THE FINANCIAL CRISIS

Since the end of the cold war and the collapse or transformation of most communist systems, the free-market economy has globalized and created wealth on a scale unimaginable in the past. It demonstrated the triumph of deregulated enterprise and innovation, including financial innovation, and confirmed the dominance of the United States and its consumer culture as the world's largest economy and the model to follow. Economists convinced by this model have been the drivers behind most government policies.

The success of this system made it impervious to critiques that it might be socially or environmentally unsustainable. Growth was the unchallengeable goal of business and government, and suggestions that there might be limits to growth were derided and ignored.  The western economy and its materialistic values have been exported to every corner of the world. Experts in the scientific and environmental communities suggesting that humans might also be vulnerable to overshoot and collapse have only recently begun to attract attention after decades in the wilderness (see a summary in Dahl 2008). The battle over the reality of climate change has illustrated how difficult it is to challenge the vested interests in the present economic and political system. Yet climate change and the related issue of dependence on limited fossil fuel resources finally reached the top of the international agenda as evidence like melting ice caps could no longer be ignored, and the rapid rise in food and energy prices signalled that something was wrong in the system. In March 2009, the UK Chief Scientist warned that the world faces a 'perfect storm' of problems in 2030 as food, energy and water shortages interact with climate change to produce public unrest, cross-border conflicts and mass migrations (Sample, 2009).

The collapse of the banking system after the American sub-prime mortgage scandal and its propagation throughout the world economy has suddenly shaken the economic paradigm. Sophisticated mathematical models for managing financial risk proved incapable of managing greed. The triumphant free-market economy has fallen off its pedestal. Stock markets have plunged and unemployment has surged. Price volatility for fossil fuels and food has destabilized national economies and plunged millions more into poverty and hunger. As the world recession deepened, government intervention on an unimaginable scale has been required in the effort to head off a complete collapse of the economy. The attempt to restore confidence in the banks and to restart lending has seen debt increasingly being transferred to governments on the assumption that confidence will always remain in governments' ability to repay their debts. Social unrest is increasing as workers ask why the rich get all the handouts while they lose their jobs. The British finance minister referred to the worst recession in 100 years ( The Guardian Weekly 13.02.09, p. 12). In late February 2009, the head of the European Central Bank said "We live in non-linear times: the classic economic models and theories cannot be applied, and future development cannot be foreseen" (quoted in Seager, 2009).

The consequences of the unravelling of the economic system are still far from evident. One distinguished economist has warned that the real danger is not a deepening recession, but the possibility that massive government intervention may produce a partial recovery. Leaders would be convinced that they had avoided the worst, and not recognize that the economic system was broken and in need of fundamental reform. Having used every weapon in their armoury this time around, there is nothing left to respond to the next crisis (Lopez-Claros, 2008). The next domino to fall could be national governments, with Great Britain, Greece, Italy and Spain already on the verge of bankruptcy (Spiegel Online 30.01.09), to mention only European countries. A loss of confidence at this level could bring down the whole global monetary system on which the economy is based.

These events have changed the diplomatic landscape, put new issues on the table, and broken major resistances to public intervention and international action. They have demonstrated how fundamental trust and confidence are to any human system or institution, including banking, business and diplomacy; how easily they are lost and how difficult to restore. They also show how all the different problems are interrelated, and solutions to all of them have to be considered together, challenging the traditional approach of dealing with different issues in separate arenas, seldom making the linkages between issue-specific agreements and regimes.

The collapse and government bail-out of the financial system raises a series of questions and issues, both in terms of the immediate causes and consequences of the financial problems, and in the possibilities opened up to move in the direction of a "green economy" as a combined solution for the economy, human well-being and the environment. This was a major theme for the UNEP Governing Council/Global Ministerial Environmental Forum in February 2009. Some of the key questions that need to be considered follow.

What are the wider consequences for people and a planet already facing ecological crisis of the near-failure of the banking system and the enormous financial effort by governments to prevent the total collapse of the economic system? Budget cuts elsewhere may include environmental and social programmes. Short term urgency may squeeze out long term necessity. There will clearly be a lack of capital to invest in other priorities unless they can be shown to meet also the requirements of the economy.

Will the rise in social instability make the transition to a more sustainable system more difficult, or facilitate it? There is a growing sense of injustice among workers and the poor that so much help has gone to the rich while rising unemployment and prices impact the poor the most. Pressures on governments to increase protectionism are growing, threatening to put a brake on global exchanges. This defensive turning inward could make it more difficult to find global solutions to climate change and other environmental problems.

What are the underlying causes of the financial crisis? Are there failures of conception in the way the economic system worked? Were there systems errors, in which each part made sense, but they interacted in ways that were not anticipated? Were the failures not in the mechanisms, but more fundamentally at the level of ethics and values? It could well be that the whole Western capitalist model is as fundamentally flawed as the communist model, with a focus on shareholder value rather than value to society, investing for the highest return, borrowing rather than saving, encouraging excessive risk taking and speculation, and seeing ever-rising levels of debt as "normal". The amounts that governments are borrowing today to finance their interventions in the economic system are so unimaginably large as to question the meaning of debt and money for ordinary people.

Is finance the central problem, or only the symptom of something deeper? The same process of debt accumulation, and living beyond our means, can be seen not only in the financial system, but in social and environmental systems, all of which are showing increasing instability and signs of reaching their limits. There is a danger of converging financial, environmental and social bankruptcies, which some experts say could lead to the collapse of civilization (summarized in Dahl, 2008). The lessons from the financial crisis may be equally valid for other dimensions of society and the environment. We may be at the end of the growth paradigm, and need to find another more aligned with sustainability. At the moment we seem to be trapped in a society heading for disaster and unwilling or unable to change course. Blind optimism in technological solutions too closely resembles the optimism in the financial system not so long ago.

How do we deal with an economic system that is so dependent on consumption to create employment, when environmental sustainability seems to require limits on or even a reduction in consumption, as well as a redistribution so that poverty can be reduced, implying an even greater changes in lifestyle among those who are better off? Even a slight reduction in purchasing power brings people into the streets and becomes politically destabilizing. We are trapped between an objective reality and a political impossibility.

Solutions

The above questions provide the context within which environmental diplomacy will need to find solutions to more specific environmental challenges such as climate change. Imagination and innovation will be required, as business as usual is no longer an option. The coordinated financial stimulus required to rebuild the world economy can either lock us into a vulnerable fossil-fuel based system or accelerate investment in a low-carbon transition, creating jobs, technological innovation and market stimulus, and using public funds to trigger much more private finance ( Global Agenda Council on Climate Change, 2009).

One dimension of the way ahead that is being pushed strongly is the rapidly developing concept of the green economy, defined as an economic system that preserves and restores ecosystems, the backbones of economic and social well-being and essential for poverty reduction, while simultaneously creating new industries and employment. Environmental industries using clean and efficient technologies, and sustainable agriculture, serve as major engines of wealth and job creation and poverty reduction. UNEP (2009) has identified the priority green economic sectors as:
- clean and efficient technologies, including renewable energy technologies and rural energy access;
- biodiversity-based businesses, including agriculture, forestry, marine, nature-based tourism, etc.;
- ecological infrastructure, including nature reserves, protected areas, watersheds, etc.;
- chemicals and waste management, including waste reduction, recycling and reuse; and
- low carbon cities, buildings and transport.

However most plans for the economic crisis emphasize relaunching consumption and maintaining sectors such as the automobile industry, in the hope of returning to the consumer economy, with only marginal efforts to invest in more "green" alternatives. There is a danger that the "green economy" would just be consumption with a new name, when the real need is to place limits on consumerism. The debate on how to do this has not yet started, and the resistance to change is very strong.

There is a need for governance at the scale of the problem. The economy has globalized, but economic management mechanisms are largely national. Perhaps movement in this area will also facilitate strengthening environmental governance for global environmental problems like climate change. At the same time, the diversity of situations around the world requires a nested set of levels of governance to keep decision making close to the level of action, and to encourage innovation and local adaptation.

The financial collapse has underlined the need for a systems approach integrating all the issues. Science and technology have united the world in information flow, finance, trade, migration and environmental impact. Each part affects the others, so they must be understood together in all their complexity. The Global Agenda Council on Climate Change (2009) called for an unprecedented multistakeholder collaboration to link the climate and economic agendas, and highlighted the diplomatic opportunity represented by "the shared desire to deliver climate security, energy, food and water security, economic security, equity between rich and poor through enhanced capital and technology flows, all through the creation of a package that promotes economic growth by decarbonizing the world economy."

Global action requires global public support, which will only come if the solutions are seen as equitable. This means simultaneously addressing the issues of poverty, as defined, for instance, in the Millennium Development Goals. As long as there are such extreme differences between and within countries in wealth and level of development, it is necessary to apply the approach of common but differentiated responsibilities, with each country adopting its own implementation strategy within the larger framework. However all must respond to the required fundamental transformation in the dominant economic paradigm and its consumer lifestyles. How to organize the transition, and cushion its negative impacts, is a major challenge, in which diplomacy must play an important role. In addressing climate change, for example, the adoption of deep emission cuts in the north, or the principle of equal per capita emission rights, will produce significant transfers of investments from north to south.

The combined crises have shown the importance of a sound ethical foundation for human society, including justice for all planetary inhabitants, equitable solutions, trust and confidence in the mechanisms, moderation in material development, an altruistic cooperative economy, effective wealth redistribution, and adequate employment creation. Agreement on these will greatly facilitate the negotiation of solutions at other levels.

REFERENCES

(accessed 25 August 2009)

Dahl, Arthur Lyon. 2008. Preventing Overshoot and Collapse: Managing the Earth's Resources. Introductory theme paper for the 2008 Environmental Diplomacy course. https://iefworld.org/ddahl08d.htm

Global Agenda Council on Climate Change. 2009. Shaping an Opportunity Out of Crisis. A message to participants in the World Economic Forum Annual Meeting 2009 from Members of the Global Agenda Council on Climate Change. World Economic Forum, Geneva, January 2009. http://www.weforum.org/pdf/GAC/selectedcontributions/Global Agenda Council on Climate Change.pdf

Lopez-Claros, Augusto. 2008. Letter to the Editor of the Financial Times, 4 December 2008. http://ebbf.org/blog/?p=448

Sample, Ian. 2009. World faces 'perfect storm' of problems by 2030, chief scientist to warn. guardian.co.uk, 18 March 2009. http://www.guardian.co.uk/science/2009/mar/18/perfect-storm-john-beddington-energy-food-climate

Seager, Ashley. 2009. Torrent of bad news ends hope of 'quick' recession. The Guardian Weekly, 27 February-5 March 2009, p. 1-2.

Spiegel Online. 2009. Can Countries Really Go Bankrupt? 30 January 2009. http://www.spiegel.de/international/world/0,1518,604523,00.html 

UNEP. 2009. GC/GMEF 25th Regular Session, Ministerial Consultations, Background Paper on Theme I, Globalization and the Environment, "Global Crises: National Chaos?" 11 p. UNEP/GC.25/16 http://www.unep.org/gc/gcss-x/download.asp?ID=1006

BIBLIOGRAPHY FOR FURTHER READING

Dahl, Arthur Lyon. 1996. The Eco Principle: Ecology and Economics in Symbiosis. Zed Books, London. 180 p.
A systems perspective integrating ecological, economic and human systems within an ethical framework.

Esty, Daniel C., and Andrew S. Winston. 2006. Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage. Yale University Press, New Haven. 366 p.
A positive view of the environment from the business perspective.

Hawken, Paul, Amory Lovins and L. Hunter Lovins. 1999. Natural Capitalism: Creating the Next Industrial Revolution. Little, Brown and Company, Boston. 396 p.
One of the alternatives to the present economic system.

McKibben, Bill. 2007. Deep Economy: The Wealth of Communities and the Durable Future. Times Books / Henry Holt and Company, New York. 261 p.
A critique of the growth paradigm with proposals for alternatives based on community-based local economies.

World Economic Forum. 2009. Green Investing: Towards a Clean Energy Infrastructure. World Economic Forum, Geneva, January 2009. 54p. http://www.weforum.org/pdf/climate/Green.pdf
A recent review of investment performance, technological opportunities and policy requirements.