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Leontief Prize

"Reconciling the Economics of Social and Environmental Sustainability"

Remarks by Paul Streeten
on the occasion of his receipt of the Leontief Prize
at Tufts University, on November 13, 2001

Since the definition of "development" incorporates our positive value judgments, including those about the environment, there can be no conflict. For if there were a form of development that would be accompanied by a degradation of the environment, and if a clean environment is part of our definition of "development," we would not call it development. It is I like the well-known verse about treason by Sir John Harrington:

Treason doth never prosper; what's the reason? For if it prosper, none dare call it treason.

Economic growth versus environment?
The problem of "growth versus the environment" is wrongly posed. Growth is simply the inter-temporal dimension of any strategy. Production, consumption, poverty reduction, income redistribution, employment, environmental protection, must each have a time profile, and this may give rise to inter-temporal tradeoffs. Economic growth is a side-effect, not the aim, of a rational economic policy. It could be that sustainable development calls for more, not less growth. It certainly calls for differently composed growth. For, although zero growth is not an option (it requires resources to maintain capital and therefore only delays exhaustion), unless sustainable development is consciously pursued, zero or negative growth could well be the result.

With technology given, four options should, theoretically, be considered. First, we may abstain from producing as much as we otherwise would, in order to reduce pollution and raw material exhaustion, which are closely linked to the pattern of production. We opt for fewer goods, in order to be saddled with fewer bads.

Second, we devote resources that would have produced goods to produce products that combat pollution: more anti-bads. Whether this implies stepping up the rate of growth of national product, slowing it down, or changing its composition, depends on conventions of national income accounting. Much that is now counted as part of net national income should be deducted as intermediate production, as anti-bads, required to combat the bads produced in the course of generating the NNP. There is something to be said for the foundation of a Society for he Promotion of Anti-Bads.

Third, we may step up the production of goods, notwithstanding the fact that they aggravate pollution, to a degree that compensates for the growth of pollution: more goods to make up for the growth of bads.

Finally, we may produce different products, with different characteristics. These are not as attractive as those that would have been produced without regard to pollution, but with the compensating merit that they carry with them less pollution: goods that are not quite so "good," but that generate also fewer "bads." Cars may travel more slowly, but are also less polluting. Compared with these four options zero growth, sometimes advocated, would be not only a blunt, but also an ineffective instrument for achieving a sustainable environment.

In practice, it is normally much cheaper and more effective to take preventive action before the creation of bads than to compensate for their generation or to produce instruments to combat them. Just as it is easier to build distributional objectives into the growth process, or protection of the poor into the adjustment process ab initio, so it is more effective to build environmental objectives from the beginning into the direction and composition of growth.

In addition, there is much evidence that some previously polluting agents can be used profitably and harmlessly, so that no trade-off arises. It points to the existence of unexplored and unexploited profit opportunities, which can be seized as a result of environmental regulation. Effluents, previously discharged into rivers, have turned out to have commercial uses. When unexplored and unexploited profit opportunities are discovered, bads can be transformed into goods. This may require some expenditure on technical research. In other cases, cheap substitutes can be used to replace damaging substances. Du Pont, the world's largest producer of chlorofluorocarbons (CFCs), had discovered some equally cheap substitutes, which made the provisions of the Montreal Protocol of 1987 (signed by 57 countries), for the protection of the ozone layer (which protects us from certain types of cancer), acceptable. International Business Machines Corporation, America's largest source of CFC-113 emissions had reduced its emissions in May 1991 by 95 per cent from the 1987 level. In the Ottawa Agreement of 1988 some industrial countries bound themselves to reduce the volume of CFC emissions by the end of the century to half the 1986 level.

The leading electronics companies have moved more rapidly than expected to phase out the use of industrial cleansers that damage the ozone layer. CFCs are used, in addition to air conditioners, refrigerators and foam insulation, to clean circuit boards and sensitive electronic components. Now cheaper, more effective and less damaging alternatives have been discovered, including warm, soapy water. Some companies have developed circuit boards that need no cleaning at all.

Solvents used in the manufacture of pressure-sensitive tape were replaced with solventless raw materials, reducing 1,100 tonnes of solvent emissions and saving $1.5 mill. on one factory alone. On another tape-making line, an inert condensation type solvent recovery system recycles about 2,500,000 lbs of solvent previously emitted in the atmosphere at an annual saving of $ 750,000 in solvent, production and energy costs. Modification of a plant boiler to burn high-hydrocarbon exhaust from a maker saved a million dollars in add-on pollution control and is likely to recover $ 270,000 of energy annually. Ammonium sulphite produced in reactors during the formulation of iron oxide, previously discharged through a waste water treatment plant into a river, is now concentrated in a vapour compression evaporator and sold as liquid fertilizer worth about $271,000 a year; savings in pollution control equipment totaled $1 mill. Examples could be multiplied.

Environmentalists claim that these discoveries have important implications for other environmental concerns, including the reduction of the use of fossil fuels, which contributes to global warming, the elimination of CFCs from aerosol cans, and the formulation of cleaner gasoline.

Professor Michael Porter of the Harvard Business School has shown that environmental regulations are entirely consistent with maintaining international competitiveness. In his book The Competitive Advantage of Nations, he found that countries with the most rigorous requirements often lead in exports of the affected products. The reason for this paradoxical conclusion is that regulations force companies to redesign their technology, to innovate, and to find new uses for waste products. The result in the medium to long term is often lower costs and improved product quality. Processes are adopted that lower the use of scarce or toxic resources and that recycle profitably previously wasted by-products.

Three types of questions have to be investigated:

first, the relationship between differently composed rates of population growth and of income per head and the discharge of harmful substances;

second, the relation between these substances and the physical environment;

and third, the impact of these changes in the physical environment on the health and well-being of human beings, both now and in the future.

The first is technical, the second physical, the third biological and physiological.

Having answered these three sets of factual questions, the problem becomes one of evaluating any remaining conflicts between higher incomes and environmental degradation and sharing fairly any sacrifices, either of the environment or of income, between the partners. Such fair sharing will involve compensation of poorer countries by richer ones for accepting measures of environmental protection that are either more costly or reduce the rate of growth. This can be done, for example, by issuing permits for emissions in excess of their needs to low-income countries, which they could sell to the high income countries, who will want to use more permits than they have been initially allocated. A system of monitoring both the state of the environment, and individual countries' performance and discharges, will be needed, as well as mechanisms for penalizing offenders. UNEP now has a Global Environmental Monitoring system (GEMS), although it is grossly under-financed.

There is now firm evidence available to answer the first question, viz. the relation between income and certain types of pollution. The main conclusion is that urban SO2 concentrations, and urban suspended particulate matter levels are lower per cubic metre in high income cities than in low income cities. It is also evident that these concentrations have been falling in high income and middle income cities between 1980 and 1989.

This has led to the notion that there is an environmental Kuznets curve. Just as income inequality first rises as nations get richer and later falls, so environmental pollution first rises and beyond a certain point falls. The reason for this is that as societies become richer, the structure of their production changes towards less polluting activities and they can afford to demand and achieve a cleaner environment. They can either change their methods of production, or export dirty industries to low-income countries. But this much-debated issue is controversial and not fully established.

Sustainable Development and Time
Does the fact that natural resources that are inputs into the economy are finite impose a limit on sustainability? Optimists and pessimists are divided. So far, looking at history, the optimists have won. The optimists have argued that the decline of existing resources will always tend to be compensated by new resource discoveries, innovation in extraction, transport and processing, and substitution of human capital (new tools, new knowledge and new skills as a result of technical progress) for natural capital. As long as substitution of tools and knowledge for non-renewable natural resources continues, consumption can be sustained for ever. The pessimists say that natural resources and human capital are interdependent and complementary.

Knowledge can appear in three forms: disembodied knowledge in blueprints, designs or articles or books; knowledge embodied in equipment or physical capital; and knowledge embodied in human skills or human capital. Disembodied knowledge is not reduced by use or the passage of time and can be accumulated without limit. If disembodied knowledge can be substituted indefinitely for natural resources, growth can continue perpetually. If it has to be embodied in equipment, perpetual growth is impossible, for some natural resources will always be needed.

Knowledge embodied in people through education has shown two opposite trends: the new technological revolution has simplified some jobs and made them easier. But others require more education and higher skills. Production technologies become ever more complex. (Sophisticated mining and processing technology is replacing axes to provide fuel, and nuclear reactors are replacing open fires to burn it.) Knowledge to protect the environment is also becoming more complex. Ever longer education has been and will be needed in order to just maintain a constant living standard of a constant population.

Since our life spans are limited, the finite knowledge that people can create, absorb, and apply can ultimately set a more serious limit on growth than the finite stock of oil or the capacity of the atmosphere to absorb carbon dioxide. The ever more highly educated workforce, which is cited as being good for competitiveness, may be a warning of future global unsustainability. This point has been relatively neglected in the literature.

Information already greatly exceeds our ability to process and absorb it. According to David Shenk, the excess of available information causes stress, memory overload, compulsive behaviour and attention deficit disorder. It is also bad for the health of the community. The global village is increasingly fragmented into specialized territories, with magazines and advertising catering for ever smaller specific audiences. This cultural splintering can break up communities.

Is it the case that only the most recent additions to knowledge are relevant, in which case time would not set a serious limit, or does the educational process require ever longer time and greater capability? What would be the effect of the growth of knowledge and hence of specialization on social cohesion? Would it be possible for any one person to understand all the issues that affect sustainability?

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