Riassunto esame Environmental economics, Prof. Borghesi Simone, libro consigliato Global Sustainability - Social and Environmental Conditions, Simone Borghesi e Alessandro Vercelli

Environmental Economics

Prof. Simone Borghesi

Environmental economics was born in the 60s, when environmental problems were started to be

perceived. In the second post-WW nation starts growing very fast, and the reconstruction was driven

without environmental consideration. After one or two decades people were starting becoming aware of

the worsening of life quality of people.

There was one special group called the “Club of Rome” of scientists from different disciplines which

stressed the need to stop the economic growth to preservation the environment and find a new balance

from consumption and production factors in one hand and the preservation of nature in the other hand.

This club was hardly criticized, because the idea of stopping growth was in deep conflict with the reason of

existence of economic system.

That was a starting point of a conflict between economists and environmentalist, and between

environmental economists and ecological economists:

- Environmental economists: study environmental problems and focus on the economic system, trying to

understand how to make it compatible with nature:

- Ecological economists: focus on nature and try to understand how to make the economic system

compatible with nature.

1992 Earth Summit (Rio de Janeiro) – first time all countries convey to Rio to discuss and find solutions

towards an agreement, non-binding for a long time. But:

1997 Kyoto Protocol – quantitative constraints/ target to be achieved in terms of emissions. -> not very

successful. It took a long time to reach a new agreement:

2015 Paris Agreement – where we are now.

Globalization, Sustainability and growth

Sustainable development: back to its origins

“Development is sustainable if it satisfies present day needs without compromising the capacity of future

generations to satisfy their needs" (Brundtland Report, 1987, p.43) -> first time def of sustainable dev.

Note: sustainability as intergenerational concept and aim, but it also apply generation by generation so

intragenerational (concerning way resources should be distributed):

“It implies a commitment to social equity between generations which for consistency’s sake must be

extended to equity within each generation” (Brundtland Report, 1987, p.43)

Environmental Sustainability: different interpretations

• Development is Environmentally Sustainable when a crucial variable x does not decrease over time

≥

• In analytical terms: dx/dt 0 -> where t=time.

• Three main interpretations ≥

– Non-Declining Utility (U): dU/dt 0 -> utility as “well being” of individuals.

The “Structure of preferences” describe the utility of individuals. They change over time. Prob. Paternalistic

approach, so focusing on another variable:

≥

– Non-Declining Consumption (C): dC/dt 0

≥

– Non-Declining Capital (K): dK/dt 0

-> two approaches:

Weak Sustainability

Within the Non-Declining Capital approach we can distinguish two interpretations: ≥

1) Weak sustainability (WS): it is total capital (KT) that should not decrease over time: dKT/dt 0

where: KT = Km+Kh+Kn

Km = man-made capital

Kh = human capital

Kn = natural capital

WS implies substitutability among different forms of capital (e.g. can replace Kn with Km)

Strong Sustainability ≥

2) Strong sustainability (SS): it is natural capital (Kn) that should not decrease over time: dKn/dt 0

SS implies non-substitutability among different forms of capital (natural capital in some cases essential, e.g.

biodiversity, ozone layer etc…)

Global Sustainability (Borghesi&Vercelli, Palgrave-Macmillan, 2008)

The inter-generational condition of sustainability

is meant to guaran- tee that the choice freedom

of future generations is not compromised by

myopic decisions of the preceding generations.

We will adopt the convention of calling this

prerequisite of sustainability as the environ-

mental condition, given that the real freedom of

future generations will depend to a large degree

on the state of the natural environment they

inherit. In practical terms, this means that the

indices of environmental deterioration should not

worsen any further with time, as this would jeopardize the ecological equilibrium of the biosphere. Of

course, this minimal requirement of environmental sustainability is not sufficient if the current state of the

biosphere lies beyond the threshold of ecological resilience.

The intra-generational condition of sustainability is meant to guaran- tee equal opportunities to all

participants in market competition. This prerequisite is met only when there is sufficient initial equality

among competitors, i.e. equal access to all significant economic options. We adopt the convention of

calling this criterion of sustainability the social condition of sustainability, given that it depends to a large

degree on indices such as the magnitude of income inequality and the incidence of poverty.

-> Issue: But the globalization process can be considered sustainable?

Globalization, growth and sustainability: the general framework

-> initial date for globalization: 1820

when the economic historians start to find a

tendency of the prices of goods traded in different

national markets to converge toward a single

price, also leading to unique price some time ->

sign of the creation of a competitive international

global market

Globalization: “progressive integration of world markets induced by the liberalisation of international

exchanges of goods, services and productive factors” (Bhagwati, 2004)

-> We went through different phases of the globalization process:

1) 1820-1915: starting with ind. revolution, shrinking price differentiation for some goods leads by tech

changes, finish with starting of WWI

2) 1915-1945: “de-globalization”: Free trade progressed until World War I, after which a phase of

de-globalization that lasted about three decades set in. In this period, the two World Wars and the great

depression of the 1930s fostered the adoption of inward policies in most countries. Each country try to be

autonomous and independent from trade exchange.

3) 1946- 1970: “Bretton woods period”: In that period international markets were regulated by the

International Monetary Fund (IMF), the World Bank (WB) and the other organizations set up during the

peace conference held in Bretton Woods, which also established their underlying behavioral rules.

In 1970 new important change in the global market: collapse of the dollar exchange standard based on

fixed currency rates (gold exchange standard) -> a new international economic order gradually emerged

that was based on floating exchange rates and a new policy philosophy. The latter, promptly adopted by the

IMF and the WB, was further pursued by a new organization instituted in 1995 with the task of completing

the liberalization of international exchanges: the WTO.

4) 1970 – nowdays: After the end of the Second World War, the process of globalization was vigorously

promoted by international organizations that supported the liberalization of trade across countries. In

particular the GATT (General Agreement on Trade and Tariffs) progressively removed, or reduced, the tariffs

and the other barriers to international trade, rapidly bringing back the extension of globalization to the

level reached at the turn of the century before the period of de-globalization triggered by the First World

War. The Uruguay Round of GATT progressively extended in the 1990s the range of goods freely

exchangeable to most immaterial goods such as software, copyrights, patents and insurance. In the same

period the growth of global markets was greatly enhanced by the diffusion of the information and

communication technologies (ICTs).

Globalization and economic growth -> The relationship between globalization and growth of per capita

income -> the growth rate decreases as the openness

to international exchange decreases -> the

more protectionist you are, the lower your

growth rate

-> Generally, are poor countries that tend to

be moderately or strongly closed -> inequality

between countries tend to increase over time

Globalization or protectionism?

• “The problem is not globalization, but the lack of access to globalization” (Lindert and Williamson, 2003)

• Causes of lack of access:

– Southern autarkic policies

– Northern protectionism:

• Highest import tariffs in agriculture and textile (15% and 20% LDC exports)

Inequality of individual incomes: 1820-1992 (Bourguignon and Morisson)- examine how and to what

extent globalization may affect inequality Global inequality grew until 1910, then

diversify trend.

You can decompose global inequality in 2

components:

- Inequality across countries: grows very fast

until 1950, and this is the results of “openness”

or “closeness” toward globalization, and so

larger income differences as a consequence.

- Inequality withing countries: quite stable in

first and second part, but dropping very fast in

between, when there where the 2 WW.

Inequality and environmental deterioration

have consequences also in performance of economic: Reasons:

1- Disruption of potential agents’ economic efficiency contribution (potential skilled, but poor less educated)

2- Taxation

3- Inflation

-> Inflation + Unemployment = Stagflation, first time it occurs in most countries. From a social point of view

it’s important because people lost their job and have to pay higher prices for same goods that they used to

buy before.

Political situation: at that time there were 2 big changes in UK and USA policy, represented by the election

of Margaret Thatcher and Ronald Regan, which have a sort of parallel government in terms of political

economy -> both very legal government, and believe in free markets. They decided to lower taxation levels

to help firms’ free market to evolve, they reduce the unemployment subsidies to induce people to re-enter

the market, they embrace the neo-liberal economic theory -> “Thatcherism” and “Reaganism” approaches.

Globalisation and inequality

Globalisation: progressive integration of world markets induced by the liberalisation of international

exchanges of goods, services and productive factors (Bhagwati, 2004)

- What is the impact of globalisation on poverty and inequality (within and across countries)?

- Globalisation socially sustainable, i.e. without increasing (and possibly decreasing) inequality and poverty?

We can consider inequality and poverty as 2 measures of social sustainability. They are strictly related

variables that measure complementary aspects of social sustainability.

Globalisation and inequality: overview Globalization can have a direct effect on

inequality, described to Heck-Oh theory.

But it can also have an indirect effect which

runs through economic growth (positive

effect-> high integration leads to higher

economic growth).

Heckscher e Ohlin

Trying to explain the theorem of comparative advantages:

1) Ricardo theory on comparative advantage: what are adv. of trading? POV: every country has comparative

advantage, so an adv. in producing that specific good in comparison to the other countries.

2) H. and O. went more in depth, adapting this intuation to a simple world in which they assume there are

just 2 countries: North (developed) and South (developing emerging economies).

Heckscher – Ohlin’s Theory: Globalisation and inequality: DIRECT EFFECT

Heckscher-Ohlin trade theory: they will specialize in the production of the good that uses intensively the

abounded factor, and import the others.

• Trade increases income for the abundant factor and decreases it for the scarce factor

• every country has 2 factors: S (skilled) and U (unskilled) workers

• 2 countries: NORTH and SOUTH

• Wi = wage factor i (i = S,U)

The demand of skilled worked will increase in the north, since It’ll specialize in the production that requires

skilled workers-> causing an increasing in wages (because u have to pay more)-> increae in inequality

because skilled workers are payed more. The opposite happen in the South. (N.b. assumption of trade)

↑ ↑

• NORTH : INEQUALITY

↓ ↓

• SOUTH : INEQUALITY

-> (book) Since unskilled labor is relatively

more abundant in the South, globalization

should increase unskilled wages relatively to

skilled wages and returns on property, thus

lowering inequality in developing countries.

The opposite applies in the North where

skilled labor is relatively more abundant, so

that globalization is expected to increase wage

dispersion. The Heckscher-Ohlin model,

therefore, implies a negative correlation

between globalization and inequality in the South and a positive one in the North.

Simon Kuznets

Globalization and inequality: the Kuznets curve Message: inequality is a temporary phenomena,

because at the beginning is worse, but get better

over time.

We should focus on economic growth.

At the left-lower corner, people are accepting to

have more inequality in exchange of more per

capita income, since the priority is growing.

Then u ask for policy that reduce the differential.

→ globalisation sustainable in the long run

historical example: industrial revolution in UK.

(book) It is interesting to notice that the direct and the indirect effects of trade liberalization on inequality

might run in opposite directions. In other words, the direct impact of globalization on inequality described

by the factor endow- ment theory suggests that inequality should decrease in developing countries and

increase in developed countries. This effect, however, might be counterbalanced by the indirect impact of

globalization upon inequality through income growth that would tend to increase inequality in the South

and decrease it in the North, as described by the KC.

A “poverty” Kuznets curve? Agenor (2003)

Limits of the Kuznets Curve

• Data problems - The data currently available on inequality were in ‘70s, and still are, scarce and

sometimes unreliable, especially in developing countries, because the data collection is difficult and costly.

• Different indices provide different results

• Additional explanatory variables

• Cross-country vs. time-series results

• N-shaped curve?

Globalisation and inequality: INDIRECT EFFECT

• Globalisation increases per capita income growth of participating countries

However:

• Differential access to globalisation

– across countries (autarkic policies or trade barriers)

– within countries (e.g. urban vs. rural China)

→ open economies/regions grow faster than closed ones and growth rates increase with the degree

of openness

→ inequality across and within countries↑

Globalisation and poverty: INDIRECT EFFECT

“Growth is good for the poor” (Dollar&Kraay, 2002)

However:

• increase in absolute income gap

• inequality may increase though 1st quintile share constant

Globalisation and poverty: empirical evidence

Consensus on declining trend in poverty rate

However:

• Large differences among different studies

• Different trends in different areas (China and India↓; Sub-Saharan Africa and Eastern Europe/Central

Asia↑)

• Number of poor people↑

Globalisation and poverty: theoretical arguments

POTENTIAL BENEFITS

• Exposure to external competition

• Access to technological progress and human capital accumulation

POTENTIAL DAMAGES

• Unemployment if imperfect labour mobility

• Exposure to shocks

• Unable to attract high technology productions due to lack of human capital

Globalization and environmental degradation: the environmental Kuznets curve (EKC)

→ globalization sustainable in the long run

The reverse happens when they ask for a change for the environment -> it’s the demand that matters.

Impact of economic growth on environmental degradation. How? Theoretical possible channels:

→ ↑ → ↑

• Economic growth inputs and outputs env degradation (= scale effect) – degradation grows with

economic growth → → ↓

• Economic growth technological progress env degradation ceateris paribus (= technological effect)

↓

, or Env. Degradation Intensity: the amount of env. deg. per unit of production ( )

→ →

• Economic growth change in the composition of production env degradation? (= composition

rd

effect), from the priority of agricultural factor to industrial factor, and finally to the priority of 3 sector, so

env. Deg. first increases and then decreases.

Limits of the EKC

• Data availability, reliability, comparability

• Cross-country vs. time-series

• Inverted-U or N-shaped curve?

• Different indicators provide different results

Per capita emissions (CO2 /POP) in 2005 -> you can imagine a

Kuznet curve in the

diagram

Emissions Intensity (CO2

/GDP) in 2005

-> this looks as an

iperbolic function: xy=k

The product of var. on

hor. Axis and vert. axes is

constant

EKC policy implication: we know that the curve suggest environmental degradation to grow up to a point

and then fall as per capita income increases. But our view up to know was to grow as fast as possible to

increase per capita income. But we have to consider also the Hight of the curve, since there might be a

limitation to what we can do in terms of environmental degradation. “Zona grigia”-> level that we should

not overcome, because environmental consequences can be uncertain and possibly irreversible, and can

cause domino effect. (“tipping points”)

So it could be the case that you reach the threshold, then you came back to 0 per capita income instead of

going on, because that could affect our per capita income. So we should intervene before reaching the

threshold, with proper environmental policies at the beginning of the growing process (flattering the curve