The nexus between the growth of GDP

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(No Transcript)
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LECTURE 2

• The nexus between the growth of GDP
• and development

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Growth and development 3 views

• Development gt growth (GDP) also individual,
  social, environmental, institutional indexes
• Different views of the relation growth ?
  development
• A) ? growth ? ? development unjustified
  assimilation
• the means becomes an end in itself ? main goal
  of economic policy
• ? growth ?gt ? development must be also
  sustainable
• main goal of economic policy sustainable
  development
• C) ? growth ? ? development theory of
  downscaling (Latouche)

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A) assimilation of development to growth

• Based on the following arguments
• Per capita GDP reliable indicator of individual
  well-being
• ? well-being (utility)
• ? growth ? ? development
• ? health
• Growth GDP necessary condition to conquer poverty
• Kuznets curve growth increases inequality after
  the industrial take-off but then reduces it
• Environmental Kuznets curve growth deteriorates
  the environment after the industrial take-off but
  then improves its quality

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A) Evolution of per capita income
US per capita GDP
UK per capita GDP
Per capita GDP thousands
Per capita GDP thousands
Fonte Lomborg (2001)
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Happiness and GDP in the USA
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Happiness and GDP in Japan
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Happiness in Italy (1975-2007)
Source Nicola Lucia, 2008
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Relationship between per capita GDP and happiness
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Cross-country relationship between GDP and health
(2000)
Source World Bank
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The first happiness paradox 1

• 1st paradox ?p.c. Y does not ? ?happiness
• We know since long that the GDP index is a
  strongly distorted and misleading index of
  well-being
• - exhaustion of natural resources
• Not registered - deterioration of natural
  and social capital
• - social and environmental negative
  externalities
• - relational goods
• Unduly registered - defensive expenditures (e.g.
  conditioning)

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The first happiness paradox 2

• Alternative measures to correct the shortcomings
  of the GDP
• NEW (Net Economic Welfare) suggested by Nordhaus
  and Tobin (1973)
• grew les than the GP in the post-war period in
  industrialized countries
• ISEW (Index of Sustainable Economic Welfare) by
  Daly and Cobb (1989)
• while the US GDP grew from 1951 to 1986 at an
  average rate of 1.90,
• the ISEW grew much less (0.53) and became
  negative since early 1970s
• ? the alternative indexes focus on the same
  neglected factors stressed by the happiness
  literature

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The second happiness paradox

• 2nd paradox ?p.c. Y does not ? ? health
• Inadequacy of the general health indexes
• The health of individuals depends on life length
  but also on its quality
• - ? frequency of depression and suicides
• - a long life is not necessarily a happy life
• - well known since long the immortals
  (struldbrugs) are unhappy
• (Gulliver travels, Swift, 1726)
• Also the general indexes of health should be
  corrected by taking into account the quality of
  life
• ? this would further enhance the decoupling
  between growth and health

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The two happiness paradoxes and economic policy

• 1st paradox ?p.c. Y does not ?
  ?happiness
• Twin happiness paradoxes
• 2nd paradox ?p.c. Y does not ? ?
  health
• Not true paradoxes long list of explanatory
  factors
• to measure development with GDP
• The real paradox is the obstinacy
• to assume growth as the main policy goal
• neoliberal camp (Bhagwati, 2004)
• Bipartisan consensus reasserted
• Keynesian camp (Benjamin Friedman, 2006)
• Extremely misleading position to be rejected

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KUZNETS curve
Inequality
Social carrying capacity
Per capita income
Fig. 9
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KUZNETS CURVE (1955)

• Plausibility ? take-off (triggered by the
  adoption of outward-oriented policies)
• -diffusion takes time
• -urbanisation
• -growing pressure in favour of redistribution
• (progressive taxation, transfers, welfare
  state)
• Optimist message the problem tends to disappear
  spontaneously
• Kuznets conjecture corroborated by econometric
  studies up to the 1970s
• since the early 1980s new econometric studies
  have progressively weakened the empirical support
  (emergence of the U-pattern in OECD countries)
• historical explanation the KC described a
  specific historical process and not general
  tendencies intrinsic in the process of
  globalisation? policy is needed

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Inequality in the U.K., 1939-1996 ()
56
52
48
44
40
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Gini index
32
28
24
20
16
1975
1985
1945
1955
1965
1995
1935
1940
1950
1960
1970
1980
1990
2000
Fig. 5
Source Brandolini (2002)
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Inequality in the USA, 1929-1996
56
52
48
44
40
Gini index
36
32
28
24
20
16
1975
1985
1915
1925
1935
1945
1955
1965
1995
1930
1940
1950
1960
1970
1980
1990
1920
2000
Fig. 6
Source Brandolini (2002)
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Impact of globalisation on the social conditions
of sustainability 2) poverty

• we have to reject the optimist message of the
  Kuznets curve
• however, according to many economists, in order
  to study the social effects of globalisation we
  should focus
• not on inequality but on poverty
• Conviction based on the Bhagwati hypothesis
  and prescription
• Countries have similar distribution of income ?
  we can only reduce poverty by increasing the rate
  of growth of income
• (Bhagwati, 2004, p.66)

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Impact of globalisation on the social conditions
of sustainability 2) poverty

• misleading hypothesis Bourguignon and Morisson
  (p.733) calculated that
• had the world distribution of income remained
  unchanged since 1820, the number of poor people
  would be less than 1/4th than it is today and the
  number of extremely poor people would be less
  than 1/8th of what is today
• ? we should try hard to realize a more
  egalitarian growth

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Poverty trends (lt 2 per diem)
Source Bourguignon and Morisson (2002)
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Environmental KUZNETS curve
Environmental deterioration
Environmental carrying capacity
Per capita income
Fig. 11
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Environmental KUZNETS curve (Panayotou, 1993)

• No historical series of comprehensive indexes of
  environmental deterioration
• ? correlation with specific indexes of
  environmental deterioration
• Some of them behave as in the KC ? environmental
  Kuznets curve
• Plausibility
• -take-off shift of labour from agriculture to
  heavy industry
• then increase of light industry and services
• -growing pressure of final users and electorate
• Econometric studies seemed to corroborate the
  hypothesis but then it was falsified in many
  cases
• - it works only when the environmental effects
  are local
• - recently N-shaped curves

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Environmental KUZNETS curve (sulfur dioxide)
1972
Sulfur Dioxide ?g/m3
1986
Per capita income (PPP)
DEVELOPMENT
Fig. 12
Source Shafik (1994)
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Environmental KUZNETS curve (coliform bacteria)
Thousands coliforms per 100ml
1986
1979
Per capita income (PPP)
DEVELOPMENT
Fig. 14
Source Shafik (1994)
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Conclusions on A) growth development

• Not always postwar growth translated in ? quality
  of life
• - the well-being of citizens (measured in terms
  of subjective happiness) did not increase in
  industrialized countries
• - health in terms of quality of life often did
  not improve
• - poverty in absolute terms increased and in the
  near future is likely to grow also in relative
  terms
• - inequality resumed growth since the late 1970s
• - environmental deterioration grows with limited
  exceptions

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Sustainable development definitions

• Development
• process of expansion of individual
  economic freedom (Sen, 1999)
• Sustainable development
• Development is sustainable if it satisfies
  present-day needs without compromising the
  capacity of future generations to satisfy their
  needs (Brundtland Report, 1987)

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Sustainable development

• Foundations

DISTRIBUTIVE EQUITY
CHOICE FREEDOM

• Income
• Wealth
• Resources

2 CONDITIONS
INTER-GENERATIONAL
INTRA-GENERATIONAL
SOCIAL CRITERION
ENVIRONMENTAL CRITERION
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Ethical and economic foundations the social
condition

• equal access to the basic economic opportunities
  ethical foundations
• this is also a fundamental condition of economic
  efficiency
• -prerequisite for a well-functioning competitive
  market guarantees that the winners of the
  economic competition are actually the best
  participants as each of them plays on a level
  playing field
• -poverty (malnutrition) implies a restriction of
  the option set reducing the potential
  contribution of poor people to economic
  efficiency and wealth
• among poor people who cannot afford a good
  education there are potentially good scientists,
  engineers, physicians, managers and so on
• -social and political tensions that have negative
  effects on income growth
• (Alesina and Perotti, 1996 Benhabib and
  Rustichini, 1996)

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Ethical and economic foundations the
environmental condition

• similarly environmental degradation has adverse
  economic effects
• ? health of people ? ? productivity
• ? land productivity
• poverty-environment trap the poor rely heavily
  on the direct exploitation of natural resources
• ? environmental degradation ?? poverty ??
  environmental degradation

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Crucial requisite of sustainabilty
Development is sustainable only if
Reduction rate of ED intensity
Rate of growth of population
gt
More likely in developed countries
Calls for
Increasingly eco-compatible

• Technologic change
• Consumption

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The sustainability gap in the current model of
energy production and consumption
Average observed values for each decade
(projection 2001-2005) Source Energy Information
Administration
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C) Point of view of de-growth

• The concept of sustainable development is
  considered as an oxymoron (Latouche)
• This assertion is based on the misleading
  assimilation of development and growth
• and thus on the confusion between the two
  preceding points of view
• -literal de-growth as necessary condition of
  sustainability
• Two versions
• -provocation to change paradigm
• - development depends on the quality of
  (de-)growth, not on the sign
• Critique
• - focus on the quantitative features
• De-growth does not help within the current model
  of development (recession)
• we have to focus on the qualitative features of
  growth
• this is what the conditions of sustainability of
  development invite us to do

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Models of development
two phases
WITHIN-COUNTRY INEQUALITY ENVIRONMENTAL DETERIORATION
1945-1971 MODERATE IMPROVEMENT WORSENING
1980-2010 WORSENING PARTIAL IMPROVEMENT
NEITHER OF THE PHASES OF POSTWAR DEVELOPMENT MAY
BE CONSIDERED AS FULLY SUSTAINABLE ALTHOUGH FOR
DIFFERENT REASONS
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Sustainable development and the crisis

• The crisis undermines the transition to
  sustainable development
• ? short-termism
• ? oil price ? ? investment in renewable energy
  sources
• ? variability oil price ? ? investment in
  renewable energy sources
• ? trend oil price ? obstacle to recovery
• ? attention on the environmental quality when it
  involves higher costs
• ? concern for ethics if it involves a monetary
  cost
• We should try hard to avoid all these destructive
  effects
• it is during a crisis that the seeds of future
  development are planted

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Unep report A Global Green New Deal

• stimulate the recovery
• GGND
• strengthen the sustainability of the world
  economy
• Governments invited to invest 1/3 of 2500 Mld
  anti-crisis
• environmental (energy-climate, water,
  ecosystems)
• in sustainability
• social (inequality and poverty)
• A study of HSBC shows that some countries move
  in this direction
• South Korea 81, China 38,
• but
• France 21, Germany 13, USA 12, UK 7, Spain
  6
• Italy is last in this list 1,3

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The future development cycle

• Each development cycle is pulled by a strategic
  sector
• -railways 1840?
• -electrification 1900?
• -auto, domestic appliances 1950?
• the new cycle is incubated during the great
  crises
• e.g. SME made in Italy (1970?)
• -renewable energy sources
• The next cycle ecologic conversion -social
  and environmental consumption
• -SRI
• It is important to catch the bus on time
• e.g. automotive industry in the US spoiled by
  the law price of gasoline and lax environmental
  constraints