UNIT 13 SUSTAINABLE DEVELOPMENT*

Sustainable
Development

Structure
13.0 Objectives
13.1 Introduction
13.2 Economic Growth and Sustainable Development
13.2.1 Economic Growth and Development
13.2.2 Environment in the History of Economic Thought
13.2.3 Implications of Growth on Environment
13.2.4 Sustainable Development: A Global Objective
13.3 Perspectives on Sustainable Development
13.3.1 The Economic Perspective
13.3.2 The Ecological Perspective
13.3.3 The Social Perspective
13.3.4 A Synthesis of Perspectives
13.4 Approaches to Sustainable Development
13.4.1 Weak Sustainability
13.4.2 Strong Sustainability
13.5 Sustainability Rules
13.5.1 Valuation of Environmental Goods and Services
13.5.2 Hartwick’s Rule
13.5.3 Daly’s Operational Principles
13.5.4 Rules for Natural Capital
13.6 Measuring Sustainability
13.6.1 Green National Accounts
13.6.2 Genuine Savings
13.6.3 Other Sustainability Indicators
13.7 Let Us Sum Up
13.8 Key Words
13.9 Some Useful Books and References
13.10 Answers/Hints to Check Your Progress Exercises

13.0 OBJECTIVES
After reading this unit, you will be able to:
• define the concept of sustainable development;
• outline the recognition accorded to environment as an important factor of
production by historical economic theorists;

*
Dr. Anindita Roy Saha, I. P. College, DU, Delhi. 209
Sustainable • discuss the implication of economic growth on the quality of
Development
environmental degradation;
• outline the perspective of sustainable development in terms of its
economic, ecological, social and synthetic perspectives;
• explain the ‘concept of sustainability’ distinguished for its ‘weak’ and
‘strong’ components;
• discuss the ‘rules of sustainability’ in terms of its various rules and
principles; and
• describe the different ‘measures of sustainability’ in terms of its two
practical approaches viz. ‘green accounting’ and ‘genuine savings’.

13.1 INTRODUCTION
The unit deals with the concept of sustainable development. The two
concepts of economic growth and development provides us a background for
understanding the broader concept of sustainability addressed in this unit.
Besides the economic perspective to sustainability, there are other
perspectives like ecological and social, which also need to be synthesised in
order to understand the multi-dimensional concept of ‘sustainable
development’. Further, the concept of sustainability is global in nature but
carry implications at national level. Sustainable development, therefore,
needs to be understood in terms of the treatment of the nation’s ‘natural
capital stock’ (of which environment is an integral component) which forms
the base for investment and hence economic growth. Depending on the two
main types of capital viz. man-made capital and natural capital, the focus
would be on maintaining the capital stock, both in the aggregate as well as at
the two individual levels.
Against this background, the unit discusses the sustainability rules and its
linkage to the role of government in policy formulation. Depending on the
policy focus, the policies would cover areas such as: optimal rate of
extraction and usage of renewable and non-renewable resources, control and
treatment of pollutants, etc. Methods of measuring sustainability, adjustments
required in the estimation of national income accounts (to include non-market
factors like environmental variables), approach to construction of economic
performance indicators like green accounting, genuine savings, etc. are
discussed in the unit. A comprehensive idea of sustainable development
along with discussions on its perspectives, rules, approaches and measures
are thus the aspects covered from an analytical perspective in this unit.

13.2 ECONOMIC GROWTH AND SUSTAINABLE

DEVELOPMENT
Nations worldwide have long been concerned with economic growth to
evaluate a country’s economic standard. The rate of growth, in absolute terms
as well as in comparison with the other nations, is the most commonly used
indicator of economic performance. An increase in the real Gross National
210 Product (GNP) or National Income is taken as an indicator of economic
growth. GNP is a measure of the standard of living because it measures the Sustainable
Development
size of the economic cake to be divided across the people.

13.2.1 Economic Growth and Development

Economic growth is defined as a long run increase in potential output. The
potential output rises due to two factors viz. (i) increase in the amount or
quantity of resources used; and (ii) increase in the productivity of these
resources. The latter (i.e. productivity) signifies a more efficient use of
resources yielding higher output for every unit of input used. GNP can
increase if there is an increase in the resource base comprising land, labour,
capital, energy and raw materials. Technological progress adds to the
efficiency of extraction and optimal utilisation of the resources. Capital
accumulation through investment can occur even with constant consumption
adding to the country’s capital stock. Economic activity increases if
productivity increases in people through better standards of education and
health. The stock of human capital would thus increase along with an
improvement in quality and productivity. While these sources add to the
process of growth of an economy, these are not formally considered in
measurements of economic growth. This necessitates the broadening of the
concept beyond economic growth expressed in terms of GNP. In other words,
GNP has been considered an inadequate measure of well-being because it
does not:
• reflect the distribution of income and resources;
• reflect the changes in social factors such as health and education;
• include the effect of the economic growth process on the environment
and vice versa;
• include natural resource stocks in the measurement of GDP/GNP.

Economic development, on the other hand, is a broader concept that

encompasses a wide range of indicators requiring them to improve over time.
These are:
• increase in GNP per capita;
• reduction in income inequality;
• improvement in education and health indicators.

Economic development may therefore be termed as a superset of economic

growth. While GNP remains important for a country’s living standard,
development describes its overall ‘quality of living’. A rising GNP per capita
does not necessarily mean that every member is enjoying a better standard of
living. It is important to consider both monetary and non-monetary indicators
if a comprehensive picture is to be drawn about the quality of life.

While economic growth rests on the principle of ‘efficiency’ in the

production system, it ignores the question of ‘equity’ or justice. More
efficient economic systems produce better output, employment and income.
However, it ignores the social variables and quality of life along with the
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Sustainable issue of efficiency in distribution. Development, on the other hand, focuses
Development
on efficiency as well as equity.

The basic idea of development was extended to define the Human

Development Indicator (HDI). It is a composite indicator of income, health
and education making it a better (or more inclusive) measure of the overall
performance of an economy. While GNP remains important in the evaluation
of economic performance, it is not the only variable in the computation of
HDI. As a result, countries have attained HDI rankings quite different from
their income rankings.

Even though HDI is an improvement over GNP, neither GNP nor HDI
accounts for environmental degradation. However, economy and
environment have such important bearing on each other that growth in one
can be at the cost of the other. For instance, if there is high ambient pollution,
peoples’ well-being will decrease while the economy’s cost of cleaning up
would increase. As a result, GNP would increase due to the activities in the
cleaning-up industry, but at the cost of the health of the population. Given
this striking reality, it is interesting to examine how such an important
component (viz. environment) has been accorded significance by the ancient
economic thinkers and what are the turning points in the course of historical
growth processes, which have led to ‘environment’ being accorded the kind
of significance that it has come to occupy today. We do this in Sub-section
13.2.2 below.

13.2.2 Environment in the History of Economic Thought

Adam Smith (1723-90), generally recognised as the first economist, did not
comment on the inter-relationship between economic growth and
environment degradation which is accepted as a major concern today.
Thomas Malthus (1766-1834) was the first one to draw attention to the fact
that population grows exponentially while food output grows in an arithmetic
progression. He thus referred to the pressure on land – an important natural
resource – and held that excess food demand over supply may cause
imbalance in the economic system. Although this framework was too
simplistic, as it ignored the possibility of technological progress, it still
offered a reference to the pressures on an environmental resource, if the
growing population is not controlled. David Ricardo (1772-1823) used the
idea of diminishing marginal returns i.e. with rising population and food
demand to say that agriculture will expand to inferior quality of land, raising
the cost of production and therefore the food prices. This would in turn have
implications on the distributional systems. These views, known as
Malthusian and Ricardian scarcity, may be considered as the first traces of
concern about limited natural resources posing potential threats to the process
of economic growth. John Stuart Mill (1806-73) felt economic growth is a
race between diminishing returns and technological progress in which capital
accumulation would lead to higher standards of living. Mill thus considered
natural resources to be productive to this growth process. Stanley Jevons
(1835-82), in his book ‘The Coal Question’ (1865), discussed the issue of
limited reserves of non-renewable resources that are extracted more and more
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with economic growth. His is thus one of the earliest prognosis to the Sustainable
Development
concerns of exploitative uses of natural resources. Harold Hotelling
developed the rule for optimal extraction of exhaustible resources (1931)
while A C Pigou made the important contribution by showing pollution as an
externality that can be solved by proper taxation (1920). Indeed, the concerns
to declining environmental resources has received attention from early 19th
century.

Recent development in environmental and resource economics began with

the Limits to Growth theory of the Club of Rome (Meadows et al) in the
1960s. According to this theory, resource constraints may bring in a slow-
down and eventually the collapse of the economic growth process.
Subsequent economists have developed rigorous theories of environmental,
ecological and natural resource economics.

13.2.3 Implications of Growth on Environment

The relationship between environmental quality and economic growth has
been a major focus of research in recent years. While environmental
degradation is an inevitable outcome of production and consumption
processes, higher income and higher population exerts higher environmental
impact. This fact, as we saw above, had received due recognition right from
1830s. But with economic growth having received primary attention in the
post-war period of reconstruction, issues of exploitative usage of resources
and land clearance has caused concern on two counts viz. depletion of
exhaustible resources and degradation of the environment and ecology.

The Environmental Kuznets Curve Hypothesis gives an answer to this

problem by forecasting an improvement in environmental quality with rise in
income, technological advancement and structural change resulting in
improvement of the degraded environmental quality. Although empirical
evidence of this hypothesis is varied, and therefore cannot be relied on
entirely, it has nonetheless served as a guide on how to manage the
environmental impacts of economic growth.

Economic growth is both a cause and cure of environmental problems. While

growth causes environmental degradation through negative side-effects, it
also gives opportunities to develop techniques to combat and reduce it. As in
most economic problems, the optimal has to be efficiently chosen by
reconciling between economic growth on the one hand and environmental
quality on the other.

13.2.4 Sustainable Development: A Global Objective

Sustainable Development is a well-known concept today. The best-known
definition is given by the Brundtland Commission Report [titled ‘Our
Common Future’ (1987)] where it refers to the development that meets the
needs of the present generation without compromising the ability of the
future generations to meet their own needs. Sustainable development, in this
sense, is based on the principle of intergenerational equity. It calls for
fairness in resource use and distribution both within and across generations.
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Sustainable While ‘efficiency’ underlines economic growth, ‘equity’ underlines
Development
economic development. Ideally, both should converge with an inter-temporal
balance.
Over the last few decades, there is a clear consensus that environmental
quality has to be maintained by reduction of anthropogenic contamination to
a level acceptable to society. Sustainable development is thus an issue of the
management of the earth’s resources in a way that their long term quality and
abundance is ensured for future generations. What this goal makes clear is
that economic policy and environmental objectives needs to be reconciled as
it will be unwise to pursue economic growth without environmental concerns,
just as it will be irrational to pursue environmental goals ignoring the
economic consequences of the future.

Sustainable development is therefore intended to be a global objective.

Because of its all-pervasive nature and meaning, collaborative efforts from all
stake holders is required. Fundamental to this is negotiations on a global
scale. It is an inter-temporal and inter-spatial process where environmental
policy objectives are laid, debates and discussions held, and legislative
procedures followed bringing the nations to come together to protect their
common future.

Check Your Progress 1 [answer within the space given in about 50-100
words]

1) What is economic growth? What are the two factors that contributes to
this growth?
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2) Why is a broadening of the concept of economic growth considered

necessary to understand the true nature of human well-being?
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3) What are the three factors whose improvement over time signifies
‘economic development’?

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Development
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4) What basically distinguishes ‘development’ from ‘growth’? Which of the

two is more encompassing? Why?

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5) How is HDI a better measure over GNP? Yet, what is a common limiting
feature of both these measures?

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6) How can rising GNP be a misleading indicator of the welfare of people?
Give illustration.

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7) To which historical economic thinker the credit of having associated
‘environment’ as a scarce resource can be attributed? Who are some of
the other early thinkers whose contribution is recognisable in this regard?
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Sustainable 8) In what respect does the Environmental Kuznets Hypothesis provides an
Development
answer to the concern of rising incomes with degrading environmental
quality?
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9) How is ‘sustainable development’ defined? What does it basically

connote?

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10) How is ‘sustainable development’ a global objective? State the processes

by which it can be achieved?

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13.3 PERSPECTIVES ON SUSTAINABLE

DEVELOPMENT
There has been recognition in literature of three perspectives in defining
sustainable development viz. economic, environmental and social.
• An economically sustainable system must be able to produce goods and
services on a continuing basis to maintain manageable levels of
government and external debt, reducing sectoral imbalance that may
otherwise damage agricultural and industrial production.
• An environmentally sustainable system must maintain a stable resource
base, control the exploitation of natural resources, maintain bio-diversity
and atmospheric stability and other ecological functions that are
ordinarily not considered as economic resources.

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• Social sustainability aims at distributional equity and provision of social Sustainable
Development
services including health and education. These objectives make
sustainability a multi-dimensional concept and a challenge to optimise
and balance. Different approaches may be taken and different methods
may be adopted to measure different dimensions of sustainability.

Let us now elaborate on each of these perspectives.

13.3.1 The Economic Perspective

Under this, sustainability is defined in terms of the maximisation of welfare
over time. The welfare here refers to human welfare and not of the non-
human world. Moreover, this welfare considers the maximisation of utility
derived only from consumption. Though over-simplified, this approach
includes many important components of human welfare, such as food,
clothing, housing, transport, health, education, etc. From a formal economic
point of view, sustainability means efficient resource allocation which
requires the use of time discounting as a method of comparing economic
values of consumption at different time periods. The choice of the rate of
discount therefore becomes crucial. Low discount rates (or some
sustainability rule regarding resource use and environmental impacts) are
necessary for establishing inter-generational equity.

The economic perspective of sustainable development (SD) can therefore be

operationalised in terms of conservation of natural capital. This leads to the
following policy objectives: (a) limit consumption of renewable resources to
the sustainable yield level and (b) reinvest the proceeds from the exploitation
of non-renewable resources into investment in renewable resources. This can
help maintain a sustainable stock of natural capital, in the presence of a stable
level of human population.

The above sustainability rule for natural capital is different from the standard
neo-classical approach in which there is no reason to conserve natural capital.
The well-known Hartwick Rule states that consumption may remain constant
or increase with decline in non-renewable resources if the proceeds from
these resources are re-invested in reproducible capital. Therefore,
maintenance of any stock of natural capital is not necessary. In the Solow-
Hartwick approach, man-made and natural capital are substitutable. The
opposite view assumes complementarity in general and substitutability in the
margins. Thus, given that natural capital has irreplaceable importance, the
approach of neo-classical economic efficiency does not suffice for
sustainability.

While some issues may be dealt with the neo-classical ideas of market
efficiency, there are others like ‘natural capital’ requiring the use of the ‘safe
minimum’ approach to protect natural resources and their environmental
functions. Such a concept can be applied to intergenerational fairness
following which society can chalk out actions that are acceptable in terms of
environmental sustainability. This brings-in issues related to moral
imperatives, public decision making and formation of social values. Viewed

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Sustainable from this standpoint, sustainability goes beyond the neo-classical economic
Development
framework calling for a broader interdisciplinary perspective.

13.3.2 The Ecological Perspective

Unlike the economic perspective, under the ecological perspective, physical
scientists and ecologists use the idea of ‘limits’. Natural systems are subject
to laws of thermodynamics (and population ecology) whereas living
organisms are subject to limits of time, space and energy. Therefore,
according to the ecological perspective, sustainability must involve limits on
population and consumption levels. Humans have to accept the boundaries of
a finite time up to which only natural capital lasts. It is also accepted that
ecological processes comprise huge variability encompassing genetic
diversity much needed to preserve the ecosystem resilience. The importance
of this can be understood from the fact that many critical problems faced by
humanity are caused by the declining character (or nature) of ecological
resilience. Examples of degrading ecological resilience can be cited in terms
of consequences of climate change (e.g. extreme floods, forest fires),
resurgence of diseases due to antibiotic resistance, spread of AIDS, etc.
An integration of economic and ecological perspectives is therefore required
in order to have a holistic view of sustainability. The ecological-economic
approach requires sustainability of ‘systems’ over ‘individuals’. Besides these
two, a third component viz. the social perspective is also important as it is
instrumental in designing social actions linking the economic and ecological
approaches.

13.3.3 The Social Perspective

The human development approach emphasises the issues of basic needs and
equity. Though it does not explicitly include the environmental measures, the
idea of intergenerational equity in life style is embedded in some of its later
reports (i.e. Human Development Reports). Since environmental
sustainability is intertwined with poverty and inequity, in addition to
democracy and decentralisation (which are the two pillars for achieving the
inclusive developmental goals), the principles of sustainable and equitable
development also need to be built-into the development discourse. Such a
perspective would amount to incorporating the essential social dimension to
the developmental process.

13.3.4 A Synthesis of Perspectives

A combination of economic, ecological and social perspectives provides a
new vision of development. This may be summarised as follows:

• Sustainable development has the potential to remedy social inequities

and environmental damage over space and time while maintaining sound
economic base.

• It is important to conserve natural capital for sustainable economic

production and intergenerational equity. Market mechanisms are not
218 sufficient for this purpose.
• From the ecological point of view, both population and total resource Sustainable
Development
demand should be subject to ‘limits of growth’. The integrity of
ecosystems and diversity of species must be maintained.

• Social equity, fulfilment of basic needs and participatory democracy are

all essential elements of development. All these are interrelated with
environmental sustainability.

The above principles therefore suggest new guidelines for development,

namely, sustainable development.

13.4 APPROACHES TO SUSTAINABLE

DEVELOPMENT
The meaning of the term sustainability has been the subject of debate and
discussion among environmental economists and other professionals ever
since the inception of the concept. This is one of the very few issues that
separates traditional economic view of the natural world from the views of
modern scientists. The debate mainly centres around the substitutability of
the environmental resources in order to keep the net ‘natural resource stock’
maintained by making appropriate compensatory additions to used-up
resources. In other words, a balance is required to be established between
natural capital and manufactured capital. This is the debate between weak
and strong sustainability discussed in this section.

13.4.1 Weak Sustainability

Development is termed ‘weakly sustainable’ if the nation’s portfolio of
natural capital is maintained at a constant level (i.e. non-diminishing over
generations) so as to maintain a non-decreasing level of output. The approach
assumes substitutability among the different components of capital. This is
the dominant interpretation of sustainability among economists who mainly
consider only three types of capital viz. man-made/manufactured capital (K),
human capital (H) and natural capital (N). Weak sustainability approach
requires that the total capital stock (K+H+N) should be non-declining over
time. The assumption of substitutability implies that all forms of capital can
be aggregated in the same units. This is known as the ‘Hartwick-Solow
Sustainability’. Alternately, the ‘Hicksian Sustainability’ requires that the
principle of non-decreasing consumption should equally apply to the
consumption of environmental goods and services. The ‘weak sustainability’
approach implicitly assumes that if savings are invested in manufactured or
human capital, they serve as perfect substitutes to natural capital.

Following this principle, countries with resource depletion and ecological

damage may still look sustainable. However, substitutability of K and N may
be one-way i.e. once transformed to K, it may be impossible to get back N.
This, therefore, is a major limitation of this sustainability argument making it
weak.

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Sustainable
Development
13.4.2 Strong Sustainability
The other interpretation of sustainability views sustainability (in terms of the
non-diminishing characteristic) to be achieved by conserving the stock of all
four components of production viz. human capital, natural resources capital,
environmental quality and technological capability. According to this
approach, minimum amounts of different types of capital should be
independently maintained in real physical form. The underlying argument is
that natural resources are essential inputs in economic production,
consumption and welfare and hence cannot be substituted by manufactured
and/or human capital. In other words, environmental components are unique.
The environmental processes are irreversible and therefore not substitutable.

Very strong sustainability is a concept developed further by the Deep

Ecology movement and by those who believe in the right to life for all
species. This implies that every component or subsystem of the natural
environment, every species and every physical stock must be preserved.
However, this seems difficult for a number of reasons. These are: (i) the
present industrial economy depends highly on primary resources; (ii) species
and ecosystems are subject to continuous processes of natural change of
which humans are also a part i.e. they are also subject to processes of natural
change and while human activity accelerates some of these processes, it
inhibits others; and (iii) the existing laws and traditions bestow some rights to
some resources (e.g. property rights) but not for many others (e.g. uncovered
areas and weakly enforced environmental standards).

A compromised version of strong sustainability is that a minimum amount of

certain environmental assets should be maintained because these assets are
partly complementary and partly substitutable to economic assets. They can
be regenerated only by nature over a very long period of time.

Check Your Progress 2 [answer within the space given in about 50-100
words]

1) What is the central feature that distinguishes between the economic and
environmental perspectives of sustainable development?
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2) In what way does the perspective of ‘social sustainability’ make it a

multi-dimensional concept?

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3) What are the two policy objectives in terms of which the economic Sustainable
Development
perspective of sustainable development can be operationalised?

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4) How does Hartwick-rule propose to maintain consumption levels in the

face of declining non-renewable resources?

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5) What characterises the approach of ‘inter-disciplinary perspective of

sustainability’ making it to go beyond the neo-classical economic
framework?

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6) What is the fundamental premise on which the ‘ecological perspective of

sustainable development’ is based? Under this, what does ‘ecosystem
resilience’ mean?
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7) Why is it important to incorporate the ‘social perspective to sustainable

development’ into the development discourse?

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Sustainable 8) What is the basic assumption behind the Hartwick-Solow concept of
Development
sustainability’ making it less rigorous (weak) as compared to the concept
of ‘Hicksian sustainability’?
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9) Is it rational to regard ‘man-made capital’ and ‘natural capital’ as

substitutes of each other? If no, why?

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10) State the reasons as to why the concept of ‘very strong sustainability’ is
regarded untenable.

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13.5 SUSTAINABILITY RULES

The markets that provide economic solutions to consumption of natural
assets/capital do so under certain rules and guidelines laid down by the
governments. There may be rules for protecting environment where
government intervention is crucial for sustainability. Four types of
intervention have been suggested in this regard.

13.5.1 Valuation of Environmental Goods and Services

Natural resources are often over-used because they are generally under-
priced. Since sustainable alternatives and economically efficient solutions do
not necessarily coincide, placing the correct prices for environmental goods
and services, as accurately as possible, is essential for sustainable use of
resources. For instance, taxes may be imposed in order to incentivise
abatement of pollution or waste disposal. These may lead to more efficient
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use of the environment. At the same time, economic efficiency may also Sustainable
Development
increase.

13.5.2 Hartwick’s Rule

This rule is close to the idea of weak sustainability. According to Hartwick’s
rule, consumption levels may be kept constant over time if the rent derived
from the consumption of natural resources is duly re-invested in man-made
capital. Such a conditional ‘reinvestment’ may result in non-declining
consumption allowing the ‘net capital stock’ to remain constant.

This idea has two limitations: (i) it assumes that utility depends on
consumption and environment is important only as an input for production;
and (ii) this rule works only when the different forms of capital are
substitutes to each other which is not so in reality.

13.5.3 Daly’s Operational Principles

Herman Daly prescribes a set of principles to attain sustainable development.
There are four components to the Daly’s principles. These are:

• Renewable Resources: The rate of harvest of renewable resources (e.g.

fishery) must be kept at less than or equal to the rate of its natural
growth.

• Non-renewable Resources: A large part of the income from the

extraction of non-renewable resources must be invested in renewable
substitutes. This will help create substitutes with the productive capacity
nearly the same as the non-renewable resources consumed by the time
the latter is exhausted. However, it may be difficult to estimate the
optimal time of exhaustion and extraction just as it is difficult to develop
a renewable substitute of a non-renewable resource.
• Pollutants: Emissions should not exceed the assimilative capacity of the
receiving environment. Although it seems a sensible rule, the problem
lies in the fact that the assimilative capacity varies over time and space.
The correct policy is difficult to design temporally and spatially.

• Controls: Daly advocated tight quality controls over and above price
controls to check increasing threats to human welfare.

13.5.4 Rules for Natural Capital

This is similar to the idea of strong sustainability which requires a non-
declining stock of natural capital. This means, any action that reduces the
stock of natural capital must be offset by a physical project that generates an
offsetting replacement. Cost-benefit analysis should be carried out to identify
such replacement activities. However, this may be difficult in the sense that
many environmental effects do not have physical substitutes. Moreover,
development projects may degrade some natural resources which may not
have an offset value at the current point of time. This questions the
development projects that threaten unique assets.
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Sustainable One possible answer lies in the concept of the Safe Minimum Standard
Development
(SMS). SMS is a means to assess the proposed change that threatens
environmental and ecological balance. It involves identification of the
minimum viable size of the resource and the cost of its safeguarding. The
problem here is to decide the level that society will accept as not too high to
preserve the SMS at some opportunity cost. Identification of SMS is easier
for wildlife than for other forms of natural capital. It requires the developer
and the conservationist to work together in order to decide the sustainable
rules whereby economic development will not be sacrificed for ecological
sustainability and vice versa.

13.6 MEASURING SUSTAINABILITY

As agreed upon at the Rio Earth Summit in 1992, the nations of the world
have come up with a set of proposals for indicators of sustainable
development. These indicators have been developed from a multidisciplinary
perspective. Two important economic perspectives in this respect are the
following.

13.6.1 Green National Accounts

The conventional accounts omit many of the inputs which are provided by
the environment to the economy. This is largely because these resources are
unpriced by the market. Depletion of natural capital is typically ignored in the
national income accounts whereas that of man-made capital it is accounted
for. Calculating Green GDP (Gross Domestic Product) is an attempt towards
this adjustment.

In order to remove the deficiency in the measurement of conventional GNP

measure, one measure suggested is to impose a maximum limit on the
consumption of such natural capital for which there is scope for reinvestment
to regenerate. Such a measure is evidently applicable for renewable natural
resources like fishery and forest. Thus, the approach to Green Accounting
allows a series of deductions for depreciation of natural capital stocks (e.g.
deforestation, ground water depletion). The other approach involves making
adjustments for non-renewable resources. In analytical terms, the formula for
green GDP can be expressed as follows:

Green GDP = GDP – (P1 – MC1) Dnr – (P2 – MC2) Dr – V Ds

where P1: price of non-renewable resources;
P2: price of renewable resources;
MC1: marginal cost of non-renewable resources;
MC2: marginal cost of renewable resources;
Dnr: change in the stock of non-renewable resources;
Dr: change in the stock of renewable resources;
V: marginal cost of abatement of pollution;
Ds: change in the pollution stock S.

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There could be many variants of the above equation. However, since one Sustainable
Development
needs to aggregate over many types of renewable and non-renewable
resources and pollutants, the adjustments will be correct if the price and cost
figures come from ‘competitive and dynamically optimal’ use of resources.
Though there is a debate over green GDP as a sustainability indicator, it does
show the way to modify the traditional economic approach to incorporate the
ecological and social perspectives with that of the economic perspective.

13.6.2 Genuine Savings

An alternative indicator of sustainable development is the concept of genuine
savings. It compares reinvestment in an economy to make up for depreciation
in both natural and manufactured capital. It is defined as:

GS = S – Dm – Dn
where GS: gross saving; S: Total saving; Dm: depreciation in man-made
capital; Dn: depreciation in natural capital.
The calculation of natural capital depreciation is similar to that of the
environmental adjustments in GDP in that it includes all the components
valued in the same way. To make the calculations more complete, changes in
the stock of human capital can also be included. The genuine savings
approach is based on the weak sustainability principle because it assumes
substitutability of the different types of capital. It also tests whether a country
on an average is following the Hartwick rule or not. Genuine savings and
green GDP are derived from the same underlying theory. However, as has
been observed empirically, they need not send the same signals.

13.6.3 Other Sustainability Indicators

Indicators of sustainability have also been designed in disciplines other than
Economics. These include the net primary production-consumption ratio and
ecological footprints. There are also socio-political indicators such as the
Index of Sustainable Economic Welfare.
All these indicators are designed to be calculated at the national level. There
are more indicators of sustainability at the regional, industrial and individual
firm levels.
Check Your Progress 3 [answer within the space given in about 50-100
words]

1) State Hartwick’s rule. What are its two limitations?

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Sustainable 2) What are the four components of Daly’s principles? In particular, what is
Development
the limitation of his proposal on ‘pollutants’?

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3) Define the concept of Safe Minimum Standard. How can this be

determined and operationalised in reality?

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4) State the equation for estimation of Green GDP specifying its different
components.
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5) What is the concept of ‘Genuine Savings’? How is it defined?

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13.7 LET US SUM UP

The unit discussed the implications of economic growth on sustainable
development. Describing the relationship between economic growth and
development, it dealt with the implications of growth on environment.
Different perspectives on sustainable development like the economic,
ecological and social perspectives have been discussed. A synthesis of all
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perspectives is to develop a comprehensive indicator of sustainable Sustainable
Development
development. Sustainable development has two dimensions viz. weak
sustainability and strong sustainability. The difference in the two lies in the
treatment of the different types of capital so as to maintain the overall level of
nation’s natural capital stock. Sustainability rules are important to design
policies that the government can impose in order to promote economic
growth without compromising on environmental sustainability.

13.8 KEY WORDS

Weak Sustainability : Refers to the maintenance of total capital stock
in a non-declining manner. It assumes that
manufactured and human capital are perfect
substitutes of natural capital consumed in
production process and that they can be
aggregated in the same units.
Strong Sustainability : The concept argues for the conservation of
natural resources and environmental quality, at
least in its minimum amounts. The concept
assumes that environmental processes are
irreversible and hence manufactured and
human capital are not substitutes of natural
capital.
Net Primary : This ratio measures the human society’s draw
Production- on nature. It indicates the rate of human
Consumption Ratio appropriation/consumption of the net primary
resources from various natural eco-systems
like forests, oceans, land, etc.
Ecological Footprint : This is a measure of human impact on earth’s
ecosystem. It reveals the dependence of the
human economy on natural capital.
Index of Sustainable : Developed by Daly and Cobb (1989), this is an
Economic Welfare indicator intended to replace the GDP. It tries
(ISEW) to include variables related to social and
environmental issues over and above the ones
included in the conventional income
accounting.

13.9 SOME USEFUL BOOKS AND REFERENCES

1) Hanley, N., Shogren, J. F. and White, B., (2001). Introduction to
Environmental Economics, Oxford University Press.
2) Tietenberg, T (2003). Environmental and Natural Resource Economics,
Pearson Education.
3) Sengupta, R., (2001). Ecology and Economics, Oxford University Press.

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Sustainable 4) Thomas, J. M. and Callan, S. J., (2007). Environmental Economics,
Development
Thomson India Edition.
5) Kolstad, C., (2011). Intermediate Environmental Economics, Oxford
University Press, India edition.
6) Bromley, D. W., (1995). Handbook of Environmental Economics,
Blackwell.

13.10 ANSWERS/HINTS TO CHECK YOUR

PROGRESS EXERCISES
Check Your Progress 1
1) Economic growth is defined as a long run increase in potential output.
2) As conventionally measured, GDP does not incorporate the contribution
of many factors which add to the process of growth.
3) Increase in GDP per capita, reduction in income inequality and
improvement in education and health indicators.
4) Development incorporates ‘equity’ while growth considers only
‘efficiency’. Development is thus more encompassing as it considers
growth with equity.
5) By being a composite indicator of income, health and education.
6) GDP can increase due to expenditure incurred in cleaning up services
caused as a result of rising pollution affecting the health of people. Thus,
growth in GDP could be at the cost of the population.
7) Malthus and Ricardo, Stanley Jevons, Harold Hotteling, etc.
8) By forecasting an improvement in environmental quality with rise in
income.
9) It incorporates the principle of inter-generational equity.
10) Because of its all-pervasive nature and meaning, it requires negotiations
on a global scale.
Check Your Progress 2
1) The former emphasises continuous production with concern for sectoral
balance while the latter emphasises on a stable ‘resource base’.
2) By aiming at distributional equity and provision of social services
including health and education.
3) By limiting the consumption of renewable resources and by reinvesting
the proceeds from the exploitation of non-renewable resources into
investment in renewable resources.
4) By reinvesting the proceeds from the consumption of non-renewable
resources in production of reproducible capital.
5) By bringing-in issues relating to moral imperatives, public decision
making and formation of social values.
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6) The premise that sustainability must involve limits on population and Sustainable
Development
consumption levels.
7) To make the two pillars of achieving inclusive developmental goals
complete.
8) The former (Hartwick-Solow concept) assumes that all forms of capital
can be aggregated in the same units. But the latter (i.e. the Hicksian)
requires that the principle of non-decreasing consumption should equally
apply to the consumption of environmental goods and services.
9) No. Because, natural resources are essential inputs in economic
production, consumption and welfare and hence cannot be substituted by
manufactured and/or human capital.
10) Because species and ecosystems are subject to continuous processes of
natural change.
Check Your Progress 3
1) That consumption levels may be kept constant over time if the rent
derived from the consumption of natural resources is duly re-invested in
man-made capital.
2) The assimilative capacity varies over time and space.
3) It is a means to assess the proposed change that threatens environmental
and ecological balance.
4) Green GDP = GDP – (P1 – MC1) Dnr – (P2 – MC2)Dr – V Ds.
5) It compares reinvestment in an economy to make up for depreciation in
both natural and manufactured capital.

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