Chapter 11

Towards a Sustainable World: Sustainable Development

References:
 Chapter 48 of textbook: “Sustainable Economic Systems” by Sebastian Plóciennik

Intended Learning Outcomes

Within the orientation, the students are expected to:
 Differentiate stability from sustainability (CLO3);
 Articulate models of global sustainable development (CLO3);

Lesson Preparation/ Review/Preview

Stability long-term growth Human Development Index (HDI)

Sustainability pluralism Progress Index

Inflation liberal market economy

Exchange rates coordinated market economy

Financial markets roll over effect

 Concept Notes Presentation

*Sustainable Economic Systems

 The first decade of the twenty-first century witnessed the strong impression that the global
economy had become a sphere of extreme uncertainty and risk.
 Symptoms were numerous. Apart from collapsing financial markets there were rising
unemployment, deeper inequalities, a shrinking middle class, extreme indebtedness, and inability
of governments to force through reforms. In addition, there were the increasing challenges of
climate change and availability of resources, which are necessary to develop new technologies and
keep economies growing.
 The author asserts that the main reason for the current problems has been the inability of
modern societies to produce enough stability and sustainability. These two elements have been
produced so far in a rather fragmented way and not always efficiently.

*Stability
 Firmness in position, permanence and resistance to change, especially in a disruptive way
 The International Monetary Fund (IMF) describes it as ‘avoiding large swings in economic activity,
high inflation, and excessive volatility in exchange rates and financial markets
 This definition refers to indexes, which describe the economy in short-term categories. Headline
news saying that the ‘economy is stable’ means actually that the system is in one of the calm
phases of the business cycle, neither heading towards boom nor towards depression
 Classical economists of this epoch believed in the self-regulation ability of economic systems
and, in their view, an unrestricted price mechanism should be enough to restore stability – at least
in the long term.
 The global interconnectedness, which was very advantageous to the world economy because
of exchange, showed its other, less appealing face. Another problem was that new
technologies made economic process faster and less predictable.
 Since 2007 many countries had been trying to restore stabilization with expensive spending
programs and generous monetary policy.
 The try-and-try-again desperate attempts to revive economic growth contributed to the
persistence of extreme public debt in many countries and the zero-bound trap by the monetary
policy. Production of stability is now jammed and this, together with grim prospects for the
world economy in the coming decade, is perhaps the most severe symptom of the crisis.

*Sustainability
 It considers the long-term capacities of a system to exist, not its short-term resistance to
change
 It is about responsible use of resources
 A well-known definition of sustainability, which emphasizes its economic notion, comes from
the Bruntland Report (World Commission on Environment and Development, 1987)
prepared for the United Nations in 1987. It says that ‘development that meets the needs of the
present without compromising the ability of future generations to meet their own needs’
deserves the label of sustainability.
 It would be, however, too much to say that the issue of sustainability was non-existent. The
pioneer was the British scholar Thomas Malthus, who published in 1798 a book on the grim
consequences of a rising population, which consumes all surplus food production and thus
prevents a rise in living standards. The solution was found in increased productivity of
agriculture, which culminated more than two centuries later in the Green Revolution in places
such as India and Bangladesh.
 Modern debate on sustainability, focused mainly on environmental questions, came later. In
1968 Garret Hardin wrote his famous work ‘Tragedy of the commons’, in which he analyzed
how public goods got exhausted by actors in a free market economy (Hardin, 1968). His
arguments helped to explain why, for example, non-regulated access to fishery can quickly
lead to empty seas and collapse of the fishery industry in many countries
 A few years later, in 1972, the Club of Rome published ‘The limits to growth’, a groundbreaking
study which dealt precisely with the connection between economic growth and scarcity of
resources.
 Rising awareness of the sustainability problem in environmental issues and resources
translated also into international cooperation. So far there have been many conferences on
climate change and framework agreements (e.g. the Kyoto Protocol on reduction of
greenhouse gases), but their effectiveness is not very high.
 Many countries see such global actions against climate change as endangering their vital
economic interests, among them particularly developing economies. According to the study
published by the Netherlands Environmental Assessment Agency, since 1990 to 2011 the most
populous countries in the world and rising industrial powers, China and India, increased
their emission of CO2 at 227% and 100% respectively.
 Sustainability perspective started to be visible not only in the environmental area. For many
years the theme of overpopulation occupied an important place in the debate. However, the
process of ageing of societies in Europe, Japan and China brought slightly different
arguments, seeing dangers for the sustainability of pension and health-care systems. It is
argued that the current structure incurs huge public debt in favor of current consumption of
the older generation and at the expense of the shrinking, younger sector of society.
*Towards a Sustainable (and More Stable) Economic Model
 It is time to elaborate on what kind of economic governance can deal efficiently with problems of
stability and sustainability.
 Three areas of economic models that should be re-thought and redesigned: Firstly, the issue of
what is an ‘efficient market’ needs some new clarification. Secondly, we must accept the fact
that there might be many different institutional ways to efficient economic systems, but it
does not necessarily mean that some of them are a priori more efficient, stable and better for
sustainability, then the others. Thirdly, a redesign needs a wider look at what is economic
growth and what kind of growth is compatible with the idea of sustainability.

1. Complexity Approach to Markets

 Markets are the most substantial, constructional element of economies. However, nowadays we
are dealing with biases which make understanding their functioning puzzling. As a consequence
there are difficulties with efficient economic policy and, obviously with providing stability and
sustainability.
 One of them is surely the formal concept of markets which dominates modern economics. It is
based on strong assumptions which make building theoretical models easier, but, like many
authors have concluded even before the crisis stated, only partly coincide with reality.
 Another strong assumption is that markets tend always to a state of equilibrium set out by forces
of demand and supply. If there is a situation of imbalance caused by external shocks, these
forces push markets ‘automatically’ towards an efficient equilibrium level of price, no matter
what kind of shock caused them.
 If one looks for a central term embracing all the problems mentioned above, it is complexity,
or, to be more precise, quickly rising levels of complexity in modern economies. More
commodities, more diversified preferences and needs of actors, more suppliers and more
buyers, faster communication between them, more sophisticated, global relations between
markets, etc.: all these did not fit into relatively simple models anymore and also challenged
traditional, sectoral and nationally oriented regulation.

2. Pluralism of Development Model

How Convergence Failed
 The years after 1980 put into the economic debate the issue of convergence of national
economic models. The source of this consideration was the rapid expansion of neoliberal
ideology, which saw markets as the most efficient way of social coordination and true growth-
creating machines.
 The neo-liberal agenda brought, however, some problems. Firstly, it increased exposition of
the world economic systems on crisis and contagion effects since most reforms were aiming at
national deregulation which was not ‘replaced' by efficient global regulation. This issue
became quite clear when local collapses in the 1990s, like the Asian crisis or the Russian
crisis, turned to be global events with extremely dangerous potential. International economic
organizations created to help countries in trouble, like the International Monetary Fund and
the World Bank, were conditioning their aid measures with even deeper deregulation of crisis-
ridden economies. This strategy provoked many controversies since it sharpened some
stability problems instead of solving them and was actually finally abandoned.
 The second problem concerned efficiency. The tacit and wide-spread assumption on
superiority of free market solutions has some flaws. There are issues with short-termism, high
volatility and inability to deal with externalities which are directly connected with the
challenge of sustainability. The efficiency assumption is also criticized in the context of social
inequalities. They are produced by the free market game, but in neoliberal approaches, the
less affluent “losers” have incentives to become more efficient and should catch up winning
the next round of the game.

The third problem is legitimacy of market based solutions. The market itself is not able to
produce legitimacy, but it needs acceptance of all actors. However, while starting with distribution
of welfare and power over the competition mechanisms, the neo-liberal agenda has to have not
only a good idea of what to do with the winners, but also what to do with the losers. If there is
no feasible solution of this challenge – a clear and accepted definition of social justice – a market
economy endangers its political sustainability by making alternatives more attractive. This is why
markets need to be propped up by other means of coordination: state, family, associations, which
are able to formulate such justifications.

Varieties of Capitalism
 This VoC is posited on a couple of basic assumptions. Firstly, it considers firms as the most
important actors for welfare creation in national economies, since they provide innovations and
new products. To achieve their goals they need access to resources, to mention the most
fundamental ones – capital, labour and skills.
 Very helpful in this context can be institutions defined as rules of the game, which structure
social interactions. They create a minimum of certainty and enable transactions. It is easy to
imagine that in different countries across the world institutions have very diversified
characters.
 Some of them are more market oriented, others put into transactions more hierarchy,
rules of associations, networks, government regulation or even religious norms. These
institutional arrangements can be decisive for competitive profiles of national economies, since
they decide how dynamic or stable access to resources will be.
  From the variety of systems we can distinguish two outermost, theoretical models: liberal
market economy (LME) and coordinated market economy (CME).
1. The first type, LME, can be characterized by dynamic access to resources, which means,
that it is relatively inexpensive to change conditions of transactions or resign from it.
We can see this feature in design of markets for capital, labour and skills.
-Capital in LMEs is derived often from stock markets, where assets can quickly
change owners and their value is estimated by price mechanisms.
-The labour market is also shaped by dynamic relations, where hire and fire is relatively
easy thanks to limited regulation. If firms perceive the market situation bad they
simply lay off workers, but if prospects are promising they quickly employ.
-In the third area – skills – individuals and potential workers – invest in their
knowledge and then sell it to firms. However, due to flexibility of the labour market they
tend to choose transferable skill profiles, since they must consider their chances and
balance the promise of getting a high salary for unique skills with the risk of remaining
unemployed. -This kind of system, if well designed and transmitting right incentives,
produces radical innovations, since it is very open to new ideas and new products.
It creates a good environment for new branches, like telecommunication
technologies, biotechnology, and media. A classic example is the USA.
2. The second outermost model is coordinated market economy (CME). Transactions are
more stable and long term oriented. Capital is provided by banks which create
loyalty based relations with firms, thus the access is ‘patient’.
-The labour market is characterized by long term contracts and relatively low
differences in wage levels. Skills are produced rather in companies, which invest their
own capital in order to create a set of specific, rare qualifications fitting ideally into their
product profile.

Since workers get employed for a longer time this kind of an investment makes sense.
Japan and Germany have been considered as typical examples of CME. Their
institutional comparative advantage is found in branches, which demand very specialized
skills and are based on incremental innovations. They do not compete with low costs,
but rather high quality. This is something that we can easily observe in German and
Japanese factories for cars or sophisticated machines.

 These two systems are of course extreme examples, and between them there are many possible
combinations. Scandinavian models mix free market with a generous social insurance that
encourages people to invest in rare, specific skills. Other models apply strong coordination of the
state, other religion or families. What is important, however, is that neither of them is per se more
efficient than the other.
 Local institutions can create very unique institutional comparative advantage and provide by the
way more legitimacy. What is important is rather the quality of institutions: if they communicate
enough with each other, if they do not contribute to power asymmetries, and if they have a
credible sanction. It sounds like an idea for a more stable and sustainable solution.
 3. Approaches to Growth

The Roll-Over Effect

 Modern capitalism developed in the last 200 years based itself on the assumption of growth and
expansion. The more products we are able to deliver, the better for everybody. Expression of this
attitude is the domination of the GDP index in measurements of performance of national
economies. It shows the output in a given year and expresses it in monetary value (national
currency). It has many advantages.
 First of all the GDP offers statistical precision and comparative perspective, since it is relatively
easy to apply similar techniques of collecting and converting data in countries across the
world. In this way GDP creates also a kind of competitive environment for nations: it is
evident who has the highest GDP growth or the highest GDP per capita. However, the GDP is
not flawless. Its beguilingly clear numbers can show only one dimension of growth, hiding
others.
 Examples: A dinner prepared at home by family members and friends is worse for the economy
than a dinner ordered in a restaurant. If there is no transaction, there is simply no growth
measured. On the other hand, a heavy smoker of cigarettes is a true GDP driver. Not only can
the single transaction of buying cigarettes be supportive, but also later visits to physicians
and purchase of medicaments. In a similar way one can look at divorces, which can make real
estate
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number of goods delivered in a national economy translates to short term growth, which
combined with other short term indicators like inflation or unemployment rates can say a
lot about stability. However, it essentially overlooks many long term indicators of
development, for example accessibility resources and their ability to regenerate, and
also social issues like health, education and security. To put it simply: costs of current
growth considered as a GDP rising can be rolled-over to a less ‘visible’ long term or, as it
happened in the past, to other countries and regions of the world.
 There are many examples of the roll-over problem. Longer working time can quickly
boost the supply of labour, but in the longer term it can cause lower birth rates, a
higher propensity of diseases, in particular, burnout syndrome, depression and
cardiovascular diseases – all in all, challenges for the labour market.
 The same scheme is about resources. Today's growth and consumption are ‘innocent’
in terms of GDP, but they flourish due to ignoring the future; and this future can
bring not only scarce, more expensive resources, but a catastrophe of the entire
system.
More Growth
 There is a strong voice in favor of continuation of the existing, dominating path. Economies
should still take care about their output level, so the GDP remains the most important point of
reference. How should sustainability be achieved then? Well, by adjustment of economies to
market forces, which make some scarce resources simply more expensive and thus enforce a
more sustainable, responsible exploitation. This principle refers not only to natural resources.
If for example capital is more expensive, a more responsible approach to debt would be an
expected reaction leading to financial sustainability.
 Another assumption is a strong belief in technological progress. It will increase productivity
and, in particular, save resources. Hybrid or electric cars, bio-agriculture, recycling
techniques, communication that reduces travelling, etc. – all should contribute to faster, and
simultaneously, better quality of growth.
 The logic of growth remains the same: the more goods, the better

Amended Growth
 It sees the GDP index as an important measure of human achievements, but it has to be
combined with additional indexes which refer to several aspects of quality of life and
sustainability. The only problem is that it is still not very clear what aspects are important. This
is why there are many more or less complicated indexes in the market, which compete against
each other.
 The only globally accepted measure of ‘amended’ growth and its quality is the Human
Development Index (HDI). It was created in 1990 by Mahbub ul Haq, the Pakistani economist,
and then developed by the Indian Nobel Prize Laureate Amartya Sen and used by the United
Nations Developing Programme for comparative studies. Its idea is to combine income, life
expectancy and education but of course not an ideal measurement. It is criticized particularly
for lack of ecological perspective and focusing on formal aspects of education, not really a
level of acquired knowledge.
 Another interesting group comprises indexes developed and applied at country level.
Sometimes they build up reputation and become popular at the global level. A good example is
the Gross National Happiness, coined by the king of Bhutan Jigme Singye Wangchuck in
1972. In the last decade it has been supplemented by a new generation of happiness
measurements (‘wellbeing’s’), but their problem is very similar to those of HDI. Interest in
the issue of happiness has been rising; however, so we can expect further amendments
and profound studies.
 Some countries are pretty much advanced in application of their own indexes. One of the best
known examples is the Canadian Index of Wellbeing, which includes arts, culture and
recreation, community vitality, democratic engagement, education, environment, healthy
populations, living standards and time use. Also Germany is a provider of similar experiments
with measuring qualitative development. Stefan Bergheim, an economist and founder of the
Zentrum fuer Gesellsschaftlichen Fortschritt, developed the Progress Index. It analyzes income,
health, education and environment, a so called ecologic footprint. It provides also a promising
statistical approach. These and many other initiatives cannot drown out the fact that a
universal, globally used and renowned index connecting level production with quality of life is
still not available.

End of Growth
 Tyler Cowen, professor at George Mason University in Virginia, prophesies that the world
economy is moving towards a time of a ‘great stagnation’. Cowen says that there are no ‘low
hanging fruits’ anymore. He means by this that the day of inexpensive access to resources is
over. One can also say that extreme increase of productivity following from migration of the
labour force and global competition is also close to exhaustion.
 The most important argument is, however, a slower pace of innovation – a crucial point for
explaining lower rates of productivity rise. It is worth stressing that until the eighteenth
century the average growth of the world economy was very low, because real innovations
were simply lacking.
 The last 200 years of growth followed from an extreme, unprecedented wave of new
techniques of production: from steam engine and mass manufacturing to the internet.
However, maybe there are no new sources of revolutionary innovations and the old ones
have reached their limits.
 Innovations and production growth should be entirely subordinated to the balance account
of the system, including resources, energy, consumption biases, and debt. Such opinion is
expressed also by Tim Jackson, British economist, who criticized a ‘soft’ conciliation
approach to growth represented by current green parties. From his point of view switching to
electric cars is just another bypass to save the old habits. He thinks that the world must
leave the traditional growth logic and search for progress in quality of life,
development of services, provision of local goods, shortened working time, end of
consumerism and higher public investment.
 Such a scenario sounds tempting, but is politically not possible. It could work in developed
economies, but would be fiercely rejected in developing, currently booming economies, whose
citizens dream about a similar level of material GDP measured affluence. This urge is difficult
to reconcile with radical development ideas. Proponents of the new approach mean, however,
that it is not a matter of ‘if’, but rather ‘when and how’ the human civilization moves to a new
concept of growth.
 The issue of sustainability will expand to all fields of economic life and merge
with stability.
 Short term policies will be evaluated under their long term impact. Secondly, we
are moving towards a new economic model. It will still be market economy;
there are few symptoms suggesting that totally new alternatives have any
chances to become viable. It will be based on the efficient markets approach,
which means no tolerance for asymmetries of information and power, and much
better knowledge about their behaviour in complex environments. The third
element will be the pluralism of institutional arrangements which can create
unique competitive profiles of national economies and a more stable global
system. The fourth and the last element, is a corrected goal and measure of
development. The very focus on growth of production is not sustainable,
although still informing well about a state of economy. However, it will be
supplemented with long term development factors, like social coherence, energy
coherence and environmental coherence. It is a matter of time, then, when this
integrated approach to growth and development becomes reality.