From Growth to Inclusive Green Growth: The Economics of Sustainable Development

May 9, 2012


Infographic: Why Green Growth?

  • Growth is necessary, but it will be unsustainable in the long run unless it is both socially inclusive and environmentally sound.
  • Inclusive green growth requires tackling political economy constraints, overcoming deeply entrenched behaviors and social norms, and developing innovative financing instruments to change incentives and promote innovation – and thus address the market, policy, and institutional failures that lead to the overuse of natural assets.

Over the last 20 years economic growth has lifted more than 660 million people out of poverty and raised the income levels of millions more, but growth has often come at the expense of the environment.

A variety of market, policy and institutional failures mean that the Earth’s natural capital tends to be used in ways that are economically inefficient and wasteful, without sufficient reckoning of the true social costs of resource depletion, and without adequate reinvestment in other forms of wealth. These failures threaten the long-run sustainability of growth and progress made on social welfare. Moreover, despite the gains from growth, 1.3 billion people do not have access to electricity, 2.6 billion have no access to sanitation, and 900 million lack safe, clean drinking water. In other words, growth has not been inclusive enough.

Economic and social sustainability, on the one hand, and social and environmental sustainability, on the other, have been found to be not only compatible, but also largely complementary. Not so with economic and environmental sustainability, as growth has come largely at the expense of the environment—hence the dotted line on this figure—which is why green growth aims to ensure that economic and environmental sustainability are compatible.

Developing countries have options other than to “grow dirty and clean up later.” Much that is useful can be done now: clean air and water and solid waste management are basic needs, and many environmental policies enhance productivity and poverty alleviation. So while poor countries should focus on meeting basic needs and expanding opportunities for growth, they need not do so at the expense of unsustainable environmental degradation. Further, environmental performance does not automatically improve with income, so policy action is needed anyway. Finally, it may be impossible or prohibitively expensive to “clean up later,” either because of the irreversibility of environmental damages like the loss of biodiversity, or because “lock-in” will make subsequent shifts to more environmentally benign structures and processes extremely costly.

The future we want

Well-designed inclusive green policies improve social welfare, taking into account not only present but also future generations. Yet policy makers are also naturally concerned with the potential trade-offs and costs, as well as the potential co-benefits, of green policies for near-term growth and employment. Careful case-by-case analysis will be needed to find optimal strategies, but there is considerable evidence that near-term costs can be minimized through the use of well-designed regulations and market-based policy instruments that promote least-cost ways of protecting the environment. Green growth can then provide a pathway to more sustainable development that reconciles the urgent need for sustained growth with the imperative of avoiding lock-in to unsustainable growth patterns and irreversible environmental damages. Green growth is not anti-growth; rather, it represents a change in how we manage economies to reflect a broader conception of what constitutes effective and sustainable growth.

The ability and will to value natural capital underpins the transition to greener growth. Environmental assets – water, land, air, ecosystems and the services they provide – represent a significant share of a country’s wealth. Just like physical and human capital, natural capital requires investment, maintenance, and good management if it is to be productive and fully contribute to prosperity. To accurately measure progress toward greener growth, countries will find it useful to implement comprehensive wealth accounting and valuation of ecosystems alongside their more conventional measures like GDP.

Critically, there is no single green growth model. Green growth strategies will vary across countries, reflecting local preferences and contexts. Any single set of “best practices” should be imported with care. Nonetheless, all countries, rich and poor, have opportunities to make their growth greener and more inclusive without slowing it.

How to get there

Greening growth requires policies that are on their own terms good for growth, as well as for the environment, such as reforming energy subsidies or trade barriers that protect pollution-intensive sectors. It entails politically difficult reforms in the patterns of pricing, regulation, and public investment, and it calls for complex changes in behaviors and social norms. Importantly, green growth requires knowing when to go for the politically expedient rather than the economically optimal.

The World Bank’s new report, Inclusive Green Growth: The Pathway to Sustainable Development, outlines a three-pronged strategy for pursuing greener growth:

  • Prong 1 – Tailor national inclusive green growth strategies to a country’s circumstances, with an emphasis on maximizing local and immediate benefits and avoiding lock-in. Optimal solutions will differ across countries with varying degrees of institutional capacity, transparency, accountability, and civil society capacity.
  • Prong 2 – Promote efficient and sustainable decision-making by policymakers, consumers, and the private sector. The use of pollution charges and other market-based instruments are important because they help incentivize efficiency and spur innovation. An array of complementary approaches will be needed to nudge individuals toward better behaviors and to unleash the power of the private sector. Critically, while we are still far from accurate pricing for ecosystem services, they are clearly valuable. Natural assets should be systematically incorporated into national accounts. The UN Statistical Commission adopted the System of Environmental and Economic Accounting as an international standard in February 2012, providing a broadly agreed methodology. Neglecting natural capital, like neglecting human and physical capital, is bad economics and bad for growth.
  • Prong 3 – Meet up-front capital needs with innovative financing tools. Given the scarcity of fiscal resources, governments and multilateral financial institutions must work urgently to increase the role of the private sector in green investment. Private-public partnerships are crucial, as is increasing access to financing for small and medium enterprises.

Ultimately, much of what is needed to green growth is good growth policy, which aims to get prices right and fix markets, address coordination failures and knowledge externalities, and assign property rights. But green growth policies are no panacea for structural shortcomings in an economy: environmental measures cannot offset macroeconomic instability, distorted labor markets, poorly regulated financial systems, or hostile business environments.

Moreover, while greener growth can be made affordable, achieving a green economy overnight cannot. Rapid shifts would entail much slower growth at least in the short to medium run. Conversely, avoiding a brutal transition is a strong incentive to start acting now.