Luxembourg relies largely on imports of capital and labour force (immigration and cross-border workers) to make its economy grow, which is fine as long as everybody benefits from this growth (by eventually having a job and higher revenues, for example) and as long as everybody seeks improvements in his or her material well-being.
But different theoretical developments have shown significant doubts about this last fact, at least for our highly developed societies. The Easterlin paradox is probably the most known fact stating that, from a certain level onwards, the subjective wellbeing does not increase at the same rate as improvements in GDP per capita.
More recent research has given evidence that relative income--hence inequality--matters at least as much as absolute levels of income to explain individual levels of subjective wellbeing. In the recent past the financial crisis and the publication of books by authors like Thomas Piketty or Joseph Stiglitz have increased the awareness of the problem.
So, if we accept the fact that inequality matters for subjective wellbeing, what about economic growth? Does economic growth reduce or increase the risks of inequality (and of what kind of inequality)? Piketty mentions right at the beginning of his book that there are no natural mechanisms in an economy to reduce inequalities, so economic growth will not be a guarantee to reduce them.
So, what about Luxembourg? For the time being income inequality is still quite limited; recent Gini coefficients give values of 0.3 even if the coefficient has slightly increased during the last years (a value of 0 indicates perfect equality whereas a coefficient of 1 indicates a most unequal society).
But the “threats” and “cracks” mentioned at the beginning of this “carte blanche” do not refer to income but to unemployment and housing prices (even if these different variables are finally linked), so we should consider the general socio-economic consequences of economic growth in Luxembourg.
If we keep our economic model, on the one hand growth will be generated by a continuous inflow of workers boosting our economy and enriching our local culture, on the other hand supplementary negative externalities will be created that have mainly been neglected in the official presentations until now.
We will have to cope with further problems of congestion and pollution, with supplementary pressures on housing prices, with difficulties to manage our educational system to integrate kids coming from more than a hundred different countries, with difficulties to manage our political system creating more and more socio economic inequalities.
So, isn’t it time to think about a different economic model?
Maybe these arguments sound a bit pessimistic, because “in the long run we are all dead”, but what about our children and grandchildren?
Carlo Klein teaches economics and social sciences at the Athénée de Luxembourg and international economics at Miami University in Differdange.