ECONOMIC GROWTH:
A REVIEW OF THE CONCEPT FROM AN ENVIRONMENTAL PERSPECTIVE
Philip Sutton
Director, Policy and Strategy
195 Wingrove Street, Fairfield (Melbourne) VIC 3078, Australia
International Telephone and Fax: +61 3 9486 4799
Email: psutton@peg.pegasus.oz.au
29 July 1996 (First version 19th February 1994) Version 2.o(ascii)
Doc. 101
Table of contents
1. 'Growth' policy and why it's important to get it right
2. The environmental debate over 'growth'
3. What is economic growth?
4. Economic growth does not measure welfare
5. Economic growth does not measure environmental impact
6. Should we promote or oppose economic growth?
7. Is it possible to have economic growth in a profoundly green economy?
8. Is it likely that economic growth will occur in a profoundly green economy?
Interlude: The People's Green Utopia
9. Will economic growth always cause inequality to increase?
10. Surely environmentally sound economic growth cannot go on forever?
11. The policy implications of a more accurate understanding of the growth issue
11.1. "Economic growth is always good": Some policy errors
11.2. "Economic growth is always bad": Some policy errors
11.3. "Economic growth is neither automatically good nor bad": The implications
12. The politics of it all
13. Summary of key conclusions
1. 'Growth' policy and why it's important to get it right
============================================
There is a widespread view among environmentally minded people that 'growth' must be stopped if the environment is to be protected and resources conserved. Now that environmentalists are taking up the challenge of devising economic strategies and are actively pursuing the creation of a green economy, two question must be answered:
* is it right to oppose all instances of 'growth'?
* what would be the effect of trying to implement policies
designed to stop 'growth'?
The position that people take on growth is important for more
than intellectual reasons. The economic policy measures that
people advocate will be strongly affected by their beliefs about
economic growth. If their understanding is inadequate or faulty
then the policies they advocate are likely to fail and may even
be quite damaging.
This paper takes a number of positions that differ from the usual 'pro' growth or 'anti' growth stereotypes. It argues that:
* growth in the use of physical resources and economic growth are not the same thing
* growth in the use of physical resources is the main cause of environmental damage and resource wastage and it is this growth that must be stopped
* economic growth should not be a goal of economic policy
and that it should not be automatically promoted or opposed.
>From an environmental point of view a major conclusion is that
if policies were put in place to stop economic growth, the transition
to a conserver or green economy would be slowed down dramatically
and might even be blocked.
So it is critical from an environmental perspective to get the
'growth' issue right.
2. The environmental debate over 'growth'
===================================
The very high rates of economic growth experienced in the three
decades after the Second World War in the rich countries, and
for a longer period in the rapidly industrialising countries,
were accompanied by massive increases in environmental damage
and resource wastage in many countries across the world. In some
areas of both the poor and rich countries the development that
generated this economic growth also caused major social disruption.
It was therefore not surprising that many people drew the straightforward
conclusion that this growth was bad and should therefore be opposed.
Unfortunately the analysis was not fine tuned enough. Opposition
to this growth became opposition to any growth.
The fundamental confusion was between the effects of growth in
the use of materials and energy and growth in economic aggregates.
While general opposition to growth is well justified in relation
to physical resource use, it does not, as will be demonstrated,
make automatic sense in relation to economic growth.
3. What is economic growth?
==========================
Economic growth measures the percentage change in economic output
in an economy in one time period compared to an earlier period.
This is not a measure of physical product or physical throughput.
It measures the money values of products (both services or goods).
In this context a product is anything that people are prepared
to pay for. So it is irrelevant whether the product is intensive
in its use of physical resources or not.
Economic growth has always measured both the physical and the
qualitative expansion of output. Since until recently physical
output expansion has overwhelmed quality increase, economic growth
has seemed to be a measure of increased physical output. If output
increases were mostly qualitative improvements then economic growth
would appear to reflect improvements in quality rather than increases
in physical output.
The reason why economic growth must reflect both increased physical
output and quality improvement is as follows. Economic output
can be said to have expanded if, after correcting for inflation,
the real money value of all production has risen. How is inflation
measured? A representative range of goods and services are examined
by bodies such as the Australian Bureau of Statistics. The current
price of each good or unit of service is compared with its earlier
price. If the goods or services are physically identical then
price changes reflect inflation or deflation. But the goods or
services in particular categories (e.g. photocopiers, margarine,
medical services, etc.) that are produced in one period are rarely
identical. There are usually quality improvements or declines
as well. So before the inflation rate can be determined, these
quality changes have to be estimated as a percentage change and
then the quality-corrected price of the goods and services can
be compared over time.(1) With all this information in hand it
is then possible to estimate the rate of economic growth.
4. Economic growth does not measure welfare
======================================
Economic growth does not measure social welfare. However, it has been considered to be a useful measure by many politicians and economists because high rates of economic growth have often been associated with:
* higher employment levels
* higher average income levels
* greater equality of income distribution.
These three factors are widely considered to correlate with overall
social welfare. In some situations the correlation can be strong
but in other situations it is very weak.
For example, contrary to normal expectations:
* total social welfare could decline despite an aggregate increase in the size of the economy if most people's income were to decline. (Growth in the economy with reduced incomes for most people could occur if the increased wealth and income concentrated in a very few hands)
* total social welfare could fall despite increases in employment
if family care and other community development functions, previously
done voluntarily, were no longer done to an adequate degree, even
on a paid basis.
5. Economic growth does not measure environmental impact
=================================================
Economic growth does not measure environmental impact or the depletion of resources. However, it has been considered to be a useful measure of these changes by many environmentalists because, to date, high rates of economic growth have usually been associated with:
* rapid depletion of physical resources
* rising pollution levels
* destruction of natural systems and species
* loss of urban and rural amenity.
However this correlation could break down if resource conservation
and environmental protection became a major preoccupation of society.
For example, if all new investment was selected on the basis
that it not only increased economic productivity but also reduced
the level of environmental damage and the consumption of non-renewable
resources, then there would not be a close link between economic
growth and environmental damage and resource consumption.
6. Should we promote or oppose economic growth?
==========================================
By definition, economic growth is directly correlated with only
one thing - the level of economic output compared to an earlier
period. What this means in the real world for either environment
or social welfare cannot be determined until the detailed character
and impact of the economic production is examined.
For example, just because the production of a certain quantity
of particular goods and services creates a net human welfare gain,
it cannot be assumed that more of those goods and services will
produce a proportionate further increase in human welfare. If
the need for a good or service has been virtually saturated, the
net welfare generated by an increase in production would, most
likely, be less than proportionate and may even be negative.
Alternatively, the increasing abundance of a good or service might
lead to greater awareness of how to use the product or may lead
to it being used more actively, in which case there could be a
higher than proportionate increase in human welfare if an additional
increment of the good or service was produced.
Even though it has been very common for negative environmental
effects to be caused by increased economic production, it cannot
be assumed that this must always be the case. If additional products
were used to consciously improve the environment and conserve
resources, then having more of these products could well be environmentally
beneficial. Or, if the production of products with potentially
negative effects was coupled with other economic activities that
prevented the potential negative impacts or compensated for them,
then the net effect of increased production may not be negative.
So the critical conclusion is that economic growth should be neither
automatically promoted nor automatically opposed. Before making
any judgement, the actual character or content of the economic
activity should be examined. Increased output of products which,
when taken as a bundle, boosted social welfare and environmental
protection/resource conservation should be encouraged (i.e. there
should be positive economic growth) while activities which, when
taken as a bundle, reduced social welfare or reduced environmental
protection/resource conservation should be wound back (i.e. there
should be negative economic growth).
So the focus should not be on the total level of economic activity
in the abstract, but on the content and proportions of 'good'
economic activity versus 'bad' economic activity.
Changing the character of economic activity is much more important
than just boosting or contracting the economy overall.
Being fixated on economic growth (to boost it or oppose it) is
rather like trying to drive a car by looking at the speedo rather
than the road (i.e. the destination) or like playing tennis by
watching the scoreboard rather than the ball.
7. Is it possible to have economic growth in a profoundly green economy?
==========================================================
An ecologically sustainable economy would be one in which current physical resource demands were:
* reduced dramatically, i.e. by at least * of the present consumption level, and then stabilised
and the production system changed so that there was virtually:
* 100% recycling
* zero pollution discharge
* 100% reliance on renewable energy, and
* zero loss of native species and ecological communities.
An economy could only meet all these requirements for any length
of time if the population was not growing. Indeed in many countries
the task would be easier if the population stabilised at a level
lower than the present one.
Economies will have to adopt this physical profile if greenhouse
warming is to be stopped and a range of other environmental problems
overcome.
The human needs that an environmentally sound economy would have to meet are of two broad kinds:
* bodily needs such as food and water, shelter, warmth, waste disposal, etc. These are material needs
* psychological needs such as love, self worth, stimulation,
community, sense of place, fulfilment, etc. These are potentially
or actually non-material needs.
So is it possible for economic growth to occur in such an economy?
Economic growth (on a per head basis) occurs when one or more of the following happen:
* productivity rises due to an increase in the quality of goods and services (and working hours do not fall)
* productivity rises due to an increase in the number of units of goods and services (and working hours do not fall)
* more hours are worked through more people being employed
or longer hours are worked per employed person (and productivity
hasn't fallen)
Increasing the hours worked cannot produce economic growth in
the long term since eventually full employment is reached and
there is a limit to how many hours individuals can and should
work.
There is a complex limit to the number of goods and services that
can be provided. The need for the economy to be ecologically
sustainable sets an upper limit on the total amount of physical
resources that will be available for making products and providing
services. Available time sets an upper limit on the volume of
services that can be directly experienced by final consumers.
Given these limits greater numbers of products and services can
be created if they become less resource intensive. However, technological
advance, the characteristics of the production and lifestyle infrastructures
and the material or bodily needs of humans set the limits on how
low resource intensity can go.
There does not seem to be any obvious theoretical limit to how
far the quality of goods and services can be improved. However,
the rate of quality improvement is limited by the speed of improvement
in technology and the rate of evolution of lifestyles or ways
of living.
So the ways in which economic growth can occur in a profoundly green economy appear to be as follows:
* while there is unemployment and underemployment, increasing the hours worked can result in economic growth
* for as long as technology can reduce the necessary resource intensity of goods and services then increases in the number of goods and services can result in economic growth
* since quality improvements in the 'service' value of goods
and services seem to have no clear limit, they should be able
to allow economic growth to continue indefinitely.
Economic growth per head could occur despite overall resource constraints while:
* the population was declining.
(The rate of decline cannot be too high or there will be welfare
losses rather than gains due to burden of increased old age dependency
and because infrastructure would have to be scrapped well ahead
of the end of its economic life.)
So the possibilities of increasing welfare per head (a better goal than economic growth per head) seem to come down to the following:
* stabilising the population (perhaps at a reduced level)
* increasing the resource efficiency of producing, delivering and using all goods and services
* ensuring that the non-material needs of humans are met as far as possible in a non-material way (i.e. dematerialising the services and goods that are used to meet peoples non-material needs)
* wherever possible, improving the quality of goods and
services rather than increasing their physical quantity.
These four strategies would require an interplay between improved
information, modified infrastructure and institutional arrangements
and changed lifestyles.
In effect what these strategies do is:
* in the near term, lower the physical resource demands of the economy to a new, very much lower level while maintaining real welfare, and
* extending beyond the near term into the distant future,
generate welfare gains through qualitative improvements in services
and goods (without requiring additional physical resources).
These qualitative improvements would register as economic growth.
So to come back to the question posed at the start of this section:
there are in fact theoretical circumstances in which economic
growth could occur in a profoundly green economy.
8. Is it likely that economic growth will occur in a profoundly green economy?
=============================================================
It used to be routinely assumed that if there was a reduction
in the physical resources available to the economy there would
have to be a fall in productivity. However, physical resources
are not the only factors of production.
The factors of production in any advanced economy are:
* labour (unskilled, skilled)
* information
* plant, equipment, technology hardware
* 'land'
* recycled materials
* recovered energy
* renewable energy (direct solar, hydro, wind power, biomass, geothermal, etc.)
* renewable materials (wood, fibre, food stuffs, water, etc.)
* newly extracted non-renewable materials (minerals, etc.)
* newly extracted non-renewable energy (coal, oil, gas,
uranium).
If the total input of physical resources into the economy is to fall dramatically then overall productivity must be maintained by increasing the use of other factors of production. Given that recycled materials and renewable energy are often (but not always) more expensive than newly processed non-renewable resources, the main factors of production that must be relied on to maintain productivity are:
* skilled labour
* sophisticated machinery and technology
* information.
All three of these factors are in fact the product of or are highly
influenced by the information industry.
A strategic analysis shows that the move to a profoundly green
economy could, far from bringing economic growth to an end, actually
make it easier to continue high levels of quality driven economic
growth for longer.
Measures to create an ecologically sustainable economy are likely to boost the growth of economic productivity and gross econmic output by:
* favouring dynamic sources of growth rather than static efficiency, for example, galvanising the economy more effectively around the information industry which is now the biggest source of economic growth;
* requiring a very close focus on the needs of the customer
thus increasing the chance of creating added value and trade competitiveness(2);
* creating greater producer awareness of product quality over a full use cycle and the incentive for producers to maximise product lifecycle efficiency due to the adoption of lifetime leasing, take-back or extended product responsibility policies;
* creating a strong focus on total system design and total
system efficiency and effectiveness(3);
* making it politically easier to favour savings (and hence investment) over current consumption;
* fostering an acceptance of investments with longer term payoffs (lower discount rate);
reducing the loss of productive capacity caused by high unemployment;
* reducing the cost of supporting unemployed people and
reducing the cost of handling the negative externalities generated
by higher unemployment;
* shifting from a focus on the growth of labour productivity to total factor productivity;
* in time, favouring the retention of employees in firms
during economic downturns thus retaining skills and providing
a more effective base for productivity improvements and innovation(4);
* eventually making urban renewal cheaper than greenfields development thereby reducing the waste of urban and social capital involved in urban decline(5);
* requiring Australian product exporters to better meet the environmental needs of the high-population countries thus boosting the economies of scale available to industry by making it easier to access larger markets;
* improving economic efficiency by reducing materials throughput(6);
* by improving the efficiency of stock utilisation by final users(7);
* by accelerating the introduction of the paperless office, by reducing traffic gridlock(8) and by reducing the cost of servicing urban allotments(9);
* more effectively tapping the productivity boosting effects of new, smaller scale and decentralised renewable energy technologies. These technologies can be mass produced thus achieving economies of scale and dynamic production advantages compared to the relatively few but massive energy projects that dominate energy production now (Flavin & Lenssen, 1995);
* reducing the drain on the economy and on wellbeing caused by environmental damage and the depletion of high quality resources. (The economic cost of avoiding these problems would be much less in a profoundly green economy that radically restructured to avoid them than it would be in a moderately green economy that had to do a lot of remedial work.);
* reducing the social log jam over development. (This is especially important for economies like Australia which are currently very resource intensive.);
* contributing to the ecologically sound creation of wealth among the poorer sections of poorer countries that is not heavily dependent on exports to the rich countries(10);
improving local economic development multipliers because it is
easier to identify good investment opportunities (related to environmental
improvement) with a consequent higher rate of retention of locally
generated investment funds.
It might be useful to use a parable to illustrate the way economic
growth could occur in a very green economy.
Interlude: The People's Green Utopia
==========================
The green revolution had succeeded and the People's Collective
met to decide what to do. It was well known that the evil capitalist
growth machine had very nearly destroyed the Earth (with some
help from the only recently demised evil communist growth machine).
The members of the People's Collective sat in a circle and after
the appropriate rituals of celebration and ReEarthing turned to
the question of what should happen with the economy. The issue
was workshopped extensively until a consensus emerged. The Collective
recognised that while they knew what they were against they were
not completely sure what they were for. So a thorough process
of consultation would be needed to determine what the revolutionary
economy should look like. One thing was clear however and that
was that any new economy would have to be totally ideologically
sound - showing a deep respect for Gaia and all beings of the
Earth, both human and non-human.
So the Consultation began. For three years it ran. In the meantime
no new economic initiatives were made. The more outrageous aspects
of the consumer economy were closed down and people shared out
the reduced working hours and take-home pay. Solidarity was strong
and spirits were still high.
At the same time, unknown to the People's Collective, an underground
movement was developing among the few remaining accountants who
had not fled to Singapore after the revolution. They were determined
to maintain the faith. They had seen the USSR crumble after 80
years. So they felt it was their duty to the capitalist way to
document the folly of the new regime. In time people would tire
of putting the environment ahead of the economy and the truth
that the accountants would document and spread through their samizdat
publications would eventually undermine the evil green regime.
During those first three years the accountants, meeting secretly
in twos and threes, built up a wonderful picture. Their data
showed an economy in deep recession with production, working hours
and income declining, investment stalled and an increasing level
of uncompetitiveness in the traded good sector. Even more exciting
was the fact that the consumption of energy and other resources
and the production of pollution was still surprisingly high, recycling
schemes were in crisis for lack of markets for the collected material,
no meaningful progress had been made in introducing renewable
energy sources since few could afford them, and soil erosion was
on the increase because of a lack of public and private funds.
So the People's Green Utopia was even failing on the green front.
Then the Great Consultation came to an end. The consensus had
been reached. The transformation of the economy could begin.
The people of Green Australia would no longer worship economic
growth. The false idol had been toppled. Only socially and ecologically
useful initiatives would be permitted. The money system would
be based entirely on ethical investment and the rest of the economy
would run on LETS Schemes. Instead of large companies, small
empowered work units would be promoted (with a wide range of legal
structures) and these would be intensively networked and supported
by an array of small supporting businesses.
The transition to a renewable energy base would begin immediately,
virtually fully recycled products would in time become the norm,
a target of zero pollution and 100% recycling would be adopted
for industry and the public. Urban areas would be reshaped to
drastically reduce dependence on the car. Degraded environments
would be repaired and natural areas protected. The residue of
the consumer mentality from the old society would be snuffed out.
A compulsory savings scheme would be used to soak up spare money
that might otherwise be spent on trivia. In recognition of the
environmental and social disaster in the making in Asia, as it
developed under the virulent Asian variant of capitalism, Green
Australia would re-orientate its entire export program to promote
"conservation, wellbeing and empowerment". Exports
of physical resources would be cut. Instead Green Australians
would work in grass roots partnerships to promote the greening
of Asia and the elimination of poverty. The People's Rolling
Plan recognised that action had to be taken urgently if the Earth
was to be sustained and poverty ended. The 17 million people
of Green Australia would have a lot to do over the next 20 years
if they were to meet their ecological and social deadlines.
Behind the scenes the dissident accountants prepared to record
the next phase of the Green Madness. The last three years had
been bad enough, with Australia turning its back on the only successful
form of economic development known to Man (sic). Now these Green
Australians were going to take the stalled economy and throw it
180 degrees into reverse. The current disaster would rapidly
become a catastrophe.
Oblivious to their fate, the Green Australians pressed on. Now
that the prohibition on initiatives had been lifted there was
actually a discernible sense of optimism and energy in the air.
Extensive visioning and training exercises conducted in the previous
three years meant that people had a good idea of what sorts of
initiatives would be desirable. They knew that all new projects
would be vetted by People's Review and Improvement Committees
and it could take a project quite a while to get through this
process if it wasn't pretty good to start with. So people set
to with some enthusiasm to pursue the new directions. Grass roots
links with Asia and the West Pacific were developed apace. The
social and environmental needs were so great that it looked like
you could involve almost everyone in Australia in some way.
At the end of the first year the network of the Accountants for
the Restoration of Sanity and Unfettered Capitalism (ARSUC) sprang
into action to calculate how the economy had gone over that time.
As the results came in a flicker of puzzlement developed in the
minds of the few key analysts who were allowed to access the full
data set. The free fall the economy had been in during the previous
four years had slowed dramatically. Net production was still
lower than the previous year. But what used to be known as consumer
confidence was up and personal spending had risen significantly
mainly because of personal investment in new initiatives. However
these results were clearly abnormal, possibly due to the booming
Asian market and the short lived effect of lifting the three year
initiatives ban.
In the second year many of the first year's projects picked up
steam. People were gaining experience. The networks were getting
more effective. Inventive types were developing better ways of
doing things. This freed a bit of time and resources to devote
to some of the other pressing initiatives that had to be put off
the previous year.
When the second year ended the accountants of the Central Data
Analysis Group of ARSUC found the economic indicators to be poor
again. For the first time since the Revolution production levels
in the economy hadn't fallen. This had to be due to some abnormal
event or it might even be due to errors in data collection or
processing. So a special task force was set the job of searching
for any errors.
During the third year the Green Australians quickened the pace
of rebuilding their industries, cities and farms. The global
support and solidarity networks established with greenies around
the world in the years before the revolution were starting to
produce unexpected results. Throughout the networks people were
hearing about the new sense of direction and purpose being shown
in creating a green economy in Australia. Ethical investment
funds, alternative technology groups, a significant number of
individuals in mainstream companies and government agencies, and
even some semi-mainstream companies became very excited and stared
to get involved with projects in Australia. Knowhow, money, markets
..... the global village turned its attention to the green and
just opportunities that were emerging in Australia.
The ARSUC task force reported. There had indeed been data errors.
It was inevitable given the difficulties the accountants were
working under. But the errors had effectively cancelled each
other out. So it was true! The economy had stopped contracting!!
In fact the figures for the year just passed showed that while
physical resource use was 25% lower than the pre-revolutionary
high (and was projected to fall much further), economic output
had actually expanded! What was more remarkable was that one
ARSUC member, on a whim, had divided the economy into those elements
that were the mainstream in the pre-revolution economy, and the
new elements introduced since the revolution. The bulk of the
economy was still pre-revolutionary in character but the pre-revolutionary
sector was declining steadily. What was extraordinary was that
the new elements of the economy, although starting from a very
small base, were expanding at over 30% per annum. At that rate
aggregate economic production would significantly exceed the pre-revolutionary
levels within 10 years! The Central Political Committee of ARSUC
was called into emergency session.
-----
The People's Collective of Green Australia was called into emergency
session. A group of university based green economists had recently
done some analyses of the economy to definitively and empirically
prove at last that social wellbeing and environmental quality
could rise, and the economy could operate viably with an ecological
sustainability target, while economic growth fell. To their total
amazement what they found was that after the initial massive slump
following the revolution, economic growth had stopped being negative
and was now back to the pre-revolutionary long term average (about
2% growth). But more remarkable than that, the long run projection
was for the economy to actually start growing in aggregate at
about 8% per annum within the next 10 years.
This news flashed around the electronic networks and across the
country within hours. Messages of dismay and confusion poured
into the Bulletin Boards and specialist 'conferences'. Recommendations
started to build and soon grew into an avalanche. A dominant
theme was that something would have to be done immediately to
stop this economic growth. It would be necessary to reimpose
the earlier ban on initiatives and then to put in place a rigid
system to ruthlessly weed out all ideologically unsound projects.
While this discussion was going on, other people on the network
started to analyse the national accounts more carefully. The
tasks were divided between ad hoc volunteer task forces. Within
two days the results came in.
There was no fault in the project assessment process. While many
Australian projects both domestically and internationally were
still a way short of the ultimate goals of 100% recycling, 0%
pollution production, 100% renewable energy base etc. they were
almost universally within the trend band that had been set earlier
to judge ideological soundness!
There was only one conclusion that could be drawn. The single minded but innovative and entrepreneurial pursuit of the ideal had inadvertently generated economic growth and high levels at that! Significant contributing factors were:
* the very high savings rate (one of the highest in the world, just slightly ahead of Singapore)
* the low failure rate of Australian investments aimed at helping the poorest people in the Asia West Pacific region to become better off, and the fast spiral of productivity improvement that socially and environmentally appropriate investment set up in these communities
* the high demand in both high and low income countries for environmentally and socially sound technologies and systems developed or 'packaged' in Australia.
* the dynamism of networks of small businesses when they had good back up and access to capital
* the dynamism that the Australian economy gained from shifting from reliance on the minerals and primary production sectors to the information industry, and the personal services and elaborately transformed manufactures sectors
* the reduced need for defensive expenditure as environmental
damage declined, health conditions improved and community cohesion
increased.
The green economists and indeed the whole nation went back to
their theory and began to revise some of their central assumptions.
It was now clear that economic growth is a resultant not a goal.
It should be neither pursued nor opposed to its own sake. Both
actions would be a fetish. The key issue was what the economy
does and what it produces. If the economy delivered high levels
of wellbeing and fulfilment and it was also truly ecologically
sustainable, then that was all that mattered. Whether the national
accounts showed growth or not in these circumstances didn't matter.
Historians of Green Australia don't know what the ARSUC accountants
thought about these questions because extensive searches revealed
no further records of the group. It appears that the group fell
into disarray and was eventually abandoned.
9. Will economic growth always cause inequality to increase?
=================================================
Economic growth per head is caused by increasing working hours
or increasing productivity. There is nothing in this that automatically
means that growth will either increase or decrease equity - either
within Australia or between Australia and other countries.
During the post Second World War boom, in areas such as the US,
Europe, Japan, Taiwan and Australia, economic growth correlated
with increasing equity in wealth and income distribution. In
many other countries, and indeed in the US, Europe and Australia
in more recent times, growth has occurred alongside increasing
inequality in wealth and income.
Which way it goes really depends on whether or not the economy
that is expanding favours the creation of jobs for the low skilled.
For nearly three decades after the 2nd World War in US, Europe
and Australia it did. In more recent times in these areas it
has not.
The solution to the equity problem is not to promote or oppose
economic growth as such, but to change what the economy does so
that the currently unskilled become skilled or so that productive
jobs are created for the unskilled.
10. Surely environmentally sound economic growth cannot go on forever?
=========================================================
Even if people concede that economic growth could be managed so
that there were no negative environmental effects for a period,
most growth critics believe economic growth could not occur for
any extended period without a re-emergence of environmental problems.
To some extent this must remain an open issue since we have never
before tried to run a truly environmentally sound industrial economy
for even a short period. However, there is one point of comparison
that could indicate what can be done. Life has existed on the
planet for over 3* billion years. During that time life has had
to cope with a fixed supply of materials and a roughly constant
energy supply. And yet there has been continuous evolution or
'development' of the forms of life on the planet and the ecosystems
they make up. For most of the 3* billion years, this 'growth'
has been caused by 'quality' improvements (evolutionary development
within species, increased numbers of species and the growth of
complex multi-species communities) rather than increases in the
total mass of living things.
Most green or ecological economists now recognise that while physical
growth in economies cannot occur for more than short historical
periods without major ecological damage, qualitative development
could continue indefinitely. However what is not generally recognised
is that economic statistics make no fundamental distinction between
quantitative and qualitative growth. Hence if the economy were
to shift from unsustainable physical growth to sustainable qualitative
development the economic statistics would simply show continuing
economic growth.
11. The policy implications of a more accurate understanding of the growth issue
==============================================================
It was asserted at the start of this paper that "if [people's]
understanding [of growth] is inadequate or faulty then the policies
they advocate are likely to fail and may even be quite damaging".
Hopefully by now the error involved in being either automatically
for or automatically against economic growth should be clear.
It is now time to turn to the policy implications of having an
accurate or an inaccurate view of economic growth.
These implications are best demonstrated by looking first at the
policy errors that arise if one believes that economic growth
is either automatically a good thing or automatically a bad thing
and then by looking at the appropriate policies that emerge if
the accurate view is held that economic growth is not automatically
good or bad.
11.1. "Economic growth is always good": Some policy errors
----------------------------------------------------------------------------------
Many people erroneously think that economic growth automatically has a number of positive attributes and that the higher the rate of economic growth the faster or more fully the benefits can be gained. Economic growth is assumed to automatically create:
* full employment
* high average incomes
* more egalitarian income distributions
* social harmony and cohesion
* the wealth needed to protect the environment and overcome social problems
* the capacity for an economy to be competitive into the
future.
If people believe that these benefits automatically flow from
economic growth they are likely to promote policies aimed at creating
high rates of economic growth without paying attention to the
quality of that growth, or to the substance of what is being produced
including its life cycle effects. The indiscriminate promotion
of growth may worsen the very problems it is meant to solve and
may create other unintended negative side effects.
For example:
* if economic growth is being caused mainly by investment in labour saving equipment or systems, then more of it will probably worsen the prevailing level of unemployment
* if economic growth is being caused mainly by investments that are only viable if low wages are paid then the average wage could be very low despite any economic growth (e.g. UK at present)
* if economic growth is being caused mainly by investments that are dependent on very high skilled people (and not much is done to raise the skills of the currently insufficiently skilled so that they can participate in the new employment) then income distributions could be very inegalitarian and more growth of this type could make the situation worse
* if economic growth is being caused mainly by investments that cannot utilise existing workers even with retraining or the location of new investment is far from the old investment or the new investment cannot support high wages or there is little need for low skilled workers or there is inadequate retraining for workers (regardless of their current skill level), then economic growth could lead to social dislocation and community breakdown
* if economic growth is being caused mainly by investments that create irreversible environmental or social damage or the profligate use of non-renewable resources or if it causes environmental or social problems that cost more to fix than the economic surplus that is generated, then environmental and social problems could be made worse despite the wealth generated
* if economic growth is being caused mainly by investments
that do not require local entrepreneurial or technological skill
or that are concentrated in the same very narrow specialisation,
then that form of economic growth could leave the economy very
vulnerable to future technological or market changes because there
will be little capacity for adaptation.
People who have committed the intellectual error of being indiscriminately
in favour of growth need to recognise that certain types of economic
growth are better that others and that some forms of economic
growth should not be supported at all since they are worse than
no growth at all.
11.2. "Economic growth is always bad": Some policy errors
--------------------------------------------------------------------------------
A significant number of people erroneously hold the opposite view
that economic growth always has negative features and no economic
growth can have any desirable features overall.
Economic growth is assumed to automatically cause:
* the destruction of the natural environment
* wastage of non-renewable resources
* increasing levels of toxic waste and pollution
* social inequality
* the intensification of materialistic values.
If people believe these ideas they are likely to oppose any policy
that might lead to economic growth (e.g. high savings and investment
rates) and some may even argue for policies that are specifically
aimed at preventing any economic growth (e.g. arguing for a decrease
in the general capital intensity of the economy). Such indiscriminate
policies could make it impossible to achieve desirable environmental
and social goals. For example, solar energy is more capital intensive
than coal based electricity production (the ratio of up-front
costs to running costs is greater) but that is no reason to oppose
solar energy.
Economic growth need not be automatically associated with the
negative features described above if the right policies are implemented
effectively.
For example:
* if a general prohibition on the further clearance of native vegetation and habitats was introduced; if companies undertook biodiversity life-cycle assessments along side the pollution, waste and energy audits that many of them do now and then undertook product and process redesign as a result; if industry sectors were restructured to maximise the use of recycled material, to reduce resource intensity generally and raw materials were drawn from already cleared areas rather than from native habitats; if population growth ceased (and even fell for a period); and if major efforts were put into restoring damaged habitats, maintaining existing habitats and recreating 'natural' habitats to help overcome the past loss of habitat; then economic growth based on quality improvement rather than increases in the quantity of physical goods could coexist with the maintenance of nature
* if a suite of depletable resources and waste disposal taxes were introduced which grew with the size of the economy and if structural adjustment programs were put in place to help industries and communities to adjust, then the economy would actively conserve non-renewable resources and switch substantially to renewables despite any economic growth that might occur
* if zero waste discharge targets were set by industries to guide their continuous improvement programs and if waste discharge/disposal taxes were introduced which grew with the size of the economy, and if the industrial ecology principle that 'all wastes should be treated as raw materials for other processes' were adopted, then the level of wastes discharged to the environment should fall dramatically despite any economic growth
* if industries and governments favoured investments that on balance were more labour using than labour saving and favoured investments that enhanced the skill levels of those currently with lower skills; if wage subsidies were introduced for the relatively unskillable; and if generally redistributive policies were adopted or strengthened; then social equality should be enhanced despite any economic growth
* if ethical investment was the norm and resource taxing
and other policies favoured development based on qualitative improvement
rather than quantitative expansion, then non-materialist values
would be favoured regardless of any economic growth.
If policies were adopted to block any possibility of economic
growth, these policies would almost certainly also block the rapid
emergence of a conserver society or a green economy.
The most important cause of economic growth is increased productivity and the main contributors to productivity growth are:
* technological and organisational innovation
* investment.
Innovation requires research and development and education. Investment
requires savings or profits. A consequence of increased productivity,
in particular increased labour productivity, is that the capital
intensity of the economy rises.
Economic growth could be stopped by putting a block on all forms
of innovation and all investments. It could be slowed down by
stopping research and development and education and by reducing
savings or blocking lending from savings accounts.
However it will take a great deal of innovation and investment to:
* restructure urban areas to be energy conserving and minimally car dependent
* rebuild manufacturing industry so that it approaches zero pollution and zero waste dumping
* create a renewable energy base for society
* convert farms to sustainable agriculture practices
* restore the land and control environmental pests
* eliminate poverty and create full employment.
The investment task is even bigger if, to meet environmental deadlines,
previous environmentally unsound investments are written off before
the end of their economic life.
So blanket or indiscriminate anti-growth policies would slow down
or stop this transformation.
Even just slowing down the transition would be disastrous ecologically.
For example controlling global warming caused by the greenhouse
effect will require a global improvement in energy efficiency
of about 5% per year in every country for the next 30 years.
This is 2* time what the Japanese achieved during the height of
the OPEC induced energy price rises during the 1970s.
So it is critical that people are discriminating when they are
deciding what they are against.
11.3. "Economic growth is neither automatically good nor bad": The implications
----------------------------------------------------------------------------------------------------------
There are a number of important implications arising from the
view that economic growth should be neither promoted nor opposed
for its own sake.
Existing and proposed economic activity should be supported if
it contributes to the achievement of society's environmental and
social objectives, and opposed if it detracts from those objectives.
To make judgements about existing economic activity requires an
appropriate assessment process. However for new activities or
projects it is possible to not only assess proposals but also
to take steps to ensure that the proposals are designed from the
start to be socially and environmentally valuable . This can
be thought of as the proposal generation process, as opposed to
the proposal assessment process.
If ecological and resource sustainability are to be objectives
for development, proposals must be designed or assessed in the
appropriate context. You can't talk about a sustainable product
in isolation from its context since it is the environment as a
whole that must be sustained. To make such system-level judgements
in a practical way, it is necessary to invent standardised frameworks
in which it is possible to make judgements. In addition it will
be necessary to maintain publicly accessible environmental histories
for materials and processes used in production.
It might be thought that an economy in which a range of development
options is being actively opposed would be unable to generate
full employment, a good standard of living and some hope of qualitative
improvement in the future. If socially and environmentally desirable
development can be substituted for socially and environmentally
inappropriate development, then there should be no reason to fear
the adoption of a discriminating approach to economic development.
This outcome is likely if a process of transformed market conforming
planning is applied to the economy. This process is an adaptation
of the concept of market conforming planning which is applied
by the Japanese, some European countries and their emulators.
12. The politics of it all
====================
It is sometimes argued that, while it might be theoretically possible
to have economic growth that is environmentally sound, it is most
unlikely that the measures needed to ensure environmental soundness
will be put in place. And so it is better to just oppose economic
growth outright.
This argument does not make sense politically since opposition
to economic growth as such, and in particular the measures that
would be needed to block it generally, are less popular and less
defensible than are the measures required to make the economy
and society green and socially sound despite any economic growth
that might occur.
While nobody would argue that putting the right environmental
and social policies in place to achieve a truly sustainable society
is easy, it is actually easier than putting in place policies
that will prevent all occurrences of economic growth.
Fortunately in this case the (slightly) easier political course
is actually the technically and morally correct course too.
13. Summary of key conclusions
===========================
* Economic growth and growth in the use of physical resources
are not the same thing.
* Growth in physical resource use, especially exponential
growth, cannot go on for long, on an historical time scale, without
disastrous environmental effects.
* Global growth in physical resource use must be brought
to an end at some point, and in fact there is ample evidence that
society has already gone well past the level of resource use that
would justify this.
* Economic growth should not be automatically promoted nor
should it be automatically opposed.
* Long term economic policies should be framed without reference
to overall long term economic growth. Other more specific indicators
should be used.
* Economic policies should be chosen on the basis of the
specific social and environmental benefits they generate and the
competitiveness and meta-stability of the system that they promote
(some minor instability in economic systems is inevitable e.g.
business cycle fluctuations).
* It is possible that, without actively promoting growth
as a policy objective, the pursuit of ecological sustainability
and the elimination of poverty could nevertheless give rise to
economic growth. This outcome is not a sign of environmental
or social policy failure.
Endnotes
=======
1 Although in theory economic growth must reflect quality improvements,
this is difficult to do adequately in practice because:
* quality is a notoriously subjective concept. Many of the factors that make up quality for a user cannot be tested objectively because they relate to the 'fit' between the good or service and the needs or wants of the user.
* quality is after all a qualitative (rather than a quantitative)
concept. While it is possible to say that product A's quality
is higher or lower than product B it is often not possible in
reality to say that product A has, say, twice or a third of the
quality of product B. Unfortunately it is the latter comparison
that is needed in order to estimate growth when qualitative economic
changes predominantly.
Given the conservative nature of statistics bodies, these difficulties
are more likely to lead to an underestimation of the change in
quality than to an overestimation.
So it is easy to underestimate the contribution quality makes
to economic growth. If economic growth is used as a indicator
for policy purposes then the underestimation of quality could
easily lead to a distorted implementation of the policy.
The underestimation of quality growth also could at least partly
explain the puzzlingly low growth in productivity in the advanced
countries over the last few decades. Quality growth has become
a more and more important feature of the economy during this time.
2 Experience with ecodesign has shown that very close attention
must be paid to the needs of the customer in order to create the
design freedom to find win-win solutions. This close attention
to the customer is likely to yield additional benefits unrelated
to environmental issues thus boosting overall value adding or
productivity.
3 When societies, economies and technologies become complex,
most people focus on incremental improvements in the parts of
the system. This leaves a vast reservoir of economic and environmental
efficiency gains to be made by those who can handle complexity.
4 In a conserver economy tax/subsidy policies would ensure that
the relative prices of physical resources rose strongly against
labour costs. So in economic downturns, employers would be less
inclined to turn to labour shedding as a way of reducing costs.
Instead they would be inclined to save costs by using labour
to reduce resource consumption.
5 The change in cost structure would arise because of Increased
urban land taxation that would be part of a physical containment
policy package and the increase of raw material costs relative
to labour costs.
6 Through cleaner and leaner production - reducing virgin resource
production, improving in-plant resource utilisation, reducing
pollution processing costs, reducing public waste disposal costs.
7 Through increased use of just-in-time hiring rather than product
ownership.
8 By improving public transport operating on its own right-of-way
(eg. rail and sometimes buses and trams), by improving electronic
communications where this substitutes for physical movements,
and by reducing the use of roads thus making commercial movements
faster where they do occur.
9 Through carefully designed higher density and by reducing resource
requirements per person.
10 This is a paradoxical opportunity. Exports by the richer elements of poor countries to the rich countries, for example the US, is a tried and true method of kick starting economic development on a large scale with high growth rates in poor countries. However, such a strategy leaves countries very exposed to international trade cycles and to the correction of the unsustainable US trade deficit. Boosting wealth creation among large numbers of the resourceful poor can be a high growth, lower risk strategy in well managed poor countries. Exports to the rich countries would still be needed to pay for the investment capital under this scheme but the scale of exports would be smaller than strategies where income growth arose directly from export revenues.