Economic growth as an article of political faith

There are irrefutable lessons from Nature that some economists like Herman Daly understood very well. One of them is that there is a big distinction between growth and development. Growth cannot continue indefinitely. Donella Meadows and her colleagues went to great lengths to point out the limits to growth. So did D'Arcy Wentworth Thompson. On the other hand, ongoing development can be sustained. Growth is quantitative. It exhausts resources. Development is qualitative. It recycles resources and rearranges parts to achieve greater and greater synergies. (GW)

Mary Dejevsky: Our irrational preoccupation with growth

Mary Dejevsky
The Independent
December 2, 2011

Growth, growth, growth... The regrettable lack of it and the imperative to encourage it were the guiding themes of the Chancellor's Autumn Statement, as they have been of practically anything anyone has said about the economy for years. Higher growth boosts national wealth and national morale; falling growth pushes countries into recession, which makes them feel, deservedly, very bad. So runs the consensus.

But maybe it is time to end this preoccupation with economic growth as the measure of success, stop chasing high growth that is unrealistic, and apply some ingenuity to making the best of low growth or even decline. With the overall size of the UK economy unlikely to return to its 2008 level until, at the earliest, 2014, might we not feel better about ourselves if, instead of pursuing growth, we were able to improve living standards as a nation by doing more with less?

The fetishisation of growth seems to stem in part from a misconception: that the industrialised world cannot compete with China, India and other emerging economies – as it should in this age of globalisation – unless our growth rates can somehow be made to approach theirs. But these are emerging economies, which are defined by their rapid development. We passed this stage long ago.

To those who then hold up Poland, the Baltic States and others as exemplifying the possibility of high growth closer to home, there is a different answer: these essentially European economies were artificially repressed under Communism. They are now settling back into the slower growth that characterises the Continent's western half. Their growth pattern was abnormal.

The economic rise of China, in particular, has somehow fostered another misconception: that the bigger the economy, the better, and that size is something all should strive for. Of course, a time is coming when the overall size of China's economy will overtake that of the United States. Just look at the comparative population figures. But so what? The more telling comparison – between the US and China, or indeed between any two or more countries – is between their per capita GDPs. China is a poor country, and will remain one for many years, even in the unlikely event that its current growth rates are sustained.

The rich world cannot and should not expect to compete with the emerging world on growth rates – or, in the future, on economic size. The competition, such as it is – and as the Arab Spring has illustrated so clearly – is for higher living standards, for which per capita GDP and purchasing power comparisons are the gauge. No country, Britain included, should beat itself up for not being China.

The reason why Britain – and the US – should be wearing sackcloth to this day is for the fervency of their belief that high economic growth is intrinsically superior to low growth, however it is obtained. Thus we watched the US boasting about its growth rates to the rest of the world in the mid-1990s – President Clinton at the G8 summit in 1997 – and "vibrant" Britain lecturing France and Germany not a decade later about how "old Europe" should emulate Britain and "grow".

Two harsh truths have since emerged about that Blair boom. The first was highlighted by George Osborne for his own political purposes this week, when he cited evidence from the Office for Budget Responsibility showing that "an even bigger component of the growth that preceded the financial crisis was an unsustainable boom". In other words, it was fuelled by –irresponsibly – easy money; it was more of a bubble than a boom.

The other is that, to the extent there was a boom, it did precious little for living standards across the board. It may have looked good, averaged out nationally, in comparison with what was going on in, say, Germany. But, as in the United States, the actual effect was to drive pay at the top into the stratosphere, allow some professional groups just about to hold their own, while excluding and even penalising middle- and lower-income groups. What is more, it is these same groups that now suffer most from the higher inflation and squeeze on credit which are invoked as part of the remedy. If the UK's growth in the early 2000s was not a complete mirage, its effect was not to make Britons more prosperous, but to exacerbate income inequality. What price economic growth if it fails to spread its benefits beyond a fraction of the top one per cent?

The way Britain followed the United States in elevating economic growth to an article of political faith had another pernicious effect, too. It encouraged the vilification of those countries that were growing only slowly or not at all – without requiring any examination of the particular reasons. Thus Germany was condemned for tolerating almost static growth, while it was, on the one hand, bearing the considerable costs of unification, and, on the other, deliberately slowing the growth of wages and benefits to make its industry globally competitive – a long-term objective that it has achieved in enviable style.

The "Great Satan" in the demonology of growth, however, has been not Germany but Japan. Western experts of every stripe have offered their growth recipes to Japan: from increasing the relatively low proportion of women in the labour force, to encouraging immigration, to a thorough overhaul of its business practices.

What is rarely mentioned, except in highly negative terms, is that Japan's is an ageing population, and that its long "recession" goes hand in hand with falling numbers of people. Given the alarm bells that rang when the global population passed seven billion, with forecasts of overcrowding, food and water shortages and the like, why does the reverse not hold? Why cannot a falling population, with static national GDP, not be hailed as the modest success that it is?

The Japanese enjoy some of the highest living standards in the world; their workers are productive, and their universities are at the forefront of researching solutions to the maladies of ageing: from medical and social care to high-tech domestic aids. Static growth need not mean falling living standards. It depends on the circumstances.

And there is a corollary in Britain. Our population is increasing, which in part reflects the country's appeal as a place to live, and a bigger population is likely to have the effect of increasing overall GDP. But higher national GDP, shared out unequally among more people, is hardly calculated to produce a greater sense of wellbeing. Instead of lauding growth for its own sake, we should try to use what we have more rationally, and accept that, in terms of living standards, the erstwhile growth laggards might have something to teach.

m.dejevsky@independent.co.uk