Nobuko Kobayashi is a Partner at EY Strategy and Consulting Co., Ltd., Strategy and Transactions — EY-Parthenon.
The war in Ukraine, which began on February 24, sent the world into a tailspin. The threat of an escalation of conflict has set off the human sustainability alarm.
Not only are the environmental consequences of our relative peacetime prosperity a cause for concern, but now the propensity of humans to inflict direct and large-scale harm on themselves is palpable.
In this geopolitical context, we need to reassess the role of the state and, more specifically, its active engagement with the market. This role should not be confused with the resurgence of state capitalism, in which the private sector worked in concert with powerful bureaucracies such as the Japanese Ministry of Economy, Trade and Industry, which produced the protectionist industrial policy that drove Japan’s post-war economic boom.
While this model certainly did wonders for resurrecting Japan after its devastating defeat in World War II, it would not be appropriate today when global problems are sprawling in nature and infinitely more complex.
If liberal democracies want to protect sustainability and ward off the threat of geopolitical disruption, we need to partly rewrite the rules of capitalism, find bold new ways for the market and the state to interact, and at the same time have a truly global reach.
A concerted effort between the market and the state is not new, even without the context of state capitalism.
When I spoke recently to Otto Schulz, board member of the German Sustainability Award, Europe’s biggest award for ecological and social commitment since 2008, he divided the relationship between state and market into three phases of activities: establishing the rules of the market economy, letting the game play to maximize innovation through competition and limiting the remaining inconvenient consequences by providing a social safety net.
In the conventional capitalist model, the state calibrates the rules – think old-fashioned directive regulation – and rebalances the outcomes for the common good by redistributing wealth through taxes.
Our challenge today, Schulz explained, is that the damage done to society and the environment after decades of operation of this conventional capitalist system is so enormous that the negative consequences – the appalling wealth gap within and between nations as well as the global climate crisis — are no longer fixable through government tinkering. We have to restart our entire operating model.
In this new model, the state would play a greater role. And even though we are only in the early days, we are not without progress.
For example, as of last month, 12 G20 countries have a carbon pricing system that includes the external cost of greenhouse gas emissions that were previously overlooked in old-style capitalism. . By resetting these rules, a greener form of capitalism can take root.
But simply resetting some rules doesn’t solve the whole durability problem. Over the decades, the functioning of the market has been optimized to allow the old system to work well.
This system is so entrenched and robust that a solid transition plan is necessary. Here, the state must play an important role in helping the private sector transition to a more sustainable future by fueling innovation.
For example, transitioning the energy mix from fossil fuels to renewables requires numerous government incentives, ranging from grants to research fellowships.
If different states are to succeed in adopting these new roles, global coherence and collaboration are of the utmost importance. Threats to sustainability are global in nature because, in our interconnected world, no country can survive in isolation. Rewired capitalism must clearly deviate from state capitalism, which resolutely prioritizes the economic prosperity of the nation.
States can look to the market for the first case studies of global collaboration. Multinational corporations, for example, are already banding together to self-regulate. The Consumer Goods Forum, an international industry body of 400 global companies, formed eight CEO-led coalitions in 2020 to address sustainability-related agendas, from protecting forests to reducing food waste.
Another example is the Responsible Jewelry Council, an industry organization founded in 2005 that actively works to prevent the supply of blood diamonds sold to fund violent insurgencies in unstable mining regions. States can approve and enforce these rules as well as hold companies accountable.
There are also green shoots for state-to-state alliances on green innovation. German Chancellor Olaf Scholz, who visited Japan in April, highlighted the Japanese-German collaboration on hydrogen as “an alternative to today’s gas and coal”.
A potential collaborative approach includes shipping hydrogen fuel and developing a hydrogen supply chain. Because both countries are built on a heavy industrial sector with a global footprint, they are understandably large enough energy consumers to achieve economies of scale. Such state-to-state hydrogen coalitions could accelerate sustainable technology development under joint leadership.
The quest for sustainability will redefine the role of state engagement with the market and will require rewriting the rules and energizing innovation. In doing so, states must unite, just as multinationals do.
Could this be the unifying force of a world seemingly on the way to decoupling? This is the ultimate question surrounding sustainability that we must all try to answer.
The views expressed in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.