The cost of economic growth

I realy enjoyed this article from Neels van Schaik from PSG gives a good perspective to what is happening and how things have changed.

Enjoy your week

Steven

"The PSG Angle is an electronic newsletter of PSG Asset Management. "
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"Whether you are a passive shareholder in a listed company or actively engaged in running your own business, there is one concept that focuses the mind of any capital provider, that being growth!




Expectations of growth determine which projects or new ventures will be allocated capital and which will be starved of capital. Measured in aggregate, economists and investors get very excited from quarter to quarter about economic growth, or the lack thereof and what adjustments need to be made to a business or economy to keep fuelling growth.



One of the problems facing certain countries at present, and this is effectively a global dilemma, is that to accommodate growing populations and the workforce that accompanies a larger human base, economic growth has to be strong and consistently so, often for unrealistically extended periods of time. What has become quite clear is that rising numbers of people are also more present when economic growth allows for it; this does however carry a deep cost – what I describe as the dark social or environmental cost of economic growth.



Having recently visited China and coincidently having just read the book by well known author and scientist, Jared Diamond called Collapse: How societies choose to fail or survive, I have increasingly been struck by the destructive forces of the human race, most notably towards our host, earth. A deep debate on the social and environmental costs of economic growth transcends typical economic discussions such as global warming and whose to blame, or whether capitalism or democratic socialism allow for better economic management or even whether capitalism in its current form is sustainable. It is instead an intense focus on whether our present day system of individual self interest and survival takes us down a path of self-destruction that is for all intense and purposes irreversible. In my opinion, my January trip to China brought home to me, a very clear perspective of the destructive nature of human population growth and our quest for economic growth at the expense of our environment.



Economic disequilibria as a result of over-population and man’s demand for resources is well documented, an interesting present day example is the Middle East. As we all know, the Middle East has been blessed with the world’s biggest oil reserves, but has some of the world’s poorest natural freshwater resources. For many centuries most of Saudi Arabia’s water came from relatively shallow underground aquifers that could sustain a relatively small subsistence population.



The drilling technology from the 1970’s stemming from the oil industry enabled Saudi Arabia to tap non-renewable ancient fossil aquifers; these are estimated to be 30,000 years old and immense in volume, estimated to be one-sixth as large as the Ogallala aquifer in America’s Midwest. As Steven Solomon puts it in his book, “Water”, with these discoveries the Saudi’s viewing their resource as infinite, used up their water resource as fast as the West was using its oil. (1)



At one point Saudi Arabia became self-sufficient in desert wheat through subsidies of roughly $900 per ton in the 1970’s, and from the 1980’s became one of the leading grain exporters – the production costs, according to Solomon were, however, five times greater than the grain price on international markets.



Today Saudi Arabia still produces roughly enough durum and wheat for domestic consumption, but now that most of their natural water resources are depleted, they have abandoned wheat growing, and will probably be relying solely on wheat imports by 2016. In this example, there is little doubt that the historical abusive usage of water has meant that irreversible damage has been inflicted to the area, and one would think that it represents failed policy and a failed example that modern economies should try to avoid.



Unfortunately, it looks as if the Chinese do not seem too focused at present on long-term environmental impacts of economic growth either. Clearly, their immediate concerns relate more to appeasing the hordes to stave off social and economic unrest which will inevitably flair if the economic juggernaut does not maintain momentum. What follows are my thoughts and observations as I travelled:



The train trip from Beijing to Shanghai covered a distance of 1400km, it was best described as an unpleasant eye opener, we covered large parts of the trip in smog . Maybe the time has come for investors to shift their obsession from commodities to medical companies.



China’s rate of urbanization clearly results in positive and negative consequences - not dissimilar to the experience in many other countries. From a ‘positive’ perspective, BHP Billiton’s half year presentation last week emphasised yet again to what extent resource companies are gearing their capital expenditure towards emerging markets, China, the most prominent. The more daunting aspect to urbanization is of course that it creates expectations, such as earning a better wage, improving living conditions and education needs. In so doing, the virtuous economic, social and environmental pressure cycle unfolds!



Whist China has been adept in managing the pace of urbanization thus far, one senses below the surface brews underlying social and economic pressures. Income inequality has already soared, statistics showing that the top 10% of the population earn at least twenty times more than the bottom 10%. Although the argument can be made that this is no different to countries such as Brazil, we believe that what differentiates China is the population size. Brazil has seven times fewer people than China! The demands and requirements of these new urbanites will have a tangible impact on the prices of many raw materials across the globe and clearly this will imply a serious environmental impact!



As populations become more affluent diets change towards higher protein intake. Per capita consumption of various protein sources like meat and eggs have already quadrupled between 1978 and 2001. These sources of protein are not necessarily efficient as it requires 5 to 10 kilograms of plants to produce half a kilogram of meat.



We have all heard the statistics about China’s water pollution, but a quick revisit would suffice. According to the World Bank, China has only a per-capita share of water of 2700 cubic meters per annum (2005 statistics). This is one quarter of the world’s average, yet they have a fifth of the world’s population. What exacerbates China’s water problem is the uneven distribution of water sources between North and South China. North China has only one fifth the per capita supply of South China.



China is now relying on 10,000 year old aquifers to supply water, with the likely outcome not dissimilar to Saudi Arabia. To address this problem, they are looking to develop a significant dependence on desalination given the current worsening state of their water quality. Desalination thus far has not proven to be an environmentally friendly solution and despite the technology having improved considerably, desalination capacity so far is only 0.3% of total global water usage.



Climate change has led to significant changes in China’s weather patterns. Deforestation and the degradation of grasslands and wetlands especially in Northern China is a key driver behind the frequency of droughts and soil erosion, according to Jared Diamond. The grassland degradation has increased the frequency of dust storms in Eastern China, and has also increased the frequency and severity of floods on the Yellow and Yangtze River. For example, roughly four fifths of the wetlands in the Sanjian Plain in the Northeast China, covering an area of 110,000 square kilometres (bigger than the Republic of Korea) has erroneously been converted to farmland, and although the Asian Development Bank is funding the restoration of this wetland area it will take years if not decades for any positive impact to be seen. As this is an important grain producing area, the question remains where and how the grain production from this area will be replaced.



Although most of us tend to focus on the impact China is having on its own environment, it is worth pointing out that it has gradually externalised its social and environmental pressures to other countries that have thus far been benefitting significantly from supplying products to China. These producer nations, in many instances so obsessed with economic growth, have paid little or no attention to the impact that this has had on their own environments. Ironic is that whilst China exports its environmental impact, in isolated pockets, it has to some extent been able to reverse its own resource depletion! Take for example a reversal in deforestation at home over recent years, with natural forest cover having increased by 12% in total over the last 20 years to 2010 (“old-growth” forest cover is still marginally lower than 1990).



This Angle in no way attempts to blame China, Western economies underwent economic industrialization decades ago and environmental concerns certainly took a back seat then too and not much has actually changed. What is, however, startling this time round is that the numbers are so much larger and thus the consequences too!



Jared Diamond highlights five key factors, environmental damage, climate change, hostile neighbours, loss of trading partners, and the society's own responses to its environmental problems that has lead to the destruction of earlier societies and civilizations, and cautions that many of these issues are present today on a global scale.



In the words of Aldo Leopold: “One of the oldest tasks in history is to live on a piece of land without destroying it "