Economic growth vs environmental sustainability

The Environmental Kuznets Curve hypothesis says “pollute first; clean up later”, but the validity of the EKC hypothesis has been seriously questioned

While teaching courses on environment and sustainability to management students, I find it interesting as to how frequently and how strongly a view emerges that India, at its current stage of development, should ignore environmental costs for the sake of meeting its development goals. This view appears to be consistent with the larger public opinion in India. When the World Values Survey—conducted across more than 80 countries—reported its findings from India in 2014, about half the people interviewed agreed that we should focus on economic growth even if it comes at the expense of the environment, whereas a little over a third of the respondents indicated a preference for environmental protection over economic growth. The larger public opinion is perhaps shaped by the discourse on the growth versus environment debate in India.

The country’s low rank on the World Bank’s Ease of Doing Business index is raised often in the media and people at the highest levels of government set out to improve our ranking. High-powered committees comprising top bureaucrats and industry leaders are commissioned to write reports on streamlining and speeding up regulatory approvals, especially those related to the environment and forests. In the past decade and a half, there have been at least five such committees, which made recommendations to improve the climate for private investments in industry and infrastructure.

Contrast this with the reaction to surveys on the state of our environment. No government official comes forward and nor are any questioned by the media on what the government is planning to do to improve India’s ranking on Yale University’s Environmental Performance Index (EPI), which ranked us 155 out of 178 countries in 2014. On air quality, the survey ranked India 174 out of 178. In fact, it is common for the government to respond to such surveys by questioning their methodology or, worse, motives. We saw this when, in May 2014, the World Health Organization declared Delhi the city with the worst air quality in the world. It was as though the common man was not aware of how polluted the city was.

The basis for this view is the idea that environmental quality comes only after basic needs such as food and housing are met. So, countries should focus initially on economic growth even if it comes at the expense of environmental quality. As countries become richer, they can afford to clean up pollution from the past and as public demand for cleaner environment increases, governments can enact and enforce stricter pollution control regulations. This is the Environmental Kuznets Curve (EKC) hypothesis and is supposed to explain why environmental quality has improved in richer countries. The argument is simple: “pollute first; clean up later”.

The validity of the EKC hypothesis, however, has been seriously questioned. In a paper published in Science in 1995, a team of researchers led by Nobel prize-winning economist Kenneth Arrow argues that the “pollute first; clean up later” approach is flawed. First, in the case of global pollutants such as carbon dioxide, there is not enough evidence that its levels start falling after countries become richer. Second, it is not clear how much damage we can cause to our ecological systems before which they start undergoing irreversible changes. Such irreversible changes can lead to changes in the earth’s life-supporting systems, with unpredictable consequences. Third, the improvement in environmental quality after an income threshold may have more to do with the ability of developed nations to shift polluting industries to developing nations at low economic cost and less to do with public demand for policies that lead to a cleaner environment. The emergence of China as the world’s manufacturing hub may have a lot to do with this reasoning.

Thus, our policy should not be based on the “pollute-first; clean-up-later” approach. What could be an alternative approach? We could start by refusing to sweep the dirt under the carpet and instead explicitly acknowledge the ecological costs (not necessarily in monetary terms) of economic growth. For example, we might want to acknowledge that the growth of the automobile sector, often considered to be an indicator of a strong economy, or our hunger for cheap energy come at the cost of air pollution to which people in our cities are exposed. We might want to explicitly acknowledge that development projects in mining and infrastructure often come at the cost of natural forests we might never be able to recreate.

The first implication for policy is that in the planning of development projects, we should explicitly identify trade-offs between economic benefit and ecological impact. Second, to determine what trade-offs are acceptable, we must design transparent mechanisms that allow for meaningful discussion through a participatory process, in which all the groups affected by the projects are involved. We need to strengthen participatory processes such as public hearings in the environmental and forest clearance process. Research shows that meaningful public participation in decision-making in a variety of environmental and natural resources management contexts will, in the long run, build greater trust among various stakeholders and reduce conflict.

We should monitor these trade-offs not only for individual projects but also at the macroeconomic level. Ecological economists are arguing increasingly that countries should consider developing and reporting measures of human well-being other than gross domestic product (GDP) that better account for environmental and social costs of resource use. Although no single indicator has emerged yet as an alternative, several have been proposed. In a paper published in Nature in 2014, a research team led by well-known ecological economist Robert Costanza identified 14 indicators of well-being as alternatives to GDP, including genuine savings, index of sustainable economic welfare, genuine progress indicator, and gross national happiness.

The idea of sustainable development cannot be mere rhetoric; it must be accompanied by transparent, participatory mechanisms that allow for meaningful discussion of the development paths that make growth truly sustainable.