Joeri de Wilde: See low economic growth as a solution, not as a problem

August 6, 2024

_{This column was originally written in Dutch. This is an English translation.}

By Joeri de Wilde, Investment Strategist at Triodos Investment Management

A Low-Growth World Is an Unequal, Unstable World, Kristalina Georgieva, Director of the International Monetary Fund (IMF), recently stated. It is a strong example of capitalist tunnel vision.

Georgieva bases her conclusion on a recent IMF study, which shows that periods of low growth lead to more inequality. That is worrisome, according to Georgieva, because the growth of the global economy in 2030 is expected to be one percentage point lower than the average growth between 2000-2019. According to the IMF, there is only one solution to prevent more inequality: revive growth as quickly as possible.

The problem with this type of publications is the high level of cherry picking and, above all, the ecological blind spot. This way, researchers do not have to question the current system anywhere in the analysis. This type of analysis, full of implicit capitalist assumptions, follows a fixed recipe in which the same inaccuracies often form the crucial ingredients. What is correct and what is not?

Correct: the world is entering a period of lower growth

It is crucial in any research that the starting point is correct, and fortunately there is increasing consensus among economists: a miraculous revival of economic growth is not going to happen. We are looking at a world in which the population is growing less rapidly and in which the greatest efficiency gains are already behind us. What remains is a technological breakthrough that would significantly increase productivity on all fronts – you cannot reasonably count on that. Less economic growth is then the logical consequence, especially if the world of (growth-promoting) globalization is moving towards fragmentation.

Incorrect: low growth by definition increases inequality

After correctly determining that we can expect low growth, a wrong turn is taken. The IMF researchers link a period of economic stagnation to greater income inequality. This is true, if we limit ourselves to a growth-based capitalist system. But why should we impose this restriction on ourselves? What follows is the conclusion that more growth is better, while higher growth over the past forty years has also led to an increase in income inequality within developed countries. So we are presented with only two flavors: a significant or slightly less significant increase in income inequality. The system that leads to both of these outcomes remains untouched.

Incorrect: we can ignore planetary boundaries

Then follows the crucial blind spot in many of these types of analyses: our planetary boundaries. Research has repeatedly shown that continuing to live in the same way equates to enormous economic damage, for example due to extreme weather as a result of climate change. More growth means an even more severe period of stagnation/shrinkage in the future. In this light, concluding that inequality in a fictional world without planetary boundaries can be combated with growth is laughable.

Incorrect: unbridled capitalism is the end of history

This type of blinkered analysis encourages capitalist tunnel vision. Not only within the IMF, but much more broadly. IMF publications regularly lead to headlines and serve as a basis for follow-up research. It is therefore important that the ecological blind spot in particular does not escape the notice of journalists and economists. This increases awareness that a world beyond capitalism is a necessity for many rich countries: their energy and material consumption is much greater than sustainably possible. There is therefore an urgent need for a system that can stagnate without increasing inequality.

Correct: drastic policy measures are needed

Fortunately, despite the flawed analysis, the proposed policy measures in the IMF report are largely in line with the necessary first steps towards a less growth-dependent system. The IMF researchers advocate redistribution through, for example, more progressive taxation, a stronger social safety net, a higher minimum wage and more investments in education. This would make countries less sensitive to periods of low growth.

Yet it remains a shame that, due to analytical gaps, the authors do not see their recommendations as the first step towards a system change, as a result of which the core of the problem remains unidentified and therefore unseen by many.