Monday, June 30, 2008

Jeffrey Sachs on resource constraints and growth

Jeffrey Sachs argues that the world needs to save resources in order to continue growing (Project Syndicate):

Limits to growth...
Reconciling global economic growth, especially in developing countries, with the intensifying constraints on global supplies of energy, food, land, and water is the great question of our time. Commodity prices are soaring worldwide, not only for headline items like food and energy, but for metals, arable land, fresh water, and other crucial inputs to growth, because increased demand is pushing up against limited global supplies. 
Are these limits real?
Many free-market ideologues ridicule the idea that natural resource constraints will now cause a significant slowdown in global growth. They say that fears of “running out of resources,” notably food and energy, have been with us for 200 years, and we never succumbed. Indeed, output has continued to rise much faster than population.

This view has some truth. Better technologies have allowed the world economy to continue to grow despite tough resource constraints in the past. But simplistic free-market optimism is misplaced for at least four reasons.

Limits incur real costs...
First, history has already shown how resource constraints can hinder global economic growth. After the upward jump in energy prices in 1973, annual global growth fell from roughly 5% between 1960 and 1973 to around 3% between 1973 and 1989.

Second, the world economy is vastly larger than in the past, so that demand for key commodities and energy inputs is also vastly larger.

Third, we have already used up many of the low-cost options that were once available. Low-cost oil is rapidly being depleted. The same is true for ground water. Land is also increasingly scarce.

Finally, our past technological triumphs did not actually conserve natural resources, but instead enabled humanity to mine and use these resources at a lower overall cost, thereby hastening their depletion.
Sachs's solution seems to be in cooperation...
If we continue on our current course – leaving fate to the markets, and leaving governments to compete with each other over scarce oil and food – global growth will slow under the pressures of resource constraints. But if the world cooperates on the research, development, demonstration, and diffusion of resource-saving technologies and renewable energy sources, we will be able to continue to achieve rapid economic progress. 

Coupled with a massive program of technology development...
A good place to start would be the climate-change negotiations, now underway. The rich world should commit to financing a massive program of technology development – renewable energy, fuel-efficient cars, and green buildings – and to a program of technology transfer to developing countries. Such a commitment would also give crucial confidence to poor countries that climate-change control will not become a barrier to long-term economic development. Cooperation and technology for conservation. That sounds like something that can easily be misused as an excuse for more and more intervention where in fact the challenge is to create better functioning markets that include signals about resource limits. For instance, are we not already seeing a lot of market price adjustments happening in response to scarcity - carbon, oil, commodities without any massive continuous intervention? And are we not witnessing a new creative growth opportunities through eco-innovations

We do need the market competition to reflect resource scarcity and we need cooperation and innovation (many times in the public domain) to respond to the opportunities presented by more expensive resources. Governments have a very important role to play in assuring that these markets outcomes do not clash with a sense of fairness in the broader society.  

The hard questions still needs answering.

Photo: Harvard Gazette, Staff Photo Jon Case

1 comment:

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