Existing models of sustainable development

the quality of life determines the path of develop- ment a region takes. In addition to providing direct benefits con- tributing to quality of life, the flow of environ- mental services determines the ability of natural capital to regenerate itself. Ecosystems and other components of the regional natural capital pro- duce environmental services that provide life-sup- port functions necessary for natural capital reproduction. The destruction of this critical nat- ural capital impairs the internal sources of im- provement of the quality of life of a region, leading to a non-sustainable path of develop- ment. Our model characterizes natural capital ac- cording to: 1 its ability to produce life-support- ing environmental services, 2 by its substitutability, and 3 by its possible recon- struction. Our model of regional development can therefore provide the basis for the design of institutions that promote sustainable regional de- velopment. It is a qualitative model, however, that is meant primarily as a heuristic device rather than a basis for quantifying the various parameters in the model in order to reach precise conclusions about the sustainability of alternative development paths. It nevertheless offers a more precise and operational basis than the existing literature for determining whether development is sustainable or not. Moreover, the model links quality of life to specific classes of natural capital at the regional level. This will help to opera- tionalize the concept of sustainable development at a level that affects people’s lives directly.

2. Existing models of sustainable development

In this section we present a brief summary of the predominant views in the literature that relate natural capital and quality of life. We focus here upon the relationship between ecological systems and economic models, although we recognize that the concept of sustainable development in- cludes a social dimension focused on consider- ations of equity Sachs, 1992; Munasinghe, 1993; Berkes and Folke, 1994; Munasinghe and Cruz, 1995. 2 . 1 . The traditional model The concept of sustainable development has its roots in the classical economics theories of the eighteenth and early nineteenth centuries, where the works of Ricardo, Malthus and Mill developed the concepts of limits to growth. Malthus based his limits to growth argument on the concept of absolute scarcity, determined by the fixed amount of land available, that would force population to cease to grow. Ricardo based his argument on the diminishing returns of land because of its non-homogeneous quality. He argued that an expanding population has to use land that is less fertile, reducing the standards of living of the population, forcing it to stop growing. Mill also thought that a stationary state could not be prevented because wealth would have to stop growing at some point. He was more optimistic than Ricardo about the steady-state, believing that a better distribution of wealth would be accomplished as a consequence of individual prudence and frugality and legislation by the state. Marxism and neoclassicism introduced new concepts that altered the views on sustainability in the mid-eighteenth century. Marx considered progress as a natural process, and defined it as the material and technological advance made possible by the exploitation of nature. He did not directly address the problem of limits to growth, but emphasized the fact that a system is viable only if it can reproduce itself, which, according to modern Marxian writers, is a hint that the natural system can set limits to progress Pearce and Turner, 1991. The neoclassical economic paradigm, starting around 1870, shifted the emphasis from long-term consequences to short-term outcomes through the use of marginal analysis. Clean air and water and ecosystem services are considered public goods that, because of their non-rival and non-exclusive characteristics, have to be provided with government intervention. Price corrections primarily through the application of Pigouvian taxes are typically characterized as the most appropriate public policy tools to restore an improved level of efficiency in cases of negative Fig. 1. Traditional view. Thin arrows: Processes that contain natural resources: Production processes A and C, distribution, consumption and import-export. Thick arrows: Waste; Dotted lines: Processes without natural resources component. Some processes in this figure have been kept simple: distribution — makes processed materials and energy, including intermediate and capital goods, accessible to consumers and producers, some occurs through the market, some dont; consumption — changes materials and energy into services; import-export — bring materials and energy in and out of the region. externalities produced by private parties, ostensi- bly leading to ‘optimal pollution levels’ Baumol and Oates, 1979; Ortolano, 1997. Neoclassical economics considers the economic system to be separated from the natural and other social systems. Natural capital is only a source of materials that comes into the production process at no cost, except the cost of extraction. Develop- ment is defined as increases in gross domestic product GDP, and can be accomplished with an efficient price system that reflects scarcity and stimulates technical improvement. This technical change counteracts depletion by substitution and by facilitating extraction. Substitution among dif- ferent kinds of capital and among capital and labor is infinite, depending only on technological change this is an assumption of both Bator and Cobb – Douglas analyses. 1 The irreversibility of damage to natural capital is therefore not an issue. The sustainability criteria derived from this view is highly influenced by the assumption of complete substitutability between the factors of production, including natural capital. Economic development is sustainable if the overall stock of assets remains constant over time. Any one asset can be reduced as long as another asset is in- 1 Bator analysis for the determination of the best configura- tion of inputs, outputs, and commodity distribution for a two-input, two-output, two-person situation uses land and labor as perfectly substitutable inputs Bator, 1957. The Cobb – Douglas analysis determines value added as a function of capital stock and employment, which can be substituted among themselves as long as neither input goes to zero Heathfield and Wibe, 1987. creased to compensate for it. This is what has been called very weak sustainability Turner et al., 1994. A regional model of these views can be summa- rized in Fig. 1, showing the relationship of the economic system with natural capital. 2 Natural capital includes all natural assets i.e. everything that is not human-made. It can be altered by humans, and its reproduction can be enhanced by humans, but it cannot be created by humans. 3 According to this model, natural capital generates two kinds of production processes, A and C. Process A starts with extractive activities, while process C obtains natural resources without destroying ecosystem integrity. 4 Both can use recy- cled waste. With the intervention of people hu- man capital, which is a function of both labor inputs and the structure of social institutions, and human-made capital, this process creates material goods and energy that are distributed, with or without the intervention of the market, and made available to consumers and producers. These goods and energy are transformed into human- made services through a consumption process. The most problematic assumptions of this paradigm in relation to the use of natural capital and its potential to produce environmental ser- vices are: 1 it uses a narrow definition of develop- ment, which includes only part of human-made services as contributing to development; 2 it requires a price system that accurately reflects scarcity; 3 it requires a high degree of substitu- tion among different kinds of capital; 4 if work- ing well, it allocates resources to where they are most needed, but takes them from where it is less expensive to extract in traditional cost terms, not necessarily least costly in environmental services terms. It is, therefore, efficient only if all external- ities are internalized through accurately-set Pigou- vian taxes. From this framework derives the proposition that economic growth improves environmental quality ‘inverted U-shaped curve’ Arrow et al., 1995. This relation has been supported by a weak empirical relation between the growth of the in- come per capita and a decrease in a subset of pollutants in some developed and underdeveloped countries World Bank Development Report, 1992. The data considered does not include the destruction of natural capital or other forms of environmental degradation, however, and increas- ing income per capita is associated with continuing increases for some pollutants. Moreover, the ‘in- verted U-shaped curve’ for pollutants sometimes shows a ‘rebound’ effect with increasing levels of income per capita that can turn it into an ‘N- shaped curve’ Opschoor, 1998. 2 . 2 . En6ironmental economics Environmental economists propose two variants to the neoclassical approach. The first is the prop- erty rights approach, which offers a market solu- tion to externalities in contrast to the Pigouvian taxes approach. It maintains that by re-defining property rights these pollution problems can be solved by polluters and sufferers through bargain- ing, and no state intervention should be necessary the basis for this approach is an interpretation of Coase, 1960. This solution allocates resources efficiently if the rights are widely recognized and easily enforced, but it does not consider the in- come distribution effects of assigning property rights, or the transaction costs involved in bar- gaining or enforcing property rights. Most of the theoretical contributions of envi- ronmental economists deal with the effects of pollution on natural capital, and the possibility of internalization of these negative externalities into the economic system. This body of theory has been the basis for the ‘polluter pays principle’, and for policies such as tradeable pollution permits. The London School approaches the problem pri- marily from this perspective Pearce and Turner, 1991. 2 The size of the areas in this and the following figures does not have any meaning. 3 The categories of natural and human-made capital are not sharply divided. Natural capital can have human modifica- tions, as will be discussed later. Human-made capital is always an alteration of natural capital. 4 Extraction is defined as any kind of destruction of the integrity of the ecosystem. It will be defined more precisely in Section III, where natural capital categories are explained. The second variant of environmental economics is the materials balance approach, which intro- duces entropy limits to the economic analysis. The approach argues that pollution is not only the result of market failure, but an inevitable phe- nomenon dictated by the laws of thermodynam- ics, which requires the government to establish some acceptable levels of pollution Georgescu- Roegen, 1970; Boulding, 1977. One branch of environmental economics is re- source economics, which applies welfare econom- ics principles to determine optimal use and depletion of resources Fisher, 1981. The goal is, then, the maximization of the present value of the resource to society. In the case of renewable re- sources this means that the rate of harvesting cannot exceed the rate of regeneration of the resource. In the case of exhaustible resources, it means finding an optimal rate to completely de- plete the resource. The Hotelling rule, developed in 1931, indicates that in the simplest case, with costless extraction, the resource should be ex- tracted in a way that the prices rise at the same rate as the discount rate rises. Critics of this model argue that such approaches implicitly as- sume information about quality and quantity of the resource in question, which is precisely what the models are trying to determine Norgaard, 1990. Other problems with this model are its absence of concern for future generations’ inter- ests, and the implied conviction that technology and substitution will solve the problems after resources are depleted. The policies derived from this approach recommend better management of nature respecting the environmental linkages; eco- nomic incentives like prices, credit, and exchange rates; and changes in the tenure of land Pearce and Turner, 1991. Natural capital is recognized by environmental economists as an important contributor to human welfare, as a life support system that provides a supply of resources, as a waste receptor, and as a provider of amenities. The opportunity cost of this use is emphasized by authors like Krutilla 1972 and Fisher 1981. The rule for natural capital conservation is that resource stocks should be kept constant over time. The stock of renew- able resources should not decline over time un- derstanding the waste assimilative capacity as a renewable resource, and depletion of exhaustible resources should be replaced by increases in re- newable resources or man-made capital assuming substitutability. This is what has been called weak sustainability Turner et al., 1994. These contributions have emphasized the idea that environmental services are important as a component of well-being, and have introduced a general criterion of conservation of natural capi- tal, but do not specify the linkages between the different kinds of natural capital according to its function in producing environmental services and improvements in the quality of life. 2 . 3 . Ecological economics Ecological Economics represents a major chal- lenge to neoclassical economics by making the socioeconomic system part of the ecological sys- tem and addressing the relationships among them. Within this approach it is recognized generally that environmental problems have a structural character and cannot be approached simply by using the concepts of externalities and substitu- tion. The ideas of Boulding, who introduced the relevance of thermodynamics to economics in 1966 expanded by Georgescu-Roegen in the early 1970s are very important to the development of this paradigm. In very simple terms, low entropy is the ultimate means of production, and exists for humans as terrestrial stock and solar flow, both limited in practical terms. Based on these con- straints and on an ideal vision of society, Daly in 1977 Daly, 1991 develops his proposition of a steady-state economics that contemplates struc- tural changes to become less dependent on this scarce source of ultimate means, reaching an opti- mal rate of matter and energy throughput in the economy equivalent to the external energy inputs. Co-evolutionary theory, developed by Nor- gaard in the early 1990s, refers to an ongoing process between social and ecological systems, through feed-back loops, that determines the pos- sibility of development of both. This theory con- siders economic development as a process of adaptation to a changing environment while itself being a source of change. Co-evolution can con- tinue indefinitely, reaching equilibria and coming out of them as social and ecological systems evolve. Norgaard 1994 argues that Western science and modernization break this pattern of co-evolution, however, by producing new ways of organizing and new technologies that impose more control over nature, rather than a deeper relationship with it. The trans-disciplinary field of ecological eco- nomics addresses three main goals: first, assessing and ensuring that the scale of human activities is ecologically sustainable; second, ensuring that the distribution of resources is fair within the current generation, between future generations, and be- tween species; and third, efficiently allocating mar- ketable and non-marketable resources under those limits. Natural capital, human capital, and manu- factured capital are ‘interdependent and to a large extent complementary’ Folke et al., 1994. The sustainability concept for this paradigm is keeping the life support ecosystems and interrelated socioeconomic systems resilient to change. ‘It is not sufficient to just protect the overall level of capital, rather natural capital must also be protected, because at least some natural capital is non-substi- tutable’ Turner et al., 1994. What is stressed in this approach is the combination of factors e.g. irrerversiblity and uncertainty, not their presence in isolation. Only if this combination of factors is maintained can we have sustainability. As Daly 1991 notes, ‘These services can hardly be pro- duced by any other form of capital, and conse- quently are complementary to them’. Depletion and pollution make natural capital a limiting factor for further development. This has been called strong sustainability and it distinguishes critical from non-critical natural capital Turner et al., 1994. Table 1 summarizes how these different theories conceptualize the relation of the economic and the ecological system, define natural capital, prevent damage to natural capital, cope with scarcity, and define sustainability.

3. Theoretical framework of a regional model