We Must Value and Account for Natural Capital

The Global Canopy Program’s Little Biodiversity Finance Book estimates that the market value of agricultural commodities such as soy, palm oil and beef, which account for 80% of the destruction, is $92 trillion annually. Conversely, the current global spending to protect ecosystems and allied services is a paltry $38 billion per year.This is plainly fraudulent!

 National and international economic policy often ignores the environment. For instance, Kenya’s Vision 2030 has been designed to promote economic and social transformation with little regard to the implications of such transformation on natural capital, presumably on the erroneous assumption those externalities are inconsequential or could be dealt with separately.

 The general claim that economic growth benefits the environment has been vindicated by the claim that there is an empirical correlation between per capita income and some metric of environmental quality. This correlation is less likely to hold whenever there feedback effects of exploitation of Natural Capital is critical, such as those involving soil productivity, freshwater and forests.  

 In 1972 four young scientists wrote the Limits to Growth. This seminal book peered into the future and for the first time demonstrated the consequences of unbridled growth on the earth’s finite resources. They predicted that global ecological constraints – related to biological productive land and water and atmospheric resources – would have significant influence on economic development and human wellbeing in the 21^st century.

 In 2011 Johan Rockstrom and colleagues identified nine limits that must not be crossed if our civilization is to avoid catastrophic collapse. In his book “Collapse: How Societies Choose to Fail or Succeed” Jared Diamond argues that refusal to husband resources such as soils, forests and clean water will lead to the collapse of modern-day societies just as surely as the precipitated the Mayan or East Island collapse.

If you keep adding items to a load-bearing creature, it is inevitable that the equilibrium will shift precipitously at some point. The Arabic proverb “the straw that broke the camel’s back” refers to any cataclysmic systemic failure achieved by a seemingly inconsequential addition, a single straw.

 Imprudent use of Natural Capital – the Planet’s lands, atmosphere, waters and their biodiversity – may reduce irreversibly, the capacity for generating material production in the future. Ultimately, the Natural Capital base upon which economic growth depends is produced by complex ecological processes and feedbacks, which in turn generate a wide variety of good and services.

 Natural Capital constraints will place a limit to future economic growth and human flourishing. These constraints will, at best, increase production costs and consumer prices over the next century and, at worse, precipitate long-term decline in global economic output and institutional and governance collapse. 

 Africa Ecological Footprint Report published by the African Development Bank and World Wide Fund for Nature (WWF) shows that the Ecological Footprint of all African countries increased by 240% between 1961 and 2008 as a result of rapid population growth and increased per capita consumption. The report notes that although Africa is not in a biocapacity deficit yet, the continent could face a deficit within a generation if current resource exploitation and degradation patterns persist.

 While our civilization can forestall the catastrophic collapse, the inexorable decline of the Earth’s biocapacity could have irreversible consequences hurling the global economy into a virulent trap of socio-economic and political instability. The long-term impact on the economy and society of discounting natural capital could include:

1.     Diminished or total lack of access to resources, especially energy, fresh water and productive soils could lead to low economic growth, which could touch off a vicious cycle of low returns, low investments leading to low interest rates;

2.     Extended regimes of low economic growth invariably lead to depressed wages. Low wages could in turn lead to inflationary responses to commodity price shocks and weak consumer demand, further exacerbating low economic output;

3.     Periods of low economic output and long periods of zero job growth. Unemployment damages emotional health and undermines the social fabric of society. Widespread unemployment could be the Achilles heals of the nascent democratic governments in Africa.

 The global economy reaps huge benefits from nature, often without accounting for or paying for the full cost of the goods and services. However, pricing nature’s products without costing the dividend from natural capital that provides it is fraudulent accounting or borrowing beyond one’s capacity to pay. Sooner or later the tax authorities or your creditors catch up with you. 

 It is incumbent upon all of us – individuals, communities, government and private sector – to understand and account for our use of Natural Capital and recognize the true cost of creature comforts, national and global economic growth, and sustaining human wellbeing today and into the future.

Private Sector Key to Africa's Adapatation to Climate Change

Thinking about our addiction to carbon reminds me of the king of Phrygia and his request to the Greek god Dionysus. King Midas asked that whatever he touched turn into gold. His wish was granted. But the king soon realized that it was a curse.

The industrial revolution, powered by fossil fuels has granted our wishes for health, wealth and power on a scale that now threatens to transform our planet into something profoundly inhospitable, especially for posterity. Climate change caused by our insatiable appetite for carbon and its impact – current and projected – is now almost incontrovertible.

There is compelling scientific evidence that climate change is a serious existential issue, which demands urgent action to forestall the risk of damaging and potentially irreversible impacts on ecosystems, societies and economies.  Nicholas Stern, author of “The Economics of Climate Change”, popularly known as the Stern Review, described climate change as “the greatest market failure the world has seen”.

It is widely acknowledged that climate change will have a broad-ranging impact on economies and financial markets over the coming decades. The impact of climate change has been accentuated by the tens of billions of dollars in losses due to recent climate-related natural disasters such as the floods and wildfires in Australia, Pakistan and Russia; droughts the Sahel and the Horn of Africa. A new draft federal report on the current and anticipated impacts from greenhouse-driven global warning admits, “Climate change is already affecting the American people”.

The evidence for climate change driven resource constraints is compelling. Climate change induced constraints such as water scarcity will have direct local impacts. National, regional and global impacts will be propagated through supply chains and through second order effects such as increased food prices and instability. Moreover, rising global temperatures and extreme weather events that are likely to become more frequent and severe are testing the Earth’s resilience. Put simply, resilience is the capacity to adapt to change, withstand or recover from shock while still maintaining critical structures and performing essential functions.

The Global Risks 2013, a report of the World Economic Forum, identified failure of climate change adaptation and rising greenhouse gas emissions as among those global risks considered to be the most likely to materialize within a decade. The limitations in our ability to transform our production and consumption patterns will have a far more severe impact on our lives than climate change, especially given the strong positive correlation between greenhouse gas emission and economic growth.

Global economic output and gains in human wellbeing is driven by big industry – heavy manufacturing and agribusiness – and the allied services that drive their global supply chains. Similarly, Africa’s private sector business accounts for 65-85% of the continent’s annual GDP growth. According to the Kenya Joint Assessment Strategy 2007-2012, the private sector accounts for more than 80% of GDP and most government revenues.

Climate-smart and resilient business must therefore be a key plank in Africa’s climate change adaptation strategy. However, conversation on climate change has been limited to resilience and adaptive capacity for smallholder farmers. Colossal diplomatic capital has been expended on how to protect vulnerable agricultural and pastoral communities in Africa. I seldom hear global conversations about how climate change will affect Africa’s business sector or how to “climate proof” Africa’s business.

Do not get me wrong. This is not to suggest that smallholder agricultural and pastoral communities do not matter. They matter hugely. But smallholders thrive when they are nested in supply and value chains of medium and large business, which are climate compatible. The resilience and adaptive capacity of private sector businesses is inextricably bound to that of vulnerable smallholder farmers and pastoral communities. 

Climate change will have impacts on companies’ financial and social performance, with huge implications of their ecological footprint. However, very little attention has been given to understanding what climate change means for long-term investment risks and opportunities in the context of strategic asset allocation, financing for investment and national economic growth. Very few private sector businesses in Africa, particularly those that are in climate sensitive sectors, have the capacity and resources to produce such evidence.

Multilateral organizations, which move large capital for private sector investment in Africa such as International Finance Cooperation (IFC) should work with local universities and policy research organizations to develop methods for evaluating climate risk and adaptation needs and responses, both policy and technical, for the private sector.

Resilient Dynamism is the theme for this year’s World Economic Forum. In a world fraught with change and uncertainty, vital institutions such private business must marshal prudent agility to build resilience to the impacts of climate change. 

The Making of Africa’s Aral Sea

We are species of self-professed fixers: our forbears domesticated plants and animals and liberated our kind from hunting and gathering; when natural capacity waned the genius of Haber and Bosch gave us inorganic fertilizers; Louis Pasteur advanced the germ theory and revolutionized microbiology and medicine.

In keeping with the tradition of our progenitors, the Ethiopian government is determined to fix chronic poverty and end decades of economic stagnation. According to the African Development Bank Ethiopia’s growth is strong with real GDP growth at or near double digits in six successive years. The Ethiopian leadership sees itself as engaged in an African rendition of the “Great Leap Forward”.

Ethiopia’s Agricultural Transformation Agency is on course to transform a country that just two decades ago was the face of famine into Africa’s breadbasket. And Ethiopia's investment in hydropower is further changing the equation. Ethiopia is on track to complete mega dam projects, which will enhance its dominance on the East African Power market.

Gibbe III Dam on the Omo River will be critical to driving and sustaining Ethiopia’s economic renaissance. It is one of the biggest hydroelectric projects in the world with the expected capacity to generate 1,870 Mega Watts of power. There are plans to export 400 megawatts to neighboring Kenya. It is the dominant view of Ethiopia’s political that areas like the Lower Omo Basin can only be transformed by replacing traditional pastoral systems with large-scale irrigation to support large-scale agro-industries.

A new study published by International Rivers and endorsed by a galaxy of leading academics and experts warns that the Gibbe III Dam project could transform one of the world’s oldest lakes into Africa’s Aral Sea. Drawing from a sound scientific evidence base, the report, “The Down Stream Impacts of Ethiopia’s Gibbe III Dam: East Africa’s Aral Sea in the Making?” could trigger an avalanche of inexorable hydrological, ecological, socio-economic and political impacts.

The Omo River contributes about 90% of the inflow into Kenya’s Lake Turkana, the world’s largest desert lake. Moreover, the Omo River inflows are critical for regulation the chemical composition and maintenance of the rich biodiversity of the Lake Turkana and the Lower Omo Basin, culture, livelihoods and economy of some 500,000 indigenous people in Ethiopia and Kenya.

The downstream consequences of the Gibbe Dam III project are complex and potentially irreversible. The International Rivers Report outlines four critical impacts, which demand urgent national, regional and international consideration.

1.     Given it location in the Omo Basin, Gibe III Dam will capture about 67% of the total river inflow. Hence, about two-thirds of the annual flood cycle, sediment and nutrients would be curtailed during reservoir filling. Moreover, the scale of irrigation to drive the agro-industrial development will reduce Lake Turkana’s volume by 58%, lower the lake level by 22m while doubling its salinity. Moreover, climate change could exacerbate the hydrological impacts of the dam.

2.     Gibbe III Dam will disrupt regular cycles of flooding, destroying the network of swamps vital for fisheries. The swamps also provide forage and browse for wildlife and livestock, support flood-retreat agriculture, and are valuable habitat for water birds that use the lake for their annual migrations between Eurasia and Eastern Africa.

3.     The Gibbe III Dam will cause the decimation of large mammal populations on a trans-boundary scale owing to habitat lose. Wildlife populations of the Omo floodplain migrate seasonally into South Sudan.  Wildlife on the Kenya side depends on the seasonally flooded areas around Lake Turkana.

4.     The disruption to the land, water, ecology and livelihoods of communities in Lower Omo Basin will have immediate and far-ranging political consequences. Local groups displaced from their livelihoods and homelands are likely to generate conflict as they seek resources on the neighbors’ lands in the Kenya-Ethiopia-Sudan borderlands. Well armed, historically polarized and often divided by support from different states, these conflicts can be bloody and protracted.

The report argues that the “Aral Sea” outcome is avoidable. What is needed is a raft of simultaneous and sustained interventions, including: action by the EU and the US to stop budgetary support to the Ethiopian government; challenging Kenya’s acquiescence of the Gibbe III Dam as an integral plank of its national energy security strategy; flagging the regional security and political stability consequences of the Gibbe III Dam; underscoring the vital ecological capital of the greater Omo Basin, especially the role of functional ecosystems in enhancing resilience to climate change; advocating the rights of indigenous peoples with regard to resources and livelihoods, including the significance of World Heritage Sites and the place of the larger Omo Basin in the human evolutionary story.  

The Gibbe III Dam project demonstrates the flaws of traditional linear approaches to public policy and development planning. Policy makers and indeed governments are not confronted with problems that are independent of each other. Public policy, planning and development are characterized by dynamic situations that consist of complex systems of fluid factors, which often interact with each other and generating hitherto unanticipated phenomena.

Problems of development planning are wicked ones with multiple tradeoffs, conflicting goals and often bedeviled by incomplete understanding, uncertainty and surprise. What we need for policy formulation and development planning are approaches that embrace complexity and systems thinking. Such approaches challenge the classical assumptions of benign linear knock-on effects and static contexts characterized by non-dynamic feedback.  

Kenya’s Growing Inequality Demands Urgent Action

Globalization and the eruption of new inventions have transformed the world economy, narrowing the gap between rich and poor economies. There is every indication that overall, the planet is becoming more equitable. However, growing inequality within countries is emerging as one of the biggest challenges of the 21^st century.

Kenya is one of the most unequal countries in Africa. What we see in Kenya today is analogous to America’s “Gilded Age”, when like America’s robber barons, Kenya’s business and political elite as well as kleptocratic public officials are accumulating nauseating wealth. Consequently, the rising gap between the rich and the poor in Kenya is worrying. It is already constraining the development consumer markets as purchasing power becomes concentrated among a small elite. The richest 10.0% of households spent on average 14.3 times more than the poorest 10% of households in 2011.

It is disheartening to see how tone deaf and out touch Kenya’s political class has become to plight of the ordinary Kenyan. We all recall with disgust the attempt by our members of parliament to award themselves a hefty pay package. The hefty retirement packages proposed for the president and prime minister are downright revolting. Moreover, our politicians, including the president and the judiciary have refused to tackle corruption and abuse of office.

The heart-wrenching inequality and conspicuous consumption we see today is not the product of meritocracy. Huge sums of money are siphoned from public coffers through politicians and their acolytes and civil servants. The bewildering wealth and conspicuous consumption we see today has little to do with entrepreneurialism. It is no coincidence that some of the wealthiest individuals in this country have served in in the civil service or held senior cabinet positions or have been government contractors.

Experts have argued that some inequality is beneficial to the economy by stimulating business opportunities in the luxury and budget goods sector. However, inequality can affect social stability; stifle expansion of the middle class and the country's economic growth potential. The history of Latin America is instructive; societies controlled by wealthy elites do not do very well. In my view, inequality in Kenya has reached a stage where it could stymie economic growth and undermine social cohesion.

Kenya’s rising income inequality could undermine Vision 2030. The staggering income gap could append social discontent, exacerbate petty and violent crime thus undermining investor confidence and adversely affect economic growth. In their book, The Spirit Level: Why Equality is Better for Everyone, Richard Wilkinson and Kate Pickett argue that inequality can result in non-income disparities in health and education outcomes, further undermining public investment in  poverty reduction.

Inequality at the scale we see in our society today leads invariably to unequal opportunity especially in early childhood development and educational attainment. About three decades ago, children born in poor families could go to school get a decent education in a public school and get ahead. Today social mobility is gravely curtailed; the gap in educational attainment between middle income and poor Kenyan children is about 40-60% wider than it was about three decades ago.

The gulf between rich and poor in Kenya must become an issue of serious social policy discourse. In the US and Great Britain, concern about the gap between the rich and the poor catalyzed an avalanche of social policy innovation: Theodore Roosevelt considered himself a steward of the people. He fought through trust-busting to reduce the control of big business over the US economy; UK Chancellor of Exchequer David Lloyd George’s 1909 budget was called “the people’s budget” because it provided for social insurance.

Roosevelt’s trust-busting and Lloyd George’s people’s budget marked the beginning of progressive taxation and government funded safety nets with the aim of making society more equitable. Our politics and social policy priorities must shift responsively to mitigate social inequality and build more equitable society without executing socialist-style wealth redistribution.

Policy tools needed to reduce inequality include a progressive tax regime to raise more money from the wealthy and close loopholes the rich exploit to evade taxes. Moreover, we could learn from the biggest cash transfer scheme – Bolsa Familia. Since 2003, 12 million Brazilian families have joined the scheme and receive around $12 a month. Inequality has been cut by 17% in just five years and poverty rate has fallen from 43% to 29%.

Equitable distribution of wealth and opportunity must occupy the center of our collective conversation, especially in this election period. And more importantly, the next government must deal robustly with the greatest purveyor of inequality: political and ethnic cronyism as well as corruption in public procurement and contracting.