Since 2007, the government has invested heavily in enhancing human capital and achieved
a major social transformation.
Using the US dollar as national
currency since 1999 was a key policy for the effective use of finance.
Human capital policies boost Ecuador
5.2.4 Biodiversity
Natural capital, defined as the quality of land, water, air and other environmental assets, is an important enabler of sustainable development.
The World Bank (2011) report on green growth and the Organisation for Economic Co-operation and Development (OECD, 2011) argue that valuing natural capital is crucial for both environmental sustainability and economic development.
The concept of ‘natural capital’ (also called environmental or ecological capital) emerged in the 1970s in the context of the limits-to- growth discourse, with its focus on sustainability (Hinterberger et al., 1997). Climate control, drinking-water supply, pollination, recycling of nutrients, provision of food, wood and other resources, the disposition of a genetic library, nature’s bequest and existence values, 29 to name only a few (Folke et al., 1994; Hinterberger et al., 1997), are recognised as environmental services flowing from a stock of environmental wealth.
Ecological economists emphasise that neo- classical concepts of capital had to be extended by considering nature and the wide range of its ecosystem processes and functions (Hinterberger et al., 1997). Natural capital provides four main functions (De Groot et al., 2002; Chiesura and de Groot, 2003; Ekins et al., 2003: 169): regulation (e.g. life-support systems), production (e.g.
raw materials), habitat (e.g. for wild plants and animals), and information (e.g. cultural) functions.
The poorest are most dependent on natural capital for their livelihoods and therefore bear disproportionate effects of resource degradation.
This has implications for the importance of natural capital for social development, and for the need to consider the interactions between the environment and poverty. Access to safe water and sanitation is a prerequisite for a decent, dignified, secure and healthy life and to avoid water-related illnesses. In many countries, women and girls are responsible for fetching and carrying water, a chore that is time-consuming, hazardous
and can have high opportunity costs in terms of girls’ education and women’s participation in the economy. Between 30% and 60% of existing rural water-supply schemes are dysfunctional (Brikké and Bredero, 2003) and the poorest people end up paying the most for inferior water services. It is also the poor who settle in fragile environments (such as flood plains and deforested watersheds that are subject to landslides), and who are most vulnerable to water-related risks.
The ERD 2011/12 showed that large-scale (foreign) land acquisitions tend to disadvantage the poor because they have little or no voice in such deals, even though they may be intensive users of the land. This is often a source of tension and conflict. Poorly regulated, high-cost land- tenure systems that lack transparency and sound redress systems tend to disadvantage the poor, increase their insecurity and make it harder for them to use their land as collateral for credit. For instance, the rapid expansion of palm-oil farming, such as in Indonesia, in order to meet the demand for biomass for energy production can create economic opportunities for smallholders, but the benefits are skewed in such a way that the poor local farmers are being pushed onto more marginal land and at the same time valuable mangrove ecosystems are lost. Hence, avoiding resource degradation and restoring biodiversity are important for sustainable development.
There can be complex links between physical and natural capital. To be sustainable, the current use of natural resources and services should not deplete the stock that is endowed to future generations.
‘Green accounting’ methods make it possible to quantify this. There are two ways to approach intergenerational transfer. The first is referred to as
‘weak sustainability’, which means that the legacy for future generations must be at least equal to the amount of total existing capital, regardless of the type, assuming that the different types of capital are mutually substitutable. The depletion of natural capital is sustainable only if the rents from exploiting natural resources are reinvested in
other types of capital (national or international), for example in education or infrastructure (Hartwick, 1977). More recently, however, it has been argued that ‘strong’ sustainability means that there is only limited potential to substitute different types of capital, and that it is not enough to maintain the total stock of capital for future generations because some forms of natural capital are irreplaceable. This is also emphasised by Rockström et al. (2009) in their nine planetary boundaries: climate change, ocean acidification, stratospheric ozone, global phosphate and nitrate cycles, atmospheric aerosol loading, freshwater use, land use change, biodiversity loss and chemical pollution. They state that beyond a critical threshold these systems cannot recover to the previous (or current) state.
Most of the ecosystem services provided by biodiversity have public or common-good characteristics in the sense that they can be consumed and depleted without adequate payment for their use and regeneration. In addition, many of the benefits of biodiversity do not lend themselves to quantification. While the valuation and pricing of benefits in the form of consumables such as timber, bush meat, tourism, or genetic information is technically feasible (though not always practical), this holds to a lesser extent or not at all for other benefits of, say, forest biodiversity. These involve non-consumables such as water purification, erosion regulation, flood protection or spiritual and cultural values; option values such as the future benefits of genetic information; bequest values; and existence values (OECD, 2013: 26). Thus, many of the benefits of biodiversity are invisible to market transactions and, given the complex and sometimes fragile interplay of ecosystem factors, an unsustainable use of forest resources can result in high environmental, economic and social costs that the market does not capture. This makes biodiversity a very illuminating example of a public good that needs to be incorporated into FFD discussions.
29 A bequest value is the non-use value of preserving the environment for future generations. Existence value refers to the non-use value that is derived from the fact the asset exists (e.g. the value that people attach simply to knowing that tropical rain forests exist).
5.2.5 Green Energy Technology
Technology and green energy technology (GET) specifically, is a crucial enabler of sustainable development. Technology generally is a key component of structural transformation to support upgrading within or between sectors. In LICs, ensuring high and sustained economic growth combined with high levels of social development is unlikely to be achieved without productivity changes based on widespread economic diversification and structural transformation – led by technological change and innovation (Hall and Jones, 1999; Lin et al., 2011; UNECA, 2011).
Innovation and the spread of technology are at the heart of radical transformations (e.g.
the role of breakthrough technologies such as computerisation). Their absence makes it increasingly difficult for firms to compete in the global economy and for countries to retain and enhance their comparative advantages.
Technological backwardness is one of the critical bottlenecks that prevents transformation in many developing countries as firms and companies, too small in size and informal in their modes of operation, do not adopt new production processes, lack access to or do not use more advanced products and blueprints, including ICTs, or do not have the ability to absorb and use them.
Dutz et al. (2011), Ugur et al. (2012) and Katz and Margo (2013) discuss the positive links between innovation, productivity and employment growth.
Technological change and innovation are thus major drivers of total factor productivity increases that the early social scientists identified as major drivers of sustainable growth (e.g. Solow, 1956;
WEF, 2013).
Complementary skills and capital goods are needed in order to adopt technology, especially in the case of systemic or general-purpose technologies such as electricity and ICT (Hall and Khan, 2002). The same applies to political, cultural, institutional and regulatory constraints that often hamper necessary changes in productive or
organisational processes. Differences in these barriers account for important disparities in income across countries, while the sustained reduction of these barriers can ‘induce development miracles’
(Parente and Prescott, 1994: 299). For example, in many LICs, agricultural transformations have been stalled for a variety of reasons: farmers lacked the necessary information and knowledge or the wish to adopt new production techniques;
organisations in charge of transferring technology to farmers or providing support services to them did not do their job effectively; farmers adopted the technology only partially or managed it incorrectly, so that potential productivity gains were not realised or when they gains did occur there was no market for the increased output (Crawford, 1993). As countries have proceeded to industrialise, technological constraints appear to be aggravated by inadequate market integration and lack of participation in supply chains as well as limited skills and affordability (World Bank, 2008).
Research and development (R&D) is important in improving technological readiness. Other factors such as the depth of domestic credit markets, educational variables, the extent of protection offered to intellectual property rights (IPRs), the ability to mobilise government resources, and the quality of complementary academic institutions also appear to be important in explaining a country’s technological readiness (Lederman and Maloney, 2003).
Chapter 6 focuses on green energy technology, whose dissemination lies at the heart of a move from a high-carbon to a low-carbon economy, making possible (green) growth by de-coupling economic growth and resource use. Green growth cannot be achieved without radical technological change for producers and consumers – while the past 30 years have seen an improvement in energy efficiency of around 2% annually, this needs to be tripled in order to keep temperature rises to a maximum of 2ºC by 2050. Achieving this will be dependent on the diffusion of green energy technology. While Kenya has invested
in renewable energy (hydro, geothermal, wind) Tanzania has taken longer than expected to exploit its identified renewable energy potential, other than traditional hydro sources (CI, Lunogelo et al., 2015). The difference in the use of green energy technology is responsible for the disparity of the renewable energy share between the two countries. This Report will examine in greater detail how finance and policies work together to explain these differences. The consequences of better technologies to address climate change will also help the poorest who are the most vulnerable to it (Stern Report, 2006; WGBU, 2011).
5.2.6 Trade
Trade constitutes the last of the enablers discussed in this Report. Trade helps to connect people and firms across borders. Societies and economies that are not well connected tend to stagnate, hence the importance of networks generally as an enabler of sustainable development.
Rauch (2001) reviews the literature on trade networks. He finds that numerous statistical and case studies show that transnational corporations (TNCs) and social networks promote international trade by alleviating problems of contract enforcement and providing information about trading opportunities.
Openness to trade is conducive to growth, provided there are appropriate domestic policies and institutions (Rodrik, 1999) and ‘an export orientation imposes a discipline and set of constraints on all economic policies that prevent the adoption of very many measures severely antithetical to growth’
(Krueger, 1990: 110).
A range of recent econometric studies have found positive links between trade and growth.
Wacziarg and Welch (2008) examined 141 liberalisation episodes, comparing growth before and after liberalisation and found that the impact of trade liberalisation on growth was substantial, even after controlling for several other determinants of growth. Per capita growth of liberalising countries
was around 1.5 percentage points higher than before liberalisation. Brückner and Lederman (2012) suggested that trade openness causes economic growth in Sub Saharan Africa: a 1 percentage point increase in the ratio of trade to GDP is associated with an annual increase of 0.5%
in growth in the short-run and an annual 0.8%
growth increase in the long-run. Le Goff and Singh (2013) use a panel of 30 African countries over the period 1981-2010 and find that trade openness tends to reduce poverty especially in countries where financial sectors are deep, education levels high and governance strong.
Limited trade openness and integration of domestic productive activities into regional and global supply chains are important factors in low productivity growth. Developing countries in Asia have consistently benefited from market linkages and openness as a means to enhance productivity growth as compared to African and especially LAC countries, which also lag behind in their integration into GVCs. East Asia in particular has been characterised by such value chains, driven by FDI and trade activity; these have allowed firms in the area to upgrade their technological base and to restructure, first by attracting labour-seeking or resource-based investment and subsequently by component-outsourcing or service-related investment in the context of regional integration.
Insufficient market size and integration, however, negatively affect the net return expected on any productive investment. Fragmented markets are a powerful entry barrier for new businesses and a binding constraint on new investment activity and competition. Thus, weak linkages of agriculture to the rest of the economy, including lack of participation in agricultural value chains, have hampered agricultural transformation.
Similarly, due to the absence of linkages with the rest of the economy, a very strong and negative association has been recorded between a country’s reliance on primary products or raw materials, even if these are exported, and the rate at which
structural change contributes to growth. It is no coincidence that in SSA, where productivity levels are low, fuels comprise 40% of total merchandise exports and ores and metals another 26%.
There is a positive correlation between productivity growth and backwards GVC participation across countries in Africa (African Economic Outlook;
AfDB et al., 2014). Improvements in trade openness and supply-chain participation in Africa reflect the dominance of the mineral-exporting sector as well as the large contribution of primary- goods exports in much of the continent. In many cases, these result in limited contributions of value-added and employment generation in other sectors, especially compared to the Asian countries. Exports of primary commodities or mineral products may contribute to within-sector productivity growth, but unless they contribute to productivity growth in other sectors, the resulting growth is not transformative (African Economic Outlook; AfDB et al., 2014). Resource- driven economies that have failed to diversify their productive base have remained at a distinct disadvantage, as diversification and structural change have been slowed down and the export sectors have been unable to absorb much labour even when productivity was enhanced (McMillan et al., 2014). In addition, not all firms and workers benefit to the same extent from GVCs, suggesting that not all trade reaches the range of firms and workers in ways that contribute to social development.
Trade also enables the diffusion of green technologies – e.g. for renewable energy – that can render domestic production cheaper and more efficient. Linkages to regional and global carbon markets or emissions-trading platforms can facilitate the adjustment of incentives for low- carbon investments.
The importance of trade is clear from the CIs. The Bangladesh and Mauritius CIs show that the use of preferential access to markets in the EU and USA for garments and sugar exports helped diversification
90% 25%
TODAY TODAY
3.5%
GDP