Consequences of growthConsequences of growth

Economic growth and Income Economic growth and Income distributiondistribution

• Economists used to believe that increased Economists used to believe that increased income inequality was necessary in the income inequality was necessary in the early years of growthearly years of growth– Some claimed that the rich tend to save more Some claimed that the rich tend to save more

than the poor, allowing more investment and than the poor, allowing more investment and capital formation.capital formation.

• Today: there is no theoretical justification Today: there is no theoretical justification for increases in income inequality. In fact, for increases in income inequality. In fact, highly unequal income distributions are a highly unequal income distributions are a barrier to growth.barrier to growth.

– Asian Tigers are characterized by more equal Asian Tigers are characterized by more equal income distributions than countries in Latin income distributions than countries in Latin America and Africa, which have grown less America and Africa, which have grown less rapidly.rapidly.

• Empirical studies have not found conclusive Empirical studies have not found conclusive results about the relationship between GDP results about the relationship between GDP per capita and income distribution.per capita and income distribution.

• The effects of growth on income distribution The effects of growth on income distribution depend on the particular conditions of each depend on the particular conditions of each individual country as well as the kinds of individual country as well as the kinds of growth policies and their impacts on income growth policies and their impacts on income distribution and poverty.distribution and poverty.– Taiwan and S. Korea had more equal Taiwan and S. Korea had more equal

distributions when they began their growth. Also, distributions when they began their growth. Also, strong emphasis was placed on the development strong emphasis was placed on the development of human capital.of human capital.

Why is income inequality Why is income inequality increasing in many countries?increasing in many countries?

• Examples of countries with increasing Examples of countries with increasing income inequalities:income inequalities:– China, India, Indonesia, Thailand and other East China, India, Indonesia, Thailand and other East

Asian and South-East Asian countries, which had Asian and South-East Asian countries, which had achieved greater income equality and reductions achieved greater income equality and reductions in poverty in their first stages of growth.in poverty in their first stages of growth.

– Russia and most central and eastern European Russia and most central and eastern European countries.countries.

– A number of countries in Latin America.A number of countries in Latin America.– Almost all OECD countries, especially Sweden, Almost all OECD countries, especially Sweden,

the UK and the US.the UK and the US.

• Reasons:Reasons:1.1. Economic and trade liberalization gives Economic and trade liberalization gives

rise to winners and losers.rise to winners and losers.

2.2. Inappropriate domestic government Inappropriate domestic government policies: policies: • Use of capital-intensive technologiesUse of capital-intensive technologies

• Low levels of investment in human capital, Low levels of investment in human capital, as they hurt poor people more than as they hurt poor people more than wealthier people.wealthier people.

• Allocating the bulk of services and Allocating the bulk of services and infrastructure investments to urban areas infrastructure investments to urban areas and ignoring the rural sector where most of and ignoring the rural sector where most of the poor live.the poor live.

•Concentrating infrastructure and services Concentrating infrastructure and services investment within the formal sector, investment within the formal sector, ignoring the urban slums, excluding the poor ignoring the urban slums, excluding the poor from the benefits of growth.from the benefits of growth.

•Highly inequal distribution of land ownership Highly inequal distribution of land ownership in rural areas.in rural areas.

•Discrimination against social groups so that Discrimination against social groups so that they have fewer employment opportunities, they have fewer employment opportunities, earn lower incomes and are more likely to earn lower incomes and are more likely to be unhealthy and poor.be unhealthy and poor.

Policies to achieve a more Policies to achieve a more equitable income distributionequitable income distribution

• From chapter 11:From chapter 11:– Transfer payments for vulnerable groupsTransfer payments for vulnerable groups– Subsidized provision of important merit goods, which Subsidized provision of important merit goods, which

should focus on poor rural and urban areasshould focus on poor rural and urban areas– Progressive taxationProgressive taxation

• Provision of micro-credit schemesProvision of micro-credit schemes• Use of appropriate technologies in agriculture and Use of appropriate technologies in agriculture and

industryindustry• Government training programmes for women and Government training programmes for women and

other social groups suffering discriminationother social groups suffering discrimination• Land reform, i.e., redistribution of land ownership Land reform, i.e., redistribution of land ownership

in cases where a small fraction of the population in cases where a small fraction of the population owns a large proportion of the land.owns a large proportion of the land.

Environmental externalitiesEnvironmental externalities

• Pollution of affluencePollution of affluence– Environmental degradation caused by Environmental degradation caused by

production and consumption activities production and consumption activities resulting from economic growth.resulting from economic growth.

– It arises from industrial production and It arises from industrial production and high-income consumption patterns high-income consumption patterns involving the use of fossil fuels, that involving the use of fossil fuels, that create pollution and use up open access create pollution and use up open access resources.resources.

• Pollution of povertyPollution of poverty– Environmental damage caused by Environmental damage caused by

consumption and production activites consumption and production activites resulting from extreme poverty.resulting from extreme poverty.

– Economic activites pursued by very poor Economic activites pursued by very poor pepople in an effort to survive.pepople in an effort to survive.

– Extreme poverty Extreme poverty → destruction of natural → destruction of natural capital → greater poverty.capital → greater poverty.

• Poverty leads to environmental Poverty leads to environmental degradationdegradation– Poor people unable to make Poor people unable to make

investments that preserve soil’s fertility investments that preserve soil’s fertility → make soils less productive→ make soils less productive

– Higher birth rates and population growth → Higher birth rates and population growth → pressure to open new lands for agriculture → pressure to open new lands for agriculture → deforestation, erosion.deforestation, erosion.

– Lack of energy sources: deforestation to Lack of energy sources: deforestation to obtain firewood.obtain firewood.

– Lack of property rights and access to credit → Lack of property rights and access to credit → inability to make investments in sanitation, inability to make investments in sanitation, irrigation, improved agricultural inputs and irrigation, improved agricultural inputs and land improvements, which would reduce land improvements, which would reduce environmental damage.environmental damage.

• Environmental degradation worsens Environmental degradation worsens povertypoverty– Deterioration of farmland → less output & Deterioration of farmland → less output &

lower incomes for farmers.lower incomes for farmers.– Farming on fragile lands with no modern agric Farming on fragile lands with no modern agric

inputs → lower yields → lower incomes.inputs → lower yields → lower incomes.

– Many millions of poor people in rural Many millions of poor people in rural areas depending on natural products for areas depending on natural products for own consumption and for sale.own consumption and for sale.

– Lower incomes Lower incomes → poor health, premature → poor health, premature deaths, poor school performance of children deaths, poor school performance of children → increase of poverty→ increase of poverty

– Air pollution and lack of clean water → direct Air pollution and lack of clean water → direct impact on health.impact on health.

All these factors translate into lower growth All these factors translate into lower growth in incomes and poorer development in incomes and poorer development prospects.prospects.

Negative environmental impacts Negative environmental impacts of increasing economic activityof increasing economic activity

• Air pollutionAir pollution– Global warming caused by carbon Global warming caused by carbon

dioxide emissions.dioxide emissions.– Excess nitrogen due to fertilizers, Excess nitrogen due to fertilizers,

human sewage and use of fossil fuels human sewage and use of fossil fuels → → reduced soil fertility.reduced soil fertility.

• Water pollution and scarcityWater pollution and scarcity– It affects more than 1 billion people in LDCs It affects more than 1 billion people in LDCs

and 40 million in DCs.and 40 million in DCs.

• Soil degradation (due to replacement of Soil degradation (due to replacement of the primary vegetation)the primary vegetation)

• DeforestationDeforestation– According to the FAO, 80% of deforestation According to the FAO, 80% of deforestation

comes from clearing forests for use as comes from clearing forests for use as farmland to feed growing populations.farmland to feed growing populations.

• Disappearing biodiversityDisappearing biodiversity

• Declining fisheriesDeclining fisheries– 70% of commercial fisheries are facing 70% of commercial fisheries are facing

declining yields due to (over)full declining yields due to (over)full exploitation.exploitation.

Social costs of environmental Social costs of environmental degradationdegradation

• Lower levels of health and more premature deathsLower levels of health and more premature deaths– 11% of illnesses and premature deaths in LDCs are caused 11% of illnesses and premature deaths in LDCs are caused

by poor water supplies and sanitation and urban and by poor water supplies and sanitation and urban and indoor air pollution.indoor air pollution.

– Poor or no sewage systems cause illnesses and premature Poor or no sewage systems cause illnesses and premature death.death.

• Reduced productivity of resourcesReduced productivity of resources– Environmental degradation makes natural resources less Environmental degradation makes natural resources less

productiveproductive– Global climate change will result in:Global climate change will result in:

• lower crop yields in some areas and more variability in lower crop yields in some areas and more variability in agricultural productivity because of extreme weather agricultural productivity because of extreme weather conditions.conditions.

• Lower water availability in many water-scarce regionsLower water availability in many water-scarce regions• Rising sea levelsRising sea levels

• Reduced rates of growthReduced rates of growthCaused by lower levels of health, reduced Caused by lower levels of health, reduced

productivity of resources and the destruction of productivity of resources and the destruction of natural resources that are key inputs in natural resources that are key inputs in production.production.

• Reduced levels of economic and human Reduced levels of economic and human development.development.– Lower growth rates Lower growth rates → fewer resources available to → fewer resources available to

pursue economic and human development objectivespursue economic and human development objectives

• Increased health and income inequalitiesIncreased health and income inequalitiesEnvironmental degradation impacts more strongly on Environmental degradation impacts more strongly on

lower income groupslower income groups

Economic growth and Economic growth and sustainable developmentsustainable development

• In the longer term, they are compatible In the longer term, they are compatible and mutually reinforcing.and mutually reinforcing.– Continued economic growth over long periods Continued economic growth over long periods

of time requires environmental preservation.of time requires environmental preservation.– Environmental preservation requires Environmental preservation requires

economic growth, as this makes more economic growth, as this makes more resources available for environmental resources available for environmental protection (designing and enforcing protection (designing and enforcing regulations and investments to protect the regulations and investments to protect the environment).environment).

• In the short term, they will be conflicting In the short term, they will be conflicting objectives in many situationsobjectives in many situations– Preservation of the environment requires Preservation of the environment requires

resources that must be diverted away from resources that must be diverted away from production, which would lower the rate of production, which would lower the rate of growth that can be attained in the present.growth that can be attained in the present.

– Ignoring the environment translates into Ignoring the environment translates into greater economic growth in the present.greater economic growth in the present.

– It has proved to be difficult for governments It has proved to be difficult for governments to take a longer-term point of view and adopt to take a longer-term point of view and adopt policies aimed at achieving both objectives.policies aimed at achieving both objectives.

• ‘‘Grow now, clean up later’ principle Grow now, clean up later’ principle based on the idea that economic based on the idea that economic growth will give rise to increased growth will give rise to increased resources that can be used for resources that can be used for investments in the environment in investments in the environment in the future. the future.

• However, some damage can be However, some damage can be irreversible.irreversible.

• This justifies government inaction in This justifies government inaction in the environmental sphere, whereas it the environmental sphere, whereas it requires explicit government requires explicit government strategies and policies.strategies and policies.

Strategies for sustainable Strategies for sustainable developmentdevelopment• In 1992, 172 governments In 1992, 172 governments

committed themselves to act on a committed themselves to act on a set of points (‘Agenda 21’) in order to set of points (‘Agenda 21’) in order to achieve sustainable development in achieve sustainable development in the Earth Summit (UN conference).the Earth Summit (UN conference).

• They promised to adopt national They promised to adopt national strategies for sustainable strategies for sustainable development.development.

• One of the MDGs is to ‘ensure One of the MDGs is to ‘ensure environmental sustainability’.environmental sustainability’.

A strategy framework for A strategy framework for sustainable developmentsustainable development

• Disagreement about what Disagreement about what sustainable development means sustainable development means from a practical point of view and from a practical point of view and how this can be achieved in practice.how this can be achieved in practice.The reason is that a vaste range of The reason is that a vaste range of

variables (environmental, economic, variables (environmental, economic, social, institutional) are involved. They social, institutional) are involved. They are interrelated in complex ways and are interrelated in complex ways and many of them are difficult to measure.many of them are difficult to measure.

• Given the current limited knowledge Given the current limited knowledge and the ethical nature of some of the and the ethical nature of some of the issues, there is a wide scope for issues, there is a wide scope for subjective interpretations of what subjective interpretations of what sustainable development means in sustainable development means in practice.practice.

• Therefore, it is impossible to provide Therefore, it is impossible to provide a blueprint for a strategy for a blueprint for a strategy for sustainable development, only some sustainable development, only some general principles can be outlined.general principles can be outlined.

1.1. Each country must decide for itself the Each country must decide for itself the strategy which is best suited to its own strategy which is best suited to its own individual environmental, economic, social and individual environmental, economic, social and institutional conditions.institutional conditions.

2.2. A strategy for SD must integrate A strategy for SD must integrate environmental protection issues with issues of environmental protection issues with issues of economic and human development.economic and human development.

3.3. A strategy for SD must be based on a A strategy for SD must be based on a partnership between the government and partnership between the government and other stakeholders (interested parties) in the other stakeholders (interested parties) in the country. Although the government should country. Although the government should have the primary responsibility, it should work have the primary responsibility, it should work closely together with local governments, closely together with local governments, citizens’ groups, business groups, professional citizens’ groups, business groups, professional groups, the private sector, NGOs, aid groups, the private sector, NGOs, aid agencies, etc.agencies, etc.

4.4. A strategy for SD must have a long term vision A strategy for SD must have a long term vision based on priorities for development. Policies based on priorities for development. Policies devised in the present must be consistent with devised in the present must be consistent with long-term objectives that take into consideration long-term objectives that take into consideration the interests of future generations.the interests of future generations.

5.5. A strategy for SD must be formulated and led by A strategy for SD must be formulated and led by national governments. In the case that there is national governments. In the case that there is involvement by aid agencies or multilateral involvement by aid agencies or multilateral lending organizations, these must be integrated lending organizations, these must be integrated into the national strategy. Control over the into the national strategy. Control over the design and implementation of the strategy must design and implementation of the strategy must be under the national government. Strategies be under the national government. Strategies externally imposed do not succeed.externally imposed do not succeed.

6.6. A strategy for SD must have an anti-poverty A strategy for SD must have an anti-poverty orientation. SD cannot be achieved unless orientation. SD cannot be achieved unless poverty is alleviated.poverty is alleviated.

Policies within a strategy for SDPolicies within a strategy for SD

• Policies for industrial pollution and emissions.Policies for industrial pollution and emissions.• Eliminating environmentally harmful subsidies.Eliminating environmentally harmful subsidies.• Establishing clear property rights, which Establishing clear property rights, which

facilitates investments by poor people in activities facilitates investments by poor people in activities that promote environmental improvements.that promote environmental improvements.

• Policies to eliminate rural poverty.Policies to eliminate rural poverty.• Policies to promote sound forest management.Policies to promote sound forest management.• Policies to confront urban environmental hazards, Policies to confront urban environmental hazards,

arising from air pollution, low coverage of arising from air pollution, low coverage of sanitation, contaminated water supplies, sanitation, contaminated water supplies, insufficient waste management,...insufficient waste management,...

• Establishing protected areas, in order to preserve Establishing protected areas, in order to preserve biodiversity and critical ecosystems.biodiversity and critical ecosystems.

• Promoting science and technology for sustainable Promoting science and technology for sustainable development.development.