Should we stop aiming for economic growth?

Advocates of the notion believe that the earth’s fragile ecology will buckle as economic growth places unbearable demands on nature. Many other economists oppose this view, believing that the global ecology cannot be so fragile.

This side of the argument believes that economic growth is still needed in developed economies to improve welfare. They believe that ways can be found to contain the damage that continued growth might do to the environment. 

Our view veers to the latter side of the debate. We question whether there is such a harsh trade-off between growth and the environment. In our thinking, advocates of “de-growth” are perhaps underestimating favourable demographic trends and technological advances.

We think it is possible to find ways to continue expanding the economy without undermining nature or exhausting the supply of resources or of fresh air and all the things in nature that we treasure. Economic growth models can be updated and reformed, so that a balanced pursuit of economic growth will still be a net positive.

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The basis of the de-growth view

The core assumption underpinning the notion of “de-growth” is that our planet has “biophysical” limits which are coming close to being breached.

Therefore, we need to reduce the size of the global economy so that it fits within these limits. In this view, pursuing economic growth continuously will degrade the global environment through the inevitable over-exploitation of energy and raw materials. 

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The growing evidence of damaging climate change in recent years — rising average temperatures combined with extreme volatility in weather patterns — has strengthened this scepticism towards economic growth.

Proponents of the view observe that while the global economy is almost five times the size it was half a century ago, this was accompanied by the degradation of an estimated 60% of the world’s ecosystems. 

Climate change is seen, in this view, as being driven primarily by the developed world’s cumulative consumption over the centuries. Thus, since these rich countries are deemed to bear disproportionate responsibility for climate change, it is they who must reduce the size of their economies.

Only in this way can enough space be created in the global carbon budget for poorer countries to continue growing without threatening the planet’s future. 

The more hardline advocates of de-growth demand the contraction of target sectors such as fossil fuels, mass-produced meat and dairy, fast fashion, advertising, cars and aviation, including private jets.

Measures to implement this proposal could involve radical ideas such as a reduction in hours worked each week, lowering the retirement age, and encouraging part-time work or adopting a four-day working week.

In other words, there are some persuasive reasons why the idea of de-growth should be taken seriously. However, the question is whether it is the best way forward, or if there are better ways to achieve the same result. 

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Why hardline versions of de-growth are a non-starter

However much we cut and slice it, de-growth will demand a radical change in the lifestyles and ambitions of the citizens of the developed world.

There are several reasons why this idea is simply not going to fly. The first is that it is politically impractical, with little chance that a consensus can be formed among voters in favour of zero growth. Whatever they say, people like growth and all the benefits they bring. 

A second reason is that the idea that economic growth must inevitably cause unacceptable damage to the earth is almost certainly wrong as well.

Third, gunning for low to zero growth could well cause more damage than benefits. 

Let’s take the political argument first. To stand any chance of being implemented, the de-growth proposal will need political leaders to be elected on a platform of zero growth. For that to happen, a broad consensus in support needs to be created in rich countries. 

Political trends in developed countries show that this is just not going to happen. So far, the only political parties in the rich world that might support this notion — the Greens — have made little headway in securing seats in national parliaments. There is virtually no Green representation in the US Congress. 

If anything, the backlash in the US against “woke” ideas is also translating into a strong aversion to ideas such as de-growth.

Looking at the likely agenda of a second Trump presidency, the chances are that we will see the reverse of de-growth policies being implemented, should he be re-elected.

The Trump team is talking about rolling back regulatory changes that protect the environment, so as to promote growth not reverse it. And that is a popular notion. 

The picture is the same elsewhere in the rich world. In the latest general election in the UK, for instance, the Green Party won just four seats out of 650 with 6.7% of the total vote. That result was the best that they had ever won and unlikely to be repeated in the next general election.

In Europe, Green parties are in government but almost always as junior parties in coalitions. In most cases, the Greens’ vote share rarely exceeds 15% of total votes cast. 

Moreover, where there are Green parliamentarians, they are a diverse lot, with most supporting middle-of-the-road policies rather than radical ones such as de-growth. The experience also shows that the more the Greens become part of ruling coalitions, the more likely it is that most of them will shift away from the more radical ideas. 

A second and more fundamental argument against de-growth questions its central assumption — that economic growth must inevitably degrade the environment. Yes, previous episodes of high growth have led to environmental degradation as we have seen recently in China. But lessons have been learnt from that experience and policies are changing so that economic growth can be decoupled from the over-consumption of natural resources and damage to the environment. 

One major reason for this is recent experience which shows that technology can promote more efficient use of resources. Better economic development policies, stronger regulation and the application of new technology have reduced the ecological intensity per unit of economic output. For example, the data shows that the global energy intensity of GDP is now 33% lower than it was in 1970. 

Similar trends are seen in the use of other resources. Think-tanks such as the World Economic Forum have shown that many countries have been able to cut emissions even as the size of their economies continue to grow, by deploying technologies such as renewable energy. 

Another important trend is that population growth is decelerating rapidly as fertility rates plunge across both developed and developing economies. It looks like populations in developed economies will start to fall in time. By the end of this century, Japan’s population would have halved to around 63 million from 124 million now. Europe’s population is forecast to peak in 2026 at 453 million, and then fall to 420 million by 2100. As populations fall, the pressure they place on the environment will ease without the need to stop economic growth. 

In essence, these trends — technology and demographics — can ensure that economic output progressively uses less energy and raw materials. Thus, there is no irreconcilable conflict between economic growth and environmental preservation. 

A final set of arguments against de-growth revolve around the unwelcome effects of a low-to-no-growth scenario. 

Generally, as economic growth slows, unemployment tends to rise and wages stagnate or fall in real terms. This causes welfare losses to the poorer segments of the population in rich countries. The pursuit of de-growth would therefore aggravate inequality. 

As Japan’s economy has shown, a long period of economic stagnation could lead to deflation. That would increase the real value of debt at a time when the trends in debt are already worrying. Very low or no growth will mean a fall in government revenues and a likely rise in spending on unemployment benefits and other social safety nets. Fiscal deficits will rise and public debt will become onerous to the point of triggering a sovereign debt crisis at some point. 

Already, public debt in developed countries has soared as a result of the fiscal costs of managing the Global Financial Crisis in 2008 and the Covid-19 pandemic more recently.

Growth is needed to ensure that public debt remains sustainable. It is generally understood that debt is only sustainable if the rate of growth of the economy exceeds the interest rate. With interest rates having risen significantly in the past two years, the debt dynamics have become more difficult to sustain without keeping economic growth on a solid trajectory.

Deflationary trends could also crystallise a fall in home prices and the values of other assets, leading to financial stresses among ordinary citizens while also raising the risks of yet another financial crisis. 

Another factor to consider is: what happens to developing economies’ growth prospects if the rich world, home to the largest markets for developing country exporters, does not grow? Consumption and investment activities by the citizens of the developed economies are what powers demand for raw materials and intermediate goods that the poorer countries export. 

All in all, the pursuit of de-growth may not be the best way forward. 

A better way forward?

There is a middle way between the advocates of de-growth and those who oppose intrusive regulations to control growth — and it is already taking shape.

Policymakers, companies and ordinary citizens are already adjusting their behaviour to take account of climate change. We just need to expedite and expand on these adjustments.

Note how companies are altering corporate strategies to reduce their carbon footprint, banks are cutting back on lending to fossil fuels and related energy sources and regulators are stepping in as well with rules about energy efficiency. The use of renewable energy is soaring while high prices of raw materials have spurred innovation to reduce the use of materials in manufacturing. 

Separately, proponents of de-growth also need to ask themselves whether pushing for extreme solutions like this will really help their cause. As we can see from the strong and highly adverse reactions to ideas such as drug liberalisation or new approaches to gender, pressing aggressively for sweeping changes can arouse popular anger — even when there might be some merit in the original idea.

The end result is the opposite of what proponents sought to achieve — the inevitable backlash actually sets back progress where it is needed. 

Better to advocate nuanced and more balanced proposals that are likely to be implemented than to reach for the sky. As Voltaire said, “The best is the enemy of the good.”  

Manu Bhaskaran is CEO of Centennial Asia Advisors