Scenarios for sustainability of global financial markets

ScMI has analyzed the scenarios developed by many renowned institutes of economic and of future research and connected them by using the Szenario-ManagementTM approach. The results are seven comprehensive scenarios which summarize the current state of knowledge.

When the Club of Rome investigated the “Limits of Growth” in the 1970s, it focused on the close relationship between growth of population, food production, industrial growth and resource consumption. However, three areas were not explicitly considered: the importance of technological progress, geopolitics as well as the financial sector.

Monetary and financial economics have been neglected for a long time and were only seen as a neutral intermediary between savers and investors. Lastly, in the global financial crisis 2007/2008 it became evident that it is by no means just a lubricant of economics but a control instrument that is decisive for the attainment of a global and sustainable development. In the first report to the European Academy of Science and Arts an international and interdisciplinary working group examined the relation between financial markets and sustainability. In order to consider the development opportunities, six scenarios were developed under the methodical leadership of ScMI that can be allocated to three different groups:

The stream of deregulation

Just as the Gulf Stream there are also powerful forces which drive the development in a direction to specific scenarios. Such a power is the deregulation of the movement of capital which started in the 70s with the release of exchange rates. A large part of the discussion focuses on where the powerful and no longer influenced flow carries our whole social and economic structure. The two first scenarios deal with this question.

A corporate world – industry states dominate and enhance the economic development through global financial markets (Scenario 1)

In the first scenario the deregulated markets became a dominant feature of the global and cyclically growing world economy. In particular, this will benefit industrial states which dominate the international financial and economic organizations as donor countries. Short-term pursuit of profit and increasing individualism promote instability in the real and financial economy that are, however, widely accepted because they lead generally to increases in prosperity.

Freedom, which is not really freedom – The escalation of the location competition of the regions leads to a division of the industrial societies. (Scenario 2)

In this alternative image, equilibrium is established by deregulation. The promise of free markets has not been fulfilled for the majority of the people. The location competition has escalated and many states are under pressure due to increasing unemployment and social conflicts have developed new forms of isolation – especially competing economic and currency blocks. This has impeded the dynamism of the world economy. A three-class society is being created from equity owners, employed and unemployed people.

Navigation through the rapids

In the first two scenarios there is literally no active navigation in the rapids of deregulation – neither in politics nor in civil society. In contrast, the following two scenarios are concerned with the possibilities of a regulatory framework which ensures the competing market mechanisms with the corresponding regulatory mechanisms:

The tide lifts all boats: International organizations ensure free movements of capital and equal participation in growth (Scenario 3)

In the third scenario the partnership-oriented international financial organizations have managed to create free product and capital markets so that the industrial and the developing countries share the growth equally, although without reducing the existing imbalances. Since the world economy is still characterized by severe instabilities, the different mechanisms to handle financial and banking crisis are present. Entrepreneurial decisions are underlying long-term strategies and social principles of responsibility. Technological processes are considered particularly important as an increase of resource productivity on the basis of capital productivity.

Parallel worlds – the glocal civil society as reassurance against the deregulated and unstable world markets (Scenario 4)

While the national decision-making structures are encrusted and caught in the traditional competition between locations, civil social structures have emerged in scenario 4, both on the global and regional area. The civic engagement has risen significantly while companies and markets are short-term and unstable – but at the same time follow a strong growth trend. In addition this above average growth in developing countries has led to a global wealth balance.

The freedom of the seas – conscious control

All of the above described scenarios were characterized by a stream of deregulation – in other words of free global financial markets, free exchange rates, logic of competition between locations, the dominance of both capital and labor productivity but also of acceleration, high volatility of the markets as well as of a decoupling of the financial markets from the real economy. In the last two scenarios future scenarios are presented where the actors elude a quick deregulation.

Sustainable growth – global regulation of the financial markets ensures long-term growth (Scenario 5)

In this scenario the world economy follows a moderate but also a long-term and stable growth trend. A collaborative regulation of the global capital market dominated by IGOs has led to an alignment between industrialized and developing countries and has made the financial markets resilient to crises. Innovation and progress are measured to a large extent by labour productivity and market mechanisms have raised the environmental quality together with individual direct interventions.

De-globalization – slowdown of the global world economy on the basis of a new working culture (Scenario 6)

In the last scenario the world economy was characterized by a deregulatory trend. Global interventions have limited the capital mobility and in the various geo-regions economic blocks have been formed with coordinated monetary systems associated with a slowdown (of what?) as well as a “rediscovery of work”. The policy is undergoing a renaissance and determines essential parts of the public life – for example through alternative labor markets or interventions in order to obtain high environmental quality.

Thinking ahead of the global financial crisis via different scenarios

Subsequently the individual scenarios were evaluated with regard to various sustainability requirements. Several ways to attain sustainable development were demonstrated – namely a strong innovation- and growth-oriented path of sustainability (Scenario 3: The tide lifts all boats), a sustainable path with consideration for inner social and international compensation (Scenario 5: Sustainable growth) as well as a sustainability path focused on regionalization.

In addition, with the publication in 2005 – 2 years before the global financial crisis – it became clear that the creation and regulation of the financial architecture have a significant effect on the real economy. Thus, only scenario 5 describes an environment that is largely free from financial and currency crises.

Scenarios in other books

The results of the scenario study can be looked up in the German book “How we are going to economize” by Stefan Brunnhuber and Harald Klimenta. In addition, the scenarios and their implementation in the global financial crisis should go into the report of the EU-Chapter of the Club of Rome and Finance Watch as well as into the World Business Academy. This report has gone into the book “Money and Sustainability – The Missing Link” by Bernard Liertaer, Christian Arnsperger, Sally Goerner and Stefan Brunnhuber.

Scenario study - financial markets