SUSTAINABLE ECONOMY AND GOVERNANCE: Is it possible to guide the market forces?

Some say that what is happening is that we don’t know what happens. This thought of José Ortega y Gasset quoted in a moment of Spanish history’s great uncertainty could be mentioned as well these days.

We try to emerge from the economic crisis but the progress is slow, sometimes hardly noticeable, probably due to dynamics that are not much more favourable in the European and global context.

It is not easy to explain this reality in a few words. Without any pretention to do it, I wish to draft some tendencies that can be at the core of some of the problems we are facing.

On one hand, it is a matter of fact that there is a certain displacement of the economy towards emerging countries registering an appreciable growth. With minor labour costs, these countries attract foreign investments encouraging industrial offshoring processes. In parallel, the progress of technological development, information and communication technologies and robotization of industrial processes are causing an accelerated transformation of economy and work with an impact on quality and quantity of employment. The liberalization of markets has promoted the expansion of trade at a global level, including the integration to global economy. At the same time, there is a production’s concentration process in multinational companies, responsible for global value chains and representing 80% of global trade. With respect to funding, we notice a high volatility of capital flows that, associated to the variability of fuel prices, creates distortions at a micro and macro level. And the environmental excesses of a highly competitive industry are contributing to the exhaustion of some resources and to the damage of ecosystems.

These global dynamics are creating some of the effects and problems we are experiencing. We observe an increasing concentration of wealth and expansion of inequality. We tend to enhance the polarization of the world in progress areas and disadvantaged regions. The axiom that associates economic growing of GDP to employment increase is now questioned. And the possibility of unlimited growth in a world with limited resources. In addition, the lack of global governability able to regulate and minimize negative externalities, to establish mechanisms avoiding excessive economical polarization between countries is also highlighted.

What are the perspectives expected if we don’t introduce corrections? Well, probably higher trade integration, higher wealth concentration, higher volatility of capital, higher inequality, higher job insecurity, higher environmental issues, higher immigration and less control of the states.

In a recent research[1], it has been concluded that even if supranational dynamics - or escaping the capacities of states - are increasing and have a high incidence, national governments still have great possibilities to guide the processes, minimize the negative impacts and take advantage of the opportunities related to the changing environment. This is much clearer if we incorporate the European framework in the debate. 

How is the European Union acting? If competencies in the economic area are a responsibility of the states[2], the European Union establishes a framework of economic governance (and ensure its compliance), defines the strategy of competitiveness and European growth (Europe 2020). It is responsibility of the states to develop the reforms[3] required in each country to make it reality.

The strategy Europe 2020 is based on knowledge, innovation as well as sustainable and inclusive development. It is a consistent strategy facing the problems of European loss of competency through a knowledge-based society offering to guide the growth towards the production of goods and services with a higher added value and promoting the sustainability market. Furthermore, Europe is sponsoring interesting initiatives such as the formation of clusters[4], promotion of circular economy and social economy, progresses in CSR and corporative government, etc.

We need to lay the foundations of an economy whose forces lead us to more positive externalities.

However, it is not enough to deploy a strategy which makes us more competitive in our global context. In parallel, we need to lay the foundations of an economy whose forces lead us to more positive externalities.

In reality we are facing the dilemma of assuming the destiny offered by global dynamics or challenging them and try to reorient them in order to expand their capacity to create positive effects for the society.

In a previous work “How can we progress towards a new economy?”[5], some ideas were detailed, for example how to evaluate the companies (adding social and environmental dimensions) and offer citizens the possibility to discriminate against the quality of companies according to these aspects and not only to the price of products and services (establishing a simple labeling making easier the consumer’s decision according to sustainability criteria). These are key aspects to progress. And Europe is well positioned thanks to its trade capacity, the market volume created and its role as a reference for environmental standards. In this sense, the European Commission could sponsor an evaluation system of corporative activity including social and environmental parameters, as well as standardized information code to consumers allowing discriminating against firms according to these aspects.

But how can national states act? Firstly, for European countries, making the European strategy reality through the adaptations needed, and taking advantage of the opportunities derived from its diverse and varied programs. And, in parallel, developing the incentives required at a national level to transit towards a more sustainable and inclusive economy.

Public administration has a great potential as a facilitator for the extension of sustainable economy. Incentives can have different natures, normative changes, regulations, taxes, grants, advantages or bonus, etc. The aim is to create the bases so that public and private actors invest and opt for activities contributing in a positive way to environment and society in general. 

And there is a lot to do. For example: better energy regulation promoting domestic production and renewable energies, promotion of the energy rehabilitation of buildings, reduced type of VAT to products with a positive environmental impact (products framed in what we call circular economy, organic fertilizer derived from organic agriculture, etc), enlargement of deductions for environmental investments in corporate taxes, reduction of taxes for social enterprises and cooperatives, socio-environmental criteria in public purchases, tax incentives in Socially Responsible Investments, tax deductions to banks financing sustainability investments, new PIT (Personal Income Tax) deductions for the purchasing of sustainable transport, etc.

It is important to conclude that positive regulation or incentives such as those mentioned above are not competing with markets performance but guiding them in order to make their results more favourable for the society. It is not a question of putting arbitrary restrictions to companies but to benefit those that make extra efforts to bring more value to society without creating additional problems. We need more companies and more employments, but business has to bring more sustainable effects and externalities, valued by the society. In the end what is at stake is to put markets, to a larger extent, at the service of society.

Autor: Fernando Varela de Ugarte

This post has been published on the Blog Society Gov 

[1] Research from entre Paréntesis: “How far  can the State go”

[2] Except monetary policy

[3]In Spain was implemented the Reform Programme (2013-2016) from the Ministry of Economy and Competitiveness

[4] Clusters: group of specialized companies that cooperate to take advantage of synergies, promote the Exchange and innotation creating opportunities for their members. See “EU Cluster Portal”

[5] Published by the initiative New Ways Sustainability.  Available on the digital platform ISSUU