Originally published at Project-Syndicate | September 9th, 2022
Advanced economies have long relied principally on developing countries for primary commodities and natural resources to fuel their industries and economic expansion. But this has entailed high social and environmental costs for lower-income economies and, increasingly, the world as a whole.
CAIRO – Overcoming the risk of “immiserizing” growth – an increase in aggregate national output that results in a net decline in national welfare – has been a perennial challenge as countries pursue economic development. It is also proving to be a major roadblock to achieving greater global income convergence.
Developing countries’ GDP growth has exceeded the global average over the past several years, and their economies are projected to expand by 3.6% on average in 2022, compared to world growth of 3.2%, according to the International Monetary Fund. But the income and welfare gaps between them and the advanced economies have widened, especially where GDP has consistently expanded at the expense of total wealth and future prosperity.
This counterintuitive development reflects a combination of factors. The GDP estimates used in cross-country comparisons do not account for large-scale outflows of payments to the foreign-owned entities that dominate many developing economies’ extractive industries. Headline growth numbers also exclude negative externalities, such as the depletion of natural capital.
Furthermore, different development models produce markedly different economic outcomes in poorer countries. The highly capital-intensive, resource-extractive model generates less inclusive growth. In contrast, labor-intensive, export-led growth reduces poverty significantly, mitigates countries’ exposure to adverse terms-of-trade shocks, and strengthens macroeconomic stability.
GROWTH THAT IMPOVERISHES
The rapid structural transformation achieved by many emerging markets – especially those in East Asia, which successfully integrated themselves into global value chains through labor-intensive exports – has skewed the distribution of global poverty even more toward lower-income and commodity-dependent developing economies. In 2021, for example, 66% of people living in extreme poverty were in Sub-Saharan Africa.
The COVID-19 pandemic, which pushed the most vulnerable households almost everywhere into poverty, has further widened the welfare gap between developed and developing economies. Recent estimates show that while the average income of households in the top 40% of the global income distribution is now about 2.8% below pre-pandemic projections, incomes of those in the bottom 40% are down 6.7%.
The good news is that the challenges posed by immiserizing growth have received a lot of attention from economists, especially since the publication of Jagdish Bhagwati’s seminal 1958 work showing how the loss of social welfare associated with adverse shifts in a country’s terms of trade could more than offset the welfare gains associated with economic growth. This explains why lower-income and commodity-dependent economies have been particularly vulnerable to immiserizing growth, which may occur either when a country’s terms of trade deteriorate or when its exports are increasing at constant terms of trade.
At the height of the pandemic-induced downturn in early 2020, global demand for manufactured goods contracted by 19%, while demand for primary commodities and natural resources plunged by a massive 38%. Economies that relied heavily on labor-intensive, export-led manufacturing suffered only the global demand shock during the first-round effects of the downturn. But economies where growth was (and remains) driven by capital-intensive primary commodities and natural-resource exports were hit by a lethal combination of price and demand shocks.
JUST AN ILLUSION
Economists and policymakers have devoted too little attention to another critical counterintuitive outcome: “illusory growth.” This occurs when an increase in aggregate output also results in environmental degradation, and specifically the depletion of natural capital, comprising assets such as land, forests, and subsoil resources. In addition to aggravating poverty and vulnerability, illusory growth has heightened climate risks and increasingly put countries’ growth and sustainability objectives on a collision course.
The United Nations World Food Program has noted how the most obvious consequences of climate change – increasingly frequent and severe droughts, wildfires, and floods, erratic rainfall, record-high temperatures in Europe, melting glaciers, and rising sea levels – are exacerbating poverty and food insecurity. Prolonged droughts are making water scarcer, reducing harvests, devastating food supplies, and causing animals to starve. In the Horn of Africa, four consecutive years of failed rains have left millions of children facing famine – and the threat of long-term emotional, cognitive, and social harm.
Illusory growth is also escalating competition for scarce natural resources across the developing world. Many lower-income countries are already on the front lines of the global climate crisis, with mass migration from regions now inhospitable to human habitation making conflicts between neighboring communities likelier. At the same time, changing grazing patterns are increasing the risk of disputes between pastoralists and arable farmers. This is already the case in the most vulnerable communities along the Sahel corridor, where households are facing the quadruple threat of climate change, disease outbreaks, food insecurity, and war.
The combination of immiserizing and illusory growth is the most important binding constraint in the pursuit of global income convergence and sustainable development. The relentless quest for growth is responsible for the rapid diminution of natural capital and the ongoing eradication of tropical rainforests at an alarming annual rate of around ten million hectares. And because these forests’ accelerated depletion further reduces their ability to absorb carbon dioxide emitted by polluting industries in more advanced economies, the pursuit of growth has exacerbated the devastating effects of climate change.
THE WEIGHT OF HISTORY
Immiserizing growth and illusory growth are part of a continuum of outcomes that lead to intergenerational poverty and ecological overshoot. They are codependent variables in a longstanding historical pattern that underpins the persistence of poverty as well as the widening welfare gap and asymmetrical rate of natural-capital depletion between developed and developing economies. In a few exceptional cases, national ownership of assets and intergenerational commitments to environmental sustainability have improved both governance and the management of natural resources. But most empirical studies have found a significant negative relationship between natural-resource abundance and economic growth, because exposure to adverse commodity terms of trade undermines public finance and exacerbates macroeconomic volatility, which in turn discourages investment, especially of the patient capital that drives economic transformation.
This phenomenon is not new. The illusory dimension of growth has been sustained by the historically unbalanced relationship between advanced economies and resource-rich developing countries, most of which were first integrated into the global economy as imperial colonies. Immiserizing growth has been a natural consequence of the persistence of the colonial model of resource extraction, which has reduced most resource-based developing economies to feedstocks for manufacturing industries in richer parts of the world.
Accounting for net foreign factor income and the depreciation of fixed and natural capital reveals a significant gap between low-income and commodity-rich economies’ estimated GDP and their adjusted net national income, a better performance indicator, especially where transforming nonrenewable natural capital into other forms of wealth is a major challenge. The gap is significantly smaller in advanced economies, where the two indicators generally converge. This partly reflects the different rates of natural capital depletion between advanced and developing economies.
The negative relationship between resource abundance and economic growth is also shaped by the ownership structure and management of natural resources, which affect countries’ welfare indirectly via savings and investment channels. These factors further undermine national income growth in resource-rich economies and are similarly unaccounted for in traditional GDP estimates. Financial leakages associated with large payments to foreign-owned entities depress national savings and hinder wealth accumulation. Together with the depletion of natural capital, this process has significant adverse welfare implications and has emerged as a major determinant of immiserizing growth.
Studies of the nature of the relationship between the depletion of natural capital and national savings in low-income countries have produced concordant results, bolstering the hypothesis of a continuum between illusory and immiserizing growth. A growing number of empirical studies rooted in greener national accounting methods show that accounting for environmental degradation and the depletion of natural capital indicates the true level of national savings. In several resource-rich developing economies, this accounting yields totals that are lower than net savings and even negative, suggesting the difficulty of achieving global income convergence and sustainable development under the prevailing growth.
CHANGING THE MODEL
Beyond fueling immiserizing growth, low national savings and financial leakages undermine the structural transformation of national economies, ensnaring at-risk countries in a vicious cycle of intergenerational poverty and environmental degradation. By slowing the growth of investment, including in green infrastructure, and frustrating the mitigation measures necessary to reduce countries’ vulnerability to climate change, these outcomes prevent resource-dependent poor countries from embarking on a path toward sustainable development and environmentally sound economic growth.
For centuries, the negative relationship between resource abundance and growth has been at the root of global economic injustice. It has delivered sustained per capita income growth in advanced economies and immiserizing growth in developing countries, thus perpetuating and widening the welfare and income gaps between them.
That relationship is now also at the heart of climate injustice. Although developing countries have contributed the least to global warming, they are most exposed to its effects. In the University of Notre Dame’s Global Adaptation Index, 95% of countries with a score below the minimum threshold of 40 are classified as low-income.
In an ecological sense, of course, developing and developed economies are like Siamese twins: They will either thrive together in a healthier and greener world or perish together in an overheated one. The economic injustice that has sustained growth and welfare gains in the Global North has revealed the extent to which the planet is a collective public good, and that safeguarding it must transcend geographic and political boundaries. Preserving our planet and achieving sustainable development will likely require building on the significant progress that has been made in valuing environmental resources and systematically measuring the rate of natural capital depletion. It will also require consistent deployment of and investment in “natural climate solutions” (or nature-based solutions) to improve ecosystem management and remove greenhouse gases from the atmosphere.
IN NATURE WE TRUST
Mainstreaming nature-based solutions in national sustainability plans should be high on the global climate agenda. These measures – defined by the International Union for Conservation of Nature as “actions to protect, sustainably manage, and restore natural and modified ecosystems that address societal challenges effectively and adaptively, simultaneously benefiting people and nature” – can strengthen climate-change mitigation and boost adaptation and resilience.
For example, the world’s nearly four billion hectares of forest absorb as much as 25% of global CO2 emissions annually. Given today’s challenging global environment and financial constraints, solutions that prevent the unsustainable exploitation of nature and mispricing of assets that make up the natural wealth are a low-cost option to slow the rate of climate change and should be the first choice for both governments and the private sector.
In 2009, advanced economies promised to channel $100 billion per year to low-income countries to help them mitigate and adapt to the effects of climate change. But even this pledge remains unfulfilled, and developing economies’ climate finance needs are projected to increase further. The UN estimates that developing countries already require $70 billion per year just to cover climate adaptation costs, and will need $140-300 billion annually by 2030.
Research shows that low-cost nature-based solutions could deliver more than a third of the climate mitigation needed by the middle of the century and keep global warming below 2º Celsius relative to pre-industrial levels. Forests represent an astonishing reservoir of carbon, currently holding more than 1,200 gigatons. Protecting and restoring them can contribute at least 30% of the emissions reductions needed to avoid catastrophic climate change and could raise the level of nationally determined contributions under the 2015 Paris climate agreement. In addition, protecting forests will improve food security and reduce the risk of conflicts between communities competing for increasingly scarce resources.
Implementing nature-based solutions is not only the right thing to do for the planet. It is also smart economics. In a recent white paper, the World Economic Forum estimated that “nature-positive” policies could generate $10 trillion in new annual business value and create 395 million jobs by 2030. Moreover, there is no trade-off between food security and restoring critical ecosystems. A major study recently published in the magazine Science suggests that an extra billion hectares of forest could be added or restored without jeopardizing food security.
Even if improving natural-resource management does not lead to the preservation and full restoration of forests, it would still raise awareness about the negative externalities of the prevailing growth model and could at least slow the rate of deforestation. And financial incentives – including market-based mechanisms for selling sedimentation reduction services to downstream water users and carbon sequestration services to buyers needing credit to meet emissions-reduction requirements under the Kyoto protocol – could eventually shift the balance in favor of preservation and restoration. For this to happen, the financial rewards of conservation will need to outweigh the expected revenues from depleting natural capital.
GREENER AND FAIRER
Bequeathing a healthier planet to future generations will require aggressive expansion of market-based measures and financial incentives to reduce greenhouse-gas emissions and accelerate the global transition toward net zero. In the short term, raising carbon taxes can play a major role in curbing the growth of negative environmental externalities. In addition to fostering further innovation in green technologies that safely deliver clean growth, taxing CO2 emissions at their source could help close the climate-finance gap by generating revenues to fund adaptation and mitigation.
Several countries are already seeing the benefits of carbon taxes. The challenge now lies in broadening the adoption of such levies, implementing them consistently across countries to reduce the risk of carbon leakage, and ensuring a smooth transition toward a global carbon tax.
Investing in green technologies that complement nature-based solutions, as well as committing to open access and technology diffusion to ensure a synchronized transition toward a carbon-neutral global economy, is crucial. These technologies should also boost renewable energy production in order to allay any fears that tackling climate change will hurt economic growth and/or indefinitely compromise the prospect of global income convergence. Even more immediately, we must focus on preserving and renewing ecosystems and tropical rainforests under a new economic paradigm that recognizes that the opportunity costs of destroying these landscapes far outweigh any economic benefits.
As John Maynard Keynes pointed out, “The difficulty lies, not in the new ideas, but in escaping from the old ones.” Advanced economies have long relied on developing countries for primary commodities and natural resources to fuel their industries and economic expansion. But this has entailed high social and environmental costs for lower-income economies and, increasingly, the world as a whole. Overcoming the colonial era’s division of the world into developed and developing economies is perhaps the most important challenge in the global race to save the planet and achieve sustainable development for all.
Hippolyte Fofack: Chief Economist and Director of Research at the African Export-Import Bank (Afreximbank).