Not just for the rich: Green growth and developing countries

Click to find out more about OECD work of relevance to Rio+20

Today we publish the second in a series of articles on the OECD’s contribution to the  RIO+20 UN Conference on Sustainable Development

A few years ago, I was invited to present the OECD’s International Futures Programme at a meeting on long-term issues organised by the UK’s Foresight project. Each of us outlined our group’s approach to strategic questions, explaining why we chose a particular time horizon. Mostly it was what you’d expect (50 years at least in the energy business, a minute or less for financiers). The most surprising contribution, for me at least, was from the chief economist of a big mining group who said that they didn’t bother with strategic planning and that, in essence, when the price of a mineral went up they got out their shovels and started digging and when it dropped, they leaned on their shovels until the price rose again. If there was nothing left worth digging out, they looked at their geological surveys and moved elsewhere.

That’s one of the factors behind the so-called “resource curse”, the idea that countries with abundant natural resources are less successful than others. The argument has its critics, but the price volatility of international commodity markets is clearly a problem for countries relying heavily on commodity exports. According to Green Growth and Developing Countries that’s the case for many non-OECD countries. The report identifies three “clusters”: fuel exporters, non-fuel commodity exporters and manufacturing exporters. Fuel exporters are strongly represented among high-income countries. The non-fuel commodity exporters are relatively over-represented in the low and lower middle-income groups. Manufacturing exporters are strongly represented among the middle-income countries.

Green growth is proposed for all three clusters as a way towards more balanced development that would also include the many people in the informal sector and who see little benefit from the economic progress of these past few years. It’s important for developing countries because the potential economic and social impacts of environmental degradation are particularly serious for them. Natural capital accounts for an estimated 26% of total wealth in low-income countries, compared with 2% of wealth in advanced economies.

As well as depending more than advanced economies on the exploitation of natural resources, many developing countries face severe economic, social and ecological threats, ranging from energy, food and water insecurity to climate change and extreme weather risks. They also face risks from premature deaths due to pollution, poor water quality and diseases associated with a changing climate.

There are international implications too. Although today most developing countries contribute only minor shares to global greenhouse gas emissions compared to the OECD and major emerging economies, they will increase their emissions if they follow conventional economic growth patterns. Green growth has emerged as a new approach to reframe the conventional growth model and to re-assess many of the investment decisions in meeting future needs.

OECD defines green growth as: “a means to foster economic growth and development while ensuring that natural assets continue to provide the resources and environmental services on which our well-being relies”. Green Growth and Developing Countries identifies three dimensions a national government should examine: a national green growth plan to create enabling conditions; green growth mainstreaming mechanisms to ensure opportunities are explored through existing economic activities; and green growth policy instruments to tap specific opportunities.

However, developing countries interpret green growth in different ways and the concept has generated some concerns. For example, the high initial costs for the transition to green growth appear to be beyond the reach of many, and even basic technologies are still lacking in most developing countries, particularly in wastewater treatment, waste management, energy efficiency and integrated water resource management. There is concern too that developing countries’ own technologies, including indigenous approaches, will not be able to compete, and they will need to import technologies from other countries.

Despite this, the majority of developing country governments are looking at different elements of a green growth strategy, such as carbon taxes, green energy funds, payment for ecosystem services, renewable energy, sustainable public procurement, and natural resource management. However green growth is rarely addressed in mainstream economic, budget and fiscal policies, and with a few exceptions, including Cambodia’s Green Growth Road Map and Ethiopia’s National Development Plans, there are few holistic policies, strategies and institutional systems in place.

That said, we started this article talking about time horizons, and we shouldn’t forget how recent the concept of green growth is and the fact that it is part of a long-term strategy seeking to change ways of doing things that have been used for decades if not centuries. Uncertainty and disagreement are to be expected at this stage and the OECD insists on the need for discussion and sharing of experiences.

A first consultation jointly organised by the OECD and the Global Green Growth Institute took place in Seoul, Korea in May 2012. The over-riding message was that unless green growth can speak clearly to poverty reduction and social and economic development in the near to medium term, it will make little progress. Most reaction was pragmatic – green growth should be seen as improving mainstream policies rather than as some radically new paradigm.

The next consultation with developing countries will take place at the Rio +20 conference on June 17th, and this effort will guide the articulation of a report that should be available by the end of 2012 and further refine the elements needed for a green growth policy framework.

Useful Links

Consultation with developing country policy makers, civil society and academia on the OECD Green Growth and Developing Countries Report, 17 th June, Pontificia Universidade Catolica do Rio de Janeiro

Discussion of the outcomes of the consultation on 17th June on adapting the proposed green growth framework to developing countries

OECD work on green growth

OECD work on improving development policy

Inequality, the crash and the crisis: Part 1 “The defining issue of our times”

Click to see the book

Today we publish the first of three articles on inequality and the crisis by Stewart Lansley, visiting fellow at The Townsend Centre for International Poverty Research, Bristol University and the author of The Cost of Inequality: Why Economic Equality is Essential for Recovery, Gibson Square, 2012. He was one of the speakers at the 2012 OECD Forum session: How Is Inequality Holding Us Back?

Does inequality trigger economic instability? A few years ago this was a issue that did not register on the political Richter scale. Nor did it attract much attention amongst professional economists. As James Galbraith, the economist son of John Kenneth Galbraith, has put it, those few working in inequality research were in an economics “backwater”. Proving his point, the academic Journal of Economic Literature has no section examining inequality and economic instability.

There is one key reason for this lack of interest. For the last thirty years, the economic orthodoxy has been that inequality is a necessary condition for economic success. We can have greater equality or faster growth but not both. That orthodoxy emerged out of the global crisis of the 1970s when, it was claimed, the move towards more equal societies in the immediate post-war decades had gone too far and had led to economic sclerosis. What was needed to put economies back on an upward and sustainable path was a stiff dose of inequality.

Since the late 1970s that theory – for theory it was – has been put to the test in a real life experiment in both the US and the UK, and more latterly in a number of rich countries. As a result, the income gap in America and Britain has grown to levels last seen in the inter-war years. So has the experiment in “unequal market capitalism” worked in the way predicted by the theory? The answer appears to be no. The income gap has surged but without the promised pay-off of wider economic progress.

On all measures of economic success bar inflation, the post-1980 era of rising inequality has a much poorer record than the egalitarian post-war decades. In the UK, growth and productivity rates have been about a third lower since 1980 than in the post-war era, while unemployment has averaged five times the level of the 1950s and 1960s. The three post-1979 recessions have been deeper and longer than the shallow and short-lived ones of the two post-war decades. The main outcome for the countries that have embraced the post-1980 model of market capitalism most fully has been economies that are both much more polarised and much more fragile, culminating in the great crash of 2008 and today’s increasingly prolonged and intractable crisis.

So does this mean the theory is fundamentally wrong? Do high levels of inequality lead to economic collapse? Was rising inequality from the 1980s in fact a central player in driving the global economy over the cliff in 2008, and in the dogged persistence of the current slump?

The official view is that inequality played no part in the present crisis. The report of the bipartisan US Financial Crisis Inquiry Commission into the causes of the 2008-9 Crash, published in January 2011, for example, failed to mention “inequality” once in its 662 page report.

Two years ago the handful of economists who argued that inequality was the real cause of the current crisis were easily dismissed as an insignificant and heretical minority. The political consensus remained that inequality was not an economic issue. Yet gradually, opinion is beginning to turn. At the 2011 World Economic Forum in Davos, Min Zhu, former Deputy Governor of the People’s Bank of China and a special adviser at the International Monetary Fund, told his audience: “The increase in inequality is the most serious challenge facing the world.” In his economic address in Kansas last December, President Obama attacked the long period of stagnant earnings facing most Americans, or what he called the erosion of the “basic bargain that made this country great”. “But this isn’t just another political debate’, he continued, ‘This is the defining issue of our time.”

At the OECD’s annual conference in Paris last month, the packed agenda was dominated by the issue of the growing divide, while the IMF has produced several reports that question the orthodox explanation of the role of inequality. In one study, two IMF economists, Andrew Berg and Jonathan Ostry, argue that the 1970s theory – by Arthur Okun in his highly influential book Equality and Efficiency, The Great Trade-Off – has failed to stand up to real world application: “When growth is looked at over the long term, the [efficiency/inequality] trade-off may not exist. In fact equality appears to be an important ingredient in promoting and sustaining growth.”.

Not only has the rise in inequality failed to deliver on faster growth, history shows a clear association between inequality and instability. The great crashes of 1929 and 2008 and the deep-seated recessions that followed were both preceded by sharp rises in inequality. In contrast, the most prolonged period of economic success and stability in recent history – from 1950 to the early 1970s – was one in which inequality fell across the rich world and especially in the UK and the US.

Of course, association is one thing, causation is another. In part 2, we will look at the reasons why the link may run from inequality to crisis, at why economies that allow a small minority to colonise an increasing share of the economic cake hike the level of economic risk and the likelihood of implosion.

Useful links

Divided We Stand: Why Inequality Keeps Rising

Growing Unequal? Income Distribution and Poverty in OECD Countries

The arithmetick of green growth

Click to find out more about OECD work of relevance to Rio+20

Today we publish the first in a series of articles on the OECD’s contribution to the  RIO+20 UN Conference on Sustainable Development

Here’s one of the best ever openings to a paper in any academic discipline you care to name: “The economic changes that occurred in this country during recent years are sufficiently striking to be apparent to any observer without the assistance of statistical measurements. There is considerable value, however, in checking the unarmed observation of even a careful student by the light of a quantitative picture of our economy.” That’s Simon Kuznets in his unremarkably entitled 1934 paper National Income, 1929-1932. Three years later, he would present a report to the US Congress that formulated such a “quantitative picture”: GDP, a single measure of the size of a nation’s economy.

Before GDP was invented (and it seems such an obvious, natural measure it’s hard to believe both that it was invented and invented so recently) governments did have some objective data on the state of the economy on which to base policy. In the 17th century already, William Petty established the bases of national accounting, essentially for tax purposes, although his Political Arithmetick also has many other lessons that are still relevant today, for example on how “a small Country and few People, by its Situation, Trade, and Policy, may be equivalent in Wealth and Strength, to a far greater People and Territory”.

Despite the centuries separating them, Petty and Kuznets were responding to a similar need to understand a changing situation. Petty’s concern was that although money rather than barter was starting to dominate economic transactions, national wealth was still counted as it had been for centuries in terms of gold and silver. In Kuznets’ time, the US government’s role in the economy was growing after the Great Depression, but as Richard T. Froyen points out, its interventions were being guided by a sketchy set of indicators such as freight car loadings or stock price indices.

The beauty of GDP was that it included so many different things in a single figure, and despite the suspicion and even outright hostility any innovative approach attracts, it became the standard measure of national economies following the 1944 Bretton Woods conference. The main criticism was, and still is, that it is not a measure of well-being since production can increase while leaving most people no better off in any way. Kuznets himself insisted that GDP was a quantitative measure and not meant to describe the quality of growth.

Speaking to the OECD Observer in 2005, François Lequiller, head of National Accounts work at the OECD, also defended GDP as doing very well what it was designed for, but admitted that it left out a number of key topics such as environmental degradation. However, as he pointed out, it’s probably impossible to design a single GDP-like figure for a wider application that would reflect the many different aspects in any meaningful way, and including them in GDP would damage its usefulness as a measure of output. A suite of indicators is more appropriate in these cases.

The OECD’s Better Life Index follows this logic to allow citizens to establish their own measure of well-being. Users “weigh” 11 topics – community, education, environment, governance, health, housing, income, jobs, life satisfaction, safety, and work-life balance – to generate their own Index from a collection of 20 indicators. But even if growth is what’s being measured, a single figure may be misleading or too vague.

When OECD governments asked the Organisation to develop tools to support policy analysis and monitor the progress of green growth strategies, it was clear that by its very nature green growth is not easily captured by a single indicator, and a set of measures would be needed as markers on a path to greening growth and seizing new economic opportunities.

A database of green growth indicators has just been launched by the OECD, structured around four groups to capture the main features of green growth:

  • Environmental and resource productivity, to indicate whether economic growth is becoming greener with more efficient use of natural capital and to capture aspects of production which are rarely quantified in economic models and accounting frameworks.
  • The natural asset base, to indicate the risks to growth from a declining natural asset base.
  • Environmental quality of life, to indicate how environmental conditions affect the quality of life and wellbeing of people.
  • Economic opportunities and policy responses, to indicate the effectiveness of policies in delivering green growth and describe the societal responses needed to secure business and employment opportunities.

Colombia, the Czech Republic, Korea, Mexico and the Netherlands have already applied the OECD’s preliminary set of green growth indicators to assess their state of green growth, and Costa Rica, Ecuador, Guatemala and Paraguay are now doing so.

Apart from providing data on what we know, compiling the database also reveals a number of gaps in our information relevant to green growth, for instance on biodiversity, what’s happening at industry level, or monetary values to reflect prices and quantities of stocks and flows of natural assets.

Even where enough data exists, it may be difficult to combine them due to differences in classifications, terminology or timeliness, to allow cross-country comparisons for example. The system of national accounts pioneered by Petty allows such comparisons for national economies, and provides the inspiration for the System of Environmental-Economic Accounts (SEEA), internationally agreed standard concepts, definitions, classifications, accounting rules and tables for producing internationally comparable statistics on the environment and its relationship with the economy.

We can only guess what William Petty would have thought of such an exercise. As for Simon Kuznets, he anticipated it in his 1971 Nobel lecture, pointing out over 50 years ago that “the conventional measures of national product and its components do not reflect many costs of adjustment in the economic and social structures…” going on to cite “clearly important costs, for example, in education as capital investment, in the shift to urban life, or in the pollution and other negative results of mass production.”

Useful Links

OECD work on green growth indicators

OECD work on green growth

Why measure subjective well-being? Richard Layard, Director of LSE’s Wellbeing Programme, argues in the OECD Observer that the search for measures of progress that might replace GDP is a timely and necessary one, but only a single metric will do the trick.