Moving towards sustainable development and a better quality of life
“Those of us wanting a unified Europe, the European integrationists, must leave behind the half-measures and pragmatic false compromises and learn again what really matters to us. The United States of Europe. Nothing more and nothing less. The current crisis has shown us that half-measures cannot withstand harsh realities, nor can false compromises. It has also shown that European visionaries were the true realists. And that only the path towards the United States of Europe can provide a real alternative to failure”
J. Fischer1
1. During the last two years a deep crisis has ravaged the world economy. The main industrialised countries have been heavily hit; less the new emerging economies. The governments have tried to face the crisis with the traditional instruments of expansionary fiscal and monetary policies. A full recession has been avoided, but rich countries are not completely out of the crisis. This dramatic experience has shown that there is an urgent need for change. In the past century, the main objective of economic policy has been to promote GDP increases, that were identified with a rising welfare. But this is no longer the case in the new world economy. In many countries GDP increases, but the quality of life is not improving at the same rate. The pressure on natural resources is unsustainable. Looking for more and more energy sources, natural disasters follow, as the oil spill in the Gulf of Mexico shows. Globalisation and the ensuing increased worldwide competition apparently oblige many countries to dismantle their welfare system and to trim down environmental protection. Thus the time seems ripe for moving urgently from uncontrolled growth towards sustainable development and a better quality of life.
While the crisis of the world economy has been originated in the financial sector, it has been rapidly spreading into the real economy. It has arisen out of a fundamental disequilibrium within the American economy, where demand has for many years outstripped the value of output, with an ensuing permanent deficit in the trade balance, twinned to a budgetary deficit in continuous expansion and to a growing indebtedness of the private sector. From 1976 to 2007, the richest 1% of the American households seized 58% of the total increase in real income. As a consequence of this growing inequality in income distribution, in the US the banking system has been largely involved in supporting the demand either of houses (and other durable goods) or consumption goods, disregarding the over-use of natural and material resources, and thus favouring the emergence of the twin deficits and the worsening of the global environment.
2. The uninterrupted growth of the world economy has been supported during the last two decades by a spectacular increase in productivity, ensuing from a worldwide expansion of a huge wave of technological development, following the implementation of the ICT revolution originated in the US. But the model of growth prevailing in the United States is now obsolete since it is largely based on a resource-exhausting, consumption-oriented demand, and the American economy remains the most energy-intensive in the industrialised world. Furthermore, the increase in consumption for the American households is largely satisfied through cheap imports coming from industrialising countries. It is true that this US demand supports exports from these areas, but in this way real resources move from the less rich countries of the world towards the richest one.
The balancing role played by the US in supporting the growth of world economy in the period after the 2nd World War – with a surplus in the trade balance funding the deficit in capital accounts – is now totally absent. After the adoption of the Marshall Plan, European states were obliged to import consumption goods from the US, since domestic production was totally disrupted as a consequence of the war and these imports were paid through the inflow of American funds. But in this way were supported at the same time both the conversion of the US economy from military production to the production of civil goods and the recovery of the European economy. Now the twin deficits in the US are financed through capital imports from the rest of the world.
Unfortunately, all over the world the American model of growth has been largely followed. This model – that is still generally prevailing – has characterised the second half of the last century, but should now be radically changed. For most countries, the main factor determining the growth rate was a technological development of an imitative kind. It was sufficient to import the best technologies from the most advanced countries to raise productivity and to increase the standard of living. But many countries have now reached the technological frontier and are unable to restart growth through import of technologies from abroad. If a new phase of growth has to be kicked off, a renewed capacity of innovating must be promoted and the production of new kinds of goods and different production processes should be envisaged.
3. A better quality of life is the main objective of the new model of growth, but the achievement of this goal requires as a first step a deep change in the pattern of consumption. In rich countries, goods should be purchased, in greater quantity than today, that satisfy real human needs and improve welfare. Many of these goods are immaterial – for instance, personal services, cultural goods, natural resources, environmental quality. Furthermore, in the post-industrial world, following the ICT revolution and the ensuing increase in labour productivity, working time could diminish, thus creating space for more leisure. Consequently, demand for enjoying cultural and natural goods could increase. At the same time, a larger quantity of material goods should be made available for satisfying basic human needs in the poor countries of the world. This is the first step for starting an endogenous process of growth in those countries as well.
Production processes too should be modified in depth. Environmental protection should be considered side-by-side with profit-maximisation and competitiveness in evaluating the effectiveness of the methods of production adopted by firms. In this evaluation, energy-saving and the trimming down of the use of natural resources should be considered as important parameters. More efficient capital goods could increase productivity, thus providing room for higher wages and better conditions of life for the workers.
4. In rich countries production processes are largely energy-intensive. This is particularly true for the United States that consumes a quarter of the world oil production even though it has only one-twentieth of the global population. As President Obama has recently remarked, the time for clean energy is now and the use of so much energy for unit of GDP should be decreased.
As it is well known, climate change is linked, to a great extent, to the burning of fossil fuels. To fight global warming the use of fossil fuels should be largely cut down. A carbon-energy tax could be effective in promoting both energy-saving through the higher prices of energy brought about by the energy share of the tax, and fuel-switching, since the carbon share of the tax favours the use of fuels with less carbon content. Hence the tax could promote a curbing of CO2 emissions and a conversion of the productive structure along the path towards a low-carbon economy. Part of the revenue flowing from the energy-carbon tax could be used to promote innovation in the field of renewable energy or in exploiting new energy sources, while competitiveness of the countries implementing the tax could be protected by introducing custom tax adjustments, that is burdening imported foreign goods with the same tax levied on domestic production.
5. At the world level, the pattern of growth followed in the past is now unsustainable since the global environment is unable to support the enormously increased pressure on natural resources. The foreseen expansion of world population from 6 to 9 billions will intensify global competition for natural resources and put a further pressure on the environment. The world was ecologically in equilibrium when only one billion people were rich and energy-consuming. Now, luckily, the ratio between rich and poor is reversed and a new equilibrium could be reached only if the consumption of natural resources and the exploitation of energy sources are decreased in the rich countries since, from the point of view of equity, it is more and more unacceptable that more than one billion of the bottom poor be excluded from a reasonable standard of living.
Furthermore, it is true that, while the availability of consumption goods has been continuously increasing, even in the affluent societies many essential needs are not adequately satisfied. Hence, policy measures supporting across-the-board consumption demand are not an effective way out from the current crisis. More selective policy measures are needed and a process targeted to the promotion of a sustainable development – from an economic, social and environmental point of view – must be started as soon as possible.
6. A policy promoting the recovery of the economic activity worldwide is the unavoidable first step to be adopted to favour the kick off of a process achieving sustainable growth. In the affluent societies this policy should not be targeted to a further increase in consumption demand, but to the strengthening of a new and more balanced economic and social model, environment-friendly. Investments are essential to achieve this goal, as well as a redistribution policy aimed to cutting down existing inequalities in income distribution, with the ensuing negative economic and social effects. But consumption should be supported in the poor countries through a Keynesian policy at the world level targeted to the achievement of the Millennium Development Goals spelled out in the Millennium Declaration adopted in September 2000 by the United Nations, committing Member States to a new global partnership to reduce extreme poverty and setting out a series of time-bound targets with the deadline of 2015.
The transition to a sustainable development pattern requires the implementation of a plan including expenditure projects in different areas:
- research and development expenditures and promotion of higher education, to strengthen the competitiveness of domestic production;
- public and private investments in advanced technologies and support to champions in the new leading industries;
- financing projects to improve the quality of life for the citizens (water and air quality, sustainable mobility, renewable energy, urban renewal, efficient personal services, especially for weak people – babies, old people, the disabled);
- investments to promote conservation and to enlarge utilisation of cultural goods and natural resources;
- investments for completing worldwide the existing network in the fields of transport, energy and telecommunications.
7. In the traditional economy, growth depends on unceasing increases in demand and enhanced production-efficiency through market incentives. Prices reflect the balance between demand and supply and provide the right incentives for an efficient allocation of the production factors. But in the new economy, the external costs of production and consumption activities due to pollution and to the use of natural resources should be internalised into prices to avoid market failures and to maximise welfare. This outcome could be achieved through the use of economic instruments (environmental taxes, emission trading system) and of command-and-control measures. But the costs of an environmental policy are translated into higher prices, either with taxes or with command and control measures, and these higher prices curb demand increases of goods and services. Hence, the question follows: is economic growth hampered by an environmental policy?
In the literature about environmental policies an important role is played by the Porter hypothesis that the constraints deriving from environmental policy oblige firms to promote technological innovation and, consequently, prop up economic growth. Porter suggests that innovation concerns product and production processes, but also new management practices, with an ensuing decrease in production costs. As a matter of fact, countries with rigid environmental constraints show higher rates of productivity increases: Germany, the most performing export country worldwide, is one of the most advanced in environmental protection as well. Hence, it seems justified to draw the conclusion that in the long run there is no trade-off between economic growth and environmental protection.
8. In the old model of growth, GDP changes are widely used to evaluate the effectiveness of an economic policy: but GDP by itself is not an efficient indicator of welfare. Environmental damages are not computed in GDP, while expenditures caused by environmental degradation increase GDP. If an efficient policy of prevention of diseases is implemented, health expenditures decrease and welfare apparently is worsened. This example shows that a new set of indicators is needed to measure welfare. The overall aim of this set is to favour policy measures able to improve the quality of life, both for current and future generations, through the creation of sustainable communities able to manage and use resources efficiently, and to tap the ecological and social innovation potential of the economy, ensuring prosperity, environmental protection and social cohesion. The conclusions of the Stiglitz-Sen-Fitoussi Commission promoted by the French President Sarkozy represent a useful first step in the right direction.
9. The condition of life in urban areas represents an essential feature of the quality of life. Everywhere in the world, progress is generally taking place within the cities and people concentrate in these areas, in the developing countries too. But congestion and pollution are endemic in urban areas, with external costs that bring about a worsening in the quality of life. Furthermore, given the increasing ratio between urban population and means of transport, urban mobility is not guaranteed to everybody. Urban life is particularly poor for the weak layers of the population, especially babies and old people.
Then, a first problem that must be urgently addressed is ensuring mobility to all the urban population, while simultaneously promoting a progressive reduction in the use of private vehicles. An unavoidable pre-requisite to achieve both these goals is to carry out a policy providing a coherent planning of urban development, that takes care – as a relevant priority – of environmental needs. As a second step, the growth of an efficient network of different kinds of public transport should be ensured and funded. But the implementation of this plan requires a lot of money and a long period of time. It follows that, if the final goal has to be achieved, during the transition period the use of private vehicle should contribute to the funding of the mobility plan through a system of road pricing, like that already implemented in London, Singapore and, with different characteristics and objectives, in Milan; a system that is able to reduce progressively the use of private vehicles and to provide at the same time the money to fund the investments needed to develop the public transport network or alternatives modes of transport.
10. One of the worst effect of urbanisation is the difficulty to guarantee a sufficient food production to feed the population in the poor countries as well as in the rich ones. In developing countries, a large part of the population is fed through self-production of consumption goods, that becomes impossible when people are urbanised. A green revolution aiming to productivity-improvements in the agricultural sector is quite important. But agricultural-policy measures per se are not sufficient. The rate of population growth should be checked and this demographic policy should be backed by measures targeted to supporting a process of decentralisation of economic activities, so that the agglomeration effect pushing people to move to the most congested urban areas could be balanced.
11. Some conclusions could be drawn from this analysis. The transition to an environment-friendly world is in march. But it has to be recognised that the process of changing the current economic model at the world level requires a multilateral effort. No single country could reach this outcome acting alone. But, if it will be able to reach a political unity through a federal link, Europe has the possibility to play an important role in this process, showing that it is possible to overcome the national dimensions, that are totally inadequate in the modern world to achieve a sustainable development.
A federal Europe could adopt a new set of indicators of welfare, as it has been suggested by the Stiglitz-Sen-Fitoussi Commission, and advance along the path already pointed out in Article 3 of the Treaty of Lisbon on European Union stating that “the Union’s aim is to promote (…) the well-being of its peoples”. The investment program needed to kick-off a new phase of growth could be funded with the emission of Union bonds. In this way, while member states should be obliged to comply with the Maastricht constraints, guaranteeing financial stability, a growth policy could be implemented by the federal government, adopting the golden rule of public finance that debt is only allowed when funding expenditures for investments – and not consumption. Hence, with such virtuous behaviours the existing trade-off between stability and growth could be dismissed.
At the federal level, the transition to a low-carbon economy could be funded by a carbon-energy tax, while at the urban level road pricing could guarantee the transition to a sustainable mobility model. If Europe succeeds, this could be a strong incentive for other countries to follow the same path. But the success of the European policy requires a radical change in the existing institutional structure. Only a federal Europe could play this role, implementing an effective economic policy backed by an external policy promoting a positive European role in the transition to a multilateral world.
12. This positive evolution of the economic perspectives of the world economy has been supported by technological growth, and globalisation has given the possibility to new countries to be included in the industrialised world. But a global effort is required to include in the process the bottom poor countries as well. The African continent represents the black hole in this process of balanced growth. As a matter of fact, not only equity, but also efficiency requires that income distribution should be improved between and within the different countries. This is a difficult, but decisive task, and in this area too Europe – with its past experience in the promotion of income growth in the new countries joining the Union – could show that a positive outcome is possible. Combining the promotion of environmental protection and a better quality of life with a fair distribution of income within the European continent and all over the world, a federal Europe could show that a policy aiming to raise welfare for human beings everywhere in the world is possible.
Now it is up to the European people to promote the building up of an effective federal Constitution, overcoming the dramatic limits of the existing European Union, confirmed with overwhelming evidence by the economic slowdown of the last two years that has shown how the current European crisis is only superficially a financial crisis. As Krugman rightly remarked, “to make the euro work, Europe needs to move much further toward political union, so that European nations start to function more like American states”2. Fischer also has recently reminded us that the recent European meltdown “in essence is a political crisis caused by the political weakness of the EU and the euro area”. And he added that “if the EU is unable to act as one, then the euro area can and must act as its vanguard, firstly within the Treaty and, if that brings no results, or they prove too slow, outside the Treaty, but in its spirit and in the interests of the Union”.
It is up to the governments to take this decision, but it is the role – and the duty – of the federalist movement to promote an initiative mobilising the public opinion and pushing European governments to act urgently.
1 Joschka Fischer, “The United States of Europe”, Lecture to the Heinrich Heine University, Dusseldorf, June 1, 2010
2 Paul Krugman, “The Making of a Euromess”, in The New York Times, February 15, 2010