//The IMF says 1.4% Contraction for Australia in 2009: Can we afford it?

The IMF says 1.4% Contraction for Australia in 2009: Can we afford it?

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It seems to me that the recent discussion and alarm about the world economic recession has somehow got itself unhinged from the basic importance of the matter. For instance, take this plot:


From the BBC’s report, ‘Deeper’ recession ahead says IMF’. The text around the figure goes like this:

The global economy is set to decline by 1.3% in 2009, in the first global recession since World War II, the International Monetary Fund (IMF) says. In January, the IMF had predicted world output would increase by 0.5% in 2009. It now projects that the UK will see its economy shrink by 4.1% in 2009, and by a further 0.4% in 2010. But other major economies are predicted to shrink even more, with Germany declining by 5.6%, Japan by 6.2%, and Italy by 4.4% in 2009. he prospects for the advanced economies are not much brighter in 2010, with an overall forecast of zero growth. (and so on …)

Whilst this is all interesting stuff, it actually gives us only half the story on global economic activity. From this report, there is no way that you can determine what is happening on the ground in these countries, or for that matter, on the lovely planet called Earth.

Why?

Simply put, output, by itself, is meaningless. Sure, there are some humans who care a lot about stuff for stuff’s sake, but not many. Most of us, I believe, only care about output to the extent that it is actually helpful to us — that it (say) provides for our health, or education, or food, or leisure, or …. And that question my friend, is all about dividing up the pie. We are not judged on our economic activity by how much we have all produced, rather, of importance is how much there is for each mouth to eat, each mind to be educated, each patient to heal.

What I’m trying to emphasise is that economic activity is only useful in that it provides for humans. So please don’t lament the loss of ‘stuff’ (output) for stuff’s sake, but rather, worry only if it will lead to lower consumption of that output by our brothers and sisters in human-kind. Let’s keep this whole economic activity thing in perspective.

So on this score, how are we doing? Well, a little history first — those of you who have been in my classes will have seen this plot before. It is a plot of the World economy from the year 1 to 2003 based on data from the excellent Angus Maddison (you can get the data behind this plot at this link).

maddison-world-1to2003

How to read this plot? If you are moving to the right, then your income or living standards are increasing (since we are using GDP/Cap as a proxy for living standards), if you are moving up, then your population is increasing. What are the take-home points?

  1. We have been moving up, that is, increasing population in an uncomprimising fashion since 1800; or put another way, regardless of our shifts left or right, we are always going north;
  2. Most of the time, and particularly so in the last 150 years, we have been moving to the right; or put another way, most of the time, our actual living standards have been increasing.

Putting these two facts together leaves you with a remarkable conclusion: for almost all years since 1800, the world economy has not only enabled more people to be catered for, but each new person has enjoyed higher standards of living than their parents. This is an amazing observation, that bears much reflection.

Of course, you can see the odd ‘blip’ along the way — these are moments when population kept marching ever northward on its uncomprimising trajectory, but provision didn’t keep pace. Or rather, it kept pace, but it didn’t increase — each new human that was born during these times had just what their parents had, no more (and note, no less).

What this diagram is trying to show is that since 1800, the world has broken free of the Malthusian dynamics that blighted Earth for all known ages before this date. Malthus believed that Man would forever be facing ‘crises’ — that is, collapse of provision, resulting in massive death following the fact that population growth is geometric (e.g. 2, 4, 8, 18, 36 .. ) but production (based on land) increases only arithmetically) (e.g. 2, 4, 6, 8, 10, …).

If you were wondering how this must have looked in the data all those years ago, you don’t need to go further than several sub-Saharan African countries today.

maddison-africanlandlocked

Tragically, in recent times, several countries in Africa appear to match the ‘fingerprint’ of the Malthusian dynamics. You can see that they are facing a direct tradeoff between population and incomes. If incomes were to go up, then the plot indicates that this might happen by lowering their population. Conversly, if the population were to go up, this would necessitate the lowering of living standards. The point is illustrated by the pie — for these countries, the pie is unchanging, output is constant, the only way to change how large each person’s slice of the pie is, is to change the number of persons. This is a very sad predicament, and is the subject of much angst and development research, discussed in other places on this website.

So bringing the discussion back to the world population, and Australia? The World Economic `pie’ is expected to get smaller by 1.3%, whilst for Australia, the number is 1.4%. So what is the population growth rate doing? In both cases, like population growth has been for many many ages, it is positive: 1.188% and 1.195% for the world and Australia respectively (see the CIA factbook for other country projections in 2009).

So yes, perhaps the hype is true, since the net change for incomes for each person on planet Earth will be 1.188 – 1.3 = -0.112% whilst for Australia, this comes to 1.195 – 1.4 = -0.205% . Or put another way, for each new child born to Earth in 2009, their income will be around 11c less for every $100 of their parents, whilst for Australia, this will be a whopping 20c per 100 Australian dollars.

Is the sky falling in? .. On this score, certainly not.

It pays to keep in mind the remarkable competition between output growth and population growth that has been largely won every single year for the last 200 excepting a few failures. Of course, I don’t want to minimise the actual burden of the recession for individuals, as ever, individuals are right to feel that discussions of averages (like this one) are not helpful — being unemployed, dealing with mortgate or other loan repayment stresses are not insignificant. However, I would suggest that we in rich Australia reserve some time in prayer and reflection for those countries, such as the ones I have included in the plot above, who are facing real losses of living standards to the tune of 1 or 2 dollars in every 100 parent dollars every year. And it’s been that way for around the last 20 years. And that, on a basis of around 10-15 times less wealth than we enjoy in Australia in the first place.

Can we ‘afford’ this recession? Yes.

Dr SIMON ANGUS is a computational and complexity scientist and member of the Department of Economics, Monash University. With a background across the physical and social sciences, he has diverse interests including complex systems science, data-science, networks, systems biology, evolutionary game theory and the study of technology.