Making Sustainable Development Work: Governance, Finance, and Public-Private Cooperation

I came today to tell you that I didn't understand what Sustainable Development was. That's been stolen. I came to sing the virtues of economic development and I will differ from Andrew Natsios on that in that I thought all development was economic development, so I'll have to talk to his wife.

I did want to talk again about economic development and how it is the foundation for other priorities that others might wish to add to the table. I wanted to apply a little economics to the concept of Sustainable Development. In the interest of moving the sessions along, I will be brief, but let me walk through some of the thoughts I had about the conversation I think we ought to have here.

The first is I did want to remind everybody of the paradigm of economic development and some of the things that we need to keep our eye on in pursuing other concepts of development including Sustainable Development.

The traditional approach to economic development is very mechanical. If you look at the growth and development literature in economics, there's a very mechanical approach to the way countries become more prosperous. They will accumulate greater quantities per capita of the factors of production, the physical capital, the structures and the equipment that go into productive processes, they will acquire greater human capital in educating the work force with skills and they need to be adaptable and flexible and they will acquire greater technologies.

Those technological innovations will allow each worker to become more productive and the equivalent of many more workers than in previous years. That is the path to economic growth and development. Now, the mechanics of it are quite appealing and indeed, if you look at the evidence, there is a lot of room for hope in this paradigm. The difference, broadly speaking, between those countries that develop and those countries that do not develop is the acquisition of human capital and skills and a well-educated labor force that is capable of competing in the world economy.

The difference among developed economies, between those that grow fast and those that grow less fast, say between the United States and Europe over the 1990s, is the productivity growth that comes from technology and the acquisition of intellectual capital. So, as a matter of the mechanics and the accounting of economic growth, the paradigm is entirely appealing. What it is missing is the issue of where the "rubber meets the road." How do you get this to work? I echo the comments at the outset of this session, which is that what we need to talk about is, what do we do next and what are the practical steps?

Good governance is at the core of this. If you want to have companies invest physical capital; if you want people to save and give up current satisfaction for an unknown future, you have to have in place contract law and property rights that rather than increasing the uncertainty about what they will get back for their sacrifice, reduces the uncertainty.

Government should be in the process of reducing uncertainty, not increasing it. That would mean the foundation of turning the mechanics of capital accumulation into actual flows of capital to places that need these resources. With human capital, no government, no individual is smart enough to know today the skills that will be needed tomorrow.

The best policies will be those that provide infrastructure and allow broad-based, non-interfering, non-targeted policies that allow individuals to seek out the best things in their interest and they will turn out to be the most beneficial for all of us. There has been a lot of discussion in the United States in the recent years, all of which I echo heartily, about the importance of entrepreneurship. Unfortunately, the fact is that most people associate this with some sort of Horatio Alger type scenario in which a single individual strides out to fly into the unknown and invents something big and grandiose.

Most entrepreneurship is really a shadow entrepreneurship. It is lowering the barriers to take a little bit of risk, doing something better in your company, changing jobs, seeking out a little extra degree at night so that you can put yourself further ahead. That kind of entrepreneurship, a climate of entrepreneurship is central to the accumulation of human capital. It is what has made America's work force much more productive and much more skilled and it is that kind of a climate that you need to create in order to have economic accumulation of human capital.

Policies that are very broad-based, policies that are non-interfering are the focus of that. On the -- I apologize -- strike four. I'm not sure if you get four. The last part is that, Sustainable Development has come to mean many things. What I want to do in the second part of my remarks was really devote a little economics to the notion of Sustainable Development. What economists like to think they do -- I don't want to know what you think the economists do -- my mother has reminded me that it's not suitable for public discussion.

What economists like to do is identify benefits, costs and prioritize choices. In the end, in many disguised ways, that's what we do. As I thought about the notion of Sustainable Development, which I confess I have never fully understood, it struck me that it grew out of economic development and I want to again say that I want to sing the praises of economic development, the importance of flexible, open, competitive markets as a foundation for economic development and growth and that that is a first priority.

But above and beyond that, Sustainable Development has come to mean many things. Indeed, it seems to be a vast umbrella under which there is a collection of social and environmental issues.

In some cases, the social issues appear to be goals that are independent of economic development and in some cases they appear to be social institutions, which are tools toward greater economic development. The lack of clarity in that discussion, I would argue, is a problem perhaps for you in planning documents, but for us, I don't think we need to decide that. I think what we need is a test to allow us to decide what to do next.

What I would offer up is to go back to what I think of as traditional Sustainable Development in its environmental core. At least, to my eye, the way that paradigm worked and the basic idea was, what economists talk about when they talk about economic growth and development is the accumulation of stocks and productive factors.

So, we have more capital, better skilled labor force, things like that, exactly what I walked through before. Unfortunately, it may be that it requires more physical capital by running down the stock of some natural endowment. You can think of extraction of a mineral as the simplest example, or the quality of water. The key test for Sustainable Development in an environmental context is the notion that we have somehow, in the process of moving forward economically committed a harm to the welfare of future generations in a way that we cannot sustain the quality of life that was in the supermarket that Jim Connaughton wants us to look at.

I endorse that and I would suggest that when we move toward broader notions of economic development and three pillars that include economics, environment and social, the issue is what do we do next. What we ought to do next is look at a problem and say is this an area in which we now face the possibility of inflicting a harm or the risk of a harm which would make it impossible for future generations to live the quality of life that we now live.

If that is the case, then that is an area in which we ought to focus our attentions and avoid that irretrievable harm. If we do that, we will sustain this quality of life, which is at the core of the Sustainable Development notion and we will have done our service to future generations and we will have exported to the world, the correct paradigm for growth coexisting with broader goals.

So, I would urge people to think about in moving forward in the next year, toward the Summit, when you face particular problems, indicators, policies and issues, to apply a very simple test. Do we now face the potential for inflicting a harm on future generations which would prohibit them from living our quality of life?

If it is the case that greater economic growth can substitute in some way for the loss of an environmental attribute or for a social goal, then by definition, we can use one to offset the other. At the core of the difference between Sustainable Development and economic development is the notion that you cannot substitute using economic development for something else which will be lost.

It's very hard, I think, to make a convincing case that there are a pervasive number of things for which there are no substitutes in the world. There may be some. Clean water and sustainable use of clean water is a resource that we may be unable to continue to exploit and damage in the present, and sustain our quality of life in the future. So, that's exactly how this should be used and I endorse that notion of sustainable development.

It's pretty hard to think of most of the social issues that at least get floated past me, as things which right now face irreversible harm in a way that will affect our future, I think those are lesser priorities. They aren't unimportant, but in the end, we can't do everything, we must pick our priorities, and I think the main priority should be, number one, the economic growth and development, which provides the resources necessary to address a broader agenda.

Number two, those irreversible attributes of our physical environment, especially environmental quality issues, which will in fact be irreversibly damaged and then put down, lower on the agenda those things which we can come back to later and which we can use our increased economic growth to address in a social setting.

So, I will not spend a whole lot more of your time on this. I have a list of things which I consider to be valuable in relations in paying attention to the environmental front. I would urge everyone to move past -- in thinking about environmental issues, to move past the simple notion that we should somehow use market incentives.

I'm an economist, I love it when people talk about using private or market incentives to deal with environment problems. In the same way that we have to worry about actual policies of Sustainable Development, I think we need to talk about the infrastructure of using the market to be helpful in the environmental area.

There are a lot of nuts and bolts in terms of monitoring compliance with environmental improvements and the ability to instill environmental policy actually incentives that have passed just talking about using markets. I think that's the next best priority past economic growth in some of the environmental areas, but there is a lot of work to be done in the infrastructure there as well.

I will be brief, having been trumped on my material and with my time and health running out, I do want to emphasize that I think that the key is not to try to do everything simultaneously. The key is really to prioritize. That's a common sense notion. Even better, I think we have a good way to do it. If we can apply the key test of what constitutes a real degradation in the welfare of future generations, we will have both made out job easier in picking what to do next and we will have served well in the notion of Sustainable Development as a whole. Thank you.