**Academic Year 2013-2014 Lectures on: Economics of Sustainable Development

Prof. Alessandro Vercelli

Objectives:

Critical introduction to the theory of Sustainable Development and its application to the Global Economy in the light of the Great Recession

Recommended prerequisites:

basic notions of macroeconomics, microeconomics and statistics

**ContentsThe lectures focus on the sustainability of global development connecting theory, methodology and the analysis of the empirical evidence In particular the lectures will analyse in some detail the following themes:

-the subprime financial crisis as a consequence of unsustainable development -globalization and sustainable development-the Kuznets curve and social sustainability-the environmental Kuznets curve and environmental sustainability,-globalization and health, -happiness, health and sustainability-the sustainability gap of the energy system and climate change, -corporate social responsibility (CSR) and the sustainable firm, -the co-evolution of economic liberalism and the globalization of markets, -the policy strategies towards the sustainability of global development

**Reading list: main referencesMain references:

-Borghesi, S. and A. Vercelli, 2008, Sustainable Globalization. Social and Environmental Conditions, Basingstoke and New York, Palgrave Macmillan

-Stiglitz, J.E, 2012, The Price of Inequality, Allen Lane. London, 2012

See also:

-Stiglitz, J.E., 2006, Making globalization work, New York, Norton

-Stiglitz, J.E., 2010 (2nd updated edition), Freefall. Free markets and the Sinking of the global Economy, London, Penguin Books

-Krugman, P., 2012, End this Depression Now!, Norton, New York

**Type of exams

No partial examination

Final examination: written

**AudienceMagisterial degrees

(1 year) Economia dellAmbiente e dello Sviluppo: 9 credits

(1 year) Management and Governance (curriculum Accounting and Management): 6 credits

(2 year) Finance: 6 credits

**Venue and timetableWednesday 10.00-12.00lecture room 11

Thursday 10.00-12.00lecture room 5

18.00-20.00lecture room 3added until Thursday 17 of April

Friday10.00-12.00lecture room 9

**

Economics of sustainable development 2013

Lecture 1

Prologue:

SUSTAINABLE DEVELOPMENT AND THE GREAT RECESSION

**Main thesisThe Great recession is the expression of the unsustainability of the development model prevailing in the last 30 years

Occasion to modify this model radically enough to make it sustainable

Otherwise the process of development will become even more unsustainable and we are condemned to further crises bound to be even more destructive and uncontrollable

We can break this vicious circle only by modifying immediately this vicious circle without waiting for the end of the crisis

**The Great recession (2007-?):an epoch-making crisis

Deep crisis of the neo-liberal cycle (1979-2010?)

This is recognized also by some of the protagonists: the Reagan-Thatcher model, which favored finance over domestic manufacturing, has collapsedthe mutually reinforcing rise of financialization and globalization broke the bond between American capitalism and Americas interests (Greenspan in late 2008, Governor of Fed from 1987 to 2006)

Awareness of the gravity of problems no safe return to BAU in the economy and in economic theoryalso in the language: the usual name subprime crisis betrays a clumsy attempt to minimize scope and responsibilities of the crisis:

I will call it Great Recession

This terminology emphasizes that the crisis is not yet over ( U and global recession in 2009 and again since 2010 in Europe)

**

**The costs of the crisisHuge costs:

April 2008: 10% of US GDPIMF itself { } only the costs for IFApril 2009: 30% of US GDP

All the DMs should reflect on responsibilities: financiers, industrialists, policy authorities, economists

Many elude responsibilities shifting them on an extremely unlikely and unpredictable combination of exogenous shocks and policy errors: black swan sighted once in a century (Greenspan)

In my opinion the causes are mainly endogenous: flawed and unsustainable model of development

**Source: Martin Wolf FT, 26.11.08 from Robert Shiller et al.CAPE = cyclically adjusted price-earning ratioQ = cyclically adjusted Tobin Q (stock-exchange value/net worth)Long cycles in finance, USA, 1900-2008the neoliberal cycle: 1979-?US Stock market valuation

***Unsustainable lightnessI focus on neo-liberalism as a macroeconomic policy strategy

overconfidence in the self-regulating virtues of unfettered markets aims to shift the boundaries market/state in favor of markets by pursuing public expenditure: privatization and welfare state regulation and supervision: deregulationlight { concern for the social capital: inequality and poverty

concern for the natural capital: scarcity and pollution

this lightness proved to be unbearable: model of growth without development that is unsustainable from the economic, financial, social and environmental points of view

***The emergence of the NL paradigmTypically, the ruling policy strategy is blamed for a severe and persistent crisis

remove the causes of the crisisnew policy strategy to { emerges avoid new crises This is what happened in the period from the late 1960s-early 1970s (workers and students struggles) and during the following stagflation in the rest of the1970s

Economic NL in the version of NCEcs emerged as winner of a long and hot struggle against the Keynesian policy strategy

***The fight against KeynesianismThe Keynesian policy strategy considered as inconsistent with equilibrium and thus efficiency:

Real equilibrium suboptimal: excessive interference of the stateexcessive public expenditurecountercyclical policiesdiscretionary monetary policies

Monetary equilibrium: inflationary bias in the real economy full employment policiescountercyclical policiesdeficit spending

Phillips curve as a menu of policy choices

***Phillips curve in the late 1960s and 1970sw/wUU*

***Recipes to sustain the optimum equilibriumAccept a vertical Phillips curve at the natural rate of unemployment

full employment policiesForsake { countercyclical policies

rigid monetary policy ruleAdopt fixed policy rules { budget equilibrium

Focus on structural policies to shift economic decision power from the state to the market: privatization and deregulation

***4 Phases1979 Mrs ThatcherThe neoliberal policy strategy adopted since {1980 Reagan administration

4 phases:

A) The Great Disinflation: 1979-1987

B) The Roaring 1990s: 1990-2000 (Krueger and Solow, 2002; Stiglitz, 2003)

C) The Zero Years: 2000-2007 (Krugman, 2009: the big zero decade)

D) The Great recession: 2007-2014?

***A) The Great Disinflation: 1979-1987The Great Disinflation: monetarist phase (inspired by the monetary equilibrium business cycle of Lucas)

Initiated and pursued by Paul Volker (chairman of FED 1979-1987)

trade unionsstrict monetary policy weakening { producers of raw materialslabor market and industrial relations deregulation {international markets (in particular financial markets)

inflationary tensions in real markets overcome Great Moderation: better monetary policystability of w and p even during the booms { flexibility of labor market

downward shift and flattening of the Phillips curve

***Phillips curve in the late 1980s w/wUGreat ModerationU*

***Collateral effects: increasing inequalityPraised as great success of NL policies (not by the workers); however the same structural reforms immediately produced collateral effects: 1 collateral effect: inequality of income distribution within countries

inversion of a downward trend persisting since WW1

this occurred in all the OECD countries

while in many developing countries that deviated from NL precepts this did not occur (e.g. Brazil)

***Gini indexSource: Brandolini (2002)Fig. 5242844485256403632201940 19451950 19551960 19651970 1975 1980 1985 1990 19952000193516Inequality in the U.K., 1939-1996 (%)

***Source: Brandolini (2002)Fig. 61915192019251930 19351940 19451950 19551960 19651970 1975 1980 1985 1990 199520001624283644522032404856Gini indexInequality in the USA, 1929-1996

***Collateral effects: increasing poverty2 collateral effect: acceleration in the number of poor people

Contrary to the Pareto law and Bhagwati hypothesis the increase in inequality since the beginning of modernization played a crucial role in the increase of poverty

had the world distribution of income remained unchanged since 1820, the number of poor people would be less than 1/4th than it is today and the number of extremely poor people would be less than 1/8th of what is today(Bourguignon and Morisson, 2002, p.733)

Further increase of the poor and malnutrition in consequence of the Great Recession

***Poverty trends (< $2 per diem)

Source: Bourguignon and Morisson (2002)

Chart1

886.80.839

978.80.815

9540.754

1040.50.717

1127.70.656

1149.70.563

1376.20.548

1330.10.44

1304.70.356

1390.30.315

1293.80.237

&A

Page &P

extreme poverty

extreme poverty %

Grafico1

886.80.839

978.80.815

9540.754

1040.50.717

1127.70.656

1149.70.563

1376.20.548

1330.10.44

1304.70.356

1390.30.315

1293.80.237

&A

Page &P

extreme poverty

extreme poverty %

Chart2

886.80.839

978.80.815

9540.754

1040.50.717

1127.70.656

1149.70.563

1376.20.548

1330.10.44

1304.70.356

1390.30.315

1293.80.237

&A

Page &P

extreme poverty

extreme poverty %

headcount (millions)

headcount (percent)

EXTREME POVERTY

Sheet1

18201850187018901910192919501960197019801992

extreme poverty886.8978.89541040.51127.71149.71376.21330.11304.71390.31293.8

extreme poverty %83.9%81.5%75.4%71.7%65.6%56.3%54.8%44.0%35.6%31.5%23.7%

Grafico2

0.9440.839

0.9250.815

0.8960.754

0.8570.717

0.8240.656

0.7590.563

0.7190.548

0.6430.44

0.6010.356

0.550.315

0.5130.237

poverty %

extreme poverty %

Sheet2

18201850187018901910192919501960197019801992

poverty %94.4%92.5%89.6%85.7%82.4%75.9%71.9%64.3%60.1%55.0%51.3%

extreme poverty %83.9%81.5%75.4%71.7%65.6%56.3%54.8%44.0%35.6%31.5%23.7%

Grafico4

886.8997.8

978.81110.5

9541134.3

1040.51243.6

1127.71416.5

1149.71550.5

1376.21805.6

1330.11946.5

1304.72200.7

1390.32426.6

1293.82800.5

extreme poverty

poverty

Grafico5

997.80.944

1110.50.925

1134.30.896

1243.60.857

1416.50.824

1550.50.759

1805.60.719

1946.50.643

2200.70.601

2426.60.55

2800.50.513

&A

Page &P

poverty

poverty %

Chart3

997.80.944

1110.50.925

1134.30.896

1243.60.857

1416.50.824

1550.50.759

1805.60.719

1946.50.643

2200.70.601

2426.60.55

2800.50.513

&A

Page &P

poverty

poverty %

headcount (millions)

headcount (percents)

Chart4

997.80.944

1110.50.925

1134.30.896

1243.60.857

1416.50.824

1550.50.759

1805.60.719

1946.50.643

2200.70.601

2426.60.55

2800.50.513

&A

Page &P

poverty

poverty %

headcount (millions)

headcount (percents)

POVERTY

Foglio1

18201850187018901910192919501960197019801992

poverty997.81110.51134.31243.61416.51550.51805.61946.52200.72426.62800.5

poverty %94.4%92.5%89.6%85.7%82.4%75.9%71.9%64.3%60.1%55.0%51.3%

Sheet3

18201850187018901910192919501960197019801992

extreme poverty886.8978.89541040.51127.71149.71376.21330.11304.71390.31293.8

poverty997.81110.51134.31243.61416.51550.51805.61946.52200.72426.62800.5

***Collateral effects: slowdown of growth3d collateral effect: slowdown of the trend of GDP growth

inequality and poverty of growth trend of aggregate demand and thus also of GDP

growth trendConsequences{ growth in OECD countries more than in developing countries less intoxicated by the NLPS therefore both the change in trend and the worse trend of OECD countries may be explained as a consequence of NL policies (applied more systematically in OECD countries)

***

***B) The roaring 1990s (1): 1987-2000Since 1987 change in monetary policy (Greenspan, 1987-2006)

preceded by a change in theory: from the monetary equilibrium business cycle of Lucas to the real business cycle of Kydland and Prescott (1982)

Greenspan put: floor to the price of financial assets without a ceiling

the real inflationary bias replaced by a financial inflationary bias

Greenspan put: alters the relative price, risk and expectations of financial/real investment : real investment growth U

Consequence 1) doping of growth:

indebtment of households to sustain aggregate demand deficit spending by the Reagan, Bush1 and 2 Administration-investment bubbles fed by excess liquidity and the implicit insurance of financial assets value (e.g. the new economy bubble)

***B) The roaring 1990s (2) risk perceptionConsequence 2) { financial instability financial fragility

environment liable to financial bubbles: increase in financial instability of the 18 main financial crises identified by Kaminsky and Reinhart (1999) in the second half of the past century (all post-deregulation):3 occurred in the 2 half of the 1970s, 7 in the 1980s, 8 in the 1990s

not global: circumscribed to a particular institution (LTCM, 1998), sector (US saving and loan associations, 1984), or country (Italy 1990, UK 1991, Japan 1992 )

All these episodes happened after specific acts of deregulation (Kaminsky-Reinhart)

the prompt and generous bail-out of big FIs under financial stress paved the way for the global crises of the years 00

1997 Asian crisis may be considered as the first global financial crisis (as it hit also the USA and Japan) but its center was not in the core of the system

***C) The Zero Years: 2000-2007 The process of increasing financial stability culminates in the zero decade:two major global crises originated within the core of the system

new economy crisis 2001: serious warning of a major disaster approaching but its structural causes were neglected BAU

also in this case monetary policy succeeded in thwarting the crisis sooner than expected, strengthening the confidence in the omnipotence of the invisible hand (helped by the Greenspans visible hand)

Speculation shifted from immaterial ICT goods to brick-and-mortar goods:

first wave of the 2 global crisis:

bubble of the housing sector (US, UK, Spain, etc.)

detonator crisis of subprime and ARM mortgages {propagation of implosion

***The Great Recession: 2007-?the detonator of the first wave -housing crisis: decline of prices in the 2nd half of 2006 soft landing expectedDetonator { -price of oil: from $63 in December 2006 to $147 in July 2008 cost inflation notwithstanding the emerging crisis, central banks reacted as usual

from 2% in May 2004by increasing the discount rate: Fed { to 6.25% in August 2008

***

**

***Oil production world summary(source: Energy Watch Group, 2007)

***

***The end of the great moderationPerverse interaction between financial, economic and environmental problems (in particular those related to the energy system based on fossil fuels) that makes clear the unsustainability of the NL growth regime

this brought to an end the era of great moderation:

in the financial sectordual inflationary bias { in the real sector

not wages (as in the Bretton Woods Era) but p resources

This has been partly masked by the ongoing recession and the North-Africa and Middle-East turmoil, but cost-inflation will accelerate immediately with recovery jeopardizing its viability:

the price of food and resources started to increase again in the second semester of 2009

***The propagation mechanismThe structural causes underlying the propagation mechanism have increased further its destructive potential

In the Bretton Woods period the propagation mechanism was strong mainly within the real side of the economy:

conflict on income distribution leapfrogging: steep Phillips curve shifting upwards

stop-and-go fluctuations, accelerating inflation, stagflation

Since the late 1970s deep transformation of the propagation process:

propagation effects mainly through the financial side of the economy in consequence of the structural transformations started in the early 1980s

***Structural Changes in the neoliberal era (1)a) Globalization: growing global interconnection among DMs

financial (immediate): sale to D/Y p Y (wealth effect) D/Y: panic accelerating the processcontagion{ real (rapid): demand production employment demand interaction with financial contagion

***Structural Changes in the neoliberal era (2)b) Securitization: propagation of systemic risk through the market assets generalized moral hazard: no one responsible for evaluation {riskalibi provided by NL economists: market knows better

Derivatives: OTC from 10% (1980) to > 90%e.g. Mortgage-backed securities: spread risk in an unknowable way,Credit Default Swaps: the financial system cannot insure itself

c) Shadow banking: propagation of systemic risk and financial fragility in an opaque way as they depend on off-balance sheets operationsFIs too big to fail transmission of financial fragility to the state

powerful and dangerous propagation process

***Second wave -shock: speculation on sovereign debt in the Eurozone2nd wave { -policy response: severe austerity measure

the shock triggering the 2nd wave has been produced by the policy response to the first wave: 2nd stage of the same Great Crisis:

finance was rescued, only to turn and bite its rescuer (RMF 1, p.2)

Blame on Keynesian policies of deficit spending but the historical record suggests the opposite

***Source: IMF, GFSR, Apr. 2010

***The hegemony of financeAfter the first major wave huge unprecedented bail-out of distressed big FIs

composition and retribution of top managementwithout conditions {support of the real economy

Rescue plan of the EU in May 2010 ostensibly meant to rescue the sovereign debt of PIIGS but the main concern was in fact the protection of the balance sheets of heavily exposed banks of core countries (Germany and France)

shifting the burden on taxpayers, public sector workers, and citizens at large (increase of unemployment, deterioration of pensions, services and so on)

In the meantime bankers are set for record pay and bonuses for second yearUS: 4% in 2009 (J.P. Morgan); e.g.:

Goldman Sachs projections 2010: revenue 13.5% while compensation 3.7 %

***the revival of NLPS by the deficit hawksRicardian equivalence the multiplier of fiscal stimulus m = zero:Barro: current private E anticipating tax burden = public E

RE and efficient financial markets: counter-factualCriticisms { 1

**The errors of economic policy 1:deregulationneoliberals: errors of economic policy authorities + shocksHot debate {critics: market failures

responsibilities deriving from a common cause: market fundamentalism

errors of policy as permissive factors

repeal (1999) of the Glass-Steagall Act (1933)Deregulation {OTC (Over The Counter) derivatives

all the postwar financial crises after deregulation of financial markets (Kaminsky and Reinhart)

**The errors of economic policy 2: monetary policy Greenspan put (1987-2006)Monetary policy { Bernanke put (2006- ?):

illusion that a financial crisis may be thwarted cheaply perception of risk by flooding the system of liquidity { moral hazard

in the short period Stabilization { but de-stabilizes in the long period (Minsky)

** The errors of economic policy 3:structural policies inequality- Dismantlement of the welfare state{ aggregate demand poverty

-housing: Fanny Mae, Freddy Mac- Debt of households encouraged { -credit cards, consumption credit

- firms (mainly FI)Effects: growing financial fragility { - households - state

vulnerability to shocks (oil, raw materials, food, climate...)

N.B.: all these behaviors encouraged by market fundamentalism

**The causes of the crisis: market failures exogenous factorsWe cannot attribute all the blame { policy errors

Fundamental factor: endogenous propagation mechanism

-housing: endogenousAlso the detonator { -oil price: unsustainable model of development

Macroscopic market failures:

it does not exist (Stiglitz)-the invisible hand is invisible because {-coerced by visible hands

In any case the real market is quite different from the perfect-competition one

**The unsustainability of the existing development modelNexus between social-environmental-financial-economic conditions:

welfare state and flexibility/precariousness of labor inequality and poverty growth of per capita income aggregate demand PIL

industrialists banks and governments supported the growth of GDP encouraging the indebtedness of households and firms

D/Y financial fragility of banks, firms and households exogenous: oil price scarcity vulnerability to shocks { endogenous: discount rate

**The unsustainability of the existing development model production of biofuels and climate change price of food further inequality and poverty financial fragility

financial crisis real crisis recession unemployment

reduction of the oil p investment in renewable energy sources climate change

economic recovery oil price stagflation

also the future growth will be unsustainable unless we radically modify the model of development sustainable development

**The ultimate cause of the crisisThe ultimate cause of the crisis is the unsustainability of the model of development supported and promoted by toxic ideologies:

Fetishism of the market: securitization, indebtedness, laxity of supervisors, weakening of regulation, dismantling of the welfare state, flexibility and precariousness of labor, and so on escape the pendulum between state and market through apt reforms meant to revive the participation of citizens and stakeholders

Fetishism of market-led growth: shared by classical and Keynesian (Ben Friedman) economists, entrepreneurs and unions, right-wing and left-wing parties transition towards sustainable development that may go on even with a low rate of growth

Fetishism of market-led innovation: not always beneficial to citizens; in particular in finance often to elude controls and increase short-term profits transition towards a model of sustainable innovation

*********