Ageing vs. GDP Growth: 2:0

For a New European Paradigm 

Shortly the 20th anniversary of the pathbreaking Rio Conference which was dedicated to Sustainable Growth will arrive. Unfortunately, implementation of this objective has been unsatisfactory, in spite of a plethora of lip services paid to that target. There is no radical change in the way we run our economies; resource use and depletion progress, the resulting burdens on climate, environment and societies continue to increase. The recent financial and economic crisis since 2008 has depleted most efforts, while attempts to re-establish “normal” growth conditions, i.e. growth rates of 3%-4% p.a. have multiplied. Many analysts predict that Europe is losing out globally, that the fast growing emerging economies of Asia, Latin America and even Africa will overpower it soon. This would imply Europe’s demise and definitely wipe out its accustomed welfare state. I do not share this view. Throughout history many states have risen and fallen and existed alongside each other for a long time. Competitiveness in the economic sense is not “Winner takes all”, but rather about relative positions. 

I agree that to combat the present crisis is of utmost importance, since the crisis has had devastating economic and social effects on many people; I agree that also within rich countries and regions many people have been left behind materially and need to catch up. But I want to argue that for Europe as a whole – as for other rich regions – the official objective of further economic growth, pursued by EU, OECD, IMF and most governments is anachronistic, even damaging – and does not make sense. Let me explain: 

The European Union as a whole produces around 16 trillion $ of output and income, about one fourth of World GDP of 64 trillion $. The US are the second largest economy with 15 trillion; Japan and China produce around 6 trillion each, Brazil around 2 trillion, India and Russia around 1.5 trillion $. Europe’s 500 million strong population each has around 33.000 $ p.a. (Austria: 42.000 $). This is less than the US, whose p.c. income is 46.000 $, but still at the top of the global income pyramid, with the exception of the oil rich Arabic countries and tax havens like Luxembourg. The big difference is that Europe’s population is starting to shrink because of insufficient fertility rates. In a number of EU countries, the population is already shrinking (Hungary, Baltics), as it is  in Russia. In all other countries (exceptions are France and Sweden) the population is ageing rapidly and will shrink sooner or later. While life expectancy is still increasing in Europe (from a very high level), Europe’s population is ageing and becoming smaller. (China’s long-term “one-child policy” will lead to a very drastic reduction in its population rather soon).

Ageing and shrinking populations pose new problems to their societies: who will pay the pensions, who will take care of old and ailing persons, where will the labor force come from, whose services we need for maintaining society, and: how can we assure the ability for innovation in an ageing, ossified society whose productivity will also start to fall?

The technocratic “optimal” solution would be to import the necessary labor from fast growing countries. This “solution”, however, has proven and is proving the be politically unacceptable, as a lack of integration creates increasing problems for host societies. I do not mean to imply that labor migration will come to a complete standstill. Complete walling-off of countries is neither desirable nor possible: the path backwards into self-sufficiency, into provincialism, into “me only” and “us versus them” societies is promoted only by some backward-looking ideologues. Exit prohibitions like in medieval Venice (for glassmakers), or the more recent Soviet Union and its satellites are not on anybody’s agenda.

But, without wholesale migration flows to freshen up and substitute for our lack of a young population, we are left to our own devices. This situation is not only one of suffering difficult adjustment problems, but can be the chance to solve some of the more pressing environmental and societal problems, if handled correctly. The ineluctable forces of an ageing and shrinking society can promote the long-overdue paradigmatic (Thomas Kuhn) changes towards a different economy.

The lynchpin of such a change in economic and social policy (a new paradigm) would be to replace the objective of maximum economic (material) growth with the objective to maintain and safeguard total national well-being (material and immaterial welfare) under the conditions of an ageing and shrinking society. Maintenance, instead of growth, can only be proposed for rich societies. However, this objective in the face of a shrinking population would – arithmetically – imply that material GDP (gross national product) would also shrink, instead of needing to grow. Total welfare could still increase for Europe, if non-material “product” increases.

A number of important theoretical and empirical research ( see e.g. Wilkinson-Pickett. The Spirit Level, Penguin 2010) show that around a per-capita income level of about 25.000 $ the costs of further GDP growth outweigh their benefits. Thus, growth diminishes total welfare. Part of these costs are the well-known deterioration in the global climate, in air, water and land pollution, in diminished bio-diversity, in degradation and depletion of water and mineral and hydro-carbon resources; another part, less well-known, but at least as important, are the costs and burdens imposed by higher work stress, longer and more energy-sapping transport to work, higher work intensity; less societal cohesion by more labor mobility, faster spreading of epidemic diseases, in short more physical and psychological diseases. In extreme cases, more anonymous and mobile societies lead to higher criminal activity, more violence and more and longer prison terms (in the US more than one percent of the male population of working age sits in prisons) and more broken family structures.

Ageing and shrinking societies require more ability to innovate, in order to master these challenges. One the one hand, this is due to a (partial) replacement of non-existing labor, but more so in order to acquire new capabilities, to quickly recognize to and adjust to new societal needs (medicine, care, mobility, etc.) of ageing populations. Innovation can counteract the ossification of societies, their clinging to vested interests an any costs, their resistance to change. But innovation is also necessary to drive adaptation and mitigation of environmental and climatic damage, necessary to complement the less resource-intensity going hand-in-hand with lower and negative growth.

Purely economic solutions aiming for growth, as they are proposed in the otherwise excellent new book by the World Bank economists Indermit Gill and Martin Raiser (Golden Growth), critiqued in my blog of Feb. 26, 2012, consisting of the call for more labor mobility and “structural change” are insufficient and “old”. They aim for more competitiveness and higher (material) growth. They ignore that shrinking societies do not need more wholesale growth, but need a different type of growth, which fosters non-material public goods instead of purely material, private goods. Shrinking societies need material growth for the poor, but stagnation or decrease for the rich; they need non-material growth to foster social cohesion. More labor mobility may produce in the short run higher economic competitiveness, but will lower total welfare if it destroys the social fabric, creates more uprooted and marginalized workers without social attachments, in short creates more societal problems than economic benefits.

Turning away from GDP growth has positive effects on the threatened climate and environment. It would slow down or reduce rich societies’ resource use, it would lessen labor intensity and its concomitant health problems. It would enable citizens to live their lives more as “zoa politika”, as societal beings, and thus would strengthen rich societies’ social cohesion and their survival.

It would be wrong to expect these necessary changes in the way we live and produce to come from politicians. Their own interest in “business as usual”, their affiliation to and dependence on growth-pursuing financial and non-financial firms, their lack of imagination and their populism will make them to strong defenders of the existing paradigm. Their appeasement strategy since Rio has been to talk and partly pursue “green growth”, i.e. still growth. This does not represent the necessary radical change of direction, but just a small, if welcome, detour into a direction which is seen positively by their voters. Rather, the desire for radical change must come from the populations themselves, from “civil society”, representing and articulating its own – very diverse – interests. Articulating these interest, civil society will be supported by the powers of facts, i.e. ageing and shrinking. While the physical environment does not have any direct representatives to articulate its need for change, the ageing and shrinking of populations will force change. When indigenous labor will no longer be available and in-migration is not tolerated, production will leave; when consumers are lacking at home, producers can produce less or try to export more (to whom, if other societies are also shrinking?); when the excesses and crises of the traditional growth process abound, many people demand radical alternatives (see the recent “Occupy Movement”). No doubt, such change will require a prolonged and hard fight, in order to achieve a better if smaller society. Existing interests will not give up easily.

But, in the end facts will call the shots. The more immediate question is whether European society will be able to adjust gradually to its self-chosen ageing and shrinking, or whether necessary change will be super-imposed and forced against an unwilling public. The difference in costs is masterly described in several examples in Jared Diamond’s path-breaking book “Collapse” (2005).


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Filed under Crisis Response, European Union, Global Governance, Socio-Economic Development

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