February 12, 2016 | by Andrew Tanabe
Financial instability, social inequality and environmental degradation – policy-makers in all countries face these global challenges. Which countries are doing best to address them?
As 2016 is still at its beginning, a new global consensus seems to have emerged on environmental, social and economic issues. While recovery from the financial collapse of 2008 continues to build with slow steps, a new vision for how the world plans to address the most pressing issues has come into greater focus. International economic, environmental and social equity issues, so goes the new thinking, must be understood as a series of deeply connected issues to be addressed through an integrated approach.
Like so many international issues, the solutions will need to be implemented at the domestic level. The Bertelsmann Stiftung’s Sustainable Governance Indicators (SGI) project offers an in depth, country specific lens to understand which countries in the OECD and European Union have been most successful at leading international work and implementing domestic measures in each of these areas. With demonstrated capacity for financial regulatory innovation, broad support for development aid, and continued environmental leadership, these countries are well positioned to shape policy and implementation debates in the coming decade.
When the global financial system crashed in 2008, shockwaves were felt throughout developed economies. These effects rippled through developing countries where growth slowed and the progress that had been made—lifting millions out of poverty, increasing inclusion in the formal economy and providing environmentally sustainable growth paths—also slowed.
Stabilizing the global financial systems is a prerequisite for sustainable development
Lessons from this experience are now being applied and consensus has emerged to address the inextricably linked areas of economic, social and environmental issues. In a headline grabbing final quarter of last year we have seen the adoption of the United Nations’ Sustainable Development Goals, the 2030 Agenda and the Paris Agreement on Climate Change. Each of these global accords highlights the need to provide for stable international financial systems as a prerequisite for continued socially and environmentally sustainable development.
In October 2015, the UN Environmental Program published an inquiry report into a sustainable financial system: one focused on retaining stability in financial markets with the flexibility and proper incentives to direct private investment and financing towards the growth of environmentally sustainable and socially inclusive activities. The report found that a sustainable financial system is within reach and the concepts and practices that constitute that system have migrated from the margins of financial regulation discussions to become the substance of regulatory decisions. The inquiry also noted that actions needed in the future will take place at the domestic level.
The German Development Institute (DIE) further elaborates in a recent discussion paper how international financial system stability is a precondition for sustainable development, particularly in the face of the new reality of development investment. DIE explains that over the past thirty years the structure of development financing has shifted away from public funding providing the majority of financing. Today the growing club of middle income countries is increasingly reliant on private flows of capital to fuel continued growth. This shift exposes the countries to new risks related to international financial stability. The upshot of increased private finance in those economies is that the connections between financial stability and social equality have never been greater.
Domestic measures are key for addressing global challenges
The Sustainable Governance Indicators help to provide a more in depth view of which countries are most successful in stabilizing the international financial system, bolstering environmental governance, and reducing social inequality.
The top countries stabilizing international financial systems show active interest in regional and international cooperation. Countries such as Germany and Canada are leaders of the G-20, while many others practice what they preach by cooperatively enacting domestic legislation in reaction to the 2008 crash. However, protectionism towards domestic banking sectors is also evident in the top group. The strength of domestic banking sectors on domestic legislation can undermine regulatory desire for stronger regulation in countries like the United States.
In terms of fostering international environmental governance the top countries tend to be leaders of past efforts to address regional environmental issues. Denmark actively promotes work within the European Union, United Nations bodies and Conference of Parties of UN Framework Convention on Climate Change to successfully pressure the EU to pursue more hardline environmental policies on the global scale. Top countries have fully pivoted to next generation environmental issues such as climate change and biodiversity. Norway works actively and in a leadership capacity towards reducing deforestation as a component of the climate change regime.
The top performing countries working to reduce social inequality have domestic support across the political spectrum for development aid. Amongst these countries it is possible to identify two main groups. Some countries like Estonia and New Zealand are focused mainly on regional support, while countries like Luxembourg and Denmark focus on assistance provided around the world. Sweden has interestingly been debating and slowly shifting aid from African states to more regional commitments in Eastern Europe. While some consider international aid and cooperation to be of inherent value, others like the United Kingdom and New Zealand overtly link their aid to domestic agendas, such as anti-terrorism.
In the continued efforts to get the global economy back on the path of robust growth, and subsequently lift millions out of poverty through sustainable economic development, there are several countries leading the charge. Countries who regularly score near the top of the SGI assessment of financial stability, global environmental governance and social inequality reduction will be faced with a number of issues integrating their efforts in these three areas over the coming decade.
The agreed upon Sustainable Development Goals, the more broad 2030 Agenda and the Paris Climate Agreement suggest helpful frameworks for these countries to formulate policies. However, as is the case with most issues in international cooperation, the solutions discovered and implemented at the domestic level inevitably provide the substance of reform. In order for the leading countries to keep up their good work, each will need to internalize and act on the concept that financial stability, social equality and environmental governance can no longer be considered separate issues.
Andrew Tanabe is an MPhil Candidate in Environmental Policy at the University of Cambridge and former legislative staff in the U.S. Senate. He writes for the Bertelsmann Stiftung’s SGI News.