Economic, social, and environmental elements of development
Contents
Need for integration
It is important to integrate and reconcile the economic, social and environmental aspects within a holistic and balanced sustainable development framework. Economic analysis has a special role in contemporary national policy making, since many important decisions fall within the economic domain. Unfortunately, mainstream economics which is used for practical policy making has often ignored the environmental and social dimensions of sustainable development. However, there is a small but growing body of literature which seeks to address such shortcomings – e.g., Ecological Economics, and Conservation Ecology.
Figure 1: Sustainable development triangle – key elements and interconnections (corners, sides, center). (Source: adapted from Munasinghe 1994a) As a prelude to integration, it is useful to compare the concepts of ecological, social and economic sustainability. One useful idea is that of the maintenance of the set of opportunities, as opposed to the preservation of the value of the asset base [1]. In fact, if preferences and technology vary through successive generations, merely preserving a constant value of the asset base becomes less meaningful. By concentrating on the size of the opportunity set, the importance of biodiversity conservation becomes more evident, for the sustainability of an ecosystem. The preservation of biodiversity allows the system to retain resilience by protecting it from external shocks, while the maintenance of stocks of manufactured capital protects future consumption. Differences emerge because economics indicates that a society which consumes its fixed capital without replacement is not sustainable, whereas using an ecological approach, unsustainable loss of biodiversity and resilience implies a reduction in the self-organization of the system, but not necessarily a loss in productivity. In the case of social systems, resilience depends to a certain extent on the capacity of human societies to adapt and continue functioning in the face of stress and shocks. Thus, linkages between socio-cultural and ecological sustainability emerge through their interactions, organizational similarities between human societies and ecological systems, and the parallels between biodiversity and cultural diversity. From a longer term perspective, the concept of co-evolution of social, economic and ecological systems within a larger, more complex adaptive system, provides useful insights regarding the harmonious integration of the various elements of sustainable development – Figure 1 and Chapter 4 (Economic, social, and environmental elements of development) [2].
Optimality and durability are two broad approaches that help to integrate the economic, environmental and social dimensions of sustainable development. While there are overlaps between the two methods, the main thrust is somewhat different in each case. Uncertainty often plays a key role in determining which approach would be preferred. For example, a system modeler expecting relatively steady and well-ordered conditions may pursue an optimal solution that attempts to control and even fine-tune theoretical outcomes. Meanwhile, a subsistence farmer facing chaotic and unpredictable circumstances might opt for a more durable and practical response that simply enhances survival prospects.
Optimality
The optimality-based approach has been widely used in economic analysis to generally maximize welfare (or utility), subject to the requirement that the stock of productive assets (or welfare itself) is non-decreasing in the long term This assumption is common to most sustainable economic growth models, as reviewed by Pezzey [3] and Islam [4]. The essence of the approach is illustrated by the simple example of maximization of the flow of aggregate welfare (W), cumulatively discounted over infinite time (t), as represented by the expression:
Here, W is a function of C (the consumption rate), Z (a set of other relevant variables), and r is the discount rate. Further side constraints may be imposed to satisfy sustainability needs – e.g., non-decreasing stocks of productive assets (including natural resources). The welfare maximizing, optimality-based approach underlies commonly used economic techniques like shadow pricing and cost-benefit analysis.
Some ecological models also optimize variables like energy use, nutrient flow, or biomass production – giving more weight to system vigor as a measure of sustainability. In economic models, utility is measured mainly in terms of the net benefits of economic activities, i.e., the benefits minus the costs [5] (Chapter 3 (Economic, social, and environmental elements of development)). More advanced economic optimization methods seek to include environmental and social variables (e.g., by valuing environmental externalities, system resilience, etc.). However, given the difficulties of valuing such ‘non-economic’ assets, the costs and benefits associated with market-based activities dominate in most economic optimization models.
Within this framework, the optimal growth path maximizes economic output, while sustainability rules are met by ensuring non-decreasing stocks of assets (or capital). Some analysts support a ‘strong sustainability’, which requires separate preservation of each type of critical asset (e.g., manufactured, natural, socio-cultural and human capital), assuming that they are complements rather than substitutes [6]. Others have argued for ‘weak sustainability,’ which seeks to maintain the aggregate monetary value of total stocks of all assets, assuming that various asset types may be valued and that there is some degree of substitutability among them [7].
Side constraints are often necessary, because the underlying basis of economic valuation, optimization and efficient use of resources may not be easily applied to ecological objectives like protecting biodiversity and improving resilience, or to social goals such as promoting equity, public participation and empowerment. Thus, such environmental and social variables cannot be easily combined into a single valued objective function with other measures of economic costs and benefits. Moreover, the price system (which has time lags) might fail to anticipate reliably irreversible environmental and social harm, and non-linear system responses that could lead to catastrophic collapse. In such cases, non-economic measures of environmental and social status would be helpful – e.g., area under forest cover, and incidence of conflict [8]. The constraints on critical environmental and social indicators are proxies representing safe thresholds, which help to maintain the viability of those systems. Multi-criteria analysis facilitates trade-offs among a variety of non-commensurable variables and objectives. Risk and uncertainty will also necessitate the use of decision analysis tools. Recent work has underlined the social dimension of decision science, by pointing out that risk perceptions are subjective and depend on the risk measures used, as well as other factors such as ethno-cultural background, socio-economic status, and gender [9].
Durability
The second broad integrative approach focuses primarily on sustaining the quality of life – e.g., by satisfying environmental, social and economic sustainability requirements. Such a framework favors ‘durable’ development paths that permit growth, but are not necessarily economically optimal. There is more willingness to trade off some economic optimality for the sake of greater safety, in order to stay within critical environmental and social limits – e.g., among increasingly risk-averse and vulnerable societies or individuals who face chaotic and unpredictable conditions. The economic constraint might be framed in terms of maintaining consumption (Essential economic activities) levels (defined broadly to include environmental services, leisure and other ‘non-economic’ benefits) – i.e., per capita consumption that never falls below some minimum level, or is non-declining. The environmental and social sustainability requirements may be measured by indicators of ‘state’ relating to the durability or health (resilience, vigor and organization) of ecological and socio-economic systems. For example, consider a simple durability index (D) for an ecosystem measured in terms of its expected lifespan (in a healthy state), as a fraction of the normal lifespan. We might specify: D = D(R,V,O,S); to indicate the dependence of durability on resilience (R), vigor (V), organization (O), and the state of the external environment (S) – especially in relation to potentially damaging shocks. Further interaction between the sustainability of social and ecological systems may be relevant – e.g., social conflict could exacerbate damage to ecosystems, and vice versa. For example, long-standing social norms in many traditional societies have helped to protect the environment [10].
Durability encourages a holistic systemic viewpoint, which is important in sustainomics analysis. The self-organizing and internal structure of ecological and socioeconomic systems makes ‘the whole more durable (and valuable) than the sum of the parts’ ([[Chapter 4 (Economic, social, and environmental elements of development)]2]). A narrow measure of merit based on marginal analysis of individual components may be misleading [11]. For example, it is more difficult to value the integrated functional diversity in a forest ecosystem than the individual species of trees and animals. Therefore, the former is more likely to fall victim to market failure (as an externality). Furthermore, use of simple environmental shadow prices could lead to homogenization and reductions in system diversity [12]. Systems analysis helps to identify the benefits of cooperative structures and behavior, which a more partial analysis may neglect. Durability is also linked to the well-known concept of “satisficing” behavior, where individuals seek to reach a minimum level of satisfaction, without striving to achieve the maximum possible value [13].
The possibility of many durable paths favors simulation-based methods, including consideration of alternative world views and futures (rather than one optimal result). This approach is consonant with recent research on integrating human actors into ecological models [14]. Key elements include multiple-agent modeling to account for heterogeneous behavior, recognition of bounded rationality leading to different perceptions and biases, and emphasis on social links which give rise to responses like imitation, reciprocity and comparison.
In the durability approach, sustainability constraints could be met by maintaining stocks of assets (as for optimality). Here, the various forms of capital are viewed as a bulwark that decreases vulnerability to external shocks and reduces irreversible harm, rather than mere accumulations of assets that produce economic outputs. System resilience, vigor, organization and ability to adapt will depend dynamically on the capital endowment as well as the magnitude and rate of change of a shock.
Complementarity and convergence of optimal and durable approaches
National economic management provides good examples of how the two approaches complement one another. For example, economy-wide policies involving both fiscal and monetary measures (e.g., taxes, subsidies, interest rates and foreign exchange rates) might be optimized on the basis of quantitative macroeconomic models. Nevertheless, decision makers inevitably modify these economically ‘optimal’ policies before implementing them, to take into account other sociopolitical considerations based more on durability (e.g., protection of the poor, regional factors), which facilitate governance and stability. Setting an appropriate target for future global greenhouse gas (GHG) emissions (and corresponding GHG concentration) provides another useful illustration of the interplay of the durability and optimality approaches [15] (Chapter 5}.
The complementarity and convergence of the two approaches may be practically realized in several ways. First, waste generation should be limited tot rates less than or equal to the assimilative capacity of the environment. Second, the utilization of scarce renewable resources should be limited to rates less than or equal to their natural rate of regeneration. Third, non-renewable resources need to be managed in relation to the substitutability between these resources and technological progress. Both wastes and natural resource input use might be reduced, by moving from the linear throughput to the closed loop mode. Thus, factory complexes could be designed in clusters – based on the industrial ecology concept – to maximize the circular flow of materials and recycling of wastes among plants. Finally, additional aspects should be considered (at least in the form of safe limits or constraints), including inter- and intra-generational equity (poverty alleviation), pluralistic and consultative decision making, and enhanced social values and institutions.
Greenhouse gas mitigation provides one example of how such an integrative framework could help to incorporate climate change policies within a national sustainable development strategy. The rate of total GHG emissions (G) may be decomposed by means of the following identity:
where [Q/P] is quality of life per capita; [Y/Q] is the material consumption required per unit of quality of life; [G/Y] is the GHG emission per unit of consumption; and P is the population. A high quality of life [Q/P] can be consistent with low total GHG emissions [G], provided that each of the other three terms on the right hand side of the identity could be minimized (see ‘tunnelling’ in "Restructuring development and growth for greater sustainability"). Reducing [Y/Q] implies ‘social decoupling’ (or ‘dematerialization’) whereby satisfaction becomes less dependent on material consumption, through changes in tastes, behavior and values – more sustainable consumption. Similarly [G/Y] may be reduced by ‘technological decoupling’ (or ‘decarbonization’) that reduces the intensity of GHG emissions in both consumption and production. Finally, population growth needs to be reduced, especially where emissions per capita are already high. The links between social and technological decoupling need to be explored [16] – changes in public perceptions and tastes could affect the directions of technological progress, and influence the effectiveness of mitigation and adaptation capacity and policies. A range of economic and social policy instruments may be used to make both consumption and production patterns more sustainable. Policy tools include market incentives and pricing, legislation and controls, improved technological alternatives, and consumer education (Chapters 5 and 14).
Climate change researchers are currently exploring the application of large and complex integrated assessment models or IAMs, which contain coupled submodels that represent a variety of ecological, geophysical and socioeconomic systems [17]. Both optimality and durability might be appropriately applied to the various submodels within an IAM.
Poverty, equity, population and sustainable natural resource use
This section examines key issues in the nexus of poverty-equity-population-natural resources, from a holistic sustainomics perspective.
Dimensions of equity and poverty
Equity and poverty are two important issues, which have mainly social and economic dimensions, and also some environmental aspects. Compelling worldwide statistics were given in "Rationale and motivations for sustainomics". Meanwhile, income disparities are worsening – the per capita ratio between the richest and the poorest 20 percentile groups was 30 to 1 in 1960 and over 60 to 1 by 2000.
Equity is an ethical and people-oriented concept with primarily social, and some economic and environmental dimensions. It focuses on the fairness of both the processes and outcomes of decision making. The equity of an action may be assessed in terms of several approaches, including parity, proportionality, priority, utilitarianism, and Rawlsian distributive justice. Rawls stated that “Justice is the first virtue of social institutions, as truth is of systems of thought” [18]|. Societies seek to achieve equity by balancing and combining several of these criteria.
Economic policies aiming to increase overall human welfare have been used for poverty alleviation, improved income distribution and intra-generational (or spatial) equity [19]. Brown points out shortcomings in the utilitarian approach, which underlies the economic approach to equity [20]. Broadly speaking, economic rules provide guidance on producing and consuming goods and services more efficiently, but are unable to choose the most equitable outcome among alternative patterns of efficient consumption. Equity principles provide better tools for making judgments about such choices.
Social equity is also linked to sustainability, because highly skewed or unfair distributions of income and social benefits are less likely to be acceptable or lasting in the long run. Equity will be strengthened by enhancing pluralism and grass-roots participation in decision making, as well as by empowering disadvantaged groups (defined by income, gender, ethnicity, religion, caste, etc.) [21]. In the long term, considerations involving inter-generational equity and safeguarding the rights of future generations, are key factors. In particular, the economic discount rate plays a key role with respect to both equity and efficiency aspects [22].
Equity in the environmental sense has received more attention recently, because of the disproportionately greater environmental damages suffered by disadvantaged groups. Thus, poverty alleviation efforts (that traditionally focused on raising monetary incomes) are being broadened to address the degraded environmental and social conditions facing the poor. Martinez-Allier argues that the poor who rely more directly on natural resources are often good environmental managers, whereas the rich impose a more harmful environmental footprint through the indirect effects of their consumption [23]. Munasinghe challenges the common belief that poverty and population growth per se are harmful to nature [24], which conceals a crucial equity issue – the poor although more numerous consume far less than the rich (see below).
In summary, both equity and poverty have not only economic, but also social and environmental dimensions, and therefore, they need to be assessed using a comprehensive set of indicators (rather than income distribution alone). From an economic policy perspective, emphasis needs to be placed on expanding employment and gainful opportunities for poor people through growth, improving access to markets, and increasing both assets and education. Social policies would focus on empowerment and inclusion, by making institutions more responsive to the poor, and removing barriers that exclude disadvantaged groups. Environmentally related measures to help poor people might seek to reduce their vulnerability to disasters and extreme weather events, crop failures, loss of employment, sickness, economic shocks, etc. Thus, an important objective of poverty alleviation is to provide poor people with assets (e.g., enhanced physical, human and financial resources) that will reduce their vulnerability. Such assets increase the capacity for both coping (i.e., making short-run changes) and adapting (i.e., making permanent adjustments) to external shocks [25].
The foregoing ideas merge quite naturally with the sustainable livelihoods approach to poverty alleviation. We identify three key aspects of livelihoods that are important for the sustainability of poverty programs [26]. First, there are gainful activities that people engage in, ranging from formal, full-time employment to seasonal, informal and ad-hoc jobs, which provide only a bare subsistence income in both urban and rural settings. Second, access to productive assets and the services they provide are important. Economic assets consist of the familiar manufactured capital like machines and buildings. Key environmental assets, which draw on the base of natural capital are often overlooked. Social capital is equally important and includes social, political and other processes and institutions, which facilitate human interactions, and are linked to values, culture and behavioral norms. Third, there are rights and entitlements, which are especially important for poor and destitute groups to meet basic needs for survival [27]. Other authors have identified five types of assets that are important for sustainable livelihoods: human, social, natural, physical and financial [28].
An even broader non-anthropocentric approach to equity involves the concept of fairness in the treatment of non-human forms of life or even inanimate nature. One view asserts that humans have the responsibility of prudent ‘stewardship’ (or ‘trusteeship’) over nature, which goes beyond mere rights of usage [29].
Population and natural resource use
The linkage between population and natural resource use is also complex, and needs to be studied in the context of poverty and equity [30]. Sustainomics encourages us to take a balanced view, where people are seen as a resource, and not necessarily an unsustainable burden. One general belief is that the growth of poor population is harmful to natural resources, starting with Malthus [31]. For example, a widely cited article on conservation of wild living resources [32] asserts provocatively that “the only practicable way to reduce human per capita resource demand is to stabilize and then decrease the human population”. This proposition is misleading and detracts from the overall content of an otherwise authoritative and comprehensive paper. No convincing evidence exists to link per capita natural resource demand with population size. Even the link between total resource use and population is complex and cannot be captured adequately by a simple statement.
Consider the earlier equation, rewritten to show total natural resource use as: N = [N/P] x P. Here P is the population, and [N/P] is per capita natural resource use. An exclusive focus on population control is one-sided, because high levels of per capita consumption are as much to blame for resource depletion as is simple population growth. Currently, a mere 15 percent of the world’s rich population consume over sixteen times as much as the almost 60 percent of the poor population (and will do so for the foreseeable future). A more equitable and balanced viewpoint would recognize the implications of both population and per capita consumption for sustainability. Furthermore, the growth rates of per capita consumption and population among the rich should be matters of greater concern, than the same indices among the poor.
Environmental degradation, population and poverty are known to form a nexus with complex interactions. The poor are the most frequent victims of both pollution and resource degradation usually caused by the rich – which is inequitable. At the same time, there are macro-circumstances in which the landless poor are forced to encroach on fragile lands, eventually degrading their own environment [33]. A comprehensive multi-agency report argued recently that poverty alleviation requires environmental protection, and that both objectives should be pursued simultaneously [34]. Grima et al. discuss reconciliation of the opposing viewpoints of ecologists favoring natural resource sustainability [35], and economists promoting development and poverty alleviation, under four different themes – institutions, ecotourism, measurement indicators, and fragile lands. Meanwhile, population growth itself depends on many factors, including not only the highly visible elements like family planning programs, but also deeper underlying factors such as education level (especially of women), the status of women, family income, access to basic needs and financial security [36].
A simple mathematical exposition suggests that the common wisdom linking population growth with natural resource depletion is not necessarily as straightforward as it seems [37]. Consider a society which has a population P and a stock of natural resources N. One useful indicator of the sustainability of natural resource stocks would be the ratio R = N/P. More specifically, one might seek a development path in which this ratio was non-decreasing. Thus, sustainability would require that dR/dt ? 0. A more convenient sustainability rule may be defined as:
It is possible to decompose the measure S to show the distinct effects of growth in natural resource stocks and growth in population. Assuming that N = N(P,t) and P = P(t), we obtain:
Clearly, the first term […] is positive if (?W/?t) > 0; that is, S rises as natural resource stocks increase over time, holding population constant. However, the sign of the second term {…} depends on the sign of both (dP/dt) and ([– e]). Thus, reducing the population (dP/dt < 0) will increase sustainability S, only if e < 1. The opposite condition e > 1 is more likely to prevail if N/P is low to begin with and ?N/?P is relatively high: for example, if mild population growth stimulates greater efforts towards protecting and increasing resource stocks. One example might be a community living in an arid area. If the human population dwindles, the natural progress of desertification could well proceed unimpeded. By contrast, a growing and thriving population (with increasing income levels) is likely to devote more efforts towards environmental protection, ensuring that the condition e > 1 is maintained.
Rapid declines in population growth rates have serious demographic implications – as many countries are discovering today. The base of the population pyramid shrinks as birth rates drop and the population ages, leaving a smaller group of productive young people to support an increasing fraction of elderly and dependent persons. Some countries have responded by encouraging immigration to increase the labor force. The policy implications of an aging population include a radical rethinking of many serious issues including the retirement age, encouraging more productive activity among the elderly, rebalancing social insurance contributions and pension payments, etc.
The foregoing argument may be summarized as follows. While it is ‘fashionable’ to automatically assume that people are a threat to natural resources and sustainability, a good case may be made for considering human beings as a valuable resource for sustainable development (see "Environmental and social assessment"). Human and natural resources are complementary. Furthermore, human attitudes towards the environment and their patterns of economic activity are at least as important as the number of people. From a sustainomics perspective, if scarce environmental resource stocks are at risk, building human and social capital through enhanced education, training, health, and other social services could be the key to unlocking the potential of poor people and converting a perceived liability into an asset. The third element of the sustainable development triangle (economic resources) could also play a role through improved technology to reduce the pressure on mineral and living wild resources.
To conclude, if both per capita resource demand and population are examined more even-handedly, some promising options for conservation of natural resources will emerge. A background factor that cannot be ignored is that economic growth is a prime imperative for developing countries, especially ones with large numbers of poor and destitute people. The discussion in "Restructuring development and growth for greater sustainability" shows how growth could be re-structured to make development more sustainable, and how policies might be tailored to find a more sustainable path or “tunnel”.
Notes (Economic, social, and environmental elements of development)
Further Reading
- Munasinghe, M. 1992. Environmental Economics and Sustainable Development, Paper presented at the UN Earth Summit, Rio de Janeiro, Environment Paper No.3, World Bank, Wash. DC, USA.
- Munasinghe, M. 1994. ‘Sustainomics: a transdisciplinary framework for sustainable development’, Keynote Paper, Proc. 50th Anniversary Sessions of the Sri Lanka Assoc. for the Adv. of Science (SLAAS), Colombo, Sri Lanka.
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