Environment and Development.

 

Why are these linked?

 

Environment as a source of the raw material for development (agriculture accounts for over 50% of employment)

 

Environment impacted by the process of growth (think of air pollution and urbanization).

 

 

Until the 1980’s, the debate tended to pit “conservationists” against “developmentalists” in development dialog. 

 

“Limits to Growth”, Meadows et al.  1972.

 

Response was growth theory incorporating natural resource stocks as a form of capital.

 

The Bruntland Commission Report of 1987, in what is probably the most commonly cited definition of sustainable development, defines the concept as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”.

 

Pezzy and Toman (2002) provide a nice summary of the economic literature on sustainable development. 

 

Pezzy and Toman report that a “key finding from Dasgupta and Heal’s 1974 analysis was that the PV-optimal outcome is grim for far-distant generations.” (p.6)

 

Estimate by Costanza et al. (1997) of the annual flow of goods and services from the environment.  33 trillion.  In contrast, annual GDP in 1997 was around 20 trillion.

 

However, with discounting, we see there may be a problem.

 

 

5% discount

10% discount

0

33 trillion

33 trillion

1

31390571008524

29859634795187

10

20015511770517

12140021558658

100

222352250970

1498197682

200

1498197682

68018

300

10094777

3

400

68018

0

500

458

0

600

0

0

 

Stiglitz, Solow also weighed in.  Later, OLG models.  Issue goes beyond equity to involve issues of fairness to future generations. 

 

A key issue identified by Pezzy and Toman is the distinction between “weak sustainability” and “strong sustainability” in the literature. 

 

The difference revolves around the question of whether substitution between human made capital and natural resources are limited (if so, then the focus is on strong sustainability) or unlimited (the focus is weak sustainability). 

 

That is, is it acceptable to return to future generations manufactured capital of a given value instead of a commensurate level of natural capital?

 

 In a related fashion, to what extent are natural and manufactured capital substitutes and to what extent are they complements? 

 

 

Environmental accounting  / green accounting.

 

Is it sensible that if you chop down the forest and sell the trees there is only a positive impact on GNP?  That is, you sell it today, you can’t sell it tomorrow, so you take away tomorrow’s GNP to increase today’s.  Plus maybe you chop down the trees and the soil runs off, also losing future potential GNP. 

 

Or if you build a factory, and produce things that contribute to GNP, should we not also reduce GNP by the value of the damage to the ecosystem if there is damage?

 

Developing "greener" national accounts places environmental problems into a framework that key economic ministries in any government will understand.

 

The prominent indicators linking the macro-economy and the environment are measures of:

  • "green" Net National Product (green NNP) -- The NNP measures the annual flow of economic production, based on market transactions, minus the value of depreciated capital (around 10% or so).  It thereby leaves out the impact of economic activity on a very important national asset - natural capital. Green NNP accounts for degradation and depletion of natural capital.

NNP*=GNP-depreciation of manufactured capital assets – depreciation of environmental capital. 

  • adjusted net saving (formerly called genuine saving) -- Building on the same concept as the NNP, adjusted net saving measure the true rate of savings in an economy after taking into account depletion of natural resources and damage caused by pollution. Adjusted net saving is the true saving rate in a country after accounting for investments in human capital, depreciation of produced assets, and the depletion and degradation of the environment.

 

 

Savings rate

Physical  capital dep rate

Natural capital dep rate

Net savings

Sustainable

 

 

 

 

Brazil

20

7

10

+3

US

18

12

3

+3

Costa Rica

26

3

8

+15

 

 

 

 

 

Marginal

 

 

 

 

Mexico

24

12

12

0

 

 

 

 

 

Unsustainable

 

 

 

 

Ethiopia

3

1

9

-7

Malawi

8

7

4

-3

Pearce and Atkinson, 1995

 

How do you measure the value of natural capital, and how do you measure its change? 

 

  • wealth accounting -- Another type of green accounting, this is the Bank's analysis of estimates of the wealth of nations, exploring the composition of wealth at a point in time (largely for the year 1994).

1994 estimates for some areas.

 

 

Human Capital Wealth

Manufactured Capital Wealth

Natural Capital Wealth

High Income

67%

16%

17%

Sub Saharan Africa

31%

17%

52%

India and China

73%

18%

9%

 

 

World Bank, 2006:  Where is the Wealth of Nations?

Total Wealth, 2000 ($ per capita and percentage shares)

Income group

Natural capital

Produced capital + urban land

Intangible capital

Total wealth

Natural share

Produced share

Intangible capital share

Low-income countries

1,925

1,174

4,434

7,532

26%

16%

59%

Middle-income countries

3,496

5,347

18,773

27,616

13%

19%

68%

High-income OECD countries

9,531

76,193

353,339

439,063

2%

17%

80%

World

4,011

16,850

74,998

95,860

4%

18%

78%

Notes: All dollars at nominal exchange rates. Oil states are excluded. (OECD) Organisation for Economic Co-operation and Development

Source: Where is the Wealth of Nations, World Bank 2006

Table 2.1 Total Wealth: Top-10 Countries, 2000

Country (descending order of per capita wealth)

Wealth per capita ($)

Natural capital (%)

Produced capital (%)

Intangible capital (%)

Switzerland

648,241

1

15

84

Denmark

575,138

2

14

84

Sweden

513,424

2

11

87

United States

512,612

3

16

82

Germany

496,447

1

14

85

Japan

493,241

0

30

69

Austria

493,080

1

15

84

Norway

473,708

12

25

63

France

468,024

1

12

86

Belgium-Luxembourg

451,714

1

13