More economic growth means more population growth, according to Thomas Malthus. The demographer and preacher believed that food production is linear and population growth exponential, and as such are the limits to growth. An overpopulated society leads to famines. Epidemics and wars were insufficient to control the growing population, according to Malthus.
Malthus published his pessimistic vision in 1798. At that time, there were approximately 800 million people in the world. That number has indeed grown exponentially since then to 7 billion, but total food production has risen much more steeply, courtesy of Ricardo’s comparative advantages and Schumpeter’s creative destruction.
Is healthy shrinkage the solution?
In line with Malthus, the Club of Rome’s report Limits to Growth was published in 1972, describing the lack of natural resources and the fact that they would gradually be exhausted. Deterioration of food supply and health care would initially lead to a standstill and later to a decline in population growth.
In the post-Corona era, many voices are again calling for an end to unbridled economic growth. A healthy contraction is seen as the solution. After all, only then will the harmful effects on the environment and in terms of inequality decrease. Moreover, economic growth is reaching its limits, given the stubbornly rising inflation. For this reason alone, a temporary contraction would be a solution.
Greed is stronger emotion than fear
Especially in the rich West, attention is paid to the environment and the climate crisis. The other three-quarters of the world population sees this as an expensive hobby they cannot afford. But in the West, too, economists are sputtering against it, mainly out of self-interest. We want more and our children should have it better than we have it. Greed is simply a stronger emotion than fear.
If there is no longer any economic growth, it means that groups within society can only improve if others lose out. This does not benefit the stability of a society. In view of the deteriorating distribution between the active and inactive, the current welfare state is no longer tenable. The reality, however, is that Western consumption is already unsustainable in its current form. There is no planet B and the high inflation rate also indicates an unsustainably high consumption pattern.
Still, you can’t do it without growth
Nevertheless, economic growth is the only solution to the climate crisis. Contrary to the beliefs of Malthus and the Club of Rome, higher economic growth will cause the population to shrink, not grow. It is precisely in the poor countries of the world that population growth is high. Because of the low level of prosperity, there is little education and little room for good healthcare.
Child mortality is high and because there are no provisions for old age, children have to provide for it. Having many children is a rich possession. As prosperity increases, the number of children decreases. In the richest countries of the world, too few children are born to maintain the population. The objective must therefore be - especially in the poorest countries - to bring economic growth to Western levels as quickly as possible.
A notorious continent in this respect is Africa. For years, the population there grew faster than the economy, which meant that there was no money for in-depth investments. All economic growth went into maintaining the existing facilities, despite all the good intentions. Everything must be aimed at breaking this downward spiral.
Cause: too many people on the planet
The cause of the climate crisis is that there are too many people on the planet. The way to clearly reduce CO2 emissions, for example, is to reduce the world’s population. When it comes to impact investing, people sometimes make the mistake of expressing impact in terms of the number of healthy years of life that people gain, but that is the opposite of the truth.
More people simply means more emissions and more pollution. If all the countries in the world were as rich as Japan, for example, the rapid population growth would soon be over. So ironically, a positive impact means that there are fewer people or that people live shorter lives.
The good news is that there are plenty of signs that strong economic growth is having a restraining effect on population growth. China, for example, embraced the one-child policy for decades, and in recent years the rules have been relaxed rapidly to stimulate population growth. Nevertheless, the much wealthier Chinese parents nowadays do not have more than one child, which threatens to make the Chinese economy age rapidly.
This will slow down the growth of the world population and therefore CO2 emissions. However, there is still ongoing urbanisation in China. In combination with the fast-growing economy, this means that the middle class is still growing strongly, even so strongly that global consumption could double in ten years’ time thanks to the contribution from Asia.
The latter conflicts with the solutions for the climate crisis, but again Malthus can be saved by Ricardo and Schumpeter. There are other countries in Asia that want to grow by producing more. Furthermore, man’s ability to adapt is constantly underestimated, especially in the area of technology.
Inflation remains stubbornly high
Growth is also important for investors; without growth, the stock market would be valued much lower. A doubling of global consumption in ten years’ time is an excellent outlook in this respect. Moreover, every challenge offers opportunities for companies that can provide solutions and, for the time being, the world has enough challenges.
Nevertheless, in this decade we will still face the limits to growth outlined by Malthus, something that will help ensure that inflation remains stubbornly high. The US economy in particular looks vulnerable in this respect. In combination with the relatively high valuation of American shares, this part of the market is not attractive.
On the other hand, there are countries like Japan and China, where inflation is clearly not a problem and where, remarkably, valuations are actually low. This relatively low valuation also applies to countries such as Brazil, India and South Africa, which benefit most from strong economic growth in terms of population and their impact on the climate crisis. Investing in these countries will make them prosperous, which in turn will reduce population growth. Investing in low-valued markets with a positive impact on the climate.
Han Dieperink is chief investment strategist at Auréus Asset Management. Earlier in his career, he was chief investment officer at Rabobank and Schretlen & Co. His contributions to Investment Officer Luxembourg appear once a week.
This column originally appeared in Dutch on InvestmentOfficer.nl.