Global Economics

Is Economic Growth Really Essential?


The financial crisis has prompted many Germans to question the "cult" of GDP. Could we live with less economic growth and be happier?

How is the German economy doing? Has it emerged from the worst of the economic crisis?

There is probably no one in Germany who can answer those questions—questions which are currently on everyone's mind—quicker or more precisely than Norbert Räth. His response consists of a single number.

Räth, a white-haired economist in his late 50s, is sitting in his corner office on the eighth floor of the Federal Statistical Office in the German city of Wiesbaden. He is in charge of the agency's Group III A, which addresses issues relating to the national accounts, used to measure the country's economic activity. If the national accounts can be characterized as Germany's balance sheet, then Räth is the country's senior accountant.

His office compiles all key economic data relating to Germany, including figures on building permits and hotel stays, poultry slaughter and automobile repair, even data on the amount of tax paid on sparkling wine by wineries. "We have data on every payment made," says Räth.

The sources of all this information include tax offices, associations and a monthly survey of 23,500 production companies. In the past, the data arrived in Wiesbaden on tons of paper, but today everything is done electronically. Once every three months, Räth recompiles the data and comes up with a figure representing the value of all goods and services produced in Germany: the gross domestic product, or GDP. In the second quarter of this year, German GDP amounted to €596.67 billion ($875 billion), up from the previous quarter's figure of €593.3 billion.

While the absolute totals are only of interest to the professional world, what makes headlines is the rate at which GDP changes. According to Räth's latest figures, Germany's GDP increased in the second quarter of 2009 by 0.3 percent compared to the previous quarter. It's a figure which is of vital importance to the country.

Everything revolves around this number, and everyone is fixated on it. Hardly any politician, whether they are from the center-right Christian Democrats or the center-left Social Democrats, much less the pro-business Free Democratic Party, would ever think to seriously question it. Growth generates jobs, growth produces social wellbeing, and growth creates affluence for all. This, at least, is the economic policy gospel, proclaimed and eulogized on every market square in Germany during the current election campaign. And at this week's G-20 summit in Pittsburgh, the heads of state and government in attendance will once again be invoking the dynamics of growth. But the good news has lost some of its luster.

Not Just Cranks

There are now plenty of skeptics who seriously question the value of constantly rising economic output. And these critics are not simply cranks who are opposed to change in general. In fact, they are respected individuals who have the courage to reflect on whether growth is always synonymous with progress—and whether stagnation automatically implies regression.

"Our affluence has quadrupled in the last 40 years. But at what price?" asks Kurt Biedenkopf, a member of the Christian Democratic Union (CDU) and the former governor of the eastern state of Saxony. The growth rate is "no longer a clear indicator of rising affluence," Biedenkopf told SPIEGEL in a recent interview.

Even German President Horst Köhler is suspicious of politicians' assurances that growth is indisputably beneficial to society. "We have convinced ourselves that permanent economic growth is the answer to everything," Köhler said in March, in the midst of the financial crisis. It was an astonishing statement, coming as it did from a professional economist and former head of the International Monetary Fund. And yet Köhler did not reveal what the correct answer could be. Stagnation, perhaps? Or even contraction?

Apparent certainties are now beginning to falter, as a broad front of critics of the system develops. They question whether it is really necessary for consumers who already have everything they need, to consume—and throw away—more and more each year. And they are also searching for new methods of measuring well-being, applying criteria like healthcare and level of education. French President Nicolas Sarkozy attracted attention last week when he proposed such an alternative way of measuring wealth.

Bigger, Faster, More

We have become used to a constant thirst for growth. We constantly want more of everything, and we want it faster. But where does that all lead? From a purely mathematical perspective, a growth rate of 3 percent—a target for many industrialized nations—means that economic output doubles in just 24 years. To take a concrete example, if a German consumer currently buys six pairs of shoes a year, he or she would buy 12 pairs in 2033. Assuming the same rate of growth, does this mean that they would buy two dozen pairs in 2057?

Nowadays people in the West "have more food, more clothes, more cars, bigger houses, more central heating, more foreign holidays, a shorter working week, nicer work, and, above all, better health," writes British economist Richard Layard in his book "Happiness: Lessons from a New Science." "And yet they are not happier," he continues. This raises a simple question: What is the purpose of growth in the first place? And why is there such a cult based around GDP?

To answer these questions, we simply have to imagine the consequences if there were to be a long period with no growth. If that happened, all of the vital functions of society would soon collapse. In other words, Germany is more or less doomed to continue growing.

The German economy has to grow to offset constantly rising productivity and the resulting decline in demand for labor, otherwise there is the risk of higher unemployment. It has to grow so that incomes can rise each year, or else societal conflicts over income distribution will intensify. It has to grow to pay for the social welfare state, or else society's safety net against illness, unemployment and poverty in old age will become unaffordable. Finally, it has to grow so that the state can continue to service its debt, or it will lose its ability to manage its own affairs.

Banks, in particular, are dependent on growth. They are only willing to lend money to companies who want to invest if they can expect to be repaid with interest, so that they can then lend the money to others. This system of permanent money creation only functions in an expanding economy. For generations, everything in Germany has been geared toward constant growth and expansion.

Symbol of a Better Life

Rising GDP has served as a benchmark of performance for every German government since that of West Germany's first chancellor, Konrad Adenauer. Economic success not only provided postwar German society with material affluence—it also helped to shape its identity. Growth signified a better life, and the more the nation progressed economically, the more it could distance itself from its Nazi past.

The wealth creation machine continued along this path year after year until 1967, when the country experienced its first recession. That downturn came as such a shock that, without further ado, the parliament in Bonn wrote "constant and appropriate growth" into law as a goal of national economic policy. Legislators had imposed on the German economy, by decree as it were, a constant rise in the output of goods and services.

It was not until the famous report to the Club of Rome in 1972, titled "The Limits to Growth," that many began to seriously reflect upon how far growth could go. The timing of the study, in the midst of the oil crisis and a recession, was perfect.

Sense of Unease

Today, once again, concerns over declining natural resources and the future of the global economy have revived that vague sense of unease over the concept of growth. For many, the world economic crisis comes as a wakeup call. In industrialized countries, faith in material wealth has been shaken since the financial markets almost collapsed and plunged the world into recession.

Many believe that unfettered capitalism, driven by a more-is-more philosophy, that values higher returns, more risk and more debt, is ultimately responsible for the debacle. The world has experienced the "elimination of upper limits on every scale," writes Karlsruhe philosopher Peter Sloterdijk, describing the disastrous consequences of the convergence of greed and megalomania.

The critics of growth now advocate modesty, saying that affluence breeds contempt. Consumption, they argue, clouds our perspective on the important things in life. And it's not just young, left-leaning members of society who feel this way. "Growth is a completely useless concept to describe well-being," says Klaus Wiegandt, 70. For anyone familiar with Wiegandt's past career, this statement is nothing short of astonishing.

Until 1998, Wiegandt was CEO of Metro (MEOG.DE), a diversified German retail group that included the Kaufhof department store chain and the Saturn and Media Markt consumer electronics retail chains. Before that, he was responsible for the rise of the Rewe supermarket chain, increasing its sales tenfold. Wiegandt set the pace in the industry, based on the principle that growth was essential to survival.

At the time, regional dairies and breweries were disappearing en masse in Germany as retail purchasing became increasingly globalized. Nowadays lamb is imported to Germany from New Zealand, flowers are flown in from Africa and German lumber is shipped to China, where it is made into furniture which is then shipped back to Europe. What is Wiegandt's assessment of these developments today? "It's completely idiotic!" he says indignantly. "Later generations will ask themselves: Who were these people?"

'Quality of Life Doesn't Mean Consuming More and More'

The former top executive readily admits that he has discovered his conscience in old age. He is sitting in the garden of his house near Seeheim-Jugenheim, a town in the German state of Hesse, sipping a glass of locally produced sparkling water. He refuses to drink Italian Pellegrino water, he says, and anyone who tries to serve him imported water in a restaurant is promptly told to take the bottle away.

Wiegandt is now an environmental activist and gives talks at universities on the scarcity of resources. He has published a well-regarded series of books on sustainability and subsidized the retail price so that each book costs less than €10 ($15). He turns down consulting contracts worth millions, a stance that lends him credibility when he says things like: "Quality of life doesn't mean consuming more and more every day." In the past, such a statement would have cost him his job.

Only in his final years as CEO of Metro, says Wiegandt, did he begin to have "this uncomfortable feeling" about the consequences of his growth strategy. He saw how his big-box stores threatened an old bazaar in Ankara, and how Western models of consumption swept away traditional cultures. In all the previous years, he says, he never thought about the consequences of his actions, and he did not even pay much attention to the Club of Rome report when it came out.

Scarce Resources

A full generation has passed since the publication of the Club of Rome study. The world has not collapsed, but it has changed. Since the Chinese, Indians and Russians have entered the market economy, the number of employed people worldwide has doubled, to about 3 billion. Vast new markets and low-wage production countries have developed, with serious consequences for the consumption of energy and water.

Oil consumption has increased by more than 25 percent since 1990, while the consumption of natural gas has grown by more than 50 percent. Fossil fuel production is becoming more and more difficult and costly.

The scarcity of water is even more serious. Global water use has doubled since 1950, and even as large segments of the world population lack adequate access to clean water, more and more water is being used in food production. For example, more than 1,000 liters of water are consumed to produce one kilogram (2.2 lbs.) of bread, while producing a kilo of beef uses up almost 16,000 liters of water.

The limits to growth are exemplified by the giant desalination plants between Abu Dhabi and Dubai, built to supply the new desert metropolises with water, by Vietnam's hundreds of textile factories, where sewing machines hum day and night, and by the world's largest coalfields in northern China, where fires blaze in the seams.

We have reached the point at which the Earth's regeneration capacity is being stretched too thin. Theoretically, humanity today already needs 1.3 planets to maintain its lifestyle. If everyone were as wasteful as the Americas, five planets would be needed. To make matters worse, by 2050 the world's population will have increased by 2 billion—people who will also need food, clothing and shelter. How is this even feasible?

The Contradictions of Growth

Given the Earth's limited system, the economy clearly cannot grow indefinitely. From an ecological perspective, this is the fundamental contradiction within the logic of growth. But there is also another problem, a mathematical problem, as it were.

As economies mature, it automatically becomes more difficult for them to sustain their rates of growth. Essentially this is merely a question of mathematics, as a simple calculation serves to show.

The young Chinese market economy is expected to grow by about 8 percent this year. Because the standard of living in China is so low, however, this translates into $260 in per capita growth. On the other hand Germany, an established industrialized nation, would be more than pleased with 1 percent growth in crisis-ridden 2009.

To achieve this much growth in Germany, however, each and every citizen—in a population only one-16th the size of China's—would have to produce an additional $447 worth of goods and services. In other words, the Germans need to make a tremendous effort to keep their economy growing. Does this mean that the growth rate is destined to decline to zero in the future, or perhaps even descend into negative figures?

New Innovations

Paul Welfens, an economist in the western German city of Wuppertal, considers this idea erroneous. He is convinced that "economic growth in Europe and worldwide can continue for centuries," that is, for as long as the world continues to move, change and develop. And as long as competition continues to produce surprising innovations, like the shipping container, the computer, the satellite and the Internet.

Whenever people believed that humanity's creativity had been exhausted once and for all, some groundbreaking new innovation emerged. These goods and services generate needs and desires, so that a saturation limit is never reached. This is the reason why companies, in order to survive, are constantly investing in new ideas. Progress is what allows the economy to grow to a practically unlimited extent.

And because the new and improved displaces the old and outdated in this productive process, manufacturers can usually charge higher prices for their innovations, thereby increasing GDP. The car manufacturer Daimler (DAI), for example, has charged more for each new model in its E Class series, because the new model always includes a qualitative improvement over the old model—features like airbags, ABS or, more recently, a warning system to combat driver fatigue.

Thus, growth does not stem solely from the fact that workers are producing more products, thereby increasing the volume of goods produced. Instead, the critical factor is the value of goods. This leads to an important realization: A growing economy does not necessarily need to consume more resources. In other words, our goal should not be to achieve less growth but better growth, and not to forego consumption but to improve the quality of that consumption.

Shifting Focus

A company like IBM (IBM) is an example of how this can work. IBM has radically changed its business, moving away from material products and the production of more and more powerful computers. Today, the company focuses on a non-material resource: knowledge. IBM has shifted its emphasis to consulting and IT services and, as a result, has seen its profits grow despite the economic crisis.

A less-is-more strategy also works on the national scale. German GDP has grown by close to a third since 1990. At the same time, however, the country's energy consumption has declined by 7 percent. Cars are now more fuel-efficient, ships consume less heavy fuel oil and businesses use less electricity. However, one of the reasons Germany is in a relatively good position is that it has outsourced much of the dirtier aspects of its production to Eastern Europe or South-East Asia.

Of course, businesses and consumers have not changed their production and consumption behavior entirely on their own—government has given them a helping hand. To a certain degree, lawmakers can promote the desired kind of growth through the use of well-designed incentives.

For instance, they can require vehicle manufacturers to reduce average emissions to less than 120 grams of CO2 per kilometer driven, thereby stimulating the development of low-emission vehicles. Or they can attach suitable prices to a valuable resource like clean air which was previously available free of charge, by way of emissions trading—thereby forcing companies to invest in climate protection.

Better Recipes

The principle is clear: Resource consumption must be decoupled from growth. The respected US economist Paul Romer employs a kitchen metaphor to illustrate the concept. "Economic growth springs from better recipes," he says, "not just from more cooking."

This is effectively what representatives of the world's governments will be discussing when they meet in Copenhagen for the United Nations Climate Change Conference in December. But the world is still a long way from this goal.

Emissions trading is still limited to Euro


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