Thursday, November 27, 2014
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Asia’s New Growth Model

MILAN – Led by Asia, the share of the global economy held by emerging markets has risen steadily over recent decades. For the countries of Asia – especially its rising giants, China and India – sustainable growth is no longer part of a global challenge. Instead, it has become a national growth-strategy issue. This marks a sea change in the global structure of incentives with respect to achieving sustainability.

Over the next few decades, almost all of the world’s growth in energy consumption, urbanization, automobile usage, airline travel, and carbon emissions will come from emerging economies. By mid-century, the number of people living in what will be (by then) high-income economies will rise to 4.5 billion, from one billion today. Global GDP, which currently stands at about $60 trillion, will at least triple in the next 30 years.

If emerging economies try to reach advanced-country income levels by following roughly the same pattern as their predecessors, the impact on natural resources and the environment would be enormous, risky, and probably disastrous. One or several tipping points would most likely bring the process to a screeching halt. Energy security and cost, water and air quality, climate, ecosystems on land and in the oceans, food security, and much more would be threatened.

At present, almost any standard measure of the concentration of global economic power would show a declining trend. If that were to continue, the result would be a world in which each country’s contribution to pressure on natural resources and the environment would make sustainability a major global challenge, as the free-rider problem in its most extreme form would prevail. To change course, global agreements that impinge on growth would be needed, along with systems that ensure compliance.

But the trend in concentration will reverse about a decade from now, owing to the size and growth rates of India and China, which together account for almost 40% of the world’s population. Although their current combined GDP is still a relatively small fraction of global output (about 15%), that share is rising rapidly.

By mid-century, India and China will account for 2.5 billion of the 3.5 billion additional people with advanced-country incomes. By themselves, they will cause global GDP to at least double in the next three decades, even in the absence of growth anywhere else.

For India and China separately, and certainly together, sustainability is no longer mainly a global issue; it is a domestic challenge to long-term growth. Their growth patterns and strategies, and the tradeoffs and choices they make with respect to lifestyle, urbanization, transportation, the environment, and energy efficiency, will largely determine whether their economies can complete the long transition to advanced-income levels.

Moreover, both countries know it. There is a growing awareness among policymakers, businesses, and citizens in China and India (and in Asia more broadly) that the historical growth paths that all of their predecessors followed simply will not work, because they do not “scale” to a world economy that is triple its current size.

As a result, these countries will have to invent new growth patterns to reach advanced-country levels of development. They are too big to be free riders, so the incentives relating to sustainability are becoming internalized as national priorities. Perceptions are rapidly coming into line with the reality that sustainability must become a critical ingredient of growth. The old model won’t work.

Of course, no one currently knows how to achieve sustainability at three (or more) times the size of the current global economy. That objective will be determined by a process of discovery, experimentation, innovation, and creativity, with tradeoffs along the way. But the incentive to ignore these issues is gone, independent of what other countries choose to do and whatever global agreements may be reached.

The large, high-growth emerging economies have certain advantages. Integrating sustainability into growth strategies and policies is in their self-interest, and it is consistent with their long-term time horizons. The legacy assets that one finds in advanced countries – the way cities are configured, for example – don’t have to be replaced to the same extent. China’s 12th Five-Year Plan lowers the growth forecast (to 7%) to create “space” to deal with issues like equity, sustainability, and the environment. The process of discovering a new growth path has started.

The emergence of sustainability as a critical element in growth strategies in the worlds’ future largest economies is an extraordinarily positive development, because national needs, goals, and priorities remain much more powerful incentives than international agreements.

This all may seem to be at variance with common wisdom. How could a tripling of global GDP and a fourfold expansion of the world’s high-income population be good news, given all that goes with it? Well, it depends on what one thinks the alternative is. Slow global growth would benefit natural resources and the environment. But that will not happen unless the world’s resource supplies and environmental underpinnings collapse.  So the baseline is high emerging-market growth, the key to which is innovation and adjustment of the growth path.

As Asians drive growth toward more sustainable patterns, they will increase the incentives for others to do so by generating new technology, lowering the environmental cost of growth, and undercutting the argument that leadership incurs competitive and other economic costs, but few benefits.

To say that free-rider problems are gone, or that multinational agreements are no longer desirable, would be incorrect. But real parallel progress, driven by necessity and self-interest, is becoming the most likely medium-term path.

Read more from our "Michael Spence on Reinventing Growth" Focal Point.

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