Lecture 5 - Relationship Between Economic Development and Environment I

7/26/2019 Lecture 5 - Relationship Between Economic Development and Environment I

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Lecture 5 - Relationship between economic development and environment I @

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Growing Population and Economic Growth

The relationship between economic growth and population growth is rather dynamic and multi

dimensional. Higher population growth means more labors and which in turn means high level of

production. This argument will only valid if the economy can manage its labor force properly and convert

population into productive forces. High level of labor also means high level of consumption. Extra peopele

will need resouces for their sustenance irrespective of their productive effort. Wwhether or not the economy

can manage the population or not increased population will create extra pressure on environment and its

natural resource endowment.

Important factors

o Population growth - more people consume goods and services

Demands for resources and energy increases

More material waste and waste energy are produced

o

Economic growth - society produces more goods and services

Each person consumes more goods and services

More material waste and waste energy (entrophy) is produced

o However, population growth does not always imply economic growth

Some important points

o

Technology and institutional arrangements impact the amount of resources, energy, and

waste that humans produce

o People now recycle more glass bottles, aluminum, paper, plastics, etc

o New institutions and arrangements are there to failitate this trend

Bins and collection centers where people can dispose of their wastes

Recycling centers that separates the types of waste Industries adjusting their production processes to include recycled materials

New transportation vehicles for recycled wastes

o People are now more conscious about environment and resource constraints

o Technological progress has made possible converting waste to useful objects

o Technology requires investment and luck

o Waste energy increases monotonically

Population Growth

World Population Growth

Period World Population Annual Growth Rate1 A.D. 250 million

1500 A.D. 425 million 0.035% (1 A.D. - 1500 A.D.)

1900 A.D. 1 billion 0.21% (1500-1900 A.D.)

2000 A.D. 6 billion 1.79% (1900-2000 A.D.)

The following table gives a getter picture of population growth since 1950


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Malthus - In 1798, Thomas Malthus predicted: Fertility and birth rates would always respond

positively to higher incomes and thus would ensure that economic prosperity and human

population would be bound by the limited amount of global resources. Population is growing

geometrically but food production is growing arithmetically

o

Malthus was a priest and economist and wrote - Essay on the Principle of Population as It

Affects the Future Improvement of Society (1798)

o

Land is a fixed, scarce resource and food production is limited

o If the population exceeded its food production, then some people would die off.

o Problem - Malthus ignored the impact of technology and through improved technology we

can increases production from scarce resources

o Recent computer models predict severe shortages of resources

Usually future prices are missing from these models, as resources become scarcer,

the prices rise.

Higher price has four impacts


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Consumers reduce their demand for products

Sellers want to increase production of product

Development of new technologies

Exploration for new resources

Example - Petroleum - scientists predicted in the 1970s that the world would run

out of petroleum by 2000

As oil became more expensive, companies explored and drilled for more

oil

High cost oil extraction - Northern Slope of Alaska

New technologies

Satellite imaging

Drilling

Oil from shale

Davind Pimentael (1994) said: The optimum global population (the largest population that could

be supported sustainably in relative prosperity) is about two billion people.

Note that the world population is already 6 billion, far exceeding Pimentael's estimate of the

optimum global population. Behind any such estimate of optimum global population, there must be

a number of assumptions made, like technological progress, rate of growth of consumption, impact

of increasing scarcity of resources on consumption habits, estimates of stocks of resources, etc.

Biologist use a logistic growth function for species

o It is an upside down U-Shape

Environment has a carrying capacity

o

The level of population a natural resource base can sustain without depletion, whether is behumans or animals

o Once the population passes the threshold of the carrying capacity, then population declines

Disastrous predictions for resources and environmental degradation

o Running out of petroleum

o

Killing off all the fish (over harvesting)

o

Many species are going extinct

More people put more pressure on the environment

o Primary energy consumption increased globally by 4.3% in 2004

o

As much as 60% of the global population depends on the waters of international freshwater systems

Rivers and lakes of which basins are shared by more than two countries

Could have more wars and conflicts over fresh water

The population situation

Graph below shows how fast the world's population is growing


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Sources - U.N. Population Division report World Urbanization Prospects: 2003 Revision; BP Statistical

Review of World Energy June 2005; GEO Year Book 2006; WRI 2005 The developed world is 75% urban

o The rate is accelerating in the developing world

o By 2030 urban population is expected to rise to five billion or 60% of the worlds

population

Population growth rate has been slowing and is shown below

Why is population slowing? Children are expensive in both money and time

o Many countries have close to a zero population growth rate

People delay having children, complete education; accumulate assets like a house,

car, etc.

o Much of the population growth is in developing countries, HIV is impacting population

growth rates in some African countries


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o

The followig figure gives the demographic transition. Birth rate and death rate with time

o Following figure gives the growth of world population


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Economic Growth

First, we must distinguish between economic growth and economic development.

o Growth refers to increases in aggregate level of output.

o Development refers to increase in output as well as in other human development indices

GDP

o The traditional measure of macroeconomic performance is Gross Domestic Product (GDP)

o GDP is the sum of the money values of all final goods and services produced in the

domestic economy during a year

Only market activity is included

Since there isnt a market for most environmental goods, they are not

included

In contrast, defensive expenditures (e.g. repairs after an auto accident) are

included

Problems that result:

The value of environmental amenities is not included in GDP

Depleting a stock of natural resources (e.g. oil, minerals, forests) increases

GDP, since it results in new sales

For comparison, depleting the capital stock hurts, as capital will not

be there for future generations

Similar reasoning should follow for natural resources

Growth that comes from the consumption of capital, including

natural capital, is not sustainable

Defensive expenditures are included


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Defensive expenditures are expenditures made to eliminate, mitigate,

or avoid damages caused by other economic activity.

For example, after a car accident, the costs to repair the car, provide

medical treatment to the victims, pay for lawyers, etc. all add to

GDP. But, has the car accident really increased welfare? A study of

Germany found that 10% of the countrys GDP consisted of

defensive expenditures.

Following usual convention goods and services are produced in the market place

o Higher demand means higher production and lower price

o Does not care much about the source of resources as long as the buyer is capable of paying

the demand of the producer/supplier then supply will be there

o

Technological progress is important in this process

o

If many industries are expanding within a country, then we have economic growth

Economic growth -increase in GDP

o A higher GDP per capita means each citizen has more goods and services to consume

o Figure below shows GDP percent-growth rate in 2007

Derivation of a Growth Model

o Total production of goods and services in a country are treated as one large production

function for whole economy

o Common in growth theory

( )ttttt

ERLKAfGDP ,,,=

o tGDP is dependent on,autonomous growth, A , reflects technology, usually the intercept

in a regression equation,t

K is capital,t

L is labor,t

E is for energy,t

R is for natural

resources


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o Usually equation has tE or tR , but not both

General trend of the developing world

o Higher population growth rates

o Movement from agriculture based development to mechanized production based

development, which results in more pollutiono Increasing urbanization, people are moving to the cites, because that is where the jobs are

However there are options for leakages

o United States - environmental laws became too harsh

Compliance costs were too high

Some industries relocated to countries like Mexico and China, Weak

environmental laws, cheaper labor

These industries pollute even more shipping their products to the United States.

High U.S. incomes are indirectly creating large amounts of pollution

Japan started to outsource the production of goods and services to other Asiancountries. Japan was big investors in other countries like China, South Korea, etc.

o Some countries actively seek out companies, trying to get them to invest in their

economies, Investments creates jobs, incomes, and more tax revenue

Is economic growth good or bad for the environment?

o

Requires more resources and energy

o Technology can change A too, creating an offset

Government may imposes restrictions on natural resources or energy use

It is difficult to measure impacts of regulations on resources, environment, and GDP

o

Government imposes a regulations to reduce air pollution in a city

Causes higher costs

People may be healthier, live longer, work harder, pay less money for medical

problems, etc

o Thus, regulations slow GDP down initially, but healthier people make GDP grow faster.

Relationship between development and population growth

Normally higher population means higher level of output.

However for the case of average productivity if the last persons productivity is greater than the

average productivity of the economy then addition of last person will increase productivity,

otherwise it will decrease average productivity

Impact of population growth on economic growth can be analyzed through the relationship

xP

l

P

O*= .


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In the above relationship, O is the output of an economy, P its population; thus,P

Ois the per-

capita output. l is the size of labor force and thusP

lis the size of labor force as a proportion of

population. x is the average product of labor.

The impact of population growth on share of labor force in the populationP

land its impact on

the average product of laborx together determine the impact of population growth on per-capita

outputP

O. Let us analyze the two impacts.

Labor force l is the number of people in the age group of 15 to 65. Children below 15 are too young

to work and adults above 65 are generally retired from the labor force. The impact of population

growth on labor force therefore depends on how population growth rate changes the age structure

of the population.0 Children 15 Size of Labor Force 65 Retirees

| | | Years of Age Scale

Age Structure of Population

Population growth has two effects on labor force: the youth effect and the retirement effect. Youth

effect is the extent to which population growth adds to 0-15 age group, and retirement effect is the

extent to which the growth adds to 65 and above age group. The two effects squeeze the size of

labor force in a population. Slower population growth rate economies specially experience more

retirement effect, whereas faster population growth rate economies specially experience more youth

effect. Empirical observations suggest that the youth effect is generally stronger. In other words, aslower population growth rate actually adds relatively more to the labor force.

High level of young population will create child labor and deplete family savings (known as youth

effect).

High level of older population will increase savings (known as retirement effect)

More savings means more capital formation


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To analyze the impact of population growth on the labor force, one has to also consider the female

availability effect of population growth. A faster population growth rate makes relatively fewer

women available for labor force, suggesting that a slower population growth rate may add relatively

more to the labor force.

Let us now analyze how population growth impacts x . One may think that a larger population and

thus a larger domestic market size offer possibilities of exploiting economies of scale. This thinking

may be true for certain outputs in some initial range of production. However according to the law

of diminishing marginal returns, each production system eventually reaches a point where the

marginal product of labor declines as more labor is added. In other words, economies of scale vanish

after some initial range of production.

One may think that a larger population makes larger pool of savings possible, which increases

investment into the economy and thus the prospect of higher rate of economic growth. But,

empirical evidences do not support this thinking. It is the older age people that generally afford and

generate savings. A slower growing population, compared to a faster growing population, has

relatively more number of older people and thus has relatively greater potential to generate more

savings. In addition, investment in an economy does not have to depend only on domestic savings if

the economy opens up to foreign investment.

Finally, it is observed that a faster population growth rate widens economic disparity among rich

and poor. Faster population growth rate depresses wage rates relatively more than profit rates. Also,

poorer families generally have larger number of children and the percentage of income they can

spend on a child goes down with more children.

Higher population growth rate makes fewer women available to labor force, as more women

become engaged in raising children (female availability effect of population growth)


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Higher population growth rate raises dependency ratio of labor force. A higher proportion of

people, those who are not in labor force, depend on labor force because a very high proportion of

children make up the population (young age effect of population growth).

Higher population growth rate increases congestion on infrastructures and on open access resources.

Ecological perspective on effect of population growth on environment

There is a practical limit to the population that can occupy a certain region, which is the carrying

capacity of the region, as a rising population is likely to cause a larger environmental degradation

through increased wastes and pollution.

However, technological development may expand the carrying capacity and mitigate some of the

above problems. Paul Ehrlich, a biologist in 1971 stated the IPAT relationship between

population ( )P , economic growth or affluence ( )A , measured as output per person, technology

variable ( )T measured as pollution per unit of output, and environmental impact ( )I measured as

units of pollution is expressed as

TAPI **= , or as

( ) ( ) ( )outputpollutionpopulationoutputpopulationI **=

In the above relationship Population and Output cancel out from the right hand side, leaving

only Pollution which is the same as the left variable ( )I . What happens to environment ( )I over

time is then determined by whether the technology ( )T improves fast enough to make up for the

rate of growth of population ( )P and economic growth ( )A .

Poverty and Environmental Degradation

Poverty and environmental degradation generally coexist in a self-perpetuating cycle, the

manifestation of which is multifaceted. According to the International Food Policy Research

Institute, these related problems possess common causes such as a historically low income, rapid

population increase, land constraints, and a lack of appropriate agricultural technology. While

resource degradation occurs around the globe, the poor are most affected by it because it often

correlates directly with their food security and livelihoods.

Poverty is generally defined as a social or economic condition that has major implications for

policy. A person is considered poor when their personal income or their consumption is below a

certain line. The United Nations Development Program defines poverty as deprivation of the

individual choices necessary for a person to lead a long, healthy, creative life and to enjoy a decentstandard of living, freedom, dignity, self-respect, and the respect of others.

An increase in population in rural areas decreases farm sizes and ultimately pushes people off of

their original land. Those affected find themselves forced to migrate to more marginal land, thereby

beginning a new process of destruction in a new area and a process of environmental degradation.

More people on smaller land plots inevitably use up more of that lands resources.


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Because the poor do not, for the most part, own the resources they utilize, they reap no benefits

from conservation. Without incentives (especially monetary) to pursue, they most often will not

protect their surrounding natural environment. When confronted with the choice of immediate

survival versus a distant eventuality, it is only human to select the latter. Often, natural resource

exploitation can be vital to survival when a person does not enjoy other options.

Poverty and environmental damage, by and large, occur jointly. A more specifically observable

cause is land quality and the affordability of the technologies necessary to its preservation. The tools

to practice environmentally sustainable methods of farming are commonly too expensive for the

average fledgling farmer to purchase.

A good first step in both conservation efforts and the alleviation of poverty is to raise awareness

about the issues involved. Access to employment in new sectors can decrease reliance on the land.

Access to education, reproductive health information and contraception also can reduce the

population pressure. Another step is for governments to subsidize environmentally sustainable tools

and practices.

Downward Spiral Hypothesis of effect of population on environment

According to this hypothesis, a rising population worsens environment, which causes still more

growth in population, and there is downward spiral in environmental degradation. Below is an

example.

A rise in population raises use of resources, like wood resources, which raises scarcity and people

need to travel farther and spend more time to find and collect wood. This induces families to choose

to have more children as free labor resources to help collect wood, which further raises population

and reinforces the downward spiral.

Induced Innovation Hypothesis of effect of population on environment A Danish economist Ester Boserup enunciated this hypothesis, according to which a rising

population does not necessarily cause a downward spiral of environmental degradation; actually, a

negative feedback from innovation will arrest the degradation trend. An example is below.

A rise in population raises demand for agricultural products, which raises the scarcity of land

relative to labor. This rise in scarcity induces incentives for agricultural innovation. People start

using more intensive and sustainable land management practices and farming methods, which

decreases pressure on land.

There have been some empirical studies on the above two hypotheses, and they have found

evidences of both. There are increasing evidences of regional environmental stresses from

deforestation, cultivation of marginal lands, and natural disasters, and also there are evidences of

innovations being applied. There is an emerging consensus that high population growth rate places

extra stresses on environmental and natural resources and a slower population growth rate is a good

environmental policy.

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Lecture 5 - Relationship Between Economic Development and Environment I