13 The resource curse and sustainable development Richard M. Auty:
Resource abundance can increase the rate of investment in resource-rich
economies relative to resource-poor ones and also expand the capacity of
the economy to import the capital goods needed to build the infrastructure
of a high-income country. Consequently, natural resource abundance can
accelerate economic growth and thereby strengthen sustainable develop-
ment, provided the correction of market failure curbs environmental
damage. Renewable natural resources can yield the rent stream to promote
this outcome indeﬁnitely under informed and rational management. But
sustainable development can also be based upon the rent from depleting
ﬁnite resources. To achieve this, resource and environmental accounting
shows that a suﬃcient fraction of the natural resource rent should be
invested during the exploitation of the ﬁnite resource in order to maintain
or enhance the total capital stock (see Chapter 17 and 18). In this way the
income stream generated by the resource is passed on to future generations
in perpetuity. This perspective assumes either that there are natural substi-
tutes for the depleted resource or that technological substitutes will be
found. In this view, conservation of the ﬁnite resource might be undesirable
if new technology renders the resource obsolete.
Nevertheless, the notion that natural resource abundance can be a curse
has emerged strongly since the 1980s. It is not a new idea, however. Imperial
Spain provides a long-recognized example of a country that failed to
prosper from the gold and silver shipped from its New World colonies. In
contrast, Spain’s beleaguered Dutch colonies were developing the economic
dynamic that was to win them their freedom and make them the commer-
cial model for western Europe. Subsequently, the failure of Argentina1 and,
until very recently, of Australia to sustain the successful growth that both
those countries enjoyed during the second half of the nineteenth century
(Lewis, 1978) has been attributed to the curse of wealth. A stark contrast
has arisen since the 1960s between the rapid economic transition of the four
resource-poor Asian dragons (Hong Kong, Singapore, South Korea and
Taiwan) and the growth collapses experienced through the 1970s and 1980s
by many resource-rich countries (Lal and Myint, 1996).
2. The incidence of the ‘resource curse’
The recent growth collapses in many oil-rich economies attracted particu-
lar attention from researchers. As a group these countries received transfers
from the oil consumers estimated by Chenery (1981) at 2 per cent of gross
world product (GWP) annually during 1974–78 and an additional 2 per
cent during 1979–81. For individual oil exporters, the oil windfalls ranged
from around an extra 10–15 per cent of non-oil GDP annually for
Venezuela and Indonesia, through almost 40 per cent for Trinidad and
Tobago (Gelb et al., 1988), to over 100 per cent of non-oil GDP for Saudi
Arabia (Auty, 1990). Yet with the exception of Indonesia, the oil exporters
experienced growth collapses. Nigeria provides the most spectacular
example: the country is estimated to have absorbed oil rent in excess of $300
billion during 1974–2004, averaging around an extra 23 per cent of non-oil
GDP during 1974–81. These revenues transformed a dynamic and diversi-
ﬁed economy, which grew by 7 per cent per annum during 1967–74 into a
mono-product basket case with a per capita income by 2004 less than one-
quarter of what it would have been if it had sustained its pre-oil boom
growth rate. There is little wonder that Gelb (1988) entitled his book: Oil
Windfalls: Blessing or Curse?
Research into the resource curse focused at ﬁrst upon the mineral
economies, which appeared to have performed especially poorly during the
years after 1973. Gelb et al. (1988) analysed the macroeconomic response
of six oil-exporting countries (Algeria, Ecuador, Indonesia, Nigeria,
Trinidad and Tobago and Venezuela). They concluded that most govern-
ments found it politically diﬃcult to resist pressure to spend the oil wind-
falls, so that the over-rapid domestic absorption of the oil revenues
triggered patterns of consumption that sustained Dutch disease eﬀects and
proved diﬃcult to cut back when oil prices fell. Indonesia shows, however,
that a growth collapse can be avoided if suﬃcient oil revenue is used to
diversify the economy competitively (Timmer, 2004).
Auty (1990) examined the eﬀorts of eight oil-exporting countries to ‘sow
the oil’ by diversifying into resource-based industrialization (RBI). He
demonstrated that few oil-rich governments had the capacity to build
RBI plants eﬃciently and that the sharp increase in production of energy-
intensive products caused by such investments was suﬃcient to glut global
markets so that the high-cost plants could not recoup their costs. In the worst
cases, like the steel plants in Nigeria, Venezuela and Trinidad and Tobago,
the RBI projects degenerated into sinks for public sector funds rather than
yielding the expected increased capital with which to further diversify the
economy. Subsequently, Auty (1993) analysed six ore-exporting countries,
which also failed to make eﬀective use of the rent from copper, bauxite and
tin to achieve the required competitive diversiﬁcation of their economies.
The resource curse and sustainable development
Such studies did not go unchallenged. For example, Neary and van
Wijnbergen (1986) noted that some restructuring of the mineral economy
was a rational response to a mineral boom, and would be self-correcting as
the boom faded, provided prudent policies were followed. Elsewhere,
Davies (1995) took umbrage at the alleged maladroit performance of the
mineral economies, arguing that many displayed relatively high indices of
social welfare, irrespective of their growth performance. It was at this stage
in the debate that Sachs and Warner weighed in with a series of papers
drawing upon econometric analysis of data on the performance of the
developing countries as a group since 1970.
Sachs and Warner (1995a) used the average share of exports in GDP as
their measure of resource dependence, and they conﬁrmed a negative link
between reliance on natural resources and economic growth. They showed
that the cross-country average share of primary exports in GDP during
1970–89 was 13 per cent, but that a one unit standard deviation increase (13
per cent) in the share of primary exports reduced the growth rate of per
capita GDP by almost 1 per cent. This ﬁnding appears to be insensitive to
the inclusion of other variables in the analysis, or to changes in the chosen
measure of resource intensity. Sachs and Warner (1997) went on to demon-
strate that the underlying adverse eﬀect of a rich natural resource endow-
ment on per capita GDP growth is indeed robust. They showed that the
ﬁnding persists after additional tests that control for institutional quality,
the share of investment in GDP, the shift in exports prices compared with
import prices, a dummy variable for a regional eﬀect, the removal of out-
liers such as the oil-exporting countries and splitting the time period into
two separate decades.
Similarly, Auty and Kiiski (2001) detected growth collapses in three out
of four sub-groups of resource-rich countries during the 1973–85 years of
price shocks, while growth collapsed in most oil-exporting countries,
the fourth category, in the mid-1980s. In contrast, the growth rates of the
resource-poor countries remained relatively high or even accelerated
(see Table 13.1). The net eﬀect of these trends was to lift the median
income of the resource-poor countries signiﬁcantly above that of the
resource-rich countries, whereas a generation earlier it had been one-third
3. Exogenous explanations for the resource curse
Explanations for the recent disappointing performance of the resource-rich
countries have been sought in terms of falling commodity prices, high levels
of price volatility, Dutch disease eﬀects and the commodity production
function. More recent attention has focused on endogenous explanations
like policy error and rent-seeking activity.
One early post-war explanation for the resource curse arises from the
Prebisch terms of trade hypothesis, which argues that over the long term,
prices of primary commodities decline relative to prices of manufactures
(Prebisch, 1950). Consequently, over time the resource-rich countries must
export more and more primary products in order to import a given volume
of manufactured goods. Worse, nascent industrialization is snuﬀed out by
competition from established manufacturers in the industrial countries,
while the industrial countries use their wealth and political inﬂuence to set
the rules of international trade in their favour. However, Duncan (1993)
found that the successful resource-driven countries diversiﬁed out of slow-
growth commodities into high-growth ones, so that the policy response
appears to be more important than the actual long-term trend in primary
commodity prices. Moreover, by the year 2000, some 80 per cent of devel-
oping country exports were manufactures compared with 20 per cent for
primary products, the reverse of the ratios in 1980.
A second explanation is that resource-rich countries experience relatively
high terms of trade volatility. This case garners more factual support than
the Prebisch terms of trade argument. Westley (1995) measures the volatil-
ity in the terms of trade as the standard deviation of their percentage rate
of change. Over the period 1960–93, the standard deviation in annual
percentage price changes for 49 primary commodities was 26.4 per cent,
while the standard deviation in the World Bank primary commodity price
index was half that percentage. The terms-of-trade volatility of the regions
with the highest primary export shares (Latin America, sub-Saharan
Africa, Middle East and North Africa) was two to three times that of
industrial countries during the 1970–92 period. However, several studies
published in the 1960s refuted the hypothesis that export price instability
constituted a signiﬁcant obstacle to growth (Macbean, 1966; Michaely,
1962). For example, Macbean found that short-term export instability was
not an important constraint on development, and that the relationship
between domestic variables and export ﬂuctuations was not a strong one.
He examined export instability in a dozen developing countries during
1946–58 and found speciﬁc local causes of revenue changes to be more
important than global prices: variations in supplies of exports have been
more problematic than ﬂuctuations in demand (Macbean, 1966, p. 34).
A third explanation for the resource curse is the Dutch disease eﬀect,
whereby the booming resource sector keeps the value of the currency so
high that other tradables sectors cannot compete internationally. Corden
and Neary (1982) explain the eﬀects with a three-sector model comprising
a resource sector, a sector of other tradables, typically manufacturing and
agriculture, and a non-tradables sector. A boom in the resource sector has
three eﬀects: a spending eﬀect; a relative price eﬀect; and a resource move-
ment eﬀect. First, spending the increased export revenues boosts demand
for tradables and non-tradables, but global competition precludes price
rises on tradables so any excess demand is met by imports. Second, in the
absence of complete sterilization of the rising foreign exchange income,
the currency experiences a real appreciation that reduces the competitive-
ness of the non-booming tradable activity. Yet domestic prices of non-
tradables rise due to increased demand because they are unaﬀected by the
currency appreciation or by competitive imports. As a result, prices of
non-tradables rise relative to the prices of tradables, so that resources of
capital and labour move from tradables into non-tradables, reducing
exports and raising imports. Third, this movement of resources between
sectors lowers capital accumulation if the non-tradable sector is more
labour-intensive than the tradable sector. This is because movements in
favour of the non-tradable sector tend to raise wages and lower returns to
capital, reducing capital accumulation. Moreover, if resource booms cause
manufacturing to shrink and manufacturing is favourable to growth (due,
for instance, to the gains from learning-by-doing), the resource-abundant
economy can experience slower long-term growth than it would if it had
no resources (Matsuyama, 1992). Krugman (1987) identiﬁes the con-
ditions under which temporary resource booms can lead to an enduring
loss of competitiveness.
Handbook of sustainable development
However, strong proponents of the dominance of Dutch disease eﬀects
like Sachs (1999), neglect the fact that an export boom may not have
harmful consequences if the increased primary export revenue is sustain-
able and/or the adjustment process is not too rapid. Moreover, as already
noted, Neary and van Wijnbergen (1986: pp. 40–41) point out that some
de-industrialization may be a symptom of the economy’s adjustment to a
new equilibrium rather than a symptom of a disease.
The fourth explanation is more selective and suggests that commodities
with a capital-intensive production function, such as most mines and
plantations, produce socio-economic linkages that are detrimental to
growth (Engerman and Sokoloﬀ, 1997; Woolcock et al., 2001). The capital-
intensive production function of mining stunts both backward and forward
productive linkages. This is because the specialized inputs required are
subject to localization economies and are acquired most cheaply as
imports. Moreover, the higher added value stages of mining such as fabri-
cation tend to be market-oriented due to high freight costs. In addition,
ﬁnal demand linkages are also limited due to the small size of the highly
productive mine workforce and the foreign ownership of capital. This
pattern of linkages leaves ﬁscal linkage (taxation of the returns to capital
and labour) as the principal stimulus to the domestic economy. Baldwin
(1956) describes the growth-stunting eﬀects of such ‘point’ linkages for the
plantation in his comparative model of the ‘West’ and ‘South’ regions of
the United States in the nineteenth century.
Engerman and Sokoloﬀ (1997) contrast this pattern of point linkages
with the diﬀuse linkages of commodities like peasant cash crops, whose
more ﬂexible production function oﬀers few barriers to entry and funnels
revenue through many economic agents. Baldwin (1956) clearly shows with
reference to yeoman farms in nineteenth century America how the ﬂexible
production function responds to small additions to investment, which
boost productivity and incomes. Consequently, ﬁnal demand linkage is
high and stimulates a wide range of local production to supply basic farm
inputs and household consumer goods. Similarly, ﬁscal linkage is more
likely to be expended on boosting rural infrastructure and education than
in the case of enclave activities like plantations and mines. A further beneﬁt
arising from diﬀuse linkages comes from the low sunk costs associated with
yeoman crops, like wheat and maize, which facilitate economic diversiﬁca-
tion, pace Duncan (1993), allowing producers to respond to falling prices
by switching from low-growth to high-growth commodities.
Unfortunately for the robustness of this fourth explanation, central gov-
ernments have proved all too capable of transforming diﬀuse linkages into
point source linkages by imposing swingeing taxes through, for example,
commodity marketing boards that allow the government to siphon away
The resource curse and sustainable development
crop rent and more (Osei, 2001; Krueger, 1993). Moreover, the examples of
Chile, Western Australia and the Witwatersrand show that mining can
nurture a diversiﬁed economy, which sustains real GDP growth, while
Graham and Floering (1984) demonstrate that the presence of plantation
agriculture (in this case the nucleus plantation) need not be associated with
disappointing economic growth.
A more recent variant of the institutional explanation for under-
performance by resource-rich countries posits their institutional inheri-
tance and speciﬁcally whether that inheritance promotes wealth extraction
or wealth creation (Acemoglu et al., 2002). Basically, if the colonial settlers
worked the overseas territory themselves, as in the case of Zimbabwe for
example, the institutional structure tended to promote wealth creation
whereas if climatic conditions were less conducive to permanent colonial
settlement, the institutions tended to be aimed at wealth extraction.
However, this variant of the theory also encounters criticism. For example,
Glaeser et al. (2004) demonstrate that the statistical methods used by
Acemoglu et al. (2002) are ﬂawed and that their thesis underestimates the
importance of human capital and policy choice.
4. Endogenous explanations for the resource curse: rent and policy error
There seems to be no clear economic reason why natural resource abund-
ance should cause countries to experience relatively low economic growth.
By following the right policies, natural resources should be a boon and
not a curse. This raises the possibility that resource-rich countries may
encounter special diﬃculties that prevent them from implementing sound
Lal (1993) analyses policy eﬀects on the long-term growth trajectory of
resource-deﬁcient and resource-rich countries, drawing upon 21 countries.
He ﬁnds that whereas eight out of ten land-abundant (resource-rich) coun-
tries pursued policies that led to growth collapses (the exceptions are
Malaysia and Thailand), only three out of eight intermediate countries did
so, while all three labour-abundant (that is resource-deﬁcient) countries
maintained rapid growth. Lal concludes that the labour-abundant coun-
tries follow the easiest development trajectory. The resource-poor country
pursues competitive industrialization which begins with reform in favour of
outward-oriented policies at a low per capita income. This is because, if the
domestic market of the resource-deﬁcient country is small, then reliance on
trade is inevitable so that political opposition to trade policy reform is
weaker. In contrast, the land-abundant (resource-rich) country faces a
longer initial dependence on primary product exports, which retards com-
petitive industrialization because the supply price of labour is higher than
in the resource-deﬁcient country at a similar level of per capita income. This
Handbook of sustainable development
tempts the governments of resource-rich countries to seek to ‘grow’ out of
their diﬃculty by engineering a populist boom or a state co-ordinated Big
Push (Sachs, 1989). This strategy triggers inﬂation, ﬁscal repression and a
growth collapse so that a period of declining real wages is required to
restore growth, but it elicits strong political opposition.
However, it is policies (along with basic social conditions and cultural
history) and not resource composition that determine growth. This posi-
tion is supported by Sachs and Warner (1995b, p. 23) who found that all
developing countries following a reasonable set of political and economic
policies between 1970 and 1989 achieved annual per capita growth of 2 per
cent or greater. Sachs and Warner (1995b) went on to examine the eﬀect of
policy error, using trade openness as a proxy for the degree of state inter-
vention. They note an inverted U-shaped relationship between trade policy
measured on the horizontal axis and natural resource dependence. As
primary product export dependence increases, trade policy ﬁrst closes but
then opens again at higher levels of resource dependence. The apex of this
inverted U-shape occurs where primary exports reach 33 per cent of GDP,
with most developing countries below this level. Sachs and Warner
attribute this policy closure to fear of the employment diminishing eﬀects
of Dutch disease by governments of resource-rich countries. They hypoth-
esize that such fear leads to stronger protectionist policies in order to
sustain the ﬂedgling manufacturing sector. Interestingly, the downswing of
the inverted U-shape (that is the subsequent opening of trade policy)
reﬂects the dominance of that section of the curve by those oil exporters
with extremely large oil reserves, which therefore lack an urgent incentive
to diversify away from dependence on the depleting oil asset. This may also
explain the adherence to an open trade policy of the government of
Botswana: some 60 per cent of the diamond revenue is estimated to be rent,
so Botswana shares many characteristics with the oil exporters, but with the
important bonus of experiencing far less revenue volatility because, in con-
trast to OPEC, the diamond cartel has held prices steady, so far at least.
Gelb et al. (1991) model the political process of trade policy distortion.
They model a resource-rich country whose government creates unproductive
jobs in public administration and in protected state-owned enterprises
(SOEs) in order to alleviate urban unemployment. They use a Harris–Todaro
migration model and assume a single urban wage in the three urban sub-
sectors (which comprise a private sector, a productive public sector and a
non-productive public sector). The model posits that an exogenous rise in
the urban wage creates a wage gap that raises the premium on rural out-
migration so that unemployment expands in the modern urban sector (see
Chapter 14). The government responds to additional urban unemployment
by increasing taxation (whose burden falls disproportionately on the private
The resource curse and sustainable development
sector) in order to invest capital in the creation of additional urban jobs. But
this process is self-defeating because it renders work in the unproductive
public sector preferable to farming, so that more people migrate to the city
where their unemployed presence intimidates the government from which the
unemployed rural migrants extract still more rent. Krueger (1992) ﬁnds
that the fraction of primary sector revenue extracted by the governments in
sub-Saharan Africa may have reached 50 per cent.
Gelb et al. (1991) use a CGE model to estimate the potential scale and
impact of the resulting rent misallocation. They test the sensitivity of the
model against widely diﬀering savings functions. The functions range from,
at one extreme, forced saving by the government (which is assumed to use
a tax that squeezes private consumption without reducing productive
investment), through to a level of taxation at the other extreme that does
not change consumption but does cut productive investment in direct pro-
portion to the scale of the tax. Simulations using empirically plausible data
over 13 time periods suggest that the consumption losses are invariably sig-
niﬁcant and that the eﬃciency of capital can be depressed below the level
required to sustain economic growth within a decade.
Auty and Gelb (2001) formalize the impact of high rents on the political
economy in terms of a two-stage process. They argue that high rents incen-
tivize governments to capture the immediate public and personal gains
from rent redistribution at the expense of promoting wealth creation,
whose gains are more long-term. In addition, prolonged reliance on natural
resource rent postpones competitive industrialization and heightens the
risk that government rent deployment will distort the economy away from
its underlying comparative advantage and lock it into a staple trap. The
essence of the staple trap is a burgeoning sector of unproductive public
employment and protected manufacturing whose demand for rent eventu-
ally outstrips the supply, causing governments to tax the returns to capital
and labour from the primary sector as well as the rent. The net eﬀect is to
intensify the reliance of the economy upon a primary sector whose com-
petitiveness is being eroded so that it becomes vulnerable to shocks and a
growth collapse from which recovery is protracted because during a growth
collapse, all forms of capital are degraded.
5. Conclusions and policy implications
It seems that fashionable post-war policies designed to increase state inter-
vention in support of forced industrialization lie behind the recent growth
collapses in resource-rich countries. This policy was invariably captured by
vested interests, blocking economic reform so that economic distortions
intensiﬁed and reversed the required competitive diversiﬁcation of the
economy. Natural resource rents sustained maladroit policies for longer,
Handbook of sustainable development
and the higher the rent relative to GDP and the more it was concentrated
on the government, the greater the distortion and the less resilient the
economy (see Table 13.1). Ironically, the same post-war concern for the
adverse impacts of the terms of trade also encouraged the governments of
commodity-dependent economies to seek to boost prices by forming
cartels such as OPEC and the IBA. These producer groups were associated
with heightened price volatility, which yielded economic shocks in the
1970s, both negative and positive, which triggered the growth collapses.
The global economic impact of the oil windfalls can be compared to the
release of a radioactive cloud that rains destruction upon those countries
that it passes over. The 1973 price shock caused many of the distorted
oil-importing economies of sub-Saharan Africa to collapse, since they were
not deemed suﬃciently creditworthy to merit the loans urgently required
to restructure their economies in order to pay for higher oil import bills. In
contrast, western banks on-loaned petro-dollars to Latin American
governments, which either invested them ineﬃciently or else found ways of
channelling them via SOEs into current public consumption. Consequently,
few such governments were able to service their burgeoning debt when inter-
est rates turned sharply positive in the early-1980s, ushering in Latin
America’s ‘lost decade’. Finally, the global recession triggered by high oil
prices ﬁrst softened those prices and then led to precipitous decline in 1985,
triggering the collapse of most oil-exporting economies.
The implications are clear: the growth collapses result from policy failure
so that a solution must recognize the constraints of governance upon policy
formation in developing countries (see Table 13.2). Domestic and external
political interests need to ally to ﬁnd ways of strengthening the motive of
governments to promote eﬃcient wealth creation through the provision of
public goods and the maintenance of incentives to invest eﬃciently. This in
turn calls for the progressive strengthening of sanctions against anti-social
governance, notably property rights and the rule of law; civic society (or
voice); and political accountability for transparent public ﬁnances. More
realistically, in the highly distorted political economies that are the legacy
of the growth collapses in resource-rich countries, compromises are
required between the International Financial Institutions (IFIs), pro-poor
domestic groups and entrenched rent-seeking interests that will increas-
ingly channel the natural resource rents away from wealth-repressing activ-
ity and towards wealth creation (Khan and Jomo, 2000).
14 Structural change, poverty and natural resource degradation Ramón López
Structural change, deﬁned as the process by which the output and employ-
ment shares of primary productive sectors decrease over time, is one of
the most ubiquitous and least controversial stylized facts of modern
economies.1 Both countries that have been able to grow fast, mainly in
Europe, parts of Asia and North America, and those less successful coun-
tries in Latin America and sub-Saharan Africa have experienced a process
where urban activities have grown signiﬁcantly faster than primary, mostly
natural resource-dependent sectors.2
Development theorists once considered structural change to be both a
key cause and also a consequence of economic growth (Lewis, 1955; Renis
and Fei, 1961). Traditional activities in the rural sector were regarded as
largely constrained by the ﬁxity of certain factors of production and by the
limitations of absorbing new technologies in such activities. As investment
in manufacturing and other mainly urban activities is implemented, labor
productivity in such industries expands, thus creating a wedge between
labor returns in rural and urban areas. This wedge acts as a pull eﬀect on
the rural population, prompting rural out-migration and an increasing
share of urban output in GDP and of the labor force employed in urban
areas. Switching factors of production from the low productivity primary
sectors to the high productivity urban sectors was seen as an engine of eco-
nomic growth and as a source of concomitant real wage increases.
The above optimistic model, which can be termed benign structural
change (BSC), was hailed enthusiastically by development theorists and
practitioners alike. This was the answer to the criticisms made by many
social scientists (especially from the left) during the post-second world war
period of the western market economy. Provide adequate economic incen-
tives for industrial investments, give then some time to the system to clear
the backwardness of the traditional activities (at ﬁrst wages would not
increase much as too large a segment of the labor force was really surplus
labor, with an almost zero opportunity cost) and then the miracle of ever-
increasing labor earnings would follow the initially large proﬁt rates that
are needed to trigger such a miracle.
Structural change, poverty and natural resource degradation
Later, however, development practitioners began to realize that though
the prediction of massive out-migration from rural areas was fully
conﬁrmed, the prediction that modern activities, especially manufacturing,
would grow rapidly was less clear and the prediction of continuous real
wage increases was even more elusive. What is clear is that, with a handful
of important exceptions mainly in Asia, rapid and persistent economic
growth has not been a common feature among the countries that were con-
sidered developing or under-developed in the 1950s. Structural change has
taken place at least to some degree even in the largely unsuccessful coun-
tries, but it has consisted mainly in a progressive diﬀusion of subsistence
and poverty from the rural to the urban sector. In fact, the movement from
rural labor subsistence activities has been much more toward equally back-
ward urban subsistence service and related sectors than to the high-
productivity industrial sectors. The end result: slow economic growth and
poverty on a large scale. This process can be called perverse structural
It is by now clear that many of the so-called ‘ﬁxed’ factors supporting
primary production are not in fact ﬁxed. These factors are mostly natural
resources which, far from being ﬁxed, are vulnerable to over-exploitation
and poor management. This is especially true in tropical and sub-tropical
areas where natural resources are much more fragile than in temperate
areas (Sánchez, 1976; López, 1997).3 More importantly, the propensity of
natural resources to degrade plays a key role in structural change. In fact,
because BSC originated in the rapid expansion of productivity in the non-
primary sector, it signiﬁcantly contributes to diminished pressure on
natural resources by reducing rural population and allowing for a slower
growth in the exploitation of natural resources. By contrast, PSC originates
in the declining productivity of labor in primary sectors rather than on a
more rapid expansion of productivity in the non-primary sectors. PSC, far
from releasing pressure on natural resources, may be triggered precisely by
the degradation of the natural resource base, which in turn causes declin-
ing labor productivity in the primary sector. Thus, PSC is likely to be asso-
ciated with not only economic stagnation and worsening poverty but also
with widespread natural resource degradation.
Clearly the classical development economists, perhaps inﬂuenced by the
historical experience of the industrial economies at the time, focused their
modeling eﬀorts on only one type of equilibrium, the benign one. Also in
consonance with the approach by most mainstream economists then and
now, they ignored the fact that primary activities are supported by natural
assets which have important dynamic properties. In reality, however, there
are pathways that may converge to at least two fundamentally diﬀerent
equilibria and, moreover, the dynamics of natural resources are likely to
Handbook of sustainable development
play a key role in determining which of these pathways the economy
follows. The dynamics of the system is essentially path dependent. As we
shall see, history matters, as well as government policy, in a way that even
relatively modest diﬀerences in these factors can cause the economy to con-
verge to an equilibrium that has dramatically diﬀerent connotations for
welfare, income distribution, poverty and natural resources.
The objective of this chapter is to study the mechanics of structural
change. In particular, we study the conditioning factors that are likely to
determine whether a country follows a pathway that may converge to an
equilibrium characterized by BSC or, alternatively, PSC. In addition we
look at the consequences of these two types of equilibrium for the poor. We
show that under certain conditions, both the rate of resource degradation
and changes in the distribution of access to natural resources among the
rural population play a key role in determining whether structural change
is benign or perverse.
The orthodox response to the realization that most developing countries
appear to converge to an equilibrium that resembles more closely the per-
verse equilibrium than the benign one was to blame it on ‘inadequate’
incentives (Schulz, 1968; Krueger et al., 1991; Easterly, 2001). By inad-
equate incentives they meant excessive government intervention, market
distortions and trade protectionism. The resulting wisdom was to take the
government out of the economy by privatizing state enterprises, deregulat-
ing the economy, liberalizing international trade, eliminating restrictions to
foreign investment, and so on. This diagnostic was backed by a massive
conceptual and empirical literature developed over the 1970s and 1980s
pointing to the need for ‘structural adjustment’. The concerted actions of
international lending banks through structural adjustment lending caused
many developing countries to adopt at least certain important components
of such a program. The experience of so many countries that implemented
pro-market reforms over the last two decades, however, allows us to con-
clude that such reforms have in many countries contributed little to spur
economic growth and much less to environmentally and socially sustain-
able growth (World Bank, 2000; López 2003).4
An important feature of the policy advice from international lending
institutions was their almost exclusive emphasis on removing government
interventions that interfered with markets. At the same time, the policy
advice largely neglected the evident biases in the allocation of public
expenditures and in the way in which public revenues were raised in many
countries. There is increasing empirical evidence showing that governments
fail to supply public goods at an appropriate scale, preferring instead to
spend public resources in largely unproductive subsidies to favor the eco-
nomic elites (World Bank, 2000; López and Toman, 2006). At the same
Structural change, poverty and natural resource degradation
time, government revenues greatly rely on indirect taxes instead of income
and property taxes, mainly as a consequence of the lack of political will by
governments to control rampant tax evasion by the economic elites (IMF,
2003; de Ferranti et al., 2004). Even today there is reluctance among main-
stream economists and international institutions to recognize that such
government spending and revenue-raising biases are likely to cause large
economic distortions, which in turn induce slower growth, worsening
poverty and damaging the environment.5 We argue below that, whether an
economy follows a pathway closer to BSC or, alternatively, to PSC in sig-
niﬁcant part depends on the way in which governments allocate expendi-
tures and raise revenues. The greater the pro-elite bias of governments, the
more likely it is that a perverse path will be followed.
2. Sources of structural change
Structural change means at least a relative, if not an absolute, compression
of the primary or natural resource-dependent sectors vis-à-vis the indus-
trial and service sectors. Clearly, this process is triggered by changes in the
relative productivity of the primary and non-primary sectors. BSC is
mostly originated in a continuous increase of labor demand by the modern
sector as a consequence of increased (usually private) investment and labor
productivity in non-primary sectors. The non-primary sector exerts a
strong pulling eﬀect on the labor force linked to natural resource-intensive
activities thus inducing a continuous reallocation of the labor force from
primary to non-primary activities despite the fact that the primary sector
may maintain or even expand its productivity as well. The ‘despite’ is very
important because it conveys the idea that BSC is not associated with a loss
of productivity of the primary sectors due to, for example, degradation of
the natural resources and lack of technical change. That is, the primary
sector continues to allow a high marginal productivity of labor which sup-
ports the opportunity cost of labor. Thus, BSC is likely to result in continu-
ously increasing real wages, especially for the unskilled workers which often
have the primary sector as their main alternative employment source.
PSC, by contrast, is mainly triggered by two factors: (1) the stagnation
or even loss of productivity of the primary sectors due to, for example, the
degradation of soils, water sources, forest biomass, ﬁsheries and other
natural resources; (2) the disenfranchising of part of the rural poor from
their natural resources even if there is no or little resource depletion.
Degradation of natural capital, a key factor of production in the primary
sectors, causes a fall of the marginal product of labor employed in such
sectors. This, in turn, reduces labor income in the primary, mainly rural,
activities leading to a progressive migration of the labor force toward the
non-primary, usually urban sectors. More importantly, the opportunity
Handbook of sustainable development
cost of the migrant workers is thus lower as a consequence of the dimin-
ished labor productivity in the primary sectors. That is, in sharp contrast
with BSC, in this case real wages often fall or at least remain stagnant. That
is, PSC is associated with a labor ‘push’ from the primary sectors instead of
the ‘pull’ eﬀect from the non-primary sector that occurs in the case of BSC.
Given that the non-primary sector is not particularly dynamic in this case,
an important segment of the migrating workers become sub-employed and
have to take refuge in the informal or subsistence urban sector.6
Factor (2) above is related to distributional changes in access to natural
resources among the rural population. Certain politico-economy processes
all too common in history are also important factors that cause the push
eﬀect in primary sectors. ‘Enclosure’ episodes, where subsistence producers
have been disenfranchised from their lands, have not been unique to the
European experience during the early phases of the industrial revolution.
Under various diﬀerent forms a similar process of forced expulsion of
important segments of rural communities has often been repeated in
modern times in Latin America, Africa and Asia.7 The usurpation of the
land resources belonging to rural, usually subsistence, communities by
large commercial interests is facilitated by: (i) the existence of poorly
deﬁned or even a lack of legal property rights of poor communities upon
their resources; (ii) the tacit or even explicit complicity of governments
which do little to protect the interests of the poor vis-à-vis those of com-
When the use of the expropriated resources is shifted from traditional
usually labor-intensive activities to more capital-intensive (and less labor-
demanding) ones, the net demand for labor falls. A ‘labor surplus’ situation
occurs.8 This causes increased migration to urban areas of workers that
have a very small opportunity cost. The net eﬀect is of course downward
pressure on real wages with the consequent increases of proﬁts and expan-
sion of the non-primary sectors. In addition, part of the increased ﬂow of
displaced labor is not able to ﬁnd employment in the formal sector and
simply engrosses the subsistence informal service sector.
In addition to the outright usurpation of land and other resources of
rural households, there are other, more subtle, forms of usurpation which
are even more common. Large investments in mining, logging, hydroelec-
tric and other energy projects, and irrigation infrastructure have also led to
the displacement of large, often poor, populations. Signiﬁcant segments of
the rural population become environmental refugees as their vital natural
resources including land and water are curtailed with little if any compen-
sation. Entire rural communities have been left with little option but to
migrate into urban areas as a consequence of massive scarcity of vital
environmental services. This has been triggered not by environmental
Structural change, poverty and natural resource degradation
damage caused by the subsistence communities themselves, but by spill-
overs and overuse of water and other resources vital for the survival of local
communities, caused by big extractive investments subject to little eﬀective
regulation (World Bank, 2000).
A related process is caused by violence associated with social strife and
civil wars that tend to aﬀect rural areas more intensively than urban ones.
Outright violence, as per its close relative ‘non-market pressures’ by eco-
nomic elites on the poor, also forces the loss of entitlement of the rural poor
to their resources, which, in turn, causes their out-migration, often toward
In summary, in sharp contrast with the conventional view, which regards
low productivity in rural areas as a ‘technical’ problem linked to excessive
population growth and limited resources, we consider it largely the result
of unbalanced political power.
The almost unchecked political power of the elites means that they face
few restraints from governments. They thus have the power to disenfran-
chise the poor from their resources when such resources become valuable
to them, and face few environmental regulations which can control the
externalities arising from their extractive investments aﬀecting the rural
poor. The net result of this is that the poor end up with progressively less
access to the natural resources and/or a more degraded natural resource
and environmental base to support their labor productivity and even their
In summary, there are three major push factors aﬀecting the rural popu-
lation: (i) outright usurpation of the resources belonging to subsistence
rural households by commercial interests; (ii) scarcity of environmental
resources that are vital for the survival of poor households caused by unre-
strained large-scale extraction of natural resources; (iii) violence caused by
civil wars and other conﬂicts. Factors (i) and (ii) both are associated with
environmental degradation and/or natural resource redistribution from
many poor individuals to a few wealthy ones. Also, both factors entail tacit
or explicit government policies that fail to protect the environment and the
poor in favor of promoting the beneﬁts of commercial interests instead.
The central implication of the previous discussion is the following: gov-
ernment failure to protect the property rights of the rural poor upon their
natural resources and to prevent massive negative environmental external-
ities from the commercial exploitation of natural resources increases the
likelihood of perverse structural change.
3. Public expenditures: an analytical taxonomy
The loss of entitlement of the rural poor to natural resources, be it through
outright usurpation of part of their resources or through environmental
Handbook of sustainable development
externalities caused by uncontrolled exploitation of natural resources by
commercial interests, is caused by government policy failures. These gov-
ernment failures include lack of delimitation and public enforcement of
property rights as well as direct incentives to large commercial interests to
expropriate resources of the rural poor often in the name of ‘progress’. But
broader public policies have other more indirect eﬀects on the pathways to
structural change which are perhaps even more important than policies
which directly concern the rural sector. In particular, the allocation of
public revenues (normally 20 per cent of GDP or more) is a key determin-
ant of the nature of structural change and through this of the evolution of
poverty and the environment. Of course governments spend public rev-
enues on a great variety of items. But a fundamental analytical taxonomy
of public expenditures simply divides them between two types:
(i) Type A. Expenditures on public and semi-public goods. These include
pure public goods (e.g. goods which at least approximately satisfy the
two classical criteria used to deﬁne a public good: non-excludable and
non-rival) as well as public expenditures directed to palliate the eﬀects
of market failure.
(ii) Type F. Expenditures in subsidies to private ﬁrms not aﬀected by
market failure (often referred to as ‘corporate welfare’).
The role of Type A expenditures in supplying (pure) public goods is clear.
Certain institutions and infrastructure can only be supplied by the state
(either directly or indirectly via concessionary investments). In addition,
government expenditures to palliate market failure or their eﬀects can also
be regarded as public goods, or, better, semi-public goods. Capital, envir-
onmental and knowledge/intellectual rights failures are among the most
pervasive and important market failures facing most developing country
Capital market failures. Capital market failures are responsible for pre-
venting or restricting socially proﬁtable investments available to individu-
als or ﬁrms that have no or restricted access to capital markets. Below we
show that under certain commonly assumed conditions capital market
failure does not aﬀect the eﬃciency and level of aggregate investment in
physical and ﬁnancial capital but it does limit the eﬃciency and the level of
aggregate investment in human capital.
Under constant returns to scale the distribution of physical and ﬁnancial
capital among ﬁrms has no eﬀect on the productivity of these assets. The
reason for this is clear: under constant returns to scale the marginal value
product of physical capital is constant and independent of the ﬁrm’s level
of capital.9 Therefore, credit market failure which limits the ability of
Structural change, poverty and natural resource degradation
certain ﬁrms (that is those that have more restricted market access) to invest
in such assets will simply imply that the investment will be concentrated in
those ﬁrms that have an advantage in the credit market. This reallocation
of investment, however, has no eﬀect on either eﬃciency or on aggregate
While the assumption of constant returns to scale for ﬁrms is not only
plausible but also follows from commonly accepted behavioral assumptions,
such an assumption is utterly unreasonable for individuals as producers.
Individual workers can be regarded as producers of an intermediate output,
labor productivity. Production of labor productivity by individuals occurs
through a production function where the main variable or semi-variable
input is human capital (education, skills, and so on) which is combined with
the worker’s ﬁxed factor, his/her own life span and natural ability to absorb
knowledge. Thus, given the existence of these important ﬁxed factors, it is
clear that the marginal productivity of human capital in the production of
labor productivity for an individual rapidly declines beyond a certain
point.10 Assume that there are two types of workers, those that face credit
market constraints to ﬁnance investments in human capital (which also have
little or no accumulated savings) and those that can make the human capital
investment unconstrained by ﬁnancial restrictions. The latter group will
choose the investment level at the point where the present value of the mar-
ginal value product of human capital equals its marginal cost. The ﬁnan-
cially constrained individuals, however, will have to invest less, only up to
the level that their availability of ﬁnancial resources allows them.
The implication of this observation for the impact of capital market
failure is obvious: if a segment of individuals face capital markets restric-
tions, those that do not face them will not make up for the shortfall of
investment in human capital that the capital-constrained individuals cause.
Individuals not facing credit constraints will quickly reach a rapidly declin-
ing marginal productivity of human capital which eventually will limit their
ability to invest further. That is, credit market imperfections aﬀect not only
the distribution of human capital among individuals but also the total
level of investment in human capital and, therefore, the aggregate level of
productivity ‘produced’ by individuals. This is in sharp contrast with the
case of physical capital discussed earlier, where credit market failure is
likely to aﬀect the distribution of capital across ﬁrms but not eﬃciency or
Thus, if the rationale for government intervention is to promote eco-
nomic eﬃciency and growth, there is ample justiﬁcation for intervening in
ﬁnancing human capital investment for the segments of society that have
imperfect access to capital markets (generally the poor) but there is little
justiﬁcation for public intervention in subsidizing investment in other
Handbook of sustainable development
forms of capital unless the distribution of capital among ﬁrms is a goal by
itself. In addition, given that human capital investments are much harder
to use as collateral than physical or ﬁnancial assets, it is likely that the
impact of capital market failure will be much more intense for investments
in human assets than in physical or ﬁnancial ones. This reinforces the
importance of public interventions in ﬁnancing human capital investment
vis-à-vis interventions to subsidize non-human assets.
One important observation: it appears that capital market failures of one
form or another are universal and extremely diﬃcult to eradicate. They are
almost a natural structural feature in a market economy (Stiglitz, 2000).
This practically rules out the possibility of ﬁrst best intervention, which
would consist of creating policies and/or institutions that remove the
market failure at source; thus the importance of relying on second best
instruments consisting of publicly ﬁnancing investment in human capital
for those that suﬀer the consequences of capital market failures. Thus, we
classify public outlays in human capital (including education and health)
as Type A expenditures, and corporate subsidies as Type F.
Other market failures. Environmental externalities as well as externalities
aﬀecting the incentives to knowledge creation cause ineﬃciency and slower
welfare growth and, ultimately, more poverty. Therefore, public invest-
ments to mitigate such externalities can be considered semi-public goods.
Unlike capital market failures, it appears that these failures can be dealt
with via ﬁrst best instruments. There is a degree of consensus among envir-
onmental economists that environmental regulation and the development
of adequate institutions, including property rights and others, for the sake
of monitoring and enforcement of environmental regulation, can go a long
way in preventing at least the most pernicious impacts of lack or failure of
environmental markets. The need for environmental (corporate) subsidies
once such ﬁrst best policies and institutions exist is questionable. In any
case, studies have shown the signiﬁcant drawbacks of using environmental
subsidies instead of taxes or even quotas as instruments to control negative
environmental externalities (Oates, 1996).
The same may be true for market failures leading to under-investment in
knowledge or R&D; it seems that there are institutional arrangements,
mainly intellectual property rights and institutions for their enforcement, that
can considerably mitigate the key externality associated with the free diﬀusion
of certain forms of knowledge that discourage private investments in R&D.
Whether or not subsidies to knowledge creation are needed when such insti-
tutions exist is debatable, but in any case there is some agreement that eﬃcient
corporate subsidies, if at all needed, should be targeted directly to R&D.
The implication of this analysis is the following: there are conceptual
reasons to include certain public expenditures directed to mitigate market
Structural change, poverty and natural resource degradation
failures or to mitigate the eﬀects of market failure as Type A public goods.
Public ﬁnancing of human capital, expenditures in environmental regula-
tion and enforcement of such regulations, property right institutions
and intellectual property right regulations and their enforcement can
all be considered Type A semi-public goods. Targeted public invest-
ment in environmental protection as well as in R&D may also fall
within the Type A expenditures. All other corporate subsidies should be
considered Type F.
4. The composition of public expenditures and structural change
In this section we ﬁrst present an analysis of the key economic distortions
caused by Type F expenditures; next we illustrate the large rates of return
of Type A public investment, and the under-investment in certain import-
ant public assets despite high rates of return. Finally we evaluate the impli-
cations of this for structural change.
Type F expenditures and economic distortions
The literature on public subsidies has traditionally emphasized the market
distortions caused by such subsidies. That is, the emphasis has been on the
fact that subsidies generally prevent prices from being ‘right’. Without
denying the importance of the price distortion eﬀect, we here focus on the
distortions caused by the crowding out of Type A expenditures caused by
Type F (subsidy) expenditures within the public budget. The crowding out
distortion is dynamic rather than purely static. Such distortion directly
aﬀects economic growth, poverty and natural resource dynamics through a
variety of mechanisms.
Empirical studies show that governments in developing countries spend
a large share of the public budget in Type F expenditures.11 The budget
crowding out of Type A expenditures has serious consequences for struc-
tural change and may signiﬁcantly aﬀect the potential for economic
growth. As discussed earlier, Type A investments are vital to assure an ade-
quate supply of human capital, R&D, key infrastructure and institutions,
and to prevent excessive damage to the environment and the natural
resources. That is, Type A investments are critical to provide the economy
with human, institutional and environmental assets that in general are
highly complementary with private investment in physical, ﬁnancial and
knowledge assets. The best way of providing incentives to the private sector
to invest at suﬃciently high levels is by providing the right public assets that
will support the proﬁtability of private assets at high levels, not subsidies.
High levels of Type F expenditures means that governments have either to
provide fewer public goods and/or that they need to raise taxes further. As
we shall see, the under-supply of public goods has serious eﬀects on
Handbook of sustainable development
growth and structural change. We focus here on the reduction of Type A
investment caused by too much Type F expenditure.12
Corporate subsidies and other forms of Type F expenditures contribute
to creating privileges and promote increased consumption by the wealthy
(the usual recipients of public subsidies) but they do not give durable incen-
tives to productive private investment. The low eﬀectiveness of corporate
subsidies as an instrument to promote investment and productivity has
been shown by empirical studies in many countries around the world.
Empirical studies using detailed ﬁrm-level data by Bregman et al. (1999) for
Israel, Fakin (1995) for Poland, Lee (1996) for Korea, Bergstrom (1998) for
Sweden, Estache and Gaspar (1995) for Brazil, Harris (1991) for Ireland,
and several others have shown that subsidies and corporate tax concessions
targeted to speciﬁc ﬁrms are at best ineﬀective in promoting investment and
technological adoption and, in some instances, even counterproductive.
A large share of Type F expenditures does stimulate one type of invest-
ment within the private sector: lobbying. When half of the public budget is
up for grabs the incentives to ‘invest’ in lobbying are indeed large.
Unproductive lobbying expenditures by the private sector can reach enor-
mous proportions especially in countries where governments are most open
to corporate welfare, up to 10 per cent of GDP, according to certain studies.
A key signal that triggers the private sector to spend so many resources in
lobbying is of course the fact that a sizable share of public expenditures is
devoted to Type F expenditures. Thus, Type F expenditures not only crowd
out the productive Type A public investment but also induce crowding out
of productive investment in favor of unproductive investments within the
The economic returns to type A expenditures
Empirical studies show extraordinarily high rates of return to investments
provided mainly through Type A expenditures including human and envir-
onmental public goods. The literature reports such high returns with an
amazing degree of consensus for many countries around the world.
Investments in formal education (especially in secondary education),
health, R&D (both in agriculture as well as in other sectors), agricultural
extension, air and water pollution abatement, and investments in the man-
agement of certain natural resources are reported to have very high rates of
return. The permanence of such high returns per se does not necessarily
reﬂect under-investment, mainly given the possible existence of signiﬁcant
non-convexities. Non-convexities may imply that the marginal returns to
these assets do not necessarily fall, or decrease only very slowly with their
accumulation. Thus, if this is the case, even a rapid accumulation of the
assets would do little to reduce their rates of return. However, given such
Structural change, poverty and natural resource degradation
high returns, one would expect a great emphasis of governments on invest-
ing in such assets. Yet, as we shall see, this is not the case. In fact, in the over-
whelming majority of developing countries, investment in human and
environmental assets has not even kept up with population growth. That is,
per capita human and environmental wealth appears to be declining.
Returns to education Two recent surveys, one by Psacharopoulos (1994)
and another one, an update of the ﬁrst survey by Psacharopoulos and
Patrinos (2002), report ﬁndings of hundreds of studies around the world
that have used a great variety of methodologies and diverse types of data
and time periods over the last three decades or so. Despite this variability
in data, countries and methodology, there is a high degree of homogeneity
of results for most countries. In fact, the calculated rates of return found in
the great majority of the countries analyzed are extremely high. The
average private rate of return for investment in primary education is about
20 per cent, while the average social rate of return is about 30 per cent.13
Only in a handful of countries are the returns to primary and secondary
education both below 15 per cent. In addition, from the evidence for coun-
tries that have more than one study, it follows that in the vast majority of
them the rates of return to education have not declined over time.
It is hard to imagine discount rates even near these rates as shown by the
large number of projects that are implemented with much lower ex-ante
rates of return in developing and developed countries alike. Despite these
large rates of return, in most developing countries one encounters massive
school drop-out rates, especially at the late primary and high school levels.
Even in middle-income countries such as Chile, Brazil and Mexico, high
school drop-out rates reach 40 per cent to 50 per cent (World Bank, 2000).
Even primary school drop-out rates were also high in the 1990s: Chile, 23
per cent; Mexico, 28 per cent; Indonesia, 23 per cent; Philippines, 30 per
cent. Similarly, public expenditure per student as a percentage of GDP per
capita was extremely low. According to the World Bank (2003) public
expenditure per student in primary school was about 8 per cent of per capita
GDP in Argentina, 9 per cent in Chile, 7 per cent in Mexico and 2 per cent
in Venezuela. This compared to 23 per cent in Korea or the United States.
The high rates of return of schooling and the high rates of school deser-
tion may be mutually consistent if liquidity constraints prevent parents
from aﬀording child education even if it is ‘freely’ provided by the state.
This issue becomes more acute when children have an opportunity cost in
the child labor market or in subsistence family operations. In fact, certain
government programs that reduce the opportunity cost of children attend-
ing school at working age (above 10 or 11 years old) and that reduce
commuting time to school by increasing public school density especially in
Handbook of sustainable development
rural areas, have been quite successful in increasing school attendance.
Making parents more aware of the value of education and increasing their
participation in their children’s education is another eﬀective mechanism to
promote more school enrollment. All this, however, requires a greater allo-
cation of government resources to education, including not only public
ﬁnancial resources, but also human and institutional resources. In a context
of a usually tight availability of such resources, this additional allocation
of government resources to education obviously needs hard choices in
terms of cutting other expenditures or increasing public revenues. Based on
the available data on government expenditures per student as a proportion
of per capita income, governments in developing countries are not opting
for such choices. They seem to have other priorities.
R&D and farm extension A survey by Alston et al. (2000) reviewed almost
300 studies that evaluated private and social rates of return to agriculture
R&D and farm extension (both of them mostly done through public insti-
tutions) in about 95 countries. The methodologies and data used varied dra-
matically across the many studies. The simple mean (social) rate of return for
agricultural research among all studies in developing countries was over 50
per cent while the mean rate of return for public expenditures in agricultural
extension was even higher, of the order of 80 per cent! In most countries
these rates rarely fall below 30 per cent, still obviously a fantastic pay-oﬀ.
Exploiting the fact that there are many countries for which there is more than
one comparable study available, the authors concluded that, as in the case of
returns to education, there is no evidence to support the view that the rates
of return have declined over time. Despite this great social proﬁtability,
studies often report that with few exceptions countries are not expanding
agricultural R&D and many have indeed drastically cut them back.14
R&D in non-agricultural contexts, especially those that emphasize
research on the adaptation of foreign technologies also seems to yield very
large returns. Countries that are able to incorporate new industrial tech-
nologies more rapidly into the productive system have been shown to grow
faster than countries that are slower to do so. Although, unlike agricultural
research, much industrial R&D is often directly done by the private sector
itself, the large positive externalities of such research are by now well doc-
umented. Yet well structured and systematic public programs to support
industrial R&D by the private sector are seldom encountered in develop-
Returns to environmental investments Pearce (2005) carefully evaluates
a large number of empirical studies measuring the rate of return to envir-
onmental investments. The rates of return of course show signiﬁcant
Structural change, poverty and natural resource degradation
variability across the various assets and regions, but in general he found
high rates of return especially to investments in water and sanitation,
energy, anti-desertiﬁcation, wetlands conservation, ﬁsheries conservation,
and several others. World Bank (2000) examines a great number of studies
that report the health beneﬁts of reducing air and water pollution in devel-
oping countries. As with the case of the other public goods discussed above,
the dollar value of pollution reduction vis-à-vis its cost is highly favorable
even if one uses a relatively high time discount rate. Cost–beneﬁt analyses
for controlling air pollution in many large cities in Asia and Latin America
have sometimes yielded extremely high rates of return to such investments
(World Bank, 2000; O’Ryan, 2001). The same is true for investments in
decreasing water contamination including sewage treatment plants and
related investments. For example, according to various World Bank studies
cited in World Bank (2000), in China a $40 billion investment in clean water
within a 10-year period would yield a present value beneﬁt of $80 to $100
billion. In Indonesia, a $12 billion investment would give beneﬁts of the
order of $25 to $30 billion in terms of present value. Some studies for
investment in air pollution control in various countries provide estimates
even more favorable than the clean water investment. In China, for
example, according to the World Bank, a $50 billion investment for selected
cities could return beneﬁts of the order of $200 billion in reduced illness
Despite the high rates of return to investments in urban water and air
pollution abatement, such investments do not seem to have received a high
priority as shown by available indicators for cities in developing countries.
For example, according to a sample of cities with per capita income below
$2500 for the year 1998, less than 40 per cent treated their waste water, and
less than 60 per cent of the population had water or sewage connections
(World Bank, 2002).
High returns but low investment in human and environmental assets
The emerging literature on genuine savings is providing a clearer picture
of the real changes in various wealth components over time (see Chapters
3 and 18). The World Bank has provided estimates of genuine investment
for many countries by adding net investment in human and natural capital
to estimates of net investments in physical capital (Hamilton, 2000). Apart
from extending the analysis to more than 110 countries, an important mod-
iﬁcation over previous estimates of genuine savings done by the World
Bank is that now measures of change of net wealth are expressed on a per
capita basis. Per capita rather than total wealth change is an adequate
and consistent measure of welfare change (Dasgupta and Mäler, 2002).
The measure of per capita genuine savings as deﬁned by Hamilton in his
Handbook of sustainable development
country estimates equals net investment in manufactured or physical
capital minus depletion of natural resources plus net investment in educa-
tion, health and R&D.
The estimates for the year 1997 show that out of 90 low and middle
income countries in Asia, Africa and Latin America, 71 (or about 80 per
cent of them) exhibit negative per capita changes in wealth. While these esti-
mates cover a large sample of countries, the fact that they refer only to one
year raises the question of how representative this year might be. An analy-
sis using the same deﬁnition of wealth as Hamilton but that covered a 20-
year period is reported by Dasgupta (2005). Five Asian countries
(Bangladesh, India, China, Nepal and Pakistan) and many sub-Saharan
countries over the period 1973–93 were considered. This analysis shows
similar results to Hamilton’s. Not only has sub-Saharan Africa experienced
decreased per capita net wealth, rather four of the ﬁve Asian countries also
show negative per capita wealth changes. The only exception is China,
which, as in Hamilton’s analysis, has managed to accumulate wealth in
advance of its population growth.
The overwhelming majority of the countries considered by these two
studies show positive per capita growth rates for physical capital, implying
that the reason for the negative growth rates of total wealth is that human,
knowledge and environmental assets are growing at a rate below that of
population. As a minimum, 80 per cent of the countries considered are
experiencing reductions in their per capita human and environmental
wealth. Since at least some countries may be compensating the declines
of human and environmental assets with positive per capita growth of
physical assets, the number of countries experiencing declines in human-
environmental assets may be even larger.
We thus have an important paradox. Despite the apparently large rates
of return to human, knowledge and environmental assets, the emerging lit-
erature on genuine savings is showing that the overwhelming majority of
the developing countries are reducing the per capita availability of such
assets. Given the semi-public good nature of these assets and the fact that
their accumulation is seriously aﬀected by market failures, their growing
scarcity has to be traced back to the misallocation of public expenditures
discussed earlier. Governments are spending too much in Type F goods and
too little in Type A goods.
The development consequences of public expenditure misallocation
Public expenditure policies biased in favor of Type F expenditures and the
consequent crowding out of Type A expenditures cause scarcity of public
and semi-public assets, including human capital and knowledge. This over
time means that the economy’s endowment of human capital and knowl-
Structural change, poverty and natural resource degradation
edge grows too slowly relative to that of countries where the government
spends more in Type A goods. Human capital and knowledge becomes
relatively scarce (and expensive). At the same time, the fact that the gov-
ernment spends too little in regulating and protecting the use of natural
capital implies that the economy develops an artiﬁcial abundance of
natural capital available to be exploited. Thus, the type F biases in public
allocation create (false) comparative advantages in primary production
and in industries that require little knowledge and human capital. Low
skill industries often use technologies that are prone to remain stagnant
with relatively slow productivity growth and are often ‘dirty’ or environ-
mentally demanding. The net eﬀect of this model is a slow increase of
labor productivity in the non-primary sectors, insuﬃcient to exert a large
pull eﬀect on the labor force. At the same time, the natural capital
degrades as a consequence of the scarcity of environmental institutions,
regulations and investment in the protection of the natural capital asso-
ciated with the public expenditure policies. This triggers the push forces
on the labor force employed in the primary sectors in a context of a falling
opportunity cost of unskilled labor. These are the key factors causing per-
verse structural change.
An opposite eﬀect takes place in countries where governments em-
phasize Type A public policies. In this case the factor endowments pro-
gressively change toward a greater abundance of human capital and
knowledge. This creates the conditions for developing comparative advan-
tages in the knowledge-intensive industries where productivity often grows
fast, thus permitting a strong pull eﬀect upon the labor force initially
employed in the primary sectors. At the same time, the development of
property right institutions and policies that regulate and protect the
natural capital is likely to prevent both the usurpation of the resources
owned by subsistence households as well as the destruction of ecosystems
vital for the survival of the rural poor caused by large resource extraction
projects. This is likely to help support the opportunity cost of unskilled
workers in primary activities, thus permitting a slower process of out-
migration from primary activities of workers that retain a relatively high
opportunity cost. That is, this model of development promotes strong pull
forces in non-primary activities while it ameliorates the push forces in
primary sectors. These are of course conditions that increase the likeli-
hood of benign structural change.
One can thus summarize and generalize the previous analysis as follows:
PSC is in part the result of the misallocation of public revenues. Moreover,
the greater the share of Type F public expenditures, the more likely it is that
the economy will follow a perverse structural change pathway.
Handbook of sustainable development
Structural change can be an important source of sustainable development
and poverty reduction. The change of the structure of production and
employment from primary, resource-dependent sectors towards non-
resource sectors may considerably alleviate the pressures upon the natural
capital that economic growth tends to impose. At the same time it can
provide new opportunities to the poor to increase their productivity and
hence their income. However, structural change can follow a completely
diﬀerent path if the change in the composition of the economy is forced as
a consequence of the degradation of natural capital and/or the disenfran-
chisement of the rural poor instead of faster productivity growth in the
non-primary sector. The labor force migrating from primary activities often
ﬁnds that the productivity of the so-called modern sector is stagnant and
provides limited employment opportunities, forcing a portion of them to
depend on urban subsistence activities. Unfortunately it appears that this
form of perverse structural change is more common than the benign form
of structural change.
The two central results discussed in this chapter show that PSC is the
product of misguided public environmental and natural resource policies,
as well as also misguided allocations of public revenues. Clearly, behind
these policy ‘mistakes’ there are powerful political economy forces, corrup-
tion and ideological biases often fomented by economists (‘corporate sub-
sidies are good because they contribute to creating jobs’). To a large extent
the real origin of the problem is the weak countervailing power of the poor
to face the great lobbying capacity of the elites and their intellectual allies.
This weakness inclines the balance toward public policies which systemat-
ically favor the most powerful segments of the economic elites, but that in
the end contribute to causing economic stagnation, environmental destruc-
tion and poverty. Which are the political failures that prevent the emergence
of adequate countervailing powers among the vast majority of the popu-
lation in developing countries that are poor or semi-poor even in democra-
tic regimes? This is certainly a key question that deserves much more
15 Economic growth and the environment Matthew A. Cole
The complex relationship between economic growth and the environment
has been a focus of academic attention since the 1970s. During the 1970s
opinion was polarized between the pro-growth ‘technological optimists’ on
the one hand and the anti-growth ‘technological pessimists’ on the other.
The former placed great faith in our ability to ﬁnd technological solutions
to environmental problems, to change the composition of output and to
ﬁnd substitutes for scarce resources, thereby removing potential environ-
mental limits. Technological pessimists argued that such beneﬁts were likely
to be short term and stressed the irreversibility of fossil fuel exhaustion.
The advent of sustainable development saw the emphasis move from
resource scarcity towards sink limits, but diﬀering opinions regarding the
impact of economic growth on the environment remained, largely a result
of diﬀering views of the capital stock that is to be maintained over time.
More recently, quantitative analyses, such as the estimation of environ-
mental Kuznets curves and the decomposition of emissions into scale, tech-
nique and composition eﬀects, have illuminated the debate to an extent.
These studies suggest that economic growth does not have to be damaging
to the environment and can co-exist alongside reductions in environmental
pollution. Emissions of local air pollutants appear to have beneﬁted from
new technology and increased energy eﬃciency which, particularly in slow-
growing (for example developed) countries, more than compensates for
increased emissions resulting from the pure scale eﬀect. The evidence also
suggests that changes to the output mix (the composition eﬀect) have only
a minor impact on emissions. However, it increasingly appears that the rela-
tionship between emissions and income, even if an inverted U-shape, is
likely to be country-speciﬁc. Much uncertainty still surrounds the precise
conditions under which emissions, and other environmental indicators, can
improve in the face of economic growth.
This chapter reviews the debate on economic growth and the environ-
ment, starting with a historical account of the so-called ‘limits to growth’
debate of the 1970s. The rise of sustainable development and its inﬂuence
on this debate will also be considered, before attention turns to a critical
review of the environmental Kuznets curve hypothesis and pollution
decomposition studies. Conclusions are then provided.
Economic growth and the environment
2. The ‘limits to growth’ debate
With a few notable exceptions, the relationship between economic growth
and the environment received little attention prior to the 1960s.1 The pub-
lication of Rachel Carson’s Silent Spring in 1962, however, increased
public awareness considerably by examining the impact of man’s indis-
criminate use of chemicals in the form of pesticides and insecticides.
Perhaps as a result of Silent Spring, environmental issues received growing
attention throughout the 1960s. In 1966, Kenneth Boulding produced his
seminal article ‘The Economics of the Coming Spaceship Earth’ in which
he highlighted the danger of steadily increasing production levels, both in
terms of reducing ﬁnite resource stocks and in terms of environmental
With these concerns in mind, in 1972 Donella and Dennis Meadows and
a team from the Massachusetts Institute of Technology produced a report
for the Club of Rome’s Project for the Predicament of Mankind entitled
The Limits to Growth. A world model was constructed to estimate the
future impact of continuous exponential growth under a number of
diﬀerent assumptions. The ‘standard’ world model assumed that the phys-
ical, economic or social relationships that have historically governed the
development of the world system would remain eﬀectively unchanged.
Additionally, this model assumed that population and industrial capital
would continue to grow exponentially, leading to a similar growth in
pollution and in demand for food and non-renewable resources. The supply
of both food and non-renewable resources was assumed to be ﬁxed. Not
surprisingly given the assumptions, the model predicted collapse due to
non-renewable resource depletion.
The radical nature of the report attracted much attention, not only in aca-
demic circles, but also in society at large. As a result, The Limits to Growth
fuelled a debate which continued throughout the 1970s. The contrasting
viewpoints in this debate stem from diﬀering opinions concerning three
factors: the rate of technical progress; future changes in the composition of
output and the possibilities of substitution (Lecomber, 1975). ‘If these three
eﬀects add up to a shift away from the limiting resource or pollutant equal
to or greater than the rate of growth, then the limits to growth are put back
indeﬁnitely.’ (Ekins, 1993, p. 271). However, for Lecomber (1975, p. 42) the
point to be stressed is that ‘this establishes the logical conceivability, not the
certainty, probability or even the possibility in practice, of growth continu-
3. The rise of sustainable development
The advent of the 1980s saw attention turn from the limits to growth argu-
ments of the 1970s towards the notion of sustainable development. The
Handbook of sustainable development
term ‘sustainable development’ appears to have been ﬁrst advanced in 1980
by the International Union for the Conservation of Nature and Natural
Resources (Ruttan, 1994) although it was the Brundtland Commission
Report (WCED, 1987) which brought the concept to the top of the agenda
of institutions like the United Nations and the World Bank. Since the
Brundtland Report the goal of sustainable development has been adopted
by an ever-increasing number of organizations and bodies.
The popularity of sustainable development would seem to belie, or is
perhaps indicative of, the vagueness of the term. Countless deﬁnitions of
sustainable development now exist, each typically reﬂecting the academic
discipline in which the author has expertise. Economists tend to emphasize
the need to maintain living standards (see especially chapters 3 and 18);
ecologists are more concerned with biodiversity and resilience (Chapters 4
and 5) and sociologists prioritize the need to maintain sociological bonds
and interrelationships within communities. The amorphous nature of the
concept means that it is impossible to state the precise relationship between
sustainable development and economic growth although, as shall be seen
below, certain general viewpoints may be deﬁned. Opponents of sustain-
able development use its ambiguity as ammunition, however, claiming such
a vague concept to be meaningless. Wilfred Beckerman, continuing his pro-
growth stance adopted in the 1970s clearly holds such a view and believes
sustainable development to be ‘devoid of operational value’ (Beckerman,
1992, p. 491). Others are critical of the ‘watered down’ interpretation of
sustainable development that has been adopted by the political main-
stream, believing it to provide little scope for environmental improvement.
Despite the countless deﬁnitions, it is generally agreed that the most
appropriate mechanism for ensuring the well-being of future generations is
to ensure that the next generation has access to a stock of capital at least as
large as the current stock. However, two viewpoints emerge regarding the
precise nature of the capital stock which is to be maintained. These
diﬀering viewpoints allow a distinction to be drawn between ‘weak’ and
‘strong’ forms of sustainable development (see, for example, Pearce, 1993
and Chapter 4 of this volume).
The capital stock consists of man-made capital (such as the means of
production, infrastructure, human capital) together with natural capital
(such as fossil fuels, habitat, clean water). Proponents of ‘weak’ sustainable
development simply require that the aggregate capital stock is maintained
and thus believe that a fall in natural capital can be compensated by an
increase in man-made capital. In contrast, the strong sustainability school
questions the substitutability between these two forms of capital and hence
believes it insuﬃcient simply to maintain the aggregate capital stock irrespective of the relative size of its constituents.
With regard to the relationship between economic growth and the envir-
onment, the two viewpoints again diﬀer. Typically, the ‘weak’ sustainable
development position is that economic growth and environmental health
are often complementary. By this deﬁnition, the recommendations of the
Brundtland Report would fall into the weak sustainability category since it
actually called for ‘more rapid economic growth in both industrial and
developing countries.’ (WCED, 1987, p. 89). Indeed, most governments
and global institutions also see no conﬂict between economic growth and
the environment and place great faith in future technological advance and
in our ability to ﬁnd substitutes for scarce resources. Many believe there to
be an inverted U- shaped relationship between pollution and production,
as illustrated in Figure 15.1, and use this as evidence of our ability to decou-
ple pollution from production. This inverted-U relationship is also known
as the environmental Kuznets curve (EKC) relationship and will be exam-
ined in detail below.2
The ‘strong’ sustainability school believes that the only way to achieve
reductions in the scale of materials and energy throughput is to reduce the
scale of economic output. Concentrating on sink-limits rather than
resource exhaustion, supporters of this viewpoint (for example Daly and
Cobb, 1989) are therefore sceptical of the potential for decoupling and
point to the risk of irreversibility associated with damage to the natural
4. The environmental Kuznets curve
The advent of the 1990s saw a signiﬁcant increase in the availability of
environmental data, particularly measuring concentrations or emissions of
Handbook of sustainable development
air and water pollution. This data has enabled econometric analyses of the
relationship between per capita income and environmental indicators
which were previously impossible. The ﬁrst such studies by Grossman and
Krueger (1991; 1995) and Shaﬁk (1994) found evidence of an inverted U-
shaped relationship between pollution and per capita income (again, as
illustrated in Figure 15.1) which has typically been explained in terms of
the interaction of scale, composition and technique eﬀects. A country’s
total emissions of a pollutant (Xt) can be deﬁned in the following way;
where Yt denotes GDP at time t, ait denotes the amount of pollution gen-
erated per unit of output in sector i at time t, and sit represents the share of
output deriving from sector i at time t. The ﬁrst term, a, can be referred to
as the technique eﬀect, the second term, s, as the composition eﬀect and the
third term, Y, as the scale eﬀect. As an economy develops we would expect
the scale of the economy to increase, which, ceteris paribus, is likely to
increase emissions. However, a growing economy is also likely to devote
more resources to the regulation of environmental damage and may
increasingly beneﬁt from new technology. These changes are likely to aﬀect
the techniques of production resulting in reductions in emissions. Finally,
as an economy develops, its composition is likely to change from an empha-
sis on agriculture, to heavy industry, to light manufacturing and services.
The contraction of heavy industry and the movement towards light manu-
facturing and services is likely, ceteris paribus, to reduce emissions. It has
therefore been argued that the inverted U-shaped relationship results from
a dominance of scale eﬀects over composition and technique eﬀects in the
early stages of development, with a reversal of this dominance in later
stages of development.
Typically, the basic EKC equation that has been estimated is of the fol-
lowing form, estimated in either logs or levels
Where X denotes the environmental indicator, either in per capita form or
in the form of concentrations, Y denotes per capita income, F denotes
country-speciﬁc eﬀects and i and t refer to country and year, respectively.
Note that some studies include a cubic income term.
In equation (15.2), if1 and1 then the estimated curve has a
maximum turning point per capita income level, calculated as Y*
( /2 ). Table 15.1 summarizes the results of those EKC studies that have
covered a range of environmental indicators. Table 15.1 indicates a reason-
able degree of compatibility across studies. For local air pollutants, turning
points are estimated at reasonably low levels of per capita income indicat-
ing that emissions/concentrations are now falling in most developed
economies. Pollution concentrations in river water also tend to have rela-
tively low estimated turning points, with the exception of nitrates from Cole
et al. (1997). Municipal waste is estimated to increase monotonically with
per capita income in the two studies to have examined it.
Many other studies have included additional variables in the EKC rela-
tionship, or considered diﬀerent pollutants (see for example, Cole, 2003;
Cole and Elliott, 2003; Hilton and Levinson, 1998; Torras and Boyce,
1998). There are, however, several studies that ﬁnd very diﬀerent results to
those summarized in Table 15.1. Dijkgraaf and Vollebergh (1998) estimate
EKCs for carbon dioxide emissions using both an OECD panel and indi-
vidual time-series regressions for each country. Interestingly, for the panel
as a whole they ﬁnd an inverted U-shaped relationship between per capita
income and emissions, with a turning point level of income well within the
sample income range. This is in stark contrast to the CO2 results from other
EKC studies (for example Cole et al., 1997; Holtz-Eakin and Selden, 1995).
For their individual country time-series regressions, Dijkgraaf and
Vollebergh ﬁnd very varied results thereby questioning the existence of a
meaningful global EKC for CO2 emissions.
Harbaugh et al. (2002) also question whether there is a systematic
relationship between per capita income and pollution. They estimate the
relationship between per capita income and concentrations of sulphur
dioxide, total suspended particulates and smoke and ﬁnd their results to be
highly sensitive to choice of functional form, to additional covariates and
to changes in the countries, cities and years included in their sample. A
plausible reason for this, as suggested by the authors, is the noisy nature of
concentrations data which requires the use of dummies to control for a
number of site-speciﬁc determinants. Stern and Common (2001), however,
consider SO2 emissions and also question the traditional EKC methodol-
ogy (and its results). This study is brieﬂy discussed below.
Criticisms of the EKC
Criticisms of the EKC fall into two categories, ﬁrstly those aimed at the
EKC methodology and secondly those concerned with the interpretation of
EKC results. The following are criticisms of the EKC methodology:
The basic EKC is determined by changing trade patterns rather than
growth-induced pollution abatement, and these trade patterns have
typically been neglected by EKC studies. The North’s declining share
of manufacturing in GNP, in part resulting from its more stringent
environmental regulations relative to the South, indicates that the
North is simply exporting its pollution to the South. The EKC
inverted U therefore merely represents a redistribution of pollution
from North to South. Stern (1998) and Stern et al. (1996) both cite
this as a criticism of the EKC relationship.
The EKC assumes unidirectional causality from GNP to emissions
and allows no mechanism through which environmental degradation
can aﬀect income levels. Least squares estimation in the presence of
such simultaneity will provide biased and inconsistent estimates.
Econometric issues. The most fundamental econometric criticisms
are provided by Stern and Common (2001) and Perman and Stern
(2003). These papers raise two key issues; (a) Studies that use only
OECD data will typically estimate turning points at lower per capita
income levels than those using data for the world as a whole. This
arises because the developing countries are experiencing increasing
emissions of even local air pollutants such as SO2. (b) Per capita
income and emissions are typically non-stationary variables and EKC
regressions do not appear to co-integrate. It is also likely that there are
omitted non-stationary variables. Standard EKC estimation in the
presence of these features is likely to generate spurious results.
Other econometric criticisms have also been raised in the literature.
Stern et al. (1996) are concerned that many EKC studies ignore the
issue of heteroscedasticity which is likely to be present in cross-
section data. Furthermore, most EKC studies estimate a quadratic
relationship between pollution and income and therefore fail to allow
for the possibility of emissions beginning to increase again at high
income levels. Finally, Harbaugh et al. (2002) and Ekins (1997) argue
that diﬀerent datasets, functional forms (for example logs versus
levels) and estimation techniques all provide diﬀerent results, sug-
gesting that the EKC relationship is fragile.
Stern (1998) criticizes EKC regressions that allow levels of pollution
to become zero or negative as being incompatible with the laws of
thermodynamics, since all resource use inevitably produces waste.
In addition to these, a number of concerns have been raised regarding the
interpretation of EKCs:
Arrow et al. (1995) argue that although EKCs have been estimated
for some local air pollutants it is dangerous to assume that similar
relationships will exist for all other environmental indicators.
EKCs do not indicate that economic growth automatically solves
environmental problems. Emissions reductions have only been attained
through investment and regulations, neither of which are automatic
consequences of economic growth.
Mean versus median income. Although many EKCs estimate turning
points around the current world mean per capita income level, this
does not mean that, globally, emissions are about to decline. Global
income distribution is skewed with far more people below the mean
than above it. If median income levels are considered rather than
mean, EKCs indicate that emissions will continue to increase for
many years to come.
5. Economic growth and the environment: beyond the EKC
Clearly, the reliability and accuracy of the EKC framework remains ques-
tionable. To an extent, diﬀering opinions of the EKC reﬂect semantic
diﬀerences in how EKCs are actually deﬁned. Many economists would agree
that the majority of developed countries have experienced an inverted U-
shaped relationship between income and local air emissions, determined by
the interaction of scale, composition and technique eﬀects. Since emissions Cole et al. (2005) utilize a divisia index approach to decompose aggregate
intensities of sulphur dioxide, nitrogen oxides and carbon dioxide into a
composition (product mix) eﬀect and a technique (sectoral intensity) eﬀect.4
This analysis is undertaken for Austria, France, the Netherlands and the
UK using industry-speciﬁc emissions data for the 1990s. For Austria,
France and the Netherlands the technique eﬀect alone was found to be the
main factor explaining declining aggregate emissions intensities. For the
UK, the composition eﬀect was also found to play a role. Figure 15.3
presents the results for sulphur dioxide in the UK and illustrates the joint
role played by technique and composition eﬀects in reducing aggregate pol-
Stern (2002) provides a more complex decomposition for sulphur
dioxide, as given by equation (15.4), and applies this to 64 countries for the
Stern’s ﬁndings are summarized in Table 15.2. Again, the main factors
reducing emissions are technological change and energy intensity (which
combine to form the technique eﬀect), although it is notable that, for this
‘global’ sample, the sum of these does not exceed the scale eﬀect.
These decomposition studies therefore suggest that, for local air pollu-
tants at least, the impact of technological change and increased energy
eﬃciency is likely to outweigh the increased emissions resulting from the
scale eﬀect. Whilst a global pollutant is also likely to beneﬁt from these
technique eﬀects, they are likely to be dominated by the scale eﬀect, result-
ing in a net increase in emissions.
Whilst the limits to growth debate has yet to be fully resolved, it is clear that
many of the predictions made by opponents to economic growth in the
1970s have proved to be wide of the mark. This failure to convince society
at large of the need to replace economic growth as a key policy objective is
illustrated by the fact that the Brundtland Report still interpreted growth
as being compatible, even complementary, to environmental well-being.
Indeed, this viewpoint is held by most mainstream advocates of sustainable
The profusion of quantitative analyses that began in the 1990s have
enlightened the debate to an extent. Although the EKC methodology has
been criticized for being too simplistic, one broad conclusion which stems
from EKC and other quantitative studies is that economic growth can
be compatible with reductions in emissions of some pollutants. Whilst a
pollution-income path that is common to all countries is questionable, it
seems probable that all countries can beneﬁt from technique eﬀects result-
ing from technological advance and increased energy eﬃciency. For local
air pollutants, these technique eﬀects are likely to dominate scale eﬀects,
resulting in a reduction in pollution. This is particularly likely to occur in
relatively slow-growing, developed economies. However, the relative size of
scale, composition and technique eﬀects is likely to be inﬂuenced by the
economic, political, cultural and environmental characteristics of individ-
ual countries. The role played by governance may also be critical. Countries
with identical income levels yet signiﬁcantly diﬀerent levels of political gov-
ernance are unlikely to share similar emissions levels.
Although environmental improvement can occur alongside economic
growth, it is important to stress that this is not an automatic procedure.
Growth does not reduce pollution. Rather, the evidence suggests that growth
may facilitate the required legislation and investment to help reduce per
capita emissions of some pollutants. This carefully worded statement illus-
trates the great care that is needed when examining the relationship between
growth and the environment. It also suggests that future research within this
area should increasingly focus on the precise conditions under which pollu-
tion can be reduced. This is likely to require highly detailed studies of indi-
vidual countries, an examination of the role played by governance and
environmental regulations, and increasingly detailed decomposition studies.
As the availability of environmental data continues to improve, particularly
industry-speciﬁc emissions data and pollution abatement expenditure data,
so too should our ability to further increase our understanding of the
complex relationship between economic growth and the environment.
1. One such exception is the classical economist John Stuart Mill. Writing in 1848, Mill com-
ments ‘Nor is there much satisfaction in contemplating the world with nothing left to the
spontaneous activity of nature; with every rood of land brought into cultivation . . . every
ﬂowery waste or natural pasture ploughed up, all quadrupeds and birds . . . exterminated
and scarcely a place left where a wild shrub or ﬂower could grow’ (Mill, 1871, p. 331).
Handbook of sustainable development
2. The environmental Kuznets curve is named after the original Kuznets curve which pos-
tulated an inverted U-shaped relationship between per capita income and income inequal-
ity (Kuznets, 1955).
3. Similar ﬁndings are made by Bruvoll and Medin (2003) and Selden, Forrest and Lockhart
4. Since the variable being decomposed is expressed as an intensity (that is emissions scaled
by output) the scale eﬀect is removed.
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16 Sustainable consumption Tim Jackson :
There is an emerging recognition of the importance of consumption within
international debates about sustainable development. The actions people
take and the choices they make – to consume certain products and services
rather than others or to live in certain ways rather than others – all have
direct and indirect impacts on the environment, on social equity and on
personal (and collective) well-being.
Quite recently and somewhat hesitantly, therefore, policy makers have
begun to engage with the question of whether and how it may be possible
to intervene in consumption patterns and to inﬂuence people’s behaviours
and lifestyles in pursuit of sustainable development. The UK, for
example, has taken a (perhaps surprising) lead in this area. In 2003, in the
wake of the Johannesburg Summit, the UK Government was
amongst the ﬁrst to launch a national strategy on sustainable consump-
tion and production. This strategy initiated a continuing and wide-
ranging process of consultation, evidence review and policy formation
that has already had signiﬁcant impact and oﬀers the potential for
some quite radical policy innovations in the next few years. Amongst
the activities fostered under this umbrella were the UK Round Table
on Sustainable Consumption, a new ‘evidence base’ on sustainable con-
sumption and production, a set of public engagement forums on sustain-
able living, and a sustainable consumption action plan to be launched in
2006 (DTI, 2003a, p. 32; DEFRA, 2005a). These kinds of activities may
not yet be convincing evidence that the UK as a whole has embraced sus-
tainability. But they certainly oﬀer an indication of the importance placed
by policy makers on the relevance of lifestyle and consumption in deliv-
ering sustainable development.
The purpose of this chapter is broadly twofold. In the ﬁrst part of the
chapter I present a very brief policy history of the concept of sustainable
consumption, and describe some of the political and ideological ten-
sions that underlie the concept. In the second part of the chapter, I discuss
some of the key features of the sustainable consumption debate, and place
these in the contexts of wider and deeper discussions about consumer
behaviour and the nature of modern consumer society. Finally, I will oﬀer
some tentative suggestions concerning the extent to which these broader
understandings of consumption might be regarded as enhancing or hin-
dering the prospect of sustainable development.
2. Sustainable consumption – a brief policy history
Evidence of concern about the consumption and overconsumption of mate-
rial resources can be traced to (at least) the second or third century (Bloch,
1950). Early modern critics of the level of resource consumption witnessed
by industrial society have included Henry Thoreau (1854), William Morris
(1891) and Thorstein Veblen (1899). Overconsumption of resources ﬁrst reg-
istered in the international policy arena in 1949 when the newly-formed
United Nations held an international Scientiﬁc Conference on the Conser-
vation and Use of Resources. The issue was revisited at the United Nations
Conference on the Human Environment in Stockholm in 1972.
In the same year, the Club of Rome published one of the ﬁrst and most
inﬂuential documents to bring attention to the impact that rising levels of
aﬄuence could have in terms of resource depletion and environmental
degradation (Meadows et al., 1972; see also Chapter 15). Falling commod-
ity prices and new discoveries undermined many of the authors’ worst pre-
dictions about resource scarcity. But the relevance of consumption patterns
to pressing environmental problems (such as climate change, ozone deple-
tion and the management of hazardous waste) proved a more robust
element of the Club of Rome critique, and by the early 1990s, consumption
had become a vital element in the debate about ‘sustainable development’
The terminology of sustainable consumption itself can be dated more or
less to Agenda 21 – the main policy document to emerge from the United
Nations Conference on Environment and Development (the ﬁrst Earth
Summit) held in Rio de Janeiro in 1992. Chapter 4 of Agenda 21 was enti-
tled ‘Changing consumption patterns’ and it called for ‘new concepts of
wealth and prosperity which allow higher standards of living through
changed lifestyles and are less dependent on the Earth’s ﬁnite resources’. In
so doing, it provided a potentially far-reaching mandate for examining,
questioning and revising consumption patterns – and, by implication, con-
sumer behaviours, choices, expectations and lifestyles.
This mandate was initially taken up with some enthusiasm by the inter-
national policy community. In 1994, the Norwegian government hosted a
roundtable on sustainable consumption in Oslo involving business, NGO
and government representatives (Ofstad, 1994). The United Nations
Commission on Sustainable Development (CSD) launched an international
work programme on changing production and consumption patterns in
1995. At the ‘Rio plus 5’ conference in 1997, governments had identiﬁed sus-
tainable consumption as an ‘over-riding issue’ and a ‘cross-cutting theme’ in
Handbook of sustainable development
the sustainable development debate. By the late 1990s, initiatives on sus-
tainable consumption were in full ﬂood. The 1998 Human Development
Report focused explicitly on the topic of consumption (UNDP, 1998). In the
same year, the Norwegian government organized a further workshop in
Kabelvåg (IIED, 1998). The government of South Korea hosted a follow-
up conference in 1999. The United Nations Environment Programme
(UNEP) launched a sustainable consumption network, integrated sustain-
able consumption policies into the Consumer Protection Guidelines, and in
2001 published a strategic document emphasizing the opportunities
aﬀorded by the new sustainable consumption focus (UNEP, 2001).
By the time the World Summit on Sustainable Development (WSSD)
convened in Johannesburg in 2002, the concept of ‘sustainable consump-
tion’ had been placed ﬁrmly on the policy map and ‘changing consumption
and production patterns’ had been identiﬁed as one of three ‘overarching
objectives’ for sustainable development (UN, 2002). But consensus on what
sustainable consumption actually is or should be about had proved remark-
ably diﬃcult to negotiate (Manoochehri, 2002; Jackson and Michaelis,
2003; Seyfang, 2003). The Appendix to this chapter illustrates that there is
still no clear agreement either on a precise deﬁnition of sustainable con-
sumption or even on the domain of application of the concept.
Two speciﬁc points are worth noting about this range of deﬁnitions. The
ﬁrst is that they take a variety of positions in relation to extent to which
sustainable consumption actually addresses the issues of consumer behav-
iour, lifestyle and ‘consumerism’. Some deﬁnitions are very much more
explicit that the domain of interest is the activity of consuming and the
behaviour of consumers. Other deﬁnitions, however, seem to favour an
approach that concentrates on production processes and consumer prod-
ucts, suggesting that the route to sustainable consumption lies mainly in the
more eﬃcient production of more sustainable products. Others seem to
want, almost deliberately, to conﬂate these two issues.
A second, related point of variation between these deﬁnitions lies in the
extent to which they imply consuming more eﬃciently, consuming more
responsibly, or quite simply consuming less. While some deﬁnitions insist that
sustainable consumption implies consuming less, others assert that it means
consuming diﬀerently, and that it categorically does not mean consuming less.
The dominant institutional consensus has tended to settle for a position
in which sustainable consumption means (more) consumption of more sus-
tainable products and this is achieved primarily through improvements in
the productivity with which resources are converted into economic goods.
This position is typiﬁed by a speech given by the former UK Trade and
Industry Secretary, Patricia Hewitt, in 2003 in which she argued (DTI,
[t]here is nothing wrong with rising consumption, indeed it is to be welcomed as
symptomatic of rising living standards in our communities. And it is quite right
that the poorest in the world aspire to escape poverty and enjoy those standards.
But we need to make sure the products and services we consume are designed
not to harm our environment. We can enjoy more comfort, more enjoyment and
more security without automatically increasing harmful and costly impacts on
the environment. But it requires a re-thinking of business models to make more
productive use of natural resources.
Even on the world stage, at the second Earth summit in Johannesburg,
the WSSD Plan of Implementation (UN, 2002) appeared to retreat from
the idea of lifestyle change advanced in Agenda 21 ten years earlier.
Instead, the focus was placed ﬁrmly on improvements in technology and
the supply of more eco-eﬃcient products, services and infrastructures –
that is to say on resource productivity improvements of one kind and
Reasons for the institutional reticence to engage with thorny issues of
consumer behaviour and lifestyle are not particularly hard to grasp. In par-
ticular, addressing them would involve questioning fundamental assump-
tions about the way modern society functions. Intervening in consumer
behaviour would contradict the much-vaunted ‘sovereignty’ of consumer
choice. Reducing consumption would threaten a variety of vested interests
and undermine the key structural role that consumption plays in economic
growth. Questioning consumption and consumer behaviour quickly
becomes reﬂexive, demanding often uncomfortable attention to both per-
sonal and social change. To make matters worse, arguments to reduce con-
sumption appear to undermine legitimate eﬀorts by poorer countries to
improve their quality of life.
Nonetheless, the fall-back position adopted by conventional institutions
is also problematic for a number of reasons. In the ﬁrst place it tends to col-
lapse any distinction between sustainable consumption and sustainable
production. Secondly, the concentration on eﬃciency and productivity
tends to obscure important questions about the scale of resource con-
sumption patterns. In fact, it would be entirely possible, under this framing
of the problem, to have a growing number of ethical and green consumers
buying more and more ‘sustainable’ products produced by increasingly
eﬃcient production processes, and yet for the absolute scale of resource
consumption – and the associated environmental impacts – to continue to
grow. Finally, and perhaps most importantly, by focusing on what are
broadly technological avenues of change, this version of sustainable con-
sumption ignores vitally important issues related to consumer behaviour,
lifestyle and the culture of consumption – key underlying factors that play
a vital role in determining the overall scale of resource consumption.
Handbook of sustainable development
In summary, it may well prove impossible to negotiate a common con-
sensus on what sustainable consumption is or to agree a clear deﬁnition of
it. But this does not mean that the current institutional position is adequate
to the challenge of sustainability. In fact, a growing body of literature with
a very long pedigree suggests an increasingly urgent need for policy and
public debate to reach the parts of consumption that institutional initia-
tives on sustainable consumption (narrowly conceived) have so far signally
failed to reach.
3. Dimensions of sustainable consumption
One of the many confusing tensions underlying the sustainable consump-
tion debate is the question of what, precisely, is being or should be (or
should not be) consumed in the consumer society. There is, for example, an
important (although not always very clearly articulated) diﬀerence between
material resource consumption and economic consumption. Material
resource consumption – with its attendant implications for resource
scarcity and environmental degradation – has been the principal focus of
many of the policy debates on sustainable development. But economic con-
sumers do not only buy and consume material resources. In fact, so-called
‘ﬁnal consumers’ (households, for example) rarely buy materials per se at
all. Rather they consume a variety of goods and services, which employ a
variety of diﬀerent kinds of material inputs and give rise to a range of
diﬀerent material and environmental impacts. Resources are consumed in
the course of economic consumption; but the two processes are not identi-
cal or even congruent. Some forms of resource consumption take place
outside of the economic framework. Some forms of economic consump-
tion involve virtually no resource consumption at all.
This lack of congruence is, in one sense, precisely what has allowed the
institutional position on sustainable consumption to retain a degree of
credibility. Continued economic growth is perhaps the most deeply
entrenched political imperative of post-war modern governments. Without
a continuing rise in household consumption levels, economic growth would
stall, giving way to the spectre of recession and the fear of unemployment,
undermining the political credibility of the government that presides over
these. Thus, any attack on levels of economic consumption is anathema to
modern governments. But what if economic consumption can be decou-
pled from material resource consumption? What if consumers can be per-
suaded more and more to buy less and less materially-intensive products?
So long as the decoupling of economic expenditure from material resources
occurs faster than the growth in economic consumption, then surely it
should be possible to preserve the sanctity of economic growth and at the
same time achieve important environmental goals?
This position is the one implicit in the UK’s sustainable consumption
and production framework, which sets out a variety of ‘decoupling
indicators’ showing that economic growth is faster than the growth in
material inputs and waste outputs (DTI, 2003c; DEFRA, 2005b). In spite
of this evidence, however, there is little doubt that economic consump-
tion has historically relied heavily on the consumption of material
resources; that improvements in resource productivity have generally
been oﬀset by increases in scale (see Chapter 15 for evidence for and
against); and that the goods and services that people actually buy
continue to be inherently material in nature (Princen et al., 2002; Jackson
and Marks, 1999). Thus, simplistic appeals to reduce material consump-
tion whilst maintaining economic growth risk charges of naivity or even
At the very least, a realistic programme for achieving such a ‘decoupling’
requires a robust examination of the complex relationships between
economic value and material inputs and outputs. In fact, this ‘mapping’ of
consumer demand and lifestyle choice onto resource requirements and envir-
onmental impacts represents one of the most proliﬁc and important avenues
of current and future research in sustainable consumption (for example,
Barrett et al., 2005; Druckman et al., 2005; Tukker, 2005; Hertwich, 2005).1
But the ‘decoupling’ arguments also require a sophisticated understand-
ing of consumer motivations and behaviours, and in particular of the rela-
tionship between consumer desires and the materiality of products. Why do
we consume? Why do we consume material products? What factors shape
and constrain our choice of material products? What do we expect to gain
from consuming material goods? How successful are we in meeting those
All these questions become vitally important in the attempt to reduce the
aggregate material impact of society’s consumption patterns. Strangely,
however, they have not yet been asked – or have only recently been asked –
explicitly within the sustainable consumption debate itself. Rather, the litera-
ture directly relating consumer motivation to sustainability has tended to fall
into two main camps. On the one hand, there is a fairly recent, empirically-
based literature which attempts to identify the psychological parameters of
‘environmentally-responsible’ or ‘environmentally-friendly’ behaviour (de
Young, 1996; Thøgersen and Ölander, 2002). On the other hand there is much
more extensive literature with a very long pedigree which attacks (over-)con-
sumption as a form of social pathology (Galbraith, 1958; Fromm, 1976;
Durning, 1992; Frank, 1999).
The ﬁrst literature set strives to identify existing behavioural types and
patterns which, if replicated and extended, might lead to sustainable con-
sumption at the macro level (Thøgerson, 1999). The second literature set
Handbook of sustainable development
highlights the social and psychological disbeneﬁts of material consumption
(Kasser, 2002). Often based implicitly or explicitly on humanistic psychol-
ogy and couched in the (problematic) language of ‘human needs’, one of
the interesting aspects of this literature is that it suggest the existence of a
kind of double dividend for sustainable consumption. Speciﬁcally, a corol-
lary of the thesis that material (over-)consumption has social and psy-
chological disbeneﬁts is that reducing consumption has social and
psychological beneﬁts; that it may be possible to live better by consuming
less (Jackson, 2005a). This implication has provided the basis for the emer-
gence of a clear – if not clearly signiﬁcant – movement towards voluntary
simplicity and downshifting (Schor, 1998; Elgin, 1993).
Both of these sets of literature have some potential value in forwarding
the debate about consumption and sustainability. Nonetheless, they barely
scratch the surface of the broader set of questions about consumer motiv-
ations indicated above. Ironically, of course, some at least of these broader
questions have been addressed extensively and for several decades outside
the sustainable consumption debate. For this reason, it is worth examining
that broader literature in more detail.
4. Understanding ‘unsustainable’ consumption
The problem for those engaged in sustainable consumption lies not so
much in a dearth of theories to work from as in a superabundance of pos-
sible answers, hailing from disciplines as diverse as economics, psychology,
anthropology, biology, sociology and marketing. In fact the contemporary
and historical science and social science literature is replete with diﬀerent
models of consumer behaviour, each oﬀering a variety of diﬀerent versions
of the nature and role of the ‘modern consumer’. These roles include, for
example: the satisfaction of functional needs, the construction of identity,
the pursuit of status and social distinction, the maintenance of social cohe-
sion, social and/or sexual selection, negotiation of the boundary between
the sacred and the profane, and the pursuit of personal and collective
This multiplicity of roles for consumption is what led Gabriel and Lang
(1995) to refer to the consumer as ‘unmanageable’ and inspired Miller
(1995) to talk about consumption as ‘the vanguard of history’. Our con-
sumption patterns oﬀer a complex, yet telling picture of the kind of society
we have become and of our relationship to material goods. Getting to grips
with this complexity is challenging. But two or three key lessons emerge
from the vast literature on modern consumption.
The ﬁrst of these is that no purely functional account of material com-
modities can provide a robust basis for analysing consumer behaviour or
for negotiating more sustainable consumption patterns. Rather material
artefacts must be seen as playing important symbolic roles in our lives
(Baudrillard, 1968; 1970; Dittmar, 1992; McCracken, 1990). This symbolic
role of consumer goods allows us to engage in vital ‘social conversations’
about status, identity, social cohesion, and the pursuit of personal and cul-
tural meaning.3 In short it allows us to use the ‘language of goods’
(Douglas and Isherwood, 1979) to ‘help create the social world and to ﬁnd
a credible place in it’ (Douglas, 1976, p. 27).
Another hugely important lesson from the literature is that, far from
being able to exercise free choice about what to consume and what not to
consume, people often ﬁnd themselves locked in to unsustainable con-
sumption patterns by factors outside their control (Sanne, 2002; Shove,
2003; Warde, 2003). ‘Lock-in’ occurs in part through ‘perverse’ incentive
structures – economic constraints, institutional barriers, or inequalities in
access that actively encourage unsustainable behaviours. It also occurs
because of social expectations or from sheer habit. At one level, consumer
behaviour is simply the manifestation of everyday routine ‘social practices’
(Spaargaren and van Vliet, 2000) which are themselves the product of a
‘creeping evolution of social norms’.
These lessons emphasize the diﬃculty associated with negotiating sus-
tainable consumption patterns. But they also highlight another key feature
in the literature: namely, the social and institutional context of consumer
action. We are fundamentally social creatures. We learn by example and
model our behaviours on those we see around us. Our everyday behaviour
is guided by two kinds of social norms (Cialdini et al., 1991). ‘Descriptive
norms’ teach us how most people around us behave. They allow us to mod-
erate our own behaviour. I know what kind of clothes to wear and when to
put out my recycling partly by observing continually what others around
me do. ‘Injunctive norms’ alert us to what is sanctioned or punished in
society. Driving outside the speed limit, polluting the water supply and
(perhaps) failing to separate our recyclables from the rubbish are all exam-
ples of behaviours which carry varying degrees of moral sanction.
In both cases, there is lot at stake. Our ability to observe social norms
inﬂuences the way we are perceived in our peer group and is important to
our personal success. My ability to ﬁnd a mate, keep my friends and stay in
a good job are all mediated by my success in following social norms.
Descriptive and injunctive norms can sometimes point in opposite direc-
tions. Most people agree that breaking the speed limit is wrong; but many
people do it. The same is true for other environmentally unsustainable
Some social theories suggest that our behaviours, our attitudes, and even
our concepts of self are (at best) socially constructed (Mead, 1934) and (at
worst) helplessly mired in a complex ‘social logic’ (Baudrillard, 1970).
Handbook of sustainable development
Social identity theory, for example, regards key aspects of our behaviour as
being motivated by the particular social groups that we belong to (Tajfel,
1982, for example). Certain behaviours are more or less ruled in or ruled
out for me, simply because I perceive myself as belonging to a particular
social group. The roots of these ‘normal behaviours’ have very little to do
with individual choice.
5. Policies for sustainable consumption
The policy implications of all this are potentially profound. Until quite
recently, consumer policy has been inﬂuenced heavily by concerns for ‘con-
sumer sovereignty’ and by an allegiance to the rational choice model
(Jackson, 2005b). From this perspective, the role of policy appears to be
straightforward, namely to ensure that the market allows people to make
eﬃcient choices about their own actions. For the most part, this has been
seen as the need to correct for ‘market failures’. These failures occur, for
example, if consumers have insuﬃcient information to make proper
choices. In this perspective, policy should therefore seek to improve access
to information. In addition, private decisions do not always take account
of social costs. Policy intervention is therefore needed to ‘internalize’ these
external costs and make them more ‘visible’ to private choice.
Unfortunately, the evidence suggests that policies based on information
and price signals have had only limited success in changing unsustainable
behaviours. In one extreme case, a California utility spent more money on
advertising the beneﬁts of home insulation than it would have cost to install
the insulation itself in the targeted homes.4 Price signals too are often
insuﬃcient to overcome the barriers to more sustainable behaviour. In
some cases, more sustainable choices are already cost-eﬀective, but are not
taken up for a variety of reasons.
The rhetoric of ‘consumer sovereignty’ and ‘hands-oﬀ’ governance does
not help much here because it regards choice as individualistic and fails to
unravel the social, psychological and institutional inﬂuences on private
behaviours. Some behaviours are motivated by rational, self-interested, and
individualistic concerns. But conventional responses neither do justice to
the complexity of consumer behaviour nor exhaust the possibilities for
policy intervention in pursuit of behavioural change.
It is clear that sustainable consumption demands a more sophisticated
policy approach aimed at removing perverse incentive structures and
making sustainable consumption behaviours easy (Darnton, 2004;
Jackson, 2005b; DEFRA, 2005a). It is beyond the scope of this chapter to
outline in detail the components of such a strategy. But the considerations
of the previous section suggest that it must have, at the very least, the
following crucial dimensions:
it must enable and facilitate access to more sustainable choices;
it must ensure that incentive (and penalty) structures support rather
than hinder the desired changes;
it must engage people in community initiatives to help themselves re-
negotiate unsustainable behaviours and practices and develop more
sustainable lifestyles; and
it must exemplify the desired changes in Government policies and
6. A ‘double dividend’ in sustainable consumption?
In closing, it is worth returning brieﬂy to the argument that sustainable con-
sumption oﬀers a kind of double dividend. If the consumer way of life is –
as critics have suggested – both ecologically damaging and psychologically
ﬂawed, then the possibility remains that we could live better by consuming
less, and reduce our impact on the environment at the same time (Jackson,
2005a). But how realistic is this perspective, in the light of the discussion
above? Is it consistent with fundamental understandings about consumer
behaviour and human motivation? Does it reﬂect socially achievable and
culturally relevant ambitions? Or is it simply a delusion based on utopian
understandings of human nature?
These are important and as yet unexplored questions, which perhaps,
more than any other, characterize both the promise and the challenge of
sustainable consumption. A more detailed pursuit of this issue is beyond
the scope of this chapter. In closing, however, I make three speciﬁc obser-
vations about the promise embodied in this perspective.
In the ﬁrst place, the insight that material commodities play symbolic
roles and that these symbolic roles serve important social and psycholo-
gical functions is perhaps the clearest message yet that simplistic appeals
to consumers to forego material consumption will be unsuccessful.
Such an appeal is tantamount to demanding that we give up certain key
capabilities and freedoms as social beings. Far from being irrational to
resist such demands, it would be irrational not to, in such a society. A
sophisticated understanding of this very real social constraint must
inform the otherwise naive appeal for a decoupling of economic and
Secondly, and despite the fact that our present consumer society is inher-
ently material in its choice of symbolic goods, symbolic value is not solely
embodied in material artefacts. A variety of other social and cultural con-
structs have – over history – played vital roles in the construction, negotia-
tion and exchange of symbolic meaning. These include processes of ritual,
myth, and narrative and institutions such as the family, the community and
the church (Campbell, 1959; Berger, 1969; Taylor, 1989). Though the tide of
Handbook of sustainable development
cultural change may have swept some of these institutions away, it does not
seem impossible – in theory at least – to conceive of futures in which some
of the symbolic functions of material commodities are once again taken
back by other kinds of institutions with lower resource ‘footprints’.
Finally, however, it is abundantly clear that cultural change at this level
is not immediately or easily negotiable. As Baudrillard (1970) was keen to
point out, symbolic meaning is negotiated through a complex ‘social logic’
that lies beyond individual choice and appears to defy conventional policy
prescriptions and interventions. Perhaps the biggest challenge for sustaina-
bility policy therefore lies in identifying the myriad ways in which govern-
ments currently intervene in and could potentially inﬂuence this social
In the ﬁnal analysis, these remarks should serve to warn us against sim-
plistic prescriptions for change. Material goods and services are deeply
embedded in the cultural fabric of our lives. Through them we not only
satisfy our needs and desires, we also communicate with each other, nego-
tiate important social relationships, and pursue personal and cultural
meaning. In this context, motivating sustainable consumption may be as
much about building supportive communities, promoting inclusive soci-
eties, providing meaningful work and encouraging purposeful lives as it is
about awareness-raising, ﬁscal policy or persuasion.
Appendix: deﬁnitions of sustainable consumption
The use of goods and services that respond to basic needs and bring a better
quality of life, while minimizing the use of natural resources, toxic materi-
als and emissions of waste and pollutants over the lifecycle, so as not to
jeopardize the needs of future generations (Ofstad, 1994).
The special focus of sustainable consumption is on the economic activity
of choosing, using, and disposing of goods and services and how this can
be changed to bring social and environmental beneﬁt (IIED, 1998).
Sustainable consumption means we have to use resources to meet our basic
needs and not use resources in excess of what we need (Participant deﬁni-
tion, Kabelvåg, IIED, 1998).
Sustainable consumption is not about consuming less, it is about consum-
ing diﬀerently, consuming eﬃciently, and having an improved quality of life
Sustainable consumption is consumption that supports the ability of
current and future generations to meet their material and other needs,
without causing irreversible damage to the environment or loss of function
in natural systems (OCSC, 2000).
Sustainable consumption is an umbrella term that brings together a
number of key issues, such as meeting needs, enhancing quality of life,
improving eﬃciency, minimising waste, taking a lifecycle perspective and
taking into account the equity dimension; integrating these components
parts in the central question of how to provide the same or better services
to meet the basic requirements of life and the aspiration for improvement,
for both current and future generations, while continually reducing envir-
onmental damage and the risk to human health (UNEP, 2001).
Sustainable consumption and production is continuous economic and
social progress that respects the limits of the Earth’s ecosystems, and meets
the needs and aspirations of everyone for a better quality of life, now and
for future generations to come (DTI, 2003a).
Sustainable consumption is a balancing act. It is about consuming in such
a way as to protect the environment, use natural resources wisely and
promote quality of life now, while not spoiling the lives of future consumers
1. That I have less to say speciﬁcally about this avenue of research is a potential limitation
of this chapter. However, this kind of work has a long pedigree in environmental eco-
nomics and is in part covered by other chapters in this volume.
2. See Jackson (2003; 2004; 2005a; 2005b), Jackson and Michaelis (2003), Princen et al.
(2002), Sanne (2002), Michaelis (2000), Røpke (1999), Jackson and Marks (1999),
Crocker and Linden (1998), Gabriel and Lang (1995) for reviews and overviews of some
of this literature.
3. The use of the term ‘social conversations’ in this context draws on the early work of
G.H. Mead (1934).
4. Cited in McKenzie Mohr (2000).
Barrett, J., R. Birch, N. Cherrett and T. Wiedmann (2005), Reducing Wales’ Ecological
Footprint. A resource accounting tool for sustainable consumption, Cardiﬀ/York: WWF
Baudrillard, J. (1968), ‘The system of objects’, extracted in Selected Writings, 1988, Polity
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