Over the years, advanced and developing countries have experimented,sometimes deliberately and frequently inadvertently,with a variety of approaches to growth. Unfortunately, many of these strategieshave turned out to have built-in limitationsor decelerators – what one might callelements of unsustainability. And avoiding serious damage and difficultrecoveries requires us to get a lot better at recognizing these self-limitinggrowth patterns early on.

Here are some of the items in a growing library of decelerating growthmodels.

In developing countries, import substitutionas a way to jump-start economicdiversification can work for a while; but, over time, as productivity growthlags and comparative advantage is over-ridden,growth grinds to a halt.

Small, open economies are naturally somewhat specialized, which leaves them vulnerable to shocks and volatility.But, in terms of growth and living standards, the cost of economicdiversification, when implemented by protecting domestic industries fromforeign competition, eventually outweighs the benefits. It is better to allowspecialization, and build effective social safety nets and support systems toprotect people and families during economic transitions. Such “structuralflexibility” is better adapted to enabling the broad changes that rapidlyevolving technological and global economic forces require.

Mismanagement of natural-resource wealth underpins anespecially potent self-limiting pattern of growth and development. If invested in infrastructure, education, and externalfinancial assets, natural-resource revenues can accelerate growth. But, toooften, such revenues distort economic incentives, which come to favorrent-seeking and interfere with the diversification that is essential forgrowth.

More recently, many advanced countries have discovered a “new” set ofgrowth models with built-in structural limitations: excessive private or publicconsumption, or both, usually accompanied and enabled by rising debt andinflated asset prices, and a corresponding decline in investment. This approachappears to work until domestic aggregate demand can no longer sustain growthand employment, at which point it ends in either gradual stagnation or a violent financial and economiccrisis. (In fact, many developing countries have learned this the hard way, but the lessons seem not to have crossed over to advanced countries.)

But the opposite of the excessive-consumption model – excessive relianceon investment to generate aggregate demand – is also a self-limiting growthpattern. When the private and social returns of investment diminish too much,growth cannot be sustained indefinitely, even though rising investment ratescan sustain aggregate demand for a while. Altering this growth pattern is asignificant part of the challenge that China now faces.

Rising inequality in either opportunity or outcomes (and often both) also poses threats to the sustainability of growthpatterns. While people in a wide range of countries accept some degree ofmarket-determined income variation, based on differentialtalents and personal preferences, there are limits. When they are breached, the typical result is a sense ofunfairness, followed by resistance and, ultimately, political choices thataddress the inequality, though sometimes in counter-productive, growth-impeding ways.

Perhaps the largest long-run sustainability issueconcerns the adequacy of the global economy’s natural-resource base: output will more than triple over the coming two orthree decades, as high-growth developing economies’ four billion people converge toward advanced-country income levels andconsumption patterns. Existing economic-development strategies will requiresignificant adaption to accommodate thiskind of growth.

Some adaptation will occur naturally,as rising energy and other commodity prices generate incentives to economize or seek alternatives. But the un-priced environmental externalities – globalwarming and water depletion, for example – will require serious attention, not myopic, reactive mindsets and approaches.  

All of these self-limiting growth patterns tend to have three things incommon. First, in one or several dimensions, some part of the economy’s base oftangible, intangible, and natural-resource assets is being run down. I would includesocial cohesion as part of the asset base: it is the one that isdepreciated by excessive inequality.

Measurement issues play an important role here. It is easier to run down something that is partly invisiblebecause it is not regularly or effectively measured. Expanded measurement ofthe dimensions of economic, social, and environmental performance is necessaryto broaden awareness of sustainabilityissues.  

Second, unidentified self-limitinggrowth patterns produce very bad results. Expectations come to exceed reality,and resetting the system to a sustainable growth pattern is difficult. Afterall, past investment shortfalls have to bemade up and future-oriented investments undertaken simultaneously – a doubleburden that must be borne by the currentgeneration. An inability to resolve the distributional and fairness problem canproduce gridlock, paralysis, and prolongedstagnation.

Finally, many of these flawed growth patterns involvefiscal distress. Contrary to the prevailingwisdom nowadays, some degree of Keynesian demand management in the transitionto a more sustainable growth pattern is not in conflict with restoring fiscalbalance over a sensible time period. On the contrary, applied both individuallyand together, fiscal stimulus and consolidation are necessary parts of theadjustment process.

But they are not sufficient. The crucial missing pieces are a shift in thestructure of accessible aggregate demand and restorationof those parts of the economy’s asset base that have been run down, implyingthe need for structural change and investment.