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Many years ago, in a desperately poor village in Rajasthan, people decided to plant trees on the land adjoining their pond so that its catchment would be protected. But this land belonged to the revenue department and people were fined for trespass. The issue hit national headlines. The stink made the local administration uncomfortable. They then came up with a brilliant game plan—they allotted the land to a group of equally poor people. In this way the poor ended up fighting the poor. The local government got away with the deliberate murder of a water body.

I recall this episode as I watch recent developments on climate change. At the recent Durban climate change conference small island nations—from the Maldives to Granada —believed, rightly so, that the world has not delivered on its promise to cut emissions and is jeopardising their future. But they do not have the power to fight the powerful. So, this coalition of climate victims turned against its partner developing countries, targeting India, for instance, for inaction. These nations pushed for India to take legal commitments to reduce emissions, dismissing its concerns of equity as inconsequential.

The divide is complete. According to Bangladeshi climate change researcher and old friend Saleemul Huq, the issue of equity—the setting of emission targets based on the contribution of each country to the stock of carbon dioxide in the atmosphere—is an old fashioned idea. He says it will not work in the new world where the dichotomy of the rich and poor countries has vanished; instead, there are equal and big polluters like China, India, South Africa and Brazil (BASIC). These, he says, are equally responsible and must take steps to cut emissions. He wants the notion of historical emissions junked. For him, countries like the Maldives and Bangladesh are victims. India is a polluter, a rich country whose government is hiding behind the poor to avoid cutting emissions.

But the fact is Maldives’ per capita emission is higher than India’s. So, should the Maldives take mandatory emission reductions? Is it a victim or a polluter? India also has a longer coastline than vulnerable Bangladesh. Is it a polluter? Or an equal victim? Sivan Kartha, a climate change researcher with the Stockholm Environment Institute, tears into this argument that is dividing the poor world and taking the focus away from countries that need to be told to take action fast. He compares India and Africa, countering the charge that Africa is being destroyed because of rich India’s reluctance to take emission reductions. “Actually, 1.1 per cent of Africans have made it to the top global wealth decile against 0.9 per cent Indians. As against this, 21 per cent Americans are in the top global wealth decile. Then, India’s total emissions are only two-thirds of what Africa emits.” As against this, US emissions are four times India’s. In this way, while the poor fight over crumbs, the cake is eaten by the rich.

My colleagues at the Centre for Science and Environment analysed income distribution and emissions data to see if rich Indians emitted more than their counterparts in rich countries. They found that the per capita emission of the richest 10 per cent of India’s population was the same or slightly less than the per capita emission of America’s poorest 10 per cent and it was less than one-tenth the per capita emission of America’s richest 10 per cent. In other words, the rich in India emitted less than even the poorest Americans. This is not to deny that Mukesh Ambani’s enormous house and electricity consumption—reportedly Rs 75 lakh a month—is distasteful. But energy and emission apartheid in the world remains unacceptable.

Simple plot. Sinister design. The poor have been divided to fight over who is more vulnerable. But one must realise that this divide is a deliberate creation. In 2009 at the Copenhagen Conference of Parties, two categories of countries were devised. One, vulnerable countries that would get fast track funds to adapt to climate change and two, emerging polluters grouped under the BASIC banner. The bribe and divide was blatant and successful. It was openly said in the conference plenary that polluting countries like India, who wanted an agreement based on equity, were blocking funds that would flow to Bangladesh and the Maldives. That penultimate night of the conference the poor fought the poor. Since then the divide has grown.

It’s time we stopped this kindergarten fight. Let us be clear the world has to cut emissions drastically and fast. There must be limits on each country based on its per capita emission and taking into account its historical contribution. China is the biggest current emitter. But in cumulative terms—taking into account the stock in the atmosphere accumulated over the years—it contributes 11 per cent against US share of 26 per cent. It must also be brought under limits, as must India. But these limits will have to be based on the principle of equity so that these countries will also have the right to development.

This is the most inconvenient of truths. But it is the truth.

This piece was originally published at CSE India.

Yu Yongding, Rattling the Renminbi
Robert Johnson, Economists: A Profession at Sea
Thomas Cate, Keynes’s General Theory: Seventy-Five Years Later
Michael Hudson, Banks Weren’t Meant to Be Like This. What Will their Future Be – and What is the Government’s Proper Financial Role?
Lex, Sany Heavy: China digs in, and Beyondbrics on land grabs
Raghuram Rajan, A Crisis in Two Narratives
Andrés Velasco, Latin America’s Stymied Innovators
Josh Fischman, As Journal Boycott Grows, Elsevier Defends Its Practices

What We’re Writing

Martin Khor, Rising risk of Western war on Iran
Patrick Bond and Michael Dorsey, Steer clear of this climate ‘Ponzi scheme’
Jeff Madrick, Will Germany Bully Europe Over the Brink?
Sunita Narain, The inconvenient truth

What will the presidential election in November mean for U.S. environmental policy? Although we don’t yet know who the Republican candidate will be, we know all too well what will be on his environmental agenda. The endless televised debates have exposed what the New York Times called “the broken windows of the Republican idea factory.” It’s not a pretty sight.

The candidates all share the same approach to the environment. Ron Paul plans to govern primarily by abolishing things. His hit list includes America’s foreign wars, but also the Federal Reserve, most federal taxes, the Environmental Protection Agency (EPA), and all limits on offshore drilling and the use of coal and nuclear power. Rick Santorum agrees that energy companies must be entirely deregulated. Newt Gingrich will build a moon colony by 2020, and will replace the EPA with a new agency that “will operate on the premise that most environmental problems can and should be solved by states and local communities.” Mitt Romney promises to “eliminate the regulations promulgated in pursuit of the Obama administration’s costly and ineffective anti-carbon agenda,” and to slow down or block regulations in general whenever industry complains about their costs (i.e., always).

Do we really need to slow down the snail’s pace of current environmental regulation, and pay more attention to industry as it bemoans the cost of compliance? Consider the case of coal ash: produced in stupendous quantities by coal-burning power plants, it contains dangerous concentrations of arsenic, lead, mercury and other toxic metals. Improper disposal has led to contamination of groundwater in many communities, and to occasional disasters such as the billion-gallon sludge spill that inundated Kingston, Tennessee in 2008.

This looks like the poster child for hazardous waste regulation – except that the coal industry has consistently used its considerable political clout to win special treatment. Back in 1980, near the dawn of modern waste regulations, Congress directed EPA to study coal ash in detail before applying hazardous waste rules to it.

That process of study has already stretched over more than 30 years. Under the Obama administration, closure was finally in sight; in 2009, EPA Administrator Lisa Jackson said she would complete regulation of coal ash that year. It turns out that the industry’s clout is undiminished, and the revised Obama plan is to punt until after the election. In January a coalition of environmental groups announced plans to sue EPA to force regulation of ash disposal.

Industry’s grumbling about regulatory costs has taken two forms. One is the claim of job losses: regulation of coal ash as hazardous waste, according to an industry-sponsored report, would eliminate more than 300,000 jobs a year. I re-examined their report and found it to be close to a complete fabrication; using standard methods of economic analysis, regulation of coal ash as hazardous waste would cause a net annual gain of 28,000 jobs.

A more exotic claim is that the stigma created by regulation of coal ash disposal would destroy the market for ash reuse. More than one-third of coal ash is recycled, often used in construction materials such as concrete, cement, and wallboard. Although EPA’s proposed rules explicitly exempt ash recycling, the industry claims that regulation of ash disposal as hazardous waste would stigmatize all uses of ash, including recycling.

If coal ash disposal bears a regulatory stigma, is it deserved? Nuclear waste is stigmatized as dangerous, which is a huge setback for any plans you might have to bury it in your backyard. No one, however, would count the lost income from your inability to open a backyard nuclear waste dump as a cost of regulation. Nor would we count the loss of income if sales dropped for a different product that was mistakenly stigmatized as nuclear waste. The latter is exactly parallel to the purported stigma effect on coal ash reuse.

Liz Stanton and I critiqued the stigma theory in testimony on ash disposal rules in 2010. At the time, the idea seemed purely hypothetical. Now the industry alleges that regulatory uncertainty and “toxic” publicity are already driving down recycling; after soaring under the previous administration, the ash recycling rate stalled in 2008-2009 and declined in 2010.

The industry has missed the obvious explanation for these trends. Coal ash is created by electricity generation; ash reuse often occurs in construction. In the economic boom before 2008, construction grew more rapidly than electricity generation, so markets for ash reuse expanded relative to the supply. In the crash after 2008, the reverse was true: construction declined more steeply than electricity generation, so reuse markets shrank relative to ash supply.

Is regulation too expensive because it calls hazardous materials hazardous, and clueless customers could accidentally extend the resulting stigma to other products? In rational debate in ordinary times, this notion would be greeted with derisive laughter, at best. Yet in a year when leading presidential candidates discuss statehood for a non-existent future moon colony, or plans to make immigrants engage in voluntary self-deportation, it’s hard to know what will count as serious.

The current administration’s environmental policies have frequently been a disappointment, but the choice in the November elections seems sure to be between disappointment and disaster.

The audacity Germany has shown in floating a demand to manage Greece’s finances is a window on the leaders of that country and how much perspective they’ve lost. Let’s be clear; not all in Germany agree with this narrow, insensitive stance and the uninformed and uneducated demands for austerity economics in debt-ridden and recessionary nations. For example, there are political parties in Germany that want their country to take the lead on a Marshall Plan for the periphery of the eurozone. But they are not the ones setting policy.

I am tempted to say that antediluvian economics is ruling in Germany, but it may not really be about economic theory, but rather superior pride, irrational fear of inflation, and perhaps vindictiveness. It’s as if a German version of our own Tea Party is now running economic policy in Europe. Germany reduced its unit labor costs beginning in the late 1990s, which were higher than much of the rest of the EU, but with the euro fixed, they benefited as their export prices remained low. Could they have done well without their eurozone trading partners buying more from them than they were selling? And they lent them the money to do so. Do they have no moral obligation here? Without the fixed euro, the DM would have soared.

Then there is David Cameron of Britain and his finance minister lecturing the rest of Europe about how to run their economies. Move over Monty Python. As everyone now knows, Britain’s GDP is still below its pre-recession high, its deficit is high and not falling as promised, it may have slid into recession, and often ignored, average wages are well down since a recovery supposedly began. The bombast with which Cameron proclaims the rightness of his austerity economics while his people suffer is right out of school-boy debating. This time his countrymen will lose the debate, not only him.

There are some hints that people of influence are talking sanely and recognize growth is necessary and that austerity in this environment is tragically anti-growth. Some believed there would be some actual policy initiatives in Monday’s summit, but there weren’t. Instead, the EU agreed to a nutty deficit limit for all its nations. The good news is that they won’t abide by in a crunch. Must we remind ourselves yet again that it was Germany that conspicuously violated the prevailing EU limits on deficits to 3 percent of GDP when it had problems? Some say the current limit is over a full economic cycle and therefore not that stifling, but 0.5 percent of GDP is stifling any way you size it up.

Other analysts are saying that now that Germany has won this round it will support further lending by the European Central Bank. What a group! Remember when Trichet, then the head of the ECB, actually raised interest rates in the spring of 2011? It is all a matter of confidence, he said. But trying to cut spending in the face of recession will not generate confidence; only renewed growth will.

It looks like Spain may have had enough of austerity economics. After all, it didn’t run crazy government deficits in the first place. I bet few non-expert citizens know how little government budget deficits had to do with the crisis, including in the U.S. For a long while, Spain’s leaders kept promising they would meet reduced deficits target, but slow growth and suddenly outright negative growth is reducing tax revenues far faster than expected. Spain is a dog chasing its tail, and it may finally realize it. Deficits as a percent of GDP come down a bit at the expense of a recession and high unemployment, but not nearly enough to satisfy Germany (or, apparently, bond markets) or to meet political promises. If Spain pursues further austerity, it may remain in recession for several years. What will that do to their democracy? Let’s hope they stop.

The Greeks would not stand for Germany running their country. Big surprise. Sarkozy then said no one should stand for it, and Merkel apparently backed off. Who knows if she was ever foolish or insensitive enough to believe in it? But she has some mighty thick-headed colleagues in her country to deal with. Meantime, Portugal is flailing, deep into recession, so it’s not only Greece we must worry about. Spain just reported negative growth. Ireland remains a mess, despite momentary cheers that austerity was working. Alas, GDP is still 10 or 15 percent below its pre-recession high there.

Germany wants to cure the problem by getting wages to fall — a solution it imposed on itself in the late 1990s — in Greece, Spain, Portugal and so on. It is commonly called an internal devaluation. Had everyone not been linked to the euro, some could have devalued explicitly. With an internal devaluation, these countries would allegedly reduce their European imbalances by importing less and exporting more as prices fell — and in the case of Greece in particular, attracting more tourists as prices fell. This is a long, painful process that will probably only marginally change imbalances.

Europe needs growth, but it is being handed recession by the Germans. Growth builds tax revenues. It’s just like the old days when even many economists believed a recession just cleaned out the dead wood so we could rebuild, which led to self-destructive policies in the early 1930s. Now we have learned that the ugly part of recessions is that they feed on themselves and sink economies deeper, clean out more new wood than old, have grave long-term consequences for standards of living, and can destabilize democracies.

Any good news? As recession hits, talk has increased that austerity is not working, as noted above. If Germany itself begins to suffer some pain because it can’t sell its exports, the nation may indeed wake up. The self-righteous there may at last be overwhelmed by the rational and sensitive.

Europe, and most importantly Germany, needs to encourage its central banks to lend more. It needs to build its rescue fund, and ultimately it needs to sell eurozone-backed bonds to generate more rescue money and enable it to transfer funds to needy countries as they scale back on spending so that citizens do not suffer so much. The U.S. does just this. There is no mystery, except one. That mystery is how nations repeat their follies so regularly in history.

For all I’ve said, I am not completely pessimistic. I see the glimmer of a horizon of hope. I think most of Europe believes in the euro and a united continent. I think they will save the day, but just by a hair’s breadth. And that’s too close for comfort. There is a chance the ship will sail too close to the horizon and fall off the earth.

This piece was originally published at New Deal 2.0.

Ecuador must be one of the most exciting places on Earth right now, in terms of working towards a new development paradigm. It shows how much can be achieved with political will, even in uncertain economic times.

Just 10 years ago, Ecuador was more or less a basket case, a quintessential “banana republic” (it happens to be the world’s largest exporter of bananas), characterised by political instability, inequality, a poorly-performing economy, and the ever-looming impact of the US on its domestic politics.

In 2000, in response to hyperinflation and balance of payments problems, the government dollarised the economy, replacing the sucre with the US currency as legal tender. This subdued inflation, but it did nothing to address the core economic problems, and further constrained the domestic policy space.

A major turning point came with the election of the economist Rafael Correa as president. After taking over in January 2007, his government ushered in a series of changes, based on a new constitution (the country’s 20th, approved in 2008) that was itself mandated by a popular referendum. A hallmark of the changes that have occurred since then is that major policies have first been put through the referendum process. This has given the government the political ability to take on major vested interests and powerful lobbies.

The government is now the most stable in recent times and will soon become the longest serving in Ecuador’s tumultuous history. The president’s approval ratings are well over 70%. All this is due to the reorientation of the government’s approach, made possible by a constitution remarkable for its recognition of human rights and the rights of nature, and its acceptance of plurality and cultural diversity.

Consider just some economic changes brought about in the past four years, beginning with the renegotiation of oil contracts with multinational companies. Ecuador is an oil exporter, but had benefited relatively little from this because of the high shares of oil sales that went to foreign oil companies. A new law in July 2010 dramatically changed the terms, increasing the government’s share from 13% to 87% of gross oil revenues.

Seven of the 16 foreign oil companies decided to pull out, and their fields were taken over by state-run companies. But the others stayed on and, as a result, state revenues increased by $870m (£563m) in 2011.

Second, and possibly even more impressively, the government managed a dramatic increase in direct tax receipts. In fact, this has been even more important in revenue terms than oil receipts. Direct taxes (mainly corporation taxes) increased from around 35% of total taxes in 2006 to more than 40% in 2011. This was largely because of better enforcement, since the nexus between big business and the public tax administration was broken.

Third, these increased government revenues were put to good use in infrastructure investment and social spending. Ecuador now has the highest proportion of public investment to GDP (10%) in Latin America and the Caribbean. In addition, social spending has doubled since 2006. This has enabled real progress towards the constitutional goals of free education at all levels, and access to free healthcare for all citizens. Significant increases in public housing have followed the constitution’s affirmation of the right of all citizens to dignified housing with proper amenities.

There are numerous other measures: expanding direct public employment; increasing minimum wages and legally enforcing social security provision for all workers; diversifying the economy to reduce dependence on oil exports, and diversifying trading partners to reduce dependence on the US; enlarging public banking operations to reach more small and medium entrepreneurs; auditing external debt to reduce debt service payments; and abandoning unfair bilateral investment agreements. Other efforts include reform of the justice system.

One exciting recent initiative is the Yasuní-ITT biosphere reserve, perhaps the world’s first attempt to avoid greenhouse emissions by leaving oil underground. This not only protects the extraordinary biodiversity of the area but also the habitats of its indigenous peoples. The scheme proposes to use ecotourism to make human activity compatible with nature.

All this may sound too good to be true, and certainly the process of transformation has only just begun. There are bound to be conflicts with those whose profits and power are threatened, as well as other hurdles along the way. But for those who believe that we are not condemned to the gloomy status quo, and that societies can do things differently, what is happening in Ecuador provides inspiration and even guidance. The rest of the world has much to learn from this ongoing radical experiment.

This piece was originally published by The Guardian.

In an article in Newsweek, Niall Ferguson argues that, the main reason why Americans should care about the European debt crisis is that “what is happening in Europe today could ultimately happen here.”

I have news for Professor Ferguson.  He has his diagnosis the wrong way around.

An important reason why Europe is in its current debt crisis is because for decades it has been emulating the US example of creating a permanent “culture of debt”.

I use the term “culture” here deliberately.  The global debt crisis is not just about the growing government debt burdens of economies, nor about the financial liquidity crisis plaguing banks.  The true debt crisis is much deeper than that.  It involves entire economies and societies evolving towards a mind-set in which more and more benefits are expected today –  but any costs are either increasingly postponed to the future, or preferably, dumped on others.

The problem with such a mind-set is that it ultimately leads to economies creating debt rather than wealth.

In a previous blog post (Can’t Pay? Won’t Pay!) I posed the question: What do the worldwide debt crisis and global warming have in common?

They both represent economies drawing down assets faster than they can replenish them.

In the case of the debt crisis, economies are spending more wealth than they are accumulating.  In the case of global warming, we are using up nature’s capital and its vital services at an alarming rate.  Rather than adding to wealth – both financial and natural – economies are squandering it.  This is not a new problem but has occurred throughout history, as I pointed out in Scarcity and Frontiers: How Economies Have Developed Through Natural Resource Scarcity, although this tendency has accelerated in recent times.

Which economy has led the way in creating both types of debts?

The United States, of course. For decades.

Until recently overtaken by China, the US economy was for years the number source of global greenhouse gases, followed closely by the European Union.  US households have carried the largest debts of all consumers, although evidence suggests that UK households may now be the biggest debtors.  Other European consumers have been quick to imitate this pattern, too.  The US economy has been running chronic trade deficits since the 1960s, and paying for it by selling financial assets, property, US government bonds and any other domestic economic assets available to foreign investors.  And, we all know what that global financial deal led to in 2008-9!

Our culture of debt also extends to management of our other two vital economic assets – human and natural capital.

Average student loan debts incurred by US graduating college seniors in 2010 $25,250, which is 5% more than the previous year.  Yet, 2010 graduates experienced an unemployment rate of 9.1% , and the average pay for those with jobs is $50,034.   A highly skilled workforce is valuable to the US economy and its prospects for growth.  But higher tuition costs, lower funding and expensive student loans means that we are forcing our most skilled laborers – university graduates – to go into debt before they even begin to put their human capital to work and collect any rewards for it.  Now, of course, the Europeans are also emulating the same student loan system that is at the heart of the human capital problem.  Caveat emptor!

We are also running down our natural capital rather than protecting or restoring it.  As I argue in my book Capitalizing on Nature: Ecosystems as Natural Assets, we are quickly entering into an Age of Ecological Scarcity.   Over 60% of the world’s major ecosystem goods and services have been degraded or used unsustainably. The demise of key global ecosystems include mangroves (35% either lost or degraded), coral reefs (30%) and tropical forests (30%).  Over the next 50 years, global biodiversity loss will accelerate, leading to the extinction of at least 500 or the 1,192 currently threatened bird species and 565 of the 1,137 mammal species.  Given these trends, it is unlikely that the world is ever going to “balance its budget” when it comes to managing ecosystems, biodiversity and other critical natural assets.

The “culture of debt” is certainly not just a European problem. Nor is it solely an American disease – although the US is clearly its main poster child.

The culture of debt has become a global issue, and it is not just financial, but defines how every society and economy now interacts with respect to their fundamental economic, human and natural assets.

Robert Skidelsky,Does Debt Matter?
Jeffrey Frankel,Will Emerging Markets Fall in 2012?
Olivier De Schutter, Taking Back Globalization
Bill Moyers on Occupy Wall Street
Milford Bateman and Ha-Joon Chang, Microfinance and the Illusion of Development: from Hubris to Nemesis in Thirty Years
Luiz Carlos Bresser-Pereira, Perverse dependence on Asia
Martin Wolf, The world’s hunger for public goods

What We’re Writing

Kevin P. Gallagher, Capital controls are not beggar thy neighbor based on his PERI Working Paper, “The Myth of Financial Protectionism: The New (and Old) Economics of Capital Controls”
Kevin P. Gallagher on capital controls on Global Policy TV
Jayati Ghosh, Could Ecuador be the most radical and exciting place on Earth?
Jeff Madrick, Obama Makes the Case for Government