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SUSTAINABILITY NEWS – Edition 1
How did we arrive where we are?
Before beginning our work together on Sustainable Issues – please see:
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Part 1
We need to consider how economic policy came to be what it is in 2015. So, we need a brief
Economic History discussion.
Our journey starts in the US at Bretton Woods in 1944, yes that long ago. It was at this conference
that the norms regulating post Second World War international trade and trade where established.
The international monetary system created there was based on a gold-exchange standard fixing the
US dollar at $35 per ounce, whilst all other currencies were fixed to the dollar. The ‘fixed’ exchange
rate system allowed small movements either side of an agreed parity and in the case of a balance of
payments problems domestic governments could make small revaluations or devaluations.
To assist this system the IMF, IBRD (forerunner of World Bank) and GATT, now the World Trade
Organisation were created. All of the above were designed to bring stability to international trade,
the opposite of what had taken place prior to the commencement of hostilities in 1939.
This stability brought economic growth and this was also advanced by the Marshall Plan and the
investment opportunities that were created by the high level of war damage that had been recorded
in many European countries and others in the Far East.
For a quarter of a century after 1945 the world economy recorded annual GDP growth rates of 5%,
some areas were even higher than this.
A quarter of a century of strong economic growth seems to have achieved, in part, by public policy
intervention, macroeconomic policy focused capital controls, financial regulation and state
intervention. This combination would prevent instability and the misallocation of resources and it
was felt that the occasional policy failure was better that a succession of market failures.
The continued growth of the US market, the emergence of what would lead to the creation of The
European Union and obvious success of such nations as Germany and Japan meant that this ‘model’
received wide support.
However, as the 1950’s developed two other changes took place. These were the beginnings of
‘independence’ amongst countries previously governed by Colonial regimes and the desire for
centrally planned economies to show that they too could provide continued economic growth and
prosperity.
Growth, as shown in the Harrod - Domar Model the accepted route to economic prosperity and the
work undertaken at the LSE that resulted in the Phillip’s Curve being published suggested that
economies could be manipulated to ‘trade-off’ unemployment with inflation. However, beneath the
apparent trade-off some were noting that capitalist economies were becoming more unstable and
that crises would arise – something which the events of the second half of the twentieth century
clearly illustrated.
The Joan Robinson model of capital accumulation was based on six determinants:
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Technology
Investment policy
Savings
Competition
The wage agreements made within labour markets
Financial conditions
If these were maintained then growth would continue. It must be noted that in NONE of these
economic theories was the word FINITE or ENVIRONMENT mentioned.
It was not until 1972 and the publication of The Report on Limits to Growth that the natural resource
base of the planet was taken into consideration when designing macroeconomic policies. In 1974
Joseph Stiglitz did publish his findings on continued economic growth when resources are finite –
though even such a respected figure as Stiglitz included in his calculations that ‘natural resource
depletion would be offset by ‘technological advancement.’
We could discuss the role of capital, interest rate selection in cost-benefit analysis exercises and the
real ability of technology to outpace exhaustion in our resource for days and never reach a
conclusion.
Let’s return to economic history. The Club of Rome produced a short report in 1972 called The Limits
to Growth. It noted constraints on continuous economic growth and put depletion and exhaustion of
the natural resource base as being central to the debate. The debate that followed the Report’s
publication was fierce – some felt it was a ‘dooms day’ scenario, whilst others felt its focus on
persistent pollutants was too narrow. It did, however, start a debate on population growth, output
growth and the impact these would have on the environment. It also considered nuclear energy to
be the solution to energy needs – a suggestion that remains ‘radical’ to this day!
Another report, published in Argentina by researchers at Fundacion Barlioche focused more
attention on natural resource exhaustion and that fact that at the time two-thirds of humanity was
submerged in poverty and exclusion.
So, forty years ago a discussion was arising that noted a link between growth and natural capital and
depletion of resources and poverty – we are still engaged in that dialogue today.
By 1973 the Bretton Woods system of fixed exchange rates had collapsed. The US was experiencing
trade deficits and was embroiled in the Vietnam War. The US encountered what has come to be
known as the ‘Triffin Dilemma’ – if a nation’s currency is also the world’s reserve that country needs
to keep a current account deficit to provide liquidity for the global economy. But this leads to a loss
of confidence in that currency. The dollar had to be de-valued and so the fixed rate exchange system
disintegrated.
The introduction of floating exchange rates led to what has become known as ‘the privatisation of
risk’, no longer were the private sector shielded from risk by fixed exchange rates. Those trying to
reduce the risk wanted capital flows to be opened up and the modern world of ‘financial
instruments’ was born.
Another crisis that arose in the early 1970’s was the first major oil price hike. It was the result of
action during and subsequent to the Yom Kippur War in the Middle East. Oil prices rose by as much
as 4 times that of their pre-crisis level and the oil consuming world became more aware of the
fragility of some of the major oil producing countries. The US economy dropped into recession,
stagflation arrived (simultaneous rises in BOTH inflation and unemployment), growth rates
stagnated, investment fell and a very different set of challenged faced policy makers.
The crisis also impacted in developing economies. They were caught in a trap of high debt services
payments as interest rates rose and falling resource prices as the developed world reduced its
demand for raw materials. This meant that many had to approach such institutions as The World
Bank and the IMF for assistance. The now often despised ‘Structural Adjustment Programme’ came
into being and policies such as:
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Cuts to social spending
Lay-offs, especially in the Public Sector
Selling of State owned firms
Large-scale privatisation
These were the price that had to be paid to contain aggregate demand, reduce price inflation and
‘balance the books’. As many developing economies know to their cost the outcome of such
programmes also contained:
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Increases in unemployment
Increases in inequality and poverty
A negative impact on the environment, as resources were exploited to pay off debt and the
standards of extraction control were reduced
All of this became known as ‘The Washington Consensus’ – tight monetary policies, fiscal policies
focused on debt repayment, income policies to reduce aggregate demand, financial deregulation,
trade liberalisation, reduced role of Government in economic planning and large-scale privatisation.
The above would rule macroeconomic policy and development throughout the nineties and allow
globalisation to become the force that it now is.
This brings the first part of our brief trip through contemporary economic history to an end. Next
time we will examine what has happened in the current century – environmental awareness
becomes ‘more fashionable’.
Topical Issue – Number 1
What we do today to the agricultural system of the world we determine the history of our future as
a species. We struggle to reconcile adequate food production and distribution systems to the need
to address improvements in living standards and the environmental sustainability of agricultural
systems.
Though we manage to grow more than the total population expands by BUT the rate of yield growth
is slowing, so has the cultivated per capita area – which show us that we are reaching the limits of
the agricultural frontiers in many key areas of the world. Consumption rates of irrigation have led to
over-exploitation of aquifers and heavy use of chemicals has been a major contributor to the
pollution of both underground and surface water sources.
Nearly one billion people live in or are close to malnutrition. You will need to consider issues such as:
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Soil degradation
Bio-diversity
De-forestation
The economic and social vulnerability of those who work the land
Research Topic
I am currently part of a project that is noting which seed types are being discovered in archaeological
digs that are, or have taken place in various African countries.
Some seeds that have been found are from crops no longer cultivated in that country or region –
why? The reasons are complex but as part of your sustainability studies why not ask those living in
your communities what crops were once grown and why did cultivation stop? Your answers will be
of interest to both your own planners and others from countries outside Sierra Leone.
Such finds might improve food security, offer new crops to farmers, so improving their incomes and
keeping more people in the essential industry of growing food.
John
1st June 2015.