Sustainable Development and Green GDP: Transition to Green Economy

SOUTH ASIAN UNIVERSITY Green GDP and Sustainable Development: Transition to a Green Economy in Afghanistan Academic Term Paper Submitted by: Ahmad Shah Mobariz 11/16/2013 This Term Paper has been submitted in partial requirement of end semester examination of Environmental Economics, MA (Development Economics) of South Asian University (SAU). The title of the term paper has been selected by sheer choice and due to my interest in Sustainable Development and Green Economy. In this term paper I have discussed the concept of Sustainable Development and transition to a Green Economy in Afghanistan by adopting some necessary measures including Green GDP in the National Accounting, and at the end suggested some policy recommendations. 2 Green GDP and Sustainable Development: Transition to a Green Economy in Afghanistan Introduction: Scholars in the field of economics throughout the evolution of economics as a discipline have shown their concerns on the sustainability of growth. Starting with Malthus, Ricardo and Mill from the classical economists who first proposed the idea of limits to growth and finiteness of resources and the solution thereof; to today’s environmental economists who confirms the idea of resources’ finiteness and asserts that unless necessary measures are taken, the scrupulous motive of human kind for economic growth at the pace it is taking place today, would hamper the natural capital to the extent that it will not be able to replenish itself. Neoclassical economists who believe in the efficiency of institutions and argues for the welfare maximization through the interaction of the agents in the market place, are of the opinion that the resource scarcity can be taken care of by the market mechanism, which would reflect itself in the prices of resources; and the possibility of substitution of natural capital with the human made capital which will be brought about by the human innovation and technological progress. Hence both of the above mentioned arguments acknowledge the scarcity of resources, but differ in their understanding of and solution for sustainability of development. In this term paper I have tried to have a critical look at the one of the propositions of the ecological economics, that is; incorporation of environment in the national accounting, to address the problem of sustainability; can Green GDP solve the problem of unsustainable development? If not, what other approaches are available for a poor economy like Afghanistan, to follow a sustainable development path? To answer these questions I have taken a theoretical and analytical approach. First, I have discussed the concept of sustainable development; secondly, the conventional concept of GDP and national accounting is briefly overviewed; thirdly the Green Accounting proposition of ecological economics to address the problem of unsustainable development is studied; fourthly, the implication of green GDP to sustainable development is critically analyzed; and fifthly, by adopting the above measures the transition to a Green Economy as a solution to sustainable development is studied; and in the last section I have evaluated the implications of a Green Economy for Afghanistan. 3 1. Sustainable Development Sustainable development has been defined as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs"1. This definition of sustainable development captures the need for concerns for intergenerational equity in terms of distribution of resources. Given that human economy receives its inputs from the natural environment and disposes of its waste to environment; cannot operate without regard for finiteness of resources (scarcity in neoclassical perspective) and carrying capacity of the nature. Resources are of two types: non renewable resources and renewable resources. Non renewable resources such as coal, petroleum and other mineral resources are a given fixed amount of endowment and will end up at some point of time, but renewable resources have the capacity to regenerate. Sustainable development implies that the use of non renewable resources should be equally distributed among generations and the use of renewable resources should be to the extent that it does not hamper the capacity of the concerned resource to regenerate itself. Sustainability of income to be used for consumption of goods and services is at the heart of neoclassical argument. In this formulation income is defined as the amount which can be spent while keeping capital intact. According to Hicks (1946:172) ‘the purpose of income calculation in practical affairs is to give people an indication of the amount which they can consume without impoverishing themselves.’ From Hicks’ statement one can infer that sustainable development requires prudent conduct to maintain sufficient consumption, guard against impoverishment and avoidance of overconsumption. Therefore, non decreasing income and consumption can only be insured by keeping capital intact at all time and failure to consider this prudent conduct would decrease capital assets for generating future income. The problem in this argument is that for a fixed stock of natural capital how can we maintain a non declining utility and consumption function. Hartwick (1977) formulated a general rule for sustainability. According to this criterion maintaining a constant real consumption of goods and services or real income is possible even in the presence of exhaustible resources, provided that the income derived from an intertemporarlly efficient use of these resources is reinvested in the renewable capital assets. Hence the focus of concern is on the prudent use of the return or savings derived from the resources, rather than the depletion of these resources2. In order to understand this formulation let us consider the following mathematical representation of Hartwick- Solow Model3. Let and and Δ be the capital stock in the first period, capital stock in the second period and depreciation of the capital stock respectively, then we shall have: Δ …………………(1) By employing in the first period the business would save period 2 the economy will have the following: Δ + 1 amount of savings, so at the beginning of …………..…(2) Our Common Future, The Brundtland Commission report, World Commission on Environment and Development, Oxford: Oxford University Press, 1987 2 Harwick Sustainability Rule 3 Hartwick 1977; Solow 1986 4 In order to have at least non declining income in the second period and keep the capital intact savings generated by employing should at least compensate for depreciation, therefore: Δ …………………………..(3) The above condition is the minimum sustainability criterion under this formulation. Now let us introduce natural capital (capital as composition of human made or physical capital and natural capital): ………………..…….(4) stands for human made capital at time t. According Where: stands for natural capital at time t, and are perfectly substitutable, and in order to sustain a non declining income a to Hartwick and constant amount of total capital should be maintained, which implies that: ………(5) Depreciation will be calculated on total capital: ……………..….(6) Capital in the next period will be a combination of both types of capital: …………..….(7) Weak sustainability criteria: A reduction in stock of natural capital can be compensated by a corresponding increase in stock human capital. Rent received from an efficient use of resources is reinvested in renewable capital assets. Compensatory investment would imply: ……….…………(8) This equation implies: Savings ( ) should be invested in the form of ( ) to compensate for the depreciation: ………..……(9) If: , then sustainable. , and the capital stock has been maintained. Therefore the development is The above argument is a standard neoclassical notion of development, which asserts that as long as a non declining income (GDP) is sustained by employing human capital to replace depreciated natural capital the development is sustainable. This argument faces the challenge that natural capital and human capital may not play same function, rather their function are unique. This critique is given by the ecological economists, who believe that in order for development to be sustainable a combination of both natural and human made capital is 5 required, not merely the total capital as the neoclassical economists claim. This argument implies that the two types of capital are complimentary not substitutes. …………………..(10) When there is depreciation in natural capital compensatory investment cannot take place. + ………(11) [ This can happen only if: , and Since investment in natural capital is not possible, therefore capital stock of natural capital will continuously decline. As we see, in the ecological perspective the human economy cannot sustain its development path without a combination of minimum stock of natural capital and human made capital. This line of argument in the literature is called ‘strong sustainability criteria’. According to strong sustainability criteria of the ecological economics, in order for the development to be sustainable it has to strictly consider the following conditions:  The rate of exploitation of renewable resources should not exceed the regeneration rate.  Waste emission should be kept at or below assimilative capacity (waste absorptive capacity) of the environment. For instance the absorptive capacity of the environment for radioactive radiation is zero, so strong sustainability criteria suggests that no radioactive substance should be disseminated to the environment.  The extraction of nonrenewable resources should be consistent with the development of renewable substitutes. This condition is in line with the Hartwick’s substitutability assumption.  Conventional national account should incorporate the depreciation of natural resources. The above conditions are required for what is called strongly sustainable development, and will lead to a green economy. Since this term paper starts with Green GDP and sustainable development, I shall now discuss the fourth sustainability criteria, that is, the incorporation of depreciation of natural capital in national accounting. Since national accounting is all about GDP, and the focus of the economy is to sustain a non declining rate of GDP growth, as promised in the introduction, let us first have a brief overview of national accounting and GDP calculation and then discuss the Green GDP. 2. Gross Domestic Product (GDP)4 From Macroeconomics we know that GDP is the market value of all officially recognized final goods and services produced in a country in a given period of time. One of the approaches to calculate GDP is the income approach, in which all incomes earned by all agents in an economy is aggregated to get the GDP. …………………….(12) 4 The equations in section 2 and section 3 are derived from Ahmed Hussain (2003) 6 Where: R= Rents; I= Interest; P= Profits; SA= Statistical Adjustment (corporate income taxes, dividends, undistributed corporate profits); and W= Wages. Or: GDP = C + I + G + (X − M)………………….….(13) Where: C= Consumption; I= Investment; G= Government Expenditure; X= Exports; and M stands for, imports. From the production function we know that income is a function of factors of production, where capital is a major component. Hence the level of GDP in an economy depends on the size of its capital. On the other hand I argued in the previous paragraphs that since depreciation of natural capital cannot be substituted by reinvestment of the rent or profit earned in the previous period, the size of natural capital would decline, which means in the long run the GDP of an economy would also fall, and therefore the condition of non declining consumption and utility for the existence of sustainable development would also break up. Of course I have based all my arguments on the definition of sustainable development I gave at the beginning: “Development that meets the needs of the present generations without compromising the ability of the future generations to meet their needs.” In equation (13) defensive and clean up cost are also included in the calculation of GDP. Defensive expenditure refers to those expenditures incurred to reduce the environmental damage and its effects on people. Or in other words defensive expenditures are the costs borne by an economy to reduce the impact of environmental damage done on welfare. While clean up costs are costs incurred to reduce the damage already done to the environment by an economic activity. As we see in the equation (13), due to inclusion of and clean up costs, an environmental disaster can increase the GDP, which implies that using GDP as a proxy for welfare would be problematic. If we calculate Net Domestic Product (NDP), depreciation of capital stock should be subtracted. ……………………...(14) As we saw earlier; the Standard National Accounting consider the depreciation of only human made capita (produced capital), and excludes the depletion of natural capital from its calculation. Furthermore, all productive market activities, except subsistence agriculture and services provided by the owner occupied housing are recorded in national accounting, but non market activities including the services provided by the environmental assets (natural capital) are excluded. Hence GDP cannot capture the sustainable development path, and neither GDP nor NDP in the conventional national accounting can be counted upon as a yardstick for the calculation of social welfare. To address this problem the concept of Green GDP was introduced, which we are drawing upon in the following paragraphs. 7 3. Green Accounting-Green GDP In the previous section it was argued that accounting for depreciation is essential for sustainable development, provided that it includes both natural capital and human made assets. In order to solve this problem another system called ‘Environmentally Adjusted Sustainable National Income Accounting’ or ‘Green Accounting’ has been developed. In this system some cost factors are deducted from the conventional GDP. The Green GDP (GGDP) = Traditional GDP- Environmental /Ecological Cost……..(15) Environmental/Ecological costs are consisting of the following components: A. Defensive expenditure in the environmental damage; B. Clean up costs: The expenditure on restoration of the resources environment to reduce the damage already done by economic activity; ): Loss in environmental resources; C. Depreciation of natural capital ( D. Maintenance Cost: Expenses for maintaining environmental resources; Or, it can be calculated as following: GGDP= Total output of the industrial sectors - Damages to resources and environment+ Total new value created by environmental protection organizations…………………..(16) A typical figure showing the classification of environmental accounting at all levels is given bellow: 8 Source: United Nations, System of Integrated Environmental and Economic Accounting, New York, 1994. As we see in this figure Green Accounting is an integrated accounting which considers the environment as an important component at all levels, both at the micro and micro levels, including firms and the government. Now let us have a look at the implication of Green accounting for sustainable development. 9 4. Implications of Green Accounting (GGDP) for sustainable development I discussed in the previous section that for calculating GGDP, depletion of natural resources and cost of pollution should be deducted from the traditional GDP. This formulation integrates the environmental statistics to the conventional GDP statistics, and by doing so it provides the policy makers with a framework to compare environmental statistics with the economic statistics to analyze the sustainability of production and consumption or the economic consequences of environmental regulation. It helps us to understand the role of natural resource in total assets contributed to economic value added; and the dimension of environmental degradation as a result of production and consumption activities. In the above figure we can clearly see that Green Accounting mechanism by segregating the accounting at the micro and macro levels, gives an overall picture of the position of environment at all levels. Furthermore, by adopting Green GDP standard, firms, municipality authorities and all other agents involved in economic and non economic activities will maintain environmentally adjusted books of accounts and adopts environment friendly policies in usage of technology and employment of resources. If we go back to the sustainability criteria equation (9) and compare it with equation (11) we will see that GGDP accounting mechanism meets the requirement of the sustainable development. Hence it would urge the agents to environment friendly technology; have an account of environmental degradation; try to find alternative ways to substitute nonrenewable resources like petroleum by solar energy; Invest on renewable resources; and not exceed the rate of extraction over range of regeneration of resources and do not dispose waste beyond the absorptive capacity of the environment. Finally, if the above measures are strictly adopted by all, a transition from brown and exploitative economy to a pro-poor, inclusive and green economy will take place; which is discussed in the following section. 5. Transition to Green Economy ‘Green Economy’ is a relatively new term that has become the focus of much interest and considerable debate among policy makers and other stakeholder in the recent years. The ‘Rio+20’ agenda has adopted ‘green economy’ as a key theme in the context of sustainable development and poverty eradication. The concept of ‘green economy’ has also been the matter of discourse among the countries of South Asia. UNEP defines a green economy as one that results in ‘improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities’. In its simplest expression, a green economy is low carbon, resource efficient, and socially inclusive economy. In a green economy, growth in income and employment should be driven by public and private investments that reduce carbon emissions and pollution, enhance energy and resource efficiency, and prevent the loss of biodiversity and ecosystem services. These investments need to be catalyzed and supported by targeted public expenditure, policy reforms and regulation changes. The development path should maintain, enhance and, where necessary, rebuild natural capital as a critical economic asset and as a source of public benefits. This is especially important for poor people whose livelihoods and security depend on nature. The key aim for a transition to a green economy is to eliminate the trade-offs between economic growth and investment and gains in environmental quality and social inclusiveness. The environmental and social goals of a green economy can also generate increases in income, growth, and enhanced well-being (UNEP 2011, page 16). 10 Importance of Green Economy The transition to ‘green economy’ has many economic and the social benefits. It provides ‘real opportunities for environmental sustainability and increased welfare’ in the society. This concept is gaining widespread acceptance as means of getting the economy to right track. ‘Decades of creating new wealth through a “brown economy model” have not substantially addressed social marginalization and the resource depletion.’ It has been seen a way to reach sustainable development and the means to get out from the vicious cycle of the poverty. “…the greening of the economies is not generally to drag on growth but rather a new engine to growth; that it is a net generator of the decent jobs, and also a vital strategy for the elimination of the persistent poverty…” (UNEP, 2011). Greening of the economy has multiple effects on poverty reduction in various sectors of economy including agriculture, forestry, renewable energy, fisheries, waste management, manufacturing etc. Sustainable and profitable growth can be obtained in these sectors in long run by green approach. Hence Green Economy which on one hand incorporates all concepts of and recommendations for a sustainable development, and on the other hand is a feasible approach for an agrarian economy, I strongly believe it is the most viable and implemental development path for Afghanistan. This argument is further explained in the following section. 6. Implications of Green Economy for Afghanistan Afghan economy is primarily an agricultural economy, where over 75% of the people are engaged in agriculture (World Bank), but agriculture output builds up only 20% of total GDP, while services and industries builds up 54% and 25.6% of GDP respectively. Due to lack of government regulation and the low standards of leaving of people the industrial sector and the war machinery has emanated huge amount of Corbondiaxide ( ), Corbonmonoxide ( , Sulpherdiaxide ( and many other polluting substances. The renewable natural of resources of the country like timber has been voraciously exploited, without regards to the regeneration capacity of the country that has continuously led to deforestation. Now the question is that, while the only asset for a developing and war torn country like Afghanistan is its natural resources and human made capital accumulation is primitive, can it follow a sovereign and sustainable development path, with increasing depletion of natural capital? What can be the most efficient and inclusive development trajectory for this country to alleviate poverty? Having seen the above arguments regarding sustainable development and the alternative path to Brown Economy, which is the Green Economy, I would argue that the viable development policy which should be adopted by any agrarian or developing country, in particular Afghanistan, is adoption of a Green Economy. Green economy in case of Afghanistan raises many questions that do not have simple and straight answers. We know, however, that the transition requires substantial efforts and engagement from all segments of society, particularly government and the private sector. It demands that governments level the playing field for greener products by removing perverse incentives, revising policies and incentives, strengthening market infrastructure, introducing new market mechanisms, redirecting public investment and ｗgreeningｘ public procurement. The private sector, on the other hand, will need to respond to these policy reforms by increased financing and investments, as well as by creating expanding skills and capabilities to make the best opportunities viable for green economy. 11 Various facilitating conditions will be required to our road to green economy. National policies, subsidies and incentives, legal frameworks and aid and trade protocols etc, are the basis for the sustainable development and a green economy. The transition to a green economy could benefit Afghanistan in various ways. The green economy demands greater social equity, something that is especially necessary for Afghanistan, which is among countries that have unequal income distribution and high Gini ratio of land ownership. The transition could, thus, serve as a platform for poverty eradication. In a green economy, natural capital becomes an asset that generates dividends and produces a competitive environment. Hence, Afghanistan has a lot to do to achieve green economy. One cannot ignore the challenges ahead of and the opportunities for transition of the Afghanistan to green economy. There are various agendas to be considered to address the challenges we are facing and avail of the opportunities associated with it. Some of the agendas which should be considered are pointed out below:  Information affects our behavior. So we should have proper information so that it can guide us to our goals. We need various measures and indicators related to green economy so that we can access to the challenges and opportunities. The agenda should be focused to collect related data and measures.  Common Agendas to be made between all actors in the economy and social activities including the government of Afghanistan and NGOs, for creating enabling conditions to transition to green economy. It includes enforcement of laws and regulations, designing policies, providing subsidies and incentives, etc. Furthermore, there should be regional understanding and co operation among South Asian countries, while drafting policies and making laws and regulations. So agenda should be to form the common platform.  There are many global challenges associated with the greening of the economy. So common voice is to be raised in international arena regarding the matter. The issues related to the climate change, global warming, green house effects, etc are of the global nature. Hence the proper understanding and the common voice among the different players in the country in particular and South Asian countries in general is necessary.  There should be massive discussions and talk about the matter so that proper understanding can be obtained. So for this purpose some platform is to be created where these discussions can take place. The concerned stakeholders should be in continuous dialogue. The stakeholders could be government, economists, environmentalists, various NGOs and INGOs and many international agencies. With proper understanding of the subject matter the necessary steps can be taken.  Protection and promotion of the green products by necessary means is necessary. Subsidies and incentives are to be provided to energy efficient and environmentally friendly technologies.  Mitigation and adaptation measures for people who are already vulnerable and suffering should be taken. Due to the climate change and global warming there are many people in the country who are already in the risk. So some measures are to be taken. 12  Common agencies are to be formed with the rest of South Asian countries, to deal with the related areas. It may include formation of the common fund to deal with, development of the research institutes etc.  Public awareness is indispensible part. So various steps are to be taken to raise public awareness. Small efforts for the public level can make great change.  We ourselves have to find a way out towards green economy as no one else will do it for us. We must realize our needs, potential and the opportunities related to it. Conclusion: Sustainable development as a concern for the present and future wellbeing of the human economic activities is something which must be placed in all areas of socio-economic life. It should have a position in legislation, policies and practices of all economic agents. Green GDP as an index of sustainability should be incorporated in accounting formulation as discussed. Provided that all measures are undertaken a newly economic framework that is Green Economy, which will favor both nature and poor human beings will surface. An agrarian economy like Afghanistan needs especial attention to its environmental hazards which affects the life and blood of the agrarian economy in the form of drought, ill health condition of the people and the wildlife in the forest. I hope with this small piece which is in fact an ‘Academic Term Paper’ and have been undertaken as an obligation, I have been able to contribute to my mother nature, through my writings and intellect. 13 References: 1. Bartelmus, P. (2008) ‘Measuring sustainable economic growth and development’ , in C.J. Cleveland (ed.) Encyclopedia of Earth 2. United Nations, UN (1993) Handbook of National Accounting System of Integrated Environmental and Economic Accounting – System of Integrated Environmental and Economic Accounting, 198 p. 3. Yusuf J. Ahmad, Salah El Serafy and Ernst Luts, Environmental Accounting for Sustainable Development, UNEP-World Bank Symposium 4. Ahmed Hussen, Principles of Environmental Economics and Sustainability, Third edition Routledge Group, 2013 5. Ulrich Brand, Green Economy – the Next Oxymoron? No Lessons Learned from Failures of Implementing Sustainable Development, GAIA 21/1(2012): 28 – 32 6. Harvey Croze, Emerging Issues in Global Environment, UNEP Year Book, 2012 7. UNEP, 2011, Towards a Green Economy: Pathways to Sustainable Development and, Poverty Eradication - A Synthesis for Policy Makers, www.unep.org/greeneconomy 8. Mohamed A Raouf A hamid, Theoretical Framework for Environmental Accounting-Application on the Egyptian Petroleum Sector, The Egyptian Forum on Environment & Sustainable Development (EFESD), Cairo, Egypt 9. World Bank, Fact Book on Afghanistan (2012) 10. Sakhidad Saleem and Mohammad Edris Raouf, (2011), Sustainable Agricultural Development and the Challenges Facing Agricultural Education in Afghanistan, Faculty of Agriculture, Kabul University;