In his speech to the World Economic Forum last week, Australian Prime Minister Tony Abbot made this incredible statement:
As always, stronger economic growth is the key to addressing almost every global problem.
It summed up the direction of the speech, which was a plea for small government and freer markets. But if the two greatest global problems of our time are extreme poverty and environmental degradation economic growth is not the key.
Economic growth has no doubt been the greatest driver of poverty reduction in the last three decades, and it has been remarkable. But there are important caveats to put on that.
Caveat 1:It is questionable whether what has occurred in China, India and the Asian “tiger” economies will be repeated any time soon for the world’s poorest countries. In his book The Bottom Billion, economist Paul Collier notes that there has been a structural shift in the global economy in which large slabs of manufacturing shifted from industrialised nations to places such as South Korea, Taiwan, and China. This drove massive economic growth and poverty reduction. Manufacturing in particular , provided a more equitable distribution of wealth than commodities, for where commodities can be controlled and run by an elite, manufacturing is labour intensive, requiring more people to share in the fruits of growth. Collier points out that many poor countries have not shared in the shift of manufacturing to the developing world, and are not likely to very soon. Manufacturing thrives in agglomerations, that is, when many manufacturing plants can be located near each other. So manufacturing will only shift to the poorest of countries when the wage gap between them and places like China is so large that it is worthwhile taking the risk to leave an agglomeration. And that, says Collier, is unlikely to happen for some time.
Caveat 2: Free markets are the stuff of fairytales. In Bad Samaritans. The Myth of Free Trade and the Secret History of Capitalism economist Ha-Joon Chang shows that the world’s industrialised nations, such as the USA, England and Australia, were rabidly protectionist during their history. That is, the governments of those countries used taxes, tariffs, subsidies, quotas, and the intellectual property of others, to drive the direction of their economies. The newly industrialised economies like South Korea and Taiwan did the same thing, as are emerging nations like China and India. Free market economists argue that this were a drag on development, that growth would have been even faster had these countries not been protectionist, where economists like Chang argue the protectionism was a critical factor in economic success. Maybe we’ll never know, but it’s worth pointing out that no country has ever moved out of widespread poverty by the free trade route.
Caveat 3: economic growth alone is not sufficient to drive poverty reduction. There must be mechanisms for ensuring the poor share in the fruits of a growing economy. Wealth is all too easily captured by powerful elites that exploit and oppress the poor. Equity and justice are not merely the fruit of economic growth, but come from the human values that must shape and drive it.
The world faces a series of threats to ecological health: climate change; the acidification of the oceans; biodiversity loss; the disruption of the nitrogen cycle. Far from economic growth being the solution, it has been the cause of these problems. Economic growth is driving a global consumer binge that is making unsustainable demands on the environment.Between 1970 and 2010 global consumption grew from a spend of $9.3 trillion to $31.8 trillion, with 80% of that growth in demand coming from affluent nations (World Bank online data sets). Simply letting the markets rip will only exacerbate the problems even further.
CLOSER TO HOME
And what of the problems confronting us closer to home: the treatment of asylum seekers; extreme poverty in remote indigenous communities; the rise of mental health problems; economic disadvantage; over 100,000 people homeless? Australia has experienced an unparalleled run of economic growth to become one of the world’s wealthiest nations, yet these challenges persist.
Economic growth will not resolve these problems for the simple fact that we are people, not merely consumers, and we live in communities, not simply economies. Human well-being derives from a broad range of things, of which economics is just one part. Sure, economic growth has allowed us to explore options previous generations might only have dreamed of. It has also allowed us to indulge our greed to a degree previously unimaginable. But it has never solved any problem. People and communities solve problems.