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Sustainability, Optimality, and Development Policy

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Sustainability, Optimality, and Development Policy Y. Hossein Farzin Department of Agricultural and Resource Economics University of California, Davis, CA 95616, U.S.A. [email protected] Abstract Considering sustainability a matter of intergenerational welfare equity, this paper examines whether an optimal development path can also be sustainable. It argues that the general “zero-net-aggregate-investment” condition for an optimal development path to be sustainable in the sense of the maximin criterion of intergenerational justice is too demanding to be practical, especially in the context of developing countries. It further argues that while the maximin criterion of sustainability may be appealing to the rich advanced industrial countries, for the poor developing countries it implies equalization of poverty across generations, and as such is too costly a moral obligation to be acceptable. The paper suggests that a compromise development policy that follows the optimal growth approach but adopts certain measures to mitigate both the intergenerational and intragenerational welfare inequalities may be more appropriate for these countries. Some of the principal elements of such a policy are highlighted. Key Words: Sustainability, intergenerational equity, optimality, discounting, development policy JEL Codes: Q01, Q56, O21, O13, D62, D63 Previous versions of this paper were presented as invited lectures at the PGPPE 2009 Workshop on Public Policy, Externalities, and Growth, University of Graz, Austria, July 9-11, 2009 and at the International Symposium on Integrating Global Environmental Studies Towards Human Security, 22-23 June 2007, Kyoto University, Japan. For helpful comments, I thank T. Takebe, Phil Martin, Richard Sturn, Kazuo Nishimura, Kazuhiro Ueta, Ron Wendner and the participants at those forums and seminars at the Institute of Economic Research and the Graduate School of Environmental Studies, Kyoto University, Colorado State University at Fort Collins, University of Alberta, Canada, and UC Davis. However, I alone am responsible for any error of commission or omission.1 Sustainability, Optimality, and Development Policy 1. Introduction “Sustainability” has come into vogue, but remains a vague concept, making it hard to test sustainability in practice. Many economists define sustainability as was done in the report of the World Commission on Environment and Development (WCED, 1987), the Bruntland Report.1 It defines sustainable economic development as: “development that meets the needs of present generation without compromising the ability of future generations to meet their own needs”. Implicit in this definition are the two basic concepts of intergenerational fairness and economic optimality. Sustainability is a question of intergenerational equity, asking about the fair or just distribution of productive capacity and welfare between the present and future generations. Economic optimality, on the other hand, is concerned with attaining the highest feasible level of social welfare over the long run. Considering sustainability as a question of intergenerational equity in economic welfare, I focus on two basic questions. First: Is there a conflict between sustainability and optimality? Or, phrased differently, Can an optimal economic development path also be sustainable? Second: Is the intergenerational justice, especially in its puritanical form of the Rawls’ maximin criterion, an appropriate social-economic objective for the poor developing countries to adopt? I begin in section 2.1 by reviewing the main insights from the theory of optimal economic growth (Ramsey, 1928) and its extension to cases where a natural exhaustible resource is essential to production (Dasgupta and Heal, 1974, and 1979). In section 2.2, I consider the extreme case of intergenerational justice as defined by Rawls’ maximin criterion and discuss its implications for economic sustainability in a simple model with a single consumption good, a reproducible man-made capital, and a natural exhaustible resource (Solow, 1974 and Hartwick, 1977) and expand this in section 2.3 to a very general model which includes many consumption goods and services, many man-made capitals and environmental stocks, and the direct (non-autonomous) effect of time (Farzin, 2006). Section 3 highlights the main limitations and practical difficulties with the implementation of sustainability rule as implied by the maximin criterion of intergenerational justice, emphasizing the important roles of scale, externalities, information, markets and other institutions in the design of a sustainability policy. In section 4, I argue that while the maximin rule of sustainability may offer a sensible approach for the rich industrial countries which have already 1 It is beyond the scope and purpose of this paper to survey, even summarily, the vast literature on various aspects of economic sustainability to which many authors have contributed. For a review of various definitions of sustainability see Pezzey (1989) and World Bank (1997). See also Farzin (2004) who uses two alternative definitions of sustainability to show that even a purely exhaustible resource economy is under certain conditions sustainable according to one of the sustainability definitions.2 achieved high living standards, it turns into a “poverty equalizer” policy for the poor developing nations which are poorly endowed with some of the man-made capital assets crucial to growth of income and welfare. I argue that a compromise policy that adopts the optimal growth approach but modifies it in several ways to reduce intragenerational and intergenerational inequality may offer a more practical and promising alternative for developing countries. I outline some of the main elements of such a policy. Concluding remarks are in Section 5. 2. Theoretical Insights 2.1 Ramsey’s Utilitarian Approach The search for an economic development path that is both optimal and sustainable occupied economists as far back as Frank Ramsey (1928). Ramsey sought an


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