Now that Europe’s debt crisis is unfolding all around us, shouldn’t we question why the world is determined to live beyond its means and not worry about how it sabotages our common future?
The debt crisis is merely a symptom of a deeper malaise. The fact is that countries, private companies and individual households can run only if they can borrow against their assets and hope that the debt will grow slower than the value of their assets. Most financial analysts will tell you now that this business is doomed because of the Ponzi-scheme nature of the loan business, in which borrowing is used to speculate to get more loans. As a result, repayment becomes difficult and, over time, impossible.
But this analysis is myopic since it misses the real nature of the problem: economic growth means living beyond one’s means. The cost of development has risen to such an extent that nothing is possible without loans or subsidy. Take agriculture in the debt-stricken rich world. It is a fact that growing food is now so expensive that it needs huge subsidy from the public exchequer to be feasible if not profitable. In 2010, the European Union spent some $70-80 billion (47 per cent of its budget) on direct payments to farmers to keep them in business. It’s the same story in other parts of the developed world. But what is not explained is that this subsidy is needed because of rising costs of land, labour, other inputs and environmental safeguards. Growing food is indeed expensive.
Or take education. In the US, student debt has increased sharply —from $80 billion in 1999 to anywhere between $550 billion and $800 billion by June 2011, according to US Federal Bank estimates. Now as unemployment looms, loan delinquency is on the rise since graduates do not have the money to pay back. By June 2011, student loan delinquency was almost as high as credit card non-repayment rates of 12 per cent. But what is not discussed is why the cost of education, particularly in the for-profit college industry, is increasing and how sustainable is this rise in the long run. The education story holds good for other sectors too. Rising health costs mean higher costs of insurance or lack of medical support for most. The list goes on.
The fact is that the cost of development is high. It makes money for a few people, but is unaffordable for most, because it is the public exchequer that has to subsidise this development. This, in turn, increases public debt to crippling levels.
What is not even discussed in the context of the current debt crisis is the other debt, which has been accumulated for growth. The release of carbon dioxide and other greenhouse gases by each country into the atmosphere has reduced the cost of its growth. It is a loan from nature for economic development. But the cumulative emissions of a country — the US has contributed 26 per cent to the stock of emissions between 1950 and 2007 — must be added to the cost of growth. In the case of natural debt, economies borrow the assimilative capacity of the environment by releasing waste gases faster than can be removed naturally. This natural debt is similar to the financial debt of a nation, because it is a loan from nature taken to grow faster and at lower costs.
The combined cost of growth is evident for everyone to see. The financial debt is leading banks and economies to collapse, while the natural debt is leading the climate to a catastrophe, adding to costs of economic repair and increasing the costs of growth itself.
This growth model should be on the agenda when the world meets to discuss climate change. The financial debt crisis is linked to the natural debt crisis — this is the real cost of growth that the world cannot afford.
Also, the question is whether the still-emerging world can afford this costly growth model. Remember that the cost of energy today is higher than it was when the now-developed world was building its infrastructure for development. Also remember that infrastructure in the emerging economies has not even been built. Financial loans are crippling the developed world now, when its development infrastructure is more or less in place; when its cost is to maintain this infrastructure or to regenerate or improve its efficiency or environmental performance. Also, its population growth is stable or even negative. This does add to costs that need to be paid to ageing segments, but it does mean that it has fewer, or an equal number of, people to provide for. But our world needs development that should reach millions of people — and millions more will be added to its populations in the years to come.
It is time the world asked some really tough questions and looked for new answers. Can we go ahead with this unaffordable and unsustainable model of growth? Can we not do better than tinker with the same economic systems that only bring more pain and more system collapse? It is time we joined the dots – the financial debt and the natural debt – to look for the answers that matter.
