The Financial Express

Climate crisis, economic growth and beyond

| Updated: March 15, 2021 20:27:14

-Representational image -Representational image

The successful landing of the Perseverance Rover on the Mars on  February 18 is a monumental  scientific and technological achievement for mankind. It is premised that the mission among other scientific investigations will also enable us to learn more about climate change and how to deal  with it. Research findings already indicate that Mars has undergone a dramatic climate change that has rendered the planet inhospitable to life.

It is likely that Mars harboured some forms of  life in the ancient past about 3.8 billion years ago. The planet had rivers , even an ocean and the overall climatic conditions were more suitable for sustaining life at the surface. It also might have had a magnetic field. All these have gone. It is a  hostile place now, completely  incapable of sustaining life. Scientists estimate that it possibly took two hundred million years to reach the current stage of complete desolation, now called the "Red Planet".

We on planet Earth are also facing  a climate crisis caused by accumulation of greenhouse gas (GHG) emissions. It is a human activity that is contributing to the emissions along with billions of tons of Carbon dioxide (CO2) into the atmosphere resulting from fossil fuel production and use.  It is to be noted that CO2 makes up the vast majority of GHG emissions.

The crisis is coming quite fast. We  are also losing forests, biodiversity, agricultural land, fisheries at a frightening rate across the whole world. Fresh water shortages and toxic accumulations are reaching a critical point threatening  sustainable living on this planet.

The world is becoming a riskier place as natural disasters like heat waves, droughts, hurricanes, costal flooding  are happening much more frequently than ever before taking toll on human lives and livelihood. The future looks quite dismal as the climate crisis is worsening due to increasing global GHG emissions as well as the potential future increases in GHG emissions, temperatures and rise in sea levels.

An UN report entitled "UN75:2020 and Beyond" describes climate change as the defining crisis of our time  and it is happening  even more quickly than we feared. The report further adds " No corner of the globe is immune from devastating consequences of climate change. Rising temperatures are fueling environmental degradation, natural disasters, weather extremes, food and water insecurity, economic disruptions, conflict and terrorism. Sea levels are rising, the Artic is melting, coral reefs are dying, ocean are acidifying, and forests are burning".

While no country is immune from the climate crisis as manifested in global warming and climate change, a developing country like Bangladesh is recognised as one of the most vulnerable  countries to the impacts of climate crisis. This is primarily due to its unique geographic location. A report by the Environmental Justice Foundation provides an analysis of the situation facing Bangladesh. The report describes Bangladesh as exceptionally vulnerable to climate change. The country's low elevation where two thirds of Bangladesh is less than five meters above sea level, high population density and inadequate infrastructure,  all these put the nation in harm's way.

The report further adds that the Bangladesh economy is heavily reliant on farming. By 2050, with a projected 50cm rise in sea level, Bangladesh may lose approximately 11 per cent of its land, affecting 15 million people living in in its low lying costal region. The process of salination has been exacerbated by rising sea levels seriously impacting on health and crop output. But more alarmingly it is also estimated that a three-foot rise in sea level would submerge almost 20 per cent of the country and displace more than 30 million people.

But there are also  other immediate concerns for developing countries like Bangladesh arising out of climate crisis. According to the IMF research findings a country's vulnerability or resilience to climate change can have a direct effect on its creditworthiness, its costs of borrowing, and  ultimately the likelihood  that the country might default on its sovereign debt.

 Of particular relevance to developing countries like Bangladesh that the IMF research findings further add is that financial risk created by climate change  are felt more acutely by developing economies, especially those that are not adequately prepared because of among others the lack of policy space to address climate shocks.

Historically, the US and Europe mostly contributed to CO2 emissions accounting for 75 per cent of cumulative CO2 emissions between 1850 and 1990. Therefore, the primary responsibility for reducing the current and future emissions lies with developed countries. However,  since the early 1990s the relative cumulative share the US and  Europe has declined to little above 50 per cent now.

The reason for the relative decline is  due to  emissions of CO2 from developing countries like China, India and others have been growing at a faster rate due to increased levels of economic activity as reflected in these countries GDP growth rates. China now stands as the largest emitter of CO2 accounting for 28 per cent in 2018 while the US was responsible for 15 per cent CO2 emissions in the same year. The US still has  one of the highest rates of per capita emissions in the world far ahead of China or India. Bangladesh was responsible for 0.21 per cent of CO2 emissions during the same year.

Meanwhile, there has been growing concern about climate crisis as reflected in global warming and its impact on economic sustainability. Historically,  GHG emissions have been rising as economies have been growing. In fact, since the industrial revolution the use of fossil fuel has been rising at a very rapid rate which resulted in growing cumulative accumulation of CO2. Now climate crisis has reached a stage, it can no longer be ignored.

For decades we have completely overlooked continuous environmental degradation because of society-wide commitment to economic growth as measured by Gross Domestic Product (GDP). GDP growth has been seen as a panacea for all economic ills. GDP growth has become like a mantra, no questions were asked about costs associated with growth or the sustainability of growth. Worse even, economic analysts  did not care to look beyond GDP. And this has been so for over half a century where GDP has become sine qua non for economic progress. Per capita income has been turned into an indicator to compare quality of life between and among countries.

But GDP was not designed to assess welfare or well being of citizens. It was designed to measure production capacity and economic growth. GDP is not also a measure of sustainability either. In 1934, Simon Kuznets who developed the US national accounting system and GDP, cautioned against equating GDP growth with economic and social wellbeing.

When the concept of GDP was developed in the US in the mid 1930s, the world was undergoing major economic upheaval caused by the Great Depression of 1929-33. GDP was designed as a measure of economic activity to help the Roosevelt Administration to use that statistics (GDP) to justify policies and associated budget expenditures aimed to bring the US out of depression.

In essence, GDP has enabled economic policy planners to trace fluctuations in economic activity ( i.e. business cycle) and to adopt policy measures to smooth out those fluctuations to keep the economy on a steady growth path. It was definitely not designed as a measure of economic or social well being. Yet, countries around the world continue to use (more precisely misuse) GDP as a scoreboard for national welfare.

It is the two Bretton-Woods institutions the World Bank (WB) and the International Monetary Fund (IMF) which have given the seal of approval and contributed to strengthening  the idea  of using GDP as the principal measure of economic progress despite insistence not to do so by none other than Simon Kuznets himself. Kuznets also feared that the simplicity of GDP might be prone to misuse.  In fact, under the tutelage of the WB and the IMF, GDP has turned into the principal guide for countries to formulate economic policies with the singular focus on economic growth measured by GDP.

But increased economic growth will lead to increased output and consumption. The production of goods and services (output) requires energy and materials such as metals, minerals, water, food and fibre, all of which come from the environment. The impacts of resource extraction, production, transportation and waste generation are central to contributing to environmental degradation.

Increased output can only come at the cost of environment. Increased output also leads to increased consumption.  The consumption of goods and services is a major driver of global resource use and associated environmental degradation. It is estimated that consumers are responsible for  more than 60 per cent of the world's GHG emissions  and about 80 per cent of global water use. Overall,  it is estimated that 60-80 per cent of the impact on the environment come from household consumption.

Production and consumption can affect people not directly involved  in undertaking those activities. This in economics is called externality. Environmental degradation is the prime example of an externality as producers and consumers do not bear the cost of their activities causing environmental degradation. In fact , the economy as a whole can be affected by (negative) externalities. It is therefore argued that the resulting differences between social and private costs lead to what is described as "market failure" which calls for government intervention to  restore the "market mechanism". That will involve internalisation of all costs of externalities by polluters. And that will require government intervention in the form a  pollution tax and that will yield a market based solution. Governments can also use a non-market based regulatory framework to abate environmental degradation.   

The reality is rather very different. Economic policy decision making by the government takes place in a political context. So, one needs to take into account the political context to understand policies taken by the government. For Example,  Noam Chomsky described the US political system as plutocracy and under such a system it is most likely that government policy decisions will be "business friendly", favouring the financial and industrial oligarchs rather than being "market friendly". And that applies to  environmental degradation issues as well. This is also true for many other countries around the world. Therefore, it is not surprising that there exists the absence of effective public policy designed to meaningfully reduce GHG emissions.

If we continue to follow the path of infinite economic growth as measured by GDP  using finite resources that the planet provides us to feed, cloth and shelter, economic activity will collapse pretty quickly. It is quite astounding to see a World Bank report which espoused that only long-term high rates of GDP growth with an emphasis on doubling of GDP each decade is the way to solve global poverty.

It is indeed ironic that one of its ( world Bank's) own former senior economist, Herman Daly said that "the current national accounting system treats the earth as a business in liquidation". He further added that we are now in a period of "uneconomic growth"; where GDP is growing but social welfare is not. Paul Hawken, an American environmentalist opined that "At present, we are stealing the future, selling it in the present, and calling it GDP''.

GDP not only fails to measure the key aspects of quality of life as reflected in society's ability to sustainably provide basic human needs for food, shelter, clothing, freedom, participation etc, but also conceals rising income inequality. More importantly, GDP measurement encourages the depletion of natural resources and degrades the ecosystem, thereby encourages activities that run counter to long-term societal wellbeing. Joseph Stiglitz et al in their book "Beyond GDP" opined that  GDP  could not tell us everything we need to know about the health of countries and societies. They further added that in fact, it (GDP) could not even tell us everything we needed to know about economic performance.

As climate crisis gets worse, inequality rises, demographics shift, technology continues to advance at breakneck speed. The  ongoing debates are now going to look at the dominance of GDP in economic thinking. In fact,  it is now well recognised that  the central logic of  the current economic system under the spell of neo-liberalism as articulated in the Washington Consensus and promoted by the two Bretton Woods institutions that  prioritise growth over human and ecological wellbeing ought to be reversed.

And that will require to acknowledge the limitations of GDP by looking at negative effects of economic growth on society such as environmental degradation and rising income inequality. Therefore,  the goal of an economy is to be geared to sustainably improve human wellbeing and quality of life that can be supported by the ecosystem. And that involves developing an alternative  national accounting system that goes beyond GDP.

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