An Era of Capital Misallocation

Posted on 19. Apr, 2011 by in

“Several concurrent crises have either sprung up or accelerated during the last decade: crises in climate, biodiversity, fuel, food, water, and of late in the financial system and the economy as a whole. Accelerating climate-changing emissions indicate a mounting threat of runaway climate change, with potentially disastrous human consequences. The fuel price shock of 2008, and a related flare up in food and commodity prices, both indicate structural weaknesses and risks which remain unresolved. Rising demand, forecast by the International Energy Agency (IEA) and others, suggests an ongoing dependence on oil and other fossil fuels and much higher energy prices as the world economy struggles to recover and grow.

As regards to food security, we are seeing neither widespread understanding of the nature of the problem, nor globally collaborative solutions for how we shall feed a population of 9 billion by 2050. Freshwater scarcity is already a global problem, and forecasts suggest a growing gap by 2030 between annual freshwater demand and renewable supply. The outlook for improved sanitation still looks bleak for over 2.6 billion people; 884 million people still lack access to clean drinking water. Collectively, these crises are severely impacting our ability to sustain prosperity worldwide and to achieve the Millennium Development Goals (MDGs) for reducing extreme poverty. They are compounding persistent social problems from job losses, socio-economic insecurity and poverty, and threatening social stability.

Although the causes of these crises vary, at a fundamental level they all share a common feature: the gross misallocation of capital. During the last two decades, much capital was poured into property, fossil fuels and structured financial assets with embedded derivatives, but relatively little in comparison was invested in renewable energy, energy efficiency, public transportation, sustainable agriculture, ecosystem and biodiversity protection, and land and water conservation. Indeed, most economic development and growth strategies encouraged rapid accumulation of physical, financial and human capital, but at the expense of excessive depletion and degradation of natural capital, which includes our endowment of natural resources and ecosystems. By depleting the world’s stock of natural wealth – often irreversibly – this pattern of development and growth has had detrimental impacts on the well-being of current generations and presents tremendous risks and challenges for future generations. The recent multiple crises are symptomatic of this pattern.

Existing policies and market incentives have contributed to this problem of capital misallocation because they allow businesses to run up significant social and environmental externalities, largely unaccounted for and unchecked. “Unfettered markets are not meant to solve social problems” so there is a need for better public policies, including pricing and regulatory measures, to change the perverse market incentives that drive this capital misallocation and ignore social and environmental externalities. Increasingly too, the role of appropriate regulations, policies and public investments as enablers for bringing about changes in the pattern of private
investment is being recognized and demonstrated through success stories from around the world, especially in developing countries.”

Read the full report UNEP (2010) Towards a Green Economy (Synthesis report)

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