Prosperity Without Growth Report


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Prosperity Without Growth? says that the current global recession should be the occasion to forge a new economic system equipped to avoid the shocks and negative impacts associated with our reliance on growth. the report calls on leaders to adopt a 12-step plan to make the transition to a fair, sustainable, low-carbon economy. March 09, Updated versin can be bought as a book nov.09.

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Prosperity Without Growth Report

  1. 1. Prosperity without growth ? The transition to a sustainable economy
  2. 2. Prosperity without growth? The transition to a sustainable economy Professor Tim Jackson Economics Commissioner Sustainable Development Commission
  3. 3. Acknowledgements This report was written in my capacity as Economics Commissioner for the Sustainable Development Commission at the invitation of the Chair, Jonathon Porritt, who provided the initial inspiration, contributed extensively throughout the study and has been unreservedly supportive of my own work in this area for many years. For all these things, my profound thanks. The work has also inevitably drawn on my role as Director of the Research group on Lifestyles, Values and Environment (RESOLVE) at the University of Surrey, where I am lucky enough to work with a committed, enthusiastic and talented team of people carrying out research in areas relevant to this report. Their research is evident in the evidence base on which this report draws and I’m as grateful for their continuing intellectual support as I am for the financial support of the Economic and Social Research Council (Grant No: RES-152-25-1004) which keeps RESOLVE going. Though written as an individually authored thinkpiece, this study builds on work from right across the Commission. In particular, it draws extensively from the work programme on Redefining Prosperity which has been developed at the SDC over the last five years (see Appendix 1 for a summary of recent work). Throughout this period, my fellow commissioners past and present – Jan Bebbington, Bernie Bulkin, Lindsey Colbourne, Anna Coote, Peter Davies, Stewart Davies, Ann Finlayson, Tess Gill, Alan Knight, Tim Lang, Alice Owen, Anne Power, Hugh Raven, Tim O’Riordan, Waheed Saleem and Becky Willis – have been generous with their time, attending workshops, offering critical commentary and reviewing various drafts of this document. Special thanks are owed to all those who contributed directly to the Redefining Prosperity workshops, in particular Simone d’Alessandro, Frederic Bouder, Madeleine Bunting, Ian Christie, Herman Daly, Arik Dondi, Paul Ekins, Tim Kasser, Miriam Kennet, Guy Liu, Tommaso Luzzati, Jesse Norman, Avner Offer, John O’Neill, Elke Pirgmaier, Tom Prugh, Hilde Rapp, Jonathan Rutherford, Jill Rutter, Zia Sardar, Kate Soper, Steve Sorrell, Nick Spencer, Peter Victor, Derek Wall, David Woodward and Dimitri Zenghelis. A number of other colleagues and friends have helped and advised – sometimes without even knowing it! Particular thanks are due to Mick Common, Andy Dobson, Angela Druckman, Ian Gough, Bronwyn Hayward, Lester Hunt, Nic Marks, Miriam Pepper, Alison Pridmore and John Urry. Finally, my thanks are due to the SDC Secretariat for their boundless expertise and enthusiasm throughout the project. Sue Dibb, Sara Eppel, Andrew Lee, Rhian Thomas, Jacopo Torriti, Joe Turrent and Kay West in particular have been a constant source of invaluable advice throughout. I owe a special debt of gratitude to Victor Anderson, whose wealth of intellectual experience and unswerving personal support have been indispensable at every turn.
  4. 4. Contents Foreword 5 Summary 6 1 Introduction 15 2 The Age of Irresponsiblity 19 3 Redefining Prosperity 29 4 The Dilemma of Growth 37 5 The Myth of Decoupling 47 6 Confronting Structure 59 7 Keynesianism and the ‘Green New Deal’ 67 8 Macro-economics for Sustainability 75 9 Flourishing – within limits 85 10 Governance for Prosperity 93 11 Steps towards a Sustainable Economy 101 Appendix 1 The SDC ‘Green Stimulus’ Package 108 Appendix 2 Towards a Sustainable Macro-Economy 110 References 113 Endnotes 122
  5. 5. Foreword Every society clings to a myth by which it lives. Ours momentous challenge of stabilising concentrations is the myth of economic growth. For the last five of carbon in the global atmosphere. And we face decades the pursuit of growth has been the single these tasks with an economy that is fundamentally most important policy goal across the world. The broken, in desperate need of renewal. global economy is almost five times the size it was In these circumstances, a return to business half a century ago. If it continues to grow at the as usual is not an option. Prosperity for the few same rate the economy will be 80 times that size founded on ecological destruction and persistent by the year 2100. social injustice is no foundation for a civilised society. This extraordinary ramping up of global economic Economic recovery is vital. Protecting people’s jobs – activity has no historical precedent. It’s totally at and creating new ones – is absolutely essential. But odds with our scientific knowledge of the finite we also stand in urgent need of a renewed sense resource base and the fragile ecology on which of shared prosperity. A commitment to fairness and we depend for survival. And it has already been flourishing in a finite world. accompanied by the degradation of an estimated Delivering these goals may seem an unfamiliar 60% of the world’s ecosystems. or even incongruous task to policy in the modern For the most part, we avoid the stark reality age. The role of government has been framed so of these numbers. The default assumption is that narrowly by material aims, and hollowed out by a – financial crises aside – growth will continue misguided vision of unbounded consumer freedoms. indefinitely. Not just for the poorest countries, where The concept of governance itself stands in urgent a better quality of life is undeniably needed, but need of renewal. even for the richest nations where the cornucopia But the current economic crisis presents us with of material wealth adds little to happiness and a unique opportunity to invest in change. To sweep is beginning to threaten the foundations of our away the short-term thinking that has plagued wellbeing. society for decades. To replace it with considered The reasons for this collective blindness are easy policy capable of addressing the enormous challenge enough to find. The modern economy is structurally of delivering a lasting prosperity. reliant on economic growth for its stability. When For at the end of the day, prosperity goes beyond growth falters – as it has done recently – politicians material pleasures. It transcends material concerns. panic. Businesses struggle to survive. People lose It resides in the quality of our lives and in the health their jobs and sometimes their homes. A spiral of and happiness of our families. It is present in the recession looms. Questioning growth is deemed to strength of our relationships and our trust in the be the act of lunatics, idealists and revolutionaries. community. It is evidenced by our satisfaction at But question it we must. The myth of growth work and our sense of shared meaning and purpose. has failed us. It has failed the two billion people It hangs on our potential to participate fully in the who still live on less than $2 a day. It has failed life of society. the fragile ecological systems on which we depend Prosperity consists in our ability to flourish for survival. It has failed, spectacularly, in its own as human beings – within the ecological limits of terms, to provide economic stability and secure a finite planet. The challenge for our society is to people’s livelihoods. create the conditions under which this is possible. It Today we find ourselves faced with the imminent is the most urgent task of our times. end of the era of cheap oil, the prospect (beyond the recent bubble) of steadily rising commodity prices, Tim Jackson the degradation of forests, lakes and soils, conflicts Economics Commissioner over land use, water quality, fishing rights and the Sustainable Development Commission, March 2009
  6. 6. Summary Economic growth is supposed to deliver prosperity. Higher incomes should mean better choices, richer lives, an improved quality of life for us all. That at least is the conventional wisdom. But things haven’t always turned out that way. Growth has delivered its benefits, at best, unequally. urgent need of economic development. A fifth of the world’s population earns just 2% of But it also questions whether ever-rising incomes for global income. Inequality is higher in the OECD the already-rich are an appropriate goal for policy in nations than it was 20 years ago. And while the a world constrained by ecological limits. rich got richer, middle-class incomes in Western Its aim is not just to analyse the dynamics of countries were stagnant in real terms long before an emerging ecological crisis that is likely to dwarf the recession. Far from raising the living standard the existing economic crisis. But also to put forward for those who most needed it, growth let much of coherent policy proposals (Box 1) that will facilitate the world’s population down. Wealth trickled up to the transition to a sustainable economy. the lucky few. In short, this report challenges the assumption Fairness (or the lack of it) is just one of several of continued economic expansion in rich countries reasons to question the conventional formula for and asks: is it possible to achieve prosperity without achieving prosperity. As the economy expands, so do growth? the resource implications associated with it. These impacts are already unsustainable. In the last quarter of a century the global economy has doubled, while The Age of Irresponsibility an estimated 60% of the world’s ecosystems have been degraded. Global carbon emissions have risen Recession throws this question into sharp relief. by 40% since 1990 (the Kyoto Protocol ‘base year’). The banking crisis of 2008 led the world to the Significant scarcity in key resources – such as oil – may brink of financial disaster and shook the dominant be less than a decade away. economic model to its foundations. It redefined the A world in which things simply go on as usual boundaries between market and state and forced is already inconceivable. But what about a world us to confront our inability to manage the financial in which nine billion people all aspire to the level sustainability – let alone the ecological sustainability of affluence achieved in the OECD nations? Such an – of the global economy. economy would need to be 15 times the size of This may seem an inopportune moment to this one by 2050 and 40 times bigger by the end of question growth. It is not. On the contrary, this crisis the century. What does such an economy look like? offers the potential to engage in serious reflection. What does it run on? Does it really offer a credible It is a unique opportunity to address financial and vision for a shared and lasting prosperity? ecological sustainability together. And as this report These are some of the questions that prompted argues, the two things are intimately related. this report. They belong in a long tradition of serious Chapter 2 argues that the current turmoil is not reflection on the nature of progress. But they also the result of isolated malpractice or simple failures reflect real and immediate concerns. Climate of vigilance. The market was not undone by rogue change, fuel security, collapsing biodiversity and individuals or the turning of a blind eye by incompetent global inequality have moved inexorably to the regulators. It was undone by growth itself. forefront of the international policy agenda over The growth imperative has shaped the the last decade. These are issues that can no longer architecture of the modern economy. It motivated be relegated to the next generation or the next the freedoms granted to the financial sector. It electoral cycle. They demand attention now. stood at least partly responsible for the loosening Accordingly, this report sets out a critical of regulations and the proliferation of unstable examination of the relationship between financial derivatives. Continued expansion of credit prosperity and growth. It acknowledges was deliberately courted as an essential mechanism at the outset that poorer nations stand in to stimulate consumption growth. 6 Prosperity without Growth? Sustainable Development Commission
  7. 7. This model was always unstable ecologically. It freedoms, but as a range of ‘bounded capabilities’ has now proven itself unstable economically. The to live well – within certain clearly defined limits. age of irresponsibility is not about casual oversight A fair and lasting prosperity cannot be isolated or individual greed. If there was irresponsibility it from these material conditions. Capabilities are was systematic, sanctioned widely and with one bounded on the one hand by the scale of the global clear aim in mind: the continuation and protection population and on the other by the finite ecology of economic growth. of the planet. To ignore these natural bounds to The failure of this strategy is disastrous in all sorts flourishing is to condemn our descendents – and our of ways. Not least for the impacts that it is having fellow creatures – to an impoverished planet. across the world, in particular in poorer communities. Conversely, the possibility that humans can But the idea that growth can deliver us from the flourish and at the same time consume less is an crisis is also deeply problematic. Responses which intriguing one. It would be foolish to think that it aim to restore the status quo, even if they succeed is easy to achieve. But it should not be given up in the short term, simply return us to a condition of lightly. It offers the best prospect we have for a financial and ecological unsustainability. lasting prosperity. Redefining Prosperity The Dilemma of Growth A more appropriate response is to question the Having this vision to hand doesn’t ensure that underlying vision of a prosperity built on continual prosperity without growth is possible. Though growth. And to search for alternative visions – in formally distinct from rising prosperity, there which humans can still flourish and yet reduce their remains the possibility that continued economic material impact on the environment. In fact, as growth is a necessary condition for a lasting Chapter 3 makes clear, the voluminous literature on prosperity. And that, without growth, our ability to human wellbeing is replete with insights here. flourish diminishes substantially. Prosperity has undeniable material dimensions. Chapter 4 explores three related propositions in It’s perverse to talk about things going well where defence of economic growth. The first is that material there is inadequate food and shelter (as is the case opulence is (after all) necessary for flourishing. for billions in the developing world). But it is also The second is that economic growth is closely plain to see that the simple equation of quantity with correlated with certain basic ‘entitlements’ – for quality, of more with better, is false in general. health or education, perhaps – that are essential to When you’ve had no food for months and the prosperity. The third is that growth is functional in harvest has failed again, any food at all is a blessing. maintaining economic and social stability. When the American-style fridge freezer is already There is evidence in support of each of these stuffed with overwhelming choice, even a little propositions. Material possessions do play an extra might be considered a burden, particularly if important symbolic role in our lives, allowing us you’re tempted to eat it. to participate in the life of society. There is some An even stronger finding is that the requirements statistical correlation between economic growth and of prosperity go way beyond material sustenance. key human development indicators. And economic Prosperity has vital social and psychological resilience – the ability to protect jobs and livelihoods dimensions. To do well is in part about the ability and avoid collapse in the face of external shocks – to give and receive love, to enjoy the respect of really does matter. Basic capabilities are threatened your peers, to contribute useful work, and to have when economies collapse. a sense of belonging and trust in the community. Growth has been (until now) the default In short, an important component of prosperity is mechanism for preventing collapse. In particular, the ability to participate meaningfully in the life market economies have placed a high emphasis of society. on labour productivity. Continuous improvements in This view of prosperity has much in common technology mean that more output can be produced with Amartya Sen’s vision of development as for any given input of labour. But crucially this also ‘capabilities for flourishing’. But that vision needs to means that fewer people are needed to produce the be interpreted carefully: not as a set of disembodied same goods from one year to the next. Sustainable Development Commission Prosperity without Growth? 7
  8. 8. As long as the economy expands fast enough to have increased by 40% since only 1990 (the Kyoto offset labour productivity there isn’t a problem. But base year). if the economy doesn’t grow, there is a downward There are rising global trends in a number of other pressure on employment. People lose their jobs. resources – a range of different metals and several With less money in the economy, output falls, public non-metallic minerals for example. Worryingly, spending is curtailed and the ability to service in some cases, even relative decoupling isn’t public debt is diminished. A spiral of recession happening. Resource productivity in the use of some looms. Growth is necessary within this system just structural materials (iron ore, bauxite, cement) has to prevent collapse. been declining globally since 2000, as the emerging This evidence leads to an uncomfortable and economies build up physical infrastructures, leading deep-seated dilemma: growth may be unsustainable, to accelerating resource throughput. but ‘de-growth’1 appears to be unstable. At first this The scale of improvement required is daunting. looks like an impossibility theorem for a lasting In a world of nine billion people, all aspiring to a prosperity. But ignoring the implications won’t make level of income commensurate with 2% growth on them go away. The failure to take the dilemma of the average EU income today, carbon intensities growth seriously may be the single biggest threat to (for example) would have to fall on average by sustainability that we face. over 11% per year to stabilise the climate, 16 times faster than it has done since 1990. By 2050, the global carbon intensity would need to be only six The Myth of Decoupling grams per dollar of output, almost 130 times lower than it is today. The conventional response to the dilemma of growth Substantial economic investment will be needed is to call for ‘decoupling’: continued economic growth to achieve anything close to these improvements. with continually declining material throughput. Lord Stern has argued that stabilising atmospheric Since efficiency is one of the things that modern carbon at 500 parts per million (ppm) would mean capitalist economies are supposed to be good at, investing 2% of GDP each year in carbon emission decoupling has a familiar logic and a clear appeal as reductions. Achieving 450 ppm stabilisation would a solution to the dilemma of growth. require even higher levels of investment. Factor As Chapter 5 points out, it’s vital to distinguish in the wider capital needs for resource efficiency, between ‘relative’ and ‘absolute’ decoupling. material and process substitution and ecological Relative decoupling refers to a situation where protection and the sheer scale of investment resource impacts decline relative to the GDP. Impacts becomes an issue. The macro-economic implications may still rise, but they do so more slowly than the of this are addressed in Chapter 8. GDP. The situation in which resource impacts decline More to the point, there is little attempt in existing in absolute terms is called ‘absolute decoupling’. scenarios to achieve an equitable distribution of Needless to say, this latter situation is essential if incomes across nations. Unless growth in the richer economic activity is to remain within ecological nations is curtailed, the ecological implications of a limits. truly shared prosperity become even more daunting Evidence for declining resource intensities to contemplate. (relative decoupling) is relatively easy to identify. The truth is that there is as yet no credible, The energy required to produce a unit of economic socially just, ecologically sustainable scenario of output declined by a third in the last thirty years, for continually growing incomes for a world of nine instance. Global carbon intensity fell from around billion people. one kilo per dollar of economic activity to just under In this context, simplistic assumptions that 770 grams per dollar. capitalism’s propensity for efficiency will allow us Evidence for overall reductions in resource to stabilise the climate and protect against resource throughput (absolute decoupling) is much harder scarcity are nothing short of delusional. Those who to find. The improvements in energy (and carbon) promote decoupling as an escape route from the intensity noted above were offset by increases dilemma of growth need to take a closer look at in the scale of economic activity over the same the historical evidence – and at the basic arithmetic period. Global carbon emissions from energy use of growth. 1 De-growth (décroissance in the French) is an emerging term for (planned) reductions in economic output. 8 Prosperity without Growth? Sustainable Development Commission
  9. 9. The ‘Iron Cage’ of Consumerism survival. The ‘iron cage of consumerism’ is a system in which no one is free. In the face of the evidence, it is fanciful to suppose It’s an anxious, and ultimately a pathological that ‘deep’ resource and emission cuts can be system. But at one level it works. The system achieved without confronting the nature and remains economically viable as long as liquidity is structure of market economies. Chapter 6 exposes preserved and consumption rises. It collapses when two interrelated features of modern economic either of these stalls. life that together drive the growth dynamic: the production and consumption of novelty. The profit motive stimulates a continual search Keynesianism and the Green New Deal by producers for newer, better or cheaper products and services. This process of ‘creative destruction’, Policy responses to the economic crisis are more or according to the economist Joseph Schumpeter, is less unanimous that recovery means re-invigorating what drives economic growth forwards. consumer spending so as to kick-start economic For the individual firm, the ability to adapt and growth. Differences of opinion are mainly confined to innovate – to design, produce and market not just to how this should be achieved. The predominant cheaper products but newer and more exciting ones (Keynesian) response is to use a mixture of public – is vital. Firms who fail in this process risk their own spending and tax cuts to stimulate consumer survival. demand. But the continual production of novelty would be Chapter 7 summarises some of the more of little value to firms if there were no market for the interesting variations on this theme. It highlights consumption of novelty in households. Recognising in particular the emerging international consensus the existence, and understanding the nature, of this around a very simple idea. Economic recovery demand is essential. demands investment. Targeting that investment It is intimately linked to the symbolic role that carefully towards energy security, low-carbon material goods play in our lives. The ‘language of infrastructures and ecological protection offers goods’ allows us to communicate with each other multiple benefits. These benefits include: – most obviously about social status, but also about • freeing up resources for household spending identity, social affiliation, and even – through giving and productive investment by reducing and receiving gifts for example – about our feelings energy and material costs for each other. • reducing our reliance on imports and our Novelty plays an absolutely central role here exposure to the fragile geopolitics of for a variety of reasons. In particular, novelty has energy supply always carried important information about status. • providing a much-needed boost to But it also allows us to explore our aspirations for employment in the expanding ‘environmental ourselves and our family, and our dreams of the industries’ sector good life. • making progress towards demanding global Perhaps the most telling point of all is the carbon reduction targets almost perfect fit between the continual production • protecting valuable ecological assets of novelty by firms and the continuous consumption and improving the quality of our living of novelty in households. The restless desire of the environment for generations to come. consumer is the perfect complement for the restless innovation of the entrepreneur. Taken together In short, a ‘green stimulus’ is an eminently these two self-reinforcing processes are exactly sensible response to the economic crisis. It offers what is needed to drive growth forwards. jobs and economic recovery in the short term, Despite this fit, or perhaps because of it, the energy security and technological innovation in relentless pursuit of novelty creates an anxiety that the medium term, and a sustainable future for our can undermine social wellbeing. Individuals are at children in the long term. the mercy of social comparison. Firms must innovate Nonetheless, the default assumption of even or die. Institutions are skewed towards the pursuit the ‘greenest’ Keynesian stimulus is to return the of a materialistic consumerism. The economy itself economy to a condition of continuing consumption is dependent on consumption growth for its very growth. Since this condition is unsustainable, it is Sustainable Development Commission Prosperity without Growth? 9
  10. 10. difficult to escape the conclusion that in the longer protecting both people’s jobs and their capabilities term something more is needed. A different kind for flourishing. But this condition will need to of macro-economic structure is essential for an be supplemented by conditions that ensure ecologically-constrained world. distributional equity, establish sustainable levels of resource throughput and emissions, and provide for the protection of critical natural capital. Macroeconomics for Sustainability In operational terms, there will be important differences in the way that the conventional There is something odd about the modern refusal to variables play out in this new macro-economy. countenance anything but growth at all costs. Early The balance between consumption and investment, economists such as John Stuart Mill (and indeed the split between the public and the private sector Keynes himself) foresaw a time in which growth spending, the nature of productivity improvements, would have to stop. the conditions of profitability: all of these will have Herman Daly’s pioneering work defined the to be re-negotiated. ecological conditions of a steady-state economy in The role of investment is particularly crucial. terms of a constant stock of physical capital, capable Sustainability will need enhanced investment in of being maintained by a low rate of material public infrastructures, sustainable technologies throughput that lies within the regenerative and and ecological maintenance and protection. assimilative capacities of the ecosystem. These investments will operate differently from What we still miss from this is a viable macro- conventional capital spending (Appendix 2) and will economic model in which these conditions can be have to be judged and managed accordingly. achieved. There is no clear model for achieving Above all, a new macro-economics for economic stability without consumption growth. Nor sustainability must abandon the presumption of do any of the existing models account fully for the growth in material consumption as the basis for dependency of the macro-economy on ecological economic stability. It will have to be ecologically variables such as resources and emissions. In short and socially literate, ending the folly of separating there is no macro-economics for sustainability and economy from society and environment. there is an urgent need for one. Chapter 8 explores the dimensions of this call in more detail. It presents results from two Flourishing – within Limits specific attempts to develop a macro-economics of sustainability. One of these suggests that it is Fixing the economy is only part of the problem. possible, under certain assumptions, to stabilise Addressing the social logic of consumerism is also economic output, even within a fairly conventional vital. This task is far from simple – mainly because macro-economy. A crucial role is played by work- of the way in which material goods are so deeply time policies in this model, to prevent rising implicated in the fabric of our lives. unemployment. But change is essential. And some mandate for The second model addresses the macro- that change already exists. A nascent disaffection economic implications of a shift away from fossil with consumerism and rising concern over the fuels. It shows that there may only be a narrow ‘social recession’ have prompted a number of ‘sustainability window’ through which the economy initiatives aimed at improving wellbeing and can pass if it is to make this transition successfully. pursuing an ‘alternative hedonism’ – sources of But crucially, this window is widened if more of identity, creativity and meaning that lie outside the the national income is allocated to savings and realm of the market. investment. Against the surge of consumerism there are These exercises reveal that a new macro- already those who have resisted the exhortation to economics for sustainability is not only essential, ‘go out shopping’, preferring instead to devote their but possible. The starting point must be to identify time to less materialistic pursuits, to their family, or clearly the conditions that define a sustainable to the care of others. economy. Small scale ‘intentional’ communities (like the These conditions will still include a strong Findhorn community in Scotland or Plum Village in requirement for economic stability as the basis for France) are exploring the art of the possible. Larger 10 Prosperity without Growth? Sustainable Development Commission
  11. 11. social movements (such as the ‘transition town’ Governance for Prosperity movement) are mobilising people’s desire to live more sustainably. These initiatives don’t appeal Achieving these goals inevitably raises the question to everyone. But they do provide an invaluable of governance – in the broadest sense of the word. learning ground, giving us clues about the potential How is a shared prosperity to be achieved in a for more mainstream social change. pluralistic society? How are the interests of the Chapter 9 discusses their strengths and limitations. individual to be balanced against the common It explores why people may turn out both to be good? What are the mechanisms for achieving this happier and to live more sustainably when they balance? favour intrinsic goals that embed them in family Particular questions arise about the role of and community rather than extrinsic ones which government itself. Chapter 10 identifies an almost tie them into display and social status. Flourishing undisputed role for the state in maintaining macro- within limits is a real possibility, according to this economic stability. For better or worse, government evidence. also ‘co-creates’ the culture of consumption, shaping On the other hand, those at the forefront of social the structures and signals that influence people’s change are often haunted by the conflict of trying to behaviour. At the same time, of course, government live, quite literally, in opposition to the structures has an essential role to play in protecting the and values that dominate society. These structures ‘commitment devices’ that prevent myopic choice represent a culture of consumption that sends all and support long-term social goals. the wrong signals, penalising ‘good’ environmental History suggests a cultural drift within government choices and making it all but impossible, even for towards supporting and encouraging a materialistic highly-motivated people, to live sustainably without and individualistic consumerism. This drift is not personal sacrifice. entirely uniform across all countries. For example, In this context, simplistic exhortations for people different ‘varieties of capitalism’ place more or less to resist consumerism are destined to failure. emphasis on de-regulation and competition. But all Urging people to insulate their homes, turn down varieties have a structural requirement for growth, the thermostat, put on a jumper, drive a little less, and rely directly or indirectly (eg in export markets) walk a little more, holiday at home, buy locally on consumerism to achieve this. produced food (and so on) will either go unheard Government itself is conflicted here. On the one or be rejected as manipulation for as long as all the hand, it has a role in ‘securing the future’ – protecting messages about high street consumption point in long-term social and ecological goods; on the other the other direction. it holds a key responsibility for macro-economic For this reason, structural change must lie at the stability. For as long as macro-economic stability heart of any strategy to address the social logic of depends on economic growth, government will consumerism. And it must consist in two main avenues. have an incentive to support social structures that The first is to dismantle the perverse incentives for undermine commitment and reinforce materialistic, unproductive status competition. The second must be novelty-seeking individualism. Particularly where to establish new structures that provide capabilities that’s needed to boost high street sales. for people to flourish – and in particular to participate Conversely, freeing the macro-economy from a meaningfully and creatively in the life of society – in structural requirement for growth will simultaneously less materialistic ways. free government to play its proper role in delivering The advantages in terms of prosperity are likely social and ecological goals and protecting long-term to be substantial. A less materialistic society will interests. enhance life satisfaction. A more equal society The narrow pursuit of growth represents a will lower the importance of status goods. A less horrible distortion of the common good and of growth-driven economy will improve people’s underlying human values. It also undermines the work-life balance. Enhanced investment in legitimate role of government itself. At the end of public goods will provide lasting returns to the the day, the state is society’s commitment device, nation’s prosperity. par excellence, and the principal agent in protecting our shared prosperity. A new vision of governance that embraces this role is urgently needed. Sustainable Development Commission Prosperity without Growth? 11
  12. 12. The Transition to a Sustainable Economy efforts, progress towards sustainability remains painfully slow. And it tends to stall endlessly on The policy demands of this analysis are significant. the over-arching commitment to economic growth. Chapter 11 presents a series of steps that governments A step change in political will – and a renewed vision could take now to effect the transition to a sustainable of governance – is essential. economy. Box 1 summarises these steps. They fall But there is now a unique opportunity for into three main categories: government – by pursuing these steps – to • building a sustainable macro-economy demonstrate economic leadership and at the • protecting capabilities for flourishing same time to champion international action on • respecting ecological limits. sustainability. This process must start by developing financial and ecological prudence at home. It must The specific proposals flow directly from the also begin to redress the perverse incentives and analysis in this report. But many of them sit within damaging social logic that lock us into unproductive longer and deeper debates about sustainability, status competition. wellbeing and economic growth. And at least some Above all, there is an urgent need to develop of them connect closely with existing concerns of a resilient and sustainable macro-economy that is government – for example over resource scarcity, no longer predicated on relentless consumption climate change targets, ecological taxation and growth. The clearest message from the financial social wellbeing. crisis of 2008 is that our current model of economic A part of the aim of this report is to provide a success is fundamentally flawed. For the advanced coherent foundation for these policies and help economies of the Western world, prosperity without strengthen the hand of government in taking them growth is no longer a utopian dream. It is a financial forward. For at the moment, in spite of its best and ecological necessity. 12 Prosperity without Growth? Sustainable Development Commission
  13. 13. Box 1: 12 Steps To a Sustainable Economy Building a Sustainable Macro-Economy Debt-driven materialistic consumption is deeply unsatisfactory as the basis for our macro-economy. The time is now ripe to develop a new macro-economics for sustainability that does not rely for its stability on relentless growth and expanding material throughput. Four specific policy areas are identified to achieve this: 1. Developing macro-economic capability 2. Investing in public assets and infrastructures 3. Increasing financial and fiscal prudence 4. Reforming macro-economic accounting Protecting Capabilities for Flourishing The social logic that locks people into materialistic consumerism is extremely powerful, but detrimental ecologically and psychologically. A lasting prosperity can only be achieved by freeing people from this damaging dynamic and providing creative opportunities for people to flourish – within the ecological limits of the planet. Five policy areas address this challenge. 5. Sharing the available work and improving the work-life balance 6. Tackling systemic inequality 7. Measuring capabilities and flourishing 8. Strengthening human and social capital 9. Reversing the culture of consumerism Respecting Ecological Limits The material profligacy of consumer society is depleting natural resources and placing unsustainable burdens on the planet’s ecosystems. There is an urgent need to establish clear resource and environmental limits on economic activity and develop policies to achieve them. Three policy suggestions contribute to that task. 10. Imposing clearly defined resource/emissions caps 11. Implementing fiscal reform for sustainability 12. Promoting technology transfer and international ecosystem protection. For further details see pages 103-107 Sustainable Development Commission Prosperity without Growth? 13
  14. 14. 1 Introduction “I think all of us here today would acknowledge that we’ve lost that sense of shared prosperity.” Barack Obama March 20081
  15. 15. Prosperity is about things going well for us – in accordance with (pro- in the Latin) our hopes and expectations (speres). Wanting things to go well is a common human concern. It’s understood that this sense of things going well includes some notion of continuity. We are not inclined to think that life is going well, if we confidently expect things to fall apart tomorrow. There is a natural tendency to be at least partly concerned about the future. There is also a sense in which individual prosperity the depletion of natural resources and the degradation is curtailed in the presence of social calamity. of the environment, impoverishing both present and That things are going well for us personally is of future generations. Climate change, depletion of oil little consolation if our family, our friends and our resources, water scarcity, the collapse of fish stocks community are in dire straits. In both these senses and the chronic loss of biodiversity are a few of these – of caring about the future and of caring about material concerns.4 others – prosperity has something in common with the concept of sustainability. The broad aim of this Particular urgency pertains to the twin challenges report is to explore that relationship – between of climate change and ‘peak oil’.i In the first case, prosperity and sustainability – in more detail. we can probably keep the economy going for a while even as we head towards the cliff. But as Sir At the heart of this exploration is a simple question: Nicholas Stern has argued, costs will be punishingly what can prosperity possibly mean in a finite world high when the crunch comes. Early investment in with a rising population that is expected to exceed the transition to a low carbon society is vital to nine billion people within decades?1 avoid economic collapse later on.5 One response – perhaps the most familiar one In the second case, oil price hikes have already – is to cast prosperity in economic terms and to shown they have the potential to destabilise the recommend a continual rise in national (and global) global economy and threaten basic securities. Fears economic output, with a corresponding increase in peaked in July 2008 when oil prices reached $147 people’s incomes. This response has an appealing a barrel. Though prices fell sharply in the following logic for the world’s poorest nations, where 20% of months, the threat of peak oil hasn’t gone away. the population earn just 2% of the world’s income. The International Energy Agency estimates that A meaningful approach to prosperity must certainly the ‘peak’ could arrive as early as 2020. Other address the plight of the one billion people across commentators believe it could be even sooner.6 the world who are living on less than $1 a day – half the price of a small cappuccino in Starbucks.2 Beyond these ecological concerns lie social ones. There is disturbing evidence that both the benefits But prosperity is not synonymous with income or and the costs of economic growth are unevenly wealth. Rising prosperity is not the same thing as distributed. The continuing disparities between economic growth. Until quite recently, prosperity rich and poorer nations are unacceptable from a was not cast specifically in terms of money at all; it humanitarian point of view and generate rising social was simply the opposite of adversity or affliction.3 tensions: real hardships in the most disadvantaged The concept of economic prosperity – and the elision communities have a spill-over effect on society as of rising prosperity with economic growth – is a a whole.7 modern construction. It is a construction that has come under considerable criticism. Finally, the continued pursuit of economic growth (beyond a certain point at least) does not appear to Economic growth, claim its critics, doesn’t always advance and may even impede human happiness. increase our prosperity. On the contrary, it can detract Talk of a growing ‘social recession’ in advanced from it in various ways. Perhaps most relevant here, economies has accompanied the relative economic the material implications of economic growth lead to success of the last decade.8 i Peak oil is the term used to describe the point at which global oil output reaches a peak, before entering a terminal decline. 16 Prosperity without Growth? Sustainable Development Commission
  16. 16. These three related arguments – ecological, social The second is that the current state of the economy and psychological – are now well-rehearsed in the and the concerns of this report are not unrelated. literature on sustainability (and on happiness). It is On the contrary, as we see in Chapter 2, it is impossible not the aim of this study to dwell on them in detail. to ignore the influence of financial markets and Rather the intention is to turn the relationship commodity prices in the relationship between between rising prosperity and economic growth on growth and prosperity. This interrelatedness has not its head. If economic growth and rising prosperity gone unnoticed amongst world leaders. Speaking on are not the same thing, and since growth can the opening day of the 2008 G8 Summit in Hokkaido, damage both people and planet, should we not UN Secretary General Ban Ki-Moon referred to the perhaps think about doing without growth, at least problems of climate change, soaring food prices and in the richer nations? development as ‘deeply interconnected’ crises that need to be addressed simultaneously.11 Clearly such a prospect is problematic in the poorest countries. But the conditions of living in The economist Peter Victor, one of the contributors to cosmopolitan Europe or the USA are a far cry from the SDC’s Redefining Prosperity project, has argued the abject poverty of rural Africa and parts of South that our overriding challenge is to build economies Asia and Latin America. which are ‘slower by design, not by disaster’.12 But if the current economic crisis really does indicate In a world of finite resources, constrained by strict (as some predict) the end of an era of easy growth, environmental limits, still characterised by ‘islands then the concerns of this report are doubly relevant. of prosperity’ within ‘oceans of poverty’,9 are Prosperity without growth is a very useful trick to ever-increasing incomes for the already-rich really have up your sleeve when the economy is going a legitimate focus for our continued hopes and down the pan. expectations? Is there some other path towards a more sustainable, a more equitable form of Perhaps most telling of all is the clear window of prosperity? opportunity – and overwhelming imperative – that now exists for change. In the face of economic In short, this report challenges the assumption of collapse, governments have an undisputed duty continued economic expansion in rich countries and to intervene. Public investment is essential. asks: is it possible to achieve prosperity without Restructuring is inevitable. Targeting these growth? interventions towards sustainability makes obvious sense. Some would say it’s ironic to be asking such questions when economic stability is itself In short, there is no better time to make progress under threat and the world struggles with global towards a more sustainable society. To invest in recession. Raising deep, structural questions about renewable technologies that will reduce both carbon the nature of prosperity in this climate might seem emissions and our dependence on finite resources. inopportune if not insensitive. ‘That is not what To renew our financial and social institutions and people are interested in when financial markets are create a fairer world. To invest in the jobs and skills in turmoil,’ admits George Soros of his own attempt that these tasks demand. To initiate the transition to to dig deeper into the global credit crisis.10 But there a sustainable economy. are several reasons not to postpone this inquiry until the economy looks brighter. Whatever the state of the economy, the central question addressed in this report is undiminished. The first is that the cumulative impacts of economic It has haunted debates on sustainable development growth – climate change, resource depletion, social for several decades. And in a very real sense, now recession, for example – are unlikely to go away, may be the best possible time to make some clear just because growth slows down in the advanced progress in answering it. That at any rate is the economies. Some may get better, temporarily. But intention of the following pages. some of them may even get worse. Sustainable Development Commission Prosperity without Growth? 17
  17. 17. 18 Prosperity without Growth? Sustainable Development Commission
  18. 18. 2 The Age of Irresponsibility “This has been an age of global prosperity. It has also been an era of global turbulence. And where there has been irresponsibility, we must now clearly say: the age of irresponsibility must be ended.” Gordon Brown September 20081
  19. 19. The conventional formula for achieving prosperity relies on the pursuit of economic growth. Higher incomes will increase wellbeing and lead to prosperity for all, in this view. This report challenges that formula. It questions whether economic growth is still a legitimate goal for rich countries like the UK, in the context of the huge disparities in income and wellbeing that persist across the globe and the constraints of living within finite environmental limits. It explores whether the benefits of continued economic growth still outweigh the costs and scrutinises the assumption that growth is essential for prosperity. In short, it asks: is it possible to have prosperity without growth? This question was thrown into sharp relief during inflation – for the first time in thirty years. Oil prices the course of writing the report. The banking crisis doubled in the year to July 2008, while food prices of 2008 led the world to the brink of financial rose by 66%, sparking civil unrest in some poorer disaster and shook the dominant economic model nations.2 to its foundations. It redefined the boundaries between market and state and forced us to confront All of these can be counted as contributory factors. our inability to manage the financial – let alone None on their own offers an adequate explanation social or environmental – sustainability of the global for how financial markets managed to destabilise economy. entire economies. Why loans were offered to people who couldn’t afford to pay them off. Why regulators Consumer confidence has been shattered. failed to curb individual financial practices that could Investment has stalled and unemployment is rising bring down monolithic institutions. Why unsecured sharply. Advanced economies (and some developing debt had become so dominant a force in the countries) are faced with the prospect of a deep and economy. And why Governments had consistently long-lasting recession. Public sector finances will be turned a blind eye or actively encouraged this ‘age stretched for a decade or more. Trust in financial of irresponsibility’. markets will suffer for some considerable time to come. Not to stand back now and question what Political response to the crisis provides us with some happened would be to compound failure with failure: clues. By the end of October 2008, governments failure of vision with failure of responsibility. across the world had committed a staggering $7 trillion of public money – over three times the Gross Domestic Product (GDP) of the UK – to securitise In search of villains risky assets, underwrite threatened savings and recapitalise failing banks.3 No one pretended that The causes of the crisis were complex. The most this was anything other than a short-term and deeply prominent villain was taken to be subprime lending regressive solution. A temporary fix that rewarded in the US housing market. Some highlighted the those responsible for the crisis at the expense of the unmanageability of the ‘credit default swaps’ used taxpayer. It was excused on the grounds that the to parcel up ‘toxic debts’ and hide them from the alternative was simply unthinkable. balance sheet. Others pointed the finger of blame at greedy speculators and unscrupulous investors intent Collapse of the financial markets would have on making a killing at the expense of vulnerable led to a massive and completely unpredictable institutions. global recession. Entire nations would have been bankrupted. Commerce would have failed en A dramatic rise in basic commodity prices during masse. Livelihoods would have been destroyed. 2007 and early 2008 (Figure 1) certainly contributed Homes would have been lost. The humanitarian to economic slowdown by squeezing company cost of failing to save the banking system would margins and reducing discretionary spending. have been enormous. Those who resisted the US’s At one point in mid-2008, advanced economies Troubled Assets Relief Program (TARP) on its first were facing the prospect of ‘stagflation’ – a reading through Congress appeared oblivious to simultaneous slow-down in growth with a rise in these consequences, inflamed as they were with 20 Prosperity without Growth? Sustainable Development Commission
  20. 20. understandable indignation over the unjustness of economists and even financiers accept the point. the solution. The suspension of practices like short-selling; increased regulation of financial derivatives; But the harsh reality was that politicians had no better scrutiny of the conditions of lending: all of choice but to intervene in the protection of the these became widely accepted as inevitable and banking sector. In the language of the media, Wall necessary responses to the crisis. There was even Street is the lifeblood of Main Street. The health of a grudging acceptance of the need to cap executive the modern economy hangs on the health of the remuneration in the financial sector. financial sector. Anything less than total commitment to its survival would have been unthinkable. The Admittedly, this was born more of political necessity appropriate goal of policy at that point in time was in the face of huge public outcry over the bonus incontestably to stabilise the system: to reassure culture than through recognition of a point of savers, to encourage investors, to assist debtors, principle. In fact, huge executive bonuses were still to restore confidence in the market. Very much as being paid. Goldman Sachs paid out $2.6 billion in governments around the world tried to do. end of year (2008) bonuses in spite of its $6 billion dollar bailout by the US government, justifying They were only partially successful – halting an these on the basis that they helped to ‘attract and immediate slide into chaos but failing to avert the motivate’ the best people.5 prospect of a deep recession across the world. This prompted a further round of economic recovery But even these responses were seen as short-term packages early in 2009 which aimed to ‘kick-start’ interventions, designed to facilitate the restoration consumer spending, protect jobs, and stimulate of business as usual. Short-selling was suspended economic growth again. In Chapter 7 we explore for six months, rather than banned. The part- some of these ‘stimulus packages’ in more detail. nationalisation of financial institutions was justified on the basis that shares would be sold back to It was abundantly clear, by the time the World the private sector as soon as reasonably possible. Economic Forum met in Davos in February 2009, The capping of executive remuneration was that a little reflection was in order. Political leaders, ‘performance related’. Figure 1 Global Commodity Prices: Jan 2003 – Feb 20094 500 450 Metals 400 350 300 Jan 2003 = 100 Oil 250 200 150 100 Food 50 0 Jan 2003 JUL 2003 Jan 2004 JUL 2004 Jan 2005 Jul 2005 Jan 2006 Jul 2006 Jan 2007 Jul 2007 Jan 2008 Jul 2008 Jan 2009 Figure 1: Global Commodity Prices: Jan 2003 – Feb 2009 Sustainable Development Commission Prosperity without Growth? 21
  21. 21. Extraordinary though some of these interventions increasing levels of debt (Box 2). One aspect of this were, they were largely regarded as temporary was the rise and rise of consumer indebtedness. measures. Necessary evils in the restoration of a Over the course of more than a decade consumer free market economy. Their declared aim was clear. debt served as a deliberate mechanism for freeing By pumping equity into the banks and restoring personal spending from wage income and allowing confidence to lenders, the world’s leaders hope to consumption to drive the dynamics of growth. re-invigorate demand and halt the recession. Not all economies were equally susceptible to this Their ultimate goal was to protect the pursuit of dynamic. Indeed it’s a feature of the system of debt economic growth. Throughout the crisis, this has that for one part of the global economy to be highly 500 been the one non-negotiable: that growth must indebted, another part must be saving hard. During continue at all costs. Renewed growth was the 450 the first decade of the 21st Century, the savers were Metals end that justified interventions unthought of only a largely in the emerging economies. The savings rate 400 few months previously. No politician seriously in China during 2008 was around 25% of disposable questions it. 350 income, while in India it was even higher at 37%. Yet question it we must. Allegiance to growth was 300 There were also clear differences between the so- Jan 2003 = 100 Oil the single most dominant feature of an economic called ‘liberal’ and ‘coordinated’ market economies’, 250 and political system that led the world to the brink with the former typically showing higher levels of of 200 disaster. The growth imperative has shaped the consumer indebtedness than the latter.6 The UK and architecture of the modern economy. It motivated the US were particularly vulnerable to the problem. 150 the freedoms granted to the financial sector. It stood at least partly responsible for the loosening 100 Personal debt in the UK more than doubled in less Food of regulations, the over-extension of credit and than a decade. Even during 2008, as recession the50proliferation of unmanageable (and unstable) loomed, it was growing at the rate of £1m every 11 financial derivatives. minutes. Though the rate of growth slowed down – 0 as it tends to do in a recession – by the end of 2008, Jan 2003 JUL 2003 Jan 2004 JUL 2004 Jan 2005 Jul 2005 Jan 2006 Jul 2006 Jan 2007 Jul 2007 Jan 2008 Jul 2008 Jan 2009 the cumulative personal debt still stood at almost The labyrinth of debt £1.5 trillion, higher than the GDP for the second year running.7 Savings, on the other hand, had In fact, it is generally agreed that the unprecedented plummeted. During the first quarter of 2008, the Figure 1: Global Commodity Prices: Jan 2003 – Feb 2009 consumption growth between 1990 and 2007 household savings ratio in the UK fell below zero for was fuelled by a massive expansion of credit and the first time in four decades (Figure 2). Figure 2 UK Consumer Debt and Household Savings 1993–20088 12% 120% Personal debt 10% 100% Savings as % of disposable income Personal debt as % of GDP 8% 80% 6% 60% 4% 40% Household savings ratio 2% 20% 0% 0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 -2% -20% Figure 2: UK Consumer Debt and Household Savings 1993-2008
  22. 22. Box 2: Debt in Perspective Lending and borrowing money is (in normal times at least) a fundamental feature of the modern economy (see Chapter 6). Households, companies and governments all participate both in lending (e.g. through savings and investments) and in borrowing (e.g. through loans, credit accounts and mortgages). Financial debts (sometimes called liabilities) are the accumulated money owed at any one point in time by a person, a firm, a government or indeed the nation as a whole. A fundamental principle of capitalism is that these accumulated liabilities attract interest charges over time. Debt rises in two ways: firstly by borrowing more money (e.g. for increased public spending); and secondly through interest accumulated on the debt. For any given interest rate, a higher level of debt places a greater demand on people’s income to pay off the interest and stop the debt accumulating. Some of this requirement could be met from revenues generated by people’s own financial ‘assets’ or savings. By participating in the economy both as savers and as borrowers, people can try and balance their financial liabilities (money borrowed) against their financial assets (money lent). The extent to which it ‘matters’ how much debt we hold depends (in part) on this balance between assets and liabilities. And as the current crisis has shown, on the financial reliability of the assets. Three aspects of debt have attracted media and policy attention over the last decade: personal debt, the national debt and the gross external debt. Though all are concerned with money owed, these debts are quite different and have different policy implications. The following paragraphs set out the key elements of each and their relevance for economic sustainability. Personal Debt Personal (or consumer) debt is the amount of money owed by private citizens. It includes home loans, credit card debt and other forms of consumer borrowing. Personal debt in the UK is currently dominated by home loans, which at the end of 2008 comprised 84% of total. For as long as the value of homes continued to rise people’s financial liabilities (home loans) were offset by the value of their physical assets (homes). Problems arise when house values collapse. Liabilities are no longer balanced by assets. When this is compounded (as in a recession) by falling incomes, debt – and the financial viability of households – becomes highly unstable. Like much of the growth economy (Chapters 4 and 6), financial stability turns out to be dependent in an unsustainable way on growth – in this case growth in the housing market. National Debt The national (or public sector) debt is the money that government owes to the private sector.9 When a government continually runs a deficit (i.e. spends more than it receives in revenues) the national debt rises. Just as for households, reducing the debt is only possible when the public sector runs a surplus (i.e. it spends less than it receives). Increased debt is a common feature of public finances during recession. But servicing this debt – without compromising public services – depends heavily on future government revenues increasing. This can happen in only three ways. First, by achieving the desired aim of growth. Second, by increasing the tax rate. And third, by using the debt to invest in productive assets with positive returns to the public purse. A continually rising public debt in a shrinking economy is a recipe for disaster. External debt The total debt held outside the country by government, business and households is called the external debt. The sustainability of this debt depends on a complex mix of factors, including the extent to which it is balanced by external ‘assets’, the form of both assets and liabilities (including the currency in which they are held) and the relative strength of domestic currency on the international market. Particular pressure is placed on an economy when its economy is shrinking and its currency is losing value. In extreme circumstances, a country may find itself unable to attract investors willing to support its spending and unable to liquidate its assets to compensate for this. At this point the level of external debt relative to the GDP becomes critical. Calling in debts worth almost five times the national income (as in the UK) would be catastrophic. Sustainable Development Commission Prosperity without Growth? 23
  23. 23. People are encouraged into debt by a complex result of the increased borrowing needed to protect mix of factors including (Chapter 6) the desire for the banks and fund economic recovery. By the social status and the drive to boost high street end of 2008, the national debt was already higher sales. But when this strategy becomes unstable – than at any time since the early 1980s, well above as it did during 2008 – it places large sections of the Treasury’s self-imposed ceiling of 40% of the the population at risk of lasting financial hardship. GDP and rising fast. The UK Government’s own Inevitably, that risk falls mainly on those who are calculations had public sector borrowing rising most vulnerable already – the lower income groups from 2.6% of GDP in 2008 to 8% within a year or who profited less from the last two decades of so. And the Government accepted that this would growth.10 Far from delivering prosperity, the culture push national debt to almost 60% of GDP by 2010. of ‘borrow and spend’ ends up detracting from it. Crucially, this figure excluded the costs of purchasing equity in the part-nationalised banks.11 The same vulnerability can afflict the nation as a whole. There are different kinds of indebtedness at Public sector debt is not in itself a bad thing. It simply the national level (Box 2). One of the key measures reflects the amount of money that government owes is the national – or public sector – debt which to the private sector. This includes money saved by measures how much government owes to the its own citizens. And the idea that citizens hold a private sector. This can vary widely across nations. financial interest in the public sector has some clear France, Germany, Canada and the US all have public advantages. It can be thought of as part of the ‘social sector debts above 60% of GDP. Italy and Japan hold contract’ between citizen and state. But when the public sector debts that are higher than their GDP. household savings rate collapses (Figure 2) and the Norway by contrast holds no public debt at all and national debt rises (Figure 3), further borrowing on the contrary has enormous financial assets. increases what is called the external debt (Box 1) – the money a country borrows from outside its own In the UK, public sector debt rose sharply through boundaries. This inevitably exposes the nation to the financial crisis (Figure 3). This was in part a the volatility of international markets. Figure 3 The UK Net Public Sector Debt: 1993–200812 60% Projected on basis PBR 2008 forecast 50% UK Treasury ceiling on national debt 40% Includes the cost of financial sector % of GDP interventions 30% Increase largely due to higher spending on 20% health and education 10% 0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Figure 3: The UK Net Public Sector Debt: 1993-2008 24 Prosperity without Growth? Sustainable Development Commission 16
  24. 24. Some countries may be better placed than others free market perspective but it was considerably to weather this volatility. External debt varied more progressive than simply pumping in cash or widely across nations (Figure 4) during 2007/8, guarantees to ensure liquidity. At least it allowed from as little as 5% of GDP (in China and India for for the possibility of a financial return to the public 60% example) to over 900% of GDP (in Ireland). In the purse. Projected on basis UK, the gross external debt increased seven and a PBR 2008 forecast half times in the space of just two decades. By the At the same time, what became clear through the 50% UK Treasury ceiling end of 2008, it was equivalent to on national debt almost five times crisis was the extent to which economic policy over the GDP and ranked as the second highest absolute two decades had positioned the UK slap bang across level of external debt in the world after the US. an emerging fault line in the financial sector. High 40% levels of consumer debt and the second highest level Includes the cost These external liabilities were set off – at least of external debt in the world were of financial sector not just accidental % of GDP in part – by a higher than usual level of external features of economic life, but theinterventions result of specific assets. But in an unstable market this placed the UK policies to increase liquidity and boost spending. The 30% in a vulnerable financial position. More to the point, one area of fiscal prudence in the UK – a relatively as the International Monetary Fund points Increase largely due to out, this low level of public sector debt – became the first position was deliberately courted by the higher spending casualty of the collapse. UK in its on 20% health and education role as an international centre of finance. This is not to suggest that the UK is alone in facing The architecture of financial recovery in the wake the severity of the current crisis. On the contrary, 10% the 2008 crisis – and in particular the role of the of in an increasingly globalised world, it was difficult public sector as an equity-holder in the banks – owed for any country to escape this recession. Even those much to the UK Prime Minister, Gordon Brown. In economies – like Germany, Japan and China – which this respect, the UK Government attracted deserving 0% retained strong manufacturing sectors, largely praise for its response to the1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 strong 2010 1993 1994 1995 1996 crisis. Part-nationalising avoided consumer debt and delivered 2009 public the banks may have been suboptimal from a sector surpluses – suffered. During the last quarter Figure 3: The UK Net Public Sector Debt: 1993-2008 Figure 4 Gross External Debt across Nations (2007/8)13 16 Absolute value of external debt ($ trillion) 14 External debt as multiple of GDP 12 10 8 6 4 2 0 US UK Germany France Ireland Japan Norway China India Figure 4: Gross External Debt across Nations (2007/8) Sustainable Development Commission Prosperity without Growth? 25
  25. 25. of 2008, Germany’s economy sank faster than any underlines the point that these interventions were other European nation, contracting by 2.1%.14 deliberate. All along the way, decisions to increase liquidity were made with a view to expanding the Ironically, these economies built their stability not on economy. ‘Amid the crisis of 2008’, remarked an domestic consumption growth but on consumption Economist leader article, ‘it is easy to forget that growth abroad. Unable to persuade their own liberalisation had good consequences as well: by consumers to spend rather than save, they achieved making it easier for households and businesses to growth by exporting to countries like the US and get credit, deregulation contributed to economic the UK where consumers were still prepared to growth.’18 spend rather than save. When credit collapsed and consumer spending slowed everywhere, there were For over two decades, deregulation of financial knock-on impacts for everyone. markets was championed under monetarism as the best way to stimulate demand. The monetarists So the sense that economic policy consciously flirted may have been reacting against the levels of public with financial risk goes much wider than the UK’s debt incurred by Keynesian spending programmes in dalliance in the banking sector. In fact, the roots of the 1970s.19 But a strategy that ended up replacing the crisis lie at least in part in a concerted effort public debt with private debt was always a risky one. to free up credit for economic expansion across the ‘When the music stops, in terms of liquidity, things world. will be complicated,’ the CEO of Citibank reportedly remarked, just before the bubble burst. ‘But as long In The New Paradigm for Financial Markets, George as the music is playing, you’ve got to get up and Soros traces the emergence of what he calls a dance. We’re still dancing.’20 ‘super-bubble’ in global financial markets to a series of economic policies to increase liquidity as a way By the end of 2008, Citibank was no longer dancing. of stimulating demand. Loosening restraints on the No bank was. The music had clearly stopped – and things US Federal Reserve, de-regulating financial markets were definitely complicated.21 Just how complicated and promoting the securitisation of debts through was indicated by the sheer size of the international complex financial derivatives were also deliberate bail-out. And the fact that even an estimated $7 trillion interventions. Their overriding aim was to promote of taxpayers’ money proved insufficient to guarantee economic growth.15 stability and avoid recession. In other words, the market was not undone by In short, the message from this chapter is that the isolated practices carried out by rogue individuals. ‘age of irresponsibility’ is not about casual oversight Or even through the turning of a blind eye by or individual greed. The economic crisis is not a less than vigilant regulators. It was undone by consequence of isolated malpractice in selected growth itself. parts of the banking sector. If there has been irresponsibility, it has been much more systemic, sanctioned from the top, and with one clear aim in The enemy within mind: the continuation and protection of economic growth. Securitisation of mortgage debts (for example) was championed at the highest level, spearheaded by The realisation that the credit crisis and the ensuing Alan Greenspan, former chairman of the Federal recession were part of a systemic failure in the Reserve. In The Age of Turbulence, Greenspan current economic paradigm is reinforced by an defends the practice explicitly, arguing that understanding of the resource and environmental ‘transferring risk away from… highly leveraged loan implications of economic growth. originators can be critical for economic stability, especially in a global environment.’16 The commodity price ‘bubble’ that developed over several years and peaked in mid-2008 had clearly In testimony to US Congress in late October 2008, burst by the end of the year (Figure 1). It now Greenspan admitted to being ‘shocked’ that seems likely that the very high prices attributed to markets hadn’t worked as expected.17 But this only key commodities in mid-2008 were in part the result 26 Prosperity without Growth? Sustainable Development Commission