SUTAINABILITY AND

ECONOMIC DEVELOPMENT
Concept of Economic Growth
 The productive process

Labour, Productive Good and

reproducible process services
capital, natural used in the
resources final
consumption
 Reproducible capital
final consumption of goods and services
any economy can achieve will determine
its living standards
cannot expect to channel all the resources
in the productive process into final
consumption of goods and services
be diverted back to replace or add to the
economy's productive capacity
 That part of the output of the economy
which is not used directly for final
consumption but used to increase our
economy's productive capacity is called
the production of reproducible capital
all products produced not for immediate
consumption, but to increase our
production of other goods and services
includes plant and equipment, buildings
and infrastructure
 Economic growth
largely determined by the level of new
reproducible capital, or "investment"
level of new reproducible capital generated
rate of increase in productive capacity of an economy
However, existing stock of reproducible capital
would get smaller depreciation
reducing productive capacity
Decline in living standard
 Capital consumption-
depreciation
The amount set aside to replace worn out
stocks of reproducible capital each year
In 1993, the UK set aside 70 billion (13%)
of its total output (GNP) of 547 billion for
depreciation
Setting this amount aside was only
sufficient to keep the existing stock of
reproducible capital intact
 "Gross Domestic Fixed Capital
Formation" (GDFCF)
to achieve an increase in productive
capacity and living standards, we would
need to add to our stock of reproducible
capital
setting aside even more of our output and
investing in new reproducible capital
amounts we set aside each year for new
capital stock - GDFCF
 In 1993, the UK set aside 92 billion in
"GDFCF" (17% of GNP)
13% of this was for depreciation to
replace existing capital stock
4% represented net capital investment
In other words, in 1993 the UK economy
added 4% to its productive capacity
economic growth
 Natural resources and
economic growth
underpins the policies followed by most of the
world's governments, which try to get re-elected
by providing their electorates with increasing
standards of living through economic growth
two major limitations
failure to appreciate a major theoretical problem
failure to tackle a practical problem
Theoretical limitations of models
of economic growth
take it for granted that the inputs of
resources required to churn out ever-
increasing levels of output and higher
living standards are always going to be
available on demand
simply ignores the constraint imposed by
the environment on resource inputs
 The availability of resource
inputs
Operates on three implicit assumptions
that some of the inputs necessary for economic
growth will be growing naturally over time, such
as labour inputs
other necessary inputs are capable of being
accumulated indefinitely, such as stocks of
reproducible capital
all that is required for productive capacity in
economies to expand indefinitely is the
existence of continued technological progress
 Constraints
Operate in closed systems
within a closed system matter and energy can
neither be created nor destroyed
the use of matter and energy will ultimately
lead to increased entropy
Energy and matter are only of economic use
when they are available in highly structured
forms, which involve low entropy
As we burn fossil fuels, for example, we do not
destroy matter. Instead we increase its entropy,
rendering the resulting residues economically
useless.
 Implications
any model of economic growth reliant on
the conversion of natural resources within
a closed system - the earth - has to face
up to the prospect of increasing levels of
entropy
higher levels of economic activity cause
the entropy of our planet's environment to
increase
mass and energy available to fuel economic
growth will decrease towards zero
 Doomsday scenario ?
Not really
for energy supplies the earth is not a closed
system
principally in the form of solar and gravitational
energy
some positive level of continued resource use
should always be possible, as long as we can
find solar or gravitational energy substitutes for
fossil fuel energy sources
 Debate on Sustainability and
Economic growth
ability to manage our environment and its
resources in such a manner as to find
substitutes for energy forms liable to
entropy
physical principles do not prove that we
are unable to continue to achieve some
positive level of economic activity
 Some argued that sustained economic
growth is not feasible because at current
rates of material and energy usage we are
already exceeding the potential available
from solar and gravitational substitutes
Some disputed this, pointing out that such
arguments assume fixed coefficients between
inputs of mass and energy and outputs of
goods and services
more efficient in our use of materials and energy
supplies
no reason to suppose such improvements will not
continue
Practical limitations of models of
economic growth
the way in which we measure economic growth
is itself inaccurate
largely ignore the use we make of environmental
resources
misleading impression of the real increase in our
economy's productive capacity
depreciation of buildings and machinery in measuring
annual national output, our national accounts make
not allowance for using up our stocks of oil
 We count the output of oil as extra output
from our economy's productive capacity
should be taking into account that we are instead
using up part of our productive capacity in the
form of extracting a non-renewable finite stock of
an environmental resource
then part of what we previously regarded as
additions to our productive capacity and
enhanced economic growth would simply be
needed to retain our existing productive
capacity
lower estimates of economic growth.
 Living standard and economic
growth
make no allowance for the damage to the
environment caused by the wastes and residues
put back into the environment as one of the by-
products of our production processes
cleaning up pollution and the damage to the
environment, such as companies involved in dealing
with oil spills, are measured as having added to the
productive capacity of the economy.
while the damage they are trying to rectify, and which
should be subtracted from our productive capacity, is
simply ignored
GROSS DOMESTIC PRODUCT

Is it possible to have strong

economy and still have a healthy
environment?
 Economic success
GDP is widely use to measure economic well
being
Measure market values for final goods and
services that have been produced domestically
in a year
Final good and services included those that are
consumed during a year as well as new
investment and inventory that are not used but
will be used in future years
 GDP does not include the market value
of intermediate goods and services that
were used to produce final goods and
services during the same year
 GDP measurement
GDP is a measure of a nation's income
Income is the flow of final goods and
services (Q) produced using labor (L),
materials (M), and capital (K) during a year
This flow is measured in monetary units,
but it is the goods and services, not the
money, that determines human well-being
 GDP is measured in both "current" dollars
and "real" dollars
Suppose that the only good produced by the
economy is bread, and that 10 loaves are
produced this year and 10 loaves were
produced last year
Now suppose that workers were paid 20
dollar bills this year and 10 dollar bills last
year. Assuming that we spend all the dollars
on bread, the price of bread would be $2 per
loaf this year and $1 per loaf last year
 However, the ratio of the price of bread
to the total money supply would be the
same in both years (i.e., 1:1)
In "current" dollars, GDP would be $20
this year and $10 last year, but in "real"
dollars, GDP would be the same in both
years
"Real" dollars are comparable across
years, but current dollars are not
 Although GDP is the most widely used
measure of economic well-being, it does
not measure all aspects of economic
well-being
Consequently, if GDP were the only
measure we used, we would overstate
economic well-being in some ways and
understate it in other ways
 GDP overstate economy
Does not account for depreciation of
capital stock (K)
Production of final goods and services
depreciates (wears out) some
manufactured (Km), natural (Kn), human
(Kh), and social (Ks) capital used to
produce those goods and services
 Some of the consumption of final goods
and services included in GDP comes at
the expense of future output
That opportunity cost decreases
economic well-being
Suppose you had a million dollars. If
you put it in the bank, you could earn
interest on this capital
The interest earned is income
 However, if you decide to spend some of the
million dollars and bank the remainder, the
interest you will earn in the future will be less
The opportunity cost of spending some of
capital is a decrease in future income
If an economy consumes some of it's capital
today, future income will decrease unless it is
replaced with new capital investment
GDP includes investment in manufactured
capital, but it does not include depreciation
 Net Domestic Product (NDP)
NDP is GDP minus depreciation of
manufactured capital (Km)
NDP is considered a more accurate
measure of a country's income than GDP
because it does not count consumption
that comes at the expense of future output
 However, neither NDP or GDP account
for depreciation of natural capital (Kn).
A country could cut down its forests,
deplete its fisheries, or erode its soil, and
the current year's NDP and GDP would
increase because of the increased
amount of goods produced from these
capital assets
Therefore overstate economic well being
since environmental damage is often
counted as an economic gain
 GDP and NDP understate
economic well-being
Excluding new investments in natural capital
(Kn)
If a wetland is restored, the future flow of
environmental services will increase
The wetland restoration and reforestation are
examples of investments in natural capital,
However, only investment in manufactured
capital (Km) is counted in measuring GDP
 Weak sustainability
Q = (Km, Kh, Kn, Ks)
Q is the maximum flow of goods and
services that can be obtained from the
current stock of manufactured capital
(Km), natural capital (Kn), human capital
(Kh), and social capital (Ks)
The ability to sustain the value of Q per
capita
 Strong sustainability
Distinguishes between critical and
noncritical natural capital
Some Kn would have to be maintained as
well as the per capita value of Q
Okay to use up crude oil since it is not
critical to maintaining planetary life, but
species extinction or depletion of the
ozone layer would not be allowed
 Stronger sustainability
All stocks of Kn to be maintained in
addition to sustaining the per capita value
of Q
Depends on what value of Q or stock of
Kn is chosen as the level to be sustained
Challenges for strong sustainability
Maintaining the standard of living in
developed countries requires between 45
to 85 metric tons of materials per person
each year
One fifth live in the richest countries and
account for 86% of world GDP
The bottom fifth accounts for 1% of world
GDP
 Conclusions on sustainability
Three alternative perspectives
Pessimistic about the issue
Optimistic
One which reflects perhaps the general
consensus amongst those concerned with
environmental resource management
 Pessimistic scenario
Acceptance of the finite nature of
environmental resources
the use of non-renewable stocks, the growing
entropy within our ecosystems, and the limits
to the environment's ability to cope with
residuals
Given this appreciation of the situation,
economic growth is taken to be ultimately
unsustainable
 There is an upper limit on output and
productive capacity under this scenario
The level of material throughput of the
system cannot, in the long term, exceed
this quantity of material recycling
 Optimistic scenario
Acknowledges the fact of rising rates of
depletion of non-renewable resources,
increased harvesting of renewable but
exhaustible resources, and increasing flows of
environmental residuals
Mechanisms already exist to incorporate
appropriate feedbacks into our management of
environmental resources, which will allow us to
cope with and adapt to such pressures
 Rising prices for non-renewable
resources and the increasing costs of
disposal of residuals will force
producers to employ more efficient
technology
The essence of this reasoning is based
on a belief in the existence of powerful
price-induced substitution effects
 Consensus
While accepting the presence of
adjustment mechanisms identified by the
optimistic scenario, questions whether
these are sufficient to avoid all the
consequences of the pessimistic scenario
 Limitations on our ability
The inability of markets to generate the
appropriate price signals for all resource uses,
partly because of the absence of property rights
The existence of irreversibility and uncertainty in
the use of environmental resources
The limits to the technological possibilities of
substitution between environmental and non-
environmental assets in maintaining our capital
stock of productive assets