May 23, 2012
The Future We Want

Twenty years ago, there was the Earth Summit. Gathering in Rio de Janeiro, world leaders agreed on an ambitious blueprint for a more secure future. They sought to balance the imperatives of robust economic growth and the needs of a growing population against the ecological necessity to conserve our planet’s most precious resourcesland, air and water.

And they agreed that the only way to do this was to break with the old economic model and invent a new one. They called it sustainable development.

Two decades later, we are back to the future. The challenges facing humanity today are much the same as then, only larger. Slowly, we have come to realize that we have entered a new era. Some even call it a new geological epoch, where human activity is fundamentally altering the Earth’s dynamics.

Global economic growth per capita has combined with a world population (passing 7 billion last year) to put unprecedented stress on fragile ecosystems. We recognize that we can not continue to burn and consume our way to prosperity. Yet we have not embraced the obvious solution — the only possible solution, now as it was 20 years ago: sustainable development.

Fortunately, we have a second chance to act. In less than a month, world leaders will gather again in Riothis time for the U.N. Conference on Sustainable Development, or Rio+20. And once again, Rio offers a generational opportunity to hit the reset button: to set a new course toward a future that balances the economic, social and environmental dimensions of prosperity and human well-being.

More than 130 heads of state and government will be there, joined by an estimated 50,000 business leaders, mayors, activists and investors — a global coalition for change. But success is not guaranteed.

To secure our world for future generations — and these are indeed the stakes — we need the partnership and full engagement of global leaders, from rich nations and poor, small countries and large. Their overarching challenge: to galvanize global support for a transformative agenda for change — to set in motion a conceptual revolution in how we think about creating dynamic yet sustainable growth for the 21st century and beyond.

This agenda is for national leaders to decide, in line with the aspirations of their people. If I were to offer advice as U.N. secretary general, it would be to focus on threeclusters” of outcomes that will mark Rio+20 as the watershed that it should be.

First, Rio+20 should inspire new thinking — and action. Clearly, the old economic model is breaking down. In too many places, growth has stalled. Jobs are lagging. Gaps are growing between rich and poor, and we see alarming scarcities of food, fuel and the natural resources on which civilization depends.

At Rio, negotiators will seek to build on the success of the Millennium Development Goals, which have helped lift millions out of poverty. A new emphasis on sustainability can offer what economists call a “triple bottom line” — job-rich economic growth coupled with environmental protection and social inclusion.

Second, Rio+20 should be about people — a people’s summit that offers concrete hope for real improvements in daily lives. Options before the negotiators include declaring a “zero hungerfuturezero stunting of children for lack of adequate nutrition, zero waste of food and agricultural inputs in societies where people do not get enough to eat.

Rio+20 should also give voice to those we hear from least often: women and young people. Women hold up half the sky; they deserve equal standing in society. We should empower them, as engines of economic dynamism and social development. And young people — the very face of our future: are we creating opportunities for them, nearly 80 million of whom will be entering the workforce every year?

Third, Rio+20 should issue a clarion call to action: waste not. Mother Earth has been kind to us. Let humanity reciprocate by respecting her natural boundaries.

At Rio, governments should call for smarter use of resources. Our oceans must be protected. So must our water, air and forests. Our cities must be made more liveable places we inhabit in greater harmony with nature.

At Rio+20, I will call on governments, business and other coalitions to advance on my own Sustainable Energy for All initiative. The goal: universal access to sustainable energy, a doubling of energy efficiency and a doubling of the use of renewable sources of energy by 2030.

Because so many of today’s challenges are global, they demand a global response collective power exercised in powerful partnership. Now is not the moment for narrow squabbling. This is a moment for world leaders and their people to unite in common purpose around a shared vision of our common future — the future we want.

Ban Ki-moon is secretary general of the United Nations.

Why Do Economies Stop Growing?

Michael Spence

23 May 2012


MILANOver the years, advanced and developing countries have experimented, sometimes deliberately and frequently inadvertently, with a variety of approaches to growth.

Unfortunately, many of these strategies have turned out to have built-in limitations or deceleratorswhat one might call elements of unsustainability. And avoiding serious damage and difficult recoveries requires us to get a lot better at recognizing these self-limiting growth patterns early on.

Here are some of the items in a growing library of decelerating growth models.

In developing countries, import substitution as a way to jump-start economic diversification can work for a while; but, over time, as productivity growth lags and comparative advantage is over-ridden, growth grinds to a halt.

Small, open economies are naturally somewhat specialized, which leaves them vulnerable to shocks and volatility. But, in terms of growth and living standards, the cost of economic diversification, when implemented by protecting domestic industries from foreign competition, eventually outweighs the benefits.


It is better to allow specialization, and build effective social safety nets and support systems to protect people and families during economic transitions. Such “structural flexibility” is better adapted to enabling the broad changes that rapidly evolving technological and global economic forces require.

Mismanagement of natural-resource wealth underpins an especially potent self-limiting pattern of growth and development. If invested in infrastructure, education, and external financial assets, natural-resource revenues can accelerate growth. But, too often, such revenues distort economic incentives, which come to favor rent-seeking and interfere with the diversification that is essential for growth.

More recently, many advanced countries have discovered a “newset of growth models with built-in structural limitations: excessive private or public consumption, or both, usually accompanied and enabled by rising debt and inflated asset prices, and a corresponding decline in investment. This approach appears to work until domestic aggregate demand can no longer sustain growth and employment, at which point it ends in either gradual stagnation or a violent financial and economic crisis. (In fact, many developing countries have learned this the hard way, but the lessons seem not to have crossed over to advanced countries.)

But the opposite of the excessive-consumption modelexcessive reliance on investment to generate aggregate demand – is also a self-limiting growth pattern. When the private and social returns of investment diminish too much, growth cannot be sustained indefinitely, even though rising investment rates can sustain aggregate demand for a while. Altering this growth pattern is a significant part of the challenge that China now faces.

Rising inequality in either opportunity or outcomes (and often both) also poses threats to the sustainability of growth patterns.
While people in a wide range of countries accept some degree of market-determined income variation, based on differential talents and personal preferences, there are limits. When they are breached, the typical result is a sense of unfairness, followed by resistance and, ultimately, political choices that address the inequality, though sometimes in counter-productive, growth-impeding ways.

Perhaps the largest long-run sustainability issue concerns the adequacy of the global economy’s natural-resource base: output will more than triple over the coming two or three decades, as high-growth developing economies’ four billion people converge toward advanced-country income levels and consumption patterns. Existing economic-development strategies will require significant adaptation to accommodate this kind of growth.

Some adaptation will occur naturally, as rising energy and other commodity prices generate incentives to economize or seek alternatives. But the un-priced environmental externalitiesglobal warming and water depletion, for example – will require serious attention, not myopic, reactive mindsets and approaches.

All of these self-limiting growth patterns tend to have three things in common. First, in one or several dimensions, some part of the economy’s base of tangible, intangible, and natural-resource assets is being run down. I would include social cohesion as part of the asset base: it is the one that is depreciated by excessive inequality.

Measurement issues play an important role here. It is easier to run down something that is partly invisible because it is not regularly or effectively measured. Expanded measurement of the dimensions of economic, social, and environmental performance is necessary to broaden awareness of sustainability issues.

Second, unidentified self-limiting growth patterns produce very bad results. Expectations come to exceed reality, and resetting the system to a sustainable growth pattern is difficult. After all, past investment shortfalls have to be made up and future-oriented investments undertaken simultaneously – a double burden that must be borne by the current generation. An inability to resolve the distributional and fairness problem can produce gridlock, paralysis, and prolonged stagnation.

Finally, many of these flawed growth patterns involve fiscal distress. Contrary to the prevailing wisdom nowadays, some degree of Keynesian demand management in the transition to a more sustainable growth pattern is not in conflict with restoring fiscal balance over a sensible time period. On the contrary, applied both individually and together, fiscal stimulus and consolidation are necessary parts of the adjustment process.

But they are not sufficient. The crucial missing pieces are a shift in the structure of accessible aggregate demand and restoration of those parts of the economy’s asset base that have been run down, implying the need for structural change and investment.

Michael Spence, a Nobel laureate in economics, is currently Chairman of the Commission on Growth and Development, an international body charged with charting opportunities for global economic growth. He is also Professor of Economics at NYU’s Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign Relations, and Senior Fellow at the Hoover Institution at Stanford University. He was previously Dean of Stanford’s School of Business and Professor of Economics at Harvard University.

Copyright Project Syndicate -

May 22, 2012 7:24 pm
Sensible Keynesians see no easy way out
By Raghuram Rajan

In the long run we are not dead, we will still be recovering from the Great Recession. We should therefore weigh stimulus policies not just on their immediate effect but on their consequences over time. Sensible Keynesians recognise this. They bet that reviving growth through government spending today outweighs the future loss of growth as the debt taken on to fund current spending is paid back. Consider two circumstances where this may apply.


The first is in a fully fledged panic where demand collapses, banks and companies fail and organisational capital is destroyed. Save, possibly, for Greece, it is hard to argue any industrial country is there today.

The second is when persistent high unemployment leads the long term unemployed to lose the habits and skills that make them employable. This is probably the more pertinent case in several industrial countries, such as the US and Spain. Increasing employment in a sustainable way today could more than pay for itself if people who would otherwise drop out of the workforce earn incomes.


The key question then is whether more government spending can make a real difference to the most severe employment problems. Here the case for a general stimulus becomes less compelling. In the US, demand is weakest in communities where a boom and bust in house prices has left an overhang of household debt. Lower local demand has hit employment in industries such as retail and restaurants. A general increase in government spending may be too bluntgreater demand in New York is not going to help families eat out in Las Vegas (and hence create more restaurant jobs there). Targeted household debt write-offs in Las Vegas could be a better use of stimulus dollars.

However, the past build-up of debt in now depressed areas may suggest that demand was too high relative to incomes. If so, demand, without the dangerous stimulant of borrowing, will stay weak.


Policy should instead help workers move where there are suitable jobs – for instance, by helping them offload their homes and the associated debt without the stigma of default.


Employment is also lower in states that experienced a housebuilding bust. In these states, unemployment is higher among construction workers and in related jobs such as real estate brokerage.

Could big publicly funded infrastructure projects, modelled on those in the 1930s, re-employ them? Possibly not, since today’s built-up US is less in need of infrastructure on that scale. Moreover, it is not clear that a worker used to putting up drywall can move easily to laying fibre-optic cable. Perhaps it would be better policy to support retraining for private jobs.

Japan, which had a huge property boom and bust in the late 1980s, provides a salutary warning of the difficulties of stimulus through infrastructure spending. Even though Japan covered much of the country with concrete, it never fully emerged from the crisis. For the Japanese, the long run has arrived, and they are older, fewer and have the highest government debt in the G7.

.The US government can still spend. The UK is more on the margin. With a huge financial sector dependent on the government’s financial standing, it can take fewer chances with its finances.


Austerity is painful, which is why austerity tomorrow is not credible. Yet shared tax increases and spending cuts can instil a sense of national purpose to help a country weather tough times.


For Greece, government spending is the problem, not the solution. A responsible government would implement judicious austerity, firing the party hacks who were hired in the go-go years, cutting wages and pensions and restructuring itself to collect taxes and provide useful services, even while retaining transfers to the indigent and elderly. As public sector workers share the private sector’s pain, national solidarity could improve. Also, improved government efficiency and other structural reforms will make it easier for Europe to provide the financing that will prevent even more savage cuts to government functions. And it will make it easier to write down Greek debt further and attract private investment, giving people hope of growth.

Targeted government spending, or reduced austerity, along the lines suggested by sensible Keynesians, might be feasible in some countries and helpful in speeding recovery. But we should examine each policy based on a country’s circumstances. We should be particularly wary of populist Keynesians, who parrot “in the long run we are dead” to justify any short-sighted government action.

They do the world a disservice by suggesting there are easy ways out. By misleading people and their leaders, they may well precipitate revolution rather than recovery.


The writer is a professor at the University of Chicago’s Booth School

Copyright The Financial Times Limited 2012.

05/23/2012 12:53 PM

Free Money

German Central Bank Issues Zero-Rate Bonds.

For the first time in history, Germany issued long term bonds with a zero percent coupon rate on Wednesday. The demand reveals the deep concerns investors have about the euro zone and their desire for a safe place to park their capital -- even if it costs them money to do so.

For now at least Germany and Greece share the same currency. But don't tell that to investors. On Wednesday the German Finance Ministry pulled off a remarkable feat for a country in a threatened currency union: It issued €4.6 billion of two year bonds with a rate of zero percent. In other words, once inflation is factored in, investors are essentially paying to park their money with the German government.

Because of the strength of its economy, Germany has emerged as a significant benefactor from the problems being experienced by Greece as well as Spain, Italy and Portugal. In Greece worries that a government uncooperative with the European Central Bank could come to power after next month's election forcing an exit from the euro zone has investors as well as ordinary citizens pulling their money out in droves. In Spain concerns over the health of the banking sector have driven up borrowing costs.

According to German officials on Wednesday, demand for the zero percent bonds was robust and added that Germany does not intend to offer up bonds with a negative interest rate. "As such, a coupon of zero percent is the lower limit," Reuters quoted a finance official as saying.

Still, it seems likely that, with investors looking for safe havens for their money, even negative interest rate bonds might sell. "Many investors are putting their money only in places where they are guaranteed to get it back," Commerzbank analyst Alexander Aldinger told the Berliner Morgenpost. "For a large degree of security, investors are willing to give up returns."

Even while borrowing costs have spiked in other euro-zone countries, rates on shorter term German bonds have already hit zero and even ventured into negative territory, meaning investors have been paying the German government to hang on to their cash. Rates on longer-term bonds have been trading consistently below the rate of inflation.

The zero percent bond issue is just the latest sign that concern about the crisis facing Europe's common currency is rampant. As are worries that the situation could become much worse before it gets any better.




In this season of concern, low interest rates on two-year bonds are hardly out of the ordinary as investors focus more on conserving capital than growing it. US two-year bonds offer an interest rate of 0.29 percent while the same bonds in Japan produce a 0.1 percent rate. According to the German daily Frankfurter Allgemeine Zeitung, the Finance Ministry in Berlin won't say whether future bond issues will also be at zero percent.

Yet even as investors seek safety, analysts are concerned that the low interest rates will produce a bubble. "If this isn't a speculation bubble, then I don't know what a speculation bubble is," Marc Oswald, research analyst at Monument Securities, told the Berlin daily Morgenpost. He expects the move to drive investors towards hard assets like real estate, gold and art. Pension funds and other institutional investors will suffer, however, as they are required to put a certain percentage of their assets into state bonds.

Oswald also says that the move is a sign that paper money has no meaning anymore. Pretty soon, he says, central banks could be forced to step back in time to the 1970's when gold anchored paper money.


Is China running out of options?

Yukon Huang

May 23, 2012

China’s economy seems to be going gradually downhill but with the dips particularly steep at times. When Premier Wen Jiabao announced in March that the growth target would be 7.5 per cent this year, no one took him too seriously since outcomes have always been significantly higher. Beijing was comfortable with growth moderating to around 8.5 per cent for this year compared with last year’s 9.2 per cent but prolonged uncertainties in the eurozone combined with the continuing lid on housing purchases now suggest that a soft landing may be more difficult to realise.

April’s economic indicators took markets and seemingly even Beijing by surprise in the uniformity of the shortfalls from forecasts. Some have speculated that the leadership has been distracted by the Bo Xilai and Chen Guangcheng affairs on top of the maneuvering relating to the leadership transition.

Industrial production grew by only 9.3 per cent year-on-year compared to the consensus forecast of 12 per cent. Growth in investment and retail sales were also below expectations particularly since various business surveys had been more reassuring. All this was corroborated by the slow growth in electricity sales and tax receipts.

Particularly worrisome, bank lending has fallen off sharply – with medium and long-term loans down nearly 50 per cent from last year. Firms find profits evaporating with demand becoming increasingly uncertain for those depending on export markets. The problem is not lack of liquidity in the banking system but lack of credible borrowers.

But the final straw came with demand from Europe collapsing last month along with the US market remaining tepid. The reality now is that external demand by itself could subtract a full percentage point from this year’s growth.

China analysts have responded by lowering their growth estimates closer to 8 percent with some even predicting a collapse. This morning the World Bank lowered its forecast to 8.2 per cent.

Beijing still has ample financial resources, however, to avoid a crisis. The premier’s recent statement on “giving more priority to maintaining growthsignaled that decisive actions would now be taken. But with its infrastructure-cum-land sales fueled growth model under stress and exchange and interest rates still tightly managed, it does not have all the necessary policy options at its disposal.


Prospects have worsened in part because of the legacy of China’s massive 2008 stimulus program. That program, which relied heavily on credit expansion, pushed growth above sustainable levels and fostered the borrowing spree that spawned the property bubble and inflation which has absorbed the attention of policy makers ever since. Even as macro conditions have seemingly been brought under control over the past six months, China’s longer-term strategy of becoming less reliant on external demand and investment and more dependent on consumption to drive growth is becoming harder to realise.


Premier Wen has shown no inclination thus far to remove the lid on the commercial housing sector which broadly defined accounted for some 10 per cent of gross domestic product in recent years. Losing this demand driver cannot be easily offset even if efforts are made to accelerate construction of social housing.

With the apparent success of its tighter monetary policy, Beijing now finds it awkward to reverse course by lowering interest rates to keep activity on a steady course and instead has to rely on cutting bank reserve requirements to recharge the system. But if with repressed commercial demand, this option may not suffice.


Although political pressures to appreciate the renminbi have lessened with declining trade surpluses, more flexible two way currency movements will have little impact in altering trends in the real economy over the coming months.


Hopes that consumption can play a more dynamic role are probably unrealistic. Consumption has in fact been relatively strong accounting for 43 per cent of GDP growth in the first quarter compared with 28 per cent a year earlier. But by its very nature, consumption is not amenable to special incentives which typically end up borrowing against the future and thus are not sustainable.


Nevertheless, consumption growth averaging 8 percent annually does provide a solid base that would help cushion all but a total collapse in the global economy triggered by events in the euro-zone.


Chastened by the explosive growth of credit-financed expenditures from the past stimulus program, China’s system now has to rely on the recently announced fiscal efforts to accelerate expenditures on infrastructure projects including roads, rail and power plants. While more transparent and less prone to waste, the fiscal channel is more bureaucratic with its expansionary impact less readily felt compared with the banking channel. Thus there continues to be a risk that Beijing’s fine-tuning of macro policies will fail to keep growth on the desired trajectory.