Economic Growth and the Environment

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Economic growth and the environment

The issue of economic growth and the environment essentially concerns the kinds of pressures that economic growth, at the national and international level, places on the environment over time. The relationship between ecology and the economy has become increasingly significant as humans gradually understand the impact that economic decisions have on the sustainability and quality of the planet.

Economic growth is commonly defined as increases in total output from new resources or better use of existing resources; it is measured by increased real incomes per capita. All economic growth involves transforming the natural world, and it can effect environmental quality in one of three ways. Environmental quality can increase with growth. Increased incomes, for example, provide the resources for public services such as sanitation and rural electricity. With these services widely available, individuals need to worry less about day-to-day survival and can devote more resources to conservation . Second, environmental quality can initially worsen but then improve as the growth rate rises. In the cases of air pollution , water pollution , and deforestation and encroachment there is little incentive for any individual to invest in maintaining the quality of the environment. These problems can only improve when countries deliberately introduce long-range policies to ensure that additional resources are devoted to dealing with them. Third, environmental quality can decrease when the rate of growth increases. In the cases of emissions generated by the disposal of municipal solid waste , for example, abatement is relatively expensive and the costs associated with the emissions and wastes are not perceived as high because they are often borne by someone else.

The World Bank estimated that, under present productivity trends and given projected population increases, the output of developing countries would be about five times higher by the year 2030 than it is today. The output of industrial countries would rise more slowly, but it would still triple over the same period. If environmental pollution were to rise at the same pace, severe environmental hardships would occur. Tens of millions of people would become sick or die from environmental causes, and the planet would be significantly and irreparably harmed.

Yet economic growth and sound environmental management are not incompatible. In fact, many now believe that they require each other. Economic growth will be undermined without adequate environmental safeguards, and environmental protection will fail without economic growth.

The earth's natural resources place limits on economic growth. These limits vary with the extent of resource substitution, technical progress, and structural changes. For example, in the late 1960s many feared that the world's supply of useful metals would run out. Yet, today, there is a glut of useful metals and prices have fallen dramatically. The demand for other natural resources such as water, however, often exceeds supply. In arid regions such as the Middle East and in non-arid regions such as northern China, aquifers have been depleted and rivers so extensively drained that not only irrigation and agriculture are threatened but the local ecosystems.

Some resources such as water, forests, and clean air are under attack, while others such as metals, minerals, and energy are not threatened. This is because the scarcity of metals and similar resources is reflected in market prices. Here, the forces of resource substitution, technical progress, and structural change have a strong influence. But resources such as water are characterized by open access, and there are therefore no incentives to conserve. Many believe that effective policies designed to sustain the environment are most necessary because society must be made to take account of the value of natural resources and governments must create incentives to protect the environment. Economic and political institutions have failed to provide these necessary incentives for four separate yet interrelated reasons: 1) short time horizons; 2) failures in property rights; 3) concentration of economic and political power; and 4) immeasurability and institutional uncertainty.

Although economists and environmentalists disagree on the definition of sustainability, the essence of the idea is that current decisions should not impair the prospects for maintaining or improving future living standards. The economic systems of the world should be managed so that societies live off the dividends of the natural resources, always maintaining and improving the asset base.

Promoting growth, alleviating poverty, and protecting the environment may be mutually supportive objectives in the long run, but they are not always compatible in the short run. Poverty is a major cause of environmental degradation , and economic growth is thus necessary to improve the environment. Yet, ill-managed economic growth can also destroy the environment and further jeopardize the lives of the poor. In many poor but still forested countries, timber is a good short-run source of foreign exchange. When demand for Indonesia's traditional commodity exportpetroleumfell and its foreign exchange income slowed, Indonesia began depleting its hardwood forests at non-sustainable rates in order to earn export income.

In developed countries, it is competition that can shorten time horizons. Competitive forces in agricultural markets, for example, induce farmers to take short-term perspectives for financial survival. Farmers must maintain cash flow to satisfy bankers and make a sufficient return on their land investment. They therefore adopt high-yield crops, monoculture farming, increased fertilizer and pesticide use, salinizing irrigation methods, and more intensive tillage practices which cause erosion .

"The Tragedy of the Commons" is the classic example of property rights failure. When access to a grazing area, or commons is unlimited, each herdsman knows that grass not eaten today will not be there tomorrow. As a rational economic being, each herdsman seeks to maximize his gain and adds more animals to his herd. No herdsman has an incentive to prevent his livestock from grazing the area. Degradation follows and the loss of a common resource. In a society without clearly defined property rights, those who pursue their own interests ruin the public good.

In Indonesia, political upheaval can void property rights overnight, and so any individual with a concession to harvest trees is motivated to harvest as many and as quickly as possible. The government-granted timber-cutting concession may belong to someone else tomorrow. The same is true of some developed countries. For example, in Louisiana mineral rights revert to the state when wetlands become open water and there has been no mineral development on the property. Thus, the cheapest methods of avoiding loss of mineral revenues has been to hurry the development of oil and gas in areas which might revert to open water, thereby, hastening erosion and saltwater intrusion, or putting up levies around the property to maintain it as private property, thus interfering with normal estuarine processes.

Global or transnational problems such as ozone layer depletion or acid rain produce a similar problem. Countries have little incentive to reduce damage to the global environment unilaterally when doing so will not reduce the damaging behavior of others or when reduced fossil fuel use would leave that country at a competitive disadvantage. International agreements are thus needed to impose order on the world's nations that would be analogous to property rights.

Concentration of wealth within the industrialized countries allows for the exploitation and destruction of ecosystems in less developed countries (LDC) through, for example, timber harvests and mineral extraction. The concentration of wealth inside a less developed country skews public policy toward benefiting the wealthy and politically powerful, often at the expense of the ecosystem on which the poor depend. Local sustainability is dependent upon the goals of those who have powergoals which may or may not be in line with a healthy, sustainable ecosystem. Furthermore, when an exploiting party has substitute ecosystems available, it can exploit one and then move to the next. Japanese lumber firms harvest one country and then move on to another. Here the benefits of sustainability are low and exploiters have shorter time horizons than local interests. This is also an example of how the high discount rates in developed countries are imposed on the management of developing countries' assets.

Environmental policy-making is always more complicated than merely measuring the effects that a proposed policy on the environment. But because of scientific uncertainty about biophysical and geological relations and a general inability to measure a policy's effect on the environment, economic rather than ecological effects are more often relied upon to make policy. Policy-makers and institutions are often unable to grasp the direct and indirect effects of policies on ecological sustainability, nor do they know how their actions will affect other areas not under their control.

Many contemporary economists and environmentalists argue that the value of the environment should nonetheless be factored into the economic policy decision-making process. The goal is not necessarily to put monetary values on environmental resources ; it is rather to determine how much environmental quality is being given up in the name of economic growth, and how much growth is being given up in the name of the environment. A danger always exists that too much income growth may be given up in the future because of a failure to clarify and minimize tradeoffs and to take advantage of policies that are good for both economic growth and the environment.

See also Energy policy; Environmental economics; Environmental policy; Environmentally responsible investing; Exponential growth; Sustainable agriculture; Sustainable biosphere; Sustainable development

[Kevin Wolf ]



Farber, S. "Local and Global Incentives for Sustainability: Failures in Economic Systems." In Ecological Economics: The Science and Management of Sustainability, edited by R. Constanza. New York: Columbia University Press, 1991.

World Bank. World Development Report 1992: Development and the Environment. New York: Oxford University Press, 1992.

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Economic Growth and the Environment

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Economic Growth and the Environment