CHAPTER TWO

2. Some Issues on the Environment and Development

2.1 The environment and emerging development issues
For a long period of time, the issue of the environment is ignored in the development process. This
is partially because of the special consideration given for economic good.
 For a good to be considered as economic good,
√ It must be marketable (tradable).
√ It must provide utility.
√ It must be relatively scarce.
However, because of the problem of market failure in the allocation of environmental resources,
environmental resources were not considered as economic good. Hence, even in the 1950’s and
1960’s environmental and natural resources were considered as free goods. Because of this, a
number of problems have been happened to the free goods, especially to environmental resources.
However, around 1980’s environmental issues were considered as development issues. Thus, the
various forms of environmental degradation are considered to undermine the effort of the
development process. This implies well-protected environment facilitates development. Fixed
supply of natural resources and environmental services puts limitation on development. Thus, the
protection of the environment shall be an essential part of development without which
development is undermined.
The forms of environmental degradation include:
 Rapid deforestation
 Air pollution
 Land degradation
 Excessive soil erosion
 Fuel-wood and water shortage
 Watershed degradation
 Over-grazing
 Over-fishing
 Loss of bio-diversity
 Water pollution
 Urban congestion /overcrowding/, etc.

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Regardless of the economic status of countries and their geographical location, currently all
countries in the world are in severe environmental problems. But the degree of the problems may
vary from country to country depending on geographical location and economic status.
But do developed countries and developing countries face the same environmental problems?
 The main concerns of developing countries are:
 Deforestation (inadequate forest)
 Water pollution (unsafe water)
 Over-fishing
 Soil depletion
 Indoor smoke (burning fire woods)
 Outdoor smoke (pollution)
 The main concerns of developed countries are:
 Global warming
Global warming refers to changes in climate (rainfall and temperature) caused by increased
concentrations of carbon dioxide and other greenhouse gases (nitrogen oxide, methane and
chlorofluorocarbons) in the upper atmosphere. Accumulation of greenhouse gases in the upper
atmosphere traps the heat reflected from the earth's surface, which increases surface temperatures.
 Air pollution
 Depletion of ozone layer (*Ozone forms as sunlight hits air containing hydrocarbons and
nitrogen oxides)
Most of environmental problems are linked with economic growth. This is why environmental
problems differ so substantially between less and more developed countries. However, the
environmental problems of less and more developed countries are of course not completely
independent of each other. For instance, the carbon dioxide emissions come primarily from rich
countries and cause greenhouse effect which leads to global warming.
The global warming affects both more and less developed countries. Development affects the
environment positively as well as negatively. Adequate and efficient use of resources will be
promoted with development. Development also causes environmental damages through resource
degradation and environmental pollution as well.
Moreover, environmental quality itself is part of the improvement in welfare that development
attempts to bring. Thus, if the benefits from rising income (economic growth) from the use of
resources and environmental assets offset the costs imposed on the quality of life (well-being) by
pollution, it can be called development.
2.1 Population Growth and the Environment
A projection to 2030 shows that, world population will reach 9-10 billion; where more than 95
percent of this increment will occur in developing nations. Such population growth raises the
question of whether the world can feed itself or not. Historically, population growth has been seen
as a major source of environmental degradation especially when it is coupled with poverty.

Food supply should grow significantly faster than population to feed the ever increasing
population. Increase in global food production in return necessitates intensification of production

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(higher food output per acre of land) which imposes impact on land and water supplies
(degradation, soil erosion, depletion). Agricultural intensification also requires increased chemical
fertilizer usages which produce harmful environmental pollution, opening of jungles for farm land
and results in deforestation, other chemical runoff like pesticides and herbicides to increase
production that result in air and soil pollution. To address these problems focus on productive
capacity alone is insufficient. Hence, resource and environmental factors will be central in
responding to the challenge of feeding much larger populations with limited resources.

Expanding populations require more space for urban, residential, and industrial development.
These will encroach on farmland, forests, and natural ecosystems. In less densely populated areas
also, land use remains a central environmental issue due to increasing pressure from suburban
developments on farmland and natural areas continual conflict between large scale agriculture or
forestry and wildlife preservation. Migration to marginal lands can be problematic as well.
Generally those lands are available for a reason. Many of them are highly erodible, which means
that they degrade over time as the topsoil and the nutrients it contains are swept away. Migration
to coastal river deltas may initially be rewarded by high productivity of this fertile soil, but due to
their location, those areas may be vulnerable to storm surges resulting from cyclones.

Rapidly growing population leads to environmental degradation such as land degradation, water
& air pollution, deforestation, lack of sanitation & clean water, etc. Four major factors govern
resource depletion and environmental pollution: population, per capita resource use, damages per
unit of resource use, and technology.

Population growth affects the environment in two ways:

1) It increases the demand for resources.
The demand for resources is functionally related to population size and per capita resource use
as:
Total Resource Use = Population x Per Capita Resource Use
The total environmental damages caused by rapidly increasing population are given by:
Total Environmental Damages =
Total Resource Use x Damages Per Unit of Resource Use − Assimilation −
Pollution Control
 Assimilation is the natural capacity of the environment to decompose residuals/ wastes
to the environment either chemically or biologically.
 Pollution control is effort made by the public and public authorities to abate damage
(abatement).
Alternatively,
𝐓𝐨𝐭𝐚𝐥 𝐄𝐧𝐯𝐢𝐫𝐨𝐧𝐦𝐞𝐧𝐭𝐚𝐥 𝐃𝐚𝐦𝐚𝐠𝐞𝐬
= (𝐃𝐚𝐦𝐚𝐠𝐞𝐬 𝐏𝐞𝐫 𝐏𝐞𝐫𝐬𝐨𝐧 𝐱 𝐏𝐨𝐩𝐮𝐥𝐚𝐭𝐢𝐨𝐧) − 𝐀𝐬𝐬𝐢𝐦𝐢𝐥𝐚𝐭𝐢𝐨𝐧
− 𝐏𝐨𝐥𝐥𝐮𝐭𝐢𝐨𝐧 𝐂𝐨𝐧𝐭𝐫𝐨𝐥
Technology influences population, resource use and environmental damages.

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2) It produces more waste and creates additional stress on the assimilative capacity of the
environment.
These in turn surround the question of future population and economic growth (the argument of
the Limits to Growth). But, the critics of the theory argue that, new technologies for extraction and
the development of substitute resources, and expanded recycling can address the problem.
But there are also environmental impacts of increased resource recovery (mining, extraction,
recycling of resources) for economic use. Mining operations for example damage the earth and the
environment. Recycling also requires high energy to process used and waste industrial products.
Up to this point we have considered the effect of population growth on economic development.
We now have to examine the converse relationship: Does economic development affect population
growth? Evidences suggest that it may, since the higher-income countries are characterized by
lower population growth rates. This suspicion is reinforced by some further evidence. Most of the
industrialized countries have passed through three stages of population growth. The conceptual
framework that organizes this evidence is called the theory of demographic transition. This theory
suggests that as nations develop, they eventually reach a point where birthrates fall.
During Stage 1, the period immediately prior to industrialization, birthrates are stable and slightly
higher than death rates, ensuring population growth. During Stage 2, the period immediately
following the initiation of industrialization, death rates fall dramatically with no accompanying
change in birthrates. This decline in mortality results in a marked increase in life expectancy and
a rise in the population growth rate. In Western Europe, Stage 2 is estimated to have lasted
somewhere around 50 years.
Stage 3, the period of demographic transition, involves large declines in the birthrate that exceed
the continued declines in the death rate. Thus, the period of demographic transition involves further
increases in life expectancy, but rather smaller population growth rates than characterized during
the second stage. This implies, economic development reduces population size.
In general, population growth intensifies environmental problems.
PopulationHumanActivityProduction&ConsumptionResourceConsumption
Depletion of Resources& Waste Accumulation
Hence, there should be policies for reducing population growth rate.
Some of the policies used to reduce population growth include:
 Access to family planning should be encouraged
 Educate people to benefit from having small family
 Legislating and implementing legal law that specifies the minimum age for marriage
 Economic incentives and disincentives
2.2 Economic growth and the environment
To begin, we must distinguish between economic growth and economic development. Growth
refers to increases in aggregate level of output. Development refers to increases in per-capita
output. Thus, population is important. The value of environmental amenities is not included in

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GDP due to lack of market for most environmental goods. With this model, we can address two
questions:
How does environmental policy affect economic growth?
 Environmental regulations divert inputs from the production of output to other goals, such
as reducing emissions.
 Since environmental benefits are not measured in GDP, they are not part of measured
output. Thus, resources diverted to environmental protection cannot be considered in the
equation. GDP falls, so economic growth, as traditionally measured, slows.
 Environmental regulations may also prohibit certain resources, such as timber, from being
used at all.
 Environmental policy can affect technological change
How does the environment benefit economic growth?
Environmental resources are an input to production.
Environmental quality affects the quality of other inputs.
Can we have both economic growth and quality environment at a time?
How does economic growth affect the environment?
There are different views:
1) Pessimists’ view—the limits to growth approach
 Economic growth is a problem to the environment. So, environmental quality and
economic growth are alternate. ⇑ Economic growth ⇢ ⇓ Environmental quality
2) Optimists’ view
 Economic growth cannot be a problem to the environment; rather they are complementary.
3) General view approach
A number of economic studies find that there is an Inverted-U-shaped relationship between levels
of environmental harms and per capita income.
The Inverted-U relationship between environmental degradation and per capita income is usually
referred to as the “environmental Kuznets curve” (EKC), named after Kuznets.
Kuznets (1955) hypothesized that there is an inverted-U shaped relationship between various
indicators of environmental degradation and income per capita, implying economic growth will
eventually reduce the environmental damages of the early stages of it.

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Figure 3: Environmental Kuznets Curve
If the EKC hypothesis were held generally, it would imply that instead of being a threat to the
environment as it is often argued in the Limits to Growth, economic growth is the means to achieve
environmental improvement. That is, as countries develop economically, moving from lower to
higher levels of per capita income, overall levels of environmental degradation will eventually fall.
If economic growth is generally good for the environment, then it would seem that there is no need
to curtail growth in the world economy in order to protect the global environment.
Empirical Evidence on the EKC hypothesis
 Is there a single pattern of relationship between the environment and economic growth?
In recent years there have been a number of studies using econometric techniques to test the EKC
hypothesis. The EKC hypothesis may hold for some environmental impacts, but it does not hold
for all. In general, there are three patterns of relationship between economic growth and
environmental degradation.
1) Some environmental problems decline as per capita income rises.
Example: lack of clean water and lack of urban sanitation

2) Some environmental problems worsen as per capita income increases.

Example: Emission of carbon dioxide. As income increases, people use more and more of
petroleum products that results in emission of carbon dioxide. This changes the composition of
atmosphere and leads to global warming (environmental degradation).

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3) Some environmental problems initially worsen but later decline as per capita income
rises.
Example: air and water pollution
At early stage of economic growth, people do not worry about environmental problems, but they
worry about increase in their income. However, as income rises, people attach high value to the
environmental quality; they need clean air, water, etc. As a result, they start to take measures to
reduce pollution, so environmental degradation declines.

Until Q*, environmental damage and PCI have positive relationship.

At low level of development, people have more income-elasticity to basic necessity items than
environmental quality.
Once high level of development is reached, people will have more income elasticity to the quality
of the environment so that economic growth and quality environment becomes complementary.
To the right of Q*, environmental damage declines.
The relationship between economic growth and environmental quality depends partly on the
effectiveness of policies in each country.
Here, two broad sets of policies are needed to attack the underlying causes of environmental
damage.
1. Policies that seek to attack the positive link between economic growth and the environmental
damage.
This can be achieved by
 Correcting (preventing) policy failure
 Improving access to resource & technology and
 Promoting equitable income growth

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2. Policies targeted at specific environmental problems; regulations and incentives that are
required to force the recognition of environmental values in decision making
2.3 Sustainable Development and Economic Policies
The question of how to incorporate the environment into GDP takes us to the concept of sustainable
development.
Sustainable Development
We take development to be a vector of desirable social objectives; i.e. it is a list of attributes which
society seeks to achieve or maximize.
The element of this might include,
 Increase in real per capita income
 Improvement in health and nutritional status
 Educational achievement
 Access to resource
 A “fair” distribution of income
 Increase in basic freedoms
A sustainable state is one in which utility (or consumption) is non-declining through time.
The alternative approach [to sustainable development] is to focus on natural capital assets and
suggest that they should not decline through time.
Critical to sustainability, however defined, seem to be:
 the degree of resource substitutability
 the rate of technical progress
 the degree of eco-system stability and resilience
 irreversibility of “investment” decisions
Sustainable development is the concept of the relationship between economic growth and the
environment.
Sustainable development is a term refers to development that is environmentally conscious
(sensible). The term was first used in 1987 by the World Commission on Environment and
Development. In 1987 the World Commission for Environment and Development (WCED)
published a document entitled Our Common Future, also known as the Brundtland Report,
after the coordinator of the commission, Gro Harlem Brundtland. There are many definitions of
sustainability and sustainable development.
The World Commission on Environment and Development (the Brundtland Commission)
provided well known and widely accepted definition of sustainable development in 1987:
Sustainable development is development that meets the needs of the present without
compromising the ability of future generations to meet their own needs.
There are several key features of the above definition.
First, the definition emphasizes mainly on the needs, in particular the essential needs of the
world’s poor, which are seen as having overriding priority.

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 Second, the definition provides the idea of limits on the ability of the environment to meet
present and future needs.
Third, the definition clearly establishes sustainable development as an equity issue.
The goal of sustainable development is principally equity rather than efficiency issues though it
doesn’t mean that efficiency is irrelevant to sustainable development.
That is, even if it is not a sufficient condition, reducing the quantity of natural resources used up
per unit of human satisfaction will clearly help reduce demands on the environment.
Thus, achieving sustainable development involves achieving equity both within generations (intra
– generation equity) and across generations (inter –generational equity).
Fourth, the Brundtland Report’s definition of sustainable development offers a fundamental
ethical principle: the responsibility of present generations to future generations.
The needs of the present should not be satisfied at the expense of future needs (well -being).
According to sustainable development definition, those who enjoy the fruits of economic
development today must not make the future generations worse off by excessively degrading the
Earth’s resources and polluting the environment.
The Brundtland Commission identified seven strategic imperatives for sustainable development:
√ Stimulating growth.-
√ Changing the quality of growth.
√ Meeting essential needs for jobs, food, energy, water, and sanitation.
√ Ensuring a sustainable level of population.
√ Conserving and enhancing the resource base.
√ Re- orienting technology and managing risk.
√ Merging environment and economics in decision making.
On the 1995 World Summit for Social Development, it was firmly believed that economic
development, social development, and environmental protection are interdependent and
mutually reinforcing components of sustainable development, which is the framework for efforts
to achieve a higher quality of life for all people.
The definition of sustainability developed by Viederman (1996) states that;
Sustainability is a community’s control and prudent use of all forms of capital—nature’s capital,
human capital, human-created capital, social capital and cultural capital—to ensure, to the
degree possible, that present and future generations can attain a high degree of economic security
and achieve democracy while maintaining the integrity of the ecological systems upon which all
life and production depends.
Viederman’s identified five capitals of sustainable development that shape, and are shaped by,
human society.
Note that to economists, capital represents the stock of something that is capable of producing a
flow of valuable goods and services.
The larger the capital stock, the larger the flow of goods and services that it can produce.
 Natural capitalist defined as the value of the existing stock of natural resources such as forests,
fisheries, water, mineral deposits, and the environment in general.

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 Natural capital generates the flow of natural resources (e.g., harvest of fish from fisheries,
harvest of trees from a forest, grazing of livestock on rangeland) and ecosystem services (e.g.,
oxygen from forests, freshwater filtration from watersheds, nutrient cycling in wetlands) upon
which human society depends.

 Natural capital is susceptible to resource degradation from the overharvesting/over extraction

of natural resources and pollution that results from the exhaustion of environmental sinks.
 Human capital is a term for human knowledge, skills, and capabilities that create a larger
and more valuable flow of labor and volunteer services. Human capital is created by
investments in education and health.
 Created capital (or constructed capital) is comprised of technologies, production facilities
(e.g., factories, offices, laboratories, roads and other infrastructure), and inventory of
products that economists traditionally think of as “capital stock.” Business firms and
government both invest in created capital, and this investment increases the stock of created
capital, which in turn provides a larger flow of goods and services.
 Social capital refers to the stock of “civic virtues” and networks of civic engagement,
involvement, reciprocity norms, and trust essential to democratic communities.
 Cultural capital refers to the body of knowledge, stories, visions, myths, and languages
shared by people and providing the framework for how people view the world and their
proper role in it.
Note that Viederman’s (1996) definition focuses on community rather than on the individual, and
provides guidance for how society should use the various forms of capital.
The three pillars of sustainability offered by Viederman (economy, community, and environment)
are widely accepted as the central elements of a sustainable society. However, Viederman
specifically refers to democracy when discussing the community pillar of sustainability.
In general, sustainable development involves in balancing between;
√ Human needs and the capacity of the environment to meet these needs
√ The needs of present and future generations
√ The poor and the rich
Objectives of Sustainable Development
Sustainable development has three objectives:
1) Economic objectives: It includes promoting economic growth and efficiency.
2) Social objectives: It includes fulfilling people’s cultural, material, and spiritual needs in
equitable manner.
3) Environmental objectives: It includes maintaining and improving the long-term validity of the
ecosystem.
The three objectives overlap each other, and their connection is shown as follows;

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Figure 4: The Three Pillars of Sustainability

Pre requisite for SD

The two important aspects of SD are:

1. Respect for people: For the development to be sustainable it must improve the quality of life
for a long time; better nutrition, adequate health, social freedom, Access to education, Need for
decent standard of living, Political freedom and Guarantee on human rights, etc.
2. Respect for the ecosystem: It must protect the diversity, the structure and action of the natural
environment.
It includes:
- The need to conserve the life support system
- The need to conserve the biological diversity (all species of animal & plants)
- ensure that all uses of renewable resource are sustainable
- Keep with the current capacity of the earth of population.
- Minimize the depletion of non-renewable resources, how? Via
o recycling
o efficiency
o switching to renewable substitutes
Is development sustaining? No! Indicators of unsustainable development:
 Poverty. Billions of population lives under absolute poverty. The level of poverty is getting
most horrible overtime
 Increasing world population and consumption of resources.
 The world population increased from 4.4 billion in 1940 to 5.6 in 1970 and to 6.2 billion in
2000.
 Resource depletion. In less than 200 years, the planet has lost 6 million Km2 of forests.
 Pollution. An increase in industrialization leads to an increase in pollution which in turn leads
to increase in cancer disease in developed countries.
 Global climate change. Because of depletion of ozone layer, the world temperature has been
increasing; rain fall decreases by 20% to 40% and world temperature has increased from 0.4%
to 0.8%.

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Approaches to sustainability
Sustainable development is examined using three different conceptions of sustainability, namely
Hartwick-Solow sustainability, ecological economics sustainability and safe minimum standards
(SMS) sustainability.
1) Hartwick-Solow Sustainability Approach to Sustainability /Weak Sustainability
Weak sustainability theory has developed from economic models of growth and technological
change in the context of limited resources.
A central element of weak sustainability theory is the assumption that man-made capital (basic
economic infrastructure, such as machines, buildings, highway systems, knowledge, etc.) and
natural capital (stock of environmentally provided assets such as soil, forest, wetland preserves,
water, fishing grounds, etc.) are substitutes.
Thus, natural capital may not be considered as an absolute necessity or natural capital is a
nonbinding constraint to sustainability.
If man-made and natural capitals are substitutes, depletion of exhaustible resources and large-scale
degradation of environmental quality need not be a major source of concern.
According to this view, sustainable development simply requires the maintenance of constant total
capital stock, but the composition of the capital stock is not considered relevant.
If decrease of natural capital is compensated by the increase in the man-made capital, there is
sustainable development.
For this reason the Hartwick-Solow criterion for sustainability is sometimes referred to as the weak
sustainability criterion—weak in the sense that it does not render natural capital an absolute must
for continued economic growth.
2) Ecological Economics Approach to Sustainability/Strong Sustainability natural systems
should be maintained whenever possible.
A key concern for ecological economists is the carrying capacity of the environment.
The ecological economics approach to sustainability starts with a worldview that the natural world
is not only finite, but also non-growing and materially closed.
Furthermore, it is postulated that the general capacity of this finite natural world is starting to be
strained by the size of the human economy.
According to this perspective, human-made capital cannot effectively substitute for the vital
services provided by ecological systems.
In fact, the more realistic way to view the future relation between these two components of capital
is as complements.
What this suggests is that a combination of both types of capital assets is needed in the production
process.
Thus, contrary to what has been suggested by the Hartwick-Solow approach to sustainability, an
economy cannot continue to function without natural capital.
Furthermore, it is expected that natural capital will be the limiting factor in the future.

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 For instance, fishing will be limited not by the number of fishing boats but by remaining fish
stocks; petroleum use will be limited not by refining capacity but by geologic deposits and by
atmospheric capacity to absorb carbon dioxide.
Thus, because natural capital is viewed as a limiting factor to future economic growth, the
ecological economics approach to sustainability is sometimes referred to as the strong
sustainability criterion.
Accordingly, the ecological economics approach defines sustainability in terms of a non-declining
(constant) “natural” capital.
3) The Safe Minimum Standard (SMS) Approach to Sustainability
Safe Minimum Standard - society is unsure of future costs of current environmental degradation.
It started as a practical guide to natural resource management under the condition of extreme
uncertainty.
The exploitation of some natural resources may lead to irreversible damage beyond a certain
threshold (or critical zone).
Therefore, in managing natural resources of this nature, it is highly important to pay serious
attention to not extending resource use beyond a certain safe minimum standard (SMS). Otherwise,
the social opportunity cost of reversing direction might become “too large.” However,
considerable uncertainty exists regarding both the cost and the irreversibility of particular human
impacts on the natural environment.
In situations where human impacts on the natural environment are regarded as uncertain but may
be large and irreversible, the SMS suggests that human and natural capital cannot be safely
assumed to be substitutes.
That is, when viewed from a long-run resource management perspective, the nature of the
substitution possibilities between natural and human capital is uncertain.
In this respect, sustainability warrants maintenance of non-declining natural capital.
Understood this way, the SMS approach to sustainability does not totally invalidate the standard
economics approach to the concept of sustainability.
It simply narrows the scope and the applicability of the standard economics conception of
sustainability by restricting its relevance to human impacts on the natural environment where the
potential consequences are regarded as being small and reversible.
It is also obvious that, to some degree, the SMS and the ecological approaches to sustainability
share common features.
Both approaches adhere to the notion of limits in the substitution possibilities between human-
made and natural capital.
However, these two approaches provide different explanations for limits in factor substitutions.
The SMS uses irreversibility while the ecological economics approach relies on all encompassing
physical laws (of which ecological irreversibility is only a part).
In many respects, then, the SMS approach to sustainability can be perceived as a hybrid between
the standard and the ecological economic approaches to sustainability.
It does not attempt to reject the basic tenets of the standard economics approach to sustainability.

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At the same time, in broad terms, it collaborates with the ecological economics notion that nature
in some ways imposes limits to factor substitutions.
Sustainable Development versus Standard Views of Economic Growth
Traditionally, the main goals of economic activity have been seen as increased production and
rising per capita consumption.
But in many ways, these goals impose a threat to the environmental sustainability of our economic
system.
The effort to balance economic and environmental goals is addressed in the theory of sustainable
development-- economic development that provides for human needs without undermining global
ecosystems and depleting essential resources.
 The standard view of economic growth is defined in terms of per capita GDP, meaning that
total GDP must raise faster than population.
 Sustainable development requires different measures. Increased output of goods and services
can certainly be part of the desired outcome, but equally important is the maintenance of the
ecological base of the economy-- fertile soils, natural ecosystems, forests, fisheries, and water
systems.
 In standard view of economic growth, every economy must use some non-renewable natural
resources.
 However, sustainable development implies conservation or recycling of these resources and
greater reliance on renewable natural resources.
 In contrast to the standard economic growth paradigm, in which “dollar votes” command the
market place and determine which goods are to be produced, sustainable development implies
putting a priority on supplying basic needs before luxury goods.
 Also in contrast to standard economic growth theory, sustainability implies limits to
macroeconomic scale.
 Rather than projecting rates of growth indefinitely into the future, some maximum level is
postulated based on the carrying capacity of the area (and ultimately of the planet).
 This in turn implies a maximum level of population--the level of population and consumption
that can be sustained by the available natural resource base-- above will be exceeded and living
standards must fall.
 Population is a key variable in determining the limits of economic growth. Thus, limiting
population growth is a critical element in successful development.
 This means that population policy must be an essential element of sustainable development.
Population policy must include elements of education, social policy, economic policy, and
health care, including contraceptive availability, and often goes in conflict with established
religious and social mores.
 Still, this difficult area is generally little considered in standard economic growth models.

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 2.4 National Income and Green Accounting
Sustainable development analysis differs from the standard analysis of economic growth and
development by incorporating natural resources as a form of natural capital.
Taking natural capital and environmental quality seriously affects the way we evaluate measures
of national income and well-being.
Can we say that a country with a higher per capita income is necessarily better off than a similar
country with a lower per capita national income?
The overall well-being of a country is dependent on many factors other than income levels,
including health, education levels, social cohesion, and political participation. But most important
from the point of view of environmental analysis, a country’s well-being is also a function of
natural capital levels and environmental quality.
Traditionally, standard measures of gross domestic product (GDP) or gross national product (GNP)
are commonly used to measure a country’s level of economic activity and progress in development,
with GDP being the most frequently used measure. Macroeconomic analyses and international
comparisons are based on these measures, and they are widely recognized as important standards
of economic progress.
However, many analysts have pointed out that these measures can give a highly misleading
impression of economic and human development.
To be fair, GDP was never intended to be an accurate measure of a country’s well-being.
But politicians and economists often place disproportionate importance on GDP and they consider
maximizing it as the primary objective of public policy.
But maximizing GDP can conflict with other goals such as promoting social equity or protecting
the environment.
In our study of environmental issues, the standard accounting measures fail to account for
√ Environmental assets and their functions
√ Environmental degradation and resource depletion as a social cost of economic activity.
This issue can be important especially in developing countries, which depend heavily on natural
resources.
For instance, if a country cuts down its forests, depletes its soil fertility, and pollutes its water
supplies, this surely makes the country poorer in some very real sense.
Here the national income accounts record merely the market value of the timber, agricultural
produce, and industrial output as positive contributions to GDP. But, the depletion of these
resources is not included in the calculation. This may lead policy makers to view the country’s
development in an unrealistically rosy light until the effects of the environmental damage become
apparent. If we are measuring social welfare with the wrong ruler, we may obtain policy
prescriptions that could actually make a country worse off, rather than better off. Economic growth
alone does not necessarily represent true economic development and may even lower human well-
being if it is accompanied by growing inequity and environmental degradation. Economic
development that ignores environmental factor is an illusionary development.

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The attempt to define better measures of development has led to new proposals to adjust or replace
traditional accounting measures in order to take into account resource and environmental factors.
Thus, contemporarily the issue of green accounting comes to vision to circumvent this problem.
Green accounting is a general term applied to efforts to incorporate natural resources and
environmental quality into national accounting techniques. Green accounts provide data which
highlight both the contribution of natural resources to economic well-being and the costs imposed
by pollution and resource degradation. Green accounting/environmental accounting/integrated
economic and environmental accounting refers to modifications of the System of National
Accounts to incorporate the use or depletion of natural resources.
Interest in inclusion of the environment in national accounting began in the 1970s and 1980s, when
several European countries began to estimate physical accounts for natural resources such as
forests, water, and land resources. In 1993, the United Nations published a comprehensive
handbook on environmental accounting, which was revised in 2003 and further systematized in
2012. The 2003 System of Environmental and Economic Accounts (commonly referred to as
SEEA-2003) describes four basic approaches to environmental accounting:
1. Measuring the relationships between the environment and the economy in both directions
This approach seeks to quantify the ways various economic sectors are dependent upon natural
resources as well as the way the environment is affected by different economic activities.
For example, one might seek to estimate how much air pollution results when different industrial
sectors increase their production levels. These accounts combine monetary data with information
on the flow of materials, pollution, and energy in an economy.
A key motivation for this approach is to determine how closely economic activity is linked to
material inputs and pollution outputs.
2. Measuring environmental economic activities
This approach measures expenditures on environmental protection and the impact of economic
policies, such as taxes and subsidies, to reduce environmental damages.
3. Environmental asset accounts
This approach collects data on the levels of various types of natural capital, such as forests,
minerals, and groundwater. These accounts can be kept in either physical units or monetary terms.
4. Adjusting existing accounting measures to account for natural capital degradation
This approach seeks to monetize the damages associated with the depletion of natural resources
and environmental quality degradation, as well as identify defensive expenditures made in
response to, or in order to avoid, environmental damages.
This approach essentially takes existing national accounting measures and makes a monetary
deduction to represent environmental damages.
Note that these approaches are not necessarily mutually exclusive--we could theoretically
implement all of them simultaneously.
The most basic approach to green accounting is to start with traditional measures and make
adjustments that reflect environmental concerns (the fourth approach described in the SEEA-
2003).

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The following approaches to environmental accounting adjust traditional national accounting
measures to account for natural capital depreciation and environmental damage.
1. Physical Resource Accounting (PRA) approach
This is making the adjustment in physical terms via the physical inculcator. Examples of the
physical indicators include
Deforestation:- measuring the volume of forest decline ⇒ by how much the forest decline per year.
Soil degradation:- measuring the amount of soil fertility decline ⇒by how much does the soil
quality go down? How many tones of soils are lost?
Water pollution:- measuring the volume/quality of water decline ⇒ what is happening to the total
quantity and quality of water? The challenge associated to this approach is that the calculation is
not an easy task, it requires in put-out put calculation in physical terms.
In this approach, as the name indicates, we are talking about changes in physical terms.
⇒ basically, this is the work of natural scientists.

2. Monetary Accounting (MA):

⇒ this is particularly the interest of economists. In this case we try to attach monetary value to the
change. Here, we will be able to come up with a single aggregate measure and we can tell what is
happening to the economy. We convert the different measurement used in monetary value. This is
not possible in the case of PRA. But, how do we attach monetary measure? Again we have two
methods.

a. Environmentally Adjusted Net Domestic Product

In current national income accounting, it is commonly recognized that when economic activity
produces new goods and services, depreciation of human-made capital occurs in each year.
For the sake of accounting for depreciation of man-made capital, standard national accounting
methods produce estimates of net domestic product (NDP)
 Net domestic product (NDP) is gross domestic product (GDP) minus the value of depreciation
of produced (human-made) capital.
𝐍𝐃𝐏 = 𝐆𝐃𝐏 − 𝐃𝐦 , where Dm is the depreciation of human-made capital
Taking this logic a step further, we realize that each year the value of natural capital may also
depreciate as a result of resource extraction or environmental degradation.
In some cases, the value of natural capital could increase as well if environmental quality
improves.
The net annual change in the value of natural capital in a country can simply be added or subtracted
from NDP to obtain what has been called environmentally adjusted NDP (EDP).
 Environmentally adjusted net domestic product (EDP) is a national accounting measure that
deducts a monetary value from net domestic product to account for natural capital depreciation.
𝐄𝐃𝐏 = 𝐆𝐃𝐏 − 𝐃𝐦 − 𝐃𝐧 , where Dn is the depreciation of natural capital
This measure requires estimating natural capital depreciation in monetary terms, rather than
physical units such as biomass volume or habitat area.

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 Natural capital depreciation is a deduction in national accounting for loss of natural capital,
such as a reduction in the supply of timber, wildlife habitat, or mineral resources
b. Adjusted Net Savings/Genuine Savings
In addition to GDP, traditional national accounting methods also estimate saving and investment
rates.
These accounts provide some insight into how much a country is saving for its future.
Starting with gross savings, including savings by governments, businesses, and individuals, net
domestic savings is obtained after adjustments and human-made capital depreciation.
 Net domestic savings (NDS) is national accounting measure equal to gross domestic savings
less manufactured capital depreciation.
𝐍𝐃𝐒 = 𝐆𝐫𝐨𝐬𝐬 𝐃𝐨𝐦𝐞𝐬𝐭𝐢𝐜 𝐒𝐚𝐯𝐢𝐧𝐠𝐬 − 𝐃𝐦
We can adjust net domestic savings to incorporate a country’s management of its natural resources
and environmental quality.
The World Bank has developed such a measure, called adjusted net savings (ANS).
 Adjusted net savings (ANS) is a national accounting measure developed by the World Bank
which aims to measure how much a country is actually saving for it future.
𝐀𝐍𝐒 = 𝐍𝐞𝐭 𝐃𝐨𝐦𝐞𝐬𝐭𝐢𝐜 𝐒𝐚𝐯𝐢𝐧𝐠𝐬 − 𝐃𝐧
Genuine savings measures sustainability. If genuine saving is persistently negative, then the total
capital stock available to future generations is eroded--a clear indication of unsustainability.
High dependency on natural resources results in lower genuine savings.
Countries which highly depend on natural resources have lower genuine savings, and vice versa.
Even though green accounting measures (such as EDP and ANS) adjust traditional national
accounting measures to account for natural capital depreciation and environmental damage, neither
of these alternatives purport to measure social welfare.
Human development index combined with genuine savings is a fully integrated indicator of well-
being and sustainability.

Policies for Development and the Environment

Some policies that are designed for efficient income growth can complement those for
environmental protection and some others substitute them. To overcome the causes of
environmental damages, two category of policies are required (available).

1. Win-Win Policies

These are policies that improve both the economic efficiency and the environment. Such objectives
can be attained:

a) By correcting (preventing) policy failures E.g. -Eliminating subsidy for the use of fossil fuels,
eliminating subsidy on chemical fertilizers etc.

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b) By improving access to resource and technology E.g. - Definition properly right (improves over
grazing, over fishing) - Use of better technology (↓ environmental degradation)

c) By promoting equitable income and growth.

The most important of the win –win opportunities that remains unexploited is related to poverty
reduction: not only is attacking poverty as a moral imperative, but it is essential for environmental
stewardship. Because of the very complex link between poverty and the environment, it is usually
the poor who suffer most from the consequence of environmental degradation and pollution and
also who seriously affect (promote) environmental degradation. Unlike the rich, the poor cannot
afford to protect themselves from contaminated water.

 In cities they are more likely to spend much of their time on the streets, breathing polluted
air;
 In rural areas they are more likely to cook on open fires of wood or dung, inhaling
dangerous fumes:

The poor may also draw a large part of their likelihood from unmarketed environmental resources:
common grazing lands, for example, or forests where food, fuel, and building materials have
traditionally been gathered. The loss of such resources may particularly harm the poorest. Sound
environmental policies are thus likely to be powerfully redistributive. Win – win policies may also
include

i. Investing in human resource/human capital investment, ⇒ Interims of education, health,

nutrition, family planning, etc.
ii. Investing in a better sanitation & safe water, and
iii. Improved research & extension services can both improve the environment and raise
incomes.
2. Forgetted Environmental Policies
The win-win policies are not enough to ensure environmental quality. Strong public institutions
and policies for environmental protection are also essential. The world has learned over the past
two decades to rely more on markets and less on government to promote development. But
environmental protection is one area in which government must maintain a central role. Private
markets provide little or no incentive for curbing pollution. Whether it be air pollution in urban
centers, the dumping of unsanitary wastes in public waters, or the over use of land whose
ownership is unclear, there is a compelling care for public action. Here, there may be tradeoffs
between income growth and environmental protection, requiring a careful assessment of the
benefits and costs of alternative policies as they affect both today’s population and future
generations. The evidence indicates that the gains from protecting the environment are often high
and that the costs in forgone income are modest if appropriate policies are adopted.

- The forgetted environmental policies aim at

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  Changing the behavior of polluters
 Specific environmental problems
These policies include
a) Policies based on incentives
e.g.: Taxation- government charges polluters according to the amount they pollute.
b) Policies based on quantitative restrictions (command a control policy).
e.g.: Setting emission standards. (I.e. a legal limit on how much pollutant a firm emits).

Economy Wide Policies and the Environment: Here we point out how different policies are
related to and affect the environment.
Trade liberalization:
⇒ This is advised by donors
⇒ It includes, removal of taxes on export, tariffs etc.
- This results in higher competition, and in order to remain in the country, factories have to increase
product, w/c intern results in higher pollutions.
- It also encourages exports, especially NR for LDCS.
Price liberalization: ⇒ This includes removal of price control, removal of subsidy. This was
advocated on the ground that it increases efficiency. Subsidy, on the other hand, leads to
misallocation of resources. But subsidy on kerosene for instance encourages people to buy and use
it. This decreases the pressure on fire wood as a source of energy which decreases reforestation.
Exchange Rate Reform:

E.g. Devaluation: discourage import and encourages export (because when you devalue the
domestic currency exporters may get more money from an export of a dollar item). This,
(especially for LDCS,) encourages export of NR – it may lead to deforestation.

Institutional reforms:

• Privatization:- this is transfer of some resources which were owned by the state this ↑
Production → ↑ waste product.

• Fiscal reform:- this is change in taxation. ↓ Aggregate tax →encourage more production
→ farmers may have an incentive to clear the forest.

• Financial liberalization:- this includes changes in interest rate. ↑i→↓I (industrialization)

→↑pollution.

• Land reform: this is change of properly right from state to the private.

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