Why we need to restructure our economic system

In a globalized world, countries have to find better ways to grow sustainably.

11 Jan 2019

Economic growth is undoubtedly a major force driving human development, for example by creating jobs and leading to improved levels of health and education. The World Bank calls it "The single most important way to reduce poverty".

Growth can easily be described as the key to prosperity and opportunity, but is there another side of the coin?

For economic growth to have a long-lasting positive impact, it needs to be inclusive, allowing everyone to take part in growth opportunities, but above all it needs to be environmentally sustainable. “There’s a footrace between growth and sustainability,” explains Michael Spence. The Nobel economist of 2001 has researched international growth patterns for almost two decades. “The majority of the world’s population lives in countries that are growing. Does the earth have enough natural resources to support an economy that large?”

Policy makers, academics and entrepreneurs examine how long-term sustained and sustainable growth can be achieved. Increases in energy efficiency and a lower-carbon intensity of the energy mix could be important steps towards the right direction. “If we don’t manage to put a price on carbon, we can’t solve the problem,” Spence explained at a recent Nobel Perspectives Live! event in London.

“New technologies that are clean are competitively disadvantaged because one output of the old technology, the fossil fuels, is not being priced negatively.”

Spence points out how economists don’t tend to agree on much but that the question of sustainable growth is one of the few exceptions. Most believe that we won’t achieve environmental stability if the economic system doesn’t change.

We have to build sustainability into growth models or they are not going to be worth much.

– Spence

Spence describes the environmental consequences of a global economy as a race that humankind seems to be losing. “We have to build sustainability into growth models or they are not going to be worth much.” That’s why Spence applauds the decision of the Nobel committee to give the 2018 prize to William Nordhaus, who worked intensively on how to integrate climate change into macroeconomic analysis. “He has argued, and I think correctly, that taxing carbon is an essential step in dealing with climate change,” Spence points out. “Whether it’s going to happen politically is very difficult to understand.”

The Trump administration seeks to increase the use of fossil fuels and pulled the United States out of the Paris agreement. How this further complicates already complex discussions could be seen at the climate change conference in Katowice in December 2018.

UBS is committed to a sustainable future, driving positive change for example in the important area of impact investing. There is an increasing number of companies, organizations and individuals that help create a more inclusive and sustainable planet and take climate action. Still, a bottom-up approach alone won’t work. There is a crucial need for governments that don’t lack commitment. “It’s essential,” Spence emphasizes.

More Nobel Laureate stories

How can developing countries stimulate their growth?

Michael Spence

Nobel Laureate, 2001