1. Macroeconomics and the Future of Cities Alejandro Nadal Centre for Economic Studies El Colegio de Mexico Urbanization and Global Environmental Change 2014 UGEC Conference Taipei, November 2014

2. The Future We Want The Outcome Document of the Rio + 20 Conference on Sustainable Development The word “urban” appears nineteen times The word “cities” appears eleven times “Macroeconomics” is never mentioned Only one entry for “macroeconomic policies” – “We recognize the importance of job creation by adopting forward- looking macroeconomic policies that promote sustainable development and lead to sustained, inclusive and equitable economic growth …” And the word “crisis” appears once… in reference to the climate crisis

3. Maybe the Rio+20 outcome document is not inaccurate… Perhaps there is no connection between macroeconomics and cities After all, macroeconomists (and macroeconomic theory) are totally unconcerned with the urban environment But then again… Consider the global macroeconomic and financial crisis

4. The global macroeconomic crisis that erupted in the Fall of 2007 was closely related to cities and their role in capital accumulation – USA: late 1970s incomes shift from wages to profits – Households: debt/income ratios more than doubled between 1970-1988 – Associated event: financial deregulation – Low interest rates led to greater indebtedness and bubbles in housing prices – Corrected “real” price of housing served as collateral for mortgage loans and later for home equity loans – Global imbalances help finance increase in debt – Finance capital enters a new space: home ownership in low income strata – Mortgages: securitized and packaged as derivatives (MBS, CDOs and credit default swaps) – Cracks start to appear in 2006: new home sales stall, home prices cease to increase, interest rates start to rise fuelled by fears of inflation, ARMs start to reset – Home prices crashed in 2007 Massive defaults blow up the bubble of real estate prices

5. … and so we got the global crisis A macroeconomic crisis, not just financial in nature – And not a ‘market failure’ crisis It has not gone away: we still have a process of deflation Deleveraging (a balance-sheet crisis) US out of QE while Europe and Japan apply their own versions of QE China: slowing down and largest real-estate bubble Sustainability displaced by other priorities in global debate Resources are for ‘recovery’, not for sustainability

6. Objective and plan of this presentation Objective: explore the relation between macroeconomic features of the global economy and urban change in the context of environmental and social sustainability (E&SS) Plan: – What is ‘macroeconomics’? – Macroeconomic Policies: Effects – Key Features of the Global Economy and their relation to sustainability and urban change

7. Introduction: Why Macroeconomics? Macroeconomic perspective is important – Examines the working of an economy as a whole Analysis at macroeconomic level uncovers rationale of the entire model and reveals how it works Sector level analysis does not challenge the rationale of the entire model – Analyses dynamics of economic aggregates A word of caution on the notion of ‘aggregates’ – Explains international economic relations – Clarifies our understanding of macroeconomic policies – Enables analysis of the nature and origins of macroeconomic crises

8. Introduction (2) Macroeconomic policies affect: – Rate of activity Employment – Economy-wide resource allocation Expenditures for environmental stewardship – Income distribution, inequality and poverty Wages, social security, relative prices – Insertion in the global economy Usage rates of natural resources – Structural and economy-wide transformations Migration patterns, industrial restructuring Macroeconomic policies should be critical for a discussion on environmental and social sustainability (E&SS)

9. Macroeconomic Policies – Monetary policies Banks: monetary creation Financial sector – Fiscal policies Fiscal revenues and public expenditures – Incomes’ policies – Key economy-wide prices Energy prices, wage goods – Balance of payments Exchange rate Capital account regulations

10. Surprisingly, the macroeconomic perspective (including policies) has been absent from debates on environmental and social sustainability

11. Macroeconomics and International Debates on Sustainability MDGs: targets on poverty, hunger, education and environmental sustainability – Critically related to public spending – No relation with macroeconomic policies? Climate change and UNFCCC – IPCC recognizes development trajectories are critical for mitigation and adaptation – Also: poverty entails vulnerability to climate change – Mitigation: Investment and technical change – Adaptation: public expenditures Rio+20 – No reference to the world’s deepest recession since 1930 – Resources for transition to ‘green economy’ to come from the financial sector – Mathematical model of the global economy does not contain a financial sector

12. Two reasons that may explain why macroeconomics is not taken into account in these discussions on sustainability FIRST: Macroeconomic perspective invites controversy No scientific imperative concerning priorities SECOND: State of macroeconomic theory

13. Five Key Features of the Global Economy and their Impact on Urban Change Dominance of financial capital Passive macroeconomic policies Massive global imbalances Intense social inequality Global economy entering a period of ‘under par’ growth, instability and crises

14. Dominance of Financial Capital Financialization originated in the mid 1970s Transformed the structure and dynamics of the economic system Led to three decades of credit driven growth – Credit/GDP ratio jumps from 157% in 1973 to 362% in 2007 Increases the importance of the financial sector relative to the real sector of the economy Transfers income from the real to the financial sector Contributes to income inequality and wage stagnation Dominates macroeconomic policy-making

15. Massive Global Imbalances Global (financial) imbalances refer to the difference between deficit and surplus countries (in current account) World economy is marked by the persistent and growing difference between surplus of export-led economies and deficit economies China, Japan and Germany vs the USA and the rest of the world No automatic reabsorption mechanism of surpluses

16. GLOBAL IMBALANCES: CURRENT ACCOUNT OUTSTANDING (1980 – 2008)

17. Effects of global imbalances Global imbalances brought about by the pursuit of neo-mercantilist policies by a small group of countries (China, Germany, Japan, Asian tigers) Global imbalances are also the product of neoliberal corporate liberalization (“barge economics”) Cost arbitraging and mobile production 76% of China’s exports are generated by wholly owned subsidiaries and joint ventures NAFTA was the template that corporations needed

18. Passive Macroeconomic Policies Macroeconomic policies subordinated to needs of finance capital (since early 1980s) Paramount objective: price stability – Repression of aggregate demand (low wages, cuts in public spending, high interest rates), overvalued exchange rate Monetary policy: interest rates linked to harnessing inflation – A word about monetary creation Fiscal policy: balanced budget – Primary surplus and public spending Capital account of balance of payments: deregulate to allow capital flows

19. Intense Social Inequality Wage stagnation in developed and developing economies since the 1970s and 1980s has led to higher inequality SAPs and mobile production and cost arbitraging leads to lower wages in developing countries Reduction in public spending worsens situation (less and costlier public services in health, education, transport) Piketty uses new data set to examine a process that started four decades ago

20. Results for the Global Economy: Secular Stagnation, Instability and Crises Global crisis: are we out of the woods? Fed stops QE: what does it mean? Developed economies and emerging markets are entering a period of slower growth Greater instability and volatility in current accounts, capital flows, exchange and interest rates Changing monetary hegemony: transitions are always bumpy

21. How do these macroeconomic features affect cities? Macroeconomic policy posture considers price stability the paramount priority To attain that objective aggregate demand is ‘managed’ in such a way that inflation is controlled Typical instruments: stagnant real wages, high interest rates, low public expenditures, overvalued exchange rates Some effects: greater inequality (and poverty), lack of resources for agriculture leads to increased migration to cities Low investment in environmental stewardship

22. Changes in the global economy and urban transitions Inequality and poverty in cities: result of low wages, incapacity of economy to provide adequate jobs With stagnant wages, growth will continue to rely on bubbles in prices of key assets (real estate) Overpopulation in cities: in part the result of policies that push people from rural to urban settlements Macroeconomic policies curtail public expenditures: affects housing and municipal services, public transportation, infrastructure, public services

23. Sustainability displaced in global agenda – Priorities: growth and ‘recovery’, jobs, macroeconomic stability Cuts in allocations for environmental stewardship (result of bailouts and fiscal austerity) Unemployment, poverty and inequality Greater pressure on natural resource base Extractivism Policy response (fiscal retrenchment) worsens situation Macroeconomic policy debate is essential: need to move from price stability to sustainability Global Crisis: Implications for Conservation

24. One final word The debate on macroeconomics is a heated debate already unfolding in the cities of the world

25. http://www.iucn.org/about/union/commissions/ceesp/

26. Thank You