AMSTERDAM – Since the 2008 financial crisis threw the world economy into a tailspin, there has been much talk about the need to pursue inclusive, sustainable prosperity. Yet policymakers in developed and developing countries alike have largely continued to rely on reactive, one-dimensional strategies aimed at boosting economic growth, instead of adopting a systemic approach that moves beyond output to account for social and environmental objectives. This may be about to change.
A recent report called New Growth Models – produced by the Nobel laureate Michael Spence and an array of distinguished policy and business practitioners, and released at the World Economic Forum’s meeting in Davos – highlights the deficiencies of the current approach. More important, it calls upon policymakers worldwide to commit to new growth models that foster inclusiveness and sustainability, alongside prosperity.
The problems with the world’s current growth trajectory are well documented. The planet is creaking under the burden of a fast-growing and increasingly consumption-hungry human population.
Moreover, despite great strides in poverty reduction – largely a result of China’s unprecedented economic rise over the last three decades – inequality is on the rise worldwide. And the world’s increasing interconnectedness has contributed to increased volatility, as individual countries struggle to address challenges ranging from food security to financial reform. If policymakers continue to focus exclusively on output growth, the global economy’s stability – indeed, its viability – will be seriously threatened.
Of course, this is not a new notion. The Club of Rome’s controversial 1972 study Limits to Growth set a new standard for modern, ecologically-inspired catastrophe theory, warning that continued consumption at contemporary levels would lead to “global economic collapse and precipitous population decline.”
Disparaged by mainstream economists as technically inadequate, Limits to Growth was effectively buried in the following decades, as the pro-market policies spearheaded by US President Ronald Reagan and UK Prime Minister Margaret Thatcher took root and spread. More recently, the widely distributed benefits of China’s rise confirmed to many that a single-minded focus on growth works in practice, even if it is theoretically flawed.
But three recent developments have reignited the debate about the dangers of unfettered growth. For starters, the global financial meltdown and subsequent recession laid bare the consequences of free-market fundamentalism, thereby undercutting popular and ideological support for the neoliberal view that markets are best at shaping societal outcomes.
Furthermore, China – the embodiment of the go-for-growth movement – has signaled a policy shift toward the pursuit of better social and environmental outcomes, alongside more moderate GDP gains. To be sure, this is largely a case of virtue arising from necessity; as export-driven growth has slowed, the risk of social unrest over issues like air pollution, food toxicity, and corruption has risen. But the new approach is also based on the recognition that China’s continued development depends on a healthy balance between ecology and economy.
This shift is linked to a third, broader development: the world’s growing understanding of where the planet is headed environmentally, especially in terms of climate change. While the science is constantly improving, the evidence concerning the looming challenge is abundant and clear. It is the economics of environmental action that now forms the core of the policy debate – unlike in 1972.
The good news is that fewer and fewer economists question the need to shift to a green economy, though this emerging consensus is not yet reflected in the pro-growth rhetoric of economics or in politics and public policy outside of China and exotic outliers like Bhutan. The question now is how to change the economic rules of the game to provide incentives for potential winners to drive progress – or at least neutralize likely losers’ ability to obstruct it.
New Growth Models argues that markets alone should not decide our collective fate; non-economic goals and metrics – both social and environmental – are also needed to guide countries’ economic aspirations and policies. This is a radical view; if applied to mainstream economic policymaking, the results would be nothing short of revolutionary.