Is Economic Growth Sustainable?

Is growth sustainable? There is probably not a more important or timely economic question. As the chapters in this volume were completed, an era of economic growth was coming to an end. It ended not because of reasons related to the normal sustainability issues of environmental degradation or climate change, but because of poor assessment of risks and massive indebtedness in the United States. Nevertheless, its ending showed that even without concerns relating to the environment, growth may not be sustainable. But the focus of this book is on longer-term issues, on the sustainability of growing living standards over the long term, decades or even centuries. The focus is on problems that could stop our economies even if we manage our macroeconomic policies perfectly and avoid the errors that have traditionally brought periods of expansion to a halt.

China’s rapid economic growth, accompanied by industrialization and rapid urbanization, has come at a high environmental price: in 2003 over 50 percent of China’s urban population was exposed to annual average PM₁₀ levels in excess of 100µg/m³—twice the U.S. standard. The problem of particulate air pollution in China is partly the result of large reserves of high-sulfur coal. China has the world’s third largest coal reserves, and over 70 percent of the energy consumed in China is from coal. Approximately half of the coal consumed is burned by industry, often in small boilers,¹ which makes the problem of pollution control difficult. It is also the case that meteorological factors predispose cities in northern China to poor air quality (Pandey 2006).

For most of human history, agriculture accounted for the dominant share of GDP and employed most labor. Johnson (1997) estimates that in 1800 about 75–80 percent of the labor force in developed nations were engaged in farming, and only 11 percent of the population lived in urban settings (cities with more than 5000 inhabitants). For some of the world, the industrial revolution changed everything. During the 19th century, labor productivity in agriculture (and everything else) increased sharply. By 1980 a unit of labor produced 50–100 times as much wheat or corn as compared to 1800. Productivity growth initially came from machinery replacing human and animal work effort. Since 1930, productivity gains came mostly from development of high-yielding crop species and adoption of intensive farming practices, including use of commercial fertilizers and pesticides. Crop yields (output per unit of land area) increased roughly threefold in the second half of the 19th century, both in the developed and in the developing world. This “Green Revolution” has been attributed more to the efforts of a single man, Norman Borlaug, than to the entrepreneurial efforts of all the world’s farmers.

Deriving conceptually sound and useful indicators of sustainable development has been a challenge, not least because sustainability is inherently a concern about the future. Yet the question of indicators is key: without some means to quantify progress towards sustainability, all of the policy commitments by governments and institutions to achieving sustainable development risk becoming empty promises.

Policy analysts and policy makers are keenly interested in whether the performance of national economies is consistent with some notion of “sustainability.” This reflects growing concerns about environmental quality and about the depletion of oil reserves and other natural resource stocks. Economists and natural scientists have offered several notions of sustainability. An especially important notion—and the one on which this chapter focuses—is defined with reference to human wellbeing. This notion of sustainability is achieved if the current generation leaves the next one with the capacity to enjoy the same or higher quality of life. Standard measures in the national income accounts—such as changes in per-capita GDP—may offer hints of whether a nation meets this sustainability criterion, but as is well known these measures do not fully capture many important contributors to well-being, such as the changes in the stocks of natural capital or in environmental quality.

This chapter addresses a difficult, important, and long-standing problem in national income accounting: How do we capture the welfare contributions of nonmarket, public environmental goods?¹ As I argue here, the key to this endeavor is the construction of a welfare-significant ecological quantity index (WSEQI). Quantity indexes and their price index counterparts are the core of any national income or product account (NIPA).

Garrett Hardin’s (1968) “tragedy of the commons” is one of the most cited articles in environment science and is assigned repeatedly to undergraduate students in Environmental Science curricula. Whenever scholars and policy discuss the problems of overuse and degradation of natural resources—whether they be fisheries, forests, irrigation systems, or the atmosphere—Hardin’s article is apt to be relied upon heavily. Why has this almost metaphoric article captured so much attention? First of all, Hardin presents an extraordinarily clear and vivid picture of a pasture “open to all.” Second, his assumptions about the motivation of resource harvesters are consistent with the assumptions about market participants that have proved powerful in deriving propositions regarding highly competitive markets. Viewing resource users as trapped in a tragedy of their own making is consistent with many textbooks on resource economics and the predictions derived from noncooperative game theory for finitely repeated dilemmas (E. Ostrom, Gardner, and Walker 1994). External authorities are presumably needed to impose rules and regulations on local users since they will not do this themselves. The “scientific management of natural resources” that is frequently taught to future regulators of natural resources presents fisheries, forests, and water resources as relatively homogeneous units that are closely interrelated across a vast domain.

History is full of examples of how globalization has affected environmental outcomes. Human migration has profoundly affected the natural environment. Much early trade was commodity based— trade in fish, agriculture, timber, and other raw materials all caused exporting countries to increase their exploitation of the natural environment beyond the level that would have occurred to satisfy local consumption demand. Nevertheless, it is only during the past 20 years that the interaction between trade and the environment has become a subject of sometimes heated public policy debate. This has been motivated by a variety of forces that have recently converged. A growing concern about the seriousness of environmental problems has prompted environmentalists to look at the role of globalization in contributing to pressure on the environment. An increase in the reliance on rules-based institutions to support and manage international trade and investment has increased the scope for conflicts between what used to be thought of as domestic policy (such as environmental regulations) and international trade and investment policy. And the rapid growth of international trade and investment flows has increased concerns about competitiveness and market access, both of which are sometimes seen to conflict with environmental policy.

Corporations are often, and quite justifiably, accused of harming the environment. Many of their production processes and products degrade the environment. Yet a certain number of corporations, probably an increasing number, go considerably beyond what is required of them legally in minimizing their environmental impact. They meet legal limits on environmental impacts and then go beyond these. This has been called “overcompliance,”¹ a descriptive, if not elegant, phrase designating going well beyond what is required by laws and regulations in force. Very visible examples are British Petroleum (BP), Starbucks, Heinz, and the banks that have adopted the Equator Principles. In 1997, before the Kyoto Protocol was signed, John Browne, then the CEO of BP, publicly recognized the reality of climate change and the contribution of fossil fuels, and pledged to reduce BP’s emissions of greenhouse gases below 1990 levels by 2005. BP met its targets, and clearly deployed considerable managerial resources in doing so. Interestingly, BP claims to have made money from this overcompliance, to the tune of $630 million, mainly through capturing and selling rather than flaring the gases associated with oil fields.² Starbucks operates in a very different business, and has also found overcompliance to be worthwhile.