The Growth Trap: Is chasing GDP still worth it for the world’s developing economies?

In 1934, the economist Simon Kuznets, who had helped to build the first national income accounts for the United States, told Congress that the welfare of a nation can hardly be inferred from a measure of its national income.

Illustration by The Geostrata

Nearly a century later, we are still doing precisely that. GDP continues to influence who wins elections, how a country’s credit is rated, and how seriously it is taken in the world. Yet this is the very measure that governments rely on while promising a sustainable future, even though it was never built to track whether that future is being reached.

WHAT GDP COUNTS, WHAT IT MISSES

At its core, GDP measures the market value of what an economy produces, but it does not ask whether that production improves or harms people’s lives. The problem is that any activity that generates spending is counted as a gain, regardless of what it costs society.

When a forest is cut down for timber, GDP rises. When the same forest is left standing, and continues to purify water, store carbon and absorb floodwater, its contribution goes unrecorded. Similarly, an oil spill adds to GDP through clean-up spending, and a wildfire does so through reconstruction. Unpaid care work, which looks after children and the elderly and sustains every society, is also left out of national accounts altogether.

This leads us to ask what happens when governments are judged only on the things that can be measured. In practice, the pressure to show strong growth every quarter means that nature is often treated as a resource that costs nothing, and when it is used up, that loss is never recorded anywhere as a cost. As a result, the burden of this damage ends up falling on the communities and ecosystems that depend on it, while the governments and industries involved are rarely held accountable for it.

WHERE GDP CLASHES WITH THE SDGS

The 2030 Agenda assumes that economic growth, social inclusion and environmental protection can all move forward together. In practice, however, these goals often pull in different directions. SDG 8 asks for sustained economic growth, while SDG 12 asks countries to break the link between that growth and the use of resources, and SDGs 13, 14 and 15 ask them to protect the climate, the oceans and life on land.

There is good reason to doubt that the link is really being broken. Whereas many countries have achieved relative decoupling, meaning that their emissions are growing more slowly than their economies. Absolute decoupling, in which emissions actually fall while the economy keeps growing, has been achieved by only a handful of rich countries, and even their results look better than they are, because a large part of their manufacturing, and its emissions, has simply moved abroad.

UN reviews also show that only a small share of the SDG targets are currently on track. In short, we have built a system that rewards producing more, and we are now asking it to deliver goals that call for restraint, repair and a fairer sharing of what we already have.

TWO WORLDS, TWO DIFFERENT PROBLEMS

Much of the debate goes wrong because it treats the whole world as if it were a single country. Rich and poor nations face very different problems and the argument for growth is not equally strong in both of them.

In high-income countries, each extra unit of GDP now adds very little to people’s wellbeing. Beyond a certain level of income, gains in life expectancy and in reported happiness tend to flatten out. These countries are also responsible for most of the carbon that has built up in the atmosphere, and their citizens still have some of the largest footprints per person.

For economies like these, the case for shrinking the most resource-hungry sectors, or at least for a “post-growth” approach in which prosperity does not depend on ever-rising output, is becoming harder to wave away.

The picture is different in places where hundreds of millions of people still go without reliable electricity, clean cooking fuel, decent housing or healthcare. There, growth is a practical necessity rather than an abstract goal, and it remains the most dependable route to what the SDGs themselves demand, such as an end to poverty and hunger.

To tell a low-income country that it should give up on growth because richer countries over-consumed in the past would, understandably, make people angry.

So, is the GDP model necessary for some countries? To a large extent it is, but as a tool and not as an end in itself. Poorer countries do need to expand their output in order to meet basic needs, but they do not need to copy the carbon-heavy path that the rich countries took.

The real question is not whether to grow, but what kind of growth to pursue, who gets the benefit from it, and what it costs the environment.

WHO PAYES: CARBON BUDGETS AND CLIMATE FINANCE

The world has only a limited amount of carbon left to emit if warming is to stay within safe limits. Most of that budget has already been used up by the countries that industrialised first, and yet latecomers are now being asked to live within whatever remains. This is exactly the situation that the principle of “common but differentiated responsibilities” was meant to address.

Climate finance is the place where that principle runs into reality. In 2009, developed countries promised to provide $100 billion a year by 2020 to help poorer countries deal with climate change. The target was met about two years late, amid arguments over how much of the money was genuinely new. At COP29 in Baku, countries agreed on a new goal of at least $300 billion a year by 2035.

Many developing countries said that this fell well short of what they need, and they pointed out that a large share of it arrives as loans, which only add to debts that already squeeze spending on health and education.

This is where the obsession with GDP does the most harm. A country that borrows in order to adapt to a crisis it did not cause ends up paying heavy interest, which slows its growth, and slower growth makes it harder to resist the argument that it should grow first and worry about the environment later. Escaping that loop will take cheaper capital, more grants and some debt relief.

DEEP-SEA MINING: THE SAME LOGIC, A NEW FRONTIER

Deep-sea mining is probably the clearest example of this mindset. The seabed holds nodules that are rich in nickel, cobalt, manganese and copper, which are often described as essential for batteries and for the clean energy transition.

 The trouble with deep-sea mining is that the deep ocean is one of the least understood places on Earth, and many scientists have warned that digging it up could stir up huge clouds of sediment, create a lot of noise underwater, and wipe out habitats that might take centuries to recover, if they recover at all.

Under international law, the seabed beyond national borders is regarded as the “common heritage of mankind”, and it is supposed to be looked after by the International Seabed Authority, which has still not managed to agree on a full set of rules for mining. While that work drags on, a few states have been thinking about handing out permits on their own, and in response a growing number of countries have called for a pause until the risks are better understood.

Developing countries don’t all see this issue in the same way, either. Some of the Pacific island states look at seabed minerals as a chance to bring in money for their people, but others are afraid of what mining could do to their fisheries and to the cultural ties they have with the ocean.

WHAT A BETTER COMPASS MIGHT LOOK LIKE

Saying all this doesn’t mean that we should give up on measuring progress. What we need is a better way of doing it than the one we have now.

A good place to start is with the national accounts. If countries changed them so that they showed what nature is really worth, then the loss of a forest or a fishery would finally appear as a cost. The UN already has a standard for this, called the System of Environmental-Economic Accounting, and it lets a government record the loss of its forests, fisheries and water as a cost, rather than counting it as income.

The expectations that we place on countries should also be different, because the rich and the poor are not starting from the same place. The wealthy economies ought to lead the way in cutting their own resource use and emissions, and they should be willing to provide finance to others on fair terms. The poorer economies, in turn, should get the help they need to move straight to renewable energy and efficient cities, so that they can skip the fossil-fuel stage altogether.

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BY SHOUNAK MAJUMDER

TEAM GEOSTRATA

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