Building a Balance Sheet for an Earth by Andrew Sheng and Xiao Geng


While all politics are local, it is shaped by a rapidly changing global landscape. Only a one Earth toll – an ascending reset of how we measure global wealth – can ensure that countries are working towards a better future for all.

HONG KONG – The 2008 global financial crisis changed the way the world looks at balance sheets. Now an even deeper transformation is needed – a transformation that recognizes the limits of narrow national accounts.

The balance sheets are balanced. This is the beauty of double-entry accounting: the assets of an economic entity must ultimately equal its liabilities. When they are not – when the income from assets, including the ability to raise additional financing, falls short of the liability obligations – crises become inevitable.

For many decades, economists did not pay much attention to the stocks of assets and liabilities on balance sheets. Instead, they focused on flows, such as GDP, savings, and trade.

That changed in 2008. The global financial crisis reminded the world that when liabilities are hidden in off-balance sheet or offshore vehicles, they eventually become, in the words of the American investor Warren Buffet, “financial weapons of mass destruction”. Macrocatastrophes have turned out to have micro and local components, which policy makers have ignored or overlooked.

After the global financial crisis, the OECD began to push its member countries to produce national balance sheets that would allow authorities to monitor not only budget and trade surpluses or deficits, but also the size of private and public debt and debt ratios. the sink. Today, most of the G20 countries produce national balance sheets, although of varying quality.

But, in our globalized world, economies do not operate independently of each other. This is why McKinsey Global Institute (MGI) has compiled a “global” balance sheet comprising the assets and liabilities of the ten largest national economies in the world – Australia, Canada, China, France, Germany, Japan, Mexico, Sweden, United Kingdom and United States – which together represent 60% of the world income.

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During the first two decades of this century, this shared balance sheet has swelled, despite moderate growth in global GDP. Total assets have grown from $ 440 trillion (roughly 13.2 times GDP in 2000) to over $ 1.5 quadrillion in 2020. And the economy’s net worth (assets minus liabilities) has grown. from $ 160 trillion to $ 510 trillion (an increase of 219%).

At the consolidated global level, net worth equals the value of real assets, as financial assets and financial liabilities cancel each other out. But, because the price of silver is influenced by the amount of money (which commercial and central banks create by increasing debt), that value increases as interest rates and rental yields fall.

Since 2000, low interest rates have fueled asset price increases that exceed inflation, with savings and investment accounting for only 28% of total net worth growth. As a result, net worth in 2020 was almost 50% higher, relative to income, than the long-term average for the period 1970-99. This highlights the crucial role of the financial sector in determining the value of real assets, and hence the importance of including the financial sector in policy making.

MGI explains that it “borrows” the balance sheet – “a fundamental tool of the business world” – to assess the health and resilience of the global economy. And its “global” assessment is a good first step. But it lacks two crucial elements: natural capital and human capital.

Currently, few countries include natural or human capital in their balance sheets. It is therefore impossible to say to what extent the expansion in net worth since 2000 has come at the expense of natural capital or social well-being (eg through increasing inequality).

With the adoption of the United Nations Environmental and economic accounting systemEcosystem accounting this year, the stage is set for a better declaration of natural capital. But the implementation of the framework has been delayed and social inequalities are still not taken into account. Fortunately, environmental, social and governance data are increasingly available, particularly from companies, and can serve as building blocks for more complete reports.

With national balance sheets that take into account natural and human capital, decision-makers would be much better equipped to make decisions that advance the well-being of their citizens and the environment. Yet, for maximum impact, the national balance sheets must be consolidated into one single balance sheet for an Earth.

A single Earth balance sheet would allow the world to improve the overall allocation of resources, deliver public goods and ensure more inclusive development. For example, some fear that the preservation and enhancement of natural and human capital means accepting very low economic growth or even “decline”. But not all economies need rapid growth. Developing and emerging economies with younger populations do so, as income growth is vital for poverty reduction. But advanced economies with aging populations can maintain a high standard of living without it.

It shows how a single Earth balance sheet can help us avoid the tragedy of the commons, when countries pursue beggarly policies, at the expense of global public goods. But such an assessment would also go a long way to avert the tragedy of the horizon: when countries are not encouraged to pursue policies today to ensure the well-being of future generations, notably by combating climate change. By integrating duration into balance sheets, the time dimension forces us all to take a longer-term view.

For this to work, the One Earth perspective must be embraced at all levels. After all, global progress – for example, towards achieving the goals set in the Paris climate agreement and reaffirmed at the recent United Nations Climate Change Conference (COP26) in Glasgow – may be more than the sum of local achievements.

All politics are local. But it is shaped by a rapidly changing global landscape. Only a One Earth toll – a bottom-up reset of how we measure global wealth – can ensure that countries are working towards a better future for all.

About Andrew Estofan

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