Janez Potočnik: A throw away economy cannot be competitive

UNEP meeting “Towards a Sustainable Economic Paradigm: from Labour to Resource Productivity”

Paris, 5-4-2013 — /europawire.eu/ — Thank you for inviting me to participate in this discussion.

I want to first of all make a comparison between labour and resources as determinants of growth. Then, I would like to make the business case for resource efficiency. I want to underline that resource efficiency is more than a ‘green’ agenda; it’s an agenda for a new industrial policy, and a modern economic world.

Firstly, there is some truth in what the title of this session implies. “From labour productivity to resource productivity” suggests that we have focused too much on labour productivity as a determinant of growth.

When I pick up a newspaper, if it wants to talk about country’s relative competitiveness, then it will usually tell me about trends in labour productivity or unit labour costs. Labour productivity is seen as a main determinant of growth prospects.

When I talk to a macroeconomist, then he or she will have statistics to hand on how labour and capital productivity are changing. Macroeconomists are used to talking about labour and capital because they are the traditional drivers of growth. Also, let us be honest, they are relatively easy to measure.

But talk to the macroeconomist for longer and he will also admit that labour and capital are no longer the main drivers of growth. In the jargon of what is called growth accounting, more than half of growth comes from something called ‘total factor productivity’. Total factor productivity captures the impact of innovation and technological change on growth, and at our stage of economic development, these are the main determinants of growth. One of the sources of that innovation is improvements in resource efficiency.

The most difficult question to answer is how much growth comes from improved resource efficiency. To try to answer that question, the best person to speak to is somebody who works with businesses, someone who tracks business costs and understands their global value chains. What they will tell you is that today, labour costs make up around 20% of total costs in manufacturing industries, compared to around 40% for material. OK, those material costs include some embedded labour costs further up the supply chain but the message is quite clear. One of the global trends we are seeing is that production is no longer based simply on labour and capital. The efficiency with which we use our natural resources is a key concern for growth in today’s economy.

Let me go further. Do you really believe that in the long-run a throw away economy will be competitive? Does it not make sense to move to a circular economy? An economy where we extract as much value as possible out of increasingly scarce resources?

Let me put this point into a historical perspective. Over the last decades, economic growth in Europe has been slower and slower with each new decade. It was 5.4% in the 1960s. It decreased to 3.8% in the 1970s, 3.1% in the 1980s, 2.3% in the 1990s. The decade 2000 to 2010 saw an economic growth of only 1.4% in Europe. Our resource challenge, and our demographic challenge, are not going to be solved with a quick fix. New growth can only come from new ideas, and resource efficiency adds an essential element to this equation.

Secondly, let me give you a more forward‑looking case for focusing on resource productivity based on some global megatrends.

During the 20th century the world population grew four times, its economic output 40 times. We increased our fossil fuel use 16 fold, our fishing catches by a factor of 35 and our water use 9 fold. It was called the “great acceleration”, but this can’t go on and I am afraid that we might hit the wall soon.

This resource-intensive growth was not enough to deal with appalling poverty in many parts of the world, and is not sustainable enough to ensure economic prosperity and well-being in the future.

Looking forward, the “business as usual” scenario tells us that we will need three times more resources by 2050. But already 60 % of the world’s major ecosystems on which these resources depend are degraded or are used unsustainably. So “Business as usual” is not an option. I for one cannot imagine that the world can support nine billion people consuming as Europeans do just now without serious problems resulting.

The fight for resources is already increasing their cost. On average, real prices for resources increased by more than 300% between 1998 and 2011. Even after 2000, prices increased by almost 6% per annum in real terms. At the same time, resource price volatility also increased. In Europe, 87% of EU companies expect resource prices to continue rising in next 5 years. The global mega trend is one of more expensive resources.

Thirdly, there are opportunities for business from becoming more resource efficient.

Improving resource efficiency has to be seen as a way of cutting our costs of production, and boosting growth.

Our modelling shows that resource efficiency policies do not hamper growth, but can actually enhance it. For instance, a one percentage point reduction in material use in Europe would be worth up to € 23 billion to business and could create between 100,000 and 200,000 new jobs.

Looking at specific business sectors, our analysis shows potential gains for businesses of between 3 and 8% of turnover from using resources more efficiently. But, business needs help to identify those opportunities and to overcome barriers to change, notably in terms of awareness and financing opportunities.

At the same time, non-implementation comes with a huge cost to society. To give an example, full implementation of EU waste policy could create an additional 400,000 jobs in the coming years and increase the annual turnover of the waste sector by €42 billion.

Finally, let me finish on a positive note. I see increasing signs that this is not a ‘green’ agenda, but is accepted as an industrial agenda.

The economic crisis revealed a clear need for stronger economic governance and coordination at EU level. The European Semester was our response. We are aiming at “smart, sustainable, inclusive growth” with greater coordination of national and European policy. The process means that the EU and the euro zone coordinate in advance national economic and fiscal policies, in line with both the Stability and Growth Pact and the Europe 2020 strategy.

The process is taken forward through seven flagship initiatives. One of those is the resource efficiency initiative, which is therefore recognised as being one of the seven key themes for delivering growth and jobs.

People accept that the different performances in Europe just now are a source of missed economic opportunities. For example, the Netherlands produces three Euros of output for every kg of resources used which is almost twice the EU average. Austria recycles 70 per cent of its waste, whilst others recycle close to zero. In other words, some Member States are much more resource efficient than others and this suggests there is scope for using resources better.

Let me come back to labour. One of the issues that I am challenging my colleagues and European Member States on is taxation. Best practice in Europe is that environmental taxes contribute around 10% of all taxes. However, the average contribution of environmental taxes is only 6%. If all countries achieved what the front‑runners do, then there would be additional tax revenue equivalent to around 1.4% of Europe’s GDP that could be used to reduce deficits or labour taxes. And those taxes on labour are large. We collect 8 Euros from taxing labour for every Euro we collect from taxing environmentally harmful activities.

To sum up, labour productivity and resource productivity can both contribute to growth. We are actively working to encourage resource efficiency. We are setting framework conditions that encourage innovation and good practice and then encouraging Member States, business and consumers to act.

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