Challenges from Rising Consumption in the Next 20 Years
The combination of population growth and the growth in consumption is a danger that we are not prepared for and something we will need global cooperation on.
—Maurice Strong
In the next 20 years, the global consumption landscape will change as vast numbers of people in emerging-market economies increasingly share the benefits of economic growth. The center of gravity for business opportunities will shift further toward China, India, and other parts of South and East Asia, as well as Sub-Saharan Africa.
In the baseline projections, the number of people worldwide with per capita incomes below $2,000 a year will decline by more than 1.1 billion over the next 20 years, despite overall population growth. The number of people with incomes of $2,000-$6,000 will increase by almost 700 million; they will be able to afford basic consumer goods, such as a refrigerator, for the first time, and to eat more meat and fish on a regular basis. The number of people with incomes of $6,000-$20,000 will rise by a little over a billion; many of them will purchase their first car. The number of people earning $20,000 and above will increase by almost 800 million; many will fly for leisure for the first time.
By 2035 global inequality will be lower than it is now. The global Gini index is projected to decline to 66.6 in 2035, from 69.1 in 2015 and 73.8 in 2003. The 90:10 ratio will fall to 25.3 in 2035, down from 28.5 in 2015. Consumption patterns will become more similar, as more people in emerging-market economies become able to afford consumer goods and services currently associated with rich countries.
These achievements notwithstanding, 400 million people will still live in absolute poverty, and inequality will remain high—both globally and within many countries. With growing awareness of income disparities, demands for greater equality within and across countries may intensify, manifesting through the political process and migration pressures.
Higher consumption of goods and services improves the well-being of vast segments of the world’s population. But rising consumption and its concentration in transportation, an energy-intensive sector, will also put a strain on natural resources and the climate. As incomes rise, people increase their spending on transportation more than proportionately. Spending on transportation is projected to quadruple in India and China, closely followed by Sub-Saharan Africa. Meeting this demand could cost $48 trillion globally for new roads and railways alone.
Addressing these trends will require policy action at the domestic and global levels. Actions by policymakers, business leaders, and investors will determine whether the changing consumption landscape results in sustainable and equitable improvements in well-being.
Reducing Inequality
Although global inequality is projected to decline, vast differences between rich and poor individuals will persist two decades from now. Policymakers should seek to reduce inequality because doing so is morally right and because it contributes to social peace.
The scope for policies to reduce global inequality by redistributing income across national borders is limited. The main vehicle for doing so has been foreign aid. Such aid has been useful during humanitarian crises. Its effectiveness in promoting longer-term growth, however, has been hotly debated (see Edwards 2014 for a review of studies on aid effectiveness).
Global inequality can decline more rapidly than projected if inequality within countries is reduced, as illustrated in chapter 4. Policies to do so are primarily under the purview of national governments. Direct redistribution within countries has traditionally been accomplished through a mix of progressive taxation and subsidies/transfers (preferably means-tested). Some experts contend that the traditional approach is insufficient, that additional policies should aim at achieving a more equal distribution of market income (income before taxes and benefits). Anthony B. Atkinson (2015, 113) suggests that “today’s high level of inequality can be effectively reduced only by tackling inequality in the marketplace.” Governments need to take distributional effects into account when designing laws and regulations, including innovation policy, antitrust policy, trade union legislation, and wage regulations and bargaining systems.
Increasing global integration also calls for governments to act together. Global coordination of tax administration and tax policy can make a significant contribution to reducing inequality, both within and across countries. The recent G-20/OECD initiative to stem tax avoidance by global corporations through “base erosion and profit shifting” seeks to ensure that global corporations pay a fair share of their profits in the countries where such profits are generated. Efforts to soften bank secrecy laws to permit sharing of information with foreign tax authorities seek to reduce tax evasion across national borders. Ensuring that global corporations and high net worth individuals contribute their fair share to tax revenues would reduce the accumulation of riches in the hands of a few and provide additional resources for governments, which they could redistribute domestically or invest in ways that foster economic growth to the benefit of broader segments of the population. A global wealth tax would prevent a “race to the bottom” by countries competing to attract mobile millionaires (see, for example, Piketty 2014).
Beyond efforts at redistribution of incomes, rapid growth in the emerging-market economies will be a crucial determinant of the speed at which global inequality is reduced. To that end, adequate financing of infrastructure investment will be key.
Boosting Infrastructure Investment
As a larger share of the global population meets its basic necessities for food, clothing, and shelter, demand for transportation will soar, particularly in emerging-market economies. Increased mobility can foster economic growth in emerging-market economies, further reducing global inequality.
Policymakers should start planning for major new investment early on, so that it can be adequately financed while keeping in check the risks to public finances and the possibility of waste or corruption. Fiscal policy is the right place to start, through higher revenues and expenditure reallocation toward public investment. Ensuring that both new investment and maintenance spending are fully reflected in medium-term fiscal frameworks would be helpful.
For fast-growing emerging-market economies in particular, the scale of financing cannot be met without much-expanded participation by the private sector. To foster private investor participation in infrastructure, governments need to create a stable regulatory environment and an open and transparent procurement system, which curbs the scope for corruption. Measures in these areas are especially important in emerging-market economies, where the needs are greatest and institutional quality weaker than in advanced economies.
A potentially vast increase in financing from the private sector could come from institutional investors such as pension funds. Possible measures include relaxing the prudential requirements for such investors to participate in infrastructure projects (both domestically and abroad) and setting up coinvestment platforms with multilateral and regional development banks, which could provide a seal of approval for projects.
Governments should not use private participation to postpone the recording of related fiscal obligations or underrecord the fiscal risks associated with providing guarantees to private partners. Procedures should be in place to monitor, disclose, and manage such fiscal risks.
Another way in which policymakers can ensure that spending on transportation and infrastructure investment experience healthy growth is to maintain and deepen openness to international trade. Investment has a higher import content than private consumption or government spending, and machinery and transportation equipment is the largest component of goods trade (for empirical evidence, see Bussière et al. 2013 and Freund 2016).
Preserving the Sustainability of Consumption Growth through International Cooperation
As people consume more and shift their spending toward goods and services that use more energy, the question of how rapid growth can be sustained without disastrous consequences for scarce natural resources and the global climate gains renewed urgency. This is not the first time that Malthusian concerns emerge about the sustainability of economic and population growth. For the most part, such concerns have proven unwarranted.1
But the jury is still out. The OECD (2015e) estimates that—absent new measures—worsening climate change, urban air pollution, water shortages, and biodiversity loss would impose massive costs on people, especially the poor, and the global economy.
The resourcefulness and technological innovations that have led mankind to overcome the Malthusian trap have been driven by individual thirst for profit and survival. When food became scarce, people developed more resistant crops and more efficient farming techniques—and some made a profit doing so.
This time may be different. Many of today’s problems, such as climate change, involve powerful externalities (see Helbling 2010); individually desirable or profitable behavior imposes a cost on society as a whole, including carbon emissions resulting from simple everyday actions such as driving. Against that background, free markets and the profit motive alone cannot provide the solution. Correcting externalities will require public policies such as carbon taxation.
When externalities take place across national borders, international coordination of policies becomes crucial. No government wants to be the first to ask its citizens to accept lower economic growth or higher taxation, even if these actions would reduce the chances of environmental disaster affecting everyone on the planet. International agreements such as the one reached at the Paris conference in December 2015—whereby all countries committed themselves to carrying out national action plans to limit carbon emissions—are a good starting point but may prove insufficient as well as difficult to monitor and implement.
Part of the motivation for this book is to provide analytically grounded estimates and projections that may sensitize readers to the scale of the forthcoming pressures from rising and changing consumption to be faced by governments and the global community—and to make the case for greater international cooperation in these areas.
Several policy measures would help steer consumption toward cleaner options:
■Cut energy subsidies and increase carbon taxation (see, for example, Lagarde and Kim 2015, OECD 2015c). Although much can be accomplished domestically in this area, some actions require international coordination. Such actions include, for example, higher taxation of international air travel (whether through taxes on jet fuel or airline tickets), which was not covered by Kyoto emission limits, or its inclusion in emission limits.
■Finance research and development of green technologies and a global climate adaptation fund, with the advanced economies making the largest contributions.
■Regional and multilateral development banks as well as export credit agencies should provide financial incentives for choosing climate-friendly infrastructure, including in the transportation sector.
■Procurement of infrastructure projects should be internationally open and transparent to facilitate the use of the most efficient technologies worldwide.
Rising consumption, particularly in emerging-market economies, will improve well-being for billions of people in the next two decades. But these opportunities will come with dangers. Improvements in global inequality may be too slow to avoid political backlash. Failure to secure financing for needed infrastructure may cause economic growth to grind to a halt. Lack of international coordination to curb climate change could imperil the planet’s survival. Policymakers need to take action urgently to face these seemingly slow-moving trends before it is too late.
1. Thomas Malthus (1798) considered that, with population growing “geometrically” in the absence of constraints and food supply growing “arithmetically,” population growth would necessarily be kept in check by misery felt by “a large portion of mankind.” With the global population explosion that began in the aftermath of World War II (which increased the population from 2.5 billion in 1950 to 7 billion in 2011), Malthusian fears resurfaced. Pioneering interdisciplinary books on sustainability (such as Meadows et al. 1972), including those prepared under the aegis of the Club of Rome, became popular in the 1970s (for a survey and several additional citations, see Rome 2015). Scientific advances led to a greater understanding of the threat to the planet from human activity.