Update from the Theme on the Environment, Macroeconomics, Trade and Investment (TEMTI)

03 August 2011 | News story
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TEMTI Chair Alejandro Nadal provides an insight into TEMTI's approach to sustainability and economics. TEMTI is a working group of the Commission for Environmental, Economic and Social Policies (CEESP). Its core mandate is to provide practical and enabling information, as well as relevant policy options on issues lying at the intersection between economics and environmental and social sustainability. The objective is to enhance and maintain the capacity of CEESP’s members and of the entire Union to address matters related to economic issues and policies that affect sustainability at the local, national and international levels.

The core mandate of TEMTI is to provide practical and enabling information, as well as relevant policy options on issues lying at the intersection between economics and environmental and social sustainability. The objective is to enhance and maintain the capacity of CEESP’s members and of the entire Union to address matters related to economic issues and policies that affect sustainability at the local, national and international levels.

TEMTI evolved from a previous cluster focused primarily on issues of trade and the environment. We have expanded this to cover macroeconomic policies, as well as sector level policies (agriculture, industry) and horizontal or cross-sector policies (energy, science and technology). It is important to emphasize here that for TEMTI long-term sustainability involves not only conserving ecosystems’ integrity, but also social responsibility and justice.

TEMTI will launch a new campaign to strengthen its membership base in Africa, Asia and Latin America. This will include a new initiative for fundraising for key flagship projects in macroeconomic and agricultural policies.

It will also involve a new TEMTI Quarterly Newsletter currently under preparation. The TQN will include contributions from members, news alerts and information about current campaigns by civil society organizations. The first number will come out in September and will carry notes on the future of sustainability, the importance of macroeconomic policies, what to expect from UNFCCC COP17 and critical perspectives for Rio+20.

The special issue of Policy Matters 18 on macroeconomic policies and sustainability will be ready for distribution by the end of August. This special issue will contain an introduction, five chapters on Latin American countries and two on the Indian experience. Aroha Mead, CEESP’s Chair, contributed a foreword inviting everyone to join in the debate.

TEMTI Co-chair Alejandro Nadal has recently published a book Rethinking Macroeconomics for Sustainability (London: Zed Books). It is easy to read and is an attempt to get the larger public involved in debates that have been restricted to so-called specialists in academia and government. The book contains a unique analysis debunking mainstream macroeconomic theory and highlights the importance of macroeconomic policies for climate change and the global green economy. It also presents the main results of a five-country study in Latin America. Finally, the book contains two important chapters with an agenda for policy reform at the domestic and international levels.

Also, Alejandro Nadal has recently been invited to serve as co-editor of the new on-line journal Economic Thought. This is an open peer discussion journal. It is one of the journals of the World Economics Association

TEMTI Chair, Alejandro Nadal has developed this note with the aim to clarify several important aspects of the current debate on economics and environmental and social sustainability. It is also aimed to generate debate within TEMTI, CEESP and the Union on several important issues we consider to be critical for the future of sustainability. The first paragraph starts with a brief discussion on the relation between economics and technology. The second concentrates on markets and economic policies. A third paragraph focuses on the global economic and financial crisis and on its repercussions on sustainability. A fourth and final paragraph centres on some of the key problem areas that need to be taken into consideration for meaningful discussions in Rio+20.


Economics is about social relations, not about technology or physical objects. Those social relations are associated with numerical magnitudes such as wages, profits and prices. They also pertain to monetary variables, such as interest rates and the evolution of the money supply. These social relations are also reflected in the actions of economic agents, from the smallest subsistence farmers, to the largest corporations, and these actions have important implications for livelihoods and the environment.

The proposition that economics deals with social relations may appear to be quite obvious. However, existing “green economy” initiatives concentrate on technological issues and ignore the most important aspects of today’s economies, both at the domestic and international levels. Things like intelligent buildings and more energy-efficient cars are more important than income distribution and regressive taxation or the concentration of market power in a few giant corporations. Although the discourse on the green economy sometimes blends in some rhetoric about reducing poverty, technology remains the main focus. The most evident omission is economic policy. Clearly, this approach leaves several thorny political issues aside; in addition, it entirely misses the point about economics and sustainability.

This reference to social relations does not mean that technology is not important. There is no doubt: things like energy efficiency and truly sustainable production technologies in which recycling, reuse and reduced inputs per unit of output are crucial. But unless we integrate economic relations in the analysis of sustainability, and this includes monetary and financial relations, we will not be able to understand the economic forces driving environmental destruction. This means we will not be able to redefine and implement the economic policies that are required to harness and control these forces. Living under their power will not take us in a trajectory of sustainable development.


Nothing in economic theory or in historical experience lends support to the idea that markets allocate resources efficiently. On the other hand, economic policies at all levels played a critical role in improving living standards in developed countries. Protectionism, credit policies, exchange rate manipulation, subsidies and public investments (including in many cases defence expenditures) are among some of the policies used to enhance competitiveness of the private sector. Advanced capitalist economies did not attain their development standards through free market policies, trade liberalization and financial deregulation.

This does not mean that markets are not important, or that prices are irrelevant. They play an important role in economic life. But although markets can be the key to the choice between the colour of cars and the flavour of ice cream, they are not to be trusted with the strategic decisions concerning employment, distribution, development trajectories or peoples’ welfare. One does not have to be obsessed with planning or centralized policy-making to recognize that economic policies are a critical component of the equation for sustainability. TEMTI addresses the issue of how to redefine them in relation to the paramount objectives of social and environmental sustainability. Our general approach is based on the principle that social responsibility and environmental integrity need to be the core objectives of economic policy at all levels.

During the heyday of neoliberalism, economic policies were considered to be simple enabling conditions for markets to display their “magic”. Thus, attributing a price to ecosystem services or different components of nature and the environment was considered important to internalize costs, avoid incomplete markets and prevent market failures. There are serious problems with this approach. The most important one is that there are limits to pricing, and there are rights and principles that are beyond economic calculation. In addition, there is also a risk that through valuation environmental dimensions may be transformed into commodities. Also, valuation seldom recognizes the importance of existence (and non-use) values.

In addition, the economic and financial crises of the nineties, as well as today’s global crisis, have demonstrated that a strategy based on unfettered markets is a dangerous proposition. Besides, economic policies are not neutral vis-à-vis the environment nor in relation to social and political choices. Pretending that economic policies are purely technical devices for “management” is misleading. On the other hand, renewed interest in policy-making demands rigorous economic analysis and solving several important governance issues (transparency and accountability, for example).

Renewed interest in policy-making demands rigorous economic analysis and solving several important governance issues (transparency and accountability, for example). Understanding the economic forces that drive environmental deterioration and undermine peoples’ livelihoods is also a critical task. This is why we need to keep abreast of contemporary research on theory and policy. Awareness of the dynamics of contemporary capitalist economies is essential to fine-tune our work on economic policies. This is required both at the sector level, as well as in the macroeconomic dimension.

TEMTI’s approach and priorities concentrate on real world economics. We focus on the structural features of economies and on their dynamics at the sector and aggregate levels. By carrying out a rigorous analysis of these features and their dynamics we are able to understand the economic forces behind environmental deterioration and peoples’ livelihoods and the economic policies and strategies to meet these challenges. This in turn enables us to formulate relevant policy reform in order to meet the challenges of sustainability in our times.

III. Global Financial-Economic Crisis

Will the global financial and economic crisis affect the prospects of sustainability? The answer is clearly in the affirmative. Millions of people in developed and developing countries have lost their job and sometimes their homes. Many millions have been thrown into poverty. Living standards have been negatively affected worldwide. Social expenditures are being cut in many countries and this will affect production and survival strategies of millions of people. Thus, this crisis will carry significant effects on sustainability. Yet, a serious analysis of the nature and causes of this crisis is nowhere to be seen in documents related to the green economy or Rio+20. In the following paragraphs we briefly examine some of the salient aspects of this crisis and the policy implications that arise from this.

The world is now about to enter the fifth year of the worse financial and economic crisis in eight decades. This one will probably be the most expensive crisis in economic history. There does not appear to be an easy end in sight. The latest data on the performance of the US economy reveal not the symptoms of a sluggish recovery, but rather the signs of a new downward turn. The financial mess in Europe has morphed into a typical sovereign debt crisis and the financial markets are not hesitating to threaten the integrity of the euro. Japan continues in a stagnant mode, while China will have to reckon soon with its own real estate bubble and the ramifications for its banking system.

The policy response to the crisis has been unfortunate. After a first set of fiscal stimulus packages in the US and Europe, the call for austerity now predominates. The collapse in private aggregate demand will now be accompanied by a reduction in fiscal expenditures. The prospect of having exports take up the slack is not bright. Thus, the recession will continue to deepen. Also, after a timid effort at financial re-regulation (i.e., the Dodd-Frank act in the US), nothing really substantive has changed in the world of finance. Rating agencies continue to call the shots in a dangerous game in Europe.

Finally, several so-called emerging markets have been the recipients of vast amounts of capital flows (partly as a result of the monetary policies of the United States). These capital flows do not bode well for many of these countries for they have not translated into healthy new investments in sustainable projects. If interest rates increase in the developed world, a reversal of capital flows may ensue with all its negative effects (as in the financial crises of the nineties). Many see this scenario as unlikely, at least in the short term. However, even in the context of a deflationary environment, some central bankers are already talking about the dangers of inflationary pressures and this will bring about hikes in interest rates. Unemployment remains at alarming levels, while the policy response in developed economies appears to be dominated by the dogma of fiscal austerity and even monetary contraction is being added into the policy mix.

The global financial and economic crisis that exploded in 2007 has vast ramifications for peoples’ welfare and the environment across the globe. In many parts of the world, the rush to control natural resources runs parallel to the search for financial security. Commodity speculation and large scale land grabbing are part of this process. Livelihoods are destroyed or endangered as a direct result of this. The developing world is moving now between the domination of the financial sector and the forces that lead back to over reliance on the natural resource base.

In the case of the United States the crisis was not caused by reckless public expenditure. The huge fiscal deficits that evolved immediately after the crisis were the result of bailouts and the fiscal stimulus packages. In countries like Spain, Italy and Portugal, the crisis presents itself as a huge sovereign debt crisis, but in fact it really is a crisis derived from the rules of the Maastricht and Lisbon treaties of European integration that eliminated monetary (and exchange rate) autonomy for these countries. This integration was conceived in the halcyon days of neoliberalism and imposed strict fiscal deficit and indebtedness rules that forced governments to access international capital markets for finance. In this manner macroeconomic policies were forced under the domination of international finance and this is what reveals today as a sovereign debt crisis.

The origins of this crisis are not to be found in external shocks to otherwise robust and healthy economies. This economic disaster is a consequence of the dynamics of endogenous forces within capitalist economies. They are to be found in the inherent instability of financial markets and their linkages to the real (non-financial) sectors of the economy (particularly through investment decisions). This feature of financial markets has been well understood since Keynes’ work, but was denied by orthodoxy and key agents in the financial sector who promoted comprehensive deregulation. There are many implications from this. It is no longer possible to think that a process of globalization based on the idea that free and unregulated markets will lead to greater prosperity and stronger environmental health.


The Earth Summit of 1992 was an important event, but it failed to deliver sustainable development. During the past two decades the key problems of the world economy (inequality, imbalances, speculation, to mention a few examples) have coexisted with a relentless process of environmental deterioration: biodiversity loss, CO2 emissions, loss of genetic resources, over-exploitation of aquifers, deforestation, over-fishing, accumulation of toxic waste, etc. Thus, economic and environmental problems were accumulating even before 2007. The global crisis and the policy responses based on fiscal austerity and the promise of monetary contraction for the near future will only make matters worse. It should be evident that the old business as usual approach to economic policy cannot continue.

Yet, the agenda for Rio+20 maintains some fundamental lacunae. The most glaring omission concerns macroeconomic policies. The web portal of the UN Conference on Sustainable Development has no room for macroeconomic policies. There is, to be sure, a document on the “Transition to a Green Economy”, but it is devoid of any reference to macroeconomic policies. This is amazing, for macroeconomic policies always have a critical role in social equity, resource allocation and structural change. In spite of this, the Rio+20 agenda ignores a serious discussion on macroeconomic policy stance.

Can the UNCSD for 2012 continue relying on the same macroeconomic policy priorities that have dominated the economic landscape since the early 1990s and that have brought about the worse crisis in eight decades? These priorities have been obsessed with price stability and are based on a series of dogmas that have been completely discredited in academia and in real life. Any discussion on the Millennium Development Goals or on Rio+20 or on the green economy requires a realistic analysis of the required changes in macroeconomic policies.

In addition, Rio+20 also requires a serious discussion on the international economy because redefining macroeconomic policies must take this frame of reference into account. Financial liberalization continues to be off the debating agenda, in spite of the fact that it has caused many crises with severe social and environmental implications. This notwithstanding, the documents shaping the debate in Rio in 2012 systematically ignore the main features of the world economy. Some of the main structural characteristics of the world economy that are highly relevant to the debate on sustainability are the following:

  1.  Expansion of the financial sector
  2.  Concentration of market power in a few giant corporations
  3.  Intense income inequality levels both domestically and at the international scale
  4.  International monetary system in disarray
  5.  Indebtedness of developing countries (the debt time bomb)

Expansion of the Financial Sector
The world’s financial sector grew at exponential rates during the past three decades. One critical problem is that financial markets are inherently unstable because much of the value attributed to financial assets relies purely on faith and expectations. These can vary rapidly and are extremely volatile.

The global market for currency transactions is now more than 120 times bigger than the value of all commercial flows between countries. This means that more than 90% of currency transactions are simply speculative in nature. This is only one example of the indicators that can be used to analyze the expansion of the financial sector. The exponential growth in derivatives and structured vehicles is another.

The main issue here is that the financial sector has been able to impose its priorities on macroeconomic policy-making. Thus, monetary and fiscal policies are dominated by the paramount objective of price stability and remain unconcerned with employment and counter cyclical measures. This is the stance of a creditor-dominated policy and it has little or no concern for sustainability.

In addition, the impact of the financial sector on other real (non-financial) sectors of the economy is an important issue for sustainability. There is ample evidence that industrial activities (both in the extractive and manufacturing industries) are affected by the short- term rationality of financial investments. Thus, structural changes required for long-term sustainability are sacrificed in the altar of short-term profitability. Also, financialization of commodity markets (through securitized commodity-linked instruments) has implications not only for price dynamics, but also for decisions on output mix, technology and resource management practices.

One of the pillars of neoliberal globalization has been the drive towards financial liberalization. Capital account liberalization was a fundamental objective of IMF and WTO policies. But financial liberalization affects sustainability through its impact on macroeconomic policies and in many cases increases the vulnerability of developing countries. The combination of floating exchange rates and free capital flows distorts the role and structure of interest rates in an economy. Interest rates cease to be a reference for investments and become another variable in speculative allocations in order to diversify risks in financial portfolios. Besides, financial liberalization fuels volatility and contagion. All of this affects stability and investments in the real (non-financial) sectors of the economy.

Concentration of Market Power
Giant corporations with considerable market power have become key actors in international economic affairs. These mega-corporations play a critical role in international trade and investment. More than 66% of international trade flows take place through transnational corporations (and 40% of this is intra-firm trade). The high levels of concentration of trade and investment in these corporations results in extraordinary market power. This is of course a far cry from the free trade as described in textbooks and in the studies used to justify free trade agreements.

Market distortions are frequently discussed in policy debates, but they are almost exclusively attributed to faulty policies. In reality, because of the acute concentration of market power, international trade is marked by price manipulation, transfer pricing, collusion and other unfair business practices. Another source of market distortion is the high degree of vertical and horizontal integration in global commodity markets. In the extractive industries, large-scale mining corporations wield a disproportionate degree of market power and can impose their agenda on communities and even on governments. The impact on the environment and on peoples’ livelihoods has been documented in many instances, yet this set of issues continues to be ignored as we move ahead in preparation of Rio+20.

Perhaps the single most important lacuna of WTO agreements is the lack of attention to concentration of market power, oligopolies and anti-trust enforcement. Not only has WTO failed to regulate the unfair business practices of large corporations, it has established rules that protect them (through the TRIMS agreement).

Income Inequality
Income inequality between developed and developing countries has continued to increase. The World Bank estimates that approximately 48% of the world’s population lives on less than $2 US dollars a day (approximately 80% of the planet’s population lives below the $10 US dollars figure). During the last three decades, income inequality also intensified within the most important developed countries.

This growth in inequality has multiple causes. The first is that median wages stagnated several decades ago. In many developing countries the adjustment programs that resulted from repeated economic crises were accompanied by the repression of aggregate demand in order to counter inflation. This resulted in chronic losses in the purchasing power of wages. In many developed countries, wages also stagnated (in the United States this started to happen in the mid-seventies). Stagnant real wages forced many households to run unusually high debt levels. This is one of the underlying causes of the present global crisis.

The second cause is related to regressive fiscal policies through which social expenditures suffered and tax cuts were implemented for the upper income brackets. Third, in an effort to attract foreign direct investment many developing countries dismantled the institutional network that had contributed to better wage levels in the past. Anything that was perceived as contrary to wage and labour market flexibility was abolished. In general terms, poverty remained stable or even increased in many regions of the world.

Clearly, inequality and high poverty levels are critical obstacles to sustainability. Poor people rely heavily on ecosystems’ services and on biodiversity. Today’s global financial and economic crisis and the policy responses it has brought about will aggravate this situation in developed and developing countries.

International monetary system in disarray
The international monetary arrangement based on the role of the US dollar as the main reserve currency is plagued by serious problems that affect sustainability in many ways. The system generates instability and diminished credibility on the reserve currency. It has also failed to correct the serious imbalances that exist between deficit and surplus countries. Clearly, maintaining an international monetary system based on a single currency (or even a small basket of hard currencies) is not a viable long-term solution.

The US dollar has been able to maintain the role of main reserve currency but at a very high cost for the rest of the world. Countries issuing a reserve currency are confronted with an acute policy dilemma between achieving domestic monetary goals and meeting other countries’ demands for liquidity. In the context of the current economic crisis, the stance for quantitative easing pursued by the Federal Reserve has been seen with growing concern by countries amassing huge amounts of Treasury bills or US dollars. But from the perspective of the Fed, quantitative easing was a crucial step in trying to control the recession.

Chinese officials have indicated it is important to shift to a monetary system based on a truly international reserve currency that would replace the US dollar. This international currency should have no links with the economic conditions and the sovereign interests of any single country. The source of China’s discontent (as well as that of other countries) is that the value of the assets in which it keeps its reserves depends on US economic policies. As of today, these fears are confirmed by the fact that US policies in the aftermath of the financial crisis are leading to a significant depreciation of the US dollar.

How is the international monetary system connected to the environment and to peoples’ livelihoods? The answer relates to the capacity of the world economy to maintain well-remunerated jobs, rising living standards and to allocate sufficient resources for environmental stewardship. It is also linked to the needs of an economy that must undergo significant structural transformations as it evolves towards a low-carbon energy trajectory and a general profile of efficiency and sustainability. In order to mobilize resources for these ends, the international monetary system needs to satisfy the liquidity needs in a changing world economy.

The Debt Problem
The debt of developing countries has long been recognized as a critical obstacle for development. The cost of servicing this debt is undermining these countries’ efforts to develop and improve living standards for their peoples. The debt of developing countries is at the heart of one of the most important connections between macroeconomic policies and sustainability. Considering the data and dynamics of debt servicing it is surprising that debates on the MDGs or UNEP’s Green Economy Initiative pay no attention to this important problem. Likewise, the Fourth Assessment Report of the IPCC has no room for a discussion on the repercussions of the debt burden of developing countries.

Several factors explain the persistence and growth of developing countries’ debt. One of them is the legacy of colonialism that imposed on the newly born countries during de-colonization the obligation to repay the debt acquired during the colonial period. In the 1960s more than 60 billion USD were imposed on the new independent countries. In those days, a unilaterally determined interest rate of 14% was imposed on many countries, leading to the rapid expansion of these debts. Even before they could decide on their development strategies, newly independent countries were saddled with a heavy burden of a huge external debt. In many cases, all of this was followed by the acquisition of odious debts negotiated by dictators and usurpers as natural resources were inscribed as collateral in return for loans.

In addition, the growth of the financial sector in the world economy has led to the expansion of loans to developing countries. In many instances, irresponsible lending practices of banks led to excessive indebtedness. Negligence and corruption also played their part. When commodity prices dropped and interest rates increased, as they did during the early eighties, many countries were unable to their obligations. The adjustment programs that followed imposed severe conditions that impaired these countries’ ability to grow.

The total public external debt of developing countries increased between 1970 and 2007 from US $70 billion to US $3,360 billion. Total debt service payments by developing countries to the creditors in the developed world during the period 1980-2007 amounted to an amazing US $7,150 billion!

In 2008 developing countries owed a total external debt of more than US $3.7 trillion. During that year the debt service (principal plus interest) amounted to US $602 billion. The external debt of the poorest countries in 2008 was US $168 billion. Debt service for these countries (with an annual per capita income of less than US $975) amounted to US $8.3 billion (roughly one million dollars every hour each day). Schemes such as the initiative for the poorest and highly indebted countries of the world have simply not been up to the task of solving this problem.

Through a combination of instruments and different forms of pressure, creditor countries have forced indebted countries in the developing world to cut expenditures on health, education, housing and environmental stewardship in order to generate the resources required to cover debt service. This has been the key priority of fiscal policy in developing countries. And when sovereign debt crises have exploded (as in the case of Mexico and most of Latin America in 1982-83), the ensuing adjustment programs have imposed pro-cyclical priorities that hamper development and generate unemployment, more poverty and greater inequality.

Clearly any serious discussion about resources for sustainability must involve an analysis of the constraints of the debt time bomb on macroeconomic policies of developing countries. If there is going to be a meaningful discussion on sustainability in Rio+20, the issue of the debt burden of developing countries (and certainly of the poorest and highly indebted countries) has to be put squarely at the top of the agenda.

Alejandro Nadal, Chair, TEMTI
August 2011


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