The growth conundrum

By Laura Tyson and Jonathan Woetzel

Rapid economic growth has placed enormous pressure on the environment. As demographic tailwinds turn into headwinds, and environmental challenges become ever more apparent, businesses and governments need to think carefully about how to improve resource efficiency while fostering more inclusive economic growth, write Laura Tyson and Jonathan Woetzel on Project Syndicate.

The world faces a major dilemma. While rapid economic growth, such as that realized over the past 50 years, is critical to support development, we now also know that it can have serious adverse consequences, particularly for the environment. How can we balance the imperatives of growth and development with the need to ensure sustainability?

The unprecedented growth of per capita income during the last 20 years has lifted more than one billion people out of extreme poverty. In developing countries, life expectancy has increased by 20 years since the mid-1970s, and the illiteracy rate among adults was almost halved in the last 30 years.

But rapid economic growth has placed enormous pressure on the environment. Moreover, it has been accompanied by rising income inequality, which has now reached historic highs within many countries (though, across countries, such inequality has declined). Given this, one might argue that slower growth would be good for the world.

In that case, the solution would be at hand. According to a new report by the McKinsey Global Institute (MGI), aging populations and declining fertility rates in many parts of the world could dampen global growth considerably over the next 50 years.

Indeed, even if productivity were to expand at the same rapid rate as during the last half-century, global growth would fall by 40%, far below the anemic rate of the last five years. Employment growth is also set to slow significantly. As a result, even with slower population growth, per capita income growth would fall by about 19%.

To be sure, GDP would still triple, and per capita income would double, over the next 50 years. Nonetheless this rate of long-term growth would constitute a sharp break with the six-fold GDP expansion and nearly three-fold increase in per capita income of the last 50 years.

Despite its potential benefits, especially for the environment, the impending growth slowdown carries significant risks. While growth is not an end in itself, it enables the achievement of a broad set of societal goals, including the creation of economic and employment opportunities for millions of vulnerable and poor people and the provision of social goods like education, health care, and pensions.

So how do we ensure that these imperatives are fulfilled, despite demographic and environmental constraints? The first step is to secure economic growth through productivity gains.

The needed acceleration in productivity growth—by 80% to sustain overall GDP growth and by 22% to sustain per capita income growth at the rates of the last half-century—is daunting. But, based on case studies in five economic sectors, the MGI report finds that achieving it, though “extremely challenging,” is possible—and without relying on unforeseeable technological advances.

Three-quarters of the potential pickup in productivity could come from “catch-up” improvements, with countries taking steps—modernizing their retail sectors, consolidating automobile production into a smaller number of larger factories, improving health-care efficiency, and reducing food-processing wastage—that have already proven effective elsewhere. The rest can come from technological, operational, and business innovations—for example, developing new seeds to increase agricultural yields, using new materials (such as carbon-fiber composites) to make cars and airplanes lighter and more resilient, or digitizing medical records.

Another significant growth opportunity lies in boosting the employment and productivity of women. Today, only about half of the world’s working-age women are employed. They earn about three-quarters as much as men in the same occupations, and are over-represented in informal, temporary, and low-productivity jobs.

MGI estimates that increasing women’s labor-force participation rate could contribute almost 60% of potential labor-force growth during the next half-century. Realizing this potential will require efforts by both employers and governments to eliminate discriminatory practices that impede the recruitment, retention, and promotion of women, as well as credit, tax, and family support policies to help workers balance their responsibilities at work and at home.

Meanwhile, in order to mitigate the environmental impact of continued rapid growth, the world must improve its resource efficiency considerably. MGI and others have identified numerous ecologically responsible growth opportunities emanating from the smarter use of limited resources.

Consider improvements in energy efficiency, which could halve projected energy demand between now and 2020. As California—the world’s eighth-largest economy—has demonstrated, strict energy-efficiency standards can actually be good for growth and jobs. Indeed, such policies have kept California’s per capita energy demand constant for the last three decades—even as such demand grew by 50% in the rest of the United States—without compromising growth.

There is a strong business and consumer case for improving resource productivity, as it could lead to substantial cost savings. Fortunately, policies that support this goal are gaining momentum in developed and developing countries alike.

Even if gains in female labor-force participation and resource-efficient productivity growth sustain high rates of economic growth, one key challenge remains: income inequality. In fact, there is no simple relationship between growth and income inequality; after all, inequality has been increasing in both slow-growing developed economies and fast-growing emerging economies.

According to the French economist Thomas Piketty, income inequality rises when the return on capital exceeds economic growth, meaning that, by itself, faster economic growth would reduce inequality. Using a different approach, economists at the International Monetary Fund also find a positive relationship between lower income inequality and faster growth, concluding that policies that redistribute income can foster faster, more sustainable growth.

Growth still matters. As demographic tailwinds turn into headwinds, and environmental challenges become ever more apparent, businesses and governments need to think carefully about how to improve resource efficiency while fostering more inclusive economic growth.

This article originally ran in Project Syndicate.

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