Is growth sustainable? What quality of life?
Growth as a prerequisite for wealth? Genshagen Trilateral Summer School, 24th August 2011
Rémi Bazillier 1 1
[email protected] http://remi.bazillier.free.fr Université d’Orléans
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Is growth sustainable?
Economic Growth is a recent phenomenon Economic Growth determinants, different type of capital and the role of technological progress Economic Growth and Wealth
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Rémi Bazillier
Economic Growth Economic growth and wealth The environmental Kuznets curve
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Rémi Bazillier
Economic Growth Economic growth and wealth The environmental Kuznets curve
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Rémi Bazillier
Economic Growth Economic growth and wealth The environmental Kuznets curve
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Rémi Bazillier
Economic Growth Economic growth and wealth The environmental Kuznets curve
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Rémi Bazillier
Economic Growth Economic growth and wealth The environmental Kuznets curve
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
What is economic growth?
Production: Transformation of natural ressources and intermediate goods in other goods or services (the final product) which creates a value-added The value-added: Technical combination of production factors, such as labour and capital the Gross domestic product (GDP): the sum of the value-added created in a country for a specific period Economic growth: is the change in GDP between two years
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Different types of capital The physical capital: accumulation of equipment goods (investments). Main factor of growth in the long run for economists. It is possible to accumulate this capital because it is produced. Each year: a share of the production is used to produced equipment goods. Share of the production which is not consumed (saving) → investments Question: does the accumulation of capital can be infinite?
Human capital: accumulation based on human knowledge (education) Natural capital: non-renewable resources (fossil resources) or renewable resources. The only capital that cannot be accumulated Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
The role of technological progress Production factor accumulation may be impacted by human factors Schumpeter emphasizes the role of inventions and innovations in the growth process Decreasing returns of per capita productivity Technological progress can reverse this tendency or at least, slow down the process of stagnation
Two visions: The pessimist one: difficult to sustain the rate of technological progress (Schumpeter) The optimistic one: the endogeneous growth theories. Accumulation of knowledge is a cumulative process. Growth can be exponential.
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Non-renewable resources and growth
If resources are substitutable with other resources: long-run growth will be a function of the substitutability of non-renewable resources and others (eg. oil with other resources) Technological change and technical progress will be two crucial factors of sustainability
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Renewable resources and growth
two factors: the use rate of resources and the replacement rate Economic growth increases in the short-run the use rate Technological progress can decrease the use rate and increase the replacement rate The net effect is ambiguous
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Is growth sustainable?
Different types of growth Different definitions of sustainability: Weak sustainability: No decrease of the level of stocks for different capitals. If a unit of natural capital may be substituted by a unit of another type of capital, the weak sustainability condition is satisfied Strong sustainability: No decrease of the the stock of natural capital
Guess what type of sustainability is promoted by most economists?
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Economic growth and wealth
To answer the question of the sustainability of growth, the best solution would be to build an index of sustainability But it is very difficult in practice to build such index Goal of the Stiglitz - Sen - Fitoussi report (2009)
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Economic growth and wealth
“Sustainability poses the challenge of determining whether we can hope to see the current level of well-being at least maintained for future periods or future generations” (Stiglitz report, p. 61) The “wealth approach of sustainability”: “the well-being of future generations compared to ours will depend on what resources we pass on to them” (Stiglitz report, p.61)
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Wealth and intertemporal well-being For an individual: the current well-being does not only depend on what she consumes now but also it depends on what she expects to consume in the future The individual well-being is better measured by a weighted combination of her current and future levels of instantaneous levels of well-being The right definition of wealth: “the discounted value of future consumptions or enjoyments that she can plan to derive from her current endowments” → It is exactly the same thing. The only difference is that wealth is not limited anymore to financial or physical wealth For instance, being in good health today increases the wealth because it enlarges one’s perspective of earning money, consuming and enjoying life ine the latter periods Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Social well-being Intertemporal well-being: a discounted sum of consumptions or enjoyments by all its current or future members at all future dates the same correspondence between the notion of intertemporal social welfare and a concept of current “extended wealth” aggregating the utility-generating potential of all our current endowments, not only for ourselves, but also for all future generations. Two difficulties: How to measure the future instantaneous consumption or well-being? The issue of discounting, i.e. of deciding how to weigh the relative well-beings of people living today and of people leaving 100 years ahead from now or more. Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Wealth and sustainability
“Measuring wealth is measuring the size of the cake to be divided between successive generations, while measuring sustainability is raising a question about how this cake will be shared between generations or periods, the objective being to have no future generation less well-off than the current one.” (Stiglitz report, p. 252)
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Measuring sustainability Two ways of measuring sustainability: 1
2
Sustainable well-being: the idea is to compute the maximum constant level of well-being that can be ensured at all successive periods with current levels of resources as a starting point (Nordhaus and Tobin, Weitzman). → The “Green GDP” Changes in global wealth: A decrease of wealth between t and t+1: we start t+1 in with a lower endowment that the one we started with at time t One day or later, society will have to adjust its standard of living downwards, and the adjustement will be all the more violent that it will come late.
→ The adjusted net saving
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
One example of green GDP: the Genuine Progress Indicator (GPI), United States, 1950-2000
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Genuine savings
Source: K. Hamilton et M. Clemens (1998) Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Source: K. Hamilton et M. Clemens (1998) Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
The environmental Kuznets curve In the previous subsection: focus on wealth and sustainability In this subsection: focus on the relation between income per capita (and growth) and environmental damages The debate: Growing economic activity requires larger inputs of energy and materials → Growth would lead to a degradation of environmental quality and a decline in human welfare But growth also lead to an increased level of demand for an improved environment quality. “The strong correlation between incomes, and the extent to which environmental protection measures are adopted, demonstrates that in the longer run, the surest way to improve your environment is to become rich” (Beckerman, 1992) Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
The environmental Kuznets curve Between these two extremes, others believe in a non-linear relation between per-capita income and environmental damages The environmental Kuznets curve (EKC):
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Environmental damages and environmental policies
If environmental damages increases monotonically with income: calls for strict environmental regulations and limits on economic growth to ensure sustainability If environmental damages decreases monotonically: environmental policies may be counter-productive if they slow down economic growth If EKC is verified: growth would have significant negative impact on the environment in the short-run but be neutral in the long-run.
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Theoretical explanations on the linkages between environment and growth
Shifts in production technologies (role of technical progress) Income elasticity for environmental quality Complete growth models with different technologies and preferences can lead to a theoretical explanation of the EKC
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
The decomposition of the income-environment relationship (Panayotou)
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
The decomposition of the income-environment relationship Environmental quality is the outcome of the interplay of emissions and abatement Three distinct structural forces: Scale of economic activity: the larger the scale of economic activity per unit of area the higher the level of pollution, all else equal the composition or structure of economic activity: economic growth changes the composition of economic activity toward sectors of higher or lower pollution intensity (inverted-U). the effect of income on the demand and supply of pollution abatement efforts: at high income levels, rising income leads to increased demand for environmental quality (normal or superior good) Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Empirical test of the decomposition income-environment (Panayotou 1997) The scale of the economy increases SO2 concentrations monotonically, but at a diminishing rate, and it is particularly strong up to income levels of $3 million per square kilometer. The composition effect leads to monotonically increasing SO2 emissions with the increasing share of industry (from 20 per cent to 43 per cent) up to per capita income of $8,000; beyond this level and up to $17,000, the industry share levels off and declines slightly (to 37 per cent) with analogous effects on emissions Environmental policies are efficient for income per capita included between $10,000 and $20,000. Less efficient for lower levels of income Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Empirical studies - EKC
For several pollutants (SO2, NOx, SPM): turning point between $3000 and $5000 lower level of turning point for deforestation (around $800) Much less consensus on the effect on carbon emissions (some have estimated the turning point for income higher than $35000) Most studies in cross-section of countries Less clear what would be the effect for a specific country What effects for individuals within a country?
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Empirical studies - EKC
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
Empirical studies - EKC
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
EKC at the individual level - Stern report) ‘
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
But the link with economic growth is not everything... See the Human Development Report 2011 What about linkages with human development?
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Economic Growth Economic growth and wealth The environmental Kuznets curve
HDI and carbon emissions
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
Life satisfaction and economic growth
Source: Deaton, 2008, JEL Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
Life satisfaction and economic growth 1
2
Poor correlation between income per capita and life satisfaction The Easterlin Paradox: Average happiness has remained constant over time despite sharp rise in GDP per capita
Rémi Bazillier Growth as a prerequisite for wealth? Source: Clark et al., 2008, JEL
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
Limitations of the GDP as a measure of quality of life
As we just saw, poor correlation between life satisfaction, GDP and GDP growth Long discussion in the Stiglitz - Sen - Fitoussi report: GDP is measuring the level of production In a closed economy, it is also the sum of income of each individual It is not necessarily the case in an open economy (income inflows and outflows / differences in prices between production and consumption) Stiglitz report: focus has to be given to income of households rather than production
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
Income and Production
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
Income and Production
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
Real households disposable Income and Production
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
Limitations of the GDP as a measure of quality of life (2)
Increasing production (and income) may have adverse consequences: The role of negative externalities (environmental damages) The positive impact of crime on GDP (police, jails...). “defensive expenditures”
Individuals may not always look for an increase of their income: Increasing leisure time? Unpaid work is not included in the GDP
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
Paid work, unpaid work and leisure time
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
Limitations of the GDP as a measure of quality of life (3)
Income and wealth are not synonymous: Wealth: stock / income: flow What really matters is inter-temporal wealth (take into account expected incomes) Wealth is an important factor to assess the sustainability of the economy (see previous section)
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
Differences between wealth (extended concept) and consumption
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
A first explanation of the Easterlin paradox The shift from non-market to market provisions of services: What was free now has a price. It increases GDP but not life satisfaction...
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
A second explanation of the Easterlin paradox (Clark et al. 2008)
In average, Deaton (2008) showed that high-income countries life satisfaction is higher than the one in low-income countries But conditional to the level of GDP per capita, the effect of economic growth on life satisfaction is negative Clark et al. (2008) shows the importance of relative income (social comparisons) and past income (habituation) Absolute levels of income plays a minor role
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
Relative and absolute levels of income
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
How measuring the quality of life
The Stiglitz report proposes to focus on the broader concept of quality of life Three main approaches: The subjective evaluation of well-being The capabilities approach The theory of fair allocation
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
The subjective evaluation of well-being
Three dimensions: Life satisfaction, the presence of positive feeling or affect, and the presence of negative feeling or affect (hedonic preferences).
But problems of measurement And Easterlin Paradox (see previous subsection)
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
The capabilities approach
Based on a combination of various functionings, defined as a collection of the observable achievements of each person, and the freedom to choose between different functionings Based on the work of Amartya Sen and the importance of human needs See the Human Developemnt Index (UNDP)
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
The fair allocation approach
refers explicitely to an equity criteria “the theory of fair allocations studies the allocation of resources among people with different tastes and abilities, subject to a number of fairness criteria, such as “no-envy” (i.e. no agent should prefer anothers bundle), “solidarity” (e.g. no agent should be hurt by an increase in available resources) and “lower-bounds” (e.g. no agent should prefer the equal-split solutions)” (Fleurbaey 2008 quoted by Sen-Stiglitz-Fitoussi) Depends on the retained definition of “fairness”
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
To sum up...
5 questions to answer to evaluate the quality of life: 1 2 3 4 5
Is Society doing well? Are people living well? Are people happy in their life? Are people satisfied with their lives Do people have the quality of life they want?
Income is not sufficient to define the level of development. One should also take into consideration human needs, and the multidimensional aspect of deprivations
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
A last point: is it possible to build an aggregated index?
“different philosophic perspectives will inevitably lead to different views on the relative importance of different dimensions, and on the attention to be paid to the conditions of different people within society” The OECD Better life project (http://www.oecdbetterlifeindex.org/) lets the users choosing the relative weight for each dimensions Related to Justice theories → philosophical debate?
Rémi Bazillier
Growth as a prerequisite for wealth?
Is growth sustainable? What quality of life?
Limitations of GDP How measuring the quality of life
Thanks for your attention!
[email protected] Presentation available at http://remi.bazillier.free.fr
Rémi Bazillier
Growth as a prerequisite for wealth?
