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.

Is the new generation in India better educated?

Intergenerational educational mobility continues to be low in India

All of us love stories of the son or daughter of an uneducated daily wage labourer or farmer cracking civil service or Indian Institute of Technology entrance exams. The real question, however, is whether such success stories, constituting inter-generational upward mobility in education, are becoming more common or do they constitute pleasant aberrations? Recent economic research suggests that the latter situation is more likely.

A December 2015 research paper by Mehtabul Azam and Vipul Bhatt, economists at Oklahoma State University and James Madison University, used the data provided by India Human Development Survey (IHDS) to look at this question.Mint has replicated the methodology used by Azam and Bhatt to establish a relation between educational attainment levels of fathers and sons. Necessary clarification: the survey data does not allow for a similar comparison involving mothers or daughters. The comparison looks at two sets of individuals: those born in the 1950s and those born in the 1980s. The results are not encouraging. Only around one in five sons born in the 1980s, whose fathers had no formal education, could pass standard 10th or its equivalent level. To be sure, there has been a slight improvement on this count over time. For those born in the 1950s, the figure was a little over one in 10. On the other hand, 9 out of 10 sons whose fathers are graduates finish standard 10th.

These figures suggest that educational attainment of children is crucially dependent on that of their fathers. This is borne out by an almost constant positive correlation between education levels of fathers and sons from 1950s to 1980s in India.

There is a silver lining here. Social group wise analysis of data by Azam and Bhatt shows that scheduled castes (SC) and scheduled tribes (ST)—historically socially deprived communities—have done much better than others in attaining inter-generational educational mobility. Of the SC/ST males who were born to fathers with no formal education, the proportion of those who cleared secondary school rose from 8% to 20% in between the two generations. In other words, SC/ST males from less educated families witnessed a 12 percentage point rise in their upward mobility. The corresponding increase in mobility for non-SC/ST males was only 4 percentage points.

How does India do on this count in comparison to other countries? Clubbing the IHDS data with the figures given in a 2007 paper by Tom Hertz of American University and others shows that India fares badly in comparison to not just advanced countries like Norway and the US, but also to its South Asian peers like Pakistan, Bangladesh and Sri Lanka. The paper ranks countries by average parent-child schooling correlation, for cases wherein the “children” are in the age group of 20 to 69 years, with higher values suggesting that educational attainment of children are more dependent on that of their parents.

The inability of children born in less educated families to study further seems to be a vicious circle of sorts. As has been written in these pages, access to education is an important determinant of incomes. (see here ) This is bound to influence the ability of parents to provide education to their children, given the rapid increase in costs of providing education. (see here ) The causation also works in the opposite direction. Bulk of those who drop out from educational institutions cite the need to augment family incomes or attending to domestic chores as the reason for dropping out. (see here ) Such pressure to drop out from school are more intense for first-generation learners, who often hail from economically weaker and under-privileged sections of the society, says Shefali Gupta of Maitri, a Delhi-based NGO which works in the field of education for learners from such backgrounds. IHDS data further corroborates these findings by showing that drop outs are higher in families where the fathers’ education level is lower.

The analysis should have a caveat. It might not have captured the recent increase in educational enrolment levels, especially at the school level in India. However, the persistence of high drop out among first-generation learners for those born between 1992 and 1996 shows that we would do well not to be complacent on this count

National life and economic destiny

National life and economic destiny

On 23 June, the UK will vote on whether to withdraw from the European Union. This is a momentous decision, with far-reaching economic and political consequences that are now being hotly debated. If Britons vote to exit, it could lead to a break-up of the EU, and set back the global move towards greater political integration.

This raises an intriguing question: What’s the optimal size for economic performance? Are we better off with many little competing city-states, a bunch of mid-sized nations or just a few big super-countries overseeing hundreds of millions of people each? If bigger is better, what about a global government?

Actually, economists have thought about this a fair amount. In 1956, Charles Tiebout believed he had a solution to the problem. He reasoned that local governments knew more about their people’s needs than distant central governments, and so the best system was one where local governing units—city-states, essentially—offered different packages of taxes and public services. People would vote with their feet, going to the place that suited them the most.

This is a very appealing vision. Want to live in a libertarian paradise, where all the roads and schools are privately built? In a Tiebout world, there will be a city set up to accommodate you. Would you rather have lots of government-built trains and hospitals? That’ll be available as well.

A number of modern-day thinkers have suggested a return to Tiebout-style city-states as a solution to our problems of political gridlock and policy paralysis. In 2013, entrepreneur and venture capitalist Balaji Srinivasan playfully suggested that Silicon Valley could secede from the US, forming a technology-oriented utopia. A number of my Japanese friends have similarly suggested that Tokyo should secede from Japan—notably, not all of those favouring succession were Tokyo residents! Others have praised the economies of city-states such as Singapore, Dubai and Hong Kong.

Some people also claim that political fragmentation has been beneficial in the past. Anthropologist Jared Diamond, in his book Guns, Germs, and Steel, suggested that competition between small countries allowed Europe to get a head start on unified China in the Industrial Revolution. Economists Brad DeLong and Andrei Shleifer argued in 1993 that city-states helped Europe develop (though more recent evidence seems to counter this). Casual evidence would also suggest that Taiwan’s de facto independence from China helped provide the mainland with a capitalist model to revive its moribund economy in the 1980s and ’90s.

So, there are plenty of economic and historical arguments in favour of fragmentation. These imply that a Brexit would be good not just for the UK, but for all of Europe.

But there are arguments on the other side, too. Mathematician and economist Truman Bewley examined the Tiebout idea in the 1980s, and found that a patchwork of little city-states doesn’t always lead to a well-functioning system.

There are several reasons why Tiebout’s idea can fail. One is that many of the services governments provide are what economists call public goods. These are things that the private sector either can’t or won’t provide. The classic examples are national defence, police, courts and support for basic research. But many other things, like roads, electrical grids and ports, are usually in short supply when left to the private sector.

When you have public goods, one person’s economic welfare depends on how much everyone else in that city, state or country is willing to pay for things like roads, power grids and sewers. That throws a big wrench into the Tiebout model, because there are many different kinds of these goods, and the amount people want of each one tends to differ a lot. You and I might both agree that we need good roads, but you might care much more about broadband infrastructure or schools than I do. Bewley showed that even splitting the government into tons of local units doesn’t solve this thorny problem.

A second issue is that governments don’t always have the right incentives. Some governments may decide to maximize the size of their tax bases. Others might care only about the welfare of their citizens, while others might be beholden to special interests—I imagine an independent San Francisco would be ruled by local landlords even more than it already is. There’s no perfect type of local government, and so we’ll have a wide variety of them. Bewley showed that this problem also prevents Tiebout’s patchwork from being an economically efficient utopia.

There are plenty of other problems that Bewley didn’t think about. It might be very hard to coordinate between city-states—for example, one little local government, concerned about preserving open space, might be able to veto a cross-continental highway that would boost almost everyone’s income. Also, there’s the possibility that some city-states might just decide to conquer their neighbours, returning us to a world of empires. In fact, this is exactly what happened in Europe, China and elsewhere every time those regions fragment. And the only way to defend yourself against a neighbouring empire, many cities have found, is to band together into a nation. Since peace is good for growth, security considerations like this are also economically important.

So, the answer to the question of fragmentation is that there’s no ideal size. Sometimes city-states are the best, but sometimes super-states are better. The UK might be on the verge of an interesting experiment. If it abandons the EU, only history will tell us whether it was a good idea.

Lessons from the nuclear security summits

Since the NSS process began, more than 175 tonnes of highly enriched uranium has been removed or down-blended

The Nuclear Security Summit (NSS) process—to prevent non-state actors, particularly terrorists, from acquiring nuclear material—was launched with fanfare in 2010 by US President Barack Obama with the ambitious objective “to secure all vulnerable nuclear material in four years”. Six years and four summits later—the last of which concluded on 1 April—this aim has not been reached, despite substantial progress being made.

Since the NSS process began, more than 175 tonnes of highly enriched uranium (HEU)—enough for nearly 7,000 nuclear weapons—has been removed or down-blended (mostly from Russia); 30 countries have eliminated all HEU from their territory; and radiation detection equipment has been installed at 329 international border crossings, airports and seaports to prevent, detect and respond to trafficking in nuclear and other radioactive material. Additionally, the Convention on the Physical Protection of Nuclear Materials (CPPNM), with the 2005 amendment, is now only eight signatures shy of entering into force and the International Convention on the Suppression of Acts of Nuclear Terrorism (ICSANT) has been signed by 103 of the 193 United Nations members.

However, an estimated 1,400 tonnes of HEU and nearly 500 tonnes of plutonium—enough for about 200,000 simple fission-type nuclear bombs—is still held by more than 30 countries. Moreover, the absence of Russian President Vladimir Putin (over strategic differences with the US) indicates that progress towards this cause is susceptible to the overall state of bilateral relations. Similarly, the failure to invite Iran (despite the nuclear deal) was a missed opportunity to engage Tehran on a crucial issue of global importance. Finally, as reports emanating from Brussels before the summit indicate, despite the NSS’ efforts, the possibility of terrorist attacks on nuclear facilities has not been eliminated even in nations such as Belgium.

These achievements and challenges underline several key lessons from the NSS process. First, because the NSS is narrowly focused on the threat of non-state actors acquiring nuclear material, it took great initiative on the part of the US to get it going; it is unlikely that any other world leader could have led a similar project. This indicates, as Obama boasted, that even in the multi-polar era, the world is dependent on US leadership.

However, as the absence of Putin and the inability of the process in securing all nuclear material in four years reflect, there are limits to even what the US leadership can achieve. Besides, the fact that the 2012 and 2014 summits were held in South Korea and the Netherlands respectively—both US allies from the developed world—indicates that Washington is still not able to find willing partners for its initiatives in the global South.

Second, some experts argue that the NSS process only deals with nuclear material in civilian facilities and not the military nuclear facilities, which account for about 83% of all nuclear material. This is disputed by others who assert that the NSS communiqués along with the CPPNM, the ICSANT and UN Security Council resolution 1540 deal with all nuclear material—civilian and military. What is not in dispute, however, is that the danger posed by forward-deployed tactical nuclear weapons, particularly by Pakistan, Russia and the US, has not been addressed and needs to be remedied.

Finally, the relative success of the NSS process also underlines the failure of the international community to address similar dangers emanating from biological weapons. As there is no international regime or institution to deal with biological weapons, they remain largely unregulated. Indeed, non-state actors and individuals are increasingly conducting research in biotechnology, especially, synthetic biology.

For India, while its contribution to the success of the NSS process is useful to highlight its credentials as a responsible nuclear state, any initiative on similar threats from biological weapons and its ability to rally others to the cause would enhance its credibility as a global leader.

Time for a world currency?

In a world even more subject to destabilizing volatility, Robert Mundell’s proposal to create a global unit of account merits serious consideration

Do we need a single global currency?

That question would have seemed quixotic to many analysts of global economics and finance a few years ago. The suggestion that we do, indeed, need a global unit of account—made by a few brave mavericks over the years—would have been, in fact, was, scoffed at and derided as hopelessly unrealistic at best and highly undesirable at worst.

These maverick economists and bankers saw merit in eliminating the destabilizing and destructive volatility in global trade, investment and financial capital movement patterns induced or exacerbated by the excessive volatility of flexible exchange rate regimes—each of which tries to achieve its own national objective without regard to the potentially damaging spillovers caused to others. The greatest of these free thinkers is my own guru, the Nobel economist Robert Mundell. Taking a leaf from former Federal Reserve chairperson Paul Volcker, Mundell has often repeated the mantra: “A global economy needs a global currency.”

During the high water mark of the great moderation, a period of roughly two decades before the great financial crisis, a certain hubris had set in among central bankers and conventional macroeconomists: the notion that the “modern” policy of inflation targeting by independent national or supranational central banks, linked by a series of bilateral flexible exchange rates, would suffice to stabilize the global macroeconomy.

In this benign view, sharp recessions, and, more generally, excessive volatility of output, unemployment and the inflation rate, were a thing of the past. The economics of the conduct of monetary policy was now a science, it was breathlessly averred. In reality, it was a cult, presided over by central bankers as high priests. The army of economists who crunched increasingly complicated mathematical models to guide the priests of the cult were votaries at the altar.

It all came terribly unstuck with the build-up of asset price bubbles that were completely missed by inflation-targeting models fixated on consumer price inflation and by a faith in the ability of financial markets to function efficiently, which proved overly optimistic. As the crisis unspooled, advanced economy central bankers, led by the US Federal Reserve’s Ben Bernanke, unleashed an arsenal of new weapons, known collectively as unconventional monetary policies (UMPs), to bring the global economy back from the brink.

A few prescient voices warned early that such adventurous new policies might, perhaps even would, have seriously undesirable side-effects, in the form of damaging spillovers to emerging market economies, in the form of excessive volatility in capital flows and associated movements in their exchange rates. Such lone voices in the wilderness included the late Ronald McKinnon, a maverick economist in his own right, and India’s own Raghuram Rajan.

From his bully pulpit at the Reserve Bank of India, Rajan has argued that, as advanced economy UMPs were harming emerging economies—as evidenced during the taper talk crisis of 2013, which badly affected India, among others—the right thing for the Fed and others to do would be to take account of these harmful spillovers when they formulated monetary policy. Bernanke, in particular, was dismissive of such arguments, and, famously, has exchanged sharp words with Rajan on a number of occasions since stepping down as Fed chairperson.

To be fair to Bernanke, the US is not going to care about the spillovers of its policy on other economies unless there is a demonstrable spillback on the US itself.

Not only is altruism not part of the Fed chairperson’s job, he or she is explicitly mandated to focus on the US economy, not worry about what is happening in India or elsewhere.

Crucially, despite the best efforts to quantify them—including by this writer and several other economists—such harmful spillbacks have been notoriously difficult to tease out of the data and to assess in terms of their economic significance. Yet, despite this challenge, Bernanke’s successor, Janet Yellen, appeared to suggest in recent remarks that emerging economy spillbacks were a real concern. Critics of the Fed’s policy go further, and argue that, by ignoring them, the Fed made a premature decision to raise rates last December, and is now scrambling to recover.

Mundell has argued repeatedly that the types of crises and mini-crises the global economy has suffered since the collapse of the Bretton Woods system of fixed exchange rates in 1971 are only to be expected, given the absence of any kind of global monetary order since then. Despite the faults it might have had, including the need for sharp and painful adjustments to shocks in the face of slow price adjustment, the Bretton Woods system gave the world a monetary order, within which trade, investment and portfolio allocation decisions could be made without the distorting effect of uncertain, uncoordinated and volatile exchange rates. The quarter-century after the end of World War II, until the collapse of Bretton Woods, was something of a golden period, at least for the advanced economies; it is plausible to argue that the system of fixed exchange rates played its role. In a world even more globalized today, and even more subject to destabilizing volatility, Mundell’s proposal to create a global unit of account surely merits our serious consideration.

China successfully launches retrievable satellite

In a bid to aid scientists to study microgravity and space life science.

China on Wednesday launched a retrievable scientific research satellite in a bid to aid scientists to study microgravity and space life science.

SJ-10 was put into orbit by Long March 2-D rocket from the Jiuquan Satellite Launch Centre in north-western China’s Gobi desert.

19 on-board experiments

While in space, the bullet-shaped probe will house 19 experiments involving microgravity fluid physics, microgravity combustion, space material, space radiation effect, microgravity biological effect and space biotechnology, before coming back to Earth with results, state run Xinhua news agency reported.

On-board experiments were selected from a pool of over 200 applicants. They include one that will study early-stage development of mouse embryos in microgravity to shed light on human reproduction in space, and another studying space radiation effects on genetic stability of fruit flies and rat cells.

“Soret Coefficient in Crude Oil”

A “Soret Coefficient in Crude Oil” experiment in partnership between the National Space Science Centre under CAS and the European Space Agency (ESA) is also onboard together with an investigation of coal combustion and pollutant formation under microgravity.

The former test is aimed to improve scientists’ understanding of oil reservoirs buried kilometres underground, while the latter is expected to help enhance energy efficiency and cut emissions.

Completely new experiments

“All experiments conducted on SJ-10 are completely new ones that have never been done before either at home or abroad,” Hu Wenrui, chief scientist of the SJ-10 mission said. “They could lead to key breakthroughs in our academic research.”

Second scientific satellite, 25 retrievable one

SJ-10 is the second of four scientific satellites under a CAS space program. Unlike the others, SJ-10 is returnable.

It is the 25th such retrievable satellite launched by China in the past decades.

Overall, eight of the experiments on fluid physics and microgravity combustion will be carried out in the orbital module and the others in the re-entry capsule which is expected to land at Siziwang Banner in Inner Mongolia, the designated landing spot for China’s Shenzhou manned space missions and a 2014 test lunar orbiter.

World military spending up in 2015, India in sixth position

India is also ahead of countries like France, Germany and Israel who happen to be among its top arms suppliers.

India is the sixth largest military spender in 2015 having spent $51.3 billion even as the world spent $1,676 billion reversing a global trend which was on the decline since 2011., as per the latest report from the Stockholm International Peace Research Institute (SIPRI).

India moved one rank up from last year accounting for 3.1 percent of global military expenditure. Over a ten-year period from 2006-15 this represents a 43 per cent jump. India is also ahead of countries like France, Germany and Israel who happen to be among its top arms suppliers.

World military expenditure rose by 1 per cent in 2015, the report noted said it reflects continuing growth in Asia and Oceania, Central and Eastern Europe, and some Middle Eastern states.

Sam Perlo-Freeman, head of SIPRI’s military expenditure project said that the military spending in 2015 presents contrasting trends. “On the one hand, spending trends reflect the escalating conflict and tension in many parts of the world; on the other hand, they show a clear break from the oil-fuelled surge in military spending of the past decade,” he said in the report.

The U.S. remained by far the world’s largest spender in 2015 despite its defence expenditure falling by 2.4 per cent to $596 billion followed by China, Saudi Arabia, Russia and U.K.

China’s expenditure rose by 7.4 per cent to $215 billion.