RIO+20 a Citizen's Background Document

7/31/2019 RIO+20 a Citizen's Background Document

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RIO+20:ACitizensBackgroundDocument

AlejandroNadalCenterforEconomicStudies

ElColegiodeMexico

andCo-Chair,TEMTI

CEESP-IUCN

STATEMENTOFPURPOSE

Humanity is at a crossroads. The global economic and financial crisis challenges thedogmasofneoliberalismandindicatesunerringlythatfollowingthismodelwillleadustoatragicabyssofnoreturn.Duringthelastfourdecadesindebtednessandasymmetriesaccumulated,environmentaldegradationcontinuedrelentlessly,inequalityintensifiedandthedestructionofpeopleslivelihoodsadvancedunquestioned.Thebankingandfinancialsectors inthemature capitalisteconomieswere the epicentre of the crisis.Today theyremainonthebrinkofcollapseandrecordhighlevelsofunemploymentpersist.The world is looking ahead at a decade of stagnation and unemployment, and yet, atUNCSD2012(Rio+20)thecrisiswillbeabsentfromtheagenda.Officialdocumentsandtheunendingbarrageofpropagandaintheinternationalbusinesspress continue to distort the publics assessment of the origins and gravity of todayscrisis,aswellasitsimplicationsforsustainability.Thisbackgrounddocumentisamodestattemptto settherecordstraightandtoprovidereferencematerialforamoreobjectiveassessmentbyconcernedcitizens.

IntroductionTwo weeks before the start of the UN Conferenceon Sustainable Development(UNCSD)theSecretariathasreleasedthedraftoftheOutcomeDocument,entitledTheFutureWeWant.Althoughintensenegotiationsaretakingplacetoimprovethetext,theseriouslimitationsandflawsofthedocumentarealreadyvisible.Thisisan instrument that isnotup to the challenges that defy humanity today.Thepeopleoftheworldandtheglobalenvironmentdeservesomethingbetter.The world economy is now entering the fifth year of a global economic andfinancial crisis. It is the worst slump since the Great Depression and it will

probably last longer. Persistent high unemployment rates have already thrownmillionsintopoverty.Thebankingandfinancialsystem,whichwastheepicentreof the crisis, remains under great pressure. Likewise, firms in the real (non-financial) sectors of the global economy have felt the negative impact of thedeflationary phase of the crisis, with greater unsold inventories and littleenthusiasmfornewinvestments.Thiseconomiccollapsehasevolvedandgonethroughdifferentstages.Itmorphedintoapublicfinancecrisis,wherethefiscalaccountswerecompromisedduetoreductionsintaxrevenues,thelaunchingofstimulusprogramsandthehighcostsof bailouts. The scars left on public accounts will have important fiscal policy

implications for years to come. But the critical state of Spains banking system


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reminds everyone that the international banking and financial sector is thebirthplaceofthecrisis.Neoliberalismappearedtobequitesuccessfulinenforcingitsprioritiesandpolicyregime.However,inthemidstoftheglobaleconomicandfinancialcrisisitsrecipes

andpolicyresponsesappeartobeuseless.Clearly,alternativepriorities,withnewinstitutionalframeworksandnovelregulatoryregimeswillberequiredtogetoutofthispredicament.Buttheworldisnotonlythreatenedbystagnation,deflation,unemploymentandfiscal accounts gone awry. Today we are trapped in a dramatic environmentalpredicament,onethatmayevenimperilthesurvivalofhumankind.Wearenotonly threatened by economic woes but also by deforestation, soil erosion,overexploitationofaquifers,theplunderofmarinefisheriesandaman-madeeventofmass extinction. Themost important assessments of the global environmentconfirmthattheworldsecosystemsarelosingtheircapacitytoprovideservices(MEA2005),thatdrylands,forestsandaquifershavebeencontinuouslydegraded(UNEP2007)andthattheaccumulationofgreenhousegassesintheatmosphereisaccelerating (IPCC 2007). A recent study identified nine planetary boundarieswithinwhichhumanitycanbeexpectedtooperatesafely(seeRockstrmetal2009) out of which three have already been transgressed (for climate change,biodiversitylossandchangesinthenitrogencycle).Ofcourse,theimpactofasignificantincreaseinpopulation(from5billionin1987to 6.8 billion in 2010) is an important factor in this process. To be sure, theadditionalburdenthatthislevelofpopulationposestosoils,aquifers,forestsand

oceans is significant. But the disparities in rates of consumption of theworldsnaturalresourcesarejustasimportantwhenitcomestodiscussingenvironmentaldeterioration.Inaddition,economicpoliciesplaya critical role inthisprocessofenvironmental degradation. The social fabric of communities and small-scaleagriculturalproducersthatplayakeyroleinenvironmentalstewardshiphasbeenseriouslydegraded during these years by economic forces. Investment in itemsthat are crucial for sustainability, such as health, education, sanitation andenvironmental stewardship has also been severely hampered by the neoliberaldogma of fiscal balance. In this context, talk about recovery and a return tonormalityisnotonlypremature,itisalsomisplacedbecausenormalityisthenameforastateofaffairsinwhichinequalitywasincreasing,andenvironmentaldestructionandspeciesextinctionproceededatfullspeed.Inspiteoftheseconsiderations,theUNConferenceonSustainableDevelopmentisleavingoutofitsagendathemostpressingproblemsofthemoment.ThedraftoftheRio+20OutcomeDocumentrevealsfivecriticalproblems.

First,itlacksameaningfuldiscussionofthenature,originsandevolutionoftheglobaleconomicandfinancialcrisisthatiswreakinghavocintheworldtoday. This crisis is not going away any time soon and has significantimplications for social and environmental sustainability. It cannot be


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ignored in any international negotiation or debate on sustainabledevelopment.1

Second,thedocumentalsochoosestoomitanyreferencetomacroeconomicpolicies.Monetary,fiscalandincomespolicyprioritieshaveamajorimpacton sustainability and urgently need to be analyzed and discussed.

Macroeconomic policy reform is a prerequisite for the formulation ofadequatesectorlevelpolicies.

Third, the Draft Zero document overlooks almost all of themain structuralproblems weighing on the world economy today, as well as theirimplicationsforsustainability.

Fourth, thegreeneconomynotionadvancedin thedocument isamisleadingconcept.Itisessentiallycentredontechnology,notoneconomicrelations.Thus,forexample,thedocumentdiscussesdecentjobsbutfailstoexaminethegraveproblemsofstagnantwagesandofhighunemploymentrates.

Fifth, the section on the means of implementation is utterly weak. Theimplementationmeasuresthatareadvocatedaretotallyinsufficient,evenforthelimitedscopeofthegoalsofagreeneconomyasadvocatedinthedocument. They foretell the failure of the objectives of sustainabledevelopment.

Theoutcomedocumentappearsthereforetobeinamodeofcompletedenialastothemosturgentproblemsfacinghumanitytoday.Thisiswhythecurrentdraftinsistsonpursuingthegoalofsustainabledevelopmentwiththesameframeworkthatexisted in1992in theheydaysofneoliberalism.Rio+20is arescuemission,butnotfortheplanet.Itsobjectiveisthesalvationoftheneoliberalmodel.

Thestructureofthisbackgrounddocumentisasfollows.Thefirstsectionfocusesonthenatureoftheglobaleconomicandfinancialcrisis,aswellasitsimplicationsfor sustainability. The second section centres on the importance ofmacroeconomic policies for a serious discussion of sustainability. The thirdsectionexaminesfivestructuralcharacteristicsoftheworldeconomythatneedtobetakenintoaccountinanynegotiationonsustainability(butareconspicuouslyabsentfromRio+20).The fourthsectionpresentsacritiqueoftheGreenEconomyreportpreparedbyUNEP.I.TheGlobalEconomicandFinancialMacroeconomicCrisis:Implicationsfor

Sustainability

Theworldisgoingthroughthemostseverecrisisineightyyears.Thiscrisisisstillunfolding and in contrast with the financial crises of the last twenty years, itoriginatedintheheartofthematurecapitalisteconomiesoftheworld.Itisthecrisis of a flawed economicmodel with a policy mix that considers both pricestabilityandfiscalbalancedbudgetsasthekeyprioritiestoattaingrowth,jobsandequilibrium.

1ThisisironicsincetheUN'WorldEconomicSituationandProspects2012'reportwarnsthattheworldisonthebrinkofanotherrecession.TheUNreportevenreducesglobalgrowthforecastsfor

2013to2.5%(downfrom4%in2010)andconsiders2012isadecisivemake-or-breakyear.Thereportisavailableat:http://www.un.org/en/development/desa/policy/wesp/index.html.


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Theneoliberalmodelachievednoneofthesegoals.Onthecontrary,itdeliveredmediocre growth rates, a systematic deterioration in the quality of jobs, andincreasedvolatility.Intheend,italsogaveustodaysglobaleconomicandfinancialcrisis with losses in the trillions. As a result, today we are looking at the

perspective of a global economy undergoing a prolonged recession, withunemploymentratescomparabletothoseoftheGreatDepression.This isamostimportantpoint: todays global economicandfinancialcrisis isanendogenous event. It was engendered by the contradictions of the neoliberaleconomicmodel. It is not the product of an external shock or of irresponsiblespendingbyprofligatestates.Itisalsoessentialtoreaffirmthefactthattodayscrisiswasnotcausedbysectorlevelphenomena,thatitisnotasimplecaseofmarketfailure(Palley,2009).Nor

wasitoriginatedbyirresponsiblestatesissuingunsustainablelevelsofsovereigndebt. These perspectives are misleading and leave the root causes of the crisisuntouched. Inability tocorrectly interpret the crisis is already leading towrongpolicyresponsesandtoaprolongedandpainfulprocessofeconomicstagnation.Afaultyanalysisoftherootsandnatureofthecrisishasthepotentialtorelegatetoadistant future the possibility of attaining the objectives of sustainabledevelopment.Itisnotpossibletounderstandtodayscrisiswithoutlookingattheevolutionoftheworld economyduring thepast six decades. In thenext fewparagraphsweengageinthisreviewinordertosetthestagefortheanalysisofhowsustainability

isaffectedbythecrisisandhowthisaffectsdeliberationsandnegotiationsgoingoninRio+20.Thebirthoftheneoliberalparadigmwasmarkedbythreecriticalevents:

a. Decliningprofitratesintherealsectorsoftheeconomy(i.e.,nonfinancialsectors) during the sixties and seventies prompted capital to launch anoffensivetoreducelabourcosts.Wagesceasedtofollowproductivitygainsandstoppedbeingareferenceforaggregatedemandandthisbroughtabout

higher indebtedness; the offensive against labour led to dislocation ofproductiveactivities;

b. The unfavourable evolution of profit rates led capital to seek moreprofitable outlets in the financial sector. As capital sought differentchannels tomaintainor increaseprofitability italsopursued itsquest forsecurity and mobility through greater liquidity. This is one of the mostimportant forces behind the expansion of the financial sector after the

seventies.a. ThecollapseoftheBrettonWoodssystemin1971-73openednewavenues

forspeculationandthisrequiredfinancialliberalization.Thedebtcrisisintheeightiesopenedthedoortoimposefinancialandtradeliberalization.

The combined effects of these three events set the stage for the birth and

developmentoftheneoliberalpolicyregime.Howtheyalsoled totodaysglobalcrisisisexaminedinthenextfewparagraphs.


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DecliningProfitRatesandStagnantWagesItisimportanttorecallthatinthepost-warperiodtheworldeconomyattainedfastandsustainedgrowth.Annualgrowthratesofthematurecapitalisteconomiesaveraged5.5%between1945-1975. 2Thisperiodthathasbeendescribedasthe

goldenageofcapitalistaccumulation.Between1950-1971grossfixedinvestmentexpandedatarateof6.1%perannumandproductivityincreasedintheperiod1960-1973atayearlyrateof4.5%.Realwagesfollowedcloselythisexpansionofproductivity.Thus,economicgrowthwasbasedonawagenormthatallowedforwidespreadparticipationinconsumptionwithouttoomuchrelianceondebt.Thus,AmericanandEuropeanworkersdoubled theiraverage standardofliving inthetwenty-fiveyearsafterWWII.Thispicturewastochangedrasticallyinthe1970s.Between1950-1975realwagesfollowedcloselythegrowthinproductivityandthis helped maintain rising aggregate demand. This kept pulling investmentforwardandrenewedaprocessinwhichproductivitygrowthandrisingwagesmaintained strong aggregate demand. To close the cycle, this fuelled positiveexpectationsandrenewedinvestment,launchinganewphaseoftheprocess.In the second half of the sixties the rate of profit in the advanced capitalisteconomies started to stagnate and then continued to drop. By the start of theseventies this trend appeared to have been consolidated but by the eightiesprofitability ratesrecovered.The causesbehindthisdrop inprofitabilityremainthe subject of animated debates in the literature.3 Two very important effectsfollowedfromthisreductioninprofitabilityrates.Thefirstwasthatthisunleashedefforts to cut labour costs. The second was that investors started to seek for

investment opportunities outside of the real sectors of the economy (the nonfinancial sector) in order to maintain profitability levels. In many cases thisinvolvedengaginginspeculativeventures.Inresponsetothedropinprofitability,labourcostswerecutasmuchaspossible.Infact,inordertocontainthegrowthofwagesageneraloffensivewasunleashedagainst labour unions and other institutions established as part of the social

2

The data in this paragraph correspond to the G7 countries (United States, England, Germany, France,

Italy, Canada and Japan).3

A recent studybyBasu and Vasudevan (2011) provides a good summary of this debate. TheanalysisofBaranandSweezy(1966)andSweezyandMagdoff(1981)stressedthedominanceofmonopolyasthekeyfactorbehindthestagnationastheoverinvestmentinproductivecapacityoutpacedinternaldemand.Severalauthorsproposedadifferentexplanationbasedontheimpactofrisingwagesonprofitability(GlynandSutcliffe1972,BodyandCrotty1975).Asomewhatrelatedexplanationisassociatedwiththetheoryofsocialstructuresofaccumulationandfindsthedriverofthisstagnationinthefalloflabourproductivityinpartrelatedtoa fallin theintensityofwork(Bowles, Gordon and Weisskopf 1987). Other accounts emphasize the intensification ofinternational competition as the main factor behind squeezed profit margins and persistentovercapacityinmanufacturing(Brenner2006).Moseley(1992)findstheexplanationinthegrowthofthe ratioof unproductivetoproductivelabouras themaincauseofthedecliningprofitability.Shutt(2005)findsthatmarketsaturationplayedacriticalroleinthisstagnationoftheprofitrate.Adifferentlineofanalysis,moreakintoMarxsviews,isfollowedbyShaikh(1987)whofindsthatthe

crisisintheseventieswasgeneratedbythedropintherateofprofit(inturncausedbyincreasingcapitalintensityandlaboursavingtechnicalchange).


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compactofthepostwaryears.Asa result,realwagesstagnatedintheU.S.since1973inspiteofrisingproductivity(WeiherandBeladi2012).Whileproductivitygrew by 62.5% between 1989 and 2010, real hourlywages only grew by 12%(MishelandShierholz2011).Realhourlycompensationincreasedby20.5%,farbehind productivity growth. Similar trends were followed by the European

economies, although institutional differences were responsible for diverse timepatternsandvariousdegreesofintensity.Bythetimeprofitrateshadrecoveredintheeighties,theUSeconomyhadalreadyweakenedunionsandanyinstitutionthathadhelpedmaintainthelinkagesbetweenproductivitygrowthandwages.Aftertheeightieseffortstocontrolandreducelabourcostswerehelpedthroughthetransferofsegmentsoftheproductiveprocesstocountrieswithinferiorlabourcostsintheeighties.Latercompletede-localisationofentireproductionfacilitiesbecame the weapon of choice in order to reduce labour costs. Globalization,understoodastheexpansionofmarketsandrelocationofproductionfacilitiesETCAsadirectresultofstagnantwageshouseholdsstartedtorelymoreondebttomaintaintheirlivingstandards.Wagesceasedtobethekeyreferenceforaggregatedemandanddebtbecametheinstrumentbywhichhouseholdsmaintainedlivingstandards. For example, according to Federal Reserve data, since 1975 totalhouseholddebtintheUSexpanded450%whenadjustedforinflation.Inturn,thisgreaterindebtednessrequiredperiodicepisodesofassetpriceinflation(bubbles)tomaintainaggregatedemand.Theseepisodesmaintainedalivetheillusionthathousehold income couldsustain aggregatedemand,but, intheend, theseboom-and-bust cycles led directly to todays crisis. Thiswas the experience of theUSeconomy, butmutatismutandis, it was also that of the vast majority of mature

capitalisteconomies.

DecliningProfitRatesandGrowthoftheFinancialSectorTheoriginsoftheexpansionofthefinancialsectorcanbetracedbacktothelong-term evolution of theworlds capitalist economy. Thehistorical and theoreticalanalysis for this can be found in Braudel (1982, 1984),Wallerstein (1974) andArrighi(1994).Thecentrepointoftheiranalysisisthatfinancialexpansionstakeplace whenever the investment of money in the real sectors of the economy(production and trade) is less effective than pure financial investments ingeneratingorincreasingthecashflowsthatcapitalrequires.Inotherterms,wheninalong-termcycleofcapitalaccumulationtherateofprofitassociated with industrial and commercial enterprise declines, capital seeksdifferentchannelstopropupprofitability.Capitalalsoseeksgreatersecurityandmobility,goalsthataremetthroughgreaterliquidity.Underthesecircumstancestherewillbegreaterpreferenceforfinancialventures.4

4

According to Wallersteins and Arrighis analyses the history of capitalism includes several long term

cycles of capital accumulation. The first one takes place in and around the northern Italian cities of

Venice and Genoa in the fifteenth and sixteenth centuries. The second cycle is organized around

Amsterdam when the centre of accumulation was displaced from Italy to the Netherlands in theseventeenth to eighteenth centuries. The third cycle revolves around England during the late eighteenth

and the nineteenth centuries as the British Empire was consolidated. The fourth world cycle ofaccumulation takes place under the hegemony of the United States during the late nineteenth century and

the twentieth century.


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Thisexpansionoffinancialcapitalrequiredfinancialderegulationandaprocessofso-called innovation surrounded by a flawed institutional framework. TheregulatoryregimethathadbeeninheritedfromtheGreatDepressionwasslowlydismantled.In1978theU.S.SupremeCourtdecidedinMarquettevs.FirstOmaha

thatstateanti-usury lawsregulating interestratescouldnotbeenforcedagainstnationally chartered banks based in other states. In 1982 the Garn-St. GermainDepository Institutions Act was approved deregulating the savings and loansindustry,ameasurethatledtothecrisisinthissectorintheendoftheeighties.In1994theRiegle-Neallaweliminatedrestrictionsonbanksinterstateactivities.In1996 the Federal Reserve reinterpreted the Glass-Steagall Act allowing bankingcorporationstoobtainupto25percentoftheirprofitsfromactivitiesrelatedtoinvestment banking. The Gramm-Leach-Bliley Financial Services ModernizationActof1999didawaywiththeGlass-SteagallActthathadbeenthebackboneofbankingsectorregulationsince1933.Fromtheacademicstandpoint,supportforlaxregulation wasprovided by the assumption that capital markets adequatelypricesecuritieswithrespecttoexpectedriskandreturn.Buyersandsellersoffinancialsecuritieswere,itwasargued,abletomakeoptimaldecisionsthatledtoriskbeingheldonlybythosecapableofmanagingit(Crotty2009:564).Attheinternational level, the advice of the Basle I and Basle II agreements (a set ofbanking rules issued by the Basel Committee on Banking Supervision)recommended rather weak capital requirements. Finally, the WTOs GeneralAgreement on Trade in Services (GATS) covered financial services and furtherpromotedderegulationofthecapitalaccount.Expansionofthefinancialsectoralsotookplacethroughacomplexandopaque

processoffinancialinnovations.Inthepasttwodecadesnewfamiliesoffinancialinstruments,mostoftheminthecategoryofderivatives,werecreated.Thekeyproblemwiththisprocessofinnovationisthatmanyofthestructuredfinancialproductsaretoocomplexandopaquetobeevaluatedobjectivelyandthereforecannotbepricedcorrectly.Thisnotonlyintroducesaseriesofperverseincentivesforspeculativeoperations,italsobringsgreaterinstabilityintotheoperationsoffinancial markets. And because of securitisation (where risk was divided intotranchesoffinancialproductsandsoldtoinvestorsindifferentfinancialmarkets)theweaknessesofthisedificeweretransmittedanddisseminatedinternationally.Another aspect of financial innovation was the acceptance of off-balanceoperationsthatalloweddifferentcomponentsofthefinancialsectortoengageinextremelyopaqueactivities.Inthelateninetiesbankswereallowedtoholdriskysecuritiesofftheirbalancesheetsinstructuredinvestmentvehicleswithnocapitalrequirementtosupportthem.Thus,theregulatoryregimeprovidedanincentivetomove themost risky and vulnerable assets out of sight into off-balance sheets.Finally,theratingagenciesalsoplayedanegativeroleastheygavetheirsealofapproval to these opaque and high-risk financial operations such as mortgagebackedsecuritiesandcollateraldebtobligations.Ratingsagenciesarepaidbytheinvestment banks whose products they rate and thus they have a perverseincentivetoratethemoptimistically.


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Theexpansionofthefinancialsectoristheoutcomeoftheconvergenceofseveralfactors.Oneofthemostimportantisthecapacityofprivatebankstocreatemoneyoutofthinair.Althoughmostpeoplethinkthatonlythecentralbankhasthemonopolyformoneycreation,ithasbeenthepracticeofmodernbankingatleastsince the end of the XIXth century to create various instruments that have the

characteristicsofmoneystrictosensu.Thus,centralbankscannotcontroldirectlythemoneysupply.MonetarycreationandprivatebanksHowwethinkabouttheeconomyisveryimportantinshapingourviewsabouttherealworld.Orthodoxormainstreameconomistsdenythismoney-creatingroleofmodernbanksbecausetheyremainfaithfultotheoldclassicideasofmonetarismandloanablefundstheories.Heterodoxeconomists,manyofwhomareso-calledpost-Keynesians, think of money as an endogenous variable. In their analysis,whenbanksmakealoantheyopenanaccountfortherecipientoftheloan.Fromthatperspective,itsasiftherecipientoftheloanhadmadeadepositinthebankfromwhichhe/shecannowmakewithdrawals.Inthissense,loansmakedepositsand deposits make reserves as Marc Lavoie (2006) has cryptically stated.Empiricalevidencesupportsthis.Incidentally, this analytical perspective provides anentirely new framework forinterpreting the European crisis. Thedominant narrative disseminated bymassmediagoeslikethis:thepeoplesofGreece,Italy,Spain,PortugalandIrelandlivedabovetheirmeansformanyyearsandnowthetimetopayhascome.Theloanschannelledtothesecountriesweresquanderedandtheyneedtoberepaid.Sincemostpeoplestillbelievethoseloanswerebackedbysavings(deposits),thisisthe

equivalent of saying that the savings of the virtuous peoples of the northwerewasted by the lavishness of profligate spending in the south. This is why fiscalausterity is being imposed on the peoples of these countries. But this view ofthings changes radicallywhen one considers the data on monetary creation byprivate banks: in 2008 for every 100 euros that were given out as loans byEuropean banks, only 1.50 euros corresponded to or were backed by actualdeposits.To be sure, there are several constraints on themoney creating capabilities ofbanks,nottheleastofwhichistherequirementtoholdcertainlevelsofreserves.Butbecausebanksarejustlikeanyothercapitalistfirm,thatistosay,theyexistinordertomakeprofits,theyseektoeliminateoravoidobstacles.Thiscanbedonethrough profit-seeking financial innovation (something that requires deepderegulationofbankingandfinancialactivities).Bankshaveaninterestinlendingbecausethisiswheretheygeneratetheirprofits.Thenaveviewofbanksasentitiesthatplaytheroleofsimpleintermediation,receiving deposits first and then finding investors that demand funds forinvestmentneedstobeabandoned.Todaymonetarycreationisinthehandsofprivate banks, while central banks can only aspire to control the short-terminterestrate(forexample,thefederalfundsrateintheUSandtherepointheUK)

atwhichitsuppliesreserves.


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Fast-forwardandyouseethattheconvergenceofallofthesefactorsexplainswhyphantomassetsarepervasiveintheworldeconomytoday.Itisestimatedthatin2008therewerecloseto30trillioninphantomassetsandthatatleast50%ofthisamount has already evaporated. The other half will probably go away in thecomingmonths,bringingaboutastringof bankruptciesinthebankingsectorof

themature capitalist economiesandrenewed pressure fromthe financialsectorforbailoutswithpublicresources(thedogmaofausteritynotwithstanding).Thiswillcontributetoholdtheseeconomiesinarecession-pronetrajectoryandthiswillfurtheraggravatethedebtproblem.Thepanoramafor2012doesnotbodewell.CollapseoftheBrettonWoodsSystemofFixedExchangeRatesAnother important event took place at the start of the seventies. In 1971 theUnited States closed the window for gold transactions and the system of fixedexchangeratesthatwas thekeystoneoftheBrettonWoodssystemdisappeared.Thiswastheresultofimportantstructuralchangesintheworldeconomy.TheUShad been the main victor in WWII and its economy had been spared. Theinternationalmonetarysystem thatemergedafterthewarwasa fixedexchangeratesystemwhereallmajorcurrencieswerepeggedtotheUSdollaratfixedrates,whiletheUScurrencywaspeggedtogoldatafixedrate(35USDperounceofgold).TheUSeconomyhadlargegoldreservesandwasrunningatradesurplusforthefirsttwodecadesafterthewar.BythesecondhalfofthesixtiestheUSalreadywasexperiencingacurrentaccountdeficit.TheUShadtodevalueandinordertodothisithadtoabandonitsexchangeratewithgold.TheBrettonWoodssystemoffixedexchangeratesdisappearedin1971.

Thenewsystemofflexibleexchangeratesledtotheprivatizationofrisk(Eatwelland Taylor 2000). In the world of fixed exchange rates the private sectorwasshieldedfromtheriskoffluctuatingexchangecurrencyrates.ButtheendoftheBretton Woods regime transferred the risks of foreign currency variations onprivatesectoragents.Itbecameurgenttoreducethesecostsandinordertodothat,thecontrolsontransboundaryflowsofcapitalhadtobeeliminated.Tradersoperatingininternationalmarketsnowhadtobeabletodiversifytheirportfoliosat will, changing the mix of currencies and financial assets according to theirperceptionsofrisksandincentives.Thenewsystemoffluctuatingexchangeratesofferedgreatopportunitiesforarbitragingandforspeculation.Thisexplainswhythevolumeofinternationalcapitalflowsincreasedexponentially.AnnualturnoverintheworldscurrencymarketsexpandedfromUS$4trillionin1973tomorethanUS$450trillionin2007(Hillmanetal2006).Thederegulationofcapitalflowsbecameanimperativeinordertohedgeagainstthecoststhatfluctuatingexchangeratesentailedfortheprivatesector.Theinternationaldebtcrisisoftheeightiesprovidedanexcellentopportunityforthe elimination of trade barriers and obstacles to financial liberalization. Thestructuraladjustmentprogramsimposedonmanykeydevelopingcountriesinthatdecadenotonlyeradicatedmanyofthesebarriers,theyalsohelpedestablishthesetofmacroeconomicpolicyprioritiesthateventodayarethekeyreferencein

developing anddevelopedcountries. Inaddition, thewave ofprivatizations that


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shook the developing economies undergoing shock therapy also opened newprofitableopportunitiesforinvestorsfrommaturecapitalisteconomies.

** *

Tosummarize,theconvergenceofdecliningprofitabilityintherealsectorsoftheeconomyduringtheseventiesandthecollapseoftheBrettonWoodssystemledtoanoffensiveonlabourcostsandonthefinancialregulatoryframework.Oneofthevehicles for the expansionof the financial sectorwas intensivesecuritization, aprocessthatbuiltaclosely-knitsystemforthetransmissionoftoxicandphantomassetsallovertheglobalfinancialsystem.Thisiswhythecrisishashadsuchavirulenteffectandissodifficulttogetridof.Theimplicationsforsustainabilityareveryimportant:

a) The environment and social justice have been displaced from the keyprioritiesintheworldsagenda;

b) Duetotheamountofresourcesdevotedtocoverfinancialcharges(frombailouts and stimulus programs) this crisis will reduce the amount ofresourcesavailableforenvironmentalsustainability;

c) Unemploymentrates,aswellascutsinwagesandpensionentitlementsarealreadyincreasingpovertyandinequalitythatwilltakeyearstorevert;

d) In many countries the crisis is already causing greater pressure on thenaturalresourcebase.

Thewidelydiscussedprocessoffinancializationofnatureiscloselyrelatedto

thisevolutionofprofitabilityincapitalisteconomies.Asprofitratesstagnatedandthe real sectors of the economy ceased to provide an attractive outlet forinvestment,capitalsoughtalternativeprofitabilityspaces.Thisledtothecreationofassetpriceinflationorbubblesinmanysectors.Housinghastraditionallybeenasectorinwhichbubblestakeplace.Butintheeightiesandnineties,manyotherspaceswereidentifiedbycapital.The expansion and development of financial markets and financial innovationfacilitated this process. Thedot.com bubble in the ninetieswas followedby theseries of speculative episodes in the NASDAQ index. The promises of a newtechnological revolution with the internet, the digital superhighway,biotechnologies and genetically modified organismswere efforts to restore theillusionofprofitability.5Allofthiswasfollowedbythecreationofnewartificialcommodities,suchascarboncreditsandbiodiversityoffsets.Forthesamereasonsfinancialcapitalwasattractedtocommodityexchangeandfuturesmarkets.Thesemarketswereestablishedtohelpproducerscopewiththeuncertainties of agricultural production. Futures markets were introduced tofacilitate price discovery and reduce volatility. In the U.S. participation in thesemarkets was restricted to producers, farm processing agents and traders. Untilrecently,otheragentswerepreventedbylawfromenteringthesemarketsinorder

5InthecaseofGMOs,thiswasalsopartofanattempttogaincontrolovertheproductionprocessinagriculture.


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topreventspeculation.Theserestrictionsweregraduallyrelaxedandin2000theUS Commodity Futures Trading Commission in charge of controlling marketmanipulationhad to implement several deregulationmeasures.6Theendresultwasincreasedtradingandpricehikes.

In the past there was some speculation in commodity exchanges and futuresmarkets, but it was based on how agents perceive the evolution of supply anddemand.Speculationinfuturesandmercantileexchangemarketswassimplytheactionof takingadvantageof asystemofrelativeprices.Carryingcosts,deliverydatesandinventorieswerecriticalindecidinghowmuchtobuyandwhentosell.Thischangedwhenfinancialinvestorsrespondedtorisksinfinancialmarketsandwent on to diversify their portfolio structures in order to search for optimalinvestmentstructures.Fortheseagents,commoditiesbecomethephysicalsupportof a new investment that is not different (from the viewpoint of portfoliostructures)fromotherfinancialassets.Asfuturescontractsinvolvingcommoditiesbecamemorecommonandweretheobjectofcomplexsecuritization(FrankfurterandAccomazzo2007),thenormalprice-inventoryrelationshipwasaltered.Toafinancialinvestorsecuritizedcommodity-linkedinstrumentsarenowconsideredaninvestment rather than a risk-management tool. This alters price dynamics andbringsintocommoditymarketssomeofthenegativetraitsoffinancialmarkets:herdbehaviourandself-fulfillingpropheciesthatcanengenderhigherpricesuntilmarketsbreakdown.Financializationofcommoditiesisaproblemthatgoeswellbeyondthewallsofthemercantileexchangeandhasdirectimpactsinoutputmix,technologychoiceandresourcemanagementpractices.Whentheyenterintoacommoditymarketand

startpushingpricesupwards,financialoperatorsmaypullagriculturalproductionintothespaceoffinancialtransactions,riskmanagementandspeculation.Becauseofthemagnitudeoftheresourcesattheirdisposal,theirtransactionsinfuturesmarkets have direct effects onmarket (spot) prices.7 Butmore than that, theseeffectsarerelayedthroughtheworkingsofcontractsthatlinkagribusiness(withtheirowncreditandmarketingfacilities)todirectproducersinthefield.Bankingderegulation, tight monetary policies (with scarce and costly credit for ruralproducers),recessivefiscalpoliciesandthewithdrawalofsupportforsmall-scaleagriculture,allcombinetoleavethisspaceforlargeagri-business.

6 The CFTC controls potential market manipulation and excessive speculation through theCommitmentofTraders(COT)report.Butthiswasseverelydowngradedandrendereduselessbythe Commodity Futures Modernization Act enacted in 2000. In addition, the regulatory andmonitoringcapacityoftheCFTCwasfurthererodedwhenitallowedtheIntercontinentalExchange(ICE) to use its trading terminals in the United States for trading of U.S. commodity futurescontractsontheICEfuturesexchangeinLondon.Later,ICEFuturesallowedtradersintheUnitedStatestouseICEterminalsintheUnitedStatestotradeitssyntheticfuturescontractsonthe ICEFutures London exchange. This not only allowed unregistered funds to effectively bypassregistration,italsocontributedtodistributetheeffectsoftheseoperationsworldwide.

7 Futuresmarkets involvecontracts inwhich traders pledge to buy or sell a commodity inthefutureatapre-setprice.Thecontractcanbetradedsothattheagentdoesnothavetoactuallytakedeliveryofthecommoditywhenthedateexpires.Inthecaseofoptions,tradershavetherightbut

nottheobligationtopurchaseorsellacommodityatapre-setpriceinafuturedateandtheypayapremiumtotheagentswhomaketheoppositepledge.


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Thetrendtowardsthefinancializationofnaturewillcontinueandwillneedtobeconfrontedwithdecisivemobilizations.Thepolicyresponsetothecurrentglobalcrisishasinjectedtrillionsofliquidityintothebalancesheetsofbanksandlargecorporations.Becausethematurecapitalisteconomiesaffectedbythecrisisare

undergoingadeflationaryprocess,thisexcessliquidityisnotfindingitswayintothe real economy. Thus, corporations and banks are sitting atop amountain ofliquidity, part ofwhich isbeingchannelledasinvestmentsoutsidethe countriesaffected by the crisis. This is one of the explanations behind the increase ofreservesincountrieslikeBrazilandMexico,tomentionacoupleofexamples.This effect of quantitative easing is recognized by none other than the FederalReserve:theverylowinterestrateswerenegativelyaffectingpensionfundsandthe profitability of the life insurance industry.8 This combination of increasedliquidityinjectedintothesystemanddecreasedprofitabilitywillgenerategreaterpressureinseekingoutletsforinvestment,leadingdirectlytothefinancializationofnatureandtomoreseverelandgrabbingevents.Thirty-five years of neoliberalism have shown that capitalist economies areinherently unstable and that they are capable of maintaining unacceptableunemployment rates for long periods of time. It has also shown that freeunregulatedcapitalistmarkets,ifleftfreefrompublicpolicyinterventionsfailtoprovidedecentlevelsofincomeforthevastmajorityofthepopulation.Allofthisisperfectly compatible with the insights of John MaynardKeynes, the founder ofmacroeconomictheory.Andtheconclusionisthatweneedtohaveaseriousandmeaningfuldiscussiononmacroeconomicpolicies.

II.TheNeedtoDiscussMacroeconomicPolicies

Macroeconomicpoliciesarerelatedtotheworkingsoftheentireeconomicmodel.Whendiscussingsustainability,meaningfulreferencestomacroeconomicpoliciesare critical. But regretfully, this is never the case. This section examines thereasons for this and lays down the guidelines for a serious discussion ofmacroeconomic policies. The section draws heavily from our book RethinkingMacroeconomicsforSustainability(ZedBooks2011).WhataretheComponentsofMacroeconomicPolicy?

Macroeconomic policies deal with economic aggregates through a very smallnumberof key variables, including the interest rate and the currency exchangerate. These are verypowerful variables because changes in the values of thesevariables affects the behaviour of agents across the economy. Macroeconomicpolicy includes monetary and financial policies, and this should include theregulatorystancevis--visthebankingandfinancialsector.Italsoincludesfiscalpolicyfromtheperspectiveofrevenues(bothtaxandnon-taxrevenues),aswellasfrom the angleof public expenditures.Macropoliciesalso include exchangeratepolicy and capital account regulations, including rules on international capitalflows.Incomespoliciesareanothercrucialcomponentofmacroeconomicpolicies

8SeeMinutesoftheFederalReservesFOMCmeetingNovember1-2,2011:http://www.fderalreserve.gov/monetarypolicy/fomcminutes20111102.htm).


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and, finally, the ability to impose certain economy-wide prices such as energy,foodstuffs,etc.WhyisMacroeconomicPolicyImportant?Macroeconomicpoliciesdeterminetherateofactivityandinvestmentdynamicsof

entireeconomies.Thismeanstheyplayacrucialroleindeterminingusageandextractionratesofnaturallivingandnon-livingresources.Theyalsodeterminetheasset composition of investment portfolios and they therefore play aninstrumental role in channelling financial resources into spheres where socialwelfare and the environment are directly affected (commodities and futuresmarkets,carbonmarkets,landgrabbingandotherexamplesoffinancializationofnature).ThisisespeciallyimportantinviewofthemacroeconomicpolicyresponsethathasinjectedvastamountsofliquidityintothefinancialsectorsofEuropeandtheUnitedStates.Macroeconomicpoliciesaffectemployment,incomedistributionandinequality.Fromthisstandpoint,theyarecriticalinattainingoneofthemainpillarsofsustainabledevelopment.Becauseof their impact on therate of investment,macroeconomic policies alsocondition the capacity of a country to undertake economy-wide structuraltransformations.Thus,macroeconomicpoliciesmaybeanobstacleorapowerfulagent for systemic technical change. This is highly relevant in climate changediscussions where drastic reductions of greenhouse gas emissions need to beattainedinrelativelyshortperiodsoftime.Sectorlevelpolicieswillnotbeuptothis task unless macroeconomic policies are well tuned to this objective.Macroeconomic policies are also very important in determining the type ofinsertion of a given country in the international economy. For many poor

countries,macroeconomicpolicieshaveplayedadecisiveroleindetermininghowthenaturalresourcebaseiscompromisedinordertomeetthechallengesofdebtserviceandclosingthecurrencygapingeneral.To summarize, macroeconomic policies determine the aggregate amount ofresourcesthataneconomyallocatesforenvironmentalstewardshipandforsocialwelfare. Finally, macroeconomic policies affect the production strategies andresourcemanagementcapabilitiesofalleconomicagentsinagiveneconomy.Thisappliestothe largest andmostpowerfulcorporations, aswellasto thesmallestsubsistencefarmer.Given these considerations, and the fact that todays crisis ismacroeconomic innature, it is rather astonishing that macroeconomic policies are off limits inRio+20.Itisevidentthatseriousnegotiationsconcerningsustainabilitydemandadiscussiononmacroeconomicpolicyprioritiesandpolicyinstruments.Therefusaltodiscussmonetaryandfiscalpolicies,aswellasthestructureoftheinternationalfinancialand payments systems ismuchmore than anoversight. Howcan thiscolossalactofnegligencebeexplained?Thereareseveralexplanations,butperhapsthemostimportantoneisthatwhenmacroeconomic policy priorities are opened for discussion, the rationale of the

entireeconomicmodelis calledintoquestion.And thepoliticaleconomyofwhobenefits and who pays is revealed for all to see. Determining the priorities of


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monetary,fiscalandincomespoliciesrespondsmoretopoliticalreasonsthantotechnical constraints. This of coursewill invite controversy. More important, itbrings out in the open the true reasons behind the fact that we are distancingourselvesfromtheobjectivesofsustainability.

It is no exaggeration to affirm that todays main priorities in macroeconomicpolicy-makingaredominatedbytheneedsofthefinancialsector.Monetarypolicyis subordinated to the struggle against inflation, an objective that ranks aboveeverythingelseintheagendaoffinancecapital.Thus,duringthepastthirtyyearsthemain objective of monetary policy has been price stability. In the end, thisobjective was not enough to steer the world economy away from speculation,volatilityandcrisis.Notonlywasthispostureofmonetarypolicytotallyinadequate,butinthepursuitofthisobjectiveothervery importantaspectsofmacroeconomicdynamicsweresacrificed. Price stability in many developing countries was typically pursuedthrough the containment of aggregate demand. This means real wages wererepressedandfiscalexpenditureswerecurtailed.Inaddition,anovervaluationofthe exchange ratewas maintained as this had a positive impact on the overallconsumerpriceindex(eventhoughithadanegativeeffectontheexternalsectoroftheseeconomies).Thus,thestrategyseekingtoattainpricestabilitywasbasedoninstrumentsthatpromoted inequalityand subjectedsector levelpolicies toadraconiandisciplinethatledtoincreasingbacklogsinhealth,education,housingandsanitation.Theinternationalregulatoryframeworkforthebankingsystemhasproventobe

entirely deficient. The rules that came out of the Basle I and II regimes wereinadequateandwere incapableofpreventingthecurrentcrisis. Ina sense, theserulesevenpromotedgreaterrisk-takingbybanksthroughopaqueprocessesandwereanincentiveforspeculationandexcessiveleverage.Allofthisaggravatedasituationinwhichthemonetarycreationcapabilitiesofbanksledtoevengreaterliquidity and asset price inflation (bubbles). It is clear that redefining theobjectives of monetary policy is a fundamental priority. There is nothing thatshouldpreventusfrommoving sustainabledevelopment (withits twopillarsofsocial justice and environmental integrity) to the centre of monetary policypriorities.ThisshouldhavebeenatthetopofthelistofprioritiesforUNCSDinRiodeJaneiro.Somethingsimilarappliestofiscalpolicy,wherethenotionofabalancedbudgetispresented as healthy principle of public finance. This has been justified bymainstreamacademicsthroughthenotionofcrowdingout.Therationalehereisthatdeficit spendingwill lead toincrements inthe commercial interestrate andthiswillpreventprivateentrepreneurstocarryoutnewinvestments.Ofcourse,anunderlying assumption is that private sector investments are under allcircumstancesbetterormoreefficientthanpublicsectorprojects.Needlesstosay,thecrowdingouthypothesisisdebatableandhasgeneratedmuchcontroversyinacademiccircles.


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In reality, fiscal policy is dominated by the priorities of debt management.International financial institutions have imposed debt service payment as theparamount priority for fiscal policy in developing countries. Every sector levelobjective isdisciplined by this overarching goal. And because new or increasedtaxes are considered to be impractical or counterproductive, the way to attain

adequate debt management objectives is through cuts in public expenditure.Allocations for health, education, housing, environmental stewardship,infrastructure and transportation, R&D, etc., are subordinated to debtmanagement.Inthejargonoffiscalpolicyspecialists,theneedtogenerateaprimarysurplusissynonymouswithhealthydebtmanagement.Theprimarysurplusistheresultofacomparisonbetweenallfiscalrevenues(taxandnon-tax)andexpendituresnetoffinancialcharges.Theraisondtreofthesurplusistocoverthecostofdebtservice.ThisshouldalsobeatthetopoftheprioritylistinRio+20.Finally, incomes policy is typically organized around the objective of notunleashing inflationarypressures and thus, it isdeterminednot byproductivitygrowth,butbytheparamountobjectiveofmaintainingpricestability.Thisisoneof the most important components of macroeconomic policy and underneoliberalismithasledtotwoproblems.Oneisrisinginequalityasincomesforthelower income brackets were more prone to suffer reductions (for example,throughindexingwageswithexpectedinflationinsteadofrealinflationrates).Theotheristhataggregatedemandstartedtodependmoreandmoreondebtandthismadetheentireedificemuchmorefragile.

Thesubordinationofsocialandenvironmentalconsiderationstomacroeconomicpolicy imperatives has been the dominant mode of policy making underneoliberalism.Oncemacroeconomicobjectivesaredetermined,everyotherpolicytargetischiselledinaccordance. Inthissense, social and environmental policiesarebeingshapedincentralbanksandministriesofthetreasury.Thedomineeringnotionsofaprimarysurplus,verylowinflationratesandfreecapitalflowsarethemacropolicy objectives towhichall other considerationsmust submit.Whethersoil erosion or biodiversity, health or education, mainstream macroeconomicpolicymakingisadamant:thesearesectorlevelissuesthatneedtobedisciplinedby macroeconomic imperatives. Redefining macroeconomic policy prioritiesshouldbeattheforefrontofnegotiationsonsustainability.OurbookRethinkingMacroeconomicsforSustainability(London:ZedBooks2011)containsamoredetailedanalysisoftheissuesmentionedinthissection.Italsoincludes two chapters on the guiding principles for redefining macroeconomicpoliciesinordertosubordinatethemtotheoverarchingobjectivesofsocialjusticeandenvironmentalresponsibility.Thosechapterscoverthepolicyreformsthatareneededforsustainability,bothatthedomesticandtheinternationallevels.III.CriticalFeaturesoftheWorldEconomyandSustainability

Globaleconomicrelationsrevealseveralimportantstructuralfeaturesthataffectboth social and environmental sustainability. They need to be part of a serious


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discussion on sustainability. However, they are absent from internationalmultilateralnegotiationsonsustainabledevelopment(e.g.,Rio+20).Inthisparagraphwebrieflyconsiderfivefundamentalcharacteristicsoftheworldeconomy.Theyarecloselyrelatedtoeachotherandshouldnotbeseenasseparate

items.Thepurposehereisnottocarryanexhaustiveanalysisofeachoneofthem,but to display their importance and indicate how they affect transformativechanges.Thefivecharacteristicsweexamineherearethefollowing:

a) Dominanceofthefinancialsectorb) Inequalityandpovertyc) Concentrationofmarketpowerd) Internationalimbalancese) Debt

Whatabouttheenvironmentaldisasterintheworld?Forexample,theregulatoryregimeforclimatechangehasbeenessentiallydestroyed.WhatistheRio+20OutcomeDocumentgoingtosayaboutthis?a)DominanceoftheFinancialSectorThe financial sector in the world economy has become the most powerfulcomponentintheglobaleconomy.Severalindicatorsrevealthatfinancialactivitiesare the single most important sector in the world economy today, with anestimatedvalueofassetsseveralordersofmagnitudeaboveGDPandworldtradeflows.Financehasbecomeseparatedfromtherealsectorsoftheeconomyand,aswehavealreadynoted,thefinancialsectoralsodominatesthesettingofpolicy

prioritiesinthemacroeconomicscene.Todayitisnoexaggerationtoaffirmthatthemainprioritiesofmacroeconomicpolicyaredominated(ordictated)bytherequirementsofthefinancialsector.Asweshallseeinthenextsection,monetarypolicyisdominatedbytheoverarchingobjective of achieving price stability, while fiscal policy is subordinated to theobjectiveoffiscalbalance.Bothobjectivesrespondtotheneedsoffinancecapital.Thishassignificantnegativerepercussionsforsustainability.Inwhatfollowswediscussfourproblemsthatneedtobeaddressed.First,thecombinationoffloatingexchangeratesandfreecapitalflowsdistortstherole of interest rates. Because of the rate of return that can be associated toexchangeratevariations,interestratesceasetobeasimplereferencefordomesticinvestments in an economy where short-term financial capital flows arecommonplace.Interestratesbecomeanotherparameterforspeculativeallocationsinsteadofbeingareferenceforanykindofproductiveinvestment,nottospeakoflong-runinvestmentsforsustainability.Second,thedominanceofthefinancialsectordistortsinvestmentpatterns.Ifratesof return are low in real economy sectors compared to returns in the financialsector,productiveinvestmentswillsuffer.Thisisespeciallytrueinthecontextof

aneconomythatisdominatedbyfinanceandspeculationaggregateinvestment


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patternswillbeaffectedinthismanner,leadingtolessgrowthandinferiorratesofemploymentgeneration.InthewordsofKeynes(1973:159):

Speculators may do no harm as bubbles on a steady stream ofenterprise.Butthepositionisseriouswhenenterprisebecomesthe

bubbleonawhirlpoolofspeculation.Whenthecapitaldevelopmentofacountrybecomesaby-productoftheactivitiesofacasino,thejobislikelytobeill-done.

Thisisofcourseaggravatedinthecontextofamodelofcapitalaccumulationthatrelies on the creation of asset bubbles in order to maintain or drive aggregatedemand.Inthiscontext,theeconomywillgeneratecyclicallyassetpriceinflationepisodesthatareaccompanied(orfuelled)byrisingexpectationsthatleadtoeverincreasingpricehikesuntiltheprocessisarrestedbyinterestrateincrementsorbytheburstingofthebubble.Minsky(2008)comestomindbecauseinhismodeloffinancial instability thedynamicsofrisingexpectationstaketheeconomyinaveritablewhirlpoolofspeculationuntilthebubbleburstsanddeflationsetsin.Third,inthecontextoffinancialliberalizationandfreecapitalflowstheexchangerate isnota variable(ortherelativepriceofcurrencies)thatadjustsinordertoequilibratemarkets.Thus,theexchangerateshouldnotbeseenasthevariablethatautomaticallyadjuststhesupplyanddemandofcurrenciesasafunctionofthetrade balance (deficit or surplus).Under a regimeof financial liberalization theexchange rate is required to remain stable by capital inflows. In the words ofEatwellandTaylor(2000:75) portfolioadjustmentsdonotprovideaway forafundamental external deficit togenerate anexchange rate adjustment thatwill

make the (trade) deficit disappear. This makes the adjustment of the tradebalanceadifficultmatter.Whenitfinallytakesplaceitisunderconditionsofchaosand overshooting devaluations. And the typical policy response under thesecircumstances is fiscal retrenchment and monetary contraction. This leads torecessions,bankruptcies,unemploymentandpoverty.b)InequalityandPoverty

Inequalitybetweendevelopedanddevelopingcountrieshasincreasedinthepasttwodecades.Theratiooftheincomeaccruingtheworldsrichest20%comparedtothatofthepoorest20%wentfrom30:1in1960to75:1in1999.Inaddition,povertyhasworsened.TheWorldBankestimatesthat48percentoftheworldstotalpopulationlivesonlessthanUS&2.50aday.Approximately80percentlivesbelowthe10-dollarline.Howdidthisgrowthin inequalitycomeabout?First, itisnowrecognizedthatinmost advanced industrial countries median wages stagnated during the lastquarter century. Living standards were more or less maintained throughincreasingindebtednessofworkingandmiddleclasses(i.e.,increasedhouseholdborrowing simply postponed the decline in living standards). Wages andcompensationsincreasedintheupperincomebracketsandthisintensifiedincome

concentrationandinequality.


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Second, the main policy priority of macroeconomic policieswas the control ofinflation.Thiswasattainedthrougharegressivepostureinfiscalpolicyassocialexpendituressufferedandtaxcutswereimplementedinfavouroftherich.Thestruggleagainstinflationinvolvedthecontractionofaggregatedemand.Inmanycasesthiswasachievedthroughnegotiationsinwhichnominalwageadjustments

wereindexedtoexpectedinflationrates.Realwageswerereducedasrealinflationexceededtheinflationtargets.Third,inthecompetitiontoattractforeigninvestmentmanydevelopingcountriesdismantledtheinstitutionalnetworkthatcontributedtobetterwagelevelsinthepast. Unions andanything thatwasperceived as anobstacle towage flexibilitycame under attack. This resulted in greater disparities between workerscompensationandtherevenuesofhigherincomestrata.Neoliberalglobalizationhasclearlycontributedtothisracetothebottominwagesandlabourconditionsasexportledgrowthbecametheguidingpostforeconomicpolicy.Inequality is a key obstacle for sustainability,wildlife conservation and speciessurvival.Alreadyitisdifficulttothinkaboutsustainabilitywhen50percentoftheworldspopulationlivebelowthepovertyline.Ithasbeenstatedthatpoorpeoplerelymoreheavilyonenvironmentalservicesandunderduresstheymayputmorepressure on the natural resource base. But a policy response dominated byneoliberalprioritieswillexacerbateinequalityandincreasepoverty.c)InternationalImbalancesThe rhetoric on globalization frequently emphasized the notion that continued

financialand trade liberalizationwould lead to convergence ingrowthrates. Infact, neoliberal globalization led to enormous international imbalances andgrowing asymmetries. These imbalances reflect the contradictions ofneoliberalismandshouldnotbeseenasaccidentalinnature.Globalization made the adjustment of external imbalances more difficult. Theincrementinacountrysexternalpositionsraisedthevulnerabilitytothevagariesoffinancialmarketsandcapitalflowsthatdependonvariationsofinterestrates,inflationandexchangerates. Expectations offundmanagersdependnotonlyonthe so-called fundamentals of a given economy, but also (and perhaps moreimportant)onthecomparativeperformanceofothereconomicspaces.Thisaddstothe volatility of capital flows and thebiggerrisks that are faced by recipientcountries. Where countries are more specialized in certain exports, or dependmoreonasingletradingpartner,adjustmentismuchmoredifficult.Underneoliberalismtheworldeconomyhassystematicallyexperienceddeficientaggregatedemand.Thiswastheresultoftheprioritiesinthepolicypackageofneoliberalism: as countries countered inflationary pressures through tightmonetarypolicies, the contractionoffiscal expendituresandthe containmentofrealwages,aggregatedemandweakened.Inmanycases,theonlywayoutwastopursueexportorientedgrowthpoliciesinordertocompensateforthisweakened

domesticdemand.TheUSeconomybecametheconsumeroflastresortbecauseitsowncurrencyisusedasameansofpaymentininternationaltransactions.


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Inthepastdecade,growthoftheglobaleconomyrestedupontheperformanceoftheChineseandUSeconomies.Chinaprovidedextraordinaryinvestmentgrowthrates,whiletheUScontributedwithaninsatiableappetiteforimports.ThecurrentaccountsurplusoftheChineseeconomymirroredtodeficitofthecurrentaccount

oftheUS.Thesedomesticandinternationalimbalancesbecameunsustainableandweretransmittedtotherestoftheworldeconomywithgraveimplicationsforall.Nowthatthedebt-financedconsumption-ledgrowthengineoftheUSeconomyhasfailed,thesystemisindangerofcollapse.Ofcourse,thisposesaseriousthreattothe entire world economy because the US dollar continues to be the mostimportant international reserve currency. Thus the crisis brought about by thecontradictions of neoliberalism threatens today the international monetaryregime.9TheglobalcrisishasintensifiedthedebateontheneedforadjustmentoftheUIScurrentaccountdeficit.UntilrecentlytheofficialviewinWashingtonwasthatthedeficit could be sustained for a long period of time, that it was not a seriousproblem and that it could be corrected in a gradual process. According toBernanke,headoftheFederalReserve,theUScurrentaccountdeficithasbeenthekey to absorb excess savings that have been generated in other countries,especially in Asia. In this view, these ever growing deficits in the US economyreflecttheaggregatedemandtheworldeconomysobadlyneeds.ThisisnotaviewsharedintheacademiccommunitybecausethegrowingneedoftheUStofinanceits deficit represent a continuously increasing risk for China and other Asianeconomies.

Thesetrendsare furthercomplicatedby the factthattheworldeconomy lacksatruly supranational currency for its payments system. Todays internationalmonetarysystemconsistsofasetofcurrenciescompetingwitheachothertoplaytheroleofinternationalreserveassetsandmeansofinternationalsettlement.Intheyears2005-2008theliquidityandbreadthoftheEuropeanfinancialmarketswas approaching that of the U.S. dollar and the euro was eroding some of theadvantages that historically supported the pre-eminence of the dollars role asleading reserve currency. However, the euro crisis casts a dark shadow on thecredibilityoftheEuropeancurrency(andevenonitsfuture).ThefactthattheeurolacksitsowntreasuryandtheTreatyfortheFunctioningof theEuropeanUnionincludes a no-bailout clause (Article 125) does not help assuage creditors andfinancialmarkets.ThesituationinSpain,PortugalandItalydoesnotbodewellfor

9CountriesissuingreservecurrenciesareconstantlyconfrontedwiththeTriffindilemmabetweenachievingdomesticmonetarypolicygoalsandmeetingothercountriesdemandsforliquidity.Whenanationalcurrencyplaystheroleofinternationalreservecurrency,thesourceofliquidityinthecountryissuingthatcurrencyisitsowntradedeficit.Inordertomaintainliquidityatanadequatelevel,theissuingcountrymustkeepadeficitbutthisgradually destroys the value of the reserve currency. Thus, countries issuing reserve

currencies cannot maintain the value of the reserve currencies and, at the same time,provideliquiditytotherestoftheworld.


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theeuro.Today,inthemidstoftheglobalfinancialandeconomiccrisis,thereisclearlynostableinternationalcurrency.d)ConcentrationofMarketPower

Giant corporations with considerablemarket power have becomekey actors ininternational economic affairs. These mega-corporations play a very importantrole ininternationaltradeandinvestment:morethan66percentofworldtradetakesplacethroughtransnationalcorporationsand40percentofthisisintra-firmtrade.Theseagentsconcentrateenormousmarketpowerinsectorsthatareclosetothenaturalresourcebase.Thecrisesinenergyandfoodpricesin2007/08canbetracedtotheactionsofthesecorporations.Economic analysis of industries where high concentration coefficients prevailshowsthatpricemanipulationandcollusiontobuildartificiallyhighentrybarriersarecommonpractice.Thesearethemostimportantdistortionsthataffectmarketsandpriceformation.Inaddition,cartelandlobby-formationareeasierinhighlyconcentrated industries than in branches where economic power is moreuniformlydistributed.Thisalsohelpsexplainhowpolicycanbeandisfrequentlyinfluencedinconcentratedbranchesofeconomicactivity.In multilateral negotiations on trade liberalization the main objective was theelimination ofdistortions brought aboutby tariffs and subsidies. Yet, the singlemost importantlacunainallWTOagreements isthislackofreferencetomarketpowerconcentration,oligopoliesandanti-trustenforcementmeasures.Althoughitisnotpossibletobelievethatinternationaltradeisnotaffectedbyunfairbusiness

practices, collusion and market concentration, WTO has left this problem areauntouched.Thisiswhyalloftheseproblemsarelefttotheopaqueworkingsofinternationalcommercearbitrationboards.However,thelackoftransparencyofthese bodies is only one part of the problem. The other and more importantproblemisthattheirscopeofcompetencedoesnotincludemandatoryanti-trustmeasures applicable to the general case. And although this set of issues isscreamingforattention ithasneverbeenaddressedbyWTO.Thus,although therhetoricinthisbodyisaboutliberatingmarketforces,inrealitytheseagentsarethe ones that truly distort anymarket outcome. In the end, the impact on theenvironment and on communities from ventures in open-pit mining or largeforestryprojectsisnottheresultofpurecompetitionmarketforcesbutofhighlyimperfectmarkets.According tomembers of a U.S. congressional investigation into theDeepwaterHorizondisaster(HuffingtonPost14-VI-2010)thedramaticexplosionandsinkingof aBritishPetroleum drilling platform in theGulf ofMexicoweredue to cost-reducingpracticesthatsacrificedsafety toprofits. Iftheseallegationswere truetheyrevealwhatmanyalreadysuspected:thatthesemega-corporationsaredoingwhat they want to the environment far away from adequate supervision andmonitoring. Deep-water oil drilling is but one example. There are many otherinstances in the extractive industries, commercial logging, fisheries, agriculture,

etc.


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e)InternationalIndebtednessThedebtofdevelopingcountrieshaslongbeenrecognizedasacriticalobstacletodevelopment. It is also one of the most important connections betweenmacroeconomicpolicyandenvironmentalsustainabilitybecauseoftheimpacton

fiscalpolicy. In spite of this, a serious debate concerning the debt burden havebeenabsentfromnegotiationsontheMDGs,theGreenEconomyReportorclimatechangepolicy.History of developing countries debt problems goes back to the period opfdecolonizationinthefiftiesandsixties.Guiss(2004)showsthatin1960atthepeak of the decolonization period a debt of US$59 billion was imposed on thenewlyindependentcountriesbytheoutgoingmetropolitanstates.Atarateof14percentthedebtaccumulatedrapidly.Thus,beforethenewlyindependentstateshadhadachancetosetuptheireconomiestheywereladenwiththeheavyburdenof an external debt that had no economic or legal justification whatsoever,especially if one considers the extraction of natural resources from thoseterritoriesduringthecolonialperiod.Inmanydevelopingcountriesdebthasincreasedasadirectresultoftheactionsofdictatorial and illegitimate governments. Frequently these resources have beenused in ways contrary to the peoples interests with the knowledge and/orconnivanceofthecreditors.Underthesecircumstances,theconceptofodiousdebtapplies(thisisawellestablishedlegalconcept,Howse2007).ThisuglysituationwasaggravatedformanyofthepoorestcountrieswheninreturnforpartialdebtcancellationtheyhavehadtoacceptconditionalityrulesimposedbytheIMFon

trade liberalization, financial deregulation and constraints on fiscal policy (i.e.,generationofaprimarysurplus).Total public external debt ofdeveloping countries increasedbetween 1970 and2007 from US $70 billion to US$3,360 billion. Total debt service payments bydeveloping to developed creditor countries during the period 1980-2007amounted to a staggering US$7,150 billion. These numbers are stark indicatorsthatsomethingistrulywrongabouttheinternationaleconomy.In1970,theworldspoorestcountrieshadatotaldebtofapproximatelyUS$25billion.In2002thesecountriesdebthadrisentoUS$523billion.InthecaseofAfrica,in1970itsdebtwasUS$11billion,butthreedecadeslateritamountedtoUS$300billion.By2008 developing countrieshadreimbursed the equivalent of102timestheamountoftheirdebtin1970,andinthatperiodtheiroutstandingdebtwasmultipliedbyafactorof48(MilletandToussaint2009).Forcreditorcountriesthe amounts involvedindebtstatisticsmay appearsmall.Forpoordebtornationstheseamountsareofcriticalimportanceandmayspellthedifferencebetweenlifeanddeathformanyoftheircitizens:asmanyasfivemillionchildrenandvulnerableadultsmayhavelosttheirlivesinsub-SaharanAfricasincethelate1980sasaresultofthedebtcrisis(Shah2005).


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Throughaseriesofinstrumentsanddiverseformsofpressure,creditorcountrieshave forced these indebted countries in the developing world to adopt amacroeconomic policy posture that entails significant cuts in social (health,education,housing),aswellasenvironmentalexpenditures.Themainpriorityoftheirfiscalpolicyhasbeendebtservicepayments.

Inadditiontothetransferofresourcesthatsurroundsthedebtproblem,majorsovereign debt crises have constituted a serious obstacle to growth anddevelopmentduringthe pastseveraldecades.Thesecriseshave beenextremelyharmful and their costs in social and environmental terms have beenoverwhelming. The ensuing adjustment programs have brought about greaterunemployment, inequality and poverty, exacerbating environmental problemssuch as deforestation and loss of biodiversity. Clearly, any discussion aboutresources for sustainability,wildlife conservation and species survival needs toaddress the issue of the debt bomb and the constraints it imposes onmacroeconomicpolicy.

IV.TheGreenEconomy

UNEPsGreenEconomy initiative isprobably thecornerstoneof UNCSDRio+20.ThecentralreferencehereisitsdocumentTowardsaGreenEconomy:PathwaystoSustainableDevelopmentandPovertyEradication.10Agreeneconomyisdefinedinthisdocumentasonethatensuresimprovedhumanwellbeingandsocialequity,whilesignificantlyreducingenvironmentalrisksandecological scarcities. According to UNEP this implies a low-carbon, resource

efficientandsociallyinclusiveeconomy.Probablythemostimportantconclusionof UNEPs reportTowards a Green Economy (TGE) is that investing just 2% ofglobalGDPintotenkeysectorsoftheworldeconomycaninitiatethetransitiontowards a low carbon, resource efficient economy. If backed by appropriatepoliciesatthenationalandgloballevels,thisgrowthprocesswouldbepossiblewithout increasing risks, shocks, scarcities and crises inherent in the existingresource-depleting,highcarbonbrowneconomy.The first paragraph in this section concentrates on the fact that for UNEP, thegreeneconomyobjectivecanbeattainedwithintheframeworkofneoliberalism.The second paragraph examines the recommendations on finance for a greeneconomy.ThethirdparagraphfocusesonthenotionofnaturalcapitalemployedinUNEPspresentationofagreeneconomy.ThefourthsectionbrieflyconsidersthemodellingexerciseusedbyUNEPtoreachitsconclusions.Thismodelistheso-called Threshold 21model of theMillennium Institute and is usedby UNEP tosupportitsconclusionthatinvesting2%ofGDPintensectorsoftheeconomywillleadtoagreeneconomy.Theseriouslimitationsinthemodelcastashadowofdoubtonthisconclusion.IV.ATheGreenEconomyandNeoliberalism

10

The document is available at: www.unep.org/greeneconomy.


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UNEPsGreenEconomyReport(GER)describeswhatagreeneconomyshouldlooklikeandattemptstoexplainhowthisobjectivecanbeattained.IntheForewordwereadthatagreeneconomydoesnotfavouronepoliticalperspectiveoveranother.ItisrelevanttoalleconomiesbetheyStateormoremarket-led.Neitherisitareplacement for sustainable development. Rather, it is a way of realising that

developmentatthenational,regionalandgloballevelsandinwaysthatresonatewithandamplifytheimplementationofAgenda21.Thus,accordingtoUNEPthenotionofgreeneconomyispolicyneutral.FortheGER then, there is no need to engage inpolicy reform at the level of the entireeconomicmodel.UNEPacknowledgesthatsomepolicychangeswillberequiredatthesectorlevelorevenonthings likesubsidiesorsomespecifictaxes.Butthesechangesdonotcompromisetheentireneoliberaleconomicmodel.Thus, forUNEP attaining the objective of a green economy is something that isperfectlycompatiblewiththeneoliberaleconomicmodel.Andthisisperhapsthesinglemostincongruousconclusion inUNEPs report.Theneoliberalmodelis inthemidstofaglobalcrisisofhistoricalproportions.Rio+20coincideswiththistrulyhistoricaleventandUNEPnotonlywastestheopportunitytomakeaseriousanalysisofthecrisis. Infact, itsbasicrecommendation isthecontinuationof themodel that generated this crisis, intensified inequality and environmentaldestruction everywhere. Any serious analysis of the evolution of the worldeconomy will show that neoliberalism is the single most important obstacle toreachsomethingresemblingsustainabledevelopment.ThedefinitionofagreeneconomyprovidedbyUNEPhasseveralkeycomponents.

Oneofthemissocialequityandtheeradicationofpoverty.Buthowdoesagreeneconomy lead to improved social equity and the eradication of poverty in anunprecedentedscale,withspeedandeffectiveness?(UNEP2011:628)HereweseethatUNEPsdocument lacks a serious analysisof how this comesabout. In theabsenceofthisanalysis,onecanonlybeledtobelievethattheobjectivesofsocialequity and poverty eradication are supposed to be attained through somethingthatlooksliketrickle-downeffects.UNEPs central premise here is that a new economic growth paradigm that isfriendlytotheenvironmentwillinandbyitselfcontributetopovertyeradication.TheargumentexpoundedbyUNEPonthisdelicatepointisthatthetransitiontoagreen economy will reduce poverty because (UNEP, 2011: 20) a number ofsectorswithgreeneconomypotentialareparticularlyimportantforthepoor,suchasagriculture,forestry,fisheryandwatermanagement.Butalthoughitistruethatthefateofmillionsofpoorpeoplewouldbeimprovedifwehadadequatepoliciesinthese(andother)sectors,underneoliberalprioritiesnone of these policies and the investment required will be forthcoming underUNEPsblueprintforagreeneconomy.Toprovideanexample,resourcesallocatedto agriculture are typicallydisciplined by the superior fiscal policy prioritiesofbalancedbudgetsandtheneedtogenerateaprimarysurplusinordertocover

financialcharges.ThisiswhyinmostcountriesintheGlobalSouththeaggregatemeasureofsupportmandatedbyWorldTradeOrganizationrequirementsiswell


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aboveactualresourcesallocatedforagriculture.Onceagain,thedogmasoffiscaldisciplineactasamajorrestrictionhere.Withoutescapingthisdogmaitwillnotbepossibletochanneltheresourcesneededtotransformagriculture.Thisisnottheonlyproblem.Underneoliberalismagriculturehassufferedamajor

offensivethroughthepowerfuleffectofeconomicforces.Tradeliberalizationhasbroughtaboutaseriousdeteriorationoftermsoftradeforagriculture(thehighpricesofagriculturalfoodstuffsregisteredinrecentyearshavenotbenefittedpoorfarmers but the large corporations and intermediaries that act in agriculturalmarkets). Fiscal restrictions made it impossible to maintain the real value of(WTO-compatible) income deficiency payments for farmers. In fact, in manycountries the number of beneficiaries of these programs has dropped as aconsequence of fiscal restrictions. These restrictions have also curtailed publicinvestment in irrigation and water management schemes, roads, storage,insurance, extremely limited credit facilities, etc. The combined effect of theseforces hasput extraordinary pressure on small-scale andpoor farmers, forcingthemtosearchforoff-siteincomegeneratingactivities.Thishasresultedinlarge-scalemigratoryprocessesthathaveeffectivelyexpelledmillionsofpeasantsfromtheir lands in recentyears. Inturn, this hasweakened the social fabric in ruralcommunities andweakened or even destroyed their capacity forenvironmentalstewardship.Finally,thismigrationalsohelpedmaintainlowwagesinruralareas.Shouldnt the green economy report consider this an important theme forconsideration?ThelinkagesbetweenpovertyeradicationandUNEPsGreenEconomybecomeless clear in the other sections of the UNEP report. The analysis of the

manufacturing industrydoesnotmentionthe forcesthathavedraggedwagesinthe worlds industrial system in a race to the bottom. This process of socialdumpingthatwasunleashedbyglobalizationshouldbeoneofthefirstitemstobeconsideredinaseriousanalysisaboutsustainabledevelopment.UNEPsgreeneconomyreportdoesnotcontainameaningfuldiscussiononwagesandworkerscompensation.Thesehavestagnatedoverthepastcoupleofdecadesandthisisatthecentrenotonlyofgreaterinequality,butalsoattheheartofthecurrentglobalcrisisbecausestagnantwagesforcedhouseholdsdowntheroadofincreasedindebtedness.Ifthesetrendscontinue,thegenerationofmorepovertywill continueandwillmost likely cancel out any gains thatmaybe achieved inothersectorsorbranchesofeconomicactivity.UNEPs green economy initiative is linked to the International LabourOrganizations project on decent jobs. But the ILO component also lacks themacroeconomic policy perspective required to set the world economy on the path to

sustainability.11 Although employment creation is one of the key elements of

macroeconomic policies, the words monetary policy and fiscal policy simply do notappear in the ILO report. Several studies have documented the fact that in the past

decades wages have grown at a substantially slower pace than GDP per capita. In fact,

11

The ILO report Green Jobs: Towards Decent Work in a Sustainable, Low Carbon Worldis available atwww.unep.org/labour_environment/features/greenjobs.asp


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many studies talk about the compression of wages in order to analyse this process in

which a great number of countries registered a decline in the share of national income

that goes to wages as wages lagged well behind productivity increases.

Not paying attention to the evolution of wages and to incomes policies in general is an

especially important omission of the GER because the recovery from the global crisiswill be very slow and in many countries, job creation will take a long time. It should be

noted that for every year a person remains unemployed, the probability that he or shewill remain unemployed and will fall below the poverty line increases. If on top of that

current trends in the evolution of wages continue, then inequality and poverty will

increase. In the context of the current global crisis, this is particularly worrying because

wages tend to fall at faster rates in times of crisis. Recovery will be slower due to this

additional factor that weakens aggregate demand. And because the emerging pattern of

income distribution will be marked by greater inequality, a green and sustainable

recovery will be difficult to attain.

In terms of poverty and environmental stewardship, the panorama that emerges fromthis picture is disquieting. The Green Economy Report should explicitly adopt the

policy objective of redressing existing inequalities in income distribution and of

establishing the institutions (such as collective bargaining) that could help revert the

negative trends brought about by neoliberalism. Redefining incomes policies, as well

as reorienting taxation in a truly progressive manner, are two priorities over which

UNEP keeps silence.

IV.BFinanceforaGreenEconomyAs the Green Economy report tackles the issue of finance, the linkages withneoliberalism become stronger. The section on finance states that hetransformationintoagreeneconomywillrequiresubstantialfinancialresources.According to UNEP financial investment, banking and insurance are the majorchannels of private financing for a green economy. Its green economy reportassuresusthattheresourcescontrolledbythefinancialservicesandinvestmentsectorscouldpotentiallybedirectedtowardsagreeneconomy.Inaddition,therapidgrowthandincreasinglygreenorientationofcapitalmarkets,theevolutionof emergingmarket instruments such as carbon finance and microfinance areopening space for financing the transition to a global green economy. UNEPscommitmenttothefinancialsectorisconfirmedbythelistofnewmarketsandinstruments to be used in channelling resources for the green economy: green

bonds,carbonmarkets,REDD+,greenpropertyasanewclassofassets,etc.Intheend,allofthispromotesthestrangleholdofthefinancialsectoronkeydimensionsoftheenvironmentandnature.ButUNEPfailstopresentaseriousanalysisoftheroleofthefinancialandbankingcomplexintheworldeconomytoday.TheinternationalfinancialsectorhasbeenatthecentreofeveryimportantcrisissincetheSavingsandLoansdebacleinthefinal years of the seventies up until the present. The basic characteristics offinancialcapitalareitspropensitytobeengagedinspeculativeactivities,aswellasits volatility. In the context of todays crisis the opacity of operations in thefinancialsectorhelpexplaintodaythevelocityofcontagionandthepersistenceofthefreezeoftheinter-bankmoneymarkets,theuselessnessofflexiblemonetarypolicyandthedurationofthecrisis.


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GiventhedominantfeaturesofthefinancialsectoritistrulyamostastonishingaspectoftheUNEPreporttoconcludethatthetransitiontoagreeneconomycanbe financed with resources from the financial sector. It isdifficult to claim thissectorshouldbethesourceoffundstosupportthetransitiontoagreeneconomy.

ButthefaiththatUNEPhasonthefinancialsectordatesbacktothedayswhenitthoughtaGlobalGreenNewDealwaspossible.Thisiswhatithadtosayonthecausesoftheglobalfinancialcrisis(UNEP2009:80):

The existing crisis may have more to do with a failure of governance and a

lack of transparency rather than a lack of regulation. The financial system is

already governed by many regulations and procedures. Most countries have

a multitude of agencies supervising every aspect of financial activity

central and private banks, stock exchanges, securities, mortgage lenders and

even other public agencies involved in the system.

This viewpoint is in complete contradiction with the need to set the world economy in

the trajectory of sustainable development. The chapter on enabling conditions confirms

the fact that UNEP believes that the green economy can be attained within the

neoliberal model. Its rhetoric about rejecting business as usual scenarios

notwithstanding, UNEPs report claims that the vast majority of the investment that

needs to be re-directed to the green economy will need to come from the private

financial sector if key sustainable development goals are to be achieved in the necessarytime scales. Not a word about imposing taxes on financial transactions. The neoliberal

model is not to be touched or modified in its essence.

IV.CNaturalCapitalOneofthemostunfortunateaspectsoftheGreenEconomyreportisitscontinuousreferencetonaturalcapital.ThisisaconstantleitmotifinthediscourseofUNEPandformsaseamlessfusionwiththeTEEBproject(EconomicsofEcosystemsandBiodiversity)and theNatural CapitalDeclaration.The emphasisonthefinancialsector as the purveyor of the needed resources for the transition to a greeneconomyshouldalsobeseenaspartofthissamemindset.Capital isa social relation, not a thing. But in mainstream economic theory thewordcapitalhasbeenassimilatedwithallsortsofphysicalandintangiblethings.Inastrangeway,thenotionofcapitalbecomesalmostmeaninglesswhenitisusedtodepictmachines,non-embodiedtechnology,humanskills,riversandbiologicaldiversity.Asthedictumwouldsay,ifeverythingiscapital,thennothingiscapital.Yet UNEP, TEEB and the sponsors of the Natural Capital Declaration have noproblem in advancing the idea that ecosystems, species and even genes arecomponentsofnaturalcapital.Themainproblemhereisthatifmachinesarecapital,andtheycanbeboughtandsold,thenitfollowsthatecosystems,speciesandgenescanalsobeboughtandsoldin themarket. The fact that it is possible to distinguish producedcapital from

non-humancapitaldoesnotcontradictthis.Thus,thenotionofnaturalcapital isintimatelylinkedwiththeideathatallofnatureisacommodity.Thenextstepisto


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provide for a price determination scheme and for markets well suited to eachcircumstance.Aswehavepointedout,profitabilityintherealsectorsoftheworldseconomyhasgonethroughperiodsofstagnationorbehavederraticallyinthepastfivedecades.

During this period, monetary creation ex nihilo by private banks and theinstrumentsoffinancialinnovationhavegeneratedamassivesupplyofinvestiblefunds.Thesearchforprofitableoutletsfortheseinvestiblefundshasledtoglobalfinancial deregulation and the plunder of public assets through massiveprivatization.Ithasalsoledtospeculationincommoditiesandfuturesmarkets.Thecreationofartificialmarkets forthingssuchascarbontradingispartofthisquest forprofitability.Thenotion ofnatural capital is the latest contribution toopeningadditionalprofitabilityspacesfortheseinvestiblefunds.Both UNEPs Green Economy report and TEEB embrace the idea thatenvironmentaldeteriorationstemsfromthefactthatthereisnopropervaluationof nature.According to UNEP this leads to a neglect of natural capital and toirrationaldecisions.Thekeypremisehere isthatoncepricesaredetermined foreachcomponentofnaturalcapitalenvironmentaldeteriorationwillbestoppedoratleastsloweddown.Thisisanentirelyimproperwayofframingtheanalysisofenvironmental destruction. Nothing in the process of price formation or in thedynamicsofpricesystemswillworkinthisdirection.Rio+20 includes an effort to push forward the so-called Natural CapitalDeclaration(NCD)thatissupposedtoincludeacommitmentonthepartofthefinancial sector with the principles of sustainable development and a green

economy.12Ananalysisofthisdeclarationshowshowdisingenuousthisinitiativeis.TheNCDstatesthatfinancialinstitutionsareanintegralpartoftheeconomyandsociety and as the engine of global economicgrowth, the financial sector canprovide some of the tools required to support a transition to sustainabledevelopment and eradicating poverty by providing loans, equity, insurance andother financial products. This is a self-serving statement because under thestrangleholdoffinancialcapitaltheworldeconomyhasbeenunderperformingfordecadesandisnowsufferingtheworstcrisisineightyyears.Inaddition,underthedominationofthefinancialsector,macroeconomicandsectorlevelpolicieshaveresultedingreaterinequalityandevenpoverty.Thus,thefinancialsectoristrulyinaveryuncomfortablepositiontobemakingthiskindofstatement.TheNCDstatesthatnaturalcapitalisapartoftheglobalcommonsandistreatedlargely as a free good. Thus governments must act to create a frameworkregulating andincentivizing theprivatesector (including the financialsector) tooperateresponsiblyregardingitssustainableuse.ThesponsorsoftheNCDseemtothinkthatbecausenaturalcapitalisundertheregimeofglobalcommonsitispossible to set the stage for its appropriation. This implies that the notion ofglobal commons is synonymous of theresnullius property regimeofClassical

12

The declaration is available at http://www.naturalcapitaldeclaration.org.


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Romanlaw.Resnulliusmeansthatathinghasnoownerand,therefore,ifathingisresnullius,anyonecanappropriateit.Butifathingispartofthecommons,thenitisundertheregimeofrescommunis.Andassuch,itcannotbetheobjectofprivateappropriation. This is not what the financial sector is promoting with itsdeclaration.

Thenotionofnaturalcapitalisnotaninnocenterrorormisconception.Itispartofadiscoursethatseekstoreduceallofnaturetotheroleofacommodity.HereweendorsetheBankTrackstatement(availableathttp://tinyurl.com/cvfrd66):

instead of expanding the scope of markets to every domain ofnature,creatingatruegreeneconomywouldstartfromtheopposite;reversingthetideofcommodificationandfinancialisation,reducingtheroleofmarketsandthefinancialsector,acknowledgingthelimitsof business versus other spheres of life, and recognising thecollective responsibility of all people for, and strengthening thedemocratic control over the worlds' ecological commons. Ratherthan a Natural Capital Declaration we needmore Nature withoutCapital.

IV.DModellingUNEPs Green Economy report is based on a modelling exercise supposed toprovideasolidfoundationtotheclaimthatinvestingintheenvironmentwillleadtohealthymacroeconomic results andhelp in theeradication ofpoverty.UNEP

relies on the Threshold 21 World model that uses systems dynamics, amethodology that incorporates feedback loops in its simulations. This enablesmodellerstostudycomplexsystems.Theuseandabuseofmodelsineconomicsisoldpractice.Itistruethatsimulationmodelscanbeusedtoextractinterestinginsightsfromthecomplexbehaviourofeconomic systems. But the quality of these insights depends on the modelsassumptions and coverage.Models inapplied economicsquite frequently ignorethe conclusions of serious economic theory for the sake of using flashymathematical tools to prove their conclusions. Models are regularly used toimpress upon the public the appearance of rigour that is conveyed bymathematical precision. The policy maker that relies on simulation models toobtainhardnumbersshouldbefullyawareofthelimitationsofthemodelhe/sheselects.FullDisclosureThereareseveralthingsthatmustbetakenintoaccountwhenusingmodels.Thefirst is that because themodelling exercise typically claims to be scientific andrigorous, the entire model needs to be disclosed, with all of its equations,parametersandresults.Thisallowsforanyonetocarryoutindependentrunsandtests with the model to confirm, find counterfactuals or disprove the original

claims.Without full disclosure, the results presented inUNEPs Green Economyreportcannotbeconsidereddefinitive.


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Althoughthedetailsofthemodelarenotavailable,informationprovidedinthespecial chapter on the T21 model already allows us to make several criticalcommentsonthismodelandonitsuseinthecontextoftheGreenEconomyreport.

FinancialSectorThe models economic sphere is made up of six sectors: agriculture, fishery,forestry,industry,servicesandasectorforeconomicaccounts.Thus,themodeldoes not have a financial sector. The banking system, capital flows, financialtransactionsandtheoperationsofthestockmarkets,allofthatremainsoutsideofthemodel. Monetarypolicy and its impact on thebehaviourof themodels keyvariablesisalsoabsent.This poses three serious problems. First, the model ignores one of the mostimportantcomponentsoftheworldeconomy.The global financial sectordwarfsevery other component of the world economy. Financial capital also dominatesmacroeconomicpolicymakingtoday.Amongotherthings,thisiswhysectorlevelpoliciesaredisciplinedbymonetaryandfiscalpolicyprioritiesthatcatertotheinterests of financial capital. For these reasons an alert and comprehensivediscussionabouttheworldeconomytodaycannotavoidmakingreferencetotheglobalfinancialsector.Second,byexcludingthefinancialsector,themodelleavesoutfinancialinstability,volatilityanduncertainty.Theseareessentialfeaturesofmodernfinanceandtheyareattheoriginofimportantcrisesindevelopingandmaturecapitalisteconomies.TheT21modelmayperformcertainsimulationswithoutmajorupheavals,butthe

userofthemodelcannotconfidentlyconcludethisisafaithfulreproductionofrealworld economics without incorporating the financial sector in the modelsstructure.Third,thereisaseriousdisconnectbetweentheclaimthatthevastmajorityoftheinvestmentforatransitiontoagreeneconomywillhavetocomefromtheprivatefinancial sector and the complete absence of the financial sector from thesimulationmodelusedbyUNEP.T21andEconomicCrisisTheT21modelhasnoroomforeconomiccrises.Themodeldoesnotappeartobeable to integrate problems related to the collapse of aggregate demand or ofuncertainty on investment decisions. The T 21 model does not tolerate thepresenceofsomethinglikeamacroeconomicproblem.Inaddition,atthesectororbranchlevels,theT21modelisunabletoreplicatethepresenceofdisequilibriumsituations.Themoduleonrelativepricesmayallowforthecalculationofsomenumericalcoefficientstheauthorsofthemodelcallprices,but it is totally incapable of describing the price formation process that issupposed to rule in a market economy. In fact, this module is derived fromcomputablegeneralequilibriummodels.Thegravelimitationsofthesemodelsare

bynowwellknown.OneofthemisthatCGEmodelshidethefactthatingeneral


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marketsareunstable.TheuseofsystemsdynamicsdoesnotchangethefactthatCGEmodelsarenotagoodapproximationtoreality.TechnologyandProduction

The use of Cobb-Douglas production functions has serious limitations, both interms of replicating technological choice and in terms of describing productionprocesses.EvenwithinthelimitedscopeofUNEPsnotionofagreeneconomytheuseofCobb-Douglasproductionfunctionsleavesmanyunansweredquestions.Theprocessofsystemictechnicalchangethatisrequiredtoensurethetransitiontoagreen economy is likely to involve significant turmoil and will shock existingeconomic structures. The use of Cobb-Douglas production functions is totallyinadequatetoexaminetheprocessoftechnicalchange.Cobb-Douglasproductionfunctionsare instrumentsthatwereoriginallydesignedtoexamineincomedistribution.Theywerederivedinitiallyaspartoftheanalysisof marginal productivity theory, a construct that attempted to explain incomedistributionastheresultofthecontributionofeachfactorofproductiontototaloutput.ThetheoreticalfoundationsofthiswereshowntobewrongasaresultoftheCambridgecontroversiesovercapitaltheoryintheseventies.Buttherelevantpoint here is that production functions are not adequate representations ofproductiveprocesses.Using Cobb-Douglas functions to describe the transformation of the worldeconomy requires the performance of several leaps of faith. There is a seriouscontroversyintheliteratureconcerningtheapparentgoodfitinestimatesofCobb

Douglasproductionfunctions.Forexample,Simon(1979)seesinthegoodnessoffit of the Cobb-Douglas function an statistical artifact in that the data being fitcorrespond to the income identity (the accounting relation equating valkue ofoutputtothesumoffactorcosts).Shaikh(1990,2005)alsoshowedthattheCobb-Douglas function is simply an anti-logarithmic transformation of the incomeidentityundercertainassumption.UntilUNEPdisclosestheentireT21modelthequestions posed by these considerations and debates will remain unanswered.UNEPsconclusionsaboutthetransitiontoa greeneconomywillalsohave tobeputonhold.AlejandroNadal is full professor at the Centre for Economic Studies author ofRethinkingMacroeconomicsforSustainability(London:ZedBooks,2011)and(withFrankAckerman),TheFlawedFoundationsofGeneralEquilibrium:CriticalEssay

RIO+20 a Citizen's Background Document

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