What exactly do we mean by economic growth? How does it work and why has it become so central to our lives?
Today, the standard measure of growth is Gross Domestic Product or GDP – the total value of all goods and services produced in a country within a given period. It’s usually calculated over the course of a year. GDP as a measure of growth is now so entwined in our lives that it’s barely given a second thought. It’s one of those things that most people don’t question: more is good; less is bad. You only need to peruse the avalanche of daily media reports to validate this assumption. Here’s an edited snippet from a recent news report that gives you an idea of how commonplace the language of growth/GDP has become.
Global outlook turns darker
…Calling the risks of a worldwide slump “alarmingly high” as it warned of decelerating economies, the IMF puts the odds of global growth falling below 2 per cent – effectively a recession – at one-in-six.
At that rate of growth, the global economy is too weak to keep up with population growth.
‘A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component,’ the IMF said in its ‘World Economic Outlook’, released in advance of the annual World Bank-IMF meeting in Tokyo…
The IMF sliced its global growth forecast to 3.3 per cent this year from 3.5 per cent in its previous reading in July, which would mark the slowest expansion since 2009, when the world was emerging from the deepest slump since the Great Depression.
The influential agency has also reduced its projected growth in 2013 to 3.6 per cent from 3.9 per cent just three months ago and 4.1 per cent in April. But it warned ominously that even the lower projection for 2012 and beyond ‘depends on whether European and US policy-makers deal pro-actively with their major short-term economic challenges.’5
This typical press report underscores a key concern: without GDP growth the global economy faces collapse. We’re hostage to the way our economy is structured. And we know what that means. We’ve seen ample evidence of the human pain and suffering that faltering growth can bring since the economic downturn of 2008. Mass unemployment, a shrinking tax base, slashed public services, shuttered factories and shops, increasing homelessness and hunger.
In the Eurozone, hard-pressed countries like Greece and Spain have been hammered by European Union austerity measures. The rationale is that short-term pain will bring long-term gain. In 2010 nearly a million Spaniards depended on the Catholic charity Caritas for food and the number has jumped since then. In that same year more than 22 per cent of Spanish households were living in poverty and nearly 600,000 of them had no income at all. With youth unemployment over 50 per cent, scavenging has become so common that the town of Girona has installed locks on supermarket garbage bins as a public health precaution.6 The situation is no better in Greece, where the recent financial crisis has caused around a quarter of the country’s workers to lose their jobs, driving thousands of protesters into the streets.
Relentless rise
The total value of goods and services produced worldwide doubled from 1991 to 2011 – to nearly $78 trillion. In the decade before the 2008 slump the global economy grew by an average 4% annually. Western industrial economies typically grew about 3% in the decade before the recession. But by 2011 that had fallen to just 1.6%. Growth in developing economies suffered less during the recent recession. They grew 6% annually in the decade before the 2008 recession and 6.2% in 2011.
Gross World Product, 1950-2011
Yet by any standard GDP is a faulty measure of prosperity. It distinguishes neither between the costs and benefits of growth nor between its quality and quantity. You might say it measures what can be counted rather than what counts, confusing ‘goods’ with ‘bads’. Any economic activity that has a price tag attached is rolled into the calculation of GDP. The cost of car accidents, pollution abatement, heart operations, cancer care, making weapons: they’re all included. For example, Hurricane Katrina, one of the worst natural disasters in American history, cost the US government an estimated $114 billion and resulted in scores of deaths, hundreds of homes destroyed and thousands of lives disrupted. No matter. It all helped to boost the US GDP. On the other hand, growth leaves out all kinds of good things that can’t be easily ‘monetized’ and absorbed by the market economy – for example, the value of housework and childcare, or the worth of clean air, or the aesthetic value of old-growth forests. The limits of GDP accounting and what constitutes ‘success’ in a growth economy will also be addressed in Chapter 6.
Exponential growth explained
When economists talk about growth what they really mean is exponential growth. If a number grows yearly by a certain fixed amount it will double in size after so many years. It all depends on the percentage growth rate: the higher the rate, the faster the doubling time. Statisticians use a rough method of measuring doubling times called the ‘rule of 70’. Divide the rate of growth into 70 and you’ll come up with the time needed for the initial quantity to double. If an economy is growing at 5 per cent a year, for example, it will take 14 years for it to double. An economy growing at 10 per cent will take 7 years to double. You see what exponential growth can do.
Let’s take China’s recent phenomenal growth to illustrate what this means in the real world. Over the past decade China’s economy has been growing by double digits. Recent turmoil in the global economy has knocked back GDP growth to just under eight per cent. Still, the country’s economy is doubling approximately every ten years. What does this mean in terms of resource consumption and pollution? Lester Brown of the Earth Policy Institute has crunched the numbers. China already consumes more grain, meat, coal and steel than the US – though on a per-capita basis China’s consumption is, of course, a lot less. However, Brown estimates that at current growth rates Chinese per-capita income will equal the US 2011 level by 2035. And when that happens? Assuming the Chinese will spend their income like Americans, Brown says that China would then consume 80 per cent as much paper as is produced globally today and 70 per cent of the yearly grain harvest. He also estimates the country would have 1.1 billion automobiles (the world now has just over a billion) and would need to pave two-thirds of its rice-growing land for roads and parking lots. To power this leap in consumption would require 85 billion barrels of oil a day (the world currently produces 86 billion barrels).
Oil consumption in the United States and China, 2010, with projections for 2035
Source: Earth Policy Institute
According to the Earth Policy Institute: ‘What China is teaching us is that the Western economic model – the fossil-fuel-based, automobile-centered, throwaway economy – will not work for the world. If it does not work for China, it will not work for India, which by 2035 is projected to have an even larger population than China. Nor will it work for the other three billion people in developing countries who are also dreaming the “American dream”. And, in an increasingly integrated global economy where we all depend on the same grain, oil, and steel, the Western economic model will no longer work for the industrial countries either.’7
It’s important to understand exponential growth
