A critical year for climate change

2021 will set the direction for a decisive decade

The coming year will be critical in setting the direction for what is widely seen as the ‘decisive decade’ for action on climate change and the UN’s Sustainable Development Goals (SDGs).

Thankfully, contrary to earlier fears that climate action would fall victim to the Covid-19 pandemic, governments and corporates are instead strengthening their commitments to net zero. News that the EU increased its emissions reduction target for 2030, from 40% to 55%, has been followed by a pledge from China to aim for net-zero carbon dioxide emissions by 2060 and from Japan and South Korea by 2050. Meanwhile, the election of Joe Biden as US President is boosting hopes that the COP26 climate talks next November will lead to accelerating progress.

Key dates for climate policy

Dec 12                 Global Climate Summit (UN/UK)

Jan 5                      Georgia Senate Runoffs (will determine control of the US Senate)

Jan 25                   Climate adaptation summit (Netherlands)

March                   China’s 5 Year Plan and Vision, 2035 outline   

Q2                          US Budget approval under new Administration

Q2                          EU legislation on 2030 “Fit for 55 Package“ and sustainable finance 

TBD                        G20 Summit Italy

H2                          IPCC Climate Change reports on Mitigation (Jul) and Adaptation (Oct)

Nov 1-12              COP26 negotiations, Glasgow UK

Q4                          EU draft legislation on circular economy

One reason why climate action has fresh momentum is that policy-makers are folding it into their efforts to achieve a ‘just transition’ and ‘build back better’ by addressing social inequality and broader environmental goals. The pandemic is highlighting the connections between people and the planet. Indeed, that’s why the SDGs are presented as being indivisible.

This was the theme of the sustainability panel entitled ‘Building Back Greener and Better’* at the recent Institute of International Finance (IIF) Annual Members Meeting, which I had the privilege to moderate. The expert panel included Ben Caldecott (Oxford University), Elsa Polanza (Barclays) and Emmanuel Martinez (SocGen). It struck an optimistic note on the prospects for action from policy-makers, corporates and financial institutions in the coming year.

The video of the webinar is now available for viewing on YouTube

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Central Bank Digital Currencies: Challenges for Commercial banks


Digital currencies are rapidly moving up the agenda for commercial banks. Although Facebook has been forced back to the drawing board with its grand Libra global currency plan, the Covid-19 pandemic is giving dramatic impetus to the central banks’ studies of creating their own digital currencies. Aside from the sudden jump in cashless contactless payments, the pandemic is sparking renewed interest in the potential for central bank digital currencies (CBDCs) to expand the monetary policy toolkit to tackle a dramatic recession. CBDCs could help get cash or even loans quickly out to people and businesses, or allow interest rates to be driven into sharply negative territory. But the implications for the role and profitability of the commercial banks could be profound.

Until recently the commercial banks were working on the assumption that central banks would concentrate on Wholesale CBDCs rather than Retail CBDCs. This would not be disruptive. Indeed, it would largely be welcome for the commercial banks. Wholesale CBDC would only be available to selected financial institutions and would improve cross-border settlements issues by speeding up transactions while reducing costs and scope for errors.

But now commercial banks are having to tune in to the prospect of Retail CBDCs being launched. The consequences could be revolutionary. Banks could find themselves competing with the central banks as well as the Big Tech companies. Indeed, some of their activities might even be taken over by the central banks. Universal access to the central bank balance sheet, and the creation of a new-risk free asset, would create new opportunities but also raise new challenges for central banks, commercial banks and financial markets.

What form CBDCs take will undoubtedly be complicated by the fact that different central banks will pursue different motives, strategies and experiments. Aside from improving existing payments infrastructures, some will also be looking to promote financial inclusion or curb financial crime and the black economy.

Big questions revolve around how the private and the public sector will divide up their roles and responsibilities. One key choice would be over whether the Retail CBDC would be exchanged using account-based ledgers or digital tokens. Another would be whether it is distributed directly by the central bank or via banks or other intermediaries. In its purest form, an account-based directly issued CDBC would be particularly challenging for commercial banks. They would find themselves competing for deposits with the central bank, which would be especially hard if the CBDC offered attractive interest rates or if a crisis triggered bank runs. It also begs the question of whether and how the central bank would make loans.

Given that central banks, at least for now, lack the resources for such a radical takeover of banking functions, it perhaps more likely that CBDC will be distributed through banks and other institutions.  This would allow the central banks to avoid much of the cost and risk of screening and servicing customers, providing complementary services (such as cards and investment products), and building and running the technology and operations.

In principle, a token-based CDBC might be the least disruptive scenario since the tokens would effectively be digital versions of cash and avoid the burden of account management and verification. However, if this were to allow non-financial players like the Big Tech companies (such as Facebook with Libra) into digital finance this would increase competition in an already highly contested market, further reducing margins and challenging the banks’ customer relationships.

The emergence of CBDCs therefore raises some deep strategic questions for the future of the commercial banks, at a time when their profitability is already challenged. This gives a new dimension to their need to accelerate their digital transformations.

A version of this article, co-authored with my colleague Carlo Cocuzzo, appeared in edited form in OMFIF’s Digital Monetary Institute’s Journal, June 2020

Further references and links:

Central bank digital currency: Central banking for all, VoxEU, April 2020

Key Aspects around Central Bank Digital Currencies Policy report, CEMLA, May 2019

Central Bank Digital Currency Policy‑Maker Toolkit, World Economic Forum, January 2020

The technology of retail central bank digital currency, BIS Quarterly Review  March 2020


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The Three Pillars of Sustainability

Sustainability Pillars

In an extended ING version of my latest piece for Project Syndicate (see previous post) I present this graphic of the three pillars of a sustainable recovery. Among others, I draw on the work of Raghuram Rajan, in his book The Third Pillar: How Markets and the State Leave the Community Behind, Samuel Bowles and Wendy Carlin, in their paper Shrinking Capitalism, who emphasise the role of civil society alongside government and the markets. In my case, I place people at the top as they will ultimately dictate what constitutes sustainability.  I argued in Pandenomics that the Covid-19 pandemic has thrown a harsh spotlight on the competence of both government and business. It remains to be seen how far this will lead people to insist on an enhanced role in the recovery for civil society and local communities.


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Sustainable Recovery Must Be More Than Green

Climate Change

In an article for Project Syndicate, entitled “A Sustainable Recovery Must Be More Than Green” I argue that climate action needs to be closely tied to the urgent need to protect jobs and livelihoods. Otherwise, it risks becoming yet another casualty of COVID-19.

The narrative will need to shift from “green recovery” to “sustainable recovery,” a broader concept that puts people’s welfare front and centre. After all, climate action is just one of the UN’s 17 Sustainable Development Goals (SDGs), and it is not for nothing that people come first in the “triple bottom line” accounting framework of people, planet, and profits.

To be truly sustainable – both politically and economically – recovery policies will need the support of business and society alike. Achieving such broad buy-in will not be easy in societies that are already highly polarized politically (between left and right) and culturally (between “open” and “closed”).

Here, the US will be the critical battleground. If the Democrats take power in November and pursue highly progressive policies, they might jeopardize the growing support for climate action among moderate Republicans. If they fail to design policies with true sustainability in mind, they could set the stage for another backlash from the populist right.

The article discusses a full spectrum policy shift to balance the green gains from investment and subsidies against the political pains from taxes and regulation. The pandemic presents policy makers with a window of opportunity for this shift. Aside from the need to boost investment to revive the economy, government financial support to  gives them greater leverage over the priorities of embattled businesses. Moreover, low energy prices and falling technology costs could facilitate a radical shift in the tax burden towards carbon and digital and away from labour.

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Pandenomics – 15 ways that Covid-19 could change the world


The Covid-19 pandemic leaves us wrestling with a callous calculus: a crude and capricious trade-off between the tragic and huge loss of life and the many more livelihoods that will be lost.

We are nowhere near knowing how bad it will get, or when it will end. Varying behavioural and policy responses, and pervasive misinformation, are making matters worse. What is worrying is that the epidemiologists are warning that the disease could return later in the year, or even become endemic like colds and flu. But even if we hope that it will be over in a few months, and a vaccine is fast-tracked, the world will never be the same again.

The pandemic is set to shake up not just healthcare, but politics and business, the economy and financial markets, culture and society, lifestyles, the use of technology, well-being and the environment.

While the world will undoubtedly breathe a collective sigh of relief when the pandemic ends, it is likely to be left profoundly changed by the experience. Actions taken in the heat of the crisis will have lasting effects on attitudes, relationships and behaviours.

So how might the new world look? In a report for ING’s New Horizons Hub, I make a start on ‘pandenomics’, combining several disciplines to identify 15 shifts that may confront us over the coming years.

15 ways that Covid-19 could change the world

  1. Big government is back – Covid-19 has forced governments to intervene in the economy and daily life in a way unprecedented in peacetime. More changes will come after emergency lockdowns and support has ended.
  2. Peak populism – populist politicians will push their nationalist agendas, pointing to the dangers of unbridled openness, but some countries may embrace a more focused internationalism to tackle global problems.
  3. Competence matters – governments and companies that fail to show competence and compassion amid lost lives and livelihoods will rapidly lose trust and support. The recriminations may fuel ongoing conflict.
  4. From monetary to fiscal – a further radical transformation of macro policy will cast a long shadow. With fiscal rules cast aside, dealing with a massive build-up of debt will be an enormous challenge.
  5. Inequality matters – it’s not just a matter of fairness, it’s a matter of social stability and public health security. Society’s dependence on often low-paid and vulnerable people providing vital services is now in the spotlight.
  6. ‘Too many to fail’ – pandemic lockdowns will lead to a shake-up in the service sector, especially in high social contact areas such as leisure, which are dominated by small businesses, the low-paid and self-employed.
  7. Collateral damage – government intervention in the financial system will continue. Beyond a rethink of how to keep financial markets functioning in future crises, a surge in insolvencies will leave a painful legacy.
  8. Rethinking efficiency – the pandemic exposed the dangers of over-optimising processes, which leave little slack to deal with sudden setbacks. Instead of ‘just in time’, the ethos will shift to bigger ‘just in case’ inventories.
  9. Rethink risk management – businesses will shift from linear thinking based on quantifiable risks based on past precedent to a new focus on mastering uncertainty with resilience and agility.
  10. Rethinking supply chains – the fact that the pandemic emanated from China, the modern day ‘workshop of the world’, exposed the vulnerability of global supply chains.
  11. Expertise matters, and it needs to be diverse – on top of epidemiology, investments in science, both physical and social, will be needed to help inform difficult political, ethical and economic choices on future challenges.
  12. War on disease – the huge human and economic toll of pandemics will push investments in health research and systems to the top of the agenda and add to the urgency of addressing other global threats to sustainability.
  13. From physical to digital – sustained curbs on travel and enforced working from home during the pandemic will lead to a step increase in people interacting digitally, radically shaking up the structure of the economy.
  14. Lasting shifts in consumer behaviour and social norms – the mortal threat posed by social interactions has shifted our thinking about how we relate to our households, families, neighbours and communities.
  15. More benign surveillance of individual health and social interactions – the benefits of tracking of personal health and our interaction with others may be reconciled with privacy and security by decentralised technology.

The report highlights that talk of a V-shaped recovery following the Covid-19 pandemic is misplaced. Mass unemployment and bankruptcies will cast a long shadow, necessitating sustained state intervention. Nationalist responses will sustain protectionism and tension, delaying necessary international co-operation. The need to build resilience into production processes will carry a heavy cost, and the pandemic’s scars will lead to lingering risk aversion and caution. These factors will weigh on long term economic growth.

However, the challenges of the pandemic aftermath also present enormous opportunities to put the global economy on a more sustainable path. While creating resilience for households and businesses will be costly, the long run benefits of avoiding or mitigating catastrophes will be huge. The recognition of the downsides of hyper-connectivity will lead to smarter use of digital technology, and the societal pressure for greener and more social approaches will present opportunities for smarter, more far-sighted governments and institutions. Grasping these opportunities will not be easy and may take many years, but the mobilisation around them may help us get through the pandemic.

You can find the full report here: Pandenomics




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GDP – a Digital Remix

GDP Digital Remix


In a recent article for Project Syndicate, I argue that more than a decade after the global financial crisis, macroeconomists have failed to absorb three crucial sets of lessons. The models that most are using are still struggling to cope with disruptive change, and with the fact that both balance sheets and inequality matter.

Moreover, the key target of economic policy, Gross Domestic Product (GDP), doesn’t provide much help. So with a view to ‘remastering’ macroeconomics, in a new ING report, produced with the help of John Calverley, Carlo Cocuzzo and I investigate how GDP could be remixed. We pay particular attention to the impact of the rapid digitalisation of the economy that has been gathering momentum over the past 25 years. Pursuing the music analogy, our focus is on a digital remix of GDP.

The key conclusions, on conservative assumptions, are that:

  1. Official data understates US real GDP growth by 0.75% per annum, and overstates inflation by 0.4% due to inadequate measurement of the digital economy and the exclusion of investment in certain intangibles.

GDP Digital Remix Table

2. The under-measurement of the digital sector may be about 0.5% of GDP annually, which arises because of rapid price declines, the plethora of new goods and services and the extent of free goods. The improvement in quality is significantly under-measured so that output is understated and inflation overstated. Mis-measurement of the digital sector may go back 30 years or more but is likely an increasing problem as it becomes more pervasive in the economy.

Digital good price
*Note: hypothetical illustration

3. Correctly accounting for all intangibles by including them as investment could add 0.25% to GDP annually. Intangibles still left out by US statisticians include investment in brands, some types of intellectual capital, training, and the value of firms’ organisation and structure.


4. The under-measurement of GDP is probably even greater than the 0.75% p.a. we claim, perhaps 1% annually or even as much as 2% because of the growing importance of services in general, where the calculation of quality improvements is much harder than for manufacturing.

Services vs Manufacturing

5. US trend growth has slowed by about 1.1% p.a. since 2004, according to official figures. Not all of the slowdown can be explained by mis-measurement in the digital sector and intangibles, because some of the mis-measurement we find occurred prior to 2004. Nevertheless, we suggest that perhaps as much as half of this slowdown may be explained in this way.

US Trend GDP per capita

Why it matters

Official statistics suggest that productivity and trend GDP growth have slowed in the last decade and we are told that median living standards are little higher than 10 years ago in many advanced countries or even 20 or 30 years ago in the US. Our Digital Remix casts doubt on these assumptions, arguing that the data is overly pessimistic.

That said, the report cautions that there are other shortcomings in GDP as a measure of prosperity, such as failing to reflect non-market activities or environmental degradation, that may be less benign. But it is clear that the digital era has exposed, more than ever, the limits of GDP as a measure of welfare. And if ‘you manage what you measure’, as the old adage suggests, these GDP flaws raise troubling questions about government policy and economic decisions, which are liable to be distorted as a result.

Read the report in full here.


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Time for Macroeconomics to be Remastered

What Economists Need to Learn

In a new article for Project Syndicate, entitled  What Economists Still Need To Learn  , I argue that conventional macroeconomic models failed to predict, explain, or offer remedies for the global financial crisis. Yet a decade later, much of the profession remains in denial and treats the crisis as just a rude interruption.

I group the crucial lessons that macroeconomists need to learn into three main categories:

  1. economies are not self-correcting.
  2. balance sheets matter.
  3. distribution matters.

While some academic economists are making progress with more heterodox approaches, their insights have had little impact on the forecasting models still being used by practitioners in the policy-making and corporate world. Meanwhile, the global backlash against the economic and political status quo is changing the game while it is still being played. As talk of a global recession begins to grow, it’s worrying that macro-economists still have no clear idea what to do about it…

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The Circular Economy’s Six ‘C’ Challenge

Why market forces alone won’t drive it

In a recent presentation to the Financial Services Forum I addressed the financing of the Circular Economy. A growing number of companies are beginning to acknowledge its potential to deliver sustainable development. But adopting its zero waste philosophy of reduce, reuse and recycle – what I called the ‘veganism of sustainability’ – is easier said than done. Why aren’t circular business models taking off faster? Market forces alone plainly aren’t enough. Here are the six ‘C’ challenges:

circular economy market forces


  1. Consumer demand. A vocal minority of consumers are advocates of sustainable living, but few are willing to pay up for it. Surveys show that few consumers are prepared to pay more for green products, let alone ones that embrace fully circular principles. And what they tell pollsters may overstate their real appetite to do so. Lack of accepted definitions and labelling of circular products doesn’t help, but in any case businesses face the challenge of making them price competitive.
  2. Counter trends. Although sustainability is now a cultural trend, there are still cultural trends running in the opposite direction. Some business models are not merely waste-intensively linear, but actively accelerating resource use. Fast fashion has spurred rapid increases in clothing purchases and disposal, with so far limited push back. E-commerce is fuelling a want-it-now culture of over-ordering, fast delivery and return. Moreover, the burgeoning middle class in the emerging markets are embracing the consumerist habits of the developed world.
  3. CSR investor pressure. Businesses are also facing pressure to ‘go circular’ from investors adopting more ethical corporate and social responsibility (CSR) principles. But while this trend is growing, it is hampered by controversies over whether these principles lead to higher investment returns. Some studies show that they do, but the question of whether the profitability of sustainable principles are the cause or the effect of business success is unresolved.
  4. Costs. For many businesses it is cheaper to use virgin raw materials or brand new parts rather than to embrace recycling, reuse or reassembly. Prices of non-renewable resources, while volatile, have been cycling around a flat trend for decades, providing little incentive to limit their consumption.
  5. Culture. Apart from cost, it is simply easier for businesses to continue with traditional resource-using production and distribution methods. Although enlightened large corporations and idealistic start-ups are embracing circular principles, there is still a long way to go in shifting corporate cultures towards circular economy principles. In part this is because, unlike the traditional linear business model, the circular business model involves new forms of collaboration and transaction with companies along, and even outside, existing supply chains.
  6. Creativity. Having accepted the culture of circularity, companies need to innovate and invest in it. Creativity is required not just around eco-design, reuse, repair, and recycling, but also business processes, supply chains and market places for recycling and second-hand products, parts and materials.

Of these challenges, the final challenge of creativity is perhaps the most important. Innovative breakthroughs would go a long way in helping to address the other challenges. The precedent of the rapid progress in reducing the cost of renewable energy, and the development of new platform businesses, give hope that business can accelerate progress towards the pervasive adoption of the circular economy in the long term. But in the meantime, policy intervention is needed to incentivise action through taxes and subsidies, positive advocacy and proscriptive rules and regulations.


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The Great Disruption

PS cover 2019

The Great Disruption is the apposite title of Project Syndicate’s magazine for 2019. It explores the implications of the political fallout out from the financial crisis, globalisation, technological change and rising inequality. I was privileged to step into the panel debate at the recent launch event in London, chaired by Larry Hathaway and featuring Ngaire Woods and Lucrezia Reichlin. You can now listen to this on the Project Syndicate website here.

Here’s my contribution to the magazine, in which I explore how companies might deal with the Great Disruption:

Doing Business in the Great Disruption

Asset prices leave financial markets vulnerable to destabilising setbacks

A decade ago, the global financial crisis cast a spotlight directly on financial institutions; but that scrutiny has since morphed into a more general scepticism about corporate behaviour. While the tech giants that are driving the digital disruption have become the centre of attention, no company should assume that the Great Disruption will be a mere passing storm. A prudent outlook would accept that today’s polarization could get worse before it gets better. After all, populists have been on the march in the midst of a sustained economic upswing and falling unemployment. Just think what will happen when the next recession arrives. Though forecasters are not ringing alarm bells about a recession in 2019, high asset prices leave financial markets vulnerable to destabilizing setbacks. And while the current crop of populists might not fare well in the next recession, they could well be replaced by others with even more radical ideas.

Moreover, while politicians come and go, other key elements of the Great Disruption will endure. The new-technology genie is out of the bottle. The rapid deployment of digitalization and artificial intelligence (AI) will be hard to stop, owing not only to the pervasive benefits these technologies bring but also to the competition they have spurred between countries – led by the United States and China – to be the winner that takes all. Similarly, the environmental challenges of climate change and resource usage are not about to go away. If anything, they will intensify as a result of populist climate denial, delay, and prevarication. Accordingly, companies should think of themselves as polar explorers, whose top priority is always to avoid freezing to death.

To survive the Great Disruption, companies first need to be careful what they say. Policy advocacy risks triggering a backlash and boycotts, and one critical presidential tweet can send share prices tumbling. In an era of social media and fake news, active but sensitive reputation management is more challenging than ever.

Foreign companies must be attuned to local cultural diversity

Second, recognizing that trust in big business is fragile, corporate leaders need to understand not just populist politicians but also the motivations and desires of the people who support them. Foreign companies, in particular, must be attuned to local cultural diversity. And ensuring the privacy and security of client data is another critical ingredient in building and maintaining trust.

Third, companies need to be better prepared to weather shocks, by de-risking their operations and balance sheets. Scenario and contingency planning, along with stress testing, are crucial for building the resilience and flexibility needed for survival. In particular, complex international supply chains and lean inventory-management techniques can be caught out by capricious political decisions and other shocks. Once companies have built up resilience, they can start to look for opportunities that the Great Disruption may offer.

To that end, multinationals should start behaving more like ‘multi-locals’ With countries so internally divided, companies will need to pay more attention to the nuances of local interests when serving their customers. Looking beyond urban elites, there are profitable opportunities in catering to less advantaged segments of the population. These cohorts’ concerns are what governments – populist or not – are under increasing pressure to address.

A major focus in the months and years ahead will be the tension between the US and China

Moreover, digital technologies and AI are creating new possibilities to serve disadvantaged groups with segmented and personalized products. Already, policymakers in Europe and elsewhere have begun to look for ways to address the dominance of US and Chinese tech companies. If that increased attention leads to tax, data, and privacy policies which level the competitive playing field, there could be new business opportunities for others.

Companies also should consider adopting a “barbell” investment strategy: having made their core businesses resilient to polarization, they can reserve a small proportion of their investment budgets for bets that promise high pay-offs. This calls for agility because companies will need to respond quickly to changing circumstances. But so long as they keep bigger buffers and reserves, they will be able to pounce on bargains after negative shocks. Today’s stretched asset valuations suggest that such shocks are becoming more likely. But even if they don’t materialize in 2019, companies can start thinking through their options. A major focus in the months and years ahead will be the tension between the US and China, which may depress asset prices, presenting attractive entry points for the booming Chinese and intra-Asian regional markets.

Companies should play the long game on environmental sustainability

Finally, companies should play the long game on environmental sustainability. Populism and nationalism may be weakening cooperation on these global challenges, particularly now that

President Donald Trump has withdrawn the US from the Paris climate agreement. But this means that there will be an even greater need for action in the long run. Alternatively, the populists themselves may come to see the attraction of shifting taxation from workers – especially their core voters – toward fossil fuels.

This may not be imminent in the US, where Trump has committed to propping up the coal industry. But the falling cost of renewable energy presents a longer-term opportunity to make the shift away from fossil fuels. Not only will less expensive renewables depress fossil-fuel prices, but, absent policy action, they will also stimulate a counterproductive rise in energy consumption. To prevent this, policymakers could raise taxes on energy generally and use the revenue to fund cuts in other taxes.

This article appears in ‘The Year Ahead 2019: The Great Disruption’ published by Project Syndicate, and also on ING’s THINK website, here.

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Forecasting is Fallible, But Necessary

In my first piece for Project Syndicate I build on my earlier post on the lessons for economic forecasters.  The subtitle of their post prompted some questions about the usefulness of big data. There’s no doubt that economic forecasters can benefit from machine learning, which provides powerful ways of spotting patterns in past (big) data. Nevertheless, this focus on past data means that is of limited use for forecasting in the midst of uncertainty and unprecedented structural change…



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