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The year 2004 was a milestone for the world economy, which grew by 5.1 percent—the fastest in nearly three decades. Among the leaders were China, expanding at 9.5 percent, Argentina at 9 percent, and India at 7.3 percent. World output of goods and services increased from $7 trillion in 1950 to $56 trillion in 2004, while annual income per person grew from $2,835 to $8,753 during this time. (See data.)

The United States, which accounts for 21 percent of gross world product (GWP)—the aggregated value of all final goods and services produced worldwide—continues to stimulate global economic expansion. As a result of productivity growth, reduced interest rates, a mounting fiscal deficit, and higher corporate investment, the United States increased output by 4.4 percent in 2004.

In contrast, output in the European Union expanded at the much slower rate of 2.5 percent, attributable to weak domestic demand and a heavy dependence on external demand. In fact, output in Germany, Italy, and the Netherlands grew by just around 1.5 percent in 2004. The gross domestic product (GDP) in the United Kingdom grew by 3.1 percent, spurred by higher consumer spending.

In Asia, Japan’s economy grew by 2.6 percent as a result of decreased consumption, a decline in investment, and weaker exports. The newly industrialized Asian economies—Hong Kong, Singapore, Taiwan, and South Korea—grew by a robust 5.5 percent, up from only 3.1 percent in 2003. South Asia as a whole, with 1.4 billion people, expanded by 7.1 percent in 2004. Economic growth in India continued strong, slowing slightly from 7.5 percent in 2003 to 7.3 percent in 2004. Strong investment and buoyant industrial activity continued to boost the Indian economy during 2004.

With booming economic activity in 2004, China sustained the remarkable 9.5 percent a year growth that it has averaged since 1980. The industrial sector remains the biggest contributor to Chinese economic expansion despite substantial government initiatives to cool down the economy in an effort to prevent a hard landing (characterized by a significant increase in inflation and a sharp slowdown in growth). An increase of 11 percent in annual income per capita (now at the equivalent of $5,642), growth in consumer spending of 13.3 percent, and a savings rate of 40 percent helped drive China’s extraordinary 2004 expansion.

Russia’s economy expanded by 7.1 percent in 2004, while the Ukraine’s grew by a record 12.1 percent due to growing demand from Russia and China and a favorable exchange rate. Rising global demand for oil and metals, as well as strong domestic demand, has accelerated growth in this region.

Surging global demand led to an increase of 27 percent in world commodity prices in 2004. This had a positive impact on commodity-exporting countries like Brazil and Mexico whose economies expanded by 5.2 and 4.4 percent respectively. Output in Latin America as a whole increased by 5.7 percent in 2004. Venezuela’s economy alone grew at an unprecedented 17.3 percent in 2004, a strong recovery after an economic contraction of 7.7 percent in 2003 partly due to a two-month oil industry shutdown. Increase in oil prices, growth in consumer spending, and improved investment triggered Venezuela’s economic expansion.

Although economic recovery has become broad-based, there are still concerns about high dependence on oil markets. This was the case in the Middle East where, despite the fragile security situation, higher oil prices boosted the regional economy by 5.5 percent in 2004. Output in sub-Saharan Africa grew by 5.1 percent, the highest in almost a decade. In the countries where oil production increased in 2004—Equatorial Guinea, Chad, and Angola—economic growth was particularly strong. Output in Ethiopia grew by 11.6 percent as a result of agricultural recovery after the country received relief from a prolonged drought. Conversely, poor governance and conflicts triggered economic contractions in Zimbabwe and Côte d‘Ivoire of 4.8 and 0.9 respectively.

With commodity and oil prices on the rise, global economic expansion has been weakening in recent months. According to the International Monetary Fund, an increase in oil prices of $5 a barrel could reduce GWP growth by up to 0.3 percent within one to two years, with prolonged price increases posing a risk to economic stability. Average oil prices increased nearly $10 a barrel in 2004 and reached $50 a barrel for the first time in late September. By early April 2005, the new record was $57.60 a barrel.

Despite rapid economic growth, income disparities are increasing across regions and within countries. As world output doubled during the past two decades, income inequality worsened within 33 countries. With one in every five people in the world surviving on less than $1 a day, poverty continues to afflict significant parts of the world’s population.

Widening income gaps have a negative impact on development. They indicate uneven opportunities, with a few privileged people securing the vast majority of the benefits of economic growth. Worldwide, the richest 5 percent of the world’s people earn 114 times as much income as the poorest 5 percent. Within countries, disparities have isolated entire areas and groups.

In China, large economic and social gaps exist between the mostly urban coastal areas, and inland regions, with coastal areas growing five times as fast. In Mexico, the poorest areas are in the mainly indigenous and rural south, while the north has from benefited strong investment and economic integration with the United States and Canada.

Furthermore, the current economic model—assessed by GDP—ignores the natural systems that support it. GDP shows only the total economic output without fully reflecting the costs of environmental input. As a counter to this, a number of sustainability and development indicators have been created. The World Economic Forum publishes the Environmental Sustainability Index (ESI), which benchmarks the ability of nations to protect the environment. The ESI demonstrates that high incomes contribute to the potential for strong environmental stewardship but do not guarantee it. The United States, for example, ranks first in GDP but forty-fifth in ESI rankings.

Other indicators of environmental sustainability include the Genuine Progress Indicator, which uses the same data as the GDP but takes into account certain costs to the economy, such as pollution and crime, and other unaccounted benefits, including volunteerism and housework. The Living Planet Index is an indicator of the state of the world’s biodiversity, and the Ecological Footprint documents humanity’s consumption of renewable natural resources.

Economic growth has come at such a heavy cost to the environment that officials can no longer afford to ignore the consequences. With humanity already exceeding the earth’s regenerative capacity by more than 21 percent, the world’s ecological assets—which all economies depend on to grow—are quickly being exhausted.

Rapidly increasing carbon emissions, deforestation, collapsing fisheries, falling water tables, and soil erosion are just a few of the trends teaching us that our current economic model is no longer viable. Moreover, persistent inequality may limit the benefits of economic growth and restrict development as political disputes and social unrest rise. Relying solely on the value of economic output to measure progress while ignoring environmental costs will further expand ecological deficits, eventually undermining the global economy.

Copyright © 2005 Earth Policy Institute