Is Growth Passé?

Some suggest that the Paris climate agreement’s target for limiting global warming can be achieved only by stopping economic expansion. But there is ample room to change the quality of growth and significantly reduce its environmental impact without condemning billions of people to lives of deprivation.

Joseph E. Stiglitz

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NEW YORK – It’s clear: we are living beyond our planet’s limits. Unless we change something, the consequences will be dire. Should that something be our focus on economic growth?

Climate change represents the most salient risk we face, and we are already getting a glimpse of the costs. And in “we,” I include Americans. The United States, where a major political party is dominated by climate-change deniers, is the highest per capita emitter of greenhouse gases and the only country refusing to adhere to the 2015 Paris climate agreement.

So there is a certain irony in the fact that the US has also become one of the countries with the highest levels of property damage associated with extreme weather events such as floods, fires, hurricanes, droughts, and bitter cold.

At one time, some Americans even hoped that climate change might benefit them. Maine’s coastal waters, for example, would become swimmable. Even today, a few economists still believe that there is not much to worry about, so long as we limit the increase in average global temperature to 3-4º Celsius, compared to the 2ºC limit set by the Paris agreement. This is a foolish gamble. Greenhouse-gas concentrations are projected to be at their highest level in millions of years, and we have nowhere else to go if we lose.

Studies suggesting that we could tolerate higher temperatures are deeply flawed. For example, because appropriate risk analyses are systematically omitted, their models do not give sufficient weight to the probability of “bad outcomes.” The greater the weight we assign to the risk of bad outcomes, and the worse those outcomes are, the more precautions we should take. By assigning little weight – far too little weight – to very adverse outcomes, these studies systematically bias the analysis against doing anything.

Moreover, these studies underestimate the non-linearities in the damage functions. In other words, our economic and ecological systems may be resilient to small changes in temperature, with damage increasing only proportionally to temperature, but once climate change reaches a certain threshold, the increase in damages accelerates relative to the rise in temperature.

For example, crop loss becomes serious as a result of frosts and droughts. Whereas a below-threshold level of climate change may not affect the risk of frost or drought, a higher level increases disproportionately the risk of these extreme events.

It is precisely when the consequences of climate change are large that we are least able to absorb the costs. There’s no insurance fund to draw upon if we need investments to respond to large increases in sea levels, unforeseen health risks, and migration on a massive scale as a result of climate change. The fact is that in these circumstances, our world will be poorer, and less able to absorb these losses.

Finally, those who argue for a wait-and-see approach to climate change – that it’s a waste of money to take large actions today for an uncertain risk far in the future – typically discount these future losses at a high rate. That is, whenever one takes an action that has a future cost or benefit, one must assess the present value of these future costs or benefits.

If a dollar 50 years from now is worth the same as a dollar today, one might be motivated to take strong action to prevent a loss; but if a dollar 50 years from now is worth three cents, one wouldn’t.

The discount rate (how we value future costs and benefits relative to today) thus becomes critical. US President Donald Trump’s administration has in fact said that one wouldn’t want to spend more than roughly three cents today to prevent a dollar loss in 50 years. Future generations just don’t count much.

This is morally wrong. But the do-nothing advocates, ignoring all the advances in public economics over the past half-century that have explained otherwise, argue that economic efficiency requires it. They are wrong.

We must take strong action now to avoid the climate disaster toward which the world is heading. And it is a welcome development that so many European leaders are spearheading efforts to ensure that the world is carbon-neutral by 2050. The report of the High-Level Commission on Carbon Prices, which I co-chaired with Nicholas Stern, argued that we could achieve the Paris agreement’s goal of limiting global warming to 2ºC in a way that enhanced living standards: the transition to a green economy could spur innovation and prosperity.

That view sets us apart from those who suggest that the Paris agreement’s goals can be achieved only by stopping economic expansion. I believe that is wrong. However misguided the obsession with ever-increasing GDP may be, without economic growth, billions of people will remain without inadequate food, housing, clothing, education, and medical care.

But there is ample room to change the quality of growth, to reduce its environmental impact significantly. For example, even without major technological advances, we can achieve carbon neutrality by 2050.1

But it won’t happen on its own, and it won’t happen if we just leave it to the market. It will happen only if we combine high levels of public investment with strong regulation and appropriate environmental pricing.

And it can’t, or won’t, happen if we put the burden of adjustment on the poor: environmental sustainability can be achieved only in tandem with efforts to achieve greater social justice.

Joseph E. Stiglitz, University Professor at Columbia University, is the co-winner of the 2001 Nobel Memorial Prize, former chairman of the President’s Council of Economic Advisers, and former Chief Economist of the World Bank. His most recent book is People, Power, and Profits: Progressive Capitalism for an Age of Discontent.

Worrying signs that a great global deregulation has begun

Evidence shows the US and Europe are poised to compete to ease the rules

Patrick Jenkins

European Commission vice-president in charge the Euro, Social Dialogue, Financial Stability, Financial Services and Capital Markets Union Valdis Dombrovskis speaks during a press conference on deepening Europe's Economic and Monetary Union at the EU headquarters in Brussels, on June 12, 2019. (Photo by JOHN THYS / AFP) (Photo credit should read JOHN THYS/AFP via Getty Images)
Valdis Dombrovskis has warned that the UK would only retain full market access to EU clients post-Brexit if UK rules remained 'equivalent' to the rules of the EU27 © AFP via Getty Images

The great global deregulation has begun. The signs are subtle so far, but last week threw up four pieces of evidence that the US and Europe are poised to compete to ease bank regulation — in turn threatening the co-ordinated global approach that has helped make the international banking system safer in the decade since the financial crisis.

Exhibit one: a week ago, Valdis Dombrovskis, the EU’s financial services commissioner, warned that the UK would only retain full market access to EU clients post-Brexit if UK rules remained “equivalent” to — or closely aligned with — the rules of the EU27. Brussels has made a similar point before. This time, though, there was a more explicit deregulatory agenda. Market access, he spelt out, would be dependent on “not starting to engage in some kind of deregulation”.

Deregulation could indeed be in prospect, if Boris Johnson’s Conservatives win a clear majority in this week’s general election. But it is far from a certainty. History, on the contrary, suggests the UK tends to gilt-edged rules from Europe, and has in fact been the architect of much Brussels regulation. Deregulatory initiatives could just as likely originate from the EU.

To wit, exhibit two, which followed on Tuesday when UniCredit, Italy’s biggest bank, announced there would be a significant financial benefit from tweaks made to new capital rules. The Italian bank is the first to quantify the capital relief generated by the EU’s CRD5 bank capital directive relative to the updated “Basel IV” global banking rules, which CRD5 is supposed to implement.

By allowing banks to use forms of debt, not just equity, as part of their capital calculations, the impact of the change is mitigated. Only 56 per cent of the “Pillar 2” capital that is specific to each bank must be funded with equity. This was fixed when CRD5 rules were passed in April. But it had been unclear until now how that would feed through to banks.

In UniCredit’s case, it means an 0.8 percentage point reduction in core equity demands. After the UniCredit disclosure, analysts at Morgan Stanley estimated that European banks should on average gain 0.9 percentage points of equity relief. That offsets the Basel IV increase of 1.1 points — a clear sign that the pendulum on regulatory capital is swinging back. The capital relief is helping UniCredit fund a €2bn share buyback. Analysts predict a string of copycat buybacks across the European banking sector.

Exhibit three: Randy Quarles, the Fed governor in charge of financial regulation, and the head of the global regulatory oversight body, the Financial Stability Board, told a Congressional hearing on Wednesday that overall capital levels at US banks should not rise, despite the extra demands of Basel IV. “We don’t believe that the aggregate level of loss absorbency needs to be increased,” he said in comments that suggested ways will be found to offset increased headline capital demands.

Exhibit four is a small but important initiative being pushed by banks such as Deutsche Bank and HSBC (with a sympathetic hearing from some European regulators), to grant environmentally friendly investments a lighter capital treatment. Addressing climate change is a crucial topic but incentivising green finance in this way looks like a recipe for distorted risk-taking.

Taken in isolation, all of the above might simply suggest pragmatism. Banks are far safer than they were in 2008. Capital levels have increased as much as tenfold over the past decade.

But there are clear signs that Brussels and Washington are eyeing each other with suspicion, spurring fears at the Basel Committee on Banking Supervision, authors of the Basel capital rules, that the globally harmonised approach to regulation could break down.

Competitive pressures to deregulate could not come at a worse time. Geopolitical uncertainties — from Brexit to Hong Kong — threaten economic stability. President Trump’s bellicose trade policies and a domestic Chinese slowdown are hurting global growth. And in financial markets, asset bubbles remain ripe for puncture, as quantitative easing and ultra-low interest rates have inflated the value of everything from house prices to private equity targets.

If at this juncture we fail to preserve a robust and harmonised global approach to banking regulation, history is likely to judge us harshly.


Why it is hard for foreign investors to be bullish on South Africa

Mandela’s memory still evokes respect. But managing money involves a cold-eyed calculus

The first question to consider in any reckoning of South Africa is whether you can get through it without a story about Nelson Mandela. You can’t, of course. So here is one that seems apposite. Mandela and his fellow prisoners on Robben Island were allowed one book other than the Bible.

They opted for the collected works of Shakespeare. Each marked a favourite passage. Mandela chose one from “Julius Caesar”: “Cowards die many times before their deaths; the valiant never taste of death but once.”

Fast-forward from the struggle against apartheid to today. South Africa’s economy has shrunk in two of the past three quarters. The state-owned power company has announced a series of rolling blackouts. An unchecked budget deficit means public debt is on track to rise above 70% of gdp by 2022. The national airline has sought protection from its creditors. The country’s investment-grade credit rating is hanging by a thread.

The situation cries out for a valiant response. Remedies have been discussed ad nauseam. If the production of reform blueprints were the key to wealth, South Africa could be the world’s richest country. Instead it suffers an unending series of small deaths. It is why, for many investors, it is often a tactical trade but never a strategic one. It is a reform story endlessly sketched out but never written.

The need for fixes is increasingly desperate. This year will be the fifth in which gdp growth has failed to keep up with population growth. The unemployment rate is 29%, a grim statistic that does not fully capture the extent of joblessness. One legacy of apartheid is that many blacks live far from where the jobs are. Since poor public transport makes searching for work costly, many simply drop out. The trouble runs even deeper.

South Africa is a cartelised country, in which insiders—big businesses and their employees; government workers—flourish and outsiders languish. Labour laws intended to reduce inequality have instead reinforced it. Wage deals are fixed by unions and big firms. Small firms must comply, but struggle to do so. Startups and the jobless suffer as a result.

The fixes are well-rehearsed: an end to restrictive labour practices; a dose of competition in industry; a clean-up of state-run power-transmission and transportation monopolies. Countless commissions and development plans have urged such measures. In its annual health-check of South Africa’s economy in 2018, the imf concluded that “bold structural reforms are urgently needed”. It was hardly a new message. In 2011 the fund had deemed reforms “critical”; by 2013 they were “imperative”; by 2016 “urgent and imperative”. But little has changed.

The wonder is that these simmering problems have never boiled over. A system of welfare grants helps contain some of the population’s anger, but weighs on public finances. South Africa is thus vulnerable to a shift in investors’ mood. It runs a persistent deficit on its current account.

It relies on overseas capital to bridge this gap between what it spends and what it earns. Ideally this would come through foreign direct investment, which would add to the country’s capital stock and create jobs. But it is hard to attract such investment when you do not have a reliable power supply.

So South Africa relies on portfolio inflows to stocks and bonds. It has had enough residual appeal to keep these coming. It has a range of well-run companies that are not especially sensitive to the struggles of the local economy, says Rob Marshall-Lee of Newton Investment Management. Oligopoly in many industries makes for handsome profit margins. Bond investors, with one eye on the country’s credit rating, are able to earn higher yields than are available elsewhere.

There is still confidence in South Africa’s key institutions, says Yacov Arnopolin of pimco, a big bond firm. The central bank has stuck to its task of controlling inflation. The Treasury has shrewdly extended the average maturity of public debt to 13 years, which buys the country a bit more time to deal with its problems.

The buying of time seems to have become an end in itself. There is still a great deal of goodwill towards South Africa among the money-men. The memory of Mandela still evokes respect and admiration. But the management of money involves a cold-eyed calculus.

Investors are tactical on South Africa; they will buy if the gloom seems overdone or the rewards eclipse the risks, even if barely. Few are valiant enough to be outright bullish. They do not wish to taste of career death even once.

The European Union Divided Over Belarus

By: Ekaterina Zolotova

European Union member states don’t always share common interests, especially when it comes to foreign policy. Belarus, and its relationship with Russia, is one of the issues on which EU member states don’t see eye to eye. 

Germany, for example, has a mostly pragmatic approach to Belarus, whereas Poland is more wary of Minsk’s close relationship with the Kremlin.

These different approaches have pitted Western European countries against Eastern European countries, revealing yet another issue over which the EU is divided.

The question of EU-Belarus relations came to a head last week when representatives from EU member states and Belarus met at the Minsk Forum to discuss Belarus’ place in Europe and the Eastern Partnership initiative, a project to help encourage cooperation between the EU and six former Soviet states: Azerbaijan, Armenia, Belarus, Georgia, Moldova and Ukraine.

In past negotiations and diplomatic meetings with Belarus, the European Commission has tried to stay focused on practical issues such as trade and cultural relations; it has not taken steps that could significantly change Belarus’ posture toward Europe or reduce Russian influence in Belarus.

For example, the two parties are drafting an action plan on customs matters for 2020-23. They are also working on an agreement to facilitate more efficient visa procedures for Belarusian citizens traveling to the European Union.

Belarus’ geographic position demonstrates why the relatively small former Soviet nation has drawn such interest from key regional actors. Europeans often speak of the country as a bridge between East and West, sandwiched as it is between Russia and the EU’s easternmost members. For Russia, Belarus has long been one of its closest allies, as it acts as a critical buffer separating the Russians from Western Europe.

Recently, especially since Russia’s annexation of Crimea, Minsk has taken a more neutral position than it had previously, attempting to balance between Russia and the West. Still, Belarus remains highly dependent on Russia, which is the largest investor in Belarus, accounting for 38.3 percent ($4.2 billion) of foreign direct investment coming into the country in 2018. Russia is also Belarus’ top trade partner, accounting for roughly 50 percent of total trade.

According to data provided by the Union State, an organization devoted to further political, economic and military integration between Belarus and Russia, there are more than 2,000 organizations in Belarus that receive Russian capital and more than 1,300 joint ventures between the two countries. About 60 percent of Belarus’ external public debt is owed to Russia. Belarus is also dependent on Russia for energy – about 90 percent of crude oil imported by Belarus comes from Russia.

One of the areas in which cooperation between the two countries has been the strongest is the military. They share a military doctrine and often participate in joint exercises. Russia also continues to supply Belarus with military equipment; the Kremlin is scheduled to deliver 12 multifunctional Su-30SM fighters to Belarus this year.

If the two countries were to integrate even further, Russia would likely be able to increase its military presence in Eastern Europe, a prospect other countries in the region would see as destabilizing (though this is unlikely to include additional Russian bases in Belarus since Minsk knows this would be a highly controversial move among the Europeans).

Given the level of cooperation between the two countries, as well as continued negotiations over deeper integration within the Union State, very few countries in Western Europe are prepared to try to increase coordination with Minsk. Most don’t have extensive economic ties to Belarus, and even those that do are more interested in maintaining the status quo with Russia than increasing cooperation with Belarus, which might irritate the Kremlin.

That’s because Russia is a significant trade partner and supplier of resources for the EU. Russian energy firm Gazprom, for example, currently supplies 43 percent of the EU’s natural gas needs.

Germany, Europe’s leading economy, is particularly wary of angering Moscow, which provides 33 percent of oil and 35 percent of natural gas consumed in Germany. Trade between the two countries reached $60 billion in 2018. Berlin is therefore unsure of how to approach Belarus. Germany imports large volumes of certain goods, especially machinery, equipment and vehicles, from Belarus and has historically been among Belarus’ top investors.

But cooperation between Berlin and Minsk has mostly been limited to economics, civil society and cultural issues. Germany therefore has not demanded significant political or social changes from Belarus.

Moreover, EU relations with Belarus are still conducted under a 1989 treaty signed between the European Economic Community and the Soviet Union. The treaty is a framework document rather than an association agreement and so does not establish deep levels of interaction. (Belarus is the only state among the six Eastern Partnership countries that does not have a cooperation agreement with the EU.) By engaging with Belarus on this limited level, Germany has managed to avoid threatening Russia’s dominant position in Belarus.

But there is another EU member that is worried about the close relationship between Russia and Belarus: Poland. Reintegration of the Russian and Belarusian states could increase Russia’s influence in Eastern Europe, which Poland sees as a threat. Warsaw, therefore, has supported the Belarusian opposition (though it denies doing so) to try to decrease Russia’s influence in its neighbor. Unlike Germany, Poland – which shares a border with Belarus – does not see Belarus relations as merely a pragmatic issue; it has its own foreign policy objectives separate from those of the EU.

Poland's foreign policy priorities in relation to the former Soviet states include weakening Russia’s geopolitical position by separating Ukraine, Belarus and other countries from Russia; diversifying energy supplies to Poland and Western Europe in order to rely less on Russian supplies; encouraging economic cooperation among Eastern European countries; and expanding its presence in the former Soviet states by investing in them and using cheap labor from Ukraine and Belarus.

Though Warsaw has recently toned down its support of ethnic Poles living in Belarus, it’s very concerned about the possible strengthening of the Russia-Belarus alliance, especially the expansion of military cooperation, which would allow Russia to increase its presence along Poland’s borders.

That’s why Warsaw is trying to reduce Russian influence in the region. Given that Poland is located on the European Plain, it’s a country that’s relatively easy to penetrate by land and has been invaded (and subsequently occupied) multiple times from the east.

Poland is therefore still concerned about the possibility of a Russian military invasion and is looking to increase its own military capabilities and encourage bilateral partnerships, including with the United States. Warsaw has repeatedly asked Washington to increase the number of U.S. troops in Poland and even promised to build a base costing $2 billion. In June, the two countries agreed on the deployment of a squadron of MQ-9 drones and an additional 1,000 U.S. troops to Poland, bringing the total number of U.S. soldiers based in the country to 4,500.

And in November, Polish Prime Minister Mateusz Morawiecki said the United States said it would increase its troops in Poland by more than 10 times. In addition, large-scale NATO exercises in Europe involving about 37,000 troops from 19 countries (including 20,000 American soldiers) are scheduled for 2020. Poland’s increasing reliance on the U.S. for defense support, at a time when a split is widening between the United States and countries like Germany and France, may turn out to be another source of tension between Western and Eastern Europe.

For Russia, a rapprochement between Minsk and Brussels would be seen as counter to Russian interests. Most EU countries, therefore, are willing to support an independent Belarus only within the framework that Russia has designed. It is more advantageous for them to maintain the current level of cooperation with Minsk than to risk angering the Russians and possibly jeopardizing their own energy security – despite the fact that not all EU member states agree with this approach. Belarus is just one more example of an issue that proves that the EU is far from united.