Why the Global Economic Crisis is Here to Stay

Edward B. Barbier

In his article published on 5 August 2012, “Three myths that sustain the economic crisis.” Larry Elliott, Economics Editor of the British newspaper The Guardian, suggests that there are three myths that are prolonging the current world economic crisis:

• The Anglo-Saxon myth that big finance is “a force for good,” rather than “rent-seeking and corrupt.”
• The German myth that “you can solve a problem of demand deficiency with belt tightening and export growth”.
• The “old model” myth that there was not much wrong with the global economy in 2007, before the advent of the financial crisis that initiated the Great Recession, even though  “the old model was financially flawed as it operated with high levels of debt, socially flawed in that the spoils of growth were captured by a small elite, and environmentally flawed in that all that mattered was ever-higher levels of growth.”

I am uncomfortable with Elliott’s first myth.  There is clearly a need for global financial reform, as outlined in the UN commission, chaired by Nobel Prize economist Joseph Stiglitz, to examine reforms of the global financial and monetary system.  But the case for reform rests on the lack of sufficient regulation of the global financial sector to curb its worst excesses and flaws.  Declaring that global finance is “corrupt” is neither necessary to make the case for reform nor is it helpful to this objective.

The second myth is already a focus of current economic policy debate.  As argued by Elliott: “The right policy involves tough curbs on the banks, international co-operation so creditor countries increase domestic demand to help debtor countries, and a measured pace of deficit reduction governed by the pace of growth rather than arbitrary targets.” It may be that this becomes the consensus view to emerge from the Eurozone debt crisis, and from the current raise- taxes- vs- cut- spending polarized political debate on US debt reduction.

However, it is the “old model” myth that may be the hardest to shake.  The good news is that there is an antidote to this myth, and that is the “green growth” model that is currently gaining prominence in key international circles.

For example, the distinguishing theme of the Rio+20 conference, held in Brazil over 20-22 June 2012, was the “green economy”, or more precisely, how economies can achieve “green growth”.  A key background document for Rio+20 prepared by the UN Environment Programme defines a green economy as one that results in “improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities.”  As the document further explains, “In a green economy, growth in income and employment should be driven by public and private investments that reduce carbon emissions and pollution, enhance energy and resource efficiency, and prevent the loss of biodiversity and ecosystem services. These investments need to be catalysed and supported by targeted public expenditure, policy reforms and regulation changes.”

Already, several studies have shown  how such investments, incentives and policies can aid the transition to a green economy, including a policy paper by the World Bank, a similar policy document by the Organization for Economic Cooperation and Development (OECD), and a book A New Blueprint for a Green Economy that I have co-authored with Anil Markandya.

Yet some myths die hard, and this certainly true of the “old model” myth. Adopting the theme of green economy at Rio+20 was laudable. The tragedy is that this theme was barely acknowledged by the concurrent G20 conference held from 18-19 June 2012 in Mexico. The G20 summit, which is an annual meeting of the leaders from the 20 largest and most populous economies of the world, is a forum for discussing and coordinating global economic policy.  It is instructive, as well as discouraging, that key world leaders, such as from the US, UK and Germany, decided to shun Rio+20 but of course attended the G20 summit.  Unfortunately, although the focus of the G20 summit was on the global economic crisis, green economy issues clearly did not receive strong endorsement as part of the policy solution to the crisis.  The Mexico G20 Leader’s Declaration did state that: “We commit to maintaining a focus on inclusive green growth as part of our G20 agenda and in the light of agreements reached at Rio+20 and the United Nations Framework Convention on Climate Change (UNFCCC).”  But no concrete actions or policies for achieving “inclusive green growth” were offered by the G20.

The implication is clear:  the world economy matters to the G20 but the global environment does not.  But as long as this fourth “global policy” myth persists, both the “old model” of the world economy and the current global crisis will be with us for a long time.

Edward B. Barbier is the John S. Bugas Professor of Economics at the University of Wyoming.

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