Sustaining growth is the century’s big challenge
By Martin Wolf
Is it possible for the vast mass of humanity to enjoy the living standards of today’s high-income countries? This is, arguably, the biggest question confronting humanity in the 21st century. It is today’s version of the doubts expressed by Thomas Malthus, two centuries ago, about the possibility of enduring rises in living standards. On the answer depends the destiny of our progeny. It will determine whether this will be a world of hope rather than despair and of peace rather than conflict.
This – not the effectiveness of its particular prescriptions – is the biggest question raised by the report of the growth commission discussed here last week. It is also the focus of a powerful new book by Jeffrey Sachs, director of Columbia University’s Earth Institute*.
The challenge is stark. World real incomes per head could rise 4.5 times by 2050 and world population by 40 per cent. This would mean a sixfold increase in global output, concentrated in the developing world (see charts). Is such an increase feasible? The answer he gives is: yes and no – yes, because changes in incentives, technology and social and political institutions would make a benign outcome feasible; and no, because the path we are now on is unsustainable. Professor Sachs is an optimistic prophet of doom. He falls in between those environmentalists who see no solution and those free-marketeers who see no problem.
By inclination, I am far closer to the latter than the former. But it has become evident, at least to me, that the human impact on the planet on which we depend has risen to enormous proportions. We have treated the global commons as if they were free. Self-evidently, they are not.
Prof Sachs emphasises three goals: first, “the end of extreme poverty by 2025 and improved economic security within the rich countries as well”; second, “stabilisation of the world’s population at 8bn or below by 2050 through a voluntary reduction of fertility rates”; and, third, “sustainable systems of energy, land and resources use that avert the most dangerous trends of climate change, species extinction, and destruction of ecosystems”. Finally, to achieve these ends, he recommends “a new approach to global problem-solving based on co-operation among nations and the dynamism and creativity of the non-governmental sector”.
One might view the first of the above goals as that of prosperity for everybody. Population control is related to this end because the world’s poorest people are burdened by the costs of rearing its largest families. Finally, only by managing the global commons will it be possible to sustain rising living standards.
The most illuminating concept in the book is that of the “anthropocene” – the era in which human activities dominate the world. Peter Vitousek of Stanford University has documented the ways in which humanity has appropriated the bounty of the earth for its own use: human beings now exploit 50 per cent of the terrestrial photosynthetic potential; they have put up a quarter of the carbon dioxide now in the atmosphere; they use 60 per cent of the accessible river run-off; they are responsible for 60 per cent of the earth’s nitrogen fixation; they are responsible for a fifth of all plant invasions; over the past two millennia they have made extinct a quarter of all bird species; and they have exploited or over-exploited more than half of the world’s fisheries.
Like it or not, we humans are now in charge. So what should we do? In his response, Prof Sachs shares the optimism of most Americans: we must fix it, but, he insists, we can do so only together. In this great venture, he argues, the US must share the leadership, but it cannot dictate to the rest of humanity.
In regard to the dynamics of catch-up growth in developing countries, Prof Sachs’ views are close to those of the growth commission. More distinctive is his recommendation of an aid-supported, big-push investment strategy, aimed at lifting the world’s poorest people, predominantly Africans, out of the poverty traps into which, in his judgment, they have fallen. Prof Sachs has made notable contributions to our understanding of the obstacles to development created by geography, the environment and devastating diseases such as malaria. In the current book, he emphasises how shortages of water are contributing to poverty and conflict across the planet.
Yet I am more sceptical than Prof Sachs of the returns to the big-push strategy. In many cases, it will fail. But it has to be tried, because there is no morally tolerable or credible alternative. I agree, too, that huge efforts must be made to accelerate the fertility decline in the world’s poorest countries, albeit on a voluntary basis.
Now suppose that economic growth then spreads across the planet, as we would wish. Can it be sustainable? Prof Sachs is notably optimistic on direct resource inputs into growth. His view is that fossil fuel resources, renewable energy and availability of fresh water should be sufficient to support continued growth over the next half century. But this would almost certainly require a transition from oil-based energy technologies to ones based on coal and renewables. Energy would, almost certainly, be much more expensive than in the 1985-2000 period, but not prohibitively so.
The challenge, in Prof Sachs’ view, is rather to make growth compatible with sustaining the global commons: species survival and, above all, climate change. Yet what is perhaps most intriguing of all is the optimism he shows on the latter task. While he embraces the view that climate change is a huge threat, he also believes it can be dealt with at modest cost, provided suitable incentives are put in place: less than 1 per cent of global income.
In all, in fact, Prof Sachs believes we can achieve all the goals he has set – elimination of mass poverty, population control and environmental sustainability – for less than 2 per cent of global incomes. This is about half a year’s global growth and, as such, surely cheap at the price.
This, then, is an analysis that manages to be both pessimistic and optimistic at the same time. One might not be quite as optimistic about the cost of the solutions. But one must recognise the salience of the challenges. If economic growth halted, conflict among the world’s people would risk becoming unmanageable. If the environmental consequences proved overwhelming, the costs of growth would become unbearable. We are the masters of our planet now. The great question for the 21st century is whether we can also become masters of ourselves.
Markets move on fears of inflation crackdown
By Chris Giles in London and Michael MacKenzie in New York
Fears that central banks around the world are planning a crackdown on rising inflation saw bond and futures markets move sharply on Tuesday, with a series of interest rate rises now priced into markets in the US, the eurozone and the UK.
The shift came after Ben Bernanke, the Federal Reserve chairman, warned of growing inflationary pressures, bolstering the view that all the world’s leading central bankers are on high alert.
Jean-Claude Trichet, the European Central Bank president, has warned of the possibility of a rate rise next month and explained on Monday that this was “entirely inspired by this necessity to anchor inflation expectations”.
The tough stance among central bankers was reinforced on Tuesday when the Bank of Canada shocked markets by leaving its interest rate unchanged, citing the risks of rising inflation.
The yield on the two-year Treasury note on Tuesday reached a high of 2.94 per cent, up from 2.40 per cent on Friday when a sharp rise in the US unemployment rate sparked a bout of buying bonds. The two-year note yield has staged its biggest rise in the past two days since 1985.
The US market reaction is falling into line with previous sharp moves in Europe, where two-year UK gilt yields have risen a full percentage point in the past month and the two-year German government bond yields are around 4.64 per cent, after trading at 4.33 per cent last week and 3.65 a month ago.
In the US overnight index swap markets – a relatively pure market predictor of official interest rates – yields on the year ahead contract rose by almost 0.2 percentage points to 2.7 per cent, indicating markets believe the Fed will raise interest rates at least three times in the coming year.
In a sign inflation fears are reaching equity markets, China’s main stock market fell 7.7 per cent, its biggest fall for a year, after its central bank moved at the weekend to curb inflation, now running at more than 8 per cent.
The sudden movements show traders think central banks will not allow inflation to rise on the back of high energy and food prices without some reaction.
June 10 (Bloomberg) -- John McCain, who wrote the law banning corporate donations to the political parties, and Barack Obama, who refuses lobbyist money, will be nominated for president at conventions largely funded by industries whose Washington clout they've railed against on the campaign trail.
Convention organizers in Denver and Minneapolis-St. Paul, hosting this year's quadrennial gatherings, are seeking donations of as much as $5 million each, part of an effort to raise $100 million between them from private sources.
The corporate cash, from companies such as AT&T Inc. and Visa Inc., may undermine a central focus of the McCain and Obama campaigns.
``The conventions are a place where money and influence can flow,'' said Bob Edgar, a former Democratic U.S. representative from Pennsylvania who now is president of Common Cause, a Washington-based group pushing for tougher ethics rules. Obama and McCain ``have decided out of expediency that they'll be silent on some of these issues until they get elected.''
It wasn't supposed to work this way. The same Watergate-era campaign finance law that provides taxpayer money to presidential nominees does the same for national conventions. This year, each party will get $17 million from the government, plus another $50 million for security costs.
Lobbyist Influence
While Obama backed the Republicans' 2005 energy legislation that included $11.6 billion in taxpayer subsidies for oil and utility companies, he has taken aim at the influence of lobbyists from the energy industry as well as those representing health- care companies and Wall Street.
``We can't afford to settle for a Washington where our energy policy, and our health-care policy, and our tax policy is sold to the highest-bidding lobbyist,'' Obama said in a May 3 speech in Indianapolis.
Xcel Energy Inc., which owns electric utilities, UnitedHealth Group Inc., the largest U.S. health insurer, as well as a law firm lobbying for private-equity firms and hedge funds, are all donors to the Aug. 25-28 Democratic convention in Denver.
Lobbyists for those groups can get credentials to both conventions or related events, allowing them to mingle with lawmakers acting on legislation important to them.
Farm Bill
McCain has also pledged to curb the influence of lobbyists as president and has banished them from his paid campaign staff.
``I upset the special interests and Washington lobbyists when I fought for ethics reform and to stop union bosses and corporations from writing million-dollar checks to political campaigns,'' McCain said at a town-hall meeting in New Hampshire last November.
Archer-Daniels-Midland Co., the world's largest grain processor, benefited from and lobbied on a just-passed legislation renewing farm programs for five years, a bill McCain criticized. ADM is supporting the Sept. 1-4 Republican convention in Minneapolis-St. Paul.
AT&T and Visa are also among the 23 companies that are helping to fund both conventions, according to the host committee's Web sites. AT&T wants immunity from lawsuits for helping the government wiretap Americans without warrants. Visa opposes efforts to restrict its ability to raise interest rates. Xcel, UnitedHealth and ADM have also given to both conventions.
Company spokesmen said the donations are given to participate in the political process, not because of pending legislation. The candidates declined to address the unrestricted convention donations.
Obama on Lobbyists
Jen Psaki, a spokeswoman for Obama, said ``Barack Obama has done more to curb the influence of special interests and lobbyists than any other candidate in this race.'' McCain spokesman Brian Rogers didn't respond to several requests for comment.
Officials of the convention host committees say the donors are motivated by civic pride. ``They get that it's good for our cities and our state,'' said Cynthia Lester, president of the Minneapolis-St. Paul committee.
The connections between the candidates and the companies go beyond the conventions. One of McCain's $250,000 fundraisers, lobbyist Wayne Berman, counts AT&T, UnitedHealth and Visa among his clients.
In February, by a vote of 67-31, the Senate endorsed granting immunity to the phone companies. McCain voted in favor of immunity; Obama opposed it.
Sidley Austin
While Obama doesn't accept donations from lobbyists, he does from others in law firms that lobby. One of his biggest sources of campaign cash, Sidley Austin LLP, was paid $6.7 million last year to lobby by clients such as Eli Lilly & Co., which has given to both conventions.
Obama's ban on lobbyist donations doesn't apply to convention contributors such as Brownstein Hyatt Farber & Schreck LLP, which lobbies for Apollo Management LP, a private-equity firm, and Citadel Investment Group LLC, which operates hedge funds. Both are fighting efforts to tax carried interest -- the fees received for managing investments -- as ordinary income.
Lobbying expert Rogan Kersh, associate dean of New York University's Wagner School of Public Service, said the corporate money could muffle the candidates' campaigns against so-called special interests.
``Corporate underwriting has become as much a part of party conventions as funny hats and long speeches,'' Kersh said. ``But in a campaign devoted to change, both parties' much-proclaimed reform candidates will have their halos tarnished by the corporate largesse.''
June 10 (Bloomberg) -- Crude oil fell more than $3 a barrel in New York as the dollar climbed against the euro and yen, curbing the appeal of commodities.
Energy and metals dropped after Federal Reserve Chairman Ben S. Bernanke said economic risks have faded, spurring bets that interest rates will rise and bolstering the dollar. Investors looking to hedge against the dollar's drop have helped lead oil, gold, corn and gasoline to records this year.
``This is a giant move for the currency markets and it's having an impact on oil,'' said Brad Samples, commodity analyst for Summit Energy Inc. in Louisville, Kentucky. ``There's obviously some bullish sentiment still in the market, otherwise we would be down much lower.''
Crude oil for July delivery fell $3.04, or 2.3 percent, to settle at $131.31 a barrel at 2:46 p.m. on the New York Mercantile Exchange. Oil has dropped $7.23, or 5.2 percent, yesterday and today, the biggest two-day drop in 11 weeks. Futures have more than doubled over the past year.
Prices climbed $10.75 a barrel on June 6, the most ever, to a record $139.12 as the dollar weakened and amid threats of supply disruptions.
``The weakness of the dollar is a primary reason for where crude is,'' said Justin Fohsz, a broker at Starsupply Petroleum, a division of GFI Group Inc. in Englewood, New Jersey. ``I think a lot of participants are just sitting on their hands shell- shocked after Friday's move.''
The U.S. Commodity Futures Trading Commission said an interagency task force has been formed to evaluate developments in commodity markets, including the role of speculators. The task force includes the Federal Reserve, the Securities and Exchange Commission, the CFTC and the Departments of Treasury, Energy and Agriculture, the commission said today in an e-mailed statement.
Correlation
The correlation coefficient between oil prices and changes in the euro has been 0.934 for the past year, indicating the two have moved in the same direction 93 percent of the time.
``Given the correlation between crude and the dollar that we've seen, crude should be down several dollars,'' Samples said.
The dollar increased 1.3 percent to $1.5448 per euro at 3:06 p.m. in New York, from $1.5646 yesterday.
``Strong'' economic fundamentals will translate to dollar strength, Treasury Secretary Henry Paulson said today in a Bloomberg Television interview in Washington.
Saudi Arabia is inviting energy officials from the Organization of Petroleum Exporting Countries, consuming nations and oil-trading banks Goldman Sachs Group Inc. and Morgan Stanley to a meeting to discuss record prices in Jeddah, Saudi Arabia, on June 22, OPEC Secretary-General Abdalla El-Badri said in a phone interview today.
Fifth Cut
The International Energy Agency cut its forecast for global oil demand for a fifth month as record prices dented consumption. The IEA reduced its 2008 outlook by about 70,000 barrels a day to 86.77 million barrels a day from 86.84 million last month, the Paris-based agency said today in its monthly report. That leaves demand growth for this year at 0.9 percent.
The IEA, which advises 27 developed nations on energy policy, was set up in 1974 in response to the Arab oil embargo.
Brent crude oil for July settlement declined $2.89, or 2.2 percent, to settle at $131.02 a barrel on London's ICE Futures Europe exchange. Prices climbed to a record $138.12 on June 6.
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