When it comes to combating unemployment, politicians presume economic growth is the answer. But herein lies the problem: growth is slow to return, and some economists predict that it will not at all. Is this true? Is it a cause for concern?
China has driven forward the global economy over the past twenty years; indeed, this country has long enjoyed double-digit growth. Yet in recent months, it barely reached 7.5%. This is still far better than Europe, which has not passed the 2% mark since the subprime financial crisis born there some eight years ago. In short, developed countries are stagnating and emerging countries seem to have stopped emerging. Does this spell the end of perpetual growth? The issue is obviously of great concern to politicians – growth correlates to unemployment (see below), and, of course, nothing beats full employment to boost your popularity with the public.
Beyond these electoral concerns, the raised voices of economists can be heard saying that growth may never return to former levels. This is partly the case for instance for Daniel Cohen, Head of the Economics Department at the Ecole Normale Supérieure in Paris. In his book, Le monde est clos et le désir infini (The world is closed and desire is endless), he maintains that the world has become too small to allow economic expansion by tapping into new markets. He also supports the idea that the technological revolution we are currently experiencing – unlike the 19th-century industrial revolution – is not yet creating any real growth. Other experts even believe that this digital revolution will slow down the economy; it will destroy work places by assigning work to computers and robots. To get a clearer picture of the debate, two economists from the University of Lausanne Faculty of Business and Economics, Délia Nilles and Mathias Thoenig, give us a lowdown of the challenges.
What is growth?
Everyone pretty much agrees about the definition of growth: the evolution of a country or region’s GDP (Gross Domestic Product) expressed from one year to the next. If the study area has created more wealth (and obviously found a market to sell its products) in the last twelve months than in the previous period, growth will be positive. Otherwise, it is negative. The trouble begins when experts discuss what to include or exclude when counting these products. Any examples? “Unpaid domestic work,” says Thoenig, professor at the Faculty of Business and Economics, and Director of the Department of Economics. “The hours spent caring for young children or elderly parents have value, but this is not reflected in national output”.
Some economists therefore want to include such activities in the results, but for now, only services and goods which are subject to a transaction and therefore have a price are included. “This raises the sensitive issue of non-commercial services provided by administrations,” adds Thoenig. “Services here are still counted, at cost price”.
How do you create growth?
“If I had the answer, I’d be a politician!” laughs Thoenig. Creating growth is in fact the key issue. Even so, Nilles, who works in the same department as well as the Institute of Applied Macroeconomics (CREA), cites demographics as the main factor: “The more people there are, the greater the needs are, and consumption increases”.
This is just the start, since the criteria are unlimited: demographics alone are not enough: purchasing power has to follow as well. And with per capita purchasing power on the rise (but no population explosion), we can also speed up consumption. “In short, basically, here like elsewhere, it’s the law of supply and demand,” says the researcher. Still, when you look at economies with fairly comparable demographics and opportunities, such as France and Germany, you can see some real differences. Why? “Because there may be structural problems – this is the case with the employment market in France,” says Nilles. She also mentions the variety of industries present in specific regions: “The Canton of Vaud has a more diversified economic fabric than Geneva for example, where finance accounts for up to 25% of GDP, this proportion having been declining in recent years. In the event of a financial crisis, the Canton of Vaud will have less of an impact on growth”.
For Thoenig, achieving a growing economy is a question of “freeing up creative forces. For a country like Switzerland, you have to focus on innovation, entrepreneurship, research and development”.
You can also influence growth by restructuring two aspects: competition between companies on the one hand, and employment legislation (already mentioned by Nilles) on the other. To illustrate his point, Thoenig draws a comparison between France and Switzerland. Competition between firms is – contrary to what you might think at first sight – much more intense in France. “Think of the telecoms sector: the great number of operators are at war and really offer rock-bottom prices compared to Switzerland, where Swisscom, the traditional operator, still holds a prominent place. The same goes for supermarket sector: it’s highly fragmented in France, where very many stores share market, whereas here in Switzerland it’s almost a duopoly”. However, employment legislation is much less flexible in France, which restricts hiring. And these two key aspects, or rather the way they are organised, which are critical to growth, also affect unemployment.
Why do people care about it so much?
The concept of growth is popular, for instance with the president of France – because it is linked to unemployment rates: if growth increases, unemployment decreases. “To get re-elected, it’s therefore important to be able to claim to have improved growth,” says Nilles, who, like her colleague, stresses that the real political challenge is employment. “But the causal link between the two is not systematic,” points out Thoenig. Indeed, it is not the increase in a country’s production which reduces unemployment. The professor of economics also emphasises that considering growth as the only a kind of antidote to unemployment is not the right strategy: “I’m Swiss and French, so I’m in a good position to see that in Switzerland there’s a real innovation policy, and the social recognition that goes with it. In France, this is much less so. Growth is primarily a social choice with an impact on the future”.
What if something goes wrong?
“Lack of growth is like a fever: it’s the symptom of a problem, but not a specific disease,” illustrates Thoenig. “There are plenty of different ways not to achieve growth”. The countless factors which can have a negative impact include geography and climate, the structure of the economy, regulation, corruption, distrust between individuals etc.
More specifically, an economic downturn results in a vicious circle: households consume less, demand decreases even more and production too, and tax revenues start plummeting, while state expenditure on the social safety net, such as unemployment benefits, increases. In brief, it is not good news.
Is zero growth or even degrowth a good idea?
Aiming to end growth is a strange political ambition. “I think it’s a poor choice of term,” says Nilles. “Campaigning for it is ill-timed; there would be a lot of negative consequences for society. I can’t imagine the people who began this discussion want less tax revenue for education, health, and all the public finance posts which are the first to be cut back in a crisis, so I suppose there’s something else behind it, namely the desire to bring about a change in our consumption patterns so that they become more environmentally friendly. It’s a question of changing attitudes to produce better thought-out consumption. This project, yes, I can be a part of it. But do I want actual degrowth? No”. Thoenig holds the same view. He also thinks there is some misdealing. “I don’t think it’s a matter of reducing GDP or criticising the capitalist system. To my understanding, zero-growth activists actually want to reflect on the fact that many of the resources used in our production system are not infinite. This begs the intriguing question of what kind of social project we want. But looking for example into renewable energies does not mean that people give up growth. On the contrary: making best use of clean energies and producing while polluting less involves investing in research and developing new technologies, which will create growth in the future”.
Will Google, Microsoft and co. kill off prosperity?
While Thoenig thinks that the development of certain new technologies is likely to aid growth, opinions on the issue are divided. The World Economic Forum in 2016 was specifically devoted to the consequences of the technological revolution that the economic world is experiencing. Take for example the impact of the robotisation of increasingly complex tasks on employment in particular (see also Are robots going to steal our jobs?). “Initial studies on the subject – even though many more will be needed to confirm this – conclude that GDP may be slowing down,” says Nilles. “Productivity won’t experience the same hike as in the industrial revolution, so there will be little impact on GDP”. The UNIL researcher points out that while new technologies are part of the discussion about future growth, aging populations are also being taken into account. With annuities and healthcare costs to be paid, the whole welfare system will have to be reformed.
“It’s true that robots will replace some jobs, contributing to the changing employment market,” confirms Thoenig. “Some pessimists deduce from this that growth will never be the same. But we can see these very changes as an opportunity because now that the workforce is free, it can be redeployed in other activities and contribute – why not? – to other ways of creating wealth! The challenge seems surmountable to me”.