Should growth really be rationed?

Duncan Green, over at his excellent blog, makes a case for rationing growth to allow the poor to grow but keep climate change in check. His three main points are, basically:

  1. You need rather robust growth in poor countries to reduce poverty.
  2. Saving a technological breakthrough, global GDP needs to fall to reduce carbon emissions
  3. There are decreasing returns to happiness, so if we want to maximize global happiness, given some maximum cap on global emissions, richer countries should forgo more growth so that poor ones can grow faster, given the limited (environmental) space that they have.

I’m not convinced, for a number of reasons:

  • The growth of the developed and developing countries are not independent – there is no pot of gold from which either the rich or the poor can draw growth; many poor countries depend on exports to rich (and other developing) countries. This is one of main channels through which the financial crisis has negatively impacted developing countries: reduced demands for their goods and services. Slower growth from richer countries also means less aid and less remittances.
  • Most people accept that there are diminishing returns to utility or happiness (let’s not get into how related those two are), but I think the jury is still out on happiness and growth. For one, happiness surveys usually give a cardinal (or very basic ordinal) scale for responding, a scale which is usually bounded about (I am super happy!). The top and bottom-coding of the responses are always going to bias the results (there are some econometric detours to get around these issues). This isn’t completely the fault of the surveys (can you imagine rating how happy you are on a scale of 0 to 10,000?)
  • Also, most of these surveys usually looked at levels of income, rather than growth or loss in income. There’s also issues of the reference point from which gains or losses in income should be judged (a heavy dose of reading into prospect theory is always helpful). Also related to prospect theory is the concept of loss aversion, that people tend suffer more from losses than from gains. I think the endowment effect likely extends to future expectations of income as well as regular income: we expect our lives and society to be improving in marginal ways our entire life, and when we fall short of those expectations we’ll be less happy.
  • Mixing the arguments for global social justice and for internalising carbon emission externalities might lead to the conflation and subsequent dilution of the two. Each country should face incentives which reflect their relative contribution to the global public good of “natural temperature.” Large per-capita polluters should be internalising the cost of their actions imposed on developing countries, where the welfare losses from a rise in temperatures is potentially much greater. Following this style of argument leads us roughly to the same sort of conclusions: the developed world must have sharper checks on their emissions (and likely growth). Note that this is a basic argument of efficiency, not of social justice.

Still, it’s good that we’re finally owning up to the fact that growth and adapting for climate change are linked, especially for poor countries.

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