Environ Resource Econ (2008) 39:17–24 DOI 10.1007/s10640-007-9175-7
Sustainable Development and Resilience in Ecosystems Karl-Göran Mäler
Accepted: 23 June 2007 / Published online: 28 December 2007 © Springer Science+Business Media B.V. 2007
Abstract Two new important developments in environmental and resource economics is presented—non convex dynamics of ecosystems and wealth as an indicator of sustainable development. Non convex dynamics imply existence of resilience, that is the robustness of systems to withstand exogenous perturbations. Resilience can be regarded as an insurance against flips of the system into different basins of stability. Sustainable development, according to the Bruntland report, is the provision of productive resources to future generations to make it possible for them to live as well as the present generation. Thus, the value of changes in productive assets is therefore an index of whether an economy is on a sustainable path or not. Resilience can be regarded as one such productive asset and the paper discusses how one can define the value of this asset. Keywords Sustainable development · Wealth · Accounting prices · Non convex dynamics · Resilience
1 Introduction In this paper, I try to summarize what I believe are two important new developments in environmental and resource economics, namely the inclusive wealth approach to measuring sustainable development and the focus on resilience in ecosystem, and show that they can be made to merge within a singleconceptual framework. I will begin by giving a brief picture of how to look at the concept of sustainable development and then show how to make it operational. A key actor in the theory is the accounting price of a resource, which is the present value of future net benefits from a resource from a virtual perturbation of the initial stock of the resource. I will argue that ecological systems in general are characterized by thresholds at which the system may quickly change to a different regime with different
K.-G. Mäler (B) Beijer institute of Ecological Economics, Ropyal Swedish Academy of Sciences, Box 50005 , Stockholm, Sweden e-mail:
[email protected]
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functions and therefore different value of its service. The distance between the current state of the system and the threshold is called the resilience of the system at that state. Thus the resilience give the maximum perturbation that we can make to the system without forcing it into another regime. Thus, if the current regime is having a higher value than the alternate regime, the resilience can be interpreted as a buffer stock that reduces the probability of a change of regimes. This stock will have an accounting price and with that price, the resilience can be included in the wealth calculations.
2 Inclusive Wealth and Sustainable Development The Bruntland commission defined sustainable development as . . .development that meets the needs of the present without compromising the ability of the future to meet their own needs. (Our Common Future, 1987). Almost as soon as ink had dried in the first edition of this book, economists started to discuss ways of formulate this principle into something measurable and the first object they started to develop was the green NNP. The idea was to include environmental factors in the conventional NNP, such as subtracting environmental damages and depletion of natural assets. The hope was that the resulting green NNP would be a useful tool for characterizing sustainable development. To a large extent, this hope was based on a result by Marty Weitzman (2006) saying that NNP, correctly computed would be equal to the constant maximum consumption society can afford forever. This was a mathematical formulation of the Lindahl concept of income (wrongly attributed to Hicks) that income is the amount of consumption you can afford without decreasing your wealth. However, it soon became clear that this result was built on two implicit assumptions: that the social welfare function is linear in consumption (that is equal to the present value of future consumption) and that the economy is on an optimal path. There are reasons to believe that the true social welfare function is concave in consumption. First, empirical evidence shows that income elasticities are different from one, which they should be with a linear utility function and secondly, most (but not all) people would find ethical problems with it as it would indicate that a transfer from a poor generation to a rich is welfare neutral. If we instead introduce concave utility functions, relative prices (on capital with consumption as numeraire) will change over time and we immediately run into problems. This second problem can be overcome, as Asheim and Weitzman (2001) have shown by using a Divisia price index. However, one still has to assume that the economy is optimal and in addition to that one has to assume that the economy is “productive”. Moreover, there is a completely different solution to this problem, namely using a stock concept as a measure of sustainability instead of the flow concept—NNP—used by Weitzman. That income like concept might be doubtful in intertemporal welfare economics was hinted at by Paul Samuelson, in 1959. However, Samuelson did not develop the issue further. David Pearce and his group (Anil Markandya and Ed Barbier) subsequently argued on intuitive grounds that measuring the value changes in stocks of capital is the correct measure of sustainable development. The theoretical basis for this approach was developed by Dasgupta and myself (2000) and by Arrow, Dasgupta and myself (2003). The intuitive story is simple. The Bruntland definition means that development is sustainable if future generations can have welfare at least as high as the present generation. Wealth from one generation to a later generation is transferred by capital stocks (man made capital, natural capital, human capital). Thus, the present generation should save so much that the resources left to the next generation will enable them to reach at least the same welfare as
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the present generation is enjoying. Formally, we can formulate the following criterion for sustainable development: Development is sustainable between two periods, t and t+1, if the value of the changes in capital stocks plus a “drift term” between the periods is positive. A more formal presentation of this theorem is given in Appendix A. It is due to Dasgupta and Mäler (2000) and extended to changes in population size to Arrow et al. (2003). The drift term is included to catch external factors, such as exogenous changes in terms of trade or exogenous growth in total factor productivity. Let us for the moment disregard such factors and assume that the drift term is zero. Then, we should follow the following procedure in order to find out whether the economy is sustainable at particular time period. Estimate the change in all stocks of capital that are relevant for the production of welfare. These will include man made capital (buildings, machines, tools, roads etc.), human capital (that is knowledge which directly or indirectly improve our well-being), and natural capital (including both renewable and non-renewable resources). Among the third types of assets are ecosystems, whose values (accounting prices) are determined by the ecosystem services they are providing. I will in the next section discuss in some more detail this valuation and in particular the accounting prices for resilience (roughly the buffer capacity of the system to resist disturbances). Thus, while traditional GNP concepts measure a flow, the value of stock changes measure changes in wealth (at constant prices—no capital gains). If the traditional national accounting is done correctly, GNP is equal to consumption plus the value of changes in all stocks (net investment), and it seems that GNP should have a similar development as the net investment.1 However, that is not general the case. It can easily happen that consumption is growing while some stocks are going down, resulting a positive growth of GNP, while genuine investment is negative! Empirical attempts to measure genuine savings confirm this. Before we go into such studies, it is necessary to touch briefly on how to include changes in population. As one can expect, under certain assumptions (constant returns to scale is one, but not the only needed assumption), one should be interested in the value of changes in stocks per capita, and there are now a number of studies looking at the development of this measure. It is also necessary to look a little bit closer on the drift term. It is there to cover all exogenous changes that may affect social welfare. One such potential change is the autonomous growth of the total factor productivity. Economists have since early 40s noted that not all of GNP growth can be explained by growth of inputs (capital and labour) and the part that cannot be explained (the so called Solow residual) is substantial—1.5% per annum. Over time better data and better methods were developed and the Solow residual was reduced. Partha Dasgupta and I, in our article from 2000 noted that if the use of natural capital has been increasing, estimates of the residual will be biased upward. A similar observation was made by Xepapadeas in his chapter on Growth and Environment in Handbook of Environmental Economics, vol. 3 (2005). Xepapadeas and collaborators, (Tzouvelekas et al. 2006) however, went further by doing an econometric study of the total factor productivity growth (2006) which showed that the residual may be zero! In that case the drift term would be zero (abstracting from other possible exogenous changes). Let me now return to empirical applications of the genuine investment approach. I will report on two studies, one by Professor Glen Marie Lange, Columbia University in which she compares the economic development of Botswana and Namibia and one by a group of economists and ecologists (Arrow et al. 2004) studying almost all countries in the world. 1 In the terminology of the World Bank, the value of the change in stocks is called genuine savings.
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Botswana and Namibia are very similar—both are very dry desert like countries with water as a very scarce commodity, both have diamonds. Botswana has cattle while Namibia has some forests and coastal fisheries. Furthermore, both countries has during the studied period, experience growth in GDP per capita. Professor Lange calculated the value of changes in man made capital, human capital (measured by expenditures on education), changes in reserves of diamonds, changes in aquifers, cattle stocks, fish stocks and forests, and converted it into genuine investment per capita. It then turned out that Botswana was on sustainable path, as genuine investment per capita was positive, while Namibia was wasting too much of its resources on consumption and therefore experience a negative genuine savings per capita! The reason for this is simply that as a policy, Botswana reinvest all rents on natural capital in other capital stocks while Namibia has as a policy to fund the government budget with the rents! The World Bank estimates annually genuine savings for all member states of the Bank (almost all nations in the world). The Bank starts with standard net investments from the national accounts and then adjusts them for depletion of exhaustible resources, depletion of forest resources, reclassify expenditures from consumption to investment and finally include an estimate of climate damage. The resulting genuine investment figures can then assumed to be a rough approximation of the true value of changes in stocks. The resulting numbers are publicly available. The Beijer Institute took the initiative to discuss the question “Are we consuming too much” in terms of changes in wealth per capita.2 Thus, a group within the Beijer networks used the Bank’s estimates of genuine savings to find the change in genuine wealth per capita. For some of the countries and regions included the results are in the table below. Country
Growth rate of GW
India 1.42 China 3.41 Sub-Saharan Africa −0.31 Middle East −0.31 UK 1.48 USA 1.79
Growth rate of per capita GW
TFP
Growth rate after TFP adjustment
−0.57 2.06 −3.05 −3.43 1.30 0.72
0.64 0.54 3.64 8.33 0.28 −2.58 −0.23 −3.82 0.58 2.29 0.02 0.75
Growth rate of per capita GDP 2.96 7.77 −0.01 0.74 2.19 1.99
In the first column are the estimated growth rates of Genuine Wealth—GW. Those numbers are then transformed into growth rate of per capita genuine wealth. If the total factor productivity growth would be zero, these numbers would tell whether these countries (and regions) are on a sustainable path or not. It turns out that neither India, Sub-Saharan Africa and the Middle East are on a sustainable path. However, if we believe that there is a growth rate in total factor productivity, we should correct for it and that is done in the fourth column. Even after this adjustment, Sub-Saharan Africa and Middle East are not on a sustainable path. Compare this column with the last column and it is quite clear that Adjusted genuine wealth gives a completely different picture of the economic development than GNP per capita!
2 These results were published in Arrow et al.— “Are we consuming too much?” (2004).
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3 Ecosystem Services and the Value of Resilience It has been more and more recognized that the human civilization is based on services produced by ecological systems. Many convincing arguments for this view are given in the Millennium Ecosystem Assessment, 2005. But some basic reflections on what is the basis for our wellbeing, based on our own experience, should be enough to convince anyone about the importance of ecosystem services. The air we are breathing is produced by green plants through photo synthesis. The water we need to survive is to a large extent purified and channeled through ecosystems. Most of our food has its origin in ecosystems. The list can be made as long as one wants, but I think these examples suffice to show the importance of ecosystem services. Most of the ecosystem services are not included in the standard national accounts (although the 1993 revision opened up the possibility of including managed ecosystem which has a well defined owner). Today, there are many studies on how to include ecosystem services in an accounting framework. In Integrated Environmental and Economic Accounting (2003), one framework for physical accounting of ecosystem services is outlined, but there is no attempt to put a value of these services in order to make them comparable with the strict economic accounts. It is not my purpose here to discuss a formal framework for ecosystem accounting or valuation of ecosystem services. See Daily (1997) for a discussion of such issues. Instead, I want to touch upon one particular, but very important characteristic of ecosystems, namely the existence of thresholds. This has been known for more than 30 years (Holling was probably the first who described such thresholds 1972). However, during the last 10 years, it has been quite clear that they are not exceptions but on the contrary, nature seems full of them. In Global Change and the Earth System, 2003, the authors give numerous examples, from climate change to fisheries, erosion, terrestrial ecosystem and others. These thresholds occur because of positive feedback loops. When climate warms up because of emissions of greenhouse gases, permafrost will start to melt, which will free methane (a very potent greenhouse gas) that previously been trapped by the frozen soil. Thus there is positive feedback to global warming. If, due to irrigation, the ground water has been saline, it constitutes a potential threat to the cultivation of the land. Heavy rains or failures in the drainage may raise the water table. If the water table reaches two meters depth, capillary forces will pump up the saline water to the root zone, and destroy the productivity of the soil. The positive feedback from these capillary forces creates a threshold. If thresholds are so frequent in nature, why do we not ecosystem cross more often? One reason is that ecosystems in general have resilience, which is a buffering capacity of the system. Initially a system may be far from the threshold and a small perturbation will not change the quantity or quality of the services it is generating. If the perturbation continues and increases, the threshold will eventually be reached, and the system will flip into a different regime. This distance from the initial state to the threshold defines the resilience of the initial state. For economic studies of thresholds and resilience, see Dasgupta and Mäler (2003). Typically, we don’t observe changes in the resilience directly, so it may happen that while everything looks fine and there is no large degradation of the services provided. However, under the surface, resilience may be substantially reduced, and with very little warning, the system may flip to completely different configuration. Thus the concept of resilience is of importance in connection with sustainable use of ecosystem services. Resilience in a system should be regarded as a capital stock, and for accounting purposes, we need to define an accounting price for this capital stock. This has been done in Mäler et al. (2006). A brief mathematical presentation is given in the Appendix B.
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If we can measure the resilience perfectly and if we know how to control the resilience perfectly, the accounting price of it would be zero (unless we are at the threshold). This is, because a change in resilience with one unit will, in this case, have no impacts. However, if there is uncertainty about the dynamics of the system and if cannot control the system perfectly, a change today in resilience will in general affect the probability of a future flip of the system. The accounting price of resilience is thus the expected value of the present value of future net benefit for the services from the system, where the expectations is taken over the probability distribution for a future flip. For details, see Appendix B. We know very little of the resilience of our ecosystems quantitatively. We hardly know how to measure it, except in very simple systems, and it may seem overoptimistic to discuss economic valuation of a stock we know so little about. On the other hand, the development of a framework suitable for accounting of resilience, will give precision in the questions we have to ask about the systems and will therefore be valuable for measuring resilience. Potentially, the value of resilience in the ecosystems of the world may be very high and that should lead us to invest in much more theoretical and empirical studies of the dynamics of ecosystems. Without such knowledge we may mismanage them grossly.
Appendix A This is a very brief mathematical explanation to the propositions made in the main text on the relation between change in social welfare and value of the change in stocks. For a more complete presentation, see Dasgupta and Mäler (2000), Arrow et al. (2003) or Mäler et al. (2006). To make this idea operational we need the concept of an accounting price. Assume for simplicity that there is only one capital stock K. Let the present generation live at date t and that their stock of capital is Kt . Tjalling Koopmans has shown (Koopmans 1960,1964) that under very general conditions, intertemporal social welfare should be defined as ∞
Wt =
s =t
U (Cs ) (1 + δ)s−t
where Cs is consumption in period s, U is the utility from that consumption and δ is the utility discount rate. Consumption is defined in a very general sense, that is, it should contain everything that affects one’s wellbeing in the given period. The utility function is assumed to be concave, implying that society as an aversion against inequality in consumption between periods. Given the present state of the economy, described by its technology and capital stocks (we assume only one stock), we can forecast future consumption and let the forecasts be Cs = α(s, t, Kt ) where t is the present period. With this forecast we can forecast the social welfare Wt =
∞ U (α(s, t, Kt )) t
(1 + δ)s−t
The accounting price pt of the capital stock is then defined by ∞ dU (α(s,t,Kt )) dWt (1+δ)s−t = pt = dKt (1 + δ)s−t t
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One can now show that Wt+1 − Wt = pt (Kt+1 − Kt ) + vt where pt is a number between pt and pt+1 (Aniyar and Mäler 2006). If the periods are short enough, pt can be approximated by pt . vt is the drift term, which is independent of changes in the resource base.
Appendix B Suppose a system has two possible regimes, the initial regime 1 and the alternate regime 2. In regime i, the net benefits from the system is Ui . Let the initial resilience be R0 and the probability that the system will flip to the alternate regime in period s be θ (R0 , s). This probability involves a prediction of the resilience at time s, conditioned by the initial resilience R0 . The cumulative distribution for a flip is then with t as the initial period.
F (R0 , t ) =
t
θ (R0 , s)
s =t
Suppose the flip happens at s. Then the present value of the net benefits is Wt (Rt , s) =
s q =t
∞ U1 (q) U2 (q) + (1 + δ)q−t (1 + δ)q−s q = s+1
Let the survival probability be S(Rt , s) = 1 − F (Rt , s) One can now show that EW (Rt ) =
∞ S(Rt , q)U1 (q) + (1 − S(Rt , q)U2 (q)) (1 + δ)s−t q =t
From this, it follows that the accounting price for resilience is given by pt =
∞ ∂S(Rt , q) ∂E(W (Rt , t)) = [U1 (q) − U2 (q)] ∂Rt ∂Rt q =t
Thus to calculate the accounting price, we need the survival probability as a function of initial resilience and the flow of net benefits in the two regimes.
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