How to get the right kind of growth

It's time to stop thinking "growth-at-all-costs" Image: Getty Images/iStockphoto
- Traditional growth metrics like gross domestic product fail to capture broader dimensions of economic progress, such as inclusivity, sustainability and resilience.
- The challenges posed by climate change, technological disruption and global interconnectedness demand a shift from the "growth-at-all-costs" mindset.
- This article was first published in Foreign Affairs Magazine, read it here.
As the 2024 US presidential election showed, public sentiment about economic prospects significantly influences voting behaviour. At the moment, those prospects appear to be grim across the world.
The International Monetary Fund has projected that annual global growth will average around 3% over the next five years – the weakest medium-term outlook in decades. The picture looks bleakest for countries with advanced economies, where growth rates are anticipated to remain stagnant.
Economic growth remains the most reliable avenue for raising living standards and is essential for making progress on almost any other policy agenda. In a low-growth environment, household incomes come under increased pressure as essential goods become less affordable.
Businesses struggle to find demand for their products and services. Policymakers face more and more zero-sum tradeoffs between competing priorities.
In countries with emerging and developing economies, slow growth threatens to set development back by a decade or more; in countries with developed economies, where years of steady growth enabled a consistent rise in living standards, a slowdown threatens to upend advances in socioeconomic mobility.
And yet, a focus on economic growth as traditionally understood is no longer fit for purpose. The world has changed in profound ways, reshaping the demands on economic policy. The climate crisis looms over economic decisions, with over half of global gross domestic product (GDP) being moderately or highly dependent on natural resources.
Fast-changing technologies such as artificial intelligence (AI) are creating new opportunities – and risks. Inequality is fraying the social fabric in many countries.
As the economic shocks produced by the COVID-19 pandemic and the supply chain disruptions induced by geopolitical chaos have shown, localized resilience is more important than ever in an increasingly interconnected world.
The growth-at-all-costs mindset common in the halls of government and in boardrooms has, in part, contributed to environmental damage, exacerbated socioeconomic inequality and reduced safeguards against economic shocks in pursuit of maximum efficiency.
The question is not whether the world still needs economic growth – it does – but what is the best way to achieve growth while advancing progress on other essential policy objectives?
Growth that prioritizes the advancement of human capital, green technology, infrastructure and resilience against global shocks can lead to higher living standards and truly shared prosperity.
Imagining this new approach to growth, which blends traditional wisdom and innovative policies, can help rebuild trust in economic policy, revive the economic fortunes of populations at risk of being left behind and address the uncertainties of a new economic era.
New tools for a new age
Although GDP is a useful measurement for capturing the trajectory of an economy, it is a blunt instrument, revealing little about the distribution of resources and opportunities, the state of the environment or the resilience of specific regions.
Widening the aperture through which leaders see growth is not simply an interesting intellectual challenge but also a practical one. Likewise, business leaders who see an uncertain environment must also rethink the trajectory of growth to capitalize on major transformations reshaping the economic landscape.
In a survey of the chief economists of leading firms and organizations across various industries, the World Economic Forum asked whether policymakers should pursue maximum growth at any cost or consider the beneficiaries of that growth.
Sixty-five percent agreed or strongly agreed that policymakers should prioritize policies that deliver a mix of economic growth and progress on other key goals, such as social cohesion, environmental sustainability, economic equality or national security, even if it means lower growth.
Moreover, nearly two-thirds did not see significant tradeoffs between growth and those goals.
What new tools will be needed in this new era of economic policymaking? The Forum’s Future of Growth Framework introduces a multidimensional approach that balances growth rates and broader global and national priorities.
It uses the latest available data for 84 indicators of economic performance to measure the extent to which growth is innovative, inclusive, sustainable and resilient across 107 countries.
The world has changed in profound ways, reshaping the demands on economic policy.
The findings are stark. Nearly four billion people live in countries with lower-quality growth, meaning that although traditional measurements may indicate an upward national economic trajectory, that progress has not translated into innovative, inclusive, sustainable or resilient growth.
Put another way, high growth is no guarantee of quality: no economy that has averaged 3% GDP growth or higher over the last five years reaches the top tier of growth quality, which includes countries that invest in talent and technology, aim to make their resource use sustainable and safeguard their economies against shocks.
The relationships among economic policy objectives are inherently complex. Some tradeoffs are unavoidable but there are also synergies that have yet to be unlocked.
Consider, for example, the complex array of potential tradeoffs between a country’s physical capital stock and its environmental footprint: although infrastructure development is a key driver of growth in many countries, the UN Environment Programme has estimated that buildings are responsible for 34% of global energy demand and 37% of carbon emissions related to energy.
At the same time, a country’s research and technology can help mitigate the environmental impact of growth by leveraging technology such as AI, temperature and flow sensors, and big data to optimize energy use in buildings and urban environments.
Openness to trade and foreign investment remains a critical accelerant of high-quality growth. Notably, countries that are more integrated in the global economy benefit from greater knowledge and technology transfer, key inputs for high-quality growth.
The world has changed in profound ways, reshaping the demands on economic policy.
—Saadia Zahidi, Managing Director, World Economic Forum
”Man is the measure
Although each country’s approach to defining and delivering high-quality growth will necessarily differ, there are common principles – a set of “no regret” moves – that can help spur cycles of such growth across the world.
Human skills and ingenuity are indispensable inputs to economic growth and enhancing human well-being should be the ultimate objective of all economic policy. Without a strong human capital ecosystem encompassing workers’ knowledge, skills, and health, economic production slows and countries fail to capitalize on the opportunities before them.
The downsides of the failure to invest in human capital are severe; the World Bank has estimated that up to 30% of differences among countries in per capita GDP are attributable to differing human capital levels.
In countries with lower levels of human capital, the gains from growth are often concentrated in small segments of the population, limiting growth prospects in the long run.
On the other hand, widespread investment in human capital can lead to virtuous cycles of growth if the economic benefits of increased productivity and growth are then reinvested in the population.
Although frontier markets, such as those for emerging technologies, matter for driving growth, investment in the foundations of economies and societies – such as basic goods and services, digital connectivity and electricity – can be transformative for large swathes of a country’s population, providing them the means to benefit from growth.
Over one billion people live in countries that struggle to provide access to clean water, healthy food and the Internet. And even many high-income and upper-middle-income economies cannot manage to offer reliable access to transportation and housing.
Meaningful progress in these areas will require major investment. UN Trade and Development has estimated that $4 trillion of annual funding is needed from the public and private sectors if countries with developing economies are to meet the UN’s Sustainable Development Goals, up from $2.5 trillion in 2015.
The largest funding gaps are in key areas of economic development, including energy, water and sanitation, infrastructure, and food and agriculture.
Weathering the storm
The green energy transition can mitigate climate change while driving innovation, instilling localized resilience, and catalyzing new growth models. The expansion of clean energy sources, such as wind and solar power, has already spurred significant advancements in technology while also creating new jobs.
According to the International Renewable Energy Agency, the renewable energy sector could employ over 40 million people worldwide by 2050. The shift toward sustainability also enhances resilience by shock-proofing against climate risks and reducing the risks of disruptions to global energy supply chains.
Resilience requires a multiplicity of suppliers, logistics networks and production means. Robust international value chains and trade are among the best ways to deliver this redundancy. Countries that score highest on the Future of Growth Framework’s overall resilience metric tend to be more diversified in their energy sources and export products.
In turn, those countries with higher degrees of openness tend to grow faster and bounce back better from shocks. Self-sufficiency, while seductive, is elusive even for countries with the most advanced economies and the most developed domestic production capabilities.
At the same time, interconnectedness can also reduce resilience if countries do not mitigate underlying risk factors, such as concentrated commodity or energy supplies.
Rather than turning inward, countries would be better served by securing and monitoring critical global supply chains and developing networks of suppliers that can withstand shocks while bolstering domestic production and stores of strategic goods when necessary and possible.
Unleashing innovation
The investment required to drive the green transition and ensure resilience, however, is missing in action: just 14 of the 107 countries covered in the Future of Growth Framework invest more than 0.5% of GDP in renewable energy.
Similarly, although the International Energy Agency has estimated that almost half the carbon emissions reductions that the world would need to realize between 2020 and 2050 to achieve a net-zero emissions scenario should come from technologies not yet on the market, innovation in green energy has been limited to a small number of countries, slowing the development of potential solutions.
Governments and industry must partner to create a stronger impetus for the global diffusion of environmental technologies that can help tackle air pollution, waste management, water supply and sanitation, energy storage and distribution, and land and water protection.
Technological progress can also drive virtuous cycles that spur growth, along with progress on a variety of other policy areas. Investments in key technologies alone, however, will not enable countries – especially developing ones – to reap the economic benefits of technological advancements.
Educating and training people to work with new technologies is equally crucial, including in the public sector, to ensure that new technologies can be used by all. Yet according to a Forum survey of over 10,000 executives from across the world, only 20% of countries have the digital talent they require.
Government action and incentives may also be needed to direct the deployment of technology in areas that drive positive social outcomes such as health, education and elder and child care.
To fulfil the promise of technology to spur high-quality growth, innovation ecosystems need a host of institutions and practices: reliable research and development expenditures, a competitive business culture, strong intellectual property protections, regulatory oversight and the rule of law.
Technological integration also requires governments to establish guardrails when it comes to ethics, safety, security and privacy.
The path forward
The global economy is grappling with tepid growth, inequality and stagnating social mobility in developed and developing countries alike. This presents policymakers with a dilemma. They must shift away from a growth-at-all-costs mindset. But they cannot pursue social, environmental or security agendas while ignoring top-line growth.
To solve this puzzle, policymakers must embrace complexity to evaluate a country’s economic performance, taking into account not just the quantity of growth but also the quality.
This balanced approach is not social policy shrouded in new terminology; it is a sound economic strategy that can reignite growth rates while also securing national interests and fostering global prosperity.
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The views expressed in this article are those of the author alone and not the World Economic Forum.
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