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No. 16: Sustainable Development: Concepts, Measures, Market and Policy Failures at the Open Economy, Industry and Firm Levels

by Philippe Crabbé, Institute for Research on Environment and Economy, University of Ottawa, October 1997


Summary

Sustainable Development (SD) has become a political ideology of the current times in developed countries and in some developing countries. It was fostered at the international level by environmental non-governmental organizations and the United Nations and then trickled down to the national and the corporate level. Though the definition of SD remains elusive, it is widely perceived that:

  1. economic growth, has been at the expense of the physical environment, at least in the recent past;
  2. economic growth does not necessarily have to be at the environment's expense; and
  3. a reorientation of growth towards a more environmentally friendly path is urgently needed lest future growth itself be jeopardized. The SD political ideology is based upon the ethical premise that current growth shall not be achieved at the expense of future generations who should not inherit a diminished physical environment and, possibly, a diminished capacity to grow in the future if current growth types are not reassessed.

Even though sustainable development extends beyond economics, this paper identifies the main characteristics of SD in the existing economic literature. The hope is that these characteristics offer consistency within a yet to be built model of SD that can be applied at the international, open economy, industrial and firm level and whose components are measurable. This paper is an issues paper and not a comprehensive survey of the already large literature at hand.

After providing an historical perspective, the paper presents in a first part the three dimensions of SD and eight attributes that are common to most approaches even though these properties are variously interpreted and a common SD definition to most approaches is still elusive. This is followed by a look at the way neoclassical economics has attempted to formalize these properties. The paper then discusses the concept of carrying capacity, an ecological concept foreign to neoclassical economics yet prominent in some approaches to SD. Finally, this first section shows why SD is perceived negatively by various interest groups.

In a second part, the paper examines SD at the international level from both a theoretical and institutional point of view. In an imperfect world, the compatibility of free trade with sustainability is entirely an empirical matter. Except for certain international agreements, there are no measures of sustainability explicitly developed for the international level because environmental standards are national. The empirical evidence indicates the following: environmental regulation has little impact on trade; environmental standards are not a major locational factor; and, when a country opens to trade, the environmental impact is first negative although eventually full cost pricing sets in. Empirical evidence is weak in favour of the so-called Porter hypothesis, which states that environmental standards trigger innovations whose benefits exceed the cost of the standard. International corporate liability is being extended and international agreements restrict the ability of multinationals to locate in environmentally weak jurisdictions. Multinationals still need to develop strategies to keep firms from competing in the environmental area. Poverty alleviation is required to reduce the positive feedback on environmental degradation and population growth. Free trade may have a negative impact on common property resources and on communities generally and may create dependency relationships that remove the freedom not to trade. The World Trade Organization, International Monetary Fund, the World Bank, the United Nations Development Program and the Commission on Sustainable Development are the major international organizations dealing with trade and SD.

A third part of this paper looks at SD in an open economy. Net National Product (NNP) correctly calculated is a measure of net national welfare interpreted as maximum sustainable value of social well-being, or sustainable income, or return on total wealth in the economy. It is measured through a system of environmental national accounts. Market incentives to adopt SD are the same as the ones developed by environmental economics, however, their combination or level of application may differ because the goals of environmental economics and SD are not the same. Empirical evidence shows that environmental standards create jobs but that the net gain in terms of jobs is small. Shifting taxation from human capital to natural capital may create jobs. Round-table processes similar to the ones developed in Canada foster cooperation in the definition and implementation of SD at the national level.

In a fourth part, the paper looks at SD at the industrial level. It shows how environmental accidents have affected industries' reputation negatively and how consumers tend to react to perceived health-related risks and to visible unsustainability first. Technological networks, including integrated industrial ecosystems, play a fundamental role in the definition of an industry. Sustainability must apply to the network as a whole and to its three fundamental strategies: niche management (independent of the market); modification of the selection environment (incentives to develop new technologies); and technological nexus (institutional link between the two first strategies). There is little evidence to suggest that sustainability of selection strategies has been a major concern up to now; public sector initiatives will be essential for the first stages of the change towards sustainability. Collaboration with customers and suppliers and the need to invest in new plants are the three major incentives for product change and for process change. In the latter case, the need to increase spending on manpower training replaces collaboration with customers as a leading organizational factor of change. Codes of conduct adopted by industries can address all aspects of sustainability; however they must be accompanied by environmental strategies. The pertinence of Coase's theorem is limited to the extent that both vertical and horizontal (agreements on compatibility standards) integrations are means of internalizing environmental externalities whenever contracts may be extremely difficult to design.

In a fifth part, the paper examines how external and internal factors contribute to promoting SD at the firm level. External factors include the following: major accidents; government intervention as both carrot and stick; green consumerism; investors' pressures; scarcity of available sinks; high cost of entry; ownership type. Internal factors include the following: a new culture of management that is more attune to social responsibilities; pressure from the workforce; fear of costly and untimely regulation; cost savings from clean technologies; new market opportunities resulting from environmental standards; competitive strategies such as a least-cost strategy for a mass market; differentiation strategies for segmented markets and niche strategies for highly specialised products; and Total Environmental Quality Management that eliminates pollution at the source and applies life cycle environmental accounting, green reputation, the Porter hypothesis, rent-seeking behavior whose cost is eventually passed on to consumers, and existing win-win solutions subject to decreasing returns. SD is measured at the firm level by means of Environmental Performance Indicators, Environmental and Sustainability Audits and Green Accounting.

This study provides a somewhat pragmatic conclusion. It emphasizes that SD is an adaptive planning process that cannot be achieved without cultural change and the active cooperation between governments and the private sector.

SD is distinct from environmental economics because the latter simply is a chapter of neoclassical economics while the former questions the very utilitarian ethical premises of neoclassical economics. SD, being an ideology rather than a science, is broader than the realm of economics. The Intertemporal Welfare Function for SD, if it exists, differs from the neoclassical Intertemporal Welfare Function that leads to present value maximization. Present value maximization is incompatible in the very long run and SD is very long-term. Present value maximization does not consider equity issues and much of SD is about integenerational equity. As will be seen, because economic efficiency is neither necessary nor sufficient for sustainability, environmental economics is neither necessary nor sufficient for SD. However, to the extent that efficiency is one desirable property of sustainability, environmental economics will be useful in bringing about SD. Pragmatically, because no intergenerational sustainable welfare function has yet been unequivocally defined, environmental economics will have to be second best, i.e. subject to sustainability constraints.

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