Why developing countries will benefit from sustainability

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The following short essay was included in an earlier draft of report on decoupling that I co-authored for the International Panel for Sustainable Resource Management. It did not make it into the final report, but is worth considering because it contradicts what virtually every South African ‘analyst’, in particular Adam Habib, tends to assume, which is that sustainability is a “cost” that others must carry, not an economic opportunity for Africa.

Decoupling the rate of economic growth from the rate of resource consumption holds the key to the building of a more sustainable economy. To achieve this, the prices of primary resources will need to increase in order to stimulate the innovations required to massively improve resource productivity. The fundamental question that will face resource-rich developing countries is whether or not they stand to gain from a continuation of the current global regime of low prices for primary resources. The answer will inevitably reveal the central irony in contemporary development economics. Virtually every Government in a resource-rich developing country will attempt to argue for the following three primary propositions:
• the prices they receive for their primary exports are too low which is why they cannot eradicate poverty; however,
• any attempt by developed countries to impose tariffs on imported primary commodities is a threat because it reduces demand;
• in the long run, resource-rich developing countries must reduce their dependence on resource exports by making the transition to a ‘knowledge economy’ which implies overcoming what Homer-Dixon called the ‘ingenuity gap’.

Although these three arguments seem plausible, on closer inspection they can be mutually contradictory with negative policy implications. It will be argued here that a new set of assumptions are required to inform a policy package that brings resource-rich developing countries more firmly into the global transition to a more sustainable economy.

As far as the first statement is concerned, there is no agreement between resource-importing developed economies and resource-rich export oriented developing economies that commodity prices are too low. The former regard low prices as necessary to assist global economic recovery, while the collapse of commodity prices is wreaking havoc across many export-oriented developing economies thus imposing even more severe downward pressures on prices. As the World Bank report Where is the wealth of nations? demonstrated, the Gross National Income of most resource-rich export-oriented developing countries is negative because prices do not cover the full costs of extraction and export. Debt is the key instrument that developed economies have to ensure that primary resource prices remain low. The global recession will more than likely see increased debt levels, especially in light of the refinancing of the IMF agreed to at the April G20 meeting in London (an agreement that may in time come to be called the “London Consensus” which replaces the “Washington Consensus”).

As global economic conditions improve, resource-rich developing countries will have an opportunity to exploit rising demand to increase prices. However, if this is left purely to the market mechanism via the individual deals that each country can negotiate, prices will remain low. Each country is simply too weak due to debt arrangements to negotiate a better deal. Therefore, a global agreement on primary resource pricing mechanisms and debt may well be needed to ensure that the necessary economic preconditions for a Global Green New Deal are in place. Without decoupling, a Global Green New Deal will not be possible, and as long as the global low price regime for primary resources remains intact, there will be no decoupling.

With respect to the second primary proposition cited above, when developing countries loudly protest against tariffs imposed by developed economies on imported goods and commodities, they use a discourse that appeals to the need for free markets and the unrestricted flow of goods and commodities. Run through to its logical conclusion, this implies unfettered competition between resource-rich developing countries for a limited set of markets. This, however, will ultimately reinforce the low-price regime that undermines the Gross National Incomes of resource-rich developing countries and undermines decoupling by removing the incentives for innovation. Higher prices are unlikely in a world of unfettered global markets.

Finally, we need to address the third primary proposition. If resource-rich developing countries want to reduce their dependence on commodity exports by making the transition to a knowledge economy (as was achieved by a number of so-called Asian Tigers), this will only be achieved if they invest in their own capacity to innovate, manufacture and exploit their own natural wealth. Some economists have mounted a pessimistic argument that the “ingenuity gap” will prevent developing economies from “catching up” (Homer-Dixon, 2000, Homer-Dixon, 1995). This may be true if the goal is to “catch up” with the type of resource-intensive development that has been pursued in developed economies. However, if the goal is to forge a new more sustainable and therefore less resource intensive economy, then what we are looking for is not the kind of knowledge needed to “catch up”, but rather the kind of knowledge to “leap frog” into a more sustainable mode of production and consumption (Sachs 2002). Some economists have even argued that developing economies may have a distinct advantage in this regard because they do not have to go through the painful process of dismantling the institutional, ideational and cultural infrastructures that have been built up in developed economies to sustain high consumption resource intensive economies (Montalvo, 2008). This may be true, but it will require political and economic elites in these developing countries to ‘see’ themselves and their countries throught contextually appropriate lenses rather than through the lenses of traditional modernization theory. This is a tall order and goes to the heart of the sustainability challenge in developing countries (Gallopin 2003).

It therefore follows that resource-rich developing countries may need to consider a different set of policy options if they are to effectively participate in the making of a Global Green New Deal that simultaneously ensures that they effective tackle the poverty challenge. These are as follows:
• in order to promote absolute decoupling in developed economies and relative decoupling in developing countries, resource prices will need to rise progressively in real terms over the next twenty years, and that a global agreement is required on how to achieve this;
• if resource importing countries want to see an increase in resource prices within their countries as a mechanism for stimulating decoupling via innovation, then the most preferable way to achieve this is to support the first proposition referred to above, or alternatively if they do use a tariff to artificially increase prices to ensure that a portion of the revenues raised are re-invested in the innovation capacity of the resource-rich developing countries; and finally
• investing in the innovational and institutional capacity to gradually reduce dependence on commodity exports is a long-term development strategy that should not have “catching up” as its strategic goal but should, rather, be aimed at “leap frogging” over the resource intensive phase of development that is the cause of the global ecological crisis – “catching up” will not, in any case, be possible given the natural limits that the current mode of production and consumption has encountered.

These three alternative primary propositions are appropriate for an era that will inevitably follow the current period of global crisis. Developmental states will be required across the developing world that have the institutional capacity, political leadership and partnerships with business and civil society to effectively mobilize local resources and social commitments, and negotiate a hostile international environment. More so than ever before, resource-rich developing countries will need to escape from the ‘resource curse’ that has effectively prevented them from over-dependence on the extraction and export of one or two primary resources. This will mean taking democracy more seriously, focusing on institution building, retaining intellectual skills, and harnessing the tremendous reservoirs of social and entrepreneurial capital that ordinary people have built up to survive under extremely difficult conditions.