Managing Our Way to Economic Decline, Revisited

In 1980, Robert H. Hayes and William J. Abernathy wrote an article with the ominous title “Managing Our Way to Economic Decline.” The malaise of American business in the early 1980s, they wrote, wasn’t just caused by generic economic forces such as inflation, government regulation, tax policy, or escalation of oil prices. US companies were to blame themselves, as their modern management principles were keeping them from competing technologically vis-à-vis European and Japanese business.

Some thirty years later, a tale with a similar storyline emerges. This time, the topic is different, and it involves economies and businesses worldwide. It’s a story of climate change.

The return on investment in climate change

There’s ample and expanding evidence on the inverse relationship between climate and economy. The 2006 “Stern Review on the Economics of Climate Change” report labelled climate change as the single biggest market failure ever witnessed, concluding that the benefits of strong, early action on climate change far outweigh the costs of not acting. It reported that inaction would increase the overall costs of climate change to at least 5 percent of global GDP annually, mounting to at least 20 percent of GDP when taking into account a wider range of risks and impacts. Clearly, there’s a return on investment in here—and it’s not hiding itself very well.

A recent study by scientists Melissa Dell, Benjamin Jones, and Benjamin Olken used historical fluctuations in temperature within poor countries to identify its effects on aggregate economic outcomes from 1950 to 2003. They concluded that higher temperatures appear to substantially reduce poor countries’ economic growth: A temperature increase of one degree centigrade may reduce long-term economic growth in poor countries by 1.3 percent. They also noted that higher temperatures seemed to reduce growth rates, agricultural and industrial output, and political stability.

The Climate Vulnerability Monitor 2012 (CVM) published some weeks ago points in a similar direction and adds to the evidence by presenting some dire figures. Climate change will cost the world more than 3 percent of its GDP (currently a staggering US$ 2.5 trillion). Mind you, the costs of negative external effects of climate change, such as the loss of biodiversity, mass migration, and social disruption have been left out of the equation. Developing countries cannot be denied their own development, but should be enabled to pursue sustainable growth themselves with existing knowledge and technology to avoid the effects of climate change. In case that doesn’t happen, the CVM estimates poor countries will lose an average of 11 percent of their GDP as a result.

An awkward moral issue

This is important news for developed countries, as future growth of global business will likely come from the base of the pyramid. Also, since climate change is “produced” in different places than where its effects hit hardest, export-oriented countries causing large eco-footprints abroad have an additional responsibility. Following the aforementioned research outcomes, this will lead the development of poor countries to be dramatically curtailed by the patterns of production and consumption of developed ones. NASA climate scientist James Hansen in this regard pointed at the awkward moral issue of “modern slavery.” It seems as if we’re making history repeat itself.

Corporate culprits

Looking at the UN Human Development Index, which measures people’s well-being (in terms of health, knowledge, and standard of living), side by side with ecological footprint data, a daunting overall picture emerges: Countries tend to develop positively in terms of human well-being, while increasing their eco-footprints. Consequently, they’re missing the sustainable development quadrant.

The obvious but inconvenient truth is that global business is a major culprit in all of this. The challenge now is to move our companies toward sustainable business and to build economies in which responsible entrepreneurs can thrive. It doesn’t take a management professor to do the math: It is evident that business hasn’t in general been living up to the sustainability challenge. We’re collectively failing on issues of energy, ecology, poverty, and morality. Several tangled crises are already raging at full speed, reinforcing each other and leading only to deeper global economic crisis—this is the inevitable grim, long-term perspective if companies fail to respond effectively.

The story of our time

To come full circle, it’s worth remembering how Hayes and Abernathy ended their article: “The key to long-term success—even survival—in business is what it has always been: to invest, to innovate, to lead, to create value where none existed before.” Indeed, that’s the way it was, the way it is, and the way it will be. Only this time around, the challenge for global business is to develop business models founded on the principles of sustainability.

That’s the story of our time and it’s fair bet to say that it will be those of next generations. If the corporate world won’t be able to make the much-needed transition, it will be managing its way to economic decline—again.

Read more stories by Lars Moratis.