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South Asian Economics Students Meet 2012 Budding Economist Competition

Abstract: This essay lays out the agenda for greening the South Asian economy in three steps. First, it describes what a green economy is, and how it would be very difficult to use conventional economic analysis to bring economies to a sustainable state. Next, it discusses some of the broad issues which are critical to address before greening the South Asian economy. Lastly it proposes and evaluates some initiatives and policies to move towards a green economy.

Umair Mesiya Pakistan Lahore University of Management Sciences umairmesiya@gmail.com

Mesiya 2 Agenda for Greening the South Asian Economy Home to over one fifth of the worlds population and some very high rates of output growth, South Asia has been growing in importance in the world economy (SAARC 1). It produced over 6.5% of world output in 2010, and not surprisingly, 7.34% of the worlds CO2 emissions (IMF 1; UN 1). With the effects of global warming and pollution much more apparent and devastating than in the past, various governments have sought to green their economies. South Asian must also begin to green its economies, as sustainable growth in the future depends on decisions taken today. This essay will first discuss what a green economy is, why the green economy concept has gained so much relevance recently, and why it would be difficult to incorporate the environment into economic decision making using conventional approaches. It will then move on to discuss the broad issues in moving to a green economy, and how these apply to the case of South Asia. Lastly, it will discuss and briefly evaluate some initiatives which will help green South Asian economies. First, we must define what a green economy is. The UNEP describes it as one that results in improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities (1). The reason, that the ideas of a green economy and green growth have recently become so popular, is that the present economic system has mostly ignored environmental externalities (Cato 6). For example, transport costs are measured only by the cost of the inputs of fuel, depreciation of the mode of transport, and the cost of labor. The cost to the environment of the resulting pollution from that transport, and the depletion of a natural resource are not accounted for. The result of this mismeasurement of costs

Mesiya 3 is that many natural resources have been over used and essential ecological services have been degraded (Cato 6). This degradation of the environment has been taking place for a long time, but now has reached a level where it has become impossible to ignore, with its effects widely known. Many governments have recognized the need to reduce this degradation to safe level. Conventional economic theory suggests two main ways to correct the misallocation of resources described in the last paragraph. One is for the government to levy taxes on environmentally degrading activities (Mankiw 16). These are referred to as Pigovian taxes . The objective is to tax the activity enough to bring the level down to the socially optimum level. The second is to allow the forces of supply and demand to arrive at an equilibrium price for the natural resource in question, once property rights to the resource, for example clean air, have been assigned. This approach relies on the Coase Theorem (Varian 630). These two methods to correct markets are simple in theory, but designing policies to arrive at the socially optimum point in the real world is a highly complex task. For example, in the second method, how would lawmakers assign property rights to natural resources among people, and more importantly, different countries? How would they account for future generations and their rights to todays resources? In the first method, for example, how would policy makers determine the optimum amount of natural resource use? How would they determine the right amount of taxes, and what effect would those taxes have on aggregate demand and supply? What structural changes would occur as a result of any policies implemented? What effect would these have on the distribution of income and resources? How would we incorporate the effects of a skewed distribution of wealth and income into the costs? How would such polices work internationally? All these questions are of prime importance to

Mesiya 4 correcting South Asias markets and moving to a socially optimum level of production or a green economy. It is these issues which this essay will now explore. Some of these issues are at the macroeconomic level, such as the aggregate supply and demand implications of the transition, the problems of structural change and placing a value on the welfare of future generations (Ocampo 8). Some are related to changes in how the pattern of international trade will change during and after the transition to a green economy (Cosbey 40). Others are related to how technology will be transferred to developing nations, how intellectual property rights will be protected, how the green economy concept may be misused (Khor 6). Ocampo focuses on the macroeconomic issues of greening economies, and groups them into several categories (8). First, is the valuation of the welfare of future generations. This has an effect on todays economic decisions on savings and investment. An important factor is what social discount rate should be used in evaluating environmental sustainability projects (Ocampo 8). Secondly he suggests including environmental constraints and investments to current aggregate demand and supply analysis (Ocampo 8). Thirdly, he believes that economic growth should be considered a process of structural change which is mostly caused by changes in technology (Ocampo 8). The social discount rate used has big implications on the kind of policies chosen. A low discount rate, such as the 1.4% recommended by the Stern Review would mean that quicker and more extensive action would be required to decrease the probability of future environmental catastrophe (qtd in Ocampo 18). A higher discount rate, such as the 5.5-6% suggested by critics, would make such changes socially unprofitable (qtd in Ocampo 18). Another debate is whether to introduce gradual changes to the economy through a variety of incentives, or to take strong

Mesiya 5 action against any future environmental catastrophes (Ocampo 18). These debates are ethical and political in nature, and legislators from the region must arrive at a consensus on these before any policies are adopted. The second issue highlighted by Ocampo is that the degradation and use of ecological services must be included in the aggregate supply and demand analysis. One approach considers natural capital as another form of capital, along with physical and human capital (World Bank qtd in Ocampo 21). This approach regards natural capital as substitutable by other forms of capital, and in essence, this would mean that investing in physical and human capital could be justified if it would mean an increase in other forms of capital (World Bank qtd in Ocampo 21). This approach is what the World Bank refers to as weak sustainability (qtd in Ocampo 21). Another approach is to think of the macroeconomy as a subsystem within the natural ecosystem. According to this approach, natural capital cannot be replaced by physical, because both provide different functions (World Bank qtd in Ocampo 21). The World Bank refers to this as strong sustainability (qtd in Ocampo 21). This implies that economic growth can be constrained by ecological limits. This is a major issue in the area of policy making, as the strong sustainability approach would result in an upper bound on economic growth and stronger restrictions on the extraction and use of natural resources, which might not be acceptable to legislators from the region. The third change which must be analyzed is the structural change which will result from the shift to a greener economy (Ocampo). Most growth in the world has been driven by technological innovations, which change the focus of economies towards new activities which results in a decline in others (Schumpeter qtd in Ocampo). If the world is to move towards a green economy, there has to be a technological revolution to support this. This technological

Mesiya 6 revolution, as Ocampo maintains, will have a much greater degree of government involvement, will be more global in nature and will take place under existing intellectual property rights which are much stronger (25). For South Asia, this would mean that policy makers would have to keep in mind how any move to the green economy would cause shifts in the distribution of activity across sectors. This would require them to deal with strong lobbies present in their respective countries. They will also be concerned about coordinating their policy with their counterparts in other countries within the region and outside of it, as any policies would have major impacts across borders. Moreover, many aspects of how international trade is conducted would have to be changed to enable countries to green their economies (Cosbey 43). These changes in the pattern of trade might result in some countries losing out, which would make it difficult for some policy makers to introduce green measures. One of these necessary but politically unpopular policies is the reduction of subsidies on fossil fuels (Cosbey 45). These are fairly common in South Asian countries which defend these policies as being pro-poor. But IEA figures show that these policies mostly benefit the rich (qtd in Cosbey 45). Another contentious issue, which was also mentioned earlier in a different context, is that of protecting intellectual property rights across borders. There will be very little incentive to invest in research and development in green technologies if intellectual property rights are not protected. On the other hand, the long period of time of their protection results in high prices for these technologies and slows down improvements in them (Cosbey 45). Policy makers in South Asia must agree on appropriate time periods for patents with developed nations, which own the intellectual property for many useful green technologies. These should be enough to encourage innovation, yet short enough to make these technologies available to a greater number of people.

Mesiya 7 Another important concern when discussing the transition to a green economy is the risk of misuse of the concept. Martin Khor has highlighted a number of ways in which the concept can be misused (6). Firstly, it might lead to a completely one dimensional approach which protects the environment, but ignores sustainable development (Khor 6). This is extremely relevant in the case of South Asia, as over 60% of the population lived on under $2 per day in 2010 (World Bank 1). Here, the need for development is great, and policy makers will not have much room to compromise on development. Secondly, Khor argues against what he describes as a one size fits all approach (6). This approach does not account for differences in the cultures, climate and structures of economies when developing economic policies. South Asia is a culturally diverse region with many different cultures and languages. There are over 500 languages in India alone (Mallikarjun 1). Hence, the policies implemented must be tailored to the requirements of individual cultures. Thirdly, he warns against the use of the green economy concept as a tool of protectionism (Khor 6). Developed countries have imposed carbon tariffs on goods from developing countries in the past, and developing countries view this as protectionism (Khor 6). Two of the largest economies in the region, India and Pakistan already have great trade barriers, both tariff and non-tariff, and these could be made worse through lobbying and misusing the green economy concept. Policy makers must take due care in forming green policies, and make sure that regulations do not pave the way for protectionism through environmental requirements on imports. The debates and issues mentioned above are only just a few of the many complexities to be dealt with in moving to a green economy. Additional complexity comes from the fact that these debates have big ethical and political dimensions as well, and so there is no single satisfactory answer to these. However, there are some initiatives which could be a starting point

Mesiya 8 for a move to a greener South Asian economy. This essay will now explore and discuss some of these, and will discuss the appropriateness of these measures for South Asia. These include increasing the amount of trade within the region, changing some aspects of consumer and producer behavior with regard to product life cycles, the use of environmentally friendly materials by government departments, encouraging organic farming and introducing cycling schemes. One major way to decrease the ecological footprint of South Asia is to increase the amount of trade within the region (Cato 130). This will reduce transportation costs by a sizable sum, and will reduce the carbon footprint of the region. A big opportunity lies in increasing trade between Pakistan and India, which, for a long time, have restricted trade with each other due to political reasons. In 2010, the value of trade between the two countries was valued at around $2.5billion (Mehta 5). Many papers on Indo-Pak trade have predicted that if these restrictions were to be lifted, trade could be more than doubled (Tabish et al 5). Naqvi and Schuler in 2007 found trade could increase by 2 to 4 times its current level (qtd in Tabish et al 5). Hence, the increase could be between $2.5 and $7.5 billion. Such a large increase in trade would reduce the environmental costs of transportation by a very significant amount. Another simple way to green the economies, is through changing the behavior of producers and consumers with regard to packaging and product life cycles (Blueprint for a Green Economy 254). Many products have a built in obsolescence, for example cell phones and computers. Many products are also poorly designed, which means that they are not able to be repaired. This means that they are purchased very frequently, and with many components of packaging which are not recycled. This adds quite a lot to the ecological footprint. Consumers must be encouraged to use products for longer periods of time, and producers should be

Mesiya 9 encouraged to make products that will not quickly become obsolete, and are capable of being repaired (Blueprint to a Green Economy 255). The packaging issue can be addressed by charging a deposit to consumers for frequently used packaging items, and refunding it to them when they return them to the appropriate recycling unit (Blueprint to a Green Economy 259). This has been very successfully used in developed countries like the USA, and has the potential to be successful in South Asia. To green the markets for electronics, products with components that cannot be repaired or upgraded can be taxed, to encourage the purchase of more durable products. Additionally, producers could be forced to collect products which have ended their useful lives to reuse and recycle components (Blueprint to a Green Economy 259). However, these policies require strong governance to be successful. Poor governance and relatively high levels of corruption pose a threat to the success of such policies in South Asia, as 5 of the 6 countries in the region scored below 3.5 on Transparency Internationals Global Index in 2011 (4). However, if these are implemented appropriately, they would have a strong impact on resource consumption, which makes them an important policy option. Moreover, the demand for resource efficient products must be increased, to encourage their production. This can be done by making it mandatory for all government and civil services departments to use products which were made using sustainable methods (Blueprint to a Green Economy 260). When budgeting for resource requirements, these requirements could be inspected by a specialist body to decide where to order the resources from (Blueprint to a Green Economy 260). The GDP weighted average ratio of government spending to GDP is 27.7% for South Asias five countries (Index of Economic Freedom 2012 1). The total government spending of the five countries is a staggering $1.33 trillion (Index of Economic Freedom 2012

Mesiya 10 1). This would create a huge market for environmentally friendly products, and would encourage producers to change their methods of production. In the same way, the promotion of organic agriculture will greatly help the South Asian economy. Agriculture forms a very significant portion of the South Asian economies, and the global market for organically produced agricultural products is growing quickly. In 2010, the global market for organically produced food products alone was $60 billion, 12.4% up from the previous year (Data Monitor 1). Considering that this growth took place in a year when most economies were struggling, the organic agriculture sector can be expected to be a high growth sector in the future. Since the prices of organic produce are higher than conventional produce, switching to organic agriculture will help boost the incomes as well as help lower the ecological footprint of the region (UNEP 18). In addition the UNEP Annual Report (2010) finds that policy has been particularly successful in African countries such as Uganda, and sees great potential for organic farming in other countries (18). Legislators should introduce favorable policies to encourage and facilitate organic farming, and agriculture departments should assist farmers in obtaining organic certifications which will make these organic products eligible for exports. Another area which requires attention is the ever increasing number of cars in city centers. The number of cars on the road per 1000 has almost doubled since 2000 in the South Asian countries (World Bank 1). This, when viewed along with the population growth rates for the period, indicates how a high number of cars will become a major problem for the regions urban areas. One simple yet highly effective way to address this issue is to introduce cycling schemes in the city centers (Gummer 9). This was particularly effective in Paris, where 700 pick and drop off points for cycles were set up. Sturdy, easy to ride bicycles were available free for use for the first 30 minutes, after which a small charge was applicable (Gummer 9). This not

Mesiya 11 only helped decrease the traffic congestion in the city center, but spurred great interest in walking and cycling in general (Gummer 9). Cycling is already fairly common in rural settings and even urban areas in South Asia, which makes this policy even more appealing. To sum up, this essay described what a green economy is, why the green economy concept has gained so much relevance recently, and why it would be difficult to incorporate the environment into economic decision making using conventional approaches. It then described the broad issues in moving to a green economy, and how these apply to the case of South Asia. Some of these issues were macroeconomic in nature, for example the impacts on aggregate supply and demand, the valuation of the welfare of future generations. Other issues were related to the changes brought by a transition to a green economy, and risks associated with the misuse of the concept. It then went on to discuss and briefly evaluate a few possible initiatives which would help green the economies of South Asia. This essay has not given a perfect solution on how to green the South Asian economies, but forms the basis and gives a starting point for any discussions on how go about greening South Asian economies.

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Works Cited "2012 Index of Economic Freedom." Economic Data and Statistics on World Economy and Economic Freedom. Heritage.org, 2012. Web. 15 Nov. 2012. <http://www.heritage.org/index/explore?view=by-variables>. Cato, Molly S. Green Economics: An Introduction to Theory, Policy and Practice. London: Earthscan, 2009. Print. Cosbey, Aaron. "Trade, Sustainable Development and a Green Economy: Benefits, Challenges and Risks." UNSCD, 2012. Web. 15 Nov. 2012. <http://www.uncsd2012.org/rio20/content/documents/Green%20Economy_full%20repor t.pdf>. Goldsmith, Zac. Executive Summary: Blueprint for a Green Economy. Executive Summary. Quality of Life Policy Group, Sept. 2007. Web. 15 Nov. 2012. <http://www.kcaarchitects.co.uk/Asp/uploadedFiles/File/QofLExecutiveSummary.pdf>. Gummer, John, and Zac Goldsmith. Blueprint for a Green Economy. Working paper. Quality of Life Policy Group, Sept. 2007. Web. 15 Nov. 2012. <http://conservativehome.blogs.com/torydiary/files/blueprint_for_a_green_economy1109 07b.pdf>. Khor, Martin. "Challenges of the Green Economy Concept and Policies in the Context of Sustainable Development, Poverty and Equity." South Center, July 2011. Web. 15 Nov.

Mesiya 13 2012. <http://www.twnside.org.sg/title2/uncsd2012/RP40_GreenEcon_concept_MKJul11.pdf>. Mallikarjun. "Mother Tongues of India According To The 1961 Census." Language in India. N.p., Aug. 2002. Web. 15 Nov. 2012. <http://www.languageinindia.com/aug2002/indianmothertongues1961aug2002.html>. Mankiw, Gregory. "Smart Taxes: An Open Invitation to Join the Pigou Club." Eastern Economic Journal (2009): 14-23. 2009. Web. 15 Nov. 2012. <http://www.economics.harvard.edu/files/faculty/40_Smart%20Taxes.pdf>. Mehta, Pradeep. "Trade Relations Between Pakistan and India." Pakistan Institute of Legislative Development and Transparency. PILDAT, Jan. 2012. Web. 15 Nov. 2012. <http://www.pildat.org/publications/publication/FP/TradeRelationsbetweenPakistanAndI ndia_IndianPerspective_Jan2012.pdf>. "Motor Vehicles (per 1,000 People)." World Bank Data Center. World Bank, 2012. Web. 15 Nov. 2012. <http://data.worldbank.org/indicator/IS.VEH.NVEH.P3?page=1>. Ocampo, Jose A. "The Macroeconomics of the Green Economy." UNSCD, 2012. Web. 15 Nov. 2012. <http://www.uncsd2012.org/rio20/content/documents/Green%20Economy_full%20repor t.pdf>. "Organic Food: Global Industry Guide 2010." Datamonitor Research Store. Data Monitor, 2010. Web. 15 Nov. 2012.

Mesiya 14 <http://www.datamonitor.com/store/Product/organic_food_global_industry_guide_2010? productid=C9A72F75-510A-4CC7-AA28-9DE6FE209E1A>. Peiris, G. L. "SAARC Needs To Boost Volume Of Trade." SAARC Information Center. SAARC, n.d. Web. 15 Nov. 2012. <http://www.saarc-sic.org/news/30-prof-peiris.html>. "Poverty Headcount Ratio at $2 a Day (PPP) (% of Population)." World Bank Data Center. World Bank, 2012. Web. 15 Nov. 2012. <http://data.worldbank.org/indicator/SI.POV.2DAY>. Transparency International Corruption Perceptions Index 2011. Publication. Transparency International, 2011. Web. 15 Nov. 2012. <http://files.transparency.org/content/download/101/407/file/2011_CPI_EN.pdf>. UNEP- Annual Report 2010. Publication. United Nations Environment Program, 2010. Web. 15 Nov. 2012. <http://www.unep.org/annualreport/2010/pdfs/UNEP-AR-2010-FULLREPORT.pdf>. "UNstats | Millennium Indicators." United Nations Statistics Division. United Nations, 2009. Web. 15 Nov. 2012. <http://mdgs.un.org/unsd/mdg/SeriesDetail.aspx?srid=749>. Varian, Hal. Intermediate Microeconomics: A Modern Approach. 7th ed. New York: W W Norton and, 2006. Print. "What Is the Green Economy." World Environment Day. United Nations Environment Program, n.d. Web. 15 Nov. 2012. <http://www.unep.org/wed/greeneconomy/>.

Mesiya 15 World Economic Outlook Database October 2012. Publication. International Monetary Fund, 2012. Web. 15 Nov. 2012. <http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/weorept.aspx?sy=2010>.