Austerity or growth, austerity for growth, and maybe for a different kind of growth? In 2012, this debate is on the top of the European agenda. But what should we do if growth is no longer possible? As growth and degrowth are both equally unsustainable what we need is “something else”. For this “something else” to be truly sustainable, it will have to be serious about both the recognition of the physical limits of our planet and the need for a more egalitarian society.
Between austerity and green growth
In recent years, the European Union has experienced very low GDP growth, reaching even negative levels. For the EU-27, real GDP growth was 0.3% in 2008 and -4.3% in 2009. It then recovered to 2% and 1.5% respectively in 2010 and 2011 but it is forecast at 0% for 2012. With high rates of unemployment (from around 7% in 2008 to 9% in 2009, reaching now 10% in 2012 for the EU-27) and increased poverty (in 2010, 23% were at risk of poverty)(1), it seems that the crisis is hitting hard. So far, the solution has been: austerity. Austerity, because we don’t have a choice, because we have spent too much, because we don’t have growth.
Yet, while austerity is presented as the only short-term solution, in the medium-term the plan is to get out of the crisis by getting back to growth. However, since it is now generally accepted that economic growth does not automatically deliver social justice and sustainable development, what we need is “addressing shortcomings of our growth model and creating the conditions for a different type of growth that is smarter, more sustainable and more inclusive”. This motto, summarising the objectives of the Europe 2020 Strategy (EU2020), is pretty representative of the current discourse and policy orientations embraced by most political actors in Europe, even among the Greens. In the case of EU2020, this growth strategy is supposed to allow us to reach five key targets on employment, innovation, education, poverty reduction and climate/energy. In order to get there, we count on several initiatives from research and innovation policy to a digital agenda, education, new skills for new jobs, etc.
There are some reasons to doubt the potential effectiveness of this strategy – and of any growth strategy. Although noticeable progress can be seen in a few areas (e.g. the emphasis on resource-efficiency), EU2020, and the general philosophy behind it, looks a lot like its predecessor: the Lisbon Strategy. Launched in 2000 by the European Council, the Lisbon Strategy aimed at making of the EU “the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion” in ten years. In other words, smart, sustainable and inclusive growth. By 2010, most of its goals were not reached. Neither its main target of 70% employment rate was met (only 66% in 2008 against 62% in 2000), nor its goal of 3% spending in research and development (it only went from 1.8% in 2000 to 1.9% in 2010).
Yet, while austerity is presented as the only short-term solution, in the medium-term the plan is to get out of the crisis by getting back to growth
If we take a step back, we can find more reasons to doubt the efficiency of growth strategies. Looking for example at the unemployment rate in the EU, it is interesting to note that the apparently high rate of 10% that currently exists is not a distinctive feature of the crisis. On average in the EU, unemployment rates have been 8% in the 1980’s, 9.4% in the 1990’s and 8.6% in the 2000s, exceeding 10% for several years in a row. Crisis or not, growth strategy or not, unemployment has been a structural problem of the EU for some time now. Looking at environmental questions, although interactions are complex it is clear that economic growth and the effects associated to it (change in consumption patterns and in technology, increased trade, etc.) are a major driver of environmental degradation. The most well-known illustration is the very strong correlation between economic growth and greenhouse gas emissions. As underlined by the IPCC, the main cause of climate change is human activities, and in particular the use of fossil fuels, a central ingredient of GDP growth in the 20th century. It cannot be avoided that this correlation is valid, in times of booms – high growth rates go hand in hand with higher emissions – like in times of crisis – worldwide emissions have only decreased after major economic crisis (the Great Depression of 1929, the 1974 and 1979 oil shocks and the 2008-2009 financial crisis).
Figure 1. Correlation between world GDP growth and CO2 emissions (1960-2010)
Growth is not going to happen any more
Persistent unemployment, environmental degradation and the overall difficulty in reaching policy targets already indicate that betting on growth doesn’t work as well as it claims to. More fundamentally, relying on growth to solve our problems is foolish, because growth is no longer an option. There are several ways to explain what drives and ensures economic growth over the long run (4). Looking at some key facts and figures, we have to acknowledge that, in Europe, the main drivers of economic growth (labour, capital and nature) are at least dysfunctional, if not dead. The growth engine is broken and this is not so much a temporary consequence of the crisis than the expression of more profound structural changes.
Roughly, growth is supposed to function as follows: productivity gains, i.e. the ability to produce more with less capital and labour input (thanks to technological and social innovation), allow increasing output whilst decreasing production costs. On the one hand this generates profit which is (partly) reinvested to increase the overall productive capacity of the economy. On the other hand the price of the products can decrease and/or the level of wages can increase, allowing everyone to consume more, stimulating the economy, i.e. GDP growth. Yet, this ‘nice and smooth’ dynamic has been undermined in recent decades.
On the labour side, although productivity has been constantly increasing in Europe in the post-war period, these efficiency gains have not been compensated by a proportional increase in wages, diminishing individual purchasing power. On the capital side, the share of wages in added value has been constantly decreasing whilst benefits were captured by the financial capital (the so-called creation of ‘shareholder value’), without being invested in the real economy (the well-known ‘financialisation’ trend). Combined with regressive fiscal policies, this contributed to create structural unemployment, and increasing inequalities. Moreover changing demographics has been further weakening the labour market by putting pressure on pension funds. While the percentage of the working-age population was stable between 1960 and 1980, it has since declined from 55-57% to 49% in 1986 and more recently 48%.
It is interesting to note that the apparently high rate of 10% that currently exists is not a distinctive feature of the crisis. On average in the EU, unemployment rates have been 8% in the 1980’s, 9.4% in the 1990’s and 8.6% in the 2000s, exceeding 10% for several years in a row.
One may think it would be enough to share the wealth better, to reinvest in the real economy and to stimulate consumption in order to repair the engine of growth. Redistribution is certainly a big part of the solution, but we cannot rely on productivism and consumerism any more to achieve these goals. Our capitalist economic system has indeed not evolved as Keynes himself predicted it would back in the 1930s: he believed that the logical consequence of rising productivity gains would be fewer hours worked. Yet instead of reducing working time (and increasing wages) proportionally, we used these gains to produce even more, in the pursuit of the idea that ‘more is always better’. The development of a consumerist culture allowed the economy to keep up with this productivist philosophy. So, even if we go for “greener” or “fairer”, counting on growth means counting on a never-ending increase of the total production and consumption of economic goods and services. This is already questionable as a general purpose of our human society but is also problematic as productivism is eroding another driver of growth itself: natural resources.
Whatever the recent trends of the ‘dematerialisation’ of the so-called ‘knowledge society’, current economic growth relies more than ever before on natural resources. Globally, the extraction and use of resource is 8 times bigger today than it was in 1900 – with the increase most pronounced in the immediate post-war period (5). This means that our resources and energy reserves are being depleted at an inexorable rate. It is true that simultaneously we have become more efficient in the way we use resource and energy for economic production: in Europe we now need roughly 30% less raw materials and energy than in 1990 to produce one unit of economic value added. However, the overall increase in goods and services we produce and consume – the scale of our economic activity – has been largely offsetting these efficiency gains. In other words, we have been able to decouple economic growth from energy and resource use in relative terms but not in absolute terms, and we are not likely to reverse this trend easily (6).
Finally, even if some of the arguments developed above would need to be nuanced and discussed further, “the proof is in the pudding”: that most drivers of GDP growth do not work any more lies in the evolution of growth itself. From an average of 4.8% growth for the EU in the 1960s, it declined to 3.4% in the 1970s, 2.3% in the 1980s, 2% in the 1990s and 1.5% in the 2000s (7). This general trend is confirmed by most projections, even those made by the European Commission, which forecasts growth rates between 1 and 1.5% for the coming decades (8). So why, if this inexorable low/no growth trend is recognised, do we keep betting on future scenarios based on growth rates that haven’t exist in decades? The golden sixties have been dead for a long time and they are not going to come back any time soon!
Other paths for Europe
So what? If growth is not possible any more, not even a green, inclusive or smart one, what then? Should Greens be in favour of austerity? No, because austerity uses the pretext of scarce (monetary only) resources to impose policies that increase inequalities and poverty while failing to resolve environmental issues. Yet, imposing radical economic “degrowth” would be untenable in a growth society, i.e. our current society. But so long as we go for growth without recognising that its drivers do not function any more we are doomed to fail. Therefore, we need to be creative about how we are going to recycle these broken drivers of growth into new functioning drivers of something else. For this “something else” to be truly sustainable, it will have to be serious about both the recognition of the physical limits of our planet and the necessity of a more egalitarian society.
The growth engine is broken and this is not so much a temporary consequence of the crisis than the expression of more profound structural changes.
Without going too much into the details, there are at least five big moves that should be undertaken simultaneously:
- Share wealth. If the cake cannot grow anymore, we need to share it. This means implementing more progressive fiscal policies, including breaking the taboo of maximum income and shifting the tax burden from labour to capital and environmental resources. In the EU, giving up on the unanimity rule for fiscal matters would be essential to allow upwards harmonisation and the end of fiscal competition between European countries. These measures would also generate more revenue for the State, and would therefore be a fairer way than austerity policies to ensure healthy public finances.
- Share work. Since productivism and consumerism are not a viable option, we need to use labour productivity gains to reduce and share work, allowing more free time for all, but also solving at least part of the unemployment issue. Note however that this will need to be combined with a better distribution of wealth and power between labour and capital, otherwise it may affect badly the most vulnerable. Moreover, in some sectors, we may want labour productivity to decrease, in particular in the care and education sector, where more human work is needed to ensure quality of the services.
- Reorient all financial profit towards investments in the real economy for the ecological transition. In order to ensure the better redistribution of wealth and work serves to build a sustainable society, the power and the importance of the financial sector must be massively reduced, be it through a Financial Transaction Tax, the separation of banking activities, the banning of all financial products that have not proven to be useful for the real economy, the end of the bonus culture, etc. No money should be diverted from investments in the green transformation of the real economy. This transformation will also require proper education and (re)training programs.
- Reduce the overall scale of production and consumption. As we have seen, energy and resource efficiency are important, but considering the existence of absolute limits to the resource availability and the biocapacity of the earth, and of the rebound effect, we also need to rescale our economy downwards. For example, rather than promoting electric cars, we need to embrace a comprehensive vision for mobility which reduces in absolute terms and for all its dimensions the human impact on the environment. On the consumption side, it is also necessary to end the race for overconsumption. This implies a need to fight against inequalities which increase competition and envy between people (9).
- Experiment with local alternatives that are building resilient systems outside the market and the growth logic. Numerous examples should be pursued from cooperative banks to transition towns, online collaborative production or local currencies. This is absolutely necessary to demonstrate the possibility for a peaceful transition, based on principles antagonist to the ones at stake behind growth: cooperation, collaboration and equality instead of competition, individualism and meritocracy.
Obviously, creating something else is not easy. These five points appear a bit like a wish-list, facing various limits and challenges. Firstly, the power and resistance from the financial sector, but also from some industries and trade unions, who tend to be reluctant to change, have a big influence on research and policies priorities as well as on the orientation of investments. Secondly, the lack of European solidarity and federal vision is a real brake on these vital fiscal reforms. Thirdly, the rhetoric of it has conquered our imaginaries in a very powerful way and in all spheres of society in such a way that there is a big fight to play on the discourse field.
Finally, the biggest challenge is probably that even those who are convinced that growth is not working and is not possible any more do not have a magical recipe to replace it. We are not quite sure about how the macroeconomics of this new system would work without growth, how exactly social security could be financed, etc. Let’s us remind ourselves that growth strategies were invented along the way, tested in real life and not in laboratory. We don’t need to have a turnkey solution to start building the house. Seeds of alternatives are sprouting, so we’d better start testing them on a bigger scale before it is too late.
(1) All figures are from the Eurostat online database www.ec.europa.eu/eurostat. “At risk of poverty” means that they were at least in one of the following three conditions: at-risk-of-poverty (i.e. living in a household with an equivalised disposable income below 60% of the national median equivalised disposable income, after social transfers), severely materially deprived (i.e. a lack of resources and experience in several deprivation items such as paying utility bills on time, keeping home adequately warm, taking one week holiday away from home, etc.) or living in households with very low work intensity (i.e. where on average the adults (aged 18-59) worked less than 20% of their total work potential during the past year).
(2) Own calculation based on online Eurostat online database (www.ec.europa.eu/eurostat). Unemployment was on average between 10 and 10,5% from 1993 to 1998.
(3) Source: Tapia Granados J. et al. “Climate change and the world economy: short-run determinants of atmospheric CO2” in Environmental Science & Policy, Volume 21, August 2012, pp. 50–62.
(4) A very interesting synthesis of the growth/degrowth debate, identifying the main drivers of growth, its advantages and limits and summarising most pro and con arguments in a quite balanced way has been produced by Hinterberger F. and Pirgmaier E. “What kind of growth is sustainable? A presentation of arguments” in Hinterberger F. et al. eds. (2012) Growth in transition, London, Earthscan, pp. 13-53.
(5) This is an average. For example, the extraction of construction minerals increased by a factor 34, the one of ores and industrial minerals by a factor of 27.
(6) See the brilliant demonstration by Tim Jackson (2009) Prosperity without growth. Economics for a finite planet, London, Earthscan. In particular Chapter 5 “The myth of decoupling”
(7) Own calculation from World Bank database. The OECD displays slightly different figures but a very similar trend.
(8) European Commission, Directorate-General for Economic and Financial Affairs (2011) The 2012 Ageing Report. Underlying assumptions and projections methodologies. Note that these figures may even be overestimated, considering the high (and quite unrealistic) projections for unemployment rates and technological changes that are made.
(9) For a development of this argument and more broadly a sensational demonstration that equality is a condition sine qua non of the well-being and overall performance of our societies, see Wilkinson R. and Pickett K. (2010) The Spirit Level. Why equality is better for everyone, London, Penguin Books