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Sustainable development: an economic perspective.

Sustainable Development: An Economic Perspective

In the process of economic development, the intention is to raise the standard of living on a sustained basis. All human activity, economic and socio-cultural, takes place in the context of certain types of relationships between society and the bio-physical world (the rest of nature). "Development" necessarily involves a transformation of these relationships.

Sustainable Development is about being fair to the future that is behaving sustainable. The concept of sustainability is becoming more prominent on the global agenda. At a general level, the concern is that our current organization of society and modes of production and consumption are not sustainable and that we need to undergo a transformation so that we can meet "the needs of the present without compromising the ability of future generations to meet their own needs" (WCED, 1987).

It can also be termed as a process of change in which exploitation of resources, the direction of investments, the reorientation of technological development and institutional change are all in harmony and enhance both current and future potential to meet human needs and aspirations.

The idea of a sustainability has quite deep historical roots such as in classical economics. It is perhaps best seen as an issue which has been recognized for some time, but which has only become more widely realized now that a number of subsidiary ecological situations (notably climate change) have reached a critical stage. The concerns which underline the overall topic of ecological sustainability have emerged over the last few decades in a number of disciplines. These include economics, particularly resource economics, ecology, social theory and development studies. The major contributions to our understanding now have been the following realizations:

1) External costs of production. 2) Potential resource scarcity. 3) Physical limits of indefinite material growth. 4) Diminishing social returns of growth. 5) Global inequality. 6) Reduced biological diversity.

These cumulative concerns are reflected in recent global overviews which go some way toward presenting overviews of the sustainability debate. Now for the first interpretation of sustainability as fairness to the future, it is the total stock of all forms of wealth that must not be depleted. It is consistent with this view that environmental wealth is depleted as long as that depletion is compensated for by a building up of the other forms of wealth, human and capital wealth. Equally, if man-made wealth is run down, environmental capital must be built upto compensate.

Deciding how much to have of each form of capital rest on determining their correct values. To the economist this means finding the right prices. The argument that environments are beyond price" is not illogical. Even though environmental services are rarely bought and sold in markets, it is possible to get some idea of what those values be if only there was a market. This is the economist idea of a "shadow-price", the price that would rule if environmental goods and services are traded in the "right" amounts. So we can say that sustainable development means getting our accounting systems to reflect as far as possible, the shadow prices of environment. This could be one of the several major steps that need to be taken in practice.

Remodelling the National

Accounting System

There is already a significant amount of effort going into the modification of the way in which we measure economic progress in the developed countries. The basis indicator is gross national product (GNP) which measures the aggregate value of the output in the economy in a given year. GNP ought to be related to society's well being. If GNP goes up we ought to be able to assume that well being has improved. But GNP is misleading in this respect. Consider what happens if people spend money trying to adapt to or prevent pollution. Their expenditure appear as a contribution to GNP. The environmental damage they seek to offset is not recorded at all. If environments do not generally have markets it does not mean that they have no economic value. But GNP essentially measures the value of marketed output. It ignores the environment. A mere correct measure of GNP net out the kinds of |defensive' expenditures incurred to combat pollution. In the same way, any environmental damage that occurs should be valued and deducted from GNP. National accounts statisticians are also used to making reasoned estimates of the amount of depreciation of man-made capital. They deduct this depreciation from GNP to get net national product (NNP). This is a better measure of well being because it allows for the fact that some of the wealth from which GNP flows is subject to decay depreciation. But NNP ignores natural wealth. It too is subject to depreciation, for example by running down reserves of oil or reducing standing stock of forest. There is no logic to support including one form of depreciation and ignoring the other.

These types of modifications to the accounting systems are beginning to be made, which are apparently costly and complex in practice. A modest alternative could be to publish sets of environmental statistics which are rare in developing countries.

Proper Pricing

The prices of natural resources should reflect their full value. The price of a resource is obviously linked to the cost of its extraction or harvest. The market mechanism will ensure that these costs are reflected in prices. But resource extraction and harvesting can also impose costs on others. If timber is removed unselectively from a tropical forest, there is damage to the watershed through river pollution and soil erosion. These costs are not reflected in the price of timber. The market has "failed" because the timber price is not picking up the value of the natural environmental services it has effectively used. We can say that prices should not just reflect the extraction and harvesting costs, but also the environmental costs. There is one more adjustment to be made to resource prices. If a resource is harvested sustainably its stock will remain broadly constant overtime. If it is used unsustainably its stock will be reduced and what is lost will not be available to the next generation. This lost future benefit from unsustainable management is called a user cost. Obviously there must be a user cost involved in all extraction of an exhaustible resource. There is also a user cost attached to the non-sustainable use of a renewable resource. We therefore have a basic rule for the "proper" pricing of natural resources. Those prices should reflect extraction costs plus environmental costs plus user costs.

Project Appraisal

Another modification required for the implementation of sustainable development practice is to alter the way which we appraise investments. When deciding on a development project, it is all too common to pay lip service to the environment. This is especially time of the rules used by bilateral and multilateral agencies lending to the developing world. Practice is being changed slowly. The vital modifications needed are in terms of measuring the environmental effects of projects and getting environmental values integrated into the economic appraisal. Development projects will inevitably degrade some environmental assets even when environmental effects are properly priced. But allowing that degradation is not consistent with holding the stock of environmental assets constant over time. Thus it is necessary to alter the portfolio of investments to ensure that there are offsetting investments in the environment.

Putting sustainable development into practice means altering the way we measure economic progress. It also means altering the way we allocate resources within the economy. The price mechanism is a very powerful allocater of resources because it relies on people acting in their own self-interest. It follows that we can use that self-interest motive to good effect by altering the signals that we send out to producers and consumers in the economy. Monitoring the environment to see how it is changing and investing in the environment to ensure that the stock of environmental assets is not reduced oversall is fundamental to achieving sustainable development.
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Title Annotation:maintaining present economic development in Pakistan without compromising future generations ability to meet their own needs
Author:Khalil, Samina
Publication:Economic Review
Date:Jun 1, 1991
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