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By Siavash Mohades
De-growth, the idea of deliberately shrinking the economy to address climate change and social injustice, has gained traction among a group of European left-leaning politicians. However, this approach is flawed and ignores the complexities of economic growth and its impact on society. Degrowth will effectively leave Europe defenceless against almost every source of global and local crises, including climate change or social inequality.
A town in Italy’s southernmost region of Calabria, a place often defined by its high levels of poverty, organized crime and a lack of opportunity. © Allesandra Bergamin
Unfortunately, a significant number of politicians and passionate activists are drawn to the idea of degrowth, failing to recognise its potential negative consequences.
Interestingly, these voices advocating for degrowth are not new; even classical economists like Thomas Robert Malthus warned of the dangers of uncontrolled growth. Thousands of years ago, Plato argued that the greed associated with progress and wealth accumulation leads to unethical behaviour.
Regrettably - for those close to poverty traps - these voices have now permeated policy-making and decision-making circles: In the same week that an all-time star of growth theory, Robert Lucas, passed away, a three-day “Beyond Growth” conference was held at the European Parliament in Brussels - as ironic as it could be - organised by 20 mainly left-leaning MEPs.
The conference was motivated by the idea that our planet and society have reached the upper bound of economic growth, and we have had enough of it. Clearly, there is a lack of knowledge about the driving forces of economic growth among the participants.
Economic Growth Theory
Economic growth, measured by the growth rate of gross domestic product (GDP), is a simple yet essential indicator of a nation's economic performance. It represents the sum of economic activities within a fixed currency value. However, GDP growth alone does not reflect inequality within a society.
For instance, if the rich become three times richer and the poor become four times poorer, overall economic activity might still show growth. Such events have never happened in short periods, and even though inequality has increased over time, economic growth has been successful in removing absolute poverty from most advanced and developing countries - and even a large group of underdeveloped economies.
The drivers of economic growth are often the accumulation of physical and human capital, technological advancements and human capital enrichment. While population growth may contribute to overall economic activity, GDP per capita, which is a crucial measure of individual prosperity, may not increase.
A society becomes richer, not just economically, when there is an investment in education (human capital), wealth accumulation, and technological progress. Economic growth provides a safety net during uncertain times, offers more opportunities for upward mobility, and enables long-term poverty reduction without excessive reliance on welfare policies.
Conversely, certain social groups may benefit from a smaller economy.
Problems of De-Growing the Economy
However, a smaller economy creates an environment conducive to state-run mafia and corruption. A strong and diverse private sector acts as a democratic counterbalance against illicit economic activities.
De-growth is not the answer to the climate crisis and social injustice - at least in Europe. The European Union comprises countries with a wide range of economic statuses. From wealthier nations like Luxembourg and The Netherlands to the poorer economies of the former Eastern Bloc, the EU encompasses diverse economies under unified policies and directives.
If such policies, for instance, de-growing the economy, are seriously going to be considered, many Eastern and Southern European economies will not only consider leaving the Union but also amplify the climate crisis by industrialising through outdated and emitting technology after being released from the tighter EU boundaries of emissions.
Inequality of GDP per capita is a reliable measure of how country (and regional) economic inequality relate to structural issues and lack of growth. © European Commission
With a significant portion of the continent experiencing zero-growth traps in the last two decades, the notion of degrowth is nonsensical and detrimental—especially when global competitors such as China are rapidly growing at the expense of the environment.
Furthermore, promoting degrowth as a solution to climate change and social injustice overlooks the potential for innovation and technological advancements that can lead to sustainable economic development.
Rather than retreating from economic growth, policymakers could focus on promoting green technologies, renewable energy sources, and sustainable practices - even though most of the approaches that are currently being promoted seem quite sceptical.
By embracing technological advancements and encouraging responsible business practices, societies can strike a balance between economic prosperity and environmental stewardship.
Moreover, addressing social injustice requires comprehensive measures that address systemic issues, promote equal opportunities, and ensure the fair distribution of resources.
It is crucial to emphasise inclusive economic growth that benefits all segments of society rather than resorting to drastic measures that may harm the most vulnerable more than everyone else.
The Danger of a Failed European Economy
De-growth is not the solution to climate change and social injustice, especially in the case of the European Union. Underrepresented groups such as immigrants need purposeful jobs, which would eventually need and drive GDP growth.
Economic growth, when pursued responsibly and sustainably, has the potential to improve living standards, reduce poverty, and drive innovation.
Rather than advocating for the contraction of economies, policymakers should prioritise efforts to decouple economic growth from environmental degradation, invest in renewable energy and sustainable practices, and address social inequalities.
A comprehensive approach that balances economic progress with environmental and social concerns is necessary to build a prosperous and equitable future for all.
Sources: The Economist, Bloomberg, Our World in Data, Advanced Macroeconomics (David Romer, McGraw-Hill Companies)
Written by Siavash Mohades
June 2023
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