Financial crises and environmental sustainability

Overview

Financial crises are associated with reduced consumption of goods, reduced industrial production, reduced energy consumption, reduced use of private means of transportation, and overall with reduced economic activity. In theory then financial crises may be good for the environment! Yet, circumstantial evidence from the current crisis suggest that paradoxically instead of ‘blue skies’ the crisis led to air pollution, illegal logging, slowdown in waste management activities and increase in pollution-related diseases. What really is the relationship between financial crises and the environment, and how can understanding this relationship help us address better the UN Sustainable Development Goals (SDGs)? This project breaks new ground in this area by offering one of the first investigations into how global and local debt dynamics impact on the sustainability indicators of forest cover, air pollution and resource efficiency.

Project design: The first level assessed how national levels of debt (public, households, corporations) correlate with national level changes in forest cover, air pollution and resource efficiency (especially waste management and resource productivity). The second level explored how the above phenomena (debt, forest cover, air pollution, resource efficiency) correlate at the subnational level (regional/local), and what lessons and new hypotheses can be drawn from subnational differences/similarities. The third level used triangular / small-N comparisons to generate a deeper understanding of the interplay between debt and the aforementioned key sustainable living indicators. By integrating findings from these three levels, the project generated a deeper understanding of the relationship between debt/indebtedness and key sustainability indicators and dynamics.

The project has advanced the aims of the Sussex Sustainability Research Programme (SSRP) by exploring trade-offs between economic and environmental policies and dynamics that have a decisive impact on the sustainability of our societies. It also advances SSRP’s transdisciplinary perspective by bringing together researchers from different natural and social sciences to generate new ideas and ways of seeing and researching the phenomenon of sustainability.

Project description

The project developed an analytical framework and methodology that captured:

  • how the emergence of a new model of debt-based political economy, especially after the 1980s, have effected a range of key sustainability indicators and trends, and
  • how economic and debt crises, which have been occurring ever more frequently and with ever more intensity during the above period, impact on the broader sustainability trends of debt-based economies and societies.

The project developed a large dataset with financial crises and environmental sustainability data from developed, emerging and developing economies. In particular, we examined the relation between financial crises and Forest Cover, Air Pollution and Resource Efficiency at a global and national level. We were interested in finding out how different types of debt (public, households, corporations) may impact on these key environmental aspects. We were also interested in how the level-of-income of a country and the type of its economy affect the relation between debt and the above environmental sustainability factors. We examined both longer-term trends through equilibrium assumptions and shocks generated by debt crises.

We then moved from the global and national levels to the subnational level. Here, we were interested in similarities and differences between regions of the same country, how these may be explained according to debt and other socio-economic indicators, and how they may be influenced or inform policy making at national and international level.

Finally, the project used the comparative method and carefully selected case-studies both for theory-testing and theory advancing purposes. The aim was to test a number of the assumptions produced in the first two phases of the project, but also to generate new insights through a bottom-up perspective on the dynamics that govern the interplay between financial crises and environmental sustainability.

The project was conducted by the newly created research unit ‘Financial Crises and Environmental Sustainability’ (FCES). The team of investigators included:

  • Dr Andreas Antoniades, a trained political scientist, with expertise in global political economy, global debt and debt-based economies. He is currently leading the Global Debt Dynamics Initiative.
  • Dr Alexander Antonarakis, a trained natural scientist, with expertise in forest carbon cycles, land cover changes, GIS mapping, remote sensing and earth observation.
  • Dr Patrick Schroeder, a trained social scientist with a PhD in Environmental Studies and extensive experience as a senior development consultant. He is an expert in circular economy within the context of sustainable consumption and production (SCP) systems and the Sustainable Development Goals (SDGs).

Timeline and funding

Timeline

April 2017-November 2020
Funding

£99,351

Methods

The project developed an adjusted Multidimensional Poverty Framework (MPF) approach. This allowed us to assess the impact of financial crisis on different SDGs (income, basic needs, health, education, and environment) in an integrated way. At an empirical level we base our econometric analysis on a large dataset of financial crises with 462 crises, in >150 countries, between 1970 and 2017. We also used machine learning techniques (Exponential Triple Smoothing) and Data Envelopment Analysis (DEA), and employed small-N comparative studies.

Findings

We produced new estimates on the anticipated impact of current financial distress dynamics on SDG targets related to: income, basic needs, health, education and the environment. Notably, in Low-Income Countries (LICs) financial crises are associated with a 9.89% higher poverty headcount, 9.82% wider poverty gap, 5.28% lower access to electricity, 17.72% lower government education expenditure, and 0.85% reduction in terrestrial protected areas. The adverse impact of crises is not limited to LICs. We found, for instance, that crises are associated with a 25.24% reduction in government education expenditure, and a 1.05% reduction in terrestrial protected areas in upper-middle income countries.

We offer new evidence on the evolution of ‘vulnerability-resilience nexus’ (VRN) in developing countries, in the context of SDGs. Our findings point to a  significant increase in the resilience of LICs in key poverty areas such as, access to basic water and infant mortality. A cause for optimism, but not complacency, for what concerted international efforts can achieve. Using a Multidimensional Poverty Framework approach helps us understand the dynamic linkages between different aspects of poverty.

New results on the effect of financial crises on air pollution. We found a 1.4-6.2% fall in CO2, SO2 and NOx emissions shortly after a crisis breakout. Yet, this positive crisis effect disappears or reverses (1-2% increase) one or two years after the start of crisis. We find no short-term impact of crises on PM2.5 emissions; in contrast, we observe 0.9-1.8% medium term increases. Thus, the ‘punctuated degrowth’ caused by financial crises offers no long-term solution to environmental sustainability.

Conclusion

This project shows that current financial distress dynamics in developing countries, especially LICs, not only make SDGs unattainable, but are likely to reverse progress achieved during the MDGs. We suggest that the implementation of SDGs should be remodelled in a way that addresses this financial distress challenge head on.

Related work

SSRP Policy Brief - Sustainable Development Goals in the debt trap [PDF 510.28KB]

Financial Crises and Environmental Sustainability (FCES) had a special issue accepted in the journal Sustainable Development. The provisional title of the special issue is ‘Financial Crises, Poverty and Environmental Sustainability’ and will be co-edited by Andreas Antoniades, Alexander Antonarakis (FCES co-investigators), Jonathan Gilman (UNEP, Asia and the Pacific Office) and Isabell Kempf (UNRISD). The Special Issue is part of a wider range of activities associated with a forthcoming policy workshop to be hosted in the UN Conference Centre, Bangkok, Thailand, 14-15 December 2020.

Outputs

  • Webinar on ‘Financial Crises, Poverty and Environmental Sustainability in the Context of SDGs and Covid-19’ (November 2021), co-organised in collaboration with the UNDP-UNEP Poverty-Environment Action for Sustainable Development Goals (PEA) and the United Nations Research Institute for Social Development (UNRISD).

The team

  • Principle Investigator (PI) and Co-Investigators

    Principal Investigator

    Co-investigators

  • Project team
    • Dr Indra Widiarto, School of Global Studies
    • Dr Patrick Schroeder, Chatham House: the Royal Institute of International Affairs
    • Dr Lucia Pacca, UCSF Centre of Vulnerable Population
    • Dr Martin Jung, International Institute for Applied Systems Analysis (IIASA)
    • Dr José María Maya-Manzano, School of Chemical and Pharmaceutical Sciences, Dublin Institute of Technology
    • Bernardo Cantone, Science & Policy Research Unit (SPRU)
    • Dara Leyden, Centre for Global Political Economy (CGPE)