1. To the Point
Discussion on the economy, by the Chief Economist April 28, 2011
Economic Growth – curse or cure?
Among most politicians and economists, economic growth is a positive concept.
Especially in industrial countries, with increased public debt burdens, growth is
seen as the cure. At the same time, there are those who argue that economic
growth threatens the ecology, and that the idea of decoupling between production
and emissions is just a myth. For those, economic growth is more of a curse, and
something that needs to be stopped in the developed world. This version of To the
Point digs a little deeper into the concept of growth at a time when the world is
Cecilia Hermansson facing both an economic and an ecologic crisis.
Group Chief Economist
Economic Research Department To grow out of debt
+46-8-5859 7720
cecilia.hermansson@swedbank.se There are four main ways to resolve the debt crisis most industrial countries face
at the moment, i.e. by growing out of debt, by inflating the economy, by paying
down debt or by restructuring debt (e.g. by asking creditors to forgive parts of the
debt or prolonging maturity).
The way that hurts the least is of course the first way by creating economic
growth, so that the ratio of debt to GDP decreases over time. However, fiscal
austerity programmes often have a negative impact on growth, and it is more
likely, going forward, that growth will be lacking or low in many debt ridden
countries. Paying down debt, restructuring the economy and implementing
reforms are often a challenge for politicians as positive effects take time and there
are interest groups resisting changes that worsen their situations. This is the most
sustainable economic solution, but in the short term, growth is negatively
affected. Inflation (the third way) would reduce debt in real terms – a positive
outcome for debtors but not for creditors. In addition, inflationary expectations
could rise and get out of hand, and the credibility built up by central banks could
be lost. The restructuring of debt (the fourth way) could mean that it would be
harder to take up new debt in the future, as credit worthiness decreases, and most
countries would like to try other options first.
It is obvious that economic growth is seen as a cure to the fiscal crisis at the
moment, and something to strive for. For many environmentalists, however,
economic growth is rather a threat, and something to work against.
The myth of decoupling
The main reason for proposing low or no growth in industrial countries
(developing countries still have a catch-up to do that is seen as defensible) is that
growing the size of the economy brings along increased use of resources which is
not a way forward as ecological limits have been reached. (See e.g., Tim Jackson:
Prosperity without growth).
There are signs of relative decoupling, such that, the amount of resources needed
to produce a unit of GDP is falling. However, in absolute terms, decoupling is
more difficult to find. In Sweden, emissions of greenhouse gases have declined
during the last 10 years despite increased production, but this is more of an
exception than a rule, and not all researchers even agree that it has occured (see
e.g., Rockström). This is the reason for proposing low or no growth, i.e. that the
market economy cannot deal with these imperfections itself. Even if it can be
argued that developing countries have much catching up to do, restraining growth
No. 4 in the industrial countries will not be enough by itself to solve the problem of
2011 04 28 reaching the ecological limit.

2. To the Point (continued)
April 28, 2011
The adverse effects of no growth
The question is how a low or no growth model would come about. Peter Victor
argues that apart from the argument mentioned above, growth is not needed to
create full employment and reduce poverty. He also argues that growth is
uneconomic as it detracts more from well-being than it adds.
Therefore, he has created an econometric model to show that it is possible to have
a society with low growth and still fulfilling social objectives such as full
employment and no poverty. There are several problems with Victor’s model, as
there is no financial or monetary sector. The central bank is supposed to stick to a
2 % inflation target as an assumption, but it would not be unrealistic to assume
deflation in a scenario where growth is taken away. In addition, the idea that
increases in unemployment can be compensated by a shorter work week is not
realistic, as has been shown by the experiment in France where a law restricting the
work week to 35 hours did not create more jobs or job turnover as there were
substitution and scale effects getting in the way of positive employment responses
(See Estevao & Sá, CEPR, 2008).
The labour force is also assumed to grow in line with GDP in the model, despite
the fact that demographics will put an increased burden on those in the labour force
and the public sector/welfare systems in the years to come. Poverty is supposed to
be taken away by distributing means to the poor, but with no discussions on
incentives to work and the political aspects of distributing wealth from some
groups to others.
The advocates of low or no growth have other agendas than just protecting the
environment, and the models proposed do not seem realistic from an economic or
political perspective.
Different kinds of growth
It is important that we discuss the impact of growth on the environment. It is also
important to acknowledge that the market economy has imperfections needed to be
dealt with. However, to do away with market economy is not the solution.
There are different kinds of growth and economic systems. The financial crisis
illustrates the risks of building up private and public debt, to finance consumption.
That type of system is not sustainable, and also puts the environment at risk in the
sense that it is short-sighted and resource demanding. It is important to focus on
more sustainable growth, which has quality rather than quantity at the forefront,
and that increases consumption of services and investments in technology needed
for ecological sustainability.
The best way to support a sustainable economy and ecology is to use the incentive
structure by taxing emissions and subsidizing “green” investments. It is more
important to create sustainable and environmental friendly growth, than no growth
at all. Having said that, it is not acceptable that policy makers shy away from the
responsibility of creating a sustainable economy and ecology. Industrial countries
must take the lead, but developing countries must also take responsibility. Further-
more, institutions must be created that can set some of the national interests aside.
Cecilia Hermansson
Economic Research Department
SE-105 34 Stockholm, Sweden
Telephone +46-8-5859 1000
ek.sekr@swedbank.com To the Point is published as a service to our customers. We believe that we have used reliable sources
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