systemic statecraft for managing new green inclusive growth · 2012. 7. 3. · elinor ostrom...
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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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