The last time The Examined Life covered Dilip’s experiments with the GDP, I noted that he was making a plausible sounding, but incorrect point. Now he has gone and made another post, and this time he makes two points, one plausible, but still incorrect, and the other so baffling that only the use of big big words saves it from being identified as self-evidently absurd.
First, the plausible, but incorrect point, which is the familiar claim that measuring the GDP does not take into account environmental degradation. I think I have already answered it when I said that the absolute GDP may not, but the GDP growth certainly does. But let me explain the dispute with an example which makes my point clearer.
Suppose that you are a farmer who does not care for the environment. You do a lot of bad things. Your farming erodes nutrients from the soil. You deplete the water table, etc. Your actions may get you a bumper crop this year and that will increase the GDP. But sooner or later, this depletion will show up in the GDP won’t it?
Yes it will, but how soon or how late? That is the crux of the disagreement between environmentalists and economists. Environmentalists think that the depletion will not show up till one day it is too late. Economists think that the problems will show up next year, in increased price or lower production. If the environmentalists are right, then the farmer will merrily draw water from the ground, depleting the water table, but increasing production, till some day poof! It’s all over. If the economists are right, then the problems will gradually increase, and people will start preparing for them and countering them.
So the economist’s point will be that a) there is no way you can get sustained GDP growth by screwing up the environment (The key word is “sustained”.) and b) As the GDP increases, people become more aware of environmental problems and they have the resources to fix them. You might disagree, you might say that we are still sitting on a time bomb. But the facts are on the economists’ side, I am afraid. Atleast the first point is a plausible disagreement over facts, unlike the second point.
The second point is bizarre. He is in effect saying that the US produces cars, not because the Americans want cars, but because car production gets added to the GDP. If you think that is a sensible point, I am afraid there is nothing I can do to help you.
I can understand how GDP growth — or the lack of it — could account for environmental degradation in the case of the farmer. But I don’t see how environmental degradation in the Tirupur case that Dilip cites will stunt GDP growth over the long term.
Isn’t it a fair assumption that atleast part of the effort that is now being expended in transporting water would otherwise have been spent on developing assets which would have caused an increase in GDP next year?
I think it is a fair assumption to make. It’s possible but not necessary.
Historically, I would imagine, GDP of most countries has always grown at a cost to the environment.
Yes, I agree, that one fine day (not next year), the depletion of natural resources may have an adverse impact on an economy. But the point is do GDP — or GDP growth for that matter — account for it now?
I think it is a fair assumption to make. Otherwise, you’d have to assume that if people have some money to spare, regardless of how rich or how poor they are, they will spend the whole spare change on frivolous pursuits and neglect things like their children’s education, saving for medical expenses etc.
Your second point is the crux of the dispute. I am hard put to think of any aspect of environmental degradation that will not give warning signs that will show up in the GDP growth rate early on. By “early”, it may not be next year, but it will certainly show up in 5-10 years. In fact, the modern economy is getting better and better at detecting early warning signs. Even something like global warming, evidence for the whose severity is thin on the ground, is showing up as increased insurance costs.
Now it is certainly true that when the market system is screwed up, what GDP growth tells will not get across at the micro level. If water is not priced properly, costs will be borne by the farmer while the benefits will be borne by the industrialist. So the industrialist will have no incentive to conserve water. But the cost will certainly show up when you add it all up at the GDP level.
Also historically, the GDP of most countries has not grown at a cost to the environment. As the GDP has grown, people become more aware of, and can afford to, take care of their environment. In the US, forests have regrown on farms abandoned because they are no longer needed because increase in productivity made them redundant. Horse manure and wood burning contributed more per capita to global warming than modern plants.
There is another point, slightly offtopic though. By not making the industrialist treat the dirty and contaminated water before discharging, the public, via the state, whether in the long or short run, is provding hidden subsidies. This is contrary to the principles of free trade. Free trade should imply that a producer should bear the full cost of producing the goods being produced, and environmental clean up as a result of the producer’s activites should be included in the cost.
To answer those who wonder how Tirupur causes a GDP downturn, let me recall a personal stoty.
My family owns a farm on the Cauvery region that is now being polluted by the industries in and around Tirupur. This not only cause a reduction in tield as you would imagine, but is giving rise to problems that no one anticipated – the dye as a waste attracts a lot of insects. This has dealt a major blow to the cotton crop and the turmeric crop in that region. Being “unusual” pests, my uncle really has no answer now. His original pest control methods don’t work well now.
And, this has resulted in a significant loss of production – which I imagine has affected the GDP.
Nilu, it isn’t as simple as that. You forget that the industries in and around Tirupur also contribute to the GDP.
Ravi, going back to your first comment for a bit:
“Isn’t it a fair assumption that atleast part of the effort that is now being expended in transporting water would otherwise have been spent on developing assets which would have caused an increase in GDP next year?â€
Isn’t this precisely the problem with GDP? The GDP has grown. But this growth fails to reflect the better alternatives on the ground.
I think the crux of the debate, which you have captured in your original post, is: When will the environmental cost show up in GDP growth numbers? You think soon enough. I am not as optimistic.
Yes, but they do not make up for whats lost. They are additions – not replacements.
That’s the point. The GDP grows. It doesn’t account for what’s lost.
Huh!
Ashok 2+2+1 = 5 and 2+1 = 3, and 5>3.
Thanks for the lesson in arithmetic. But, again, you are forgetting something. Isn’t it possible that the second equation is 4+2=6? 6>5