THE “GROWTH MODEL” IS NO LONGER SERVING US WELL
As an economist in South Africa, I’ve “grown up” in an environment where economic growth seems to have largely been the end goal of economic policy and economic thinking. As a former macroeconomist, and a forecasting one at that, that well-known measure of economy-wide production, namely GDP (Gross Domestic Product), was undoubtedly the most important forecasted economic variable. In fact it probably still is in this part of the world at least for the time being.
And other macro variables that receive much attention, for instance interest rates or exchange rates, are often merely of key interest due to their impact on the economy and on the “holy grail” that is GDP growth.
There is of course a common reasoning behind driving GDP growth hard with the “appropriate” economic policy. GDP growth will drive employment and income growth, which in turn can be instrumental in lifting more people out of poverty and supposedly providing a better life for a greater part of society, so the reasoning more-or-less goes, and that surely is a noble ideal.
There is obviously a distributional requirement to this, i.e. that if income distribution were to deteriorate while economic and total income growth was taking place, GDP growth may not necessarily lift more people out of poverty. And so, economists and policy-makers involved in policy debates and setting have spent significant time not only debating how to achieve growth, but also how it should be distributed or redistributed.
Nevertheless, whether one tended towards “unfettered growth and trickle down economics” or towards greater redistribution, the biggest obsession in my lifetime as an economist has been largely around income and wealth as a way of increasing society’s happiness and well-being….with many of us having believed that growth was key to all of this.
A key problem with the GDP growth focus is that it often doesn’t consider the all the costs of achieving that GDP growth. Achieving economic growth requires financial, human and natural resources, and those costs are often not well considered by economists as they enthuse over a “good” quarterly or annual economic growth number. What was the cost in natural resources and in terms of environmental destruction? How much additional debt needed to pile up in order to achieve that growth? In recent years, many countries have been raising various forms of borrowing and indebtedness sharply to keep short term economic growth going the “easy way”, which when taken into account doesn’t make their current economic growth that impressive. And we are often not too concerned with what gets produced to feed this economic growth.
I use the example of urban commuting to illustrate this. The massive amount of fuel production and vehicle production that is required for the wasteful daily urban commute to and from places of work gets added to GDP, and is thus often implicitly seen as a “positive” by macroeconomists as they admire the GDP number. Insufficient emphasis has been placed on the amount of daily emissions pollution caused, and the health costs to people not only from that pollution but also due to congestion and the stress related to it. Why would it? Simplistically viewed, Healthcare services and products to help mentally and physically unhealthy people adds to GDP too. For some, if it adds to GDP then all is good, even if a product does so only because of negative factors that could have been proactively avoided, and even if human health and well-being does suffer in the longer term.
So, even if GDP does remain the most important economic targeted variable, the composition of that GDP desperately needs attention.
We may conceivably be better off as a society with less GDP and income, should we be able to structure production better so as to lessen the “wasteful costs” of urban commuting, pollution and congestion for example, which include not only the financial and time costs of transport, but possibly significant health care costs too. Past generations of office workers were seemingly less concerned with these costs, perhaps because urban congestion wasn’t as bad as today, and of course the lack of information and communication technology decades ago gave them little option out of the “rat race”. At the same time, the looming climate crisis awareness was far less, so air pollution was not yet seen as such an immediate threat to human survival and well-being.
And so economists and planners focused large amounts of their time on that simple GDP growth measure and how to get it to grow faster, along with employment and income and the distribution of that, implicitly assuming that if we could get the amount and the distribution of income and financial wealth right we would create a happier society, or greater societal well-being.
And when trade and industrialization policies were discussed, with the aim of boosting export growth in order to boost GDP and income growth, the discussion centered largely industrial incentives of a tax, tariff or subsidy nature, or perhaps on easing the “red tape” or legislation/policies associated with doing business. It may also periodically focus on human capital development, but then normally in the narrow sense of acquiring the skilled labour relevant for the production process.
TIME FOR CHANGE - THE RISE OF THE WELL-BEING FOCUS
But attitudes in our world have seemingly been changing, in many ways for the better I believe, and I expect that the change will continue. What change am I referring to? In short, a change to where that simple GDP measure gets “demoted” to a position of lesser importance, becoming a means to an end as opposed to the end goal, and where the composition of GDP becomes far more sustainable.
Firstly, it appears very clear that the climate crisis is becoming a very serious matter, rapidly increasing in profile and importance in the media and in politics. Sustainability is the buzz word. It makes no sense to drive short term GDP growth if there is not going to be a habitable planet in the longer run. So that is the first major change in thinking taking place. Policy change is not all being driven by policy and law makers. Much of it is driven more from the Household Sector upwards, with society becoming ever more concerned about environmental destruction and its negative impacts to it, forcing policy and law makers to change their thinking should they wish to continue to remain in power, and corporates too should they wish to continue to sell their product.
This is a process of change already under way, especially in certain developed economies, albeit seemingly not far enough yet to see a significant reversal on environmental damage.
Environmental destruction, and concerns surrounding that, implicitly perhaps have a lot to do with thinking around current or future “physical”health of people.
But the concern around mental health and well-being seems to be a relatively newer concern.
Mental health has become a major issue, having been seemingly more neglected in bygone years. Certainly in my economist schooling it received almost no attention at all. We thought about what skills were necessary to enhance labour output and productivity, with far less attention to mental health and motivation levels. Efficiency was king in the production process, which often meant increasing specialization or automation of labour, making many jobs increasingly mundane. As production processes become longer and more complicated, and employees increasingly specialized and reliant on machines, many must surely battle to see what value they add, or how meaningful their impact is to the complex process. This may well have been a negative to human happiness and well-being in many cases, as working life has become highly repetitive and mundane for many. But for many economists and business leaders alike, greater efficiency has often been the main consideration, great for output but perhaps to the detriment of the mental health and well-being of the work force.
However, efficiency considerations have been traditionally more limited to within the workplace, and not always to what happens outside of that. So while a workplace may have be “highly efficient”, the commuter time cost in getting to and from that place was anything but efficient, receiving far less attention in many cases. I love using the example of urban commuting as a wasteful and inefficient exercise.
But the times they are a changin’.
Admittedly a lot of work has been done over many decades in many cities of the world on urban design and transport systems in order to address congestion and quality of life issues. So this is nothing new, although much work is still needed in many cities of the world. But rapid information and communication technology advances are likely to force city governments’ into speeding up the redesign of their cities into greater “lifestyle” cities. I expect this, because technology is making a sizeable portion of companies and the labour force increasingly mobile with regard to where they are located.
Certain activities such as mining, for instance, are bound to a specific location due to the availability of a natural resource. But in a country such as South Africa, where two-thirds of the economy is services, a large portion of business can service its client base from a variety of locations. So how do business leaders and owners choose their locations? As mobility and location flexibility increases, lifestyle appears to play a more prominent role. How do higher skilled employees decide where to live? Increasingly, lifestyle appears to play a role. And where do affluent retirees take their purchasing power and locate to? Lifestyle often plays a key role.
In South Africa, we have seen a major outcome of this increased mobility and location flexibility in the form of a major “semi-gration” of employees, retirees and even businesses in the direction of the country’s Western Cape Province. Various studies have provided evidence of this. While South Africa has a major emigration issue, or “brain drain”, due to its national policies and performance, it also has significant migration of skilled labour within its borders between regions. The Western Cape has been the province that, over the past 2 decades or more, has been able to attract and retain affluent and skilled people better than any other of the 9 provinces. The reason appears to be that region’s combination of being perceived as a region with a relatively good lifestyle, a major economic opportunity having a major city of Cape Town within its borders, and being relatively well-run at provincial and local government levels according to a lot of evidence.
The result is that the Western Cape has seemingly outperformed most others when it comes to long term economic performance, because South Africa’s services-dominated economy is increasingly a modern skills-dependent economy. And then there is a large group of affluent retirees who bring their considerable purchasing power to the Western Cape.
This internal migration within South Africa is insightful, because it begins to show us what is required to achieve a competitive advantage trade and business-wise. There is not a different currency or any exchange rate competitiveness issue for the Western Cape relative to other South African region. And there is not a meaningful difference in trade policies and regulations between the country’s regions. The Western Cape is gaining a competitive advantage over others, and thus a superior economic performance to most, significantly due to its ability to attract and retain skilled labour and affluent purchasing power.
Future trade policy and strategy discussions in countries’ corridors of power and planning may in future not be confined to the set of industrial financial incentives, therefore. A lifestyle discussion may be a big part of those deliberations. Increasingly, as skilled labour becomes more mobile, and is able to operate more remotely from their official place of employment in certain industries, so major centres’ competitive advantage will be determined by their ability to attract and retain skills and purchasing power….skills and purchasing power that are increasingly able to leave for “greener pastures”.
But this is an old trend. What is new?
What’s New is seemingly the discovery by an increasing part of society as to what drives their well-being. And it isn’t all about income and financial wealth, as earlier generations were seemingly taught. Let’s not downplay money. It has an important place. But it is one of a few factors key to well-being. For very low income people, money is often extremely important, and the “marginal utility” from each Dollar gained can be very high. But as a person’s income rises, so that marginal utility from each dollar gained often declines, and some studies even point towards an average income being reached in a society above which no further increase in happiness is observed.
What do higher income/skilled people then start to do? Many move up Maslow’s hierarchy of needs to look for fulfillment in self-actualisation or self-transcendence. Purpose and Meaning are 2 words often heard from modern day positive psychologists. Many people are searching for purpose and meaning in their lives, and want jobs with that. Engagement is another driver of well being according to positive psychologist Martin Seligman, while Accomplishment is another. And while you may argue that a sense of achievement can be attained from one’s corporate job, for many it cannot because of the difficulty in measuring what one’s contribution to the company’s results are. And so there are theories that many senior corporate execs are taking to endurance sport to find a sense of achievement, because measurement of performance in such activities is far more precise and transparent.
All of this change in focus away from solely money towards a more balanced view of well-being drivers, raises the possibility that the employee paycheck and bonus can no longer serve as such a strong motivating factor as what may have been believed in the past.
COVID-19 lockdowns have seemingly magnified this apparent change in thinking. Some surveys, emanating from the lockdown period, from developed countries point to a significant portion of employees being prepared to work for a lower salary in return for being able to work from home. Others point to strong resistance by employees towards being forced back into the long commute to the office. And then in the USA there has been talk of the so-called “Great Resignation” in 2021, with record numbers of people quitting their jobs, and many experts pointing to this being in part a result of many employees rethinking their lives and moving for something which may satisfy their passion or give them more meaning and satisfaction.
What happens next?
It is a slow process, but increased focus and understanding by individuals of what drives their well-being, and a realization that there are multiple factors of which income is only one, ultimately forces change upward. Companies who want to attract and retain top skills will be the ones to move first to attempt to accommodate these people’s needs. The rest will have to follow in order to compete.
And in the economic policy debate, Governments will be increasingly pressured into focusing economic policy on well being, with economic growth relegated from the pole position. That is not to say economic growth of the right (environmentally sustainable) type won’t be important. But it will become a means to an end, as opposed to the end, the end increasingly becoming the well-being of society.
Expect an increasing number of nations’ Governments to label themselves as well-being focused al la New Zealand, and to increasingly focus on, and be evaluated according to, new metrics measuring happiness, well-being and sustainability. Former UK Prime Minister David Cameron was possibly ahead of his time when he aimed to be evaluated more on the happiness of the UK’s citizens than on mere growth. And the measurements of happiness and well-being have some way to go, The annual World Happiness Report probably just the start. But this, I believe, is where the world is steadily headed, and it is long overdue.
As the world piles up mountains of debt and decimates the environment al in the name of growth, it is time for change. It is time for the economy to serve the people, and not for the people to serve the economy. The “Simple Growth Model” is no longer serving us well.
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