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Markets will facilitate move to net zero, but regulations and guidance needed: banker

18 March 2021

Markets will facilitate the move toward combatting climate change and in achieving net-zero emissions if countries decide that they are serious about these issues, but regulations and guidance are also needed, said Reza Moghadam, vice chairman, global capital markets at Morgan Stanley

Speaking at the CERAWeek by IHS Markit conference, Moghadam said markets have an incredibly efficient way of allocating resources, and at the same time they are good at following guidance and regulations from the relevant authorities.

This is evident from recent developments where markets moved through the gears quickly on a shift away from market neutrality on climate change after a number of European central bankers highlighted the importance of this topic in speeches, he said.

"You [have seen that] the official sector has acted, you [have] seen the impact … but the markets can also [offer] guidance in terms of where policies should be … We should look at the market as a facilitator, which also needs regulation and guidance," he said.

Peter Rodriguez, dean and professor of strategic management, Jones Graduate School of Business at Rice University, another panelist, said these interconnections were leading him to teach his students to be problem solvers, to be highly attuned to what is happening in the world, so they can be holistic leaders.

Globalization under increasing attack

The devastation caused by the COVID-19 pandemic has not only demonstrated the interconnectedness of the world, but it has also seen globalization come under increasing attack. But the benefits of globalization need to be first acknowledged before addressing the disadvantages it brings, said Moghadam.

Globalization has helped the world in trade and mobility as well as leading to higher living standards around the world, as evident from the near five times increase in gross domestic product per head in many countries since 1950, particularly in east Asia and countries that have plugged into the benefits of globalization, he said.

But there have also been increasing concerns about the impact it brings.

"If you look across the entire world, the number of countries whose living standards have actually fallen since the 1950s, they tend to be countries that have decided to isolate themselves like Zimbabwe or they have gone into major dislocation. So, one has to accept that globalization has increased living standards. It has reduced inequality across the world between countries; it has lifted more than a billion people in the last 20 years out of extreme poverty, but the big side effect is it has also exacerbated inequity within countries… We need to acknowledge the benefits of globalization and then talk about how we can contain the side effects of it," Moghadam said.

Increasing inequity

Rice University's Rodriguez pointed out the mismatch between domestic policies that are unsustainable and global policies that have become strained by tensions as a result of increasing inequity.

"They can't advance without one another; they are interdependent. We see that most acutely in the case between the United States and China. I don't think decoupling is something [that will] necessarily last, but it could be around for a while. Over the long haul, it is just unsustainable. The gains between the two countries are simply too large to be had — supply chain and production networks that have been created — because the two would be too intricate to undo and too costly to undo," he told the audience.

Rodriguez sees the potential for "synergy" between the countries' goals, but he said that it also can be perceived as "a mutual hostage situation".

"Either way, it points in the same direction that globalization will tend to further decouple or [lead to] the integration of China and the United States in the long haul. The biggest risk is with the pullback of the United States, you will see this rationale disinvestment in global trading … There is not only a gain to be had between the two countries working this out and creating more gains, there is a gain to be had globally. And if we want productivity to be advanced so that we can work through this inequity issue at the domestic levels, the US and China will have to be at the center stage," he said.

In response to moderator IHS Markit Senior Vice President, Global Energy Carlos Pascual's question about whether the global trade system still exists, Moghadam, who is also an economist, said economists tend to be less probing about the potential dislocation and problems that trade causes. The "side effects" of globalization are now acknowledged alongside the benefits of trade, he added.

"There is an acknowledgement now that trade, particularly the increased reliance on exports from the developing and emerging markets, does destroy jobs in the developed economy, particularly manufacturing jobs. How big is that impact? Between the mid-1990s and a couple of years ago, the average job destruction in the United States is [about] 150,000 manufacturing jobs. That is now being admitted, but the question is: Is it big enough to cause concerns? It is certainly a major problem, but you have to put that against the major backdrop of the same period when 10 times as many jobs were created in the services sector.

"In terms of job creation, there is an issue, there is a dislocation, the same people may not be able to occupy the jobs that have been created. There is also another aspect and that is while inequity across the world comes down, because you are destroying jobs in the manufacturing sector in another advanced economy, it causes inequity within the country to increase as it has in the United States and elsewhere in Western Europe," he said.

But the inequity in those countries can be resolved through political will and reasonable policies, Moghadam said. Measures that can be taken include adjusting the domestic tax system, training and re-employment of workers, and reallocation of resources within the economy, an area which Moghadam said, has not been sufficiently addressed.

"There are a lot of ideas being put forward by the economist community. And there is also a willingness in the economist community to look at interventionist measures which were probably not fashionable in the early days of globalization," he said.

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