Competition for scarce resources may bring the West to a standstill

Douglas McWilliams
THERE are limits to growth. Extra economic activity in emerging economies can lead to less growth for us in the West. At least partly, global economic growth is a zero sum game.

Restrictions in the supply of minerals, energy, food and water mean growth is likely to be constrained. If we are lucky, world growth over the next quarter century will average 3 per cent. But it could well be closer to 2 per cent.

The mechanism holding world growth down is a complex one. If supplies of natural resources are restricted – either as a result of deliberate environmental policies or crude shortages – prices rise. Rising inflation chokes off growth in two ways: it squeezes disposable incomes directly and causes economic policy to be more restrictive.

To get rapid world economic growth, supplies of minerals, energy, food and water need to be available without causing inflationary price rises. We will be extremely lucky if prices are kept down. It is more likely that rises in the price of commodities will hold back growth.

With world growth partly a zero sum game, growth in the more competitive East will partly be at the expense of us in the West. Our economic modelling suggests that growth in the emerging economies over the next 25 years will probably be about 2 percentage points faster than in the West. So if world economic growth is about 3 per cent, the East will grow at 4 per cent and we will grow at 2 per cent. If world growth is only 2 per cent, the East will grow at 3 per cent but we will only grow at 1 per cent.

And these percentages apply to the West as a whole. Europe is likely to grow much more slowly than the US. If Western growth averages 1 per cent, Europe will stagnate with no growth. And the uncompetitive parts of Southern Europe provided the euro continues – which seems pretty improbable under this scenario – would have a growth rate lower than zero. What can we do to stop this happening?

First, the biggest constraint on world economic growth is likely to be the availability of minerals. My lecture tonight at Gresham College will show consistent underinvestment in mineral extraction and increasing unwillingness by the major companies to invest. Governments and environmental campaigners increasingly limit the ability of companies to invest profitably. Provided they don’t break the law, this is their democratic right and their point of view needs to be understood.

But equally, governments and campaigners need to understand the consequences of their actions. Restricted supplies of minerals will slow down current economic growth which is doing so much to alleviate poverty throughout the world. Campaigners may think they are harming the so-called “fat cat” companies. But actually, as in so many areas, the law of unintended consequences comes into operation with the result that the more supplies of minerals are restricted, the higher the prices of the products and hence the more profitable the “fat cat” companies turn out to be.

Second, there are two new technologies that can make world growth less constrained. They are genetically modified (GM) foods and shale gas. The Americas have adopted these aggressively. Brazil’s development of GM crop technology has had much to do with its rapid growth acceleration, which has led to it overtaking the UK as the world’s sixth largest economy. In the US, rapid oil development has led to a price of oil $20 (£12) cheaper than in Europe and shale gas that is available at an equivalent price to $24 a barrel for oil. Cheap energy is starting to fuel what could potentially turn into a new industrial revolution in the US.

If we in Europe stand back and don’t use these new technologies, we will fall even further behind.

If we do use these technologies and governments step back from restricting the development of minerals around the world, there is a good chance that my gloomy warnings will be proved wrong.

Douglas McWilliams is Professor of Commerce at Gresham College. His second in a series of free public lectures is taking place tonight at Gresham College, Barnards Inn, EC1N 2HH, at 6pm.