Posted in Finance Articles, Total Reads: 4437
, Published on 17 October 2012
Sustainable development is a term that everyone likes, but nobody is sure of what it means’. the term ‘sustainable development’ is decidedly vague, and has become something of a catch all phrase to mean almost anything from recycling to re-afforestation, to integrated policy for sustained economic growth to the use of environmentally-adjusted national income accounts.
Sustainable development is about a whole lot more than economics and ethics, of course. It’s about the protection of natural capital, the promotion of public health, the preservation of national security, and the quality of human development more generally. None of these things are mutually exclusive of one another nor, indeed, of economics or ethics. . The sustainability question is: How can we design and build a world in which the Earth thrives and people can pursue flourishing lives?
Perhaps the most commonly used definition today is that put forward by the 1987 World Commission on Environment and Development in its report’ Our Common Future’; viz. ‘development that meets the needs of the present without compromising the ability of future generations to meet their economic needs’. Not that this has quelled the number of new interpretations!
The increasing prominence of sustainable development in recent times, in terms of the burgeoning literature on the subject and the number of international conferences that focus upon it (particularly following the 1992 Earth Summit in Rio de Janeiro), suggests that this particular aspect of capitalist development has a short-term future. Indeed, to develop along sustainable lines can assist business in gaining competitive advantage.
The challenge is to produce incentive systems that induce a change in the behaviour of economic agents such that economic activity proceeds along ecologically sustainable lines. The market is a powerful and dynamic mechanism that, harnessed appropriately, can be the catalyst for change.
In some countries, more intervention may be necessary as compared to others, and some countries may have more intervention than is absolutely necessary. A determinant of the extent of intervention will be the ‘maturity’ of the market in the country in question, in terms of its ability to deliver ecological economic efficiency.
Reference to the ‘maturity’ of the market in this context deserves further explanation. In essence, it is to do with the level of ecological consciousness. The more mature the market, the more likely it is that businesses within that market will have made (or will be in the process of making) the transition from industrial capitalism to natural capitalism. The businesses that characterize this kind of market will not behave in a reactionary manner when engaging with the natural environment. On the contrary, they will be proactively seeking competitive advantage by going beyond compliance with environmental regulations, and reaping the economic benefits that sustainable development can bring. Quite clearly, state intervention is these circumstances would be unjustified.
Bridging the gap between theory and reality: There is an old English adage that ‘the more things change, the more they stay the same’. This phrase encapsulates rather nicely, the concept of paradigm shift, and the difficulty sometimes experienced in making the transition from the ‘old way of thinking’ to the ‘new way of thinking’.
There are some obstacles in the path of sustainable development, and some fundamental changes are required if sustainable development is to be truly embraced as a viable alternative to free market economics as it currently exists within the neo-classical paradigm.
Scientific revolution, or paradigm shift, is the transition from one paradigm to another. Unlike a political revolution, a scientific revolution does not involve bloodshed and violence, but both are the result of profound discontent. After the revolution, the new paradigm does not necessarily replace the old one completely, and some parts of the old paradigm are often absorbed into the new, but most parts of the old paradigm, which are incompatible with the new, have to be dropped. This causes intellectual and psychological difficulties for those who adhered strongly to the incompatible parts of the old paradigm. Some will be persuaded and converted to the new paradigm, but some will resist. In many instances, no conversion will be possible and the old paradigm will survive until its supporters die.
The censorship role of the current paradigm and its supporters are also seen to be relevant to economics. Articles or books that radically challenge the existing paradigm have great difficulty in getting past the referees appointed by publishers and journals, because these referees are invariably leading exponents of the existing paradigm.
Business leadership as a catalyst for change: A number of observations might be made at this juncture. First and foremost, significant change is unlikely in any society so long as the people in the seats of power (and their advisors) continue to be the products of the mainstream paradigm.
A second observation is that, generally, human behavior is such that it only responds to incentives, and so long as the incentive to embrace paradigm shift remains weak (or non-existent), the prospects of change are remote. A ‘command-and-control’ approach on the part of the state, for example, might provide a useful legislative framework for change, but, unless there are tangible benefits to be gained from operating within this framework, change is likely to be piece-meal. Rapid change is far more likely to occur if it is voluntary.
Given the right incentive, the business community can lead the charge. Business is the only institution within the national and international political economies powerful enough to foster the changes necessary for ecological and social sustainability. The profit motive has an important role to play (something largely absent within academe and state bureaucracies). For business to take up the challenge, sustainable behavior must be a source of competitive advantage. The vital ingredient is education of business leaders. If it can be demonstrated that a business strategy based on sustainable development is capable of providing a competitive edge in the marketplace, then it is possible for positive feedback to prompt a logistic and for paradigm shift to be effected.
Given the considerable uncertainty surrounding the definition of sustainable development, it should not be altogether surprising that measurement of sustainability has been somewhat problematic. This has proved to be quite a convenient state of affairs for some less than ethical companies, because it has allowed them to exploit this uncertainty, and project a ‘clean, green image’, when in actuality, this is not the case at all – a practice commonly referred to as ‘greenwash’. Now we have to see what needs to be done if the flow of greenwash is to be curtailed.
While market-oriented approaches are in vogue, and they can certainly enhance a country’s capacity to move toward sustainable development, it is worth noting that in some circumstances, assigning correct pricing to environmental resources may prove impossible or superfluous.
In simple terms, the goal of increasing the welfare of society through changing relative prices is all very well, but only if society remains within what might be referred to as its ecological budget constraint.
This requires an economy to meet human material needs while maintaining the stock of natural capital. If changing relative prices does not do this, then the market mechanism by itself is clearly not be sufficient to secure ecological economic efficiency, and some intervention on the part of the state will be necessary.
Despite the obvious advantages of wealth, nations do a poor job of keeping count of their own. They may boast about their abundant natural resources, their skilled workforce and their world-class infrastructure, but there is no widely recognized, monetary measure that sums up this stock of natural, human and physical assets.
This article has been authored by Manisha Vashist from SCMHRD and Anshul Chhabra from UBS Chandigarh.
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