ENVIRONMENTAL ACCOUNTING II

 

 

Session 2A8

ON THE LOGIC OF SUSTAINABILITY CRITERIA — SUSTAINABILITY IN AN OPEN ECONOMY WITH ENDOGENOUS GROWTH

Room

Gernot Klepper (Kiel Institute of World Economics)

 

National accounts do not reveal information about the sustainability of an economy with respect to its use of natural resources including the environment. The use of Net National Product (Dasgupta et al. 1996) or Genuine Savings (World Bank 1995) are therefore advocated as appropriate measures for describing whether an economy follows a sustainable growth path. The implications of such approaches are analyzed in this paper.

This paper develops an endogenous growth model with an exhaustible resource within a two-country framework. The classical Solow-Stiglitz-Model is expanded by introducing endogenous growths, i.e. investment not only enlarges the existing capital stock, it also has spillovers to the resource use by inycreasing the efficiency of the natural resource in the production process. The two countries trade in the output of each economy and in the natural resource.

A previously unsustainable economy by following an investment rule which maintains an overall constant stock of capital and resources will (1) increase its investment, (2) increase its resource use,

(3) improve its welfare. These results hold for an open as well as a closed economy. Endogenous growth in the efficiency of natural resource use will slow down the extraction of natural resources; it is impossible, however, to create a situation where technical progress will lead to a lower resource use than the one which would prevail under a unsustainable growth path.

If in the open economy framework without technical progress one country unilaterally follows a sustainable growth path, whereas the other country does not, overall resource extraction will increase. The country following the sustainability rule will import the resource and force increased resource extraction upon the other country. It is, so to speak, "imperting sustainability". The results for the endogenous growth model are ambivalent as factor prices in the two countries start to diverge and the volume of resource trade can not be predicted.

References: Dasgupta et al. (1996): "Net national Product as a Measure of Social Well-Being". Beijer International Institute, Stockholm. World Bank (1995): "Monitoring Environmental Progress".