  Global  pool  of  new  Consump0on  and  Savings  

Source:  OECD  Development  Centre  

Source: International Energy Statistics 2011

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Market/Business Models�

State/Policies�

Market/ Business Models�

State/Policies�

Planet/ Resources

Planet/ Resources

World

Sustainable Relations�

•  Current international economic relations are unsustainable because of national and global Collective Action Traps [note failed negotiations]

•  Competition needs to be a “race to the top” for environmental sustainability, social equity, and globally beneficial outcomes

•  How do you avoid the “clash”? •  By definition, sustainability is a supranational

objective •  In PPP, put People and Planet before Profit – Profits

will come when there is Equality and Environment is Sustainable 22  

Development Policy

Getting to Low-carbon World is Feasible (WBGU 2011)

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It relies heavily on the change agents, who can test and advance the options for leaving behind an econ-omy reliant on the use of fossil resources, thus help-ing to develop new leitmotifs, or new visions, to serve as guiding principles for social transition. Ini-tially, the change agents are involved as marginalised protagonists; they could, however, develop into an effective force, greatly advancing the transforma-tion (fig. 2). It needs a proactive state to allow the transformation process to develop into a certain direction by provid-ing the relevant framework, by setting the course for structural change, and by guaranteeing the imple-mentation of climate-friendly innovations. The proactive state gives the change agents leeway, and supports them actively. It also counts on the cooperation of the international community and the establishment of global govern-ance structures as the indispensable driving force for the intended transformation momentum.

The most important starting point for the transforma-tion towards sustainability is the reduction of CO2 emis-sions from the use of fossil energy carriers. Apart from decarbonisation, a second major goal of a remodelling of the energy systems is overcoming global energy pov-erty.

The WBGU shows explicitly that the decarbonisa-tion of energy systems on a global level is feasible, both from a technical and an economic point of view. The long-term economic costs of such a transformation amount to just a few percent of the global GDP. For the transformation to succeed, it is imperative that the reduction of the carbon dioxide intensity of the glo-bal GDP is greatly accelerated. Assuming an economic growth of 2–3 %, if a development path were to be fol-lowed that would lead to not more than 750 Gt CO2 emissions from fossil sources by 2050, then, over the next few years, the speed at which the CO2 intensity of the global economic output is reduced would have to be at least twice as fast as it has been in the past.

However, there is more than one way to transform energy systems in the direction of climate protection.

Topography of the transformation: the first step towards turning the global society’s status quo into low-carbon (complete decarbonisation) is the overcoming of obstacles, shown here as an increase in social costs. This increase is currently intensified through barriers (red): the social costs of the status quo appear to be lower than appropriate, due to, for example, misguided incentives such as subsidies for fossil energy carriers, or environmental costs that are not internalised. At the same time, the barriers to be overcome appear to be higher than they actually are: although overcoming various barriers requires a high degree of effort, for example, the costly overcoming of path dependencies, this is compensated by favourable factors: many low-carbon technologies are already available, and their deployment is financially viable. Aided by the favourable factors, barriers can be diminished to pave the way for the transformation. Once the decisive barriers have been overcome, the move towards low-carbon can be expected to develop its own dynamics.Source: WBGU

How to deal with systems reform? Donella Meadows: Thinking in Systems – Primer, 2008    

•  A system is more than the sum of its parts. It exhibits adaptive, dynamic, goal-seeking, self-preserving, and sometimes evolutionary behavior.

•  No physical entity can grow forever. If company managers, city governments, and the human population do not choose and enforce their own limits to keep growth within the capacity of the supporting environment, then the environment will choose and enforce limits.

•  The trap called the tragedy of the commons comes about when there is escalation, or just simple growth, in a commonly shared, erodible environment.

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Elinor Ostrom “Governing The Commons: The Evolution of Institutions for Collective Action”, 1990

•  Historically, people can create institutions for collective action that benefits them all.

•  Rules of the game can be changed to turn zero-sum games into non-zero-sum games

•  Successful basic design principles: –  Group boundaries are clearly defined. –  Rules governing use of collective goods match local needs and conditions. –  Legitimacy - individuals affected can participate in modifying the rules. –  Community Rights respected by external authorities. –  Wiki-monitoring: community themselves monitoring of member behavior. –  A graduated system of sanctions is used. –  Access to low-cost conflict resolution mechanisms. –  For larger systems: appropriation, provision, monitoring, enforcement, conflict resolution, and

governance activities are organized in multiple layers of nested enterprises.

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Strategic Intervention in Complex Systems — Finding “Leverage Points” (adapted from Ostrom/Meadows)

1.  Foster  shared  values  (community)  and  cultivate  networks.  2.  Work  at  multiple  levels  of  scale    (top  down,  bottom  up,  outside  in,  

and  inside  out)  for  legitimacy  3.  Make  space  for  self-­organization  4.  Create  Diversity    5.  Get  Incentives  right  –  promote  competition  (race  to  top)  6.  Pay  attention  to  what  is  important,  not  just  what  is  quantiNiable  7.  Make  Feedback  policies  for  Feedback  systems  8.  Be  prepared  to  make  sacriNices  for  greater  good  [system  unstable  

when  even  leader  is  free  rider]  9.  Assume  that  change  is  going  to  take  time.  10. Be  prepared  to  be  surprised.  

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Food  for  Thought  

•  Perhaps  the  greatest  challenge  for  Asia  is  to  “rediscover”  how  we  can  live  in  a  Sustainable  world,  given  rising  population  and  the  limits  to  Natural  Resources.  

•  Since  neo-­classical  economics  failed  to  deal  with  the  contradiction  between  limits  to  growth  and  material  consumption,  we  must  re-­examine  within  ourselves  the  foundations  of  political  economy  –  how  can  the  world  can  be  a  better  place,  without  limitless  wants  to  unlimited  self-­destruction?  

•  This  is  truly  the  challenge  for  Asian  and  global  thinkers.    

Thank You

www.fungglobalinstitute.org

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