Breaking the Cycle: Financial Stress, Unsustainable Growth, and the Transition to Sustainability

Increasing debt, natural disasters, and extreme weather events claim an ever-larger part of national budgets across the globe, undermining global stability and the capacity of our societies to transition to sustainability. The dominant crisis response policy paradigm treats the economy and the environment as separate domains and is based on a ‘fix-the-economy-first’ principle, i.e., fiscal consolidation and debt sustainability need to be achieved first before addressing other socio-environmental policy goals. This paper demonstrates that this approach entraps countries and the global economy in a vicious cycle. In the absence of an integrated policy framework for addressing these intersecting challenges, our responses to financial stress often exacerbate the environmental crisis and its consequences, adding further financial strain on an already fragile socio-environmental system. Breaking out from this conundrum requires a new crisis response policy paradigm. To this end, this study develops the Unsustainable Growth Vicious Cycle (UGVC) as an analytical framework that exemplifies the incentive structure that governs the dominant crisis response model, and the negative feedback loops that sustain it. Our analysis unfolds in four stages. We analyse how financial stress triggers multidimensional poverty traps and how these impact on the environment. We use the concept of poverty-environment trap 2.0 to capture the emergence of the environmental crisis as a global poverty and inequality trap in its own right. We explicate the limits of the dominant economic policy paradigm through the lens of unsustainable economic growth. We finally discuss the need of transforming ‘economic adjustment programmes’ into ‘sustainability adjustment programmes’, as part of a new global settlement for sustainability transition.