Are we in an era of uneconomic growth?

In 1992, Mr Bill Clinton used the catchphrase — “It’s the economy, stupid!” — to successfully wrest the American presidency from Mr George H W Bush.

Today, the elephant in the room is not the economy; it is the environment. The earth is crying out that it has had enough.

The economy is just a symptom. In Singapore, GDP growth has tapered from 4.7 per cent in 2013, to 3.3 per cent in 2014 and 2 per cent last year. It will most certainly be less than that this year, with growth forecast to be between 1 and 1.5 per cent.

Reasons offered by pundits include lacklustre global growth, slumping oil prices, falling world trade and disruptive changes in technology. All these factors are important, but they do not tell the whole story.

Since the 1970s, several economists such as Herman Daly, professor at the University of Maryland, have pointed out that you cannot grow forever in a confined space — in this case, the planet Earth.

Prof Daly is a pioneer of “The Economics of Sustainable Development” and he was the one who coined the phrase “uneconomic growth”. In 2005, Prof Daly used the expression in an article in which he concludes: “Evidence suggests that the US may already have entered the uneconomic growth phase.” By that Prof Daly means that the disutility of growth exceeds the utility.

In Prof Daly’s view, as growth progresses, the marginal utility becomes smaller and the marginal disutility grows. That is a bit theoretical, but you can imagine that a poor person who makes 100 bucks is happier than a millionaire who makes the same amount.

So the marginal utility of growth is lower for a higher level of development. Not only that, the disutility gets bigger. Prof Daly uses this as an example: If you take a tree and make it into a table, you convert natural capital into man-made capital, and that works well if you need a new table badly.

But there is a disutility as well, and as you work longer hours to cut more trees to make more tables that pile up in a warehouse, this economic process becomes more futile and destructive.

The disutility exceeds the utility. Prof Daly concludes that the US is at that point. Add to the disutility of resource depletion caused by industrial production the pollution of the atmosphere, earth and waterways, and you have an economic process that is counter-productive.

Two of Prof Daly’s students, Rob Dietz and Dan O’Neill, have continued the old professor’s work and published Enough is Enough: Building a sustainable economy in a world of finite resources in 2013.

Mr Rob Dietz visited Singapore in July this year, and I met him at the National University of Singapore where he attended a conference on biodiversity conservation. Based on his book, Mr Dietz made the point that ecological limits are now playing a direct role in our ability to grow the economy.

After all, headlines like these are now appearing: “Over 90 per cent of world choking on bad air”; “World on track to lose two-thirds of wild animals by 2020”; “Big-fish stocks fall 90 per cent since 1950”; “2016 will be the hottest year on record”.

It is clear that we can no longer use up the world’s limited natural resources in our pursuit of GDP growth.

The utility of conventional economic growth has been universally accepted, it has lifted some 500 million people in China alone out of poverty.

What is new today is that the disutility of population growth and increased consumption has become a factor to be considered.

Take the case of cars in Singapore. There is huge economic growth potential here. Every young man I know wants a big, fast car to race down the highway; car dealers would love to sell thousands of such cars each month. But we simply cannot allow that anymore.

The future is car-lite, and when the new North-South Expressway opens around 2026, it will have a cycling path alongside it. Cycling and walking will be the future, and although that is quite pleasant, it does not add much to GDP.

In a broader sense, we simply cannot continuously build and consume and expand in the conventional manner that we have come to associate with growth. Space and resources have become critical constraints when we try to grow the economy.

In The End of Growth (2011), American journalist and writer Richard Heinberg identifies three factors limiting our ability to grow the economy in the traditional way: Depletion of non-renewable resources, negative environmental impacts and financial disruption. It is my personal view that we can probably continue sweeping the first two problems under the carpet for perhaps two to three more decades.

But we may run out of options on the financial side very soon, when monetary policies entailing historic low (or even negative) interest rates, quantitative easing and fiscal deficit spending no longer works. Not just fiscal conservatives and libertarians have started to warn about excessive debt levels.

When even the International Monetary Fund warns of the dangers of a US$152 trillion (S$216 trillion) global debt, it is time to pay attention.

What will a future of slow (or negative) economic growth look like? Powerful forces around the world are trying to address this.

In Singapore, the 30-member Committee on the Future Economy is wrestling with the issues of how to make Singapore relevant in the future and ensure good jobs for the people.

Government officials and the business community have regular meetings, such as Responsible Business Forum on Sustainable Development this month at Marina Bay Sands.

It is not for me to say what ideas to transform the economy for the future will or will not work.

However, looking at all the facts and the data out there, it is safe to say that our era of business as usual is over.

My take on this as a financial analyst independent of both government and big business interests is: Prepare for tough times ahead. Now is not the time to squander your hard-earned cash. Keep it for a rainy day and invest wisely. And help the earth at the same time: We need more deferred spending, more accumulated capital and less of the excessive consumption that is wrecking the planet.

ABOUT THE AUTHOR:

Morten Strange is a Singapore-based financial analyst and writer and the author of Be Financially Free.