ECONOMIC DEVELOPMENT Concept of Economic Growth The productive process
Labour, Productive Good and
reproducible process services capital, natural used in the resources final consumption Reproducible capital final consumption of goods and services any economy can achieve will determine its living standards cannot expect to channel all the resources in the productive process into final consumption of goods and services be diverted back to replace or add to the economy's productive capacity That part of the output of the economy which is not used directly for final consumption but used to increase our economy's productive capacity is called the production of reproducible capital all products produced not for immediate consumption, but to increase our production of other goods and services includes plant and equipment, buildings and infrastructure Economic growth largely determined by the level of new reproducible capital, or "investment" level of new reproducible capital generated rate of increase in productive capacity of an economy However, existing stock of reproducible capital would get smaller depreciation reducing productive capacity Decline in living standard Capital consumption- depreciation The amount set aside to replace worn out stocks of reproducible capital each year In 1993, the UK set aside 70 billion (13%) of its total output (GNP) of 547 billion for depreciation Setting this amount aside was only sufficient to keep the existing stock of reproducible capital intact "Gross Domestic Fixed Capital Formation" (GDFCF) to achieve an increase in productive capacity and living standards, we would need to add to our stock of reproducible capital setting aside even more of our output and investing in new reproducible capital amounts we set aside each year for new capital stock - GDFCF In 1993, the UK set aside 92 billion in "GDFCF" (17% of GNP) 13% of this was for depreciation to replace existing capital stock 4% represented net capital investment In other words, in 1993 the UK economy added 4% to its productive capacity economic growth Natural resources and economic growth underpins the policies followed by most of the world's governments, which try to get re-elected by providing their electorates with increasing standards of living through economic growth two major limitations failure to appreciate a major theoretical problem failure to tackle a practical problem Theoretical limitations of models of economic growth take it for granted that the inputs of resources required to churn out ever- increasing levels of output and higher living standards are always going to be available on demand simply ignores the constraint imposed by the environment on resource inputs The availability of resource inputs Operates on three implicit assumptions that some of the inputs necessary for economic growth will be growing naturally over time, such as labour inputs other necessary inputs are capable of being accumulated indefinitely, such as stocks of reproducible capital all that is required for productive capacity in economies to expand indefinitely is the existence of continued technological progress Constraints Operate in closed systems within a closed system matter and energy can neither be created nor destroyed the use of matter and energy will ultimately lead to increased entropy Energy and matter are only of economic use when they are available in highly structured forms, which involve low entropy As we burn fossil fuels, for example, we do not destroy matter. Instead we increase its entropy, rendering the resulting residues economically useless. Implications any model of economic growth reliant on the conversion of natural resources within a closed system - the earth - has to face up to the prospect of increasing levels of entropy higher levels of economic activity cause the entropy of our planet's environment to increase mass and energy available to fuel economic growth will decrease towards zero Doomsday scenario ? Not really for energy supplies the earth is not a closed system principally in the form of solar and gravitational energy some positive level of continued resource use should always be possible, as long as we can find solar or gravitational energy substitutes for fossil fuel energy sources Debate on Sustainability and Economic growth ability to manage our environment and its resources in such a manner as to find substitutes for energy forms liable to entropy physical principles do not prove that we are unable to continue to achieve some positive level of economic activity Some argued that sustained economic growth is not feasible because at current rates of material and energy usage we are already exceeding the potential available from solar and gravitational substitutes Some disputed this, pointing out that such arguments assume fixed coefficients between inputs of mass and energy and outputs of goods and services more efficient in our use of materials and energy supplies no reason to suppose such improvements will not continue Practical limitations of models of economic growth the way in which we measure economic growth is itself inaccurate largely ignore the use we make of environmental resources misleading impression of the real increase in our economy's productive capacity depreciation of buildings and machinery in measuring annual national output, our national accounts make not allowance for using up our stocks of oil We count the output of oil as extra output from our economy's productive capacity should be taking into account that we are instead using up part of our productive capacity in the form of extracting a non-renewable finite stock of an environmental resource then part of what we previously regarded as additions to our productive capacity and enhanced economic growth would simply be needed to retain our existing productive capacity lower estimates of economic growth. Living standard and economic growth make no allowance for the damage to the environment caused by the wastes and residues put back into the environment as one of the by- products of our production processes cleaning up pollution and the damage to the environment, such as companies involved in dealing with oil spills, are measured as having added to the productive capacity of the economy. while the damage they are trying to rectify, and which should be subtracted from our productive capacity, is simply ignored GROSS DOMESTIC PRODUCT
Is it possible to have strong
economy and still have a healthy environment? Economic success GDP is widely use to measure economic well being Measure market values for final goods and services that have been produced domestically in a year Final good and services included those that are consumed during a year as well as new investment and inventory that are not used but will be used in future years GDP does not include the market value of intermediate goods and services that were used to produce final goods and services during the same year GDP measurement GDP is a measure of a nation's income Income is the flow of final goods and services (Q) produced using labor (L), materials (M), and capital (K) during a year This flow is measured in monetary units, but it is the goods and services, not the money, that determines human well-being GDP is measured in both "current" dollars and "real" dollars Suppose that the only good produced by the economy is bread, and that 10 loaves are produced this year and 10 loaves were produced last year Now suppose that workers were paid 20 dollar bills this year and 10 dollar bills last year. Assuming that we spend all the dollars on bread, the price of bread would be $2 per loaf this year and $1 per loaf last year However, the ratio of the price of bread to the total money supply would be the same in both years (i.e., 1:1) In "current" dollars, GDP would be $20 this year and $10 last year, but in "real" dollars, GDP would be the same in both years "Real" dollars are comparable across years, but current dollars are not Although GDP is the most widely used measure of economic well-being, it does not measure all aspects of economic well-being Consequently, if GDP were the only measure we used, we would overstate economic well-being in some ways and understate it in other ways GDP overstate economy Does not account for depreciation of capital stock (K) Production of final goods and services depreciates (wears out) some manufactured (Km), natural (Kn), human (Kh), and social (Ks) capital used to produce those goods and services Some of the consumption of final goods and services included in GDP comes at the expense of future output That opportunity cost decreases economic well-being Suppose you had a million dollars. If you put it in the bank, you could earn interest on this capital The interest earned is income However, if you decide to spend some of the million dollars and bank the remainder, the interest you will earn in the future will be less The opportunity cost of spending some of capital is a decrease in future income If an economy consumes some of it's capital today, future income will decrease unless it is replaced with new capital investment GDP includes investment in manufactured capital, but it does not include depreciation Net Domestic Product (NDP) NDP is GDP minus depreciation of manufactured capital (Km) NDP is considered a more accurate measure of a country's income than GDP because it does not count consumption that comes at the expense of future output However, neither NDP or GDP account for depreciation of natural capital (Kn). A country could cut down its forests, deplete its fisheries, or erode its soil, and the current year's NDP and GDP would increase because of the increased amount of goods produced from these capital assets Therefore overstate economic well being since environmental damage is often counted as an economic gain GDP and NDP understate economic well-being Excluding new investments in natural capital (Kn) If a wetland is restored, the future flow of environmental services will increase The wetland restoration and reforestation are examples of investments in natural capital, However, only investment in manufactured capital (Km) is counted in measuring GDP Weak sustainability Q = (Km, Kh, Kn, Ks) Q is the maximum flow of goods and services that can be obtained from the current stock of manufactured capital (Km), natural capital (Kn), human capital (Kh), and social capital (Ks) The ability to sustain the value of Q per capita Strong sustainability Distinguishes between critical and noncritical natural capital Some Kn would have to be maintained as well as the per capita value of Q Okay to use up crude oil since it is not critical to maintaining planetary life, but species extinction or depletion of the ozone layer would not be allowed Stronger sustainability All stocks of Kn to be maintained in addition to sustaining the per capita value of Q Depends on what value of Q or stock of Kn is chosen as the level to be sustained Challenges for strong sustainability Maintaining the standard of living in developed countries requires between 45 to 85 metric tons of materials per person each year One fifth live in the richest countries and account for 86% of world GDP The bottom fifth accounts for 1% of world GDP Conclusions on sustainability Three alternative perspectives Pessimistic about the issue Optimistic One which reflects perhaps the general consensus amongst those concerned with environmental resource management Pessimistic scenario Acceptance of the finite nature of environmental resources the use of non-renewable stocks, the growing entropy within our ecosystems, and the limits to the environment's ability to cope with residuals Given this appreciation of the situation, economic growth is taken to be ultimately unsustainable There is an upper limit on output and productive capacity under this scenario The level of material throughput of the system cannot, in the long term, exceed this quantity of material recycling Optimistic scenario Acknowledges the fact of rising rates of depletion of non-renewable resources, increased harvesting of renewable but exhaustible resources, and increasing flows of environmental residuals Mechanisms already exist to incorporate appropriate feedbacks into our management of environmental resources, which will allow us to cope with and adapt to such pressures Rising prices for non-renewable resources and the increasing costs of disposal of residuals will force producers to employ more efficient technology The essence of this reasoning is based on a belief in the existence of powerful price-induced substitution effects Consensus While accepting the presence of adjustment mechanisms identified by the optimistic scenario, questions whether these are sufficient to avoid all the consequences of the pessimistic scenario Limitations on our ability The inability of markets to generate the appropriate price signals for all resource uses, partly because of the absence of property rights The existence of irreversibility and uncertainty in the use of environmental resources The limits to the technological possibilities of substitution between environmental and non- environmental assets in maintaining our capital stock of productive assets