One global crisis after another

Nicholas Stern, author of the UK’s landmark review on climate-change economics, has some sharp words about banks. Before heading to India to continue a village research project, the World Bank’s former chief economist spoke with John Crace.

When Nicholas Stern left the London School of Economics (LSE) in 1993, he assured colleagues he’d be back in academia within two or three years. Fourteen years later, he’s finally delivered on that promise with his return to the LSE as the first holder of the school’s IG Patel chair. "I’ve never really had much of a career plan," he offers by way of explanation. "And interesting opportunities kept cropping up." 

You can’t argue with that: chief economist at both the European Bank for Reconstruction and Development (EBRD) and the World Bank and head of the British government’s economic service at the Treasury make for an interesting CV, but it’s still somewhat disconcerting to hear a leading economist admit to such flexibility about meeting a target. Not least when there’s so little room for manoeuvre in his own global prescriptions.

Back in October 2006, Stern delivered a 700-page wake-up call to the world with the publication of his government-backed Review of the Economics of Climate Change. The message was clear and uncompromising: global warming is a reality and governments had to act immediately to mitigate the consequences. But has it been taken to heart? Stern starts by diplomatically running through the success stories — pointing out US president George W Bush’s reluctant acceptance of the problem, the European commitment to a 20% reduction in emissions by 2020, the Group of Eight (G8) commitment to a 50% reduction by 2050, and the ousting by voters of the Australian prime minister, climate-change sceptic John Howard.

Yet Stern is aware that it’s no longer a question of winning the argument. The battle now is to get governments to turn the rhetoric of commitment into actions. And that’s easier said than done when you’re asking politicians to break the habit of a lifetime and act in the long-term interest. But Stern insists they have no choice. "If we do nothing, then there’s a 50% chance of global temperatures increasing by five degrees within the next century," he argues. "That would be catastrophic. If we act now, we can reduce that risk to about 4% or 5%. Governments have to understand we must keep working on this for the next four decades, so there is no excuse for the necessary measures to be delayed or derailed by short-term economic fluctuations."

The economics of climate change is still a relatively new subject and Stern readily accepts that his review was very much a work in progress. Yet he utterly rejects some of the criticism he got at the time for painting the worst-case scenario. "If anything, I was far too cautious," he says. "We now know that emissions are much higher than I assumed, that the carbon cycle — the earth’s ability to absorb CO2 — is much weaker and that the risks of increased temperatures for every level of greenhouse gases are much greater. I could have underestimated the costs of inaction by up to 50%."

Although Stern tends to speak the language of economics, with climate change reframed in terms of "risk assessment" and "future discounting", he doesn’t ignore the ethical issues. Getting people to understand they have to pay for the damage they cause while developing more environmentally friendly solutions is not just a simple cost-benefit analysis; it’s a moral choice. No one would dare to seriously suggest that someone who was born in 2005 was worth 50% less than someone who was born in 1970, yet Stern insists that is the only realistic interpretation of arguments in favour of taking action later rather than sooner.

So even if he’s too much of a statesman to point the finger at any one person or government in particular, he’s not about to let anyone off the hook. You just have to pick your way through his velvet words to find the steel behind them. "I think we got the [annual] cost of action just about right at 1% of [global] GDP," he smiles. "But that depends on governments implementing good policy." The key word here is “good”. Stern knows all too well how things can go wrong when people take their eye off the ball, and the current economic crisis is a case in point.

While many analysts have treated the collapse of the British bank Northern Rock and the global investment firm Bear Stearns as a financial problem caused by a prolonged period of reckless lending by banks, Stern argues that the problem is systemic. Financial institutions can only operate within the economic framework laid down by their governments. And for various reasons — including a tendency to assume that a long period of growth will go on forever, and a desire to keep interest rates low to stave off a recession in the wake of the September 11, 2001 attacks in the United States and the dot-com bubble — governments allowed a culture to develop that tacitly encouraged banks to take greater lending risks.

"There were two different market philosophies at play," Stern explains. "One was that the deregulation of the financial sector was a good thing; the other was the government was responsible for avoiding major systemic collapses — neither of which was silly on its own, but if taken together and pushed to the extreme could be interpreted irresponsibly as ‘anything goes and the government will bail you out, regardless’. And this partly explains what happened when a level of complacency crept in. Some financial regulation is essential. First, though, the government has to put out the current economic fire, and the hard thing now is that combating the threat of recession with low interest rates might recreate exactly the same conditions that gave rise to the crisis."

You get the feeling that, reduced to its basics, economics is a straightforward game of truth and consequences for Stern, who is now 61 years old. And that isn’t a bad way of trying to understand his own career path, either. His father was a German Jew who escaped to the United Kingdom after Kristallnacht, a Nazi pogrom in 1938. Nicholas grew up in the west London suburb of Brentford in the postwar period — hence his decision to become Lord Stern of Brentford when he was appointed to the House of Lords, the upper house of parliament, in 2007.

Stern studied mathematics at the University of Cambridge, before going on to teach at the University of Oxford. He was immediately picked out as a high-flyer, going on to plum jobs at Warwick University and the LSE, but academia was never going to be quite enough. From early on in his career, he had been interested in the economics of the developing world — much of his early research work was based in Kenya and India — and he was never going to be able to resist when the opportunity arose to work on the reconstruction of the former Soviet republics for the EBRD. In 2000, he followed the Nobel prize-winning Joseph Stiglitz — whom he had known since they had worked together in Kenya in 1969 — as chief economist of the World Bank, an institution he wholeheartedly defends.

"It’s true that its system of appointments could be improved," Stern says, "as it’s clearly wrong that the US should choose [the bank’s] president. But to claim the World Bank is just an extension of US foreign policy is just wrong. I worked very closely with [former World Bank president] Jim Wolfensohn — who was a Democratic appointment [nominated by former US president Bill Clinton] — under a Republican administration [led by Bush], and the bank was very much its own institution with its own priorities."

Stern certainly did enough to attract the attention of the UK’s now-prime minister Gordon Brown, and in 2003 he was asked to join the Treasury when Brown was chancellor of the exchequer — "I was a civil servant, not a part of the government" — first in supervising the amalgamation of the Inland Revenue and the customs and excise departments, and then as director of policy and research for the Commission for Africa. From there it was a giant leap to his public-sector swansong — the report on climate change. So how does it feel to be out of the limelight, tucked away in an office on the fifth floor above the LSE library?

"It’s very important that there should be cross-fertilisation between government and academia," he says. "Both parties can benefit from having a better understanding of how the other works. But — you know what? — it’s rather nice to be back here." Not that he’s going to be entirely anonymous, as he will head the newly created India Observatory as well as chair a new Centre for Climate Change Economics and Policy, which is being funded by the UK’s Economic and Social Research Council (ESRC).

In late March 2008, Stern was off to India to continue a research project charting the economic transformation of the Uttar Pradesh village of Palanpur, which he began more than 20 years ago. Better still, he’s even managing to get in a few days holiday at the end of it.

"My wife and I are planning to stay on a tea plantation and go watching birds and rhino," he says. Most of all, though, he’s clearly hoping he won’t bump into anyone who’ll start quizzing him on whether he’s offset his carbon emissions. "I get enough of that at parties at home."

Copyright Guardian News and Media Limited 2008