Degrowth Can Address Overconsumption in the Global North

And still allow the Global South to grow.

Image courtesy of Next Billion

My colleague at Arketa Institute, Steve Rocco and I were invited by James Militzer, the managing editor at NextBillion, to write an article for the publication.

NextBillion is an open forum for discussion of business models and innovations that address development challenges in low- and middle-income countries (LMICs). Next Billion is based at the William Davidson Institute at the University of Michigan. Their mission is to disseminate knowledge about both the opportunities and challenges of doing business in developing markets, while supporting the enterprises and initiatives working on the ground.

If you are interested in development in the Global South, we recommend you check them out.

We wrote the article: To Change the World, Change Your Economics: How Degrowth Can Shrink Overconsumption in the Global North While Allowing the Global South to Grow.

Please read the whole article if you are so inclined, but it’s about 3,400 words, so I’ll offer you a summary here.

The limits of Neoclassical Economics

We can attribute a lot of the problems we face today, from inequality to environmental degradation, to our flawed economic system. The economics we use now, Neoclassical economics is characterized by a reliance on markets to solve problems, skepticism about government intervention, deference to the private sector and a focus on constant growth have become the accepted norms of our economic system — though the “flavors” of neoclassical economics practiced across the globe vary due to legal, cultural and policy differences across countries.

The standard conception of neoclassical economics is based on firms and households virtuously working in harmony to produce the products and services that society needs, as illustrated by the graphic below.

However, neoclassical economics has a fatal flaw: one that only became apparent as the environmental impacts of our vast global economy became clearer. It does not adequately deal with the facts that our economy depends on limited natural resources and massive amounts of energy as inputs to the system, and has no satisfactory way to deal with the waste produced by our economic activity.

Ecological Economics to the rescue

While its roots are old, ecological economics is an emerging concept which adequately considers both the energy needed for our economic activity and the waste produced by that activity, as illustrated in the graphic below.

With its grounding in physics, it acknowledges that our economy sits within nature, placing real physical limits on the economic activity of humanity. This can be understood through the concept of an “empty world” vs. a “full world.”

The environmental degradation of the planet has been driven mainly by the Global North (including countries like China that have risen through the income ranks), using the resources of the Global South — both historically through colonization, and in modern times through a financial system that keeps emerging economies dependent on the export of their natural resources to wealthier countries.

This is where “degrowth” comes in. Degrowth refers to an equitable downscaling of production and consumption so the world can remain within planetary boundaries — a downscaling that will need to come primarily from the Global North.

The Global South should be allowed to grow. The main problem with humanity living beyond its means comes primarily from those of us living in wealthier countries. The richest 10% in the world are responsible for about half of the world’s carbon emissions, while the poorest 50% are responsible for only about 10% of the world’s carbon emissions, according to Oxfam (see the graphic below).

How can a degrowth agenda emerge?

Investing, in its essence, is a practice of measuring and reacting to risk. Up to this point, the financial markets and global investment decision makers have done a poor job of evaluating the true risks of climate change and environmental degradation. They vastly underestimate the risk of financial assets breaking down due to the destruction of our environmental systems. But at some point, the true risks of continuing down our current path will more accurately be factored into asset prices.

This will likely not happen all at once, but it will ultimately lead to a shock in the investment system: When investors realize that mitigating the worst-case scenarios of climate and ecological collapse will result in a great deal of stranded assets in the Global North, this will significantly affect both the flow of products, resources and capital between the Global North and Global South. Global North-based capital, primarily in the form of credit, has financed extractive and resource-intensive sectors across the Global South, which have, in turn, sold these raw materials back to Northern businesses and consumers. These commodities are contributing to the imbalance between overconsumption in the North and underdevelopment in the South. In spite of the contributions of development and impact finance, there is little reason to think that this dynamic will change as long as the underlying system is based in neoclassical economics.

However, if exports of material resources from the South decrease as a degrowth agenda leads to reduced demand from the North, this will lower export revenues and give the South an incentive to re-orientate its economies to domestic consumption and wellbeing. Meeting the wellbeing needs of its citizens will require growth, and without the resource demands of the markets of the Global North, the Global South will be more free to plot its own course. These countries’ resources could be used instead to create a thriving middle class — though this will require new leadership, new ideas and new capital.

A global degrowth agenda can lead to capital flows to the Global South

If (or when) the Global North enters its degrowth phase, there will be excess liquidity in the Northern investment sector. This will occur as Northern capital-intensive industries such as fossil fuels, mining and industrial agriculture are slowly downsized in a post-growth world. This lack of demand for capital will lead to a shrinking of the financial sector itself, while also freeing up vast amounts of capital in the system which will need to be invested.

The adoption of degrowth policies by the Global North will provide the Global South with an opportunity which may not be obvious at first. With the North completely reorienting and decarbonizing its economy, the Global South will need to reorient its own economy away for exporting resources, whose markets will be much smaller, and instead build the industries needed to meet the needs of its citizens. This shift to local development and consumption and away from export resources could be supported by capital in the North, which under a degrowth agenda will be sitting idle with future institutional investors.

These future investors will need to totally reimagine the entire investment process, from credit agencies, due diligence processes, risk models and accounting systems to the final terms, conditions and pricing of the credit.

But once degrowth becomes necessary, this dynamic could shift, and capital could find its way to the hundreds of ideas and innovations that could help the North live within planetary boundaries, and the South better meet the needs of its citizens through fairer terms of trade and investment. Once people see this connection, a post-growth future could build a huge collation of people both in the North and South who believe in creating a more sustainable and just future.