Is constant economic growth essential for our prosperity?

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: chief economist Thijs Knaap on whether economic growth is absolutely necessary to maintain prosperity. “People always want to improve.”

For a long time, economic growth was seen as a positive development, but in recent years the opposing voices have continuously been getting louder: economic growth also has harmful effects, for people and for the environment. “The question in this discussion is what exactly is growing. That is the gross domestic product, or GDP. When people think of production, they often think of chemical factories where stuff rolls out that you buy at Blokker, for example. But production can just as easily be about services, such as a visit to the hairdresser, the tax consultant or a ride on the train.”

Polluting

In recent decades, people have started buying more services than products. “The carbon emissions associated with manufacturing a product or providing a service have been decreasing since measurements began in the early 1990s. After World War II, the Netherlands had to be rebuilt and production in factories largely consisted of cars, bicycles and building materials for houses. Now you can also think of production as programming a computer program or visiting a psychotherapist. Especially the latter is a service that does not involve any raw materials and is therefore not really polluting. With these kinds of services, you can grow GDP for a long time, especially if people keep coming up with new forms.”

GDP growth can be broken down into three components, Knaap continued. These are higher production due to population growth, growth of capital (for example, offices, factories but also human capital in the form of training) and progress. “In the Netherlands today, growth is mainly accounted for by the latter component. But progress through new innovations, for example, is also less today than in the 1980s and 1990s.” So there is already less economic growth AND the growth that is still happening is less polluting than before.

Psychological factor

Knaap emphasizes that there is also no economic law that says there must always be growth. After all, the economy can also shrink. “Still, it is nice when there is growth, but that is mainly due to a psychological factor. Namely, people always want to be better off. You become happy not so much from the level of prosperity you already have, but mainly from the prospect of your prosperity rising (further). In that sense, it is a positive development if the economy continues to grow a little more each year. For poorer countries that effect is even greater than for richer countries, because the former may be able to eliminate infant mortality, hunger and homelessness as a result.” In this context, Knaap also refers to the 2008-2009 recession. “GDP went down at that time, unemployment rose and housing prices fell. In short: misery all around. But GDP was just as high in 2007, and that was a great year economically.”

A purely economic argument for growth is that the economy is partly based on expectations, and generally those expectations are expectations of growth. “Suppose I build a hotel on a lake, I expect people to come there and I will recoup my investment after a number of years. Much of the (Dutch) economy is based on these kinds of expectations for the coming decades. If we decide that there should be no more growth, there will be a lot of bankruptcies and unemployment before a new balance can possibly emerge.”

Japan

Growth may also come to a kind of natural halt. “As we saw, the capital factor is barely growing anymore, and the influence of innovations is also declining. That leaves population as a growth factor. However, some countries are already experiencing a declining population, and this development will play out in more countries in the future. Countries with low birth rates include Italy and South Korea, as well as China, Germany and the Netherlands. And in Japan, the population has been declining since 2010. “However, GDP in Japan is still increasing, so the three factors mentioned for economic growth do not exist completely independently of each other either. As the population declines, it is important to increase productivity so that everyone can still go to the supermarket or the hairdresser. In Japan, for example, they are already frequently deploying robots, not only in factories but also in retirement homes.” In the Netherlands and the rest of Western Europe, the tightness in the labor market also seems to be a structural development now that the large baby boom generation is retiring. “By focusing on further growth in productivity, like in Japan, the consequences of aging can be managed reasonably well here too,” Knaap concludes.