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Does the world need green growth or degrowth?

We’re already in a period of prolonged stagnation. It’s time to accept new economic – and ecological – realities.

By Hans Stegeman

What is the best way to create a more sustainable economy? On the environmentalist left, this hotly debated topic seems to have been focused on the choice between green growth and degrowth. The Labour Party seems to have embraced the former, promising the highest growth in the G7 while embarking on an ambitious decarbonisation drive. But the degrowth or green growth binary is false: both perspectives have their merits.

The concept of degrowth – a planned scale-down of economic activity – presents a promising avenue for affluent societies to establish an economy that operates within the limits of planetary boundaries, while simultaneously accommodating the developmental needs of other countries. On the other side of the argument, a substantial number of people contend that boosting economic activity assumes a critical role in funding the crucial transition towards sustainability. Considered from this perspective, innovation emerges as the sole viable pathway to effectively address the multifaceted challenges we face. These so-called green growth proponents argue that economic contraction is neither an imminent nor a politically viable prospect; voters are all too familiar with the consequences of recessions.

In neoclassical economics, degrowth hardly finds any support as a positive tenet. The expansion of the productive capacities of the world economy has substantially enhanced the quality of life of many people worldwide, improving healthy life expectancy, educational opportunities and well-being. Additionally, economic stagnation strains the affordability of non-market goods, particularly in ageing societies, and policymaking becomes a zero-sum game.

In addressing ecological concerns, economic theories often oversimplify with the assumption of flawless substitution between natural resources and capital and labour. The belief in carbon pricing as an innovation-driven solution exemplifies this perspective, emphasising efficiency as pivotal for ecological challenges. Reality paints a different picture, however. Growth is not available in the colour green. There is scant evidence that it can be fully decoupled from the negative effects on nature. While certain countries have achieved absolute decoupling of economic growth from carbon emissions, it is certainly not a worldwide phenomenon. Moreover, the current pace of decoupling is nowhere near rapid enough to reach the ambitions of the Paris Climate Agreement in time to limit global heating to below 2°C above pre-industrial levels. So far, there is a lack of evidence to prove a decoupling between economic activity and resource use.

It’s unlikely that the very mechanism that led us into this ecological predicament can serve as the solution to the same problem. But it is undeniably challenging to alter a growth-based system, even if it comes at the expense of our future well-being.

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[See also: The growth delusion]

If we examine the facts, it becomes apparent that the growth debate has become outdated. Seeing growth as an absolute necessity is neither the answer to our sustainability challenges, nor does it align with our current economic reality. As it is, the prospects for structural growth in Europe are bleak. In fact, it is already experiencing an era characterised by flatlining GDP, and the eurozone is in a state of recession. Estimates for structural growth are below 1 per cent, mostly based on a rather optimistic forecast for productivity growth. The World Bank has also warned of another “lost decade”.

A future characterised by these low-growth prospects can be attributed to various factors commonly observed across rich countries. One key factor is an ageing population, which diminishes the availability of additional labour supply. Additionally, the escalation of global tensions has undermined the positive contributions historically associated with globalisation and free trade. Furthermore, there has been a persistent trend of structurally lower productivity growth over the course of several decades. Another significant contributor to the low-growth trajectory are economies burdened by high levels of debt, which, in theory, encumbers future growth. Finally, sustainability transitions, such as the ongoing energy transition, not only stimulate but can also exert a dampening effect on the economy, particularly in the medium term.

Thus, limited growth, hovering marginally above zero on a structural level, emerges as the only realistic outlook, deviating from the conventional reliance on 2-3 per cent growth rates that underpin our current economic framework. Ongoing pleas from certain factions advocating for investment in growth capacity, and the refusal to settle for diminished returns, have not been able to turn the downward trend around over the past decades. Whether the Labour Party can confound its critics remains to be seen.

We need to begin embracing the prospect of lower growth, as it presents a crucial nexus between proponents of sustainable growth and those advocating for degrowth. As growth can no longer be taken for granted, it has become imperative for our society to adapt, regardless of political inclinations. Although we are still far from a fully radical post-growth society, we are certainly transitioning towards a post-growth model.

Several adjustments can be made to reduce our economic system’s dependence on growth. A logical starting point is revising our tax bases, shifting away from labour income and profit taxation, which heavily relies on growth for revenue generation. Instead, emphasis should be placed on augmenting taxes tied to less growth-dependent factors, such as wealth, pollution, resource utilisation and emissions.

[See also: Why an end to economic growth is inevitable]

A second measure that can be relatively easily implemented entails curbing the debt incentive. Lower growth inevitably undermines debt sustainability. Currently, stimulating economies through debt is both convenient, often fiscally facilitated, and has resulted in record levels of debt globally. At the macroeconomic level, we could further constrain leverage within the financial system through the imposition of higher buffers. At the individual level, reducing the leverage of growth can be realised by providing greater financial security. Establishing basic jobs, implementing a basic-income scheme, or ensuring subsistence security assumes paramount importance in this regard.

Investment in education, research and a mission-driven government investment agenda offers a common ground for both advocates of degrowth and proponents of green growth. Such investments not only contribute to an improved quality of life but may also lead to heightened productivity.

A mature economy does not hinge indispensably on perpetual growth; rather, it aligns our institutions and attitudes with the realities at hand.

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