Economic Growth And Environmental Sustainability Economics Essay

‘Sustainable development’ = ‘development’ + ‘sustainability’. Sustainability means the capacity for continuing the process of development in “human ways of life” more or less indefinitely into the future. The human ways of life is a combination of values, objectives, institutions and activities, with social, ethical, economic and environmental dimensions. Therefore sustainability has also four important dimensions such as social, ethical, economic and environmental. Questions arise in this context that, for the economy, can today’s level of economic growth be sustained? For the environment, can its contribution to the economy and human welfare be sustained? For society, can social cohesion and social institutions be sustained? And ethically, does human being highly value other human being and other life forms, now and in future?

Social sustainability refers to a society’s ability to maintain itself, as well as, the necessary means of wealth creation to reproduce in itself a shared sense of social purpose to foster social integration and cohesion (Ekins 2000). However, it is observed that during this arena of market economy, which induces consumerism in the name of human welfare, a sense of social connectedness of community is being deteriorated. It has also undermined the symbiotic relationship between man and nature.

Economic sustainability

Economic sustainability is defined as a condition of non-declining economic welfare projected into the future (Pezzey 1992). It is to be noted here that economic welfare is different from economic income (Ayres et al 1996). Economic income is commonly measured as Gross National Product (GNP), which includes environmental costs (e.g. the depletion of natural capital) and excludes some benefits (e.g. unpaid household labour). Economic welfare derives not only from income but also from the environment, which performs various functions, some of which contribute to production and hence income, others contribute to welfare directly such as assimilation and recycling of wastes, maintaining eco-balance and regulating climates (Ehrlich and Mooney 1983; Pearce and Turner 1990; De Groot 1992; Daily 1997). Economic sustainability, therefore, focuses on the maintenance of capital which generates economic welfare. Here, question that arises is that whether it is the total capital stock that must be maintained with substitution among them, or only the natural capital, some of which are non-substitutable due to their unique contributions to economic welfare as mentioned above. In this regard, Turner (1993) identifies four types of sustainability based on the extent of substitution ranging from the very weak (Hartwick’s Rule [1] ), which assumes complete substitutability, to the very strong, which assumes no substitutability. Even if it is an empirical matter, still, some natural capital must be maintained at minimum level for their unique contribution to economic welfare, and it claims for environmental sustainability. Therefore, it is remarked that economic activities are sustainable only if the life-support ecosystems on which they depend are resilient (Arrow et al 1996).

Environmental sustainability

Before defining environmental sustainability it is worthwhile to bring up the significance of environment for living being in general and human life in particular. The following are the three broad and important functions that the environmental resources perform at their permissible range [2] (Pearce and Turner 1990): (i) the provision of resources for production and consumption in terms of food, fodder, fuels, minerals, timber, non-timber forest produces and water; (ii) the absorption of waste from both production process and disposal of consumption goods; and (iii) environmental services including ‘survival services’ such as those producing climate and ecosystem stability, protecting from ultraviolet radiation by ozone layer, and ‘amenity services’ such as the beauty of wilderness and other natural areas. The first two functions can be substituted by man-made capital to some extent, depending on technology and production process; but ultimately, there is a limit to growth (as discussed earlier). The third function, which generates welfare directly and is quite inevitable for maintenance of human ways of life, cannot be substituted by man-made/manufactured capital. At this juncture, it can be said that, if current development is unsustainable, it is because it is depleting some critical, non-substitutable components of the capital base on which it depends. Ekins (2000) defines critical natural capital as “natural capital which is responsible for important environmental functions and which cannot be substituted in the provision of these functions by manufactured capital”.

In this context, the environmental sustainability of human ways of life refers to the sustainability of the environment to sustain those ways of life. The environmental sustainability of economic activity refers to the continuing ability of the environment to provide the necessary inputs to the economy to enable it to maintain economic welfare (Ekins 2000). Overall, the term environmental sustainability refers to the continuity of the environmental carrying capacity more or less indefinitely into the future (Lee et al 2005).

The fundamental measures of environmental sustainability are those related with the endowed environmental carrying capacity and the eco-efficiency, that cannot be changed unless a society changes the way it produces and consumes. Therefore, the society needs not only to limit the level of pollution, but also to improve the eco-efficiency of the environment including the protection of land, forests, water and biodiversity. In the Foreword to Munasinghe and Shearer’s book (1995), De Souza and Serageldin warn that in the face of current overexploitation of natural resources, “the quality of the environment and of human life is likely to decline rapidly, accompanied by widespread suffering”.

In spite of the above role and function of the environment, on the one hand, and threat to the environment due to depletion/degradation of environmental resource base, on the other, environmental sustainability does not seem to be the dominant, though increasingly important, objective of public policy particularly in natural resource rich states of developing countries like Orissa.

2.2 Economic Growth and the Environment

The literature on economic growth and environment is vast. However, the widest disagreement about the relationship remains. The following are the two extreme views on the relationship between the above two. According to Goldin and Winters (1995) “economic growth and development are perfectly consistent with environmental protection”, while for Daly (1990), “sustainable growth is an oxymoron”. Common (1995) asks the question, “which view is correct”. Ekins (2000) answers it “No one really knows. Reasonable people may reasonably differ on the question”.

The developing countries, that are striving for a higher standard of living, the fundamental policy issue in the last three decades has been: do environmental constraints impose limits on development process? It has been perceived that caring for environmental conservation limits the pace of economic growth (Chopra 2000). At the same time, higher levels of economic activity (production and consumption) require larger inputs of energy and material, and generate larger quantities of waste byproducts (Georgescu-Roegen 1971; Meadows et al 1972; Ehrlich and Holdren 1971 & 1973; Cleveland et al 1984; Parikh et al 1991; CEC 1992a). Increased extraction of natural resources, accumulation of waste, and concentration of pollutants would devastate the carrying capacity of the biosphere and result in the degradation of environmental quality and decline in human welfare, despite rising income (Daly 1977). Furthermore, it is argued that degradation of the resource base would eventually put economic activity at risk (Jansson et al 1994). It has also been argued that economic growth is not sustainable as it consumes many of environmental resources that fortify the production of goods and services (Heywood 1995; Postel et al 1996; Houghton et al 1996; Vitousek et al 1997).

On the other hand, it is claimed that there is a positive relationship between economic growth and environmental quality (Beckerman 1992). Moreover, it is also claimed that environmental regulation, by reducing economic growth, may actually be reducing environmental quality (Brown 1999).

Another set of literature (Shafik and Bandyopadhyay 1992; Panayotou 1993, Grossman and Krueger 1993; Selden and Song 1994; Lim 1997; Chaudhuri and Pfaff 1998; Verbeke and Clercq 2002) have studied the so called ‘Environmental Kuznets Curve’ (EKC). In fact, this set of literature came after the publication of World Banks’s World Development Report 1992: Development and Environment, where the gravity of environmental situation has been accepted. The EKC relates a particular kind of environmental damage to per capita income. They are based on cross-country data. The curve shows that countries with very low incomes, have limited environmental damage. As income rises the environment gets worse, but only up to a point. Beyond that point, further increase in per capita income is associated with an improved environment.

The intuitive explanation for the above relationship is as under: with low income, the country does not affect the environment much. As income rises, environmental damage increases, but because income remains relatively low, demand for a cleaner environment does not increase much. But, at a certain stage income is sufficiently high for the demand for environmental improvements to catch up, so further income growth will be accompanied by improvements in the environment.

The following are the explanations of non-applicability of EKC analysis in developing countries, particularly in a resource rich state like Orissa. Firstly, it has been countered by Maler (1998) that at least for environmental resources, particularly in developing countries, that are primarily used as input (rather than amenities), the income elasticity is less than one. Moreover, most of the studies have focused on the pollution problem in industrial countries, rather than the resource base in developing countries. It is worth noting that, the fundamental measures of environmental sustainability, as mentioned earlier, are those related to the endowed environmental carrying capacity and the eco-efficiency. Therefore, the environment to be sustainable, not only pollution but also the eco-efficiency needs to be maintained.

Secondly, Arrow et al (1996) have identified that the relationship has been limited to pollutants involving local short-term costs (e.g. SO2, SPM and fecal coliforms), and not for accumulation of stocks of waste or for pollutants involving long-term and more dispersed costs (e.g. CO2), which often increase the function of income. Thirdly, the inverted-U shaped EKC, as it has been estimated, say nothing about the overall consequences of emission reductions. Reduction on one pollutant in one country may involve increases in other pollutants in the same country or transfer of pollutants to other countries. And lastly, in most cases where emissions have declined with rising income, the reductions have been due to local institutional reforms, such as environmental legislation and market-based incentives to reduce environmental impacts. But such reforms often ignore international and intergenerational consequences. Where the environmental costs of economic activity are borne by the poor, by future generations, or by other countries, the incentives to correct the problem are likely to be weak. Accordingly, the environmental consequences of growing activity may be very mixed (Arrow et al 1996). Among others, Opschoor (1998) has criticized the empirical validity of the EKC.

With this, it can be concluded that economic growth, irrespective of its scale, is not a matter of concern, but the issue is the composition, process and quality of growth. The content of economic growth refers to the composition of inputs (including environmental resources) and outputs (including waste products) in its process. This content is determined by, among other things, the economic institutions and policies within which human activities are conducted. The quality of economic growth, which includes its content, refers to the efficiency and the contribution of economic systems that prevail in an economy to maintain equity in terms of use of and access to its resources, including environmental resources.

2.3 Natural Resources and Economic Growth

Countries endowed with natural resources are expected to have a natural advantage in economic growth. But Sachs and Warner (1995) have studied that economic growth of resource-rich countries, on an average, has grown less rapidly than that in resource-poor countries. It has been observed that in the early 1960s, resource-rich Burma, the Philippines and Srilanka were the three Asian countries that were vastly outperformed over the next three decades by the resource-poor ‘tigers’ (e.g. Hong Kong, Singapore, South Korea, Taiwan). Similarly, sub-Saharan Africa, which is rich in minerals, timber, and land, has suffered negative economic growth rates since the mid-1960s (Vincent et al 1997). Vincent (1997) has reviewed different perceptible explanations for not maintaining the tempo of economic growth in resource rich countries.

2.3.1 Natural resources, environment and economic growth:

As it has been mentioned earlier, a country may experience increase in income by exploiting more and more natural resources, but it would overwhelm the carrying capacity of the biosphere and thereby result in the degradation of environmental quality and decline in human welfare. Moreover, it has been argued that degradation of the resource base would eventually put economic activity at risk (Jansson et al 1994). It has also been argued that economic growth is not sustainable as it consumes many of environmental resources that fortify the production of goods and services (Heywood 1995; Postel et al 1996; Houghton et al 1996; Vitousek et al 1997).

2.3.2 Natural resource abundance and Dutch disease:

Natural resource abundance can lead to the ‘Dutch disease’ [3] : a booming resource sector obstructs the growth of non-resource sectors, particularly manufacturing sector, by driving up the real exchange rate (Corden and Neary 1982; Corden 1984; Sachs and Warner 1995). A natural resource boom and associated flow in raw-material exports drive up the real exchange rate of the country, and possibly the manufacturing and service exports.

2.3.3 Natural resources and export earning and economic growth:

Export earnings of resource rich countries have fluctuated. They have mostly declined over time. This might be due to declining prices of resource-based commodities (Smith 1979) or imperfect market in terms of importers control over resource market [4] (Vincent 1997).

2.3.4 Natural resources and investment:

Natural resources as a form of capital (Pearce and Turner 1990), if depleted, must be either regenerated or substituted, if countries are to maintain or expand their assets [5] and thus maintain a constant or rising trend of economic growth (Hartwick 1977; Dasgupta and Heal 1979; Solow 1986; Vincent 1997). For this, resource rich countries must have to invest enough in reproducible capital to offset resource depletion (Vincent 1997), otherwise, in the long run, the tempo of economic growth cannot be maintained. Similarly, it has been argued that commodity export earning is the potential source of funds for investment. Even temporary price booms provide windfalls that, if invested, can enhance future growth (Deaton 1999 cited in Stijns 2000). However, this explanation, by assuming substitutability between natural and man-made resources and technology, ignores the ‘survival services’ and carrying capacity of natural resources.

2.3.5 Natural resources, revenue earning and social unrest:

Enormous revenue potentialities of natural resources, during the emerging market economy, especially in conjunction with ill-defined property rights and lax legal structures in many developing countries may generate more revenue from natural resource exploitation and create opportunities for revenue-seeking behaviour on a large scale on the part of producers, thus diverting resources away from more socially fruitful economic activity (Auty 2001a; Auty 2001b).

Tornell and Lane (1998) have shown that natural resource booms may trigger political interaction, or games, among powerful interest groups that result in current account deficits, disproportionate fiscal redistribution and reduced growth. The combination of abundant natural resources, missing markets and lax legal structures may have quite adverse consequences. In extreme cases, civil wars break out – such as Kashipur civil war against the Utkal Alumina international Ltd. in Orissa, India. Unfortunately 28 tribals were killed in police firing at various places in the state such as Maikanck, Raigarh, Mayurbhanj and Kalinga Nagar connected with different civil wars against developmental project induced displacement (Mishra 2006; www. miningwatch.ca/ publications/Utkal_Action_backgnd.html). Collier and Hoeffler (1998) show empirically how natural resources increase the probability of civil war. Moreover, an abundance of natural resources may attract foreign governments (multinational companies- MNCs) to evade issues of adverse consequences and possibility of such an event may prompt the domestic authorities to spend vast resources on national defense (Knight et al 1996 cited in Gylfason and Zoega 2001).

Besides, with vested nexus, among political power, bureaucrats and MNC concerned, the governments, in the name of revenue generation and economic growth, may grant unfair favour to specific enterprises or individuals to exploit natural resources (Krueger 1974; Singh 1997; Shiva undated). This process denies the right of indigenous people to access common property resources, which they had been availing over centuries. Moreover, extensive profit seeking, i.e., seeking to make money from market distortion, can breed corruption in business and government, thus distorting the allocation of resources and reducing both economic efficiency and social equity (Shleifer and Vishny 1993). Empirical evidence and economic theory suggest that import protection and corruption tend to obstruct economic efficiency and growth (Mauro 1995; Bardhan 1997).

2.4 Debt, Trade and Depletion of Natural Resources

Rauscher (1989) has established a link between public debt, trade and depletion of renewable resources for small open countries that are exporters of renewable resource intensive goods. It is shown that the level of public debt of a country determines the speed at which exportable renewable resources are depleted. The target steady state level of natural resources that the country would like to preserve is independent of the level of debt, as it depends on terms of trade, preferences and technology. However, during the transition phase, when the stock of natural resources is being harvested, the level of debt determines the speed and effort spent in extracting renewable resources. Rauscher (1989) has also shown that during transition, if debt increases, so does the rate of extraction of exportable renewable resources. It shifts the extraction of such resources from the future to the present. However, other things remaining the same, this linkage could also be applicable to exhaustible resources.

2.5 Foreign Direct Investment and Economic Growth

With regard to foreign capital, the popular view is that it is an important driver of economic growth in developing countries. But, Krugman (1993) argued that this is logically impossible when foreign capital only accounted for a fraction of gross capital formation in these countries. In this context, the level of foreign capital inflows is not a matter; rather its proportion to domestic capital formation is significant. The evidence shows that inflow of Foreign Direct Investment (FDI) particularly into the mining sector has not been translated into significant increase in employment, as FDI projects are capital intensive in nature (Awudi 2002).

2.6 Foreign Direct Investment and the Environment

The ‘pollution havens [6] ‘ hypothesis, with regard to FDI and the environment, states that, companies with FDI will move their operations to less developed countries in order to take advantage of lax environmental regulations. Besides, all countries may purposefully undervalue their environment in order to attract new investment. Either way, this leads to excessive (non-optimal) levels of pollution and environmental degradation.

With regard to interaction between FDI and the environment, Mabey and McNally (1999) have concluded that: (i) FDI can fuel economic development e and pace that overwhelms host country regulatory capacity, resulting in inefficient and irreversible environmental destruction and even potentially a decline in overall welfare; (ii) Home country policies in subsidising FDI through export credits and aid flows produce a bias towards more environmental damaging investment; (iii) Pollution intensive industries are relocating to areas with lower regulatory standards, and often operate to lower standards than in their home countries; (iv) Natural resource seeking have a poor record of environmental management relative to global best practice. Often investors prevent host countries maximizing returns from their resources, encouraging overexploitation and unsustainable use; and (v) Competition to attract FDI, or retain investments by international companies, has produced a chilling effect on global environmental standards.

Evidence shows (Awudi 2002) that major environmental problems have arisen in the mining communities brought about by the mining boom through FDIs, resulting from massive deforestation and land excavation, waste disposal, mineral processing and misuse of mineral chemicals. Consequently, declining safe drinking water and air quality, loss of biodiversity, land degradation and poor health status has been experienced.

Conclusion

From the above review of literature, it is observed that there are different schools of thoughts on economic growth, natural resources and environmental sustainability. For some analysts, the evidence of environmental degradation is either not conclusive enough to warrant action, or they believe that the economy will react appropriately to emerging environmental scarcity without policy intervention. Some believe that active intervention is justified in order to achieve a sustainable development that is compatible with continuing economic growth. Others still believe that the environmental problems are evidence of limits to growth. On the other hand, there is little empirical evidence of how environmental sustainability is being affected by the very process of economic activities through natural resources degradation and loss of eco-efficiency particularly in Orissa. Therefore, a comprehensive empirical study especially in a resource rich but poor state like Orissa is required.