When economic growth comes with hefty price

Unthinking pursuit at odds with preservation of the environment and ecological balance
Anthony Rowley, Business Times 31 Jul 08;

SCARCELY a day passes when I, like thousands of other journalists and analysts, do not use the term 'economic growth' in writing reports and analyses. We employ these words in a rather unthinking fashion, taking it for granted that if we can report economic growth in one place or another in the world that is a 'good thing' whereas economic slowdown is a bad thing. But does this interpretation make sense any longer, if indeed it ever did?

The futility of an unthinking pursuit of growth as a kind of panacea for all ills was highlighted during the recent G-8 summit in Hokkaido. Leaders of the world's great powers fretted over the recent economic slowdown and promised to do all in their power to speed things up again. They then turned their attention to the damage that global economic expansion is wreaking upon the global environment and promised to fix that too.

This is a cynical impossibility, a contradiction in terms; a circle that cannot be squared. Environmental damage is a man-made phenomenon that increases exponentially with the pursuit of economic growth. We can slow the process, especially in its most insidious form of global warming, through technology. But essentially economic growth (read: greed and avarice) is incompatible with preservation of the environment and ecological balance.

Using expansion of output as a target for achieving human welfare and happiness begets the question as to how we are supposed to know when this end has been achieved. Perhaps when the earth's six billion inhabitants all have one (or maybe two) smart dwellings, one (or maybe more) automobiles, access to endless shopping malls and consumer goods and the ability to travel round the world as and when they please.

This must be the logical outcome of continuing and equitable economic growth. Or is it to be assumed that the rich will continue to get richer into infinity while the poorer will achieve just sufficient incremental gains in wealth to keep them quiet? If we accept that neither of these extreme scenarios is possible without ravaging earth's natural resources - air, land and water as much as others - then the myth of perpetual growth must be challenged.

If it is not questioned on an ecological (or ethical) basis, the pursuit of an ever-rising growth in world output will be challenged on economic and financial grounds before long. Indeed, this process has already begun, in the shape of the sub-prime mortgage crisis. It may seem a little far-fetched to draw such a connection and yet it is a very direct one. It requires monetary stimulus above all to feed economic growth - and that brings inevitable nemesis.

Without going too deeply into economic theory, there is a limit to the extent that output can be expanded by increases in productivity and by the use of comparative advantage through trade.

A far more potent stimulus to economic activity is an increase in money supply and credit, and it is a device that has been used to colossal effect in so-called advanced economies in recent decades. The stupendous increase in lending that has taken place has been predicated upon securitisation of mortgages and other loans that rendered risk anonymous and credit expansion almost infinite.

The inconvenient truth is that trouble will always 'out' in the end and once some little corner (the sub-prime market) of the soaring debt edifice became exposed, the frailty and rot of the entire structure was revealed. It is crumbling now - in slow motion rather than with a crash - and with it not only the mega increase in asset values which a succession of monetary bubbles has engendered but also the frenetic economic activity which they have supported.

There is not a small number of experts who believe that all this will end in a lengthy period of economic contraction in 'advanced' nations. It is part of the 'natural' economic cycle as values and prices adjust to a new reality and as the base of economic activity sinks to a level from which it can rise again.

All other things being equal, this would provide a breather for the environment as economic activity and resource depletion slows.

But all other things are not equal. China, India, Russia, Brazil and other emerging market powers are involved deeply nowadays in global economic expansion. Even if their economies are slowing, they show little sign yet of following advanced natinto recession (even if it has still to be shown that emerging economies that are notions addicted to US-style spending can sustain growth without the stimulus of credit-induced external demand).

These economies, apparent at the G-8 summit, claim a kind of moral right to undergo industrial revolution without being challenged by Western nations that have already undergone such a transition. There is a kind of perverse logic in this but it could be calamitous for the environment.

Even if global warming can be slowed, the drain on earth's resources, caused not so much by population increase as by the pursuit of growth and high material standards of living, cannot. This is not Malthusian pessimism: it is demonstrable fact.

Of course, we may yet be saved by the 'hidden hand'. The soaring price of oil has produced a salutary, if as yet marginal, drop in consumption and a search for other forms of energy.

Inflation in other commodity prices could similarly act as a brake on profligate consumption once the pass-through effect on prices is fully manifest. But such ultimately desirable outcomes could be thwarted or delayed by (panic) monetary expansion. The growth habit is a hard one to kick.