Stewart Wallis, Executive Director of the New Economics Foundation, assesses the consequences if the world returns to business as usual instead of learning the lessons of the financial crisis. The interview is part of the Risk Response Network‘s What if? series, which explores various hypothetical risk scenarios.
What is your main field of expertise and current research?
I am the Director of the New Economics Foundation. My background is working in business as an economist at the World Bank and with Oxfam as their International Director. My area of expertise is the systemic nature of the current world economy, the problems we face and what we are going to do about them.
My organization looks at how we can create a world in which there are enough good jobs, improved well-being and less inequality. We ask: what needs to change to achieve this, within the constraints of good ecological management?
Given your research, what would you say is the most under-appreciated risk that would have global, regional or industry implications?
I see the biggest “what if” risk in the medium term lies in trying to return to the world as it was in the early 2000s and to see that period as business as usual. I argue that the global community faces four major interlinked and systemic problems that make efforts to go back to that as an ideal model, a dangerously high risk strategy. I call these problems The Four Us or The Four Horsemen of Economics.
First, our global economy is unsustainable. On average in 1980, the global population was living just within the planet’s ability to renew itself each year. Currently we are living at 1.3 times the planet’s capacity to renew itself. This is unsustainable. We face the serious risk of unstoppable climate change and global warming of up to four degrees as compared to pre-industrial levels. We also face shortages of key minerals, oil, coal and other natural resources that have been our engines of survival and growth.
The second U is unfair. The world has become considerably more unequal, especially in the last 20 to 40 years. In the early 20th century, the ratio of the poorest on earth to the richest was about 7:1. By the end of the 20th century, it had risen to 75:1. Such levels of unfairness are not sustainable.
The third problem is that our systems are unstable.
Global economic systems were designed for efficiency, not for resilience. As a result, they keep falling over. Whether you consider the current euro crisis, or the banking crisis of two years ago, which is not yet over, the lack of resilience in our systems is clear. Without a major overhaul there is a real risk of serious instability continuing or multiplying.
The final U is unhappy. Despite all our activity, all our consumption, all our rush, we are not happier.
For the poor, increased income really can make a difference, but for the reasonably well-off increased economic wealth alone does not increase happiness. The question is what does? How do we measure what does make us happy and ensure there is more of it to go around?
In your analysis, how might this “what if” scenario unfold?
The “what if” of returning to business as usual is likely to lead to a number of serious problems.
Serious social unrest, unemployment and inequality riots may result. Problems around sustainability and serious climate change, including unpredictable weather patterns, flooding, hurricanes and a rise in sea level, will continue to have significant and disastrous impacts on vulnerable populations, most often in the poorest regions.
Oil prices risk rising exponentially within a few years. Figures like US$ 400 a barrel are not inconceivable and while that would motivate a rapid move to renewable energy sources, it would also trigger a massive recession that would make the current downturn look like a picnic in the park.
There is also the risk of further major financial crises. While our leaders focus on solving only financial crises that we are in at any one time, while also failing to tackle the instability inbuilt in our systems, there will be more collapses and more frequently.
All these risks are interlinked.
Who would feel the impact the most, and how?It is the poorer and most vulnerable in our global communities who will be most affected by these ongoing financial crises and economic downturns, by the effects of global warming and rising sea levels and by the emerging social unrest that will result.
How well do you think we are prepared for such a contingency?
Populations are ill-prepared for the ongoing environmental, social and financial instability that will occur if we do not tackle the Four Us.
Nor do I see the current leadership as well-prepared because they fail to understand these factors as systemic and interlinked. They rush from one crisis to another. It is like a fairground game where you have a hammer and you have things popping up all over the place. You try to hit down one that has just come up, but something else pops up over there. We are facing a situation where everybody is trying to deal with the latest problem rather than deal with the set of problems to come and the underlying systems that cause them.
What is your top mitigation approach for this risk?
We need to focus on what actually makes people happier. One approach is to start measuring well-being as a key indicator alongside GDP and to consider not just average GDP but medium GDP which reveals the degree of inequality within a country. We need to restructure incentive systems and move to a stakeholder view of companies, rather than a shareholder view. We must make the benefits of our economic activity evident and available to wider groups within our communities.
Taxation systems need to change. Rather than taxing value-added labour, or productivity, for example, non-renewable resources must be taxed more heavily. This will require serious economic re-engineering.
We need industrial and economic policies that maximize well-being and job creation in a way that few countries have considered, although there are some success stories such as South Korea. Business and government will need to work actively together.
Although investing in green economies could provide a significant boost to job creation and GDP in the short term, if we are going to live within ecological constraints, wealthy countries will have to consume less.
What opportunities do you see associated with this situation?
Resolving these systemic problems requires leadership of a type that can see the whole problem and is prepared to take radical action. If we achieve what we need to achieve, we will do more than simply alleviate the problems that face us now. We will achieve greater well-being, fairer societies and job creation on the scale that population growth requires.
The opportunity that we are working for is to create a different vision of the world as it could be. It is doable. Lives across the planet can be improved within the ecological constraints of the planet we live on. But we must be prepared to restructure and rethink the economy dramatically.
Pictured: The first New Year’s Eve fireworks explode above Sydney Harbour Bridge late December 31, 2000 (Reuters)
Stewart Wallis is Executive Director, New Economics Foundation; Member of the World Economic Forum Global Agenda Council on Values in Decision-making 2011