LECTURE 2

2. LECTURE 2 The nexus between the growth of GDP and development

3. Growth and development: 3 views Development > growth (GDP): also individual, social, environmental, institutional indexes Different viewsof the relationgrowth ↔ development: A)↑ growth → ↑ development: unjustified assimilation the means becomes an end in itself → main goal of economic policy • ↑ growth ≠> ↑ development: must be alsosustainable main goal of economic policy: sustainable development C)↓ growth → ↑ development: theory of downscaling (Latouche)

4. 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

5. 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)

6. Happiness and GDP in the USA

7. Happiness and GDP in Japan

8. Happiness in Italy (1975-2007) Source: Nicola Lucia, 2008

9. Relationship between per capita GDP and happiness

10. Cross-country relationship between GDP and health (2000) Source: World Bank

11. 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)

12. 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

13. 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

14. 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

15. KUZNETS curve Inequality Social carrying capacity Per capita income Fig. 9

16. 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

17. Inequality in the U.K., 1939-1996 (%) 56 52 48 44 40 36 Gini index 32 28 24 20 16 1985 1975 1945 1955 1965 1935 1995 1970 1990 1940 1950 1960 1980 2000 Fig. 5 Source: Brandolini (2002)

18. Inequality in the USA, 1929-1996 56 52 48 44 40 Gini index 36 32 28 24 20 16 1985 1975 1915 1945 1955 1965 1925 1935 1995 1970 1990 1940 1950 1960 1980 1930 1920 2000 Fig. 6 Source: Brandolini (2002)

19. 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)

20. 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

21. Poverty trends (< $2 per diem) Source: Bourguignon and Morisson (2002)

22. Environmental KUZNETS curve Environmental deterioration Environmental carrying capacity Per capita income Fig. 11

23. 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

24. Environmental KUZNETS curve (sulfur dioxide) 1972 Sulfur Dioxide g/m3 1986 Per capita income (PPP$) DEVELOPMENT Fig. 12 Source: Shafik (1994)

25. Environmental KUZNETS curve (coliform bacteria) Thousands coliforms per 100ml 1986 1979 Per capita income (PPP$) DEVELOPMENT Fig. 14 Source: Shafik (1994)

26. 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

27. 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)

28. Sustainable development Foundations DISTRIBUTIVE EQUITY CHOICE FREEDOM • Income • Wealth • Resources 2 CONDITIONS INTER-GENERATIONAL INTRA-GENERATIONAL SOCIAL CRITERION ENVIRONMENTAL CRITERION

29. 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)

30. 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

31. Crucial requisite of sustainabilty Development is sustainable only if: • Technologic change • Consumption Reduction rate of ED intensity Rate of growth of population > More likely in developed countries Calls for: Increasingly eco-compatible

32. 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

33. 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

34. Models of development two phases NEITHER OF THE PHASES OF POSTWAR DEVELOPMENT MAY BE CONSIDERED AS FULLY SUSTAINABLE ALTHOUGH FOR DIFFERENT REASONS

35. 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

36. 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%

37. 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