By Pavan Sukhdev
If corporate profits and growth in GDP were adequate indicators of human progress, the planet and society would be doing just fine. In the US, corporate profits soared from 3% of GDP to 15% of GDP from 1980 to 2010, but meanwhile, household real incomes and employment fell repeatedly. GDP growth in both China and India was in the high single digits over the last decade, but ecological disasters increased and social disparities widened. Much has been said (including by me) about why the big problem is our current economic model : a “brown economy” that creates environmental risks, ecological scarcities, and social inequity whilst trying to improve our well-being. It fails to deliver to reasonable expectations, so transition to a “green economy” is the answer.
True, but how and why will that ever happen?
Two-thirds of the world’s economy is private sector, and today’s corporation is hard-wired to deliver its best performance in a “brown” economy, measured the “old” way: narrowly accounting for financial profits, ignoring social costs. Add up all these social costs (or “negative externalities” as economists call them) of doing business as usual, and you have it : a world that gets environmentally, ecologically, and socially poorer whilst corporations and their shareholders get financially richer.
This is not a small problem. Corporate “externalities”, the unaccounted public costs of the top 3,000 listed corporations doing “business as usual”, are an estimated US$ 2.2 Trillion of social costs every year, or 3.5% of global GDP. In our relentless pursuit of profits and GDP we are now living by consuming the earth’s capital, not its interest. This cannot go on.
At a ‘macro’ level, the problem can be broken up into four component problems : excessive demand, production at a social cost, overuse of earth’s resources, and no measurement of anything that really matters – especially ! These problems cannot be solved at a “macro” level without also fixing their drivers at a “micro” or corporate level. But what are the main drivers that we need to fix?
Excessive demand is driven mostly by a culture of consumerism built and sustained by marketing & advertising, which indiscriminately turns human insecurities into wants, wants into needs, and needs into demand and production. Harmful or misleading advertising (eg: cigarettes, infant formula) takes decades to be stopped or corrected.
Production is increasingly in the hands of large and fast-growing multinationals (MNC’s), who arbitrage cheap resources from ill governed African regimes, cheap labour markets in Asia, manufacturing subsidies from development-hungry nations, and retail margins from rich consumer markets. Such flexibility is possible because finance is cheap and plentiful and value-chains are international. However, excessive use, mis-use, or abuse of leverage has driven all major recessions of late : GFC 2008, Asian Debt 1998, and even in the ‘80’s Savings & Loans crisis and the Latin American debt crisis. Corporate behemoths become “too big to fail” and are bailed out with public funds: unlike banks, they are not forced to set aside capital against potential losses.
Over-use of resources – minerals, fuels, and also the atmospheric resource that fossil fuels pollute – is driven by a lack of incentives for resource efficiency. We tax corporate profits, but scarcely tax resource extraction. Taxing the goods and not the bads is the problem, and it must be addressed by making more of a tax burden fall on resources
Yvon Chouinard, founder & CEO of Patagonia, says ““Everything manufactured comes with a cost that exceeds its price.” This home truth describes the problem of externalities – they are large and pervasive, growing larger, and impose huge environmental and social costs. Discovering them, measuring them, managing them and reporting them has to be part of the solution.
New “rules of the game” are needed, which include policies regarding accounting practices, taxation, financing and advertising practices which can result in a new Corporate model, which we call “Corporation 2020”. The output and profits of this new form of corporation will then add up to a green and inclusive economy, an economy of permanence that increases human wellbeing and social equity, whilst decreasing environmental risks and ecological losses and scarcities.