*Disclaimer-This editorial is written from a business perspective, however it has very interesting analogies and a good case study.
Many businesses measure growth by selling more stuff to more people, and consumer markets are expected to expand in the decades ahead.
The world is on pace to exceed 9.5 billion people by 2050, with far fewer living in poverty than today. Thanks to the rapid industrialization of developing countries like China, Brazil and India, 3 billion people are projected to join the global middle class in the next 15 years alone.
These demographic shifts represent both a human development victory and an enormous business opportunity for those companies positioning to meet the needs of added consumers.
But there’s a catch: Current consumption patterns, even assuming efficiency improvements, put the global economy on an impossible trajectory. We would use three times as many natural resources by 2050 compared to what we used in 2000—and what we are using today has already exceeded planetary boundaries.
Yet few, if any, companies are fundamentally rethinking the models by which they meet customer needs. This is the elephant in the boardroom—uncomfortable and unmentioned because the solution requires radical change.
Business Leaders at the Crossroads
Companies will not thrive if their growth strategies assume infinite supplies of finite resources.
Likewise, without progress on global environmental challenges like climate change, economic and social instability will undermine development around the world. Meanwhile, those businesses that remain stagnant will face more direct threats from the innovative business models that will emerge to deliver more value with the resources available.
While some companies are already investing in cleaner and more efficient operations and goods—such as fuel-efficient cars—these steps fall short if core business models remain predicated on selling more things to more people, requiring more and more resources.
Even with a significantly more resource-efficient economy, natural resource extraction would still increase by 40 percent by 2050, undermining global climate change and sustainable development goals and posing other environmental risks.
That means that to meet consumer demand in 2050—and grow earnings—companies must embrace changes to their core business models. Companies will need to rethink how they provide basic necessities, comforts and conveniences to billions more customers—without exceeding planetary boundaries.
A Case Study
The apparel industry is responsible for 10 percent of the world’s greenhouse gas emissions and 20 percent of its industrial water pollution.
Meeting the demands of a growing global middle class will mean innovating new products and services that deliver shareholder value and meet consumers’ needs in different ways.
For example, Gwynnie Bee and Rent the Runway are two clothing services that allow customers to rent rather than buy clothing, which can curb the wastefulness of fast fashion.
Discarded clothing represented nearly 8 percent of all municipal solid waste in the United States in 2013. Scaling sharing models would dramatically reduce environmental damages caused by the apparel industry, which is responsible for 10 percent of the world’s greenhouse gas emissions and 20 percent of global industrial water pollution.
Address the Elephant in the Boardroom
Moving away from unchecked resource consumption may be the defining sustainability challenge of our time, but even companies with laudable sustainability agendas stop short of addressing today’s unsustainable consumption patterns.
A review of 40,000 corporate sustainability reports between 2000 and 2014 found that only about 5 percent of companies mention some type of ecological limits. Of those, most did not provide detail on current or planned changes to address the issue.
Normalizing the conversation will set the groundwork for pursuing new business models that allow growth within the planet’s limits and generate value in new and exciting ways.
The choices that business leaders make today will define the future for generations to come. What they needs to do is outlined below-
- do the math by looking openly and honestly at their dependency on natural resources and the associated limits on business growth;
- take a leadership role by using their influence to change the conversation with key stakeholders; and
- transform the business to one that will thrive in a resource-constrained environment.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.