Ballooning Liabilities

Conventional economies in the twentieth century churned out cornucopian prosperity and opportunity for people in dozens of countries. But as the century wore on, troubling numbers began to appear in environmental and societal balance sheets, suggesting that what is called "economic growth" entails significant losses—of species, healthy ecosystems, and a stable climate, for instance. Today, the alarming liabilities of modern economies threaten to undermine economic stability worldwide. Three issues—climate change, ecosystem degradation, and wealth inequality—illustrate the self-subversion of economies and economic activity today.

Climate change. The hidden story behind the headline-grabbing drama of climate change—melting glaciers, rising sea levels, and hundred-year storms—is the costs inflicted by global warming. The Intergovernmental Panel on Climate Change, the international scientific body charged with assessing the issue, reported in 2007 that the cost of curbing climate change through reductions in greenhouse gas emissions would run about 0.1 percent of gross world product annually. An independent review in 2006 conducted by Nicholas Stern, head of the

Seeding the Sustainable Economy

Government Economic Service in the United Kingdom, came to a more sobering conclusion: the cost of mitigation would be around 1 percent of gross world product. One percent in 2007 would have represented $650 billion, equivalent to the cost of the Viet Nam War (in 2007 dollars). This cost is steep, but it would be spread over many countries each year.12

Whatever the cost of action, it is a bargain compared with the cost of doing nothing. The Stern Report concluded that inaction on climate change could dampen global economic output by anywhere from 5 to 20 percent every year over the course of this century, the upper limit likely being closer to the final tally. It noted that heat waves like the one in 2003 in Europe, which killed 35,000 people and caused agricultural losses of $15 billion, will be commonplace in a few decades. And hurricane wind speeds in the United States, which are projected to increase 5-10 percent because of rising sea temperatures, would double annual hurricane damage costs. The report's low estimate reflects estimated market costs, while the 20 percent estimate sums market costs, nonmarket health and environmental costs, and an equity weighting factor that accounts for the fact that poor countries will bear a disproportionate burden of the total.13

The Stern Report's findings were largely echoed in a survey of climate research by the Global Development and Environment Institute (GDAE) at Tufts University, which noted that two major modeling efforts estimated annual climate damages by the end of this century at 8 percent or more of world output. Business as usual would lead to declining agricultural yields later in this century, as well as more immediate damage to water supplies, human health, and essential natural ecosystems. The Stern and GDAE assessments suggest that early preventive action is a prudent investment necessary to address what the Stern report calls "the greatest and widest-ranging market failure ever seen."14 Ecosystem degradation. In 2005, a comprehensive report entitled the Millennium Ecosystem Assessment documented the extent of global ecosystem destruction in the last half of the twentieth century. It concluded that human activity had changed the world's ecosystems, largely for the worse, more rapidly during those 50 years than during any period in recorded human history. Species extinction rates, on the rise since the Industrial Revolution, increased to at least 50-500 times the natural rate. Some 20 percent of the world's coral reefs were lost and another 20 percent were degraded. And more than half of the increase in atmospheric carbon dioxide levels, which stand some 36 percent above their 1750 levels, has occurred since 1959. The web of life weakened as ecosystems became less resilient and less stable.15

The report made an effort to measure the drag that ecosystem destruction has already had on economies. Citing World Bank data, it noted that in 2001 some 39 countries experienced a decline of 5 percent or more in wealth (measured as net savings) once unsustainable forest harvesting, depletion of non-renewable mineral and energy sources, and damage from carbon emissions were taken into account. For 10 countries, the decline ranged from 25 to 60 percent. And these estimates were conservative because they ignored fisheries depletion, atmospheric pollution, degradation of freshwater sources, and loss of noncommercial forests, all of which carry their own economic costs.16

Comprehensive data on the economic value of ecosystem services are scarce, but the picture emerging from research over the last decade suggests that these services are of major, though often hidden, economic importance. A 1997 study conservatively

Seeding the Sustainable Economy estimated the total global value of 17 ecosystem services to be at least as large as the combined annual output of the world's economies. A follow-up 2002 study estimated that current rates of habitat conversion cost the world's economies some $250 billion, year in and year out. And a 2006 set of case studies from Europe documents how biodiversity losses—of assets from crayfish to peatbogs to agricultural land—lead to the loss of ecosystem services, with clear economic costs. Plantation forests in Portugal, for example, have been associated with a fourfold increase in burnt area from forest fires between 1975 and 2003. Those losses totaled some 137 million euros in 2001, roughly 10 percent of the total economic value of the country's forests that year.17

Despite early indications of their enormous economic value, ecosystems continue to be lost. A lack of hard data regarding the actual value of the services of particular ecosystems hampers the incorporation of value into business and government decisionmaking. In addition, even when a value can be credibly estimated, it is often an externality—a cost or benefit accruing to society at large, rather than to the individuals or companies respon-sible—so there is little incentive for those actors to care for the species or ecosystem in question. And finally, the net value of converting an ecosystem may be artificially skewed by subsidies, tax breaks, and other government-sponsored incentives for the conversion. These market failures are common drivers of the huge environmental losses of the past half-century documented by the Millennium Ecosystem Assessment.18

Poverty amid affluence. Economic activity in the last century generated enough wealth, in principle, to have made extreme poverty obsolete. Global economic output increased more than 18-fold between 1900 and 2000 and nearly fivefold on a per person basis, dwarfing the total growth of the previous 19 centuries. Yet extreme deprivation became and remains the norm for a huge share of humanity: even now, as noted earlier, some 40 percent of people worldwide survive on $2 or less per day. One in every eight people in the world was chronically hungry in 2001-03, while one in five lacked access to clean water and two in five lacked adequate sanitation.19

Meanwhile, those at or near the economic pinnacle are fabulously wealthy. The gulf between the richest and poorest is now almost incomprehensible: the U.N. Development Programme reported in 2006 that the combined income of the world's 500 richest people was about the same as the income of the world's poorest 416 million people—imagine a tiny village somewhere in South America with as much wealth as the rest of the continent. While income inequality worldwide has lessened slightly since the Chinese economic surge began, China's course of development could not spread to Africa, South Asia, and other impoverished regions without catastrophic environmental ramifications.20

If inequality is measured in terms of net assets (a fuller measure of wealth than income), the skewing is even greater. (See Table 1-1, which uses household data to derive per capita wealth.) A 2006 United Nations University study found that in 2000 the richest 2 percent of adults globally owned more than half of the world's household assets—that is, financial assets such as investments, plus physical assets such as a home, minus debt—while the poorest 50 percent controlled only about 1 percent. The United States had the highest average net worth per household, at $143,857, while India had the lowest, at $6,500.21

Inequity can dampen development prospects. The World Bank's World Development Report 2006 noted that when some

Table 1-1. Net Worth Per Person, by Country Income Group, 2000

Seeding the Sustainable Economy

Table 1-1. Net Worth Per Person, by Country Income Group, 2000

Net Worth

Share of World

Share of

Country per

Net Worth

World

Group Person

per Person

Population

(dollars in

purchasing

power parity)

(percent)

(percent)

High-income OECD* 113,675

64

15

High-income

non-OECD* 91,748

3

1

Upper middle-income 21,442

9

11

Lower middle-income 12,436

16

33

Low-income 5,485

8

40

World 26,421

100

100

*Organisation for Economic Co-operation and Development.

Source: See endnote 21.

people lack access to markets for credit, land, or jobs, resources likely do not flow to where they can do the most good for an economy. A hard-working peasant might generate more wealth for the economy than a less talented shopkeeper, but the shopkeeper, being wealthier and better connected, is more likely to obtain credit or title to land. Multiply the example across many victims of economic discrimination and many input markets, and the losses of wealth to an economy could be sizable. And once these inequities are set, they tend to be reinforced by institutions and social arrangements that favor the interests of the wealthy, which can lock in inequality—and under-performing economies—for generations.22

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