On Tuesday I attended the ninth Business Week “European Leadership Forum”, also known by its Twitter hash tag #elf09. Business Week are to be congratulated for bringing together a fascinating group of industry leaders.
Here are a few of the points from the course of the day that made me think.
The threat of a new economic crisis
Professor Urs Muller, Managing Director and Chief Economist at BAK Basel Economics, had some worrying thoughts about the state of the global economy:
The good news is that the economic crisis is over. The bad news is that the conditions responsible for the crisis are still intact, and the next crisis is already brewing.
Like various other speakers and panellists, Professor Muller was concerned about the state of regulation of banking activities. As we discussed afterwards: “Who would be a regulator?”
It’s hard to identify and agree which elements of banking need new regulation regimes, and which don’t. However, action by one country alone (for example, by the UK) would fail, since it would merely drive key lines of business elsewhere. Coordination is needed – but hard!
I asked, how much time do we have? Do governments have around ten years to reach agreement and take action, or are things more urgent? Professor Muller replied that if matters were not resolved during 2010, it might already be too late. Unfortunately, the side effect of the current crisis appearing to be over, is that government attention is liable to diminish. Everyone is breathing a sigh of relief, prematurely.
This ominous discussion reminded me of remarks made by eminent economist and FT columnist John Kay a few days earlier, at a lunchtime meeting at the RSA, “Banking in the Wake of the Crisis: how will confidence be restored?” That meeting addressed the questions:
- Have banks and bankers have really learned the lessons of the crisis?
- Are we in danger of falling into a dangerous cycle once more?
John Kay gave the answers No and Yes.
On a more positive note, Professor Muller highlighted the FSB (Financial Stability Board) as a cross-border organisation with a strong potential to address banking system vulnerabilities and to develop and implement strong regulatory, supervisory and other policies in the interest of financial stability. John Kay’s recommendations – in favour of what is called “Narrow banking” – are contained in a 95-page PDF “The Reform of Banking Regulation” available from his website.
In search of the European Bill Gates
Questions posed included why there was no real equivalent, in Europe, to Bill Gates, and which field of technology is likely to prove the most important in the near-term future.
I liked the answer given by Professor Dutta:
The next big wave of hitech innovation is improving the quality of life – including both improving the environment, and improving healthcare.
However, these technologies should not be viewed as alternatives to ICT (Information and Communications Technology). Instead, these technology areas will succeed by implementing the next wave of ICT. But instead of just experiencing “the Internet of websites”, we will see “the Internet of things”.
Alternatives to dependency on growth
Running near the surface of much of the discussion during the day was the theme of growth and sustainability.
Opening keynote speaker Stephen Green, Group Chairman of HSBC Holdings Plc, put it as follows:
The biggest change arising from the economic crisis is that companies must stop focussing on short-term value maximisation, and should instead focus on sustainable value maximisation.
Later, from the floor, Professor Dutta posed the simple question,
Is growth good?
I didn’t hear a satisfactory answer. I did hear the answer that “business needs growth”, but that just skirts the issue.
Interestingly, Mikhail Gorbachev addressed the same issue in his keynote address at the General Assembly conference of the Club of Rome on 26 October 2009, in Amsterdam. Here’s an extract:
A low-carbon economy is only a part of this new economic model we need so badly today. The model that has been around for the past five decades should be replaced. Of course, it cannot be achieved overnight, but I think we can already discuss reference points and general contours of this new model.
It means, above all, the overcoming of the economy’s ‘addiction’ to super-profits and hyper-consumption, which is not possible unless societies reshape their values. It means shifting of the increasingly larger swaths of the economy to production of ‘social goods’, among which the sustainable environment takes a centre stage.
These social goods also include human health in the broad sense of the word, education, culture, equal opportunities, and social unity, including the elimination of the glaring gaps between the rich and the poor.
Society needs all this not only because ethical imperatives dictate it. The economic benefits to be brought by these “goods” are enormous. However, economists are yet to learn how to measure them. An intellectual breakthrough is needed here. A new model of economy can not be built without it.
Energy and sustainability
The #elf09 gathering split up during the afternoon into a series of six parallel discussions. Along with around 40 other people, I took part in a roundtable discussion on “Energy and sustainability”.
The discussion was led by Mark Williams, Downstream Director of Royal Dutch Shell, and Sophia Tickell, Executive Director of SustainAbility.
Mark Williams made the following points (I apologise in advance for condensing a much richer set of messages):
- Almost certainly, the total energy needs of the world will double by 2050;
- It seems highly unlikely that this vast energy requirement can be met by non-fossil fuels;
- We need to prepare for a scenario in which at least 70% of the world’s energy needs in 2050 will still be met by fossil fuels;
- In other words, “we have to come to grips with carbon”;
- Even as we continue to rely on fossil fuels, we have to “decarbonise” the system;
- There’s no reasonable alternative to developing and deploying technology for widespread CCS (Carbon Capture and Storage);
- It’s already possible to store CO2 underground, safely, “for geological amounts of time”;
- It’s true that there is public concern over the prospect of leaks of stored CO2, and over failures in warning systems to detect leaks, but “governments will have to take the lead in public education”.
Timescales to adopt new sources of energy
Mark Williams made the point that, so far, it has taken any new source of energy at least 25 years to achieve 1% of global energy delivery. That point should be kept in mind, to avoid anyone becoming “too optimistic about new energy sources”.
In response, people around the table asked:
- Would the equivalent of a war-time situation provide a different kind of reaction from both markets and governments? Do we have to accept that we’ll have the same mindsets as before?
- Don’t underestimate “the tyranny of the installed base”;
- Alternative energy sources have to face very significant issues with storage and transport: “electricity is not easily stored”.
I tried a different tack:
- Consider the fact that, 25 years ago, there were virtually no mobile phones in use. Over that timescale, enormous infrastructure has been put in place around the planet, and nowadays more than half of the world’s population use mobile phones. Countless technical difficulties were solved en route;
- Key to this build-out has been the fact that many companies were prepared to make huge financial investments, anticipating even larger financial paybacks as people use mobile technology;
- If energy pricing is set properly (including full consideration for “negative externalities“), won’t companies find sufficient incentives to invest heavily in sustainable energy sources, and develop solutions – roughly similar to what happened for the mobile industry?
- As a specific example, what about the prospects for gigantic harvesting of solar energy from a scheme such as Desertec (as described here)?
- The investment needed for new energy sources (at the scale required) dwarfs the investment even of the mobile telephony industry;
- New energy sources have too much ground to catch up. For example, every year, China installs as many additional coal-based energy generators as the entire existing UK installed base of such generators.
Around the table, it seemed generally agreed that we do need to prepare for a scenario in which fossil fuels remain in very substantial use over the decades ahead.
The role of green subsidies
Sophia Tickell raised the question of whether government subsidies could make a significant difference to the speed of transition to renewable energy sources. South Korea is perhaps the leading example of where a government green stimulus package is having a significant effect.
Attractive beneficiaries for government subsidies (to recap earlier discussion) would presumably include products for electrical storage and CCS.
On the other hand, it’s possible for governments to pick losers as well as winners, with consequent waste of public funds. Also, government subsidies can in some cases lead to technology failing to develop as efficiently and as innovatively as it ought to. For this reason, it was suggested that “the environmental movement may have oversold the idea of a Green New Deal”.
- Government should be putting the right framework in place, for market mechanisms to drive the selection and development of desirable products. This includes identifying and allocating the costs of negative externalities, and establishing a proper “level playing field”;
- When a desirable momentum is emerging in the marketplace, governments should be getting behind it.
I asked: is it already clear what is this “desirable momentum” that governments should be getting behind? People around the table started listing options. It quickly became a long list. This provoked the following insightful comment from Juan Pablo Crespi, COO Europe of Alkol – to whom I’ll give the final word:
There are too many momentums – but not enough permanentums!