That same old question is once again hovering in the air: Is the world running out of natural resources and is thus condemned to live with rising commodity prices? The next obvious question: Is our economic growth sustainable or are we depleting our resources at an unsustainable rate?
From Thomas Malthus in the 19th century to the Club of Rome in the 1970s, many have voiced fears about the limits to growth. The optimistic side can point to one plain fact: Commodity prices in real terms are half of what they were a hundred years ago, thanks to new discoveries and technological innovation. Dylan Grice, a strategist at Societe Generale, framed the issue in an interesting manner. “When you buy commodities, you’re selling human ingenuity,” he told the Buttonwood column in The Economist.
Also See Future Concerns (PDF)
In a famous 1980 wager, economist Julian Simon asked ecologist Paul Ehrlich to pick five metals whose prices the latter thought would soar as population growth outstripped available supplies of food and resources. Simon bet that the prices of these metals would fall by 1990. He won. His victory has often been held up as proof of the vacuity of modern Malthusian predictions.
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However, is it different this time? George Mason University economist Tyler Cowen, not some environmental loony, recently posed a sharp question in his popular Marginal Revolution blog. “When most of the growth is catch-up growth, the poor countries demand more resources but supply technologies are not racing so quickly ahead. Real resource prices are more likely to rise.”
There is a long history of falling real resource prices, but is this simply reflecting the fact that the last 300 years don’t offer many periods of catch-up growth? Now, an era of catch-up growth seems to be upon us. So why should we be so confident that Simon’s predictions will continue to hold?”
These renewed debates will likely feed into the larger debate on the sustainability of economic growth. Real commodity prices can fall even if the world draws down its resource bank in a hurry. The sustainability debate has largely been run on moral rather than empirical grounds, especially in India. If you are not part of either extreme, it is hard to make any sense of the intellectual scuffles that keep breaking out in India.
An ambitious recent research paper by Kenneth Arrow, Partha Dasgupta, Lawrence Goulder, Kevin Mumford and Kirsten Oleson—each of them a top-notch economist—could help blow away some of the smoke and provide much-needed clarity on the sustainability debate.
The five economists first define sustainability. It is “the capacity to provide well-being to future generations”. The definition is worth thinking over. Arrow and the others have put forward a more demanding concept of intergenerational equity, compared with some earlier definitions. For example, the Brutland Commission of 1987 (whose report on our common future was endorsed by Rajiv Gandhi) had spoken about “… development that meets the needs of the present without compromising the ability of future generations to meet their needs”. Meeting the needs of future generations is a less strict requirement than providing for their well-being.
But what is to be sustained? This is difficult territory and far removed from the airy prejudices voiced in our public debates. Arrow and his co-authors develop a comprehensive measure of wealth for this purpose—wealth not just measured in terms of capital assets but also human capital, natural capital and environmental capital. Each has to be calculated, be it an increase in one sort of capital or the depletion of another. Country A may improve the health of its people but pollute the atmosphere. Country B may get good cash flows from oil exports but struggle with a high mortality rate. Putting it all together in a single number involves complex assumptions about shadow prices (since not all types of capital are traded in markets) and discount rates (to estimate a current value to future costs).
However, the bottom line is this. Five countries have been put under the scanner: the US, China, Brazil, India and Venezuela. Is their growth sustainable? Sustainability has been measured in terms of per capita growth in comprehensive wealth, taking into account changes in population and productivity. The five economists say that the US, China and India are “meeting the sustainability criterion”. Brazil just gets through while “the depletion of Venezuela’s natural resources exceeds its investment in human and reproducible capital”.
In the case of the US and India, investments in human capital “significantly outweigh the adverse wealth effects from natural resource depletion and from higher oil prices to these net importers”. Increase in reproducible capital does the trick for China.
What the five economists show is that improvements in human capital and physical capital can help sustainability despite depletion of the natural resource base.
Niranjan Rajadhyaksha is managing editor of Mint. Your comments are welcome at email@example.com
Graphic by Yogesh Kumar/Mint