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Degrowth in a small peripheral European state

I have been invited to go to Zagreb in late April to speak about “degrowth in small countries on the European periphery” to a group in Croatia who are being sponsored by the Heinrich Boell Foundation in Germany. Our discussion began with two papers published in the Green European Journal, one by Igor Matutinovic, an economist at the Uni Zagreb and a reply by Group 22. Igor acknowledges that growth in Croatia is problematic from an environmental point of view but argues that now is not the time to go for “degrowth” in Croatia while Group 22, a left-green group recently formed in that country, are challenging that viewpoint.

Here are the two GEJ articles:

Degrowth: can Croatia afford less work and less consumption?
What kind of growth, what kind of degrowth: the case of Croatia revisited

My commentary on them is below.

Introduction – the situation in Croatia

Croatia came out of the former Yugoslavia in 1991 but, just over 20 years later, things in Croatia are not a whole lot better. The first ten years were marked by war, trauma and considerable damage to economic infrastructure. The privatisation was scarred by corruption that has left large parts of the population seething with rage at the injustice of what has happened, as well as leaving large parts of the economy, including agriculture, limping. Significant pockets of poverty and increasing inequality exist. After the first traumatic decade there was a sort of a recovery for a few years at the turn of the century before Croatia got dragged down by the global crash of 2007/8. It has barely recovered since. Unemployment is high. The country is about to join the EU, rather half heartedly. There is a foreign deficit, a government deficit and, to complete the picture, the IMF are on hand recommending austerity. In this context Igor fears social upheaval. He can only see growth as averting a social explosion because, he hopes, it will help create employment and allow a strengthening of the social fabric. The silver lining for Igor is that there are plenty of opportunities for this to be “green growth”.

The fact is though that Croatia is a wealthy country by global standards, partly at the expense of its environment. Research by Group 22 members shows that Croatia’s ecological footprint exceeded its bio-capacity in 2007 – the amount involved means effectively that Croatia’s population requires 3/4 of “another Croatia” to maintain its lifestyle. Croatia is by no means the worst performer in environmental terms but its economy is not sustainable nonetheless – even though the population see the environment as having the lowest ranking among their priorities. In its external imbalances (trade deficits) and budget deficits Croatia is not different from many countries on the periphery of europe. The austerity recommendations of the IMF are not different in Croatia to elsewhere, except perhaps in magnitude. In Greece, Italy, Spain. Portugal, Baltic and eastern European countries, and in Ireland too, there is growing unemployment. Youth unemployment is high in these countries, there are social security cuts, a growth of poverty and insecurity, inequality and seething discontent. In many of these countries too the governing elite are repeatedly rocked by corruption scandals.

The point here is that if degrowth is not possible in Croatia, which at least has its own currency, then the same logically surely applies in many other places. If degrowth is not possible in Croatia degrowth is never going to be possible anywhere until the problems of all of these societies ease. And to achieve that will these countries need to grow too? What will then happen to global and local environments?

There are different ways of thinking about the current crisis in Croatia, as well as the crisis in the other countries. One way is to consider the possibility that growth is over anyway. Growth has been made possible by humanity using a mass of devices powered by fossil fuels but, now that fossil fuels are increasingly expensive to extract, an ever larger proportion of national income has to go to pay for the same energy throughput. Perhaps on the other hand this idea is not right – perhaps new technologies to extract shale gas, or to extract methane hydrates from the sea bed, will bring the future price of energy down. What is not in doubt is that the costs of growth are growing and exceeding the benefits – for example food prices are put up by climate change impacts on harvests. We urgently need to look for a different development model that works in the new situation.

The need for a new development model

But what kind of new development model will this be? The first thing that should be said at this point is that outsiders should be very cautious about recommending development models for places that they do not know well. This is not false modesty – it is based on the idea that development has to be tailored to local problems and local potentials, which local people know and outsiders generally don’t. I know from personal experience of working in East Germany in 1996 that many of my ideas from Nottingham in the UK did not work in the different conditions of Dessau after the end of East German communism. Places, institutions and the way people think are quite different in different places and wonderful ideas from one place often do not travel. The problem of transferring ideas is likely to be especially difficult if, as here, a big emphasis is put on what is locally possible, involving changes by local communities in their local environments – using and sharing the resources and potentiality of their unique location.

Nonetheless, different places can learn from each other and adapt. There are valuable lessons out there – and I am thinking particularly about the way that some places have improved their quality of life without growth. Research using the Human Development Index by the United Nations in countries all around the world shows that the HDI can often advance without a strong correlation to economic growth – particularly in health and education.

Reorganising the community and local economy along ecological lines

In this case a well educated population is particularly needed if the Croatian people are to be equipped with the skills and knowledge to help to transform the economy at the local level. The kind of development needed is one that reduces the extent to which economies are integrated into distant markets. It would not be efficient to try to provide all needs locally but as energy prices and environmental costs rise we will need to provide a greater proportion of our needs closer to home. Ecological economic restructuring means a move away from large scale supply activities geographically distant from end uses typical of the planning from the centres of power. These have big effects on eco-systems – reservoirs flooding whole valleys, power stations based on fossil fuels generating greenhouse gases, food mono-cultures standardising the countryside (i.e. killing it). They also entail energy loss and pollution in transmission, transport, pumping, processing, packaging, wholesaling and retailing functions and non usable wastes. In contrast the production arrangements of the future are about moves towards more small scale supply activity adjacent to end uses. As far as possible needs should be met on the spot rather than from afar. This means the need for an emphasis on developing through technologies based on cycles or partially integrated systems. Examples would include climate adjusted buildings; solar and wind energy techniques; multiple use and recycling of water etc; separating and recycling wastes and composting organic wastes; food production in gardens and near cities. Where needs would be met and designed, on the spot, in a multiplicity of localities like this they must be designed and installed there. Locally appropriate strategies could not be defined in detail from the boardrooms and ministries of corporate and central state power. This means transferring decision making back to those localities whose development comes to be seen as the centre point of development strategy.

Difference governance and property frameworks

Instead of assuming profit motivated enterprises will do this we need to foster a different governance regime in the eco-social and community economy. We need new types of enterprise purposes and arrangements. That means organisations whose purposes are commons based – developing, protecting and sharing resources. It also means different kind of governance relationships that takes place between organisations rather than over them.To make local and regional level changes coherent and well co-ordinated we need a co-ordinative service among horizontally equal project initiatives. Following the ideas of cybernetic theorist, Stafford Beer, a co-ordinative service would have 4 types of role – to deal with conflicts, to achieve synergy, to create an up to date a dynamic assessment of changing operational environments and, finally, to maintain common identities.

This can be illustrated with an example. Suppose a number of community garden projects in a city decide to co-ordinate their work in order to become more effective. There might be potential conflicts where they all wish to call upon a limited common pot of finance to develop their work – in this case there is a need for a conflict-resolution process. Additionally, co-ordination might allow for a variety of synergies, such as by working together to purchase inputs jointly to the advantage of all, or by organising a local market together. Those are operational issues of the here and now type. In addition they can share arrangements to ensure appropriate adaptation to an evolving environment – researching the likely future demand for services, monitoring public policy changes in land or finance, and researching and sharing information about good practice from outside their city. Finally there are those issues defining general ethics and principles for community gardens reflecting shared purposes and values – which may, for example, determine whether other projects be invited to share their joint arrangements, or which they may decide to defend together if public policy seems to be challenging what they are seeking to represent and uphold.

Reducing the need to buy stuff

An important dimension of this local level transformation involves reducing the need to buy stuff – well insulated and well designed houses don’t need to buy in so much energy. A good food garden, or a local community garden, or a community supported agriculture, cuts the need to buy in food, via supermarkets, from distant suppliers. A public transport system, or car pools, reduce the need to buy and use cars. A library reduces the need to buy books and there can be tool libraries, toy libraries for children as well as other kinds of resource centres. Different types of durable equipment can be hired and shared – sewing and knitting machines, woodworking and metalworking equipment, “fab-labs” with computer controlled machine tools producing artefacts directly from computer designs. In Munich there is a place called “Haus der eignen Arbeit” – equipped workshop space for people to find the tools, the help, the ideas and encouragement, to try their hand at a host of practical skills to improve their homes and lives. A further point is community resource pools like this will want to acquire equipment that lasts, that is of good quality and that can be repaired.

Note too that this is a community economy being developed outside of the paid work sector – to improve the efficiency of the household sector. When we think of the economy we tend to think of employing organisations and paid work. But in most countries only 10 to 20% of our lives only are spent in paid work. Children, elderly people, unemployed people and people who are ill are not in paid work. In addition even people who are in paid work spend a greater part of their time at home. These dimensions of our lives can be improved and will need to be in an ecological transformation. It would help too to provide a way of coping with demographic changes – for example if there are an increasing proportion of elderly people who are still healthy and can contribute, but without being involved in paid work.

Resource mobilisation strategies – the case for a land value tax

But where will the resources and the money come from? To an important extent the resources are already there as unemployed labour, unused land and buildings so the question is not one of where the resources exist, but of how they can be mobilised. For this purpose local exchange schemes, perhaps even local currencies, might help but this alone will not be enough. More substantial cash expenditure will be needed and must come from somewhere. That means fundamentally rethinking and reorganising the taxation system and there is a case here for a land value tax (site value tax). A land value tax might also be a way of partly addressing the serious corruption that appears to have accompanied privatisation, including a process of land grabbing. The aim of the exercise would be to allow landowners to keep the titles to land but to take back for the community the economic benefit from that land via tax – and then to plough that benefit into the sorts of schemes described above, as well as education in skills that would be needed in an ecological restructuring – eg learning about ecological design.

The important issue here is that any form of economic development has a spatial dimension – it takes place somewhere. Particular locations are then valuable because of infrastructural investment, because of roads, parks, proximity to services and markets and transport links – or because farms are near their markets. The landowner does nothing to provide these advantageous features but can charge for the use of a site that has them. In this way landowners transfer the value created by other tax payers and a community, to his own account without doing anything, except for owning land. With a land value tax a community taxes the landowner for these features that the landowner has not created. To the extent that a landowner puts in money and effort improving land, developing or building it, they are not taxed on the value brought about by their improvements – they keep the fruits of their labour – but they are not able to “reap where they have not sowed”. This has the added advantage that it prevents speculative hoarding of land. Studies have shown that land value taxes like this makes for more compact and efficient use of land. If land has a unimproved value and is NOT in use, because it is being held back for speculative purposes, then it is still charged site value tax. So the landowner is forced to put it to use to be able to pay the tax – either that or sell it. This prevents speculation and releases land too. Spatial compactness then improves ecological efficiency too, people have to travel less far and travel costs fall. Since speculative gains in land values are taxed away this prevents speculative bubbles forming in the land market, pumped up by bank credit creation – so a site value tax would capture socially created values for the community AND stabilise the finance sector too.

Money and banking system reform – so that the Croatian state can regulate demand to achieve full employment

This points to another necessary reform – the reform of the banking and sector. Croatia has its own currency, the Kuna, but its banks are owned by foreigners. There is currently talk of going into the Euro – which would mean that Croatia would lose the ability to devalue its currency, thus giving up an an important tool of economic policy and economic independence. Croatia should, instead, go the other way – moving towards a situation where it truly controls its own currency.. It cannot be said to truly control its own currency when most of its currency is lent into circulation by foreign banks. Current banking arrangements all over the world involve banks creating money when they lend it into circulation. When bank debtors repay their loans, from their deposits, then these deposits are extinguished and money goes out of circulation. The current system is crazy. It means that the money and credit is created in times of boom and of optimism (often when more money and credit is not needed, and is funding speculative bubbles). On the other hand, the banks are reluctant to lend and put money in circulation, when it is needed, during periods of recession, because of the general pessimism and lack of business lenders. Indeed, as bank loans are paid off, the money supply shrinks.

This is not the place for a description of the detail of a banking sector reform – however the key idea is to take from banks the power to create money through their credit creation process. The power of money creation should be in the hands of the community/state. Then if there is unemployment state money would be created to allow the state to spend more than it raises in taxes. This would NOT be inflationary if there are unemployed resources in the economy – it would bring resources into use rather than bidding up prices. Only if the economy is operating at full capacity, and prices were rising excessively, would money be taken out of circulation by the state taxing more and cutting its expenditure.

Degrowth policy pursued through the energy system and “cap and share”

But would not such a policy, focused on the full employment of resources, create a growth process that degrades the environment? The economist Jan Tinbergen argued that, in order to make effective economic policies, governments and communities need a separate policy instrument for each separate problem or issue that they are trying to deal with. A community development strategy would help re-localise the economy and develop ecological efficiency at local level; new approaches to management and coordination would democratise the local economy and society; a land value tax (or site value tax) would raise resources from owners of land and natural resources who are unjustly reaping the benefit from locations whose value they have not helped to create; money and banking system reform would give back to the government the power to generate full employment through expenditure policy. But another policy is needed to complete the package and drive the process of degrowth itself – drive it fast enough to decarbonise at an adequate rate, setting an example to the rest of the world how to decarbonise so that humanity does not create a runaway climate catastrophe.

This policy would be driven through energy and carbon policy. Ultimately the environmentally degrading growth process is created by burning fossil fuels. These fuels feed a host of petro-chemical based processes and provide energy to the production systems using powered devices – computers, motor cars, machine tools, televisions, heating and cooling equipment, ovens. All the statistics show that as growth of production occurs, so more fuels are burned. Thus more greenhouse gases are created in millions of places every day. How can this vast process be possibly brought under control and then quickly be brought to a halt? The answer is conceptually quite simple – ban the production and sale of any fossil fuel without a permit. Require fossil fuel suppliers to have permits for all the fuels that they sell into the economy. Limit the number of permits and reduce the number of permits year by year as quickly as possible. For example, almost all of Croatia’s fossil fuels are imported. So, in the absence of an international scheme, imports of any fuel would require permits. These permits could be based on the carbon content of the fuel when burned. The fossil fuel importers would then be required to buy the limited number of permits and the money that they pay for the permits would be divided up among every Croatian citizen equally. The distribution of the money from the sales of permits would help poor people pay the rising price of fuel and, indeed, people with a low carbon lifestyle might even come out on top. If the number of permits are reduced year by year by say 6% then Croatia would “degrow” – as its production system adapted, However, there would be other policy tools to prevent the degrowth leading to an economic collapse – because the state would have the tools to create full employment through banking system reform, the land value tax to release land resources and the other policies to help people cope too…

In conclusion – the ideas of outsiders are often flawed….

In conclusion, advice and ideas from outside a country must be given very tentatively. The ideas here are my way of thinking about development from a very different place and from different experience. So they are put forward here merely as my starting point – to get a discussion going and to put ideas into the process, rather than saying “this is the answer”. I will leave that kind of “know what’s best for you” approach to the International Monetary Fund and the EU….they seem rather attached to it.

Addendum : Monday 25th March.

Considering what has just happened to Cyprus it seems to be obvious to observe that the people of Croatia, who are committed to joining the European Union this year, would have to be collectively crazy to also continue with the project of joining the Eurozone. The bankruptcy of the Cypriot financial system not only lay in it being a place for Russian oligarchs to launder their money. It was rooted in the earlier write-down of Greek bonds by the IMF, EU and European Central bank – when many of these bonds were owned by Cypriot banks. It was known that this would cause problems for the inflated financial sector of Cyprus but Cyprus is so small that little attention was paid to its problems until they became too difficult to ignore. The result is now an extraordinarily brutal treatment at the hands of the powerful countries of eurozone. Croatia, another very small country, should take note!

Featured image: Dubrovnik, red roofs. Author: gosiakkk. Source:

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