Topic 2: Economic Growth and Sustainability

1. Topic 2: Economic Growth and Sustainability David Letson Marine Affairs/Economics University of Miami

2. Overview: Visions of the future Markets as self-righting mechanisms Sustainable growth? Natural Resource Economics: helping set priorities

3. What�s your vision of the future? Positive sustainable level of welfare? Ultimate level of welfare? Future welfare vs. our actions?

4. Sustainability: Natural vs. Man-made Capital Not simply an issue of survival. Access to natural environments. Unique assets versus quality of life.

5. Elements of Sustainable Development

6. Example: FL�s 800 Miles of Sand Beaches 18 million residents, 80 million seasonal tourists. Tourism & construction are two largest industries here. Coast supports economy and our quality of life. How to balance growth and coastal environmental quality?

7. Markets as self-righting mechanisms Resources to most highly valued uses. Adam Smith: division of labor. Resource scarcity as limit to growth. Wager: Julian Simon and Paul Ehrlich. Markets as self-righting mechanisms. Markets alleviate scarcity by allocating resources toward their most highly valued uses. Adam Smith noted that the division of labor is the great source of our wealth. He argued that the extent of the market limits the division of labor, and that navigable waters extend the market. Thus, development tends towards waters. Environmentalists reasonably question the consistency of economic growth and environmental quality. Natural resource scarcity can be a drag on economic growth, but beware of alarmists. Perhaps most visible example of this was wager between economist Julian Simon and environmentalist Paul Ehrlich on mineral prices, 1980-1990. Ehrlich chose 5 minerals, and the two agreed upon how much $1000 would buy of these minerals in 1980 and that the loser would pay the other the difference in cost of that quantity in 1990. The economist Simon, with a great deal of faith in markets, be that prices (in 1980 dollars) would fall. Not only did he win ($570), but he would have won for 33 of the 35 commonly transacted minerals, and even if they had not corrected for inflation.Markets as self-righting mechanisms. Markets alleviate scarcity by allocating resources toward their most highly valued uses. Adam Smith noted that the division of labor is the great source of our wealth. He argued that the extent of the market limits the division of labor, and that navigable waters extend the market. Thus, development tends towards waters. Environmentalists reasonably question the consistency of economic growth and environmental quality. Natural resource scarcity can be a drag on economic growth, but beware of alarmists. Perhaps most visible example of this was wager between economist Julian Simon and environmentalist Paul Ehrlich on mineral prices, 1980-1990. Ehrlich chose 5 minerals, and the two agreed upon how much $1000 would buy of these minerals in 1980 and that the loser would pay the other the difference in cost of that quantity in 1990. The economist Simon, with a great deal of faith in markets, be that prices (in 1980 dollars) would fall. Not only did he win ($570), but he would have won for 33 of the 35 commonly transacted minerals, and even if they had not corrected for inflation.

8. An old debate Parson T. Malthus: Scarcity of land. J.S. Mill: technical change. Higher resource prices imply: innovation and conservation; protection of renewables; and exhaustibles become expensive. Parson Thomas Malthus: if the only check on population growth is starvation and misery, then the population will grow until it is miserable and starves. Scarcity of agricultural land implies diminishing returns to labor. Population grows geometrically (1,2,4,8,...) faster than its ability to feed itself, which grows arithmetically (1,2,3,4,...). Note that Garrett Hardin (�the freedom to breed is intolerable�) is a neo-Malthusian in his description of population growth as an unstoppable, destructive force. John Stuart Mill: Noted absence of technological change in Malthus� model. Saw economic progress as a race between technical change and diminishing returns in agriculture. Under right circumstances, markets do act as �self-righting mechanism� in response to natural resource scarcity. Higher relative prices for natural resources may mean: technical innovation, resource conservation, and exploration; protection from over-harvesting renewables; and exhaustibles become extremely expensive and may not ever be exhausted. Parson Thomas Malthus: if the only check on population growth is starvation and misery, then the population will grow until it is miserable and starves. Scarcity of agricultural land implies diminishing returns to labor. Population grows geometrically (1,2,4,8,...) faster than its ability to feed itself, which grows arithmetically (1,2,3,4,...). Note that Garrett Hardin (�the freedom to breed is intolerable�) is a neo-Malthusian in his description of population growth as an unstoppable, destructive force. John Stuart Mill: Noted absence of technological change in Malthus� model. Saw economic progress as a race between technical change and diminishing returns in agriculture. Under right circumstances, markets do act as �self-righting mechanism� in response to natural resource scarcity. Higher relative prices for natural resources may mean: technical innovation, resource conservation, and exploration; protection from over-harvesting renewables; and exhaustibles become extremely expensive and may not ever be exhausted.

9. Why study natural resource economics? Important. Different from labor and capital. Many market failures. Recall: First fundamental theorem of welfare economics (Arrow/Debreu): C.E. + C. = P.O. competitive markets missing markets First fundamental theorem of welfare economics (Arrow/Debreu): C.E. + C. = P.O. We do not spend much time on how competitive markets are, but much of this course revolves around missing markets, e.g., open access, externalities, and public goods. If markets are missing for a resource, then so is a positive price that would ration its use. Overuse is a likely outcome.First fundamental theorem of welfare economics (Arrow/Debreu): C.E. + C. = P.O. We do not spend much time on how competitive markets are, but much of this course revolves around missing markets, e.g., open access, externalities, and public goods. If markets are missing for a resource, then so is a positive price that would ration its use. Overuse is a likely outcome.

10. Is economic growth sustainable? Yes, if wealthier nations pollute less More services; less manufacturing. Rich can afford to be green. Quality of life. Government. Technological advance. Development versus growth. Idea is that the content of growth matters a great deal, particularly if we have market failures. This theme appears in the paper by Arrow et al. (1995). Arrow et al. dispute what has been called �the inverted-U� hypothesis, that wealthier nations are less polluting. Important because if it�s true, then we could simply grow our way to environmental quality. There would be no need for environmental policy. The case for the inverted-U hypothesis (richer = cleaner; see Cairncross 1995, Green Inc.): More consumption of services and less of manufactured goods. Less polluting. Richer countries can afford to be green. Affluent citizen demand environmental quality. Government may be more effective (?) Technological advance. Development versus growth. Idea is that the content of growth matters a great deal, particularly if we have market failures. This theme appears in the paper by Arrow et al. (1995). Arrow et al. dispute what has been called �the inverted-U� hypothesis, that wealthier nations are less polluting. Important because if it�s true, then we could simply grow our way to environmental quality. There would be no need for environmental policy. The case for the inverted-U hypothesis (richer = cleaner; see Cairncross 1995, Green Inc.): More consumption of services and less of manufactured goods. Less polluting. Richer countries can afford to be green. Affluent citizen demand environmental quality. Government may be more effective (?) Technological advance.

11. Is economic growth sustainable? Problems with inverted-U: Dispersed or long-lived effects. Emissions as proxy for degradation. Bottom line on the Inverted-U: Growth alone will not protect environment. Poverty is bad for environment.  Arrow et al.: �Is there a reliable, empirical relationship between per capita income and environmental quality?� Yes, for a small number of pollutants with local, short-term effects. No, for environment generally and carrying capacity in particular. (We do not understand eco-system dynamics such as threshold effects, buffering capacity, and resilience.) Where costs of degradation are borne by the poor, by future generations, or by other countries, incentives to correct the problem are likely to be weak. Policies that promote growth are no substitute for environmental policy, e.g., well defined property rights. We want growth, but the content of growth matters. Arrow et al.: �Is there a reliable, empirical relationship between per capita income and environmental quality?� Yes, for a small number of pollutants with local, short-term effects. No, for environment generally and carrying capacity in particular. (We do not understand eco-system dynamics such as threshold effects, buffering capacity, and resilience.) Where costs of degradation are borne by the poor, by future generations, or by other countries, incentives to correct the problem are likely to be weak. Policies that promote growth are no substitute for environmental policy, e.g., well defined property rights. We want growth, but the content of growth matters.

12. Too Many People?

13. Is Population Growth Sustainable? Population growth and economic development Poverty and environmental degradation Theory of demographic transition Productivity of children Opportunities for saving Status of women We might also add what is called the theory of demographic transition (Partha Dasgupta): Reductions in population growth accompany rising standards of living, at least in long run. (Immediate effects may differ if death rates fall faster than birth rates.) �Children as capital or, rather, consumer durables. �Shift from agrarian to industrial economy reduces productivity of children. �In absence of credible banking system, children may be only way to provide for old age. �National income growth increases options for women outside the home. Rising opportunity cost of women�s time. Also, their status is no longer tied to child rearing. �Direct cost of children higher in growing, urbanized economy: housing and compulsory education. We might also add what is called the theory of demographic transition (Partha Dasgupta): Reductions in population growth accompany rising standards of living, at least in long run. (Immediate effects may differ if death rates fall faster than birth rates.) �Children as capital or, rather, consumer durables. �Shift from agrarian to industrial economy reduces productivity of children. �In absence of credible banking system, children may be only way to provide for old age. �National income growth increases options for women outside the home. Rising opportunity cost of women�s time. Also, their status is no longer tied to child rearing. �Direct cost of children higher in growing, urbanized economy: housing and compulsory education.

14. Natural Resource Economics: Helping set priorities. Need a hierarchy of values. Lack of markets implies a lack of information for decision makers. Which uses are most important to protect? Without a hierarchy of environmental issues, governments have no idea where first to spend taxpayers money. Example of ICW. The scarcity of resources in relation to human demands implies tradeoffs. In markets, we at least can make informed choices. Products are visible, have well-known characteristics, and carry designated prices. While it spawns a great deal of economic activity, the various uses of ICW are not themselves transacted in markets. Registration fees for boaters, while not negligible, cover administrative costs and do not represent willingness to pay for boating access or the value of lost manatee habitat. Consequently, much less information exists about these alternative uses of the ICW. Posted prices are lacking that would reflect user values. Economics contributes an ability to quantify changes in social welfare resulting from changes in the condition or availability of natural resources. Improving our knowledge of economic values informs policy making by identify or at least approximate what the best choice may be. Without a hierarchy of environmental issues, governments have no idea where first to spend taxpayers money. Example of ICW. The scarcity of resources in relation to human demands implies tradeoffs. In markets, we at least can make informed choices. Products are visible, have well-known characteristics, and carry designated prices. While it spawns a great deal of economic activity, the various uses of ICW are not themselves transacted in markets. Registration fees for boaters, while not negligible, cover administrative costs and do not represent willingness to pay for boating access or the value of lost manatee habitat. Consequently, much less information exists about these alternative uses of the ICW. Posted prices are lacking that would reflect user values. Economics contributes an ability to quantify changes in social welfare resulting from changes in the condition or availability of natural resources. Improving our knowledge of economic values informs policy making by identify or at least approximate what the best choice may be.