“Growing Beyond Growth?”

Effect of Social Values and Technology on Ecological Market Failures and Policies of International Financial Institutions

applied microeconomics
environmental economics
articles
Author

Kenny Guo

Published

June 9, 2024

I. Introduction

“Look how you’ve grown!” versus “You have a growth.”

In this biological sense, growth is a double-edged sword. Regarding the economy, however, growth’s positive association with welfare has been hammered into our social and political values since the twentieth century. Governments and international financial institutions (IFIs) heralded indicators such as gross domestic product (GDP) as primary objectives of economic policy, bringing about neoliberal initiatives to increase growth. However, the increasing demands and industrialization of growing economies and lack of conservation incentives have led to unsustainable resource depletion and emissions, with these issues often being framed as failures of free markets forwarded by IFIs. Therefore, I argue that in our society’s technological age and transition into a “post-growth” economy, IFIs should reframe their agendas for the developing world to reflect ecologically sustainable social values to correct for these failures because solutions prescribing continual economic growth are based on rudimentary theory, policies can and are vital to balancing economic welfare with ecological sustainability, and new data technologies can facilitate such efforts through alternate economic arrangements besides neoliberal free markets.

II. Historical Context, Review of Literature

The adoption of growth-centered policy is best understood in the context of GDP, introduced by Russian economist Simon Kuznets as a means of valuing a nation’s economy and quantifying efforts towards post-crisis reconstruction following the Great Depression (Vanham). Later, in 1944, the Bretton Woods Conference, which led to the establishment of the International Monetary Fund (IMF) and the World Bank, also adopted GDP and similar indicators to promote post-WWII economic development (Babb and Kentikelenis 16). In their conference proceedings, they emphasize various objectives of the IMF, including “…a high level of employment and real income, which must be a primary objective of economic policy…avoid[ing] competitive exchange depreciation…elimination of foreign exchange restrictions which hamper the growth of world trade” (“United Nations” 22-23). These goals demonstrate the emerging neoliberal sentiment at the time and the political establishment of metrics such as real income (related to GDP) and growth-centered policy as the dominant values in securing economic welfare following the crises of WWII. However, these growth-centered values held by IFIs have generated huge externalities, especially ecological degradation. Environmental resources, such as clean air, water, and landscapes, often are classified as public goods, meaning they are not privatized and can be consumed relatively freely. Without private incentives to conserve these resources, the free market fails to allocate these efficiently, leading to excessive depletion in pursuit of growth (Kostad and Krautkraemer). These externalities are even more pronounced in our technological age, with its increasing energy demands. National Bank of Belgium researchers Krist Buysse and Dennis Essers highlight how increasing automation may increase demand for more carbon-intensive intermediate inputs, often sourced from emerging economies (19-20). This indicates how the growing energy demands of the technology sector could lead to further efforts by IFIs to open up exchange with the developing world, exacerbating environmental costs in pursuit of growth.

Therefore, the debate on whether policies should reflect growth or ecological preservation centers around the supposed tradeoff between the two, encapsulated in the Environmental Kuznets Curve (EKC) hypothesis. The EKC relates a nation’s income or GDP with various environmental indicators, such as greenhouse gas emissions or water pollution. It hypothesizes an “inverted-U” relation: environmental degradation first increases with a nation’s income, then decreases once a certain turning point is reached (Barbier 369-370). To explain this result, Thomas Selden and Song Daqing from Syracuse University identify potential causes, from positive income elasticities for environmental quality (as income increases, people value the environment more), increasing education and awareness, and structural changes to production processes (147). Building on the latter, Gene Grossman and Alan Krueger from Princeton state how growing nations begin to harness cleaner technologies to conserve resources, which could offset the adverse effects on the environment of increased production (354). Therefore, the debate over the EKC and the tradeoff between GDP growth and environmental sustainability begets the question of whether policies should continue to prioritize growth, trusting that environmental quality will eventually decrease, or whether urgent, explicit environmental policy is required by institutions today.

III. Discussion

I argue that IFIs should reframe their policies to reflect sustainable values to correct for urgent negative environmental externalities, first because solutions prescribing growth as a panacea based on the EKC are rudimentary, insufficient, and slow.

Despite empirical studies showing signs of the EKC, there are still many conflicting cases. For example, Edward Barbier from Colorado State University finds, “…indicators with a more global or indirect impact, e.g. carbon dioxide…either increase monotonically with income or else have high turning points with large standard errors” (377-378). This not only shows evidence against the “inverted-U” shape, but even if the EVC were to hold, indicators displaying high turning points are a large concern as well. Selden and Song also find substantially higher turning points for various pollutants, and because much of the world’s population has yet to reach these points, they do not forecast global emissions to improve over the next century (161), which emphasizes the urgency of these issues and insufficiency of blind faith in the EVC hypothesis and prioritizing growth. Furthermore, Grossman and Kreuger also consider a different cause of EVC trends, stating how as countries develop, they cease producing pollution-intensive goods and instead import more from developing economies with less restrictive environmental laws (372). This theory implies EVC patterns might not mimic the ones displayed by developed nations previously, placing more importance on open-trade policies by IFIs on developing economies which can subject them to the demands of the developed world.

In addressing these concerns, IFIs should employ policies with ecologically sustainable values as political intervention is vital to balancing the tradeoff between economic growth and sustainability. One key note is that even if the EVC hypothesis is true, it does not imply the underlying processes that improve environmental conditions are automatic; i.e. “spontaneously occur” due to the free market. Economic anthropologist Karl Polanyi shared this idea in his notion of “economic embeddedness,” stating how the economic sphere cannot be separated from the political sphere—governments must work to protect factors such as human labor or natural land from market forces (Polanyi 76). In practice, this means nations have to direct more investment into cleaner technologies (Grossman and Krueger 371) or increase spending on environmental research and regulation enforcement, requiring the coordination and willingness of many jurisdictions (Barbier 380). Citizen sentiment is also crucial; as nations experience greater prosperity, citizens can demand more attention to “noneconomic” aspects of living, including environmental quality (Grossman and Krueger 372). These examples demonstrate the collective responses and actions that must be taken to initiate the downward-sloping effect in EVC trends, and the importance of intentional political action in catalyzing these processes.

Finally, I discuss potential ways IFIs can initiate efforts to shift embedded social values from growth to sustainability. One solution is the concept of the “doughnut,” formalized by Oxford economist Kate Raworth. Her idea was to transition from a “post-growth” economy to one focused on equity and sustainability through balancing within a doughnut-shaped region, bounded by planetary limitations. To accomplish this, she calls to “nurture human nature,” indicating that humans are “social, interdependent, approximating, and fluid in values” (Raworth 22-23). Raworth introduces alternative economic thought by recognizing the collaborative nature of humans in addressing societal issues, which could correct the externalities of the current free market, where actors are supposedly acting in their self-interest instead. Furthermore, this collaborative human nature could be aided by new data technologies, one example being the “digital feedback structures” presented by researcher Evgeny Morozov. Using reams of data and machine learning, he envisions a digital infrastructure flagging social issues, such as climate change, and facilitating collaboration about them (Morozov 16-17), rejecting the competitive, Hayekian notion of humans, and considering the same non-individualistic nature shared by Raworth. While these solutions are nascent, the values behind them—balance over growth and collaboration over competition—hold significance to IFIs and governments and their visions for the developing world.

IV. Conclusion

It is important to recognize the adjustments IFIs have taken to reflect ecologically sustainable values. The IMF, for example, has directed more resources into managing Cambodian forestry or Mauritania fisheries, but its primary mission still is addressing short-run instability, which does not explicitly include environmental concerns (Gandhi). More recently, President Ajay Banga of the World Bank declared they would “restructure their scorecard” to include metrics such as overall greenhouse gas emissions, calling on donors, shareholders, and philanthropies for support (Banga), emphasizing the crucial role that public awareness and involvement by the developed world has in shifting from growth to sustainable social values. Certainly, more research is needed into areas such as the capabilities of technology and the EVC, but overall, IFIs and the public should recognize the context we live in today, the limitations of current economic organizations, and the new ones technology can facilitate, in figuring out the path for emerging economies and the issues of our future.

V. Works Cited

  • Babb, Sarah, and Alexander Kentikelenis. “International Financial Institutions as Agents of Neoliberalism.” The SAGE Handbook of Neoliberalism, 2018, pp. 16–27.
  • Banga, Ajay. “International Development Association (IDA) Midterm Review.” The World Bank, Dec. 2023.
  • Barbier, Edward. “Introduction to the environmental Kuznets curve special issue.” Environment and Development Economics, vol. 2, no. 4, Nov. 1997, pp. 369–381.
  • Buysse, Krist, and Dennis Essers. “Are we entering an era of deglobalisation?” National Bank of Belgium Economic Review, 2022.
  • Gandhi, Ved. “The IMF and the Environment.” International Monetary Fund, 28 July 1998, www.imf.org/external/pubs/ft/exrp/environ/.
  • Grossman, Gene, and Alan Krueger. “Economic Growth and the Environment.” The Quarterly Journal of Economics, vol. 110, no. 2, May 1995, pp. 353–377.
  • Kostad, Charles, and Jeffrey Krautkraemer. “Natural Resource use and the Environment.” Edited by Allen Kneese and James Sweeney. Handbook of Natural Resource and Energy Economics, vol. 3, 1993, pp. 1219–1265.
  • Morozov, Evgeny. “Digital Socialism? The Calculation Debate in the Age of Big Data.” New Left Review, vol. 116/117, 2019.
  • Polanyi, Karl. The Great Transformation: The Political and Economic Origins of Our Time. 2nd ed., Farrar and Rinehart, 1944.
  • Raworth, Kate. Doughnut Economics: Seven Ways to Think like a 21st-Century Economist. Chelsea Green Publishing, 2023.
  • Selden, Thomas, and Daqing Song. “Environmental Quality and Development: Is There a Kuznets Curve for Air Pollution Emissions?” Journal of Environmental Economics and Management, vol. 27, no. 2, Sept. 1994, pp. 147–162.
  • Tamazian, Artur, and B. Bhaskara Rao. “Do economic, financial and institutional developments matter for environmental degradation? Evidence from transitional economies.” Energy Economics, vol. 32, no. 1, Jan. 2010, pp. 137–145.
  • “United Nations Monetary and Financial Conference, July 1-22, 1944.” United States Government Printing Office, Center for Financial Stability, vol. 1, 1948, https://fraser.stlouisfed.org/files/docs/publications/books/1948_state_bwood_v1.pdf.
  • Vanham, Peter. “Stakeholder Capitalism: A Brief History of GDP - and What Could Come Next.” World Economic Forum, 13 Dec. 2021, www.weforum.org/agenda/2021/12/stakeholder-capitalism-episode-1-a-brief-history-of-gdp/.