(8) A new paradigm of economic growth

An important caveat is in order: growth is not an end in itself. The objective of economic policy is not growth but rather broad-based progress in living standards.

By Richard Samans

Green growth is a relatively new concept that has been characterized by the Organization for Economic Cooperation and Development (OECD) as "fostering economic growth and development, while ensuring that natural assets continue to provide the resources and environmental services on which our well-being relies." It is closely related to the concept of a green economy, which UNEP defines as one in which "growth in income and employment should be driven by public and private investments that reduce carbon emissions and pollution, enhance energy and resource efficiency, and prevent the loss of biodiversity and ecosystem services."

In any discussion of economic growth, an important caveat is in order: growth is not an end in itself. The fundamental objective of economic policy is not growth but rather broad-based progress in living standards. After all, growth in GDP per capita is a measure of mean, not median, progress. Moreover, it is only a partial measure insofar as it captures the production of most but not all goods and services, omitting or undervaluing some of those that improve a society's health, security and the environment.

But while GDP growth is an imperfect proxy for the pace and breadth of progress in living standards and may not be sufficient for economic success, it certainly is necessary. In all but very wealthy societies, major socioeconomic progress is simply not possible without rising employment, incomes and wealth. The ultimate objective of economic policy must be to generate what might be called "BIG" growth: strong GDP growth that is also "Balanced" in the sense of being resilient and stable rather than prone to disruptive booms and busts; "Inclusive" in the sense of generating broad-based social gains rather than exacerbating inequality and social exclusion; and "Green" in the sense described by the OECD, and the United Nations Environment Programme (UNEP).

Green growth is therefore best understood as one part of a three-part quest to enlarge the very conception of economic growth ?to create a new economic model that produces faster but also wider, more resilient and more environmentally sustainable economic progress. Construction of this new paradigm begins with recognition that the quantitative and qualitative aspects of growth require equal and integrated attention by policymakers.

Allocative efficiency

This may sound obvious and uncontroversial in the aftermath of a systemic international financial crisis and during a period of rising income inequality and widespread ecological degradation. However, the challenge such parallelism poses to economists and policymakers should not be underestimated, as it represents a departure from the way economics has been taught and economic policy has been practiced for over a generation.

While important, measures that promote the allocative efficiency of markets and quantitative side of growth (e.g., deregulation, privatization, trade liberalization and fiscal balance) have been systematically overemphasized relative to the three more qualitative parameters of BIG growth, sometimes to catastrophic effect, as illustrated by the recent sharp rise in unemployment, poverty and social upheaval in some countries and deterioration of fisheries and fresh water supplies in still others.

Rhetorical recognition of the need for a new growth model may now be widespread, as evidenced by G20 leader communiques and similar pronouncements by heads of the major international economic institutions. But actual change in policy and pedagogy has only just begun. What is needed next is a more specific investigation of how and when the promotion of financial stability, social inclusion and environmental sustainability can complement and even accelerate allocative efficiency and top-line GDP growth. What specific policies and initiatives promote win-win, BIG growth outcomes, and how can governments and other stakeholders most effectively pursue them?

Such an investigation in respect of green growth is the very purpose of the Global Green Growth Institute, which was created by Korea a year and a half ago through an act of leadership by President Lee Myung-bak but now involves more than a dozen governments and numerous other state and non-state actors such as international organizations, research institutes, companies and civil society organizations.

Enabling green growth

Green growth's connection to GDP growth is comparatively straight forward, since it is fundamentally concerned with increasing the efficiency and sustainability by which economies utilize one of their most important factor inputs, like natural resources, through the application of new resource efficient technologies and practices. As a resource productivity agenda, green growth is intrinsically a total factor productivity agenda ― i.e., a pure allocative efficiency play that also promotes social well-being by reducing the environmental externalities that often accompany the exploitation of natural resources in the form of pollution and biodiversity loss.

There is a long and geographically diverse history of government policy and public-private cooperation along these lines aimed at improving the enabling environment for private investment in industries deemed to have significant potential to generate large productivity gains for the economy as a whole. Far from picking winners and losers, these interventions seek to build the underlying infrastructure of new markets by removing obstacles that distort market signals or deter the entry of a wider range of competitors and investors. They create the playing field, the rules and sometimes the basic inputs necessary to support a major expansion of investment and competition in areas considered to have a broader potential economic and social payoff.

Judging from the history of industries as diverse as accounting, information technology, aviation, electricity and asset management ―all of which have had a far-reaching impact on economic productivity ― public-private cooperation has a vital role to play in enabling the acceleration and scaling of industries related to green growth.

Architecture for green growth

In recent years, international environmental governance in general and the U.N. climate change negotiations in particular have focused on building top-down political architecture, i.e., national environmental commitments and international environmental goals. GGGI is helping the international community to construct a complementary economic architecture that more directly supports country-led and industry-led (i.e., bottom-up) progress on green growth.

Organizations, including GGGI, are doing this by helping developing and emerging economy governments to design rigorous green growth plans that integrate environmental considerations into their core economic development strategies, conducting research to improve our understanding of the nature and transformational potential of green growth, and facilitating public-private partnerships that reduce risks, uncertainties and market imperfections which impede the engagement of additional private resources and actors into a wider competition for resource-related efficiency gains.

The green growth agenda has an inherent economic and environmental justification. But by moving more quickly and directly to mainstream sustainability in core economic policy and business strategy, it could also have the political co-benefit of improving the chemistry of international environmental negotiations by demonstrating that the United Nations' objective of "a green economy in the context of sustainable development" is indeed possible for countries rich and poor, and by improving the readiness of countries to implement climate, biodiversity, fisheries, water and other treaties whenever the international community ultimately gets around to reaching consensus on them.

International cooperation

The year 2012 is shaping up to be a crucial year for both international economic and environmental cooperation, with crises and corresponding opportunities looming on both fronts. We do not have the luxury of time to engineer a greener growth model. Investments in power, industrial and construction systems over the next 10 years will lock in environmental consequences for the next 40.

As governments prepare for the Group of 20 and United Nations Rio+20 summits in June of this year, they would do well to recognize the potential benefit of building this bottom-up, enabling economic architecture, viewing it as a natural complement to the traditional focus of international environmental governance on top-down legal frameworks and institutions. In the remaining months, they should work hard to cultivate a series of initiatives that increase support for developing countries seeking to design and implement green growth development plans as well as for public-private partnerships that have the potential to scale green investment and innovation in the power, transport, fisheries, construction, water and agricultural sectors.

Richard Samans is Executive Director of the Global Green Growth Institute, which is headquartered in Seoul. He was Managing Director of the World Economic Forum until March 2011, overseeing the Forum's policy and public-private partnership initiatives as well as its relations with international organizations, governments, NGOs, unions and other non-business constituencies. Before joining the Forum in 2001, Rick served as Special Assistant to the President for International Economic Policy in the U.S. White House. As Senior Director of the National Security Council's International Economic Affairs directorate and a senior staff member of the National Economic Council, he assisted President Clinton on a broad range of international trade and financial policy matters. From 1996-1998, as Economic Policy Advisor to U.S. Senate Democratic Leader Tom Daschle (D-SD), he assisted Senator Daschle and the Senate Democratic Caucus on international trade and monetary, tax, and broad economic policy issues.