CHALLENGE OF OUR TIME

By februari 2, 2024 Algemeen

The grand challenge of our time: to achieve the transition to a -global- economy that supports a just society within ecological boundaries.

The transition implies redefining economic and financial logic to preserve, regenerate, and enhance our renewable resources, ecosystems, and their biodiversity and related ecosystem dynamics. It is now increasingly understood that continuing along development pathways based on global, linear, fossil-based and GDP-oriented economic progress is literally unrealistic to expect this model to continue forever. There is also clear evidence that the increase in global GDP over the past few decades has not led to significant economic progress for most: socio-economic inequalities are growing as the rich become richer. Policy, business, and society have developed shared values and discourses (culture), rules, institutions and networks (structure), and routines (practices) geared towards progress, growth, and innovation through markets over a period of decades. This growth-based orientation solidified under the influence of globalized markets, financial systems, and related facilitating structures. In this process, the financial system has become increasingly detached from the real economy and has incorporated incentives that reward trading and speculation instead of long-term wealth creation. At the same time, the financial sector moved from being seen as largely ‘unproductive’ – mainly existing to facilitate the market economy – to a productive and central part of the economy while extracting an increasingly large share of revenue generated by other sectors. To support growth, finance has excelled in creating financial value and profit.

On a micro scale, these structures and ways of thinking in terms of economic and financial growth and optimization have led to a culture of seeing people as ‘rational economic agents’ and ‘consumers’ rather than human beings with different values, aspirations, emotions, and roles in society.

The system is increasingly targeted for supporting inequality, tax evasion, and for ignoring ecological and social value, while significant attempts are made to stimulate finance for good and green growth.

A transformative shift to an economy that prioritizes nature and well-being over money, inevitably requires new forms of governance, strategy and finance. It requires a double materiality perspective on sustainability: not only financial materiality necessary for understanding the impact of sustainability on a company’s development and performance (internal impact), but also environmental and social materiality for understanding the impact of a company’s activities on nature and society (external im

The number of large but still developing economies and their relative economic weight are likely to increase during the next 20 years. These economies, led by China, could increasingly demand more influence over the direction of economically focused international organizations, altering standards and norms to reflect their economic interests, some of which may be incompatible with the interest of advanced economies. The economic environment of the future, characterized by increasing national debt, a more complex trading environment, diversified global connections, and employment disruptions, will increase strains on governments. Taken together, these trends are likely to shift economic influence to a broader range of players, including private corporations and less open economies).

Several global economic trends, including rising national debt, a more complex and fragmented trading environment, the global spread of trade in services, new employment disruptions, and the continued rise of powerful firms, are shaping condi­tions within and between states. Calls for more planning and regulation will intensify, particularly of large platform, e-commerce corporations. Our industrial society is following the patterns of consumption shown from the 1972 Limits to Growth base case scenario. In context of this scenario, we have reached or just passed peak industrial production (per captia). This model predicts a peak in services to society (per capita) a few years later, followed by a peak in food production (per capita).

During the next two decades, several global economic trends, including the aforementioned rising national debt, a more complex and fragmented trading environment, the global spread of trade in services, new employment disruptions, and the continued rise of powerful firms, are likely to shape conditions within and between states.

Our monetary systems are not in a fit state to engage in fundamental industrial reform. An unprecedented severe economic downturn in the form of a global bond crisis, followed by a systemic debt default is now mathematically inevitable. Moreover, due to the centralized nature of its operational control, the monetary system fragility and its virtual nature implies a period of paralysis would be inflicted onto the real economy, at a time when the real economy really needs to evolve in a comparative step change. The debt saturation point of the US and EU has almost been reached.

Inflation, debt and interest rate rises are emerging risks. Today, governments and central banks – led by developed markets, notably the United States of America, Eurozone and the United Kingdom of Great Britain – are walking a tightrope between managing inflation without triggering a deep or prolonged recession and protecting citizens from a cost-of-living crisis while servicing historically high debt loads.

Until now, decision-making tends to focus on financial materiality (e.g. by analyzing the impact of so-called ESG factors on financial performance). Creating the conditions – within which economic activity will automatically generate value for nature and people first – requires decision-making based on guiding principles for a sustainable future. It is clear that political and economic leadership have no Plan B beyond these unprecedented levels.

In the face of vulnerabilities highlighted by the pandemic and then war, economic policy, particularly in advanced economies, is increasingly directed towards geopolitical goals. Countries are seeking to build self-sufficiency, underpinned by state aid, and achieve sovereignty from rival powers, through onshoring and friend-shoring global supply chains. Defensive measures to boost local production and minimize foreign interference in critical industries include subsidies, tighter investment screening, data localization policies and exclusion of companies from key markets. At the same time, transformative innovations (alternative concepts, technologies and practices) and sustainability transitions in key markets are emerging in energy, food, mobility and resources. These are supported by new governance strategies, co-operative and civil support as well as through social entrepreneurship and new finance.

These emerging niches are in part interlinked with the destabilization of economic sectors that are based on fossil fuels. This automatically hits the financial sector as well, since it is heavily invested in those sectors. Rapid and nonlinear shifts are possible to economic futures that are circular, decentralized and with internalization of externalities. These shifts thus imply completely transformed economic and financial structures.

In analytical terms, we are in a process -transition- in which a societal system is pushed away from a dynamic equilibrium (regime) into a phase of chaotic and non-linear reconfiguration; the need to imagine alternative futures beyond business as usual! If structural, non-linear changes are inevitable, what potential threats or opportunities do they offer? What are the desired and undesired alternative futures that need to be explored?

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