by Sebastiano Nerozzi, Università Cattolica del Sacro Cuore and
Giorgio Ricchiuti, Università degli Studi di Firenze
JANUARY 21, 2021
Exploring the limits of growth
The 2020 pandemic has made crystal-clear the close links among massive exploitation of natural resources, environment deterioration and health insecurity. At the same time, its patterns of diffusion and its social impact have been largely shaped by present economic and social inequality. As a result, poverty rates, economic insecurity and unemployment have been dramatically rising all over the world. According to the UN Sustainable Development Report, by July 70 million people had fallen below the international poverty line. This short essay tries to explore some possible links between environment, inequality and growth, which may render most Sustainable Development Goals very hard to be achieved. By examining some data on the distribution of economic growth worldwide, it is possible to grasp the macroeconomic linkages between these different phenomena and to understand how policies aimed at correcting extreme inequalities and fighting poverty are not a consequence, but a necessary premise, for any long-term strategy of sustainable development.
1. The good face of inequality
During the last thirty years, globalization has expanded global wealth, redesigning the economic balance in favour of "emerging countries" such as China, India, Brazil, Southeast Asia, South Africa. By becoming leaders in the so-called Global Value Chains, these countries have experienced strong economic growth with rates that, in some cases, have reached 10% per annum. The gap between the average GDP per capita of advanced countries and that of emerging countries has shortened.
However, while inequalities between countries have been narrowing, those within countries increased. In the last three decades, the élite of the super-rich and the new middle class ranks in emerging countries have enjoyed most of the benefits of globalization: their incomes have been growing at an unprecedented rate and their number have been growing by 70million per year. The condition of the poorest has also improved, allowing approximately 800 million people to surpass, albeit only slightly, the absolute poverty threshold set by the UN at $ 1.9 per day. Living standards, access to education and health care have also experienced some improvements (Global Multidimensional Poverty Index 2020).
According to traditional economic theory, economic growth and increasing inequalities are sides of the same coin. Inequality speeds the processes of capital accumulation and rewards the more qualified entrepreneurs and workers with a significant share of the new social income. However, as the national income grows, inequality tends to shrink. It is the famous "Kuznets curve", developed by the Russian-born economist Simon Kuznets by analysing the paths followed by many Western economies. Inequality follows an "inverted U" trend: it grows in the take-off phase of industrialization and then begins to decline, thanks to higher workers' wages, welfare state provision, and progressive taxation.
Quite along the same lines, environmental economists trace "the environmental Kuznets curve", depicting the relationship between economic growth and environment deterioration. Also, in this case, the curve is shaped as an "inverted U": economic growth initially involves a strong environmental impact which then decreases as better technology is available for manufacture and services and more sustainable styles of consumption spread.
Some economists highlight that the parallel increase in inequalities and the environmental impact in emerging countries is associated with the ascending phase of the "Kuznets curve": a trend reversal whose first signs can already be detected in countries like China. Meanwhile, economic growth increases the income of the super-rich and the global middle classes, but reduces poverty, creating jobs and opportunities for many. Furthermore, by making more resources available, growth makes it possible to finance investments in new technologies that reduce the environmental impact of production, making development more sustainable. Thus, economic growth and an increase in inequalities are necessary conditions to improve both the living conditions of the poor and the quality of the environment.
Nonetheless, many scientists such as Tony Atkinson, Joseph Stiglitz and Gaël Giraud have expressed strong doubts on this optimistic view, highlighting the negative effects of extreme inequalities on social and environmental sustainability. Let's try to better understand why.
2. Slowness and speed
In economic, social and natural processes, speed is a fundamental, but often forgotten, variable. The environmental historians John H. Mc-Neill and Peter Engelke have coined the term "Great Acceleration" to describe what has happened from the 1950s to today. Until the second industrial revolution, the biosphere was able to absorb and regenerate the amount of CO2 produced by man; in the second half of the 20th century this was no longer possible. World GDP has multiplied by about 6 times, while energy use and greenhouse gas emissions have increased by more than 3 times. Reports by the Intergovernmental Panel on Climate Change (IPCC), based on data widely shared by the scientific community, clearly point to the increase in greenhouse gases as the main cause of global warming. Of course, the environmental impact of economic processes is much wider and affects multiple ecosystems.
Speed affects the resilience not only of the natural environment, but also of the social context, in the face of both positive or negative shocks induced by economic trends and events. The increasing speed of real and financial exchanges on a global scale widens the earning opportunities for some individuals. At the same time, it generates processes of redistribution of income and wealth that society is rarely able to absorb smoothly. Economic and social balances have different speeds: this misalignment causes increases in inequalities, not only economic, but social, cultural, technological ones. These different kinds of inequalities, if left alone, tend to reinforce each other, creating "poverty traps" and "wealth traps" that prevent social mobility and broaden the distances between groups, social classes and territories.
Therefore, structural discontinuities such as the “great acceleration” and the real and financial globalization has led to the failure of the Kuznets’ predictions: today the two curves do not offer a dependable guide to understand current or prospective trends. Inequality, poverty and growth could intertwine in a perverse way and push humanity on a path of growth that is increasingly unsustainable from both a social and environmental point of view. In our view, this is what an analysis of the distribution of the economic benefits of globalization seems to suggest.
3. What happened to the globalization cake?
The benefits of economic growth that took place in the glorious thirty years of globalization did not spread heavenly on world population: in a famous graph that the New York Times has baptized the "Milanovic elephant", (https://www.nytimes.com/2018/09/21/arts/design/elephant-graph-income-inequality.html), in honour of the Serbian economist Branko Milanovic who build it, the distribution of economic growth at the world level is made explicit.
Using World Bank data available for many countries, Milanovic estimated the growth rates percentile of income from the poorest to the richest: from 1988 to 2008, the new middle classes in emerging countries saw an increase of over 60-70% of their income (the elephant's shoulders and head), in line with the richest 2% of the world population (the trunk). On the contrary, the workers and middle classes of developed countries (the elephant's mouth) have seen their incomes stagnate, together with the poorest of the countries of the global South (the tail). A photograph overthrew the classic representations of the North-South divide, joining the fate of hundreds of millions of people very distant from a geographical point of view and for living conditions: this is the case for the middle and working classes of the north, and the lowest income ranks in the South, who suffered a similar stagnation of their incomes.
Even more interesting from our point of view is the examination of Milanovic's data in terms of quotas (see Figure below): looking at how the ‘globalization pie’ was divided, we can see that the richest 2% of the population benefited from 52% from the new wealth produced globally from 1988 to 2008, leaving the rest of the world with less than half the pie, and to the poorest 50% with only 10% of the total new income produced at the world level.
Source: World Economic and Social Survey, UNDP 2013.
This allows us to intuitively grasp the link between inequality, poverty and the environment. The graph describes the relationship between the change in income in each percentile and the change in total income. It offers an indicator of how much income in the various percentiles has been increased thanks to the increase in global income.
Let's imagine, by hypothesis, that this distribution is constant over time: then Milanovic's data tell us that in order for the poorest half of the world population to have an extra dollar (3.7 billion dollars in total), production and global consumption must grow by 37 billion, of which over half (19 billion) will go to an elite of about 148 million people (the famous 2% of Milanovic). In other words, when an individual representing the poorest half of the world's population earns an extra dollar, a super-rich earns 130.
Globalization, therefore, brings benefits to humanity, but in an inefficiently, unbalanced and unstable way: if these benefits were a little more widespread, the pace of development would be faster and safer. But the environment would get better as well: the production and consumption of goods and services necessary to bring development and work to a large part of humanity would be smaller.
Let's go back to the numerical example taken from Milanovic: imagine limiting the share of the super-rich to 33% (instead of 52%) and raising the share of the poorest half of the world population from 10 to 14%. Under these conditions, an extra dollar for the poorest would require an increase in production and consumption of 26.4 billion (instead of 37). Environment and poverty reduction would improve. Finally, imagine distributing the remaining 15% of world growth to the remaining 48% of humanity, including workers and the middle classes of developed countries, whose income would increase despite the lower growth, while that of the "super-rich" would drop to 59 dollars.
Naturally, this is a mere accounting exercise (with many possible intermediate solutions) which serves to clarify the macroeconomic compatibility of the relationship between environment, economic growth and inequality. An effective change of course requires correcting the fiscal, financial and productive mechanisms that generate the current inequality, without destroying the virtuous mechanisms that reward work and investment. Studies, analyses and proposals are not lacking. However, we believe, the courage to implement them is needed.
The experience of two centuries of industrial development tells us that a little inequality is necessary for economic growth because it rewards talents and effort, creating the right incentives for innovation, work, savings: but too much inequality risks hindering social mobility, fuelling rent seeking positions, creating "poverty traps", financial bubbles and economic crises, together with congested centres and increasingly marginal peripheries. Above all, in a world with limited borders, extreme inequality risks derailing the train of economic growth from the increasingly narrow tracks of sustainable development. We need to put the train back on track, possibly before the next curve: reduce the "environmental footprint" of the GDP we produce (thanks to technology and innovations), but above all increase its human and social value, reducing the need to grow at physically unsustainable rates.
Dropping extreme inequality is not a further goal to be achieved, but a starting point to make many other goals possible.