The concurrent achievement o f both short and long term objectives should be a concern o f policy-makers. In formal terms, this requires the determination o f values for qt and n that obey simultaneously both the full em ploym ent requirem ent (equations 3.8 or 3.12) and the sustainability principle (condition 3.17).
Expression 3.18 presents both requisites in term s o f growth r a te s ,r e s u ltin g in a more restrictive expression for the warranted rate:
r, ■ Km, (3.18)
The impact o f introducing the sustainability condition is to raise the warranted rate of growth whenever net depletion exceeds net investment: the introduction o f a sustainability
The equation on the riglit side of expression 3,18 is obtained by applying equations 3.5, 3.6 and 3.9 to equation 3.12.
condition may increase the required levels o f investment even if full employment has already been achieved. At this limit situation, increasing investment is only possible if aggregate consumption is reduced, the conventional neoclassical solution.
The original problem addressed by H arrod (1939) and D om ar (1946) was the difficulty o f keeping the econom y at this full em ploym ent position. The sustainability requirement introduces a new dimension to this instability: it is not enough for the policy makers to establish a full em ploym ent target in the short run (the traditional problem in the Harrod- D om ar tradition), it is also necessary to check w hether this situation will jeopardize future levels o f economic activity.
The problem is aggravated because investment is relatively rigid in response to policy instruments, especially in developing countries. If investment in man made capita cannot be increased by policy incentives, the control o f resource depletion becomes the only available instrument to achieve two different objectives: full employment and sustainability. How ever, it is possible that both objectives imply contradictory policy recommendations. This is shown in figure 3.3, which com bines the results from the previous sections.
Figure 3.3 Combining short term and long term conditions
A C V/a.Km B i . X --- ^ ---- D t I . . . / . > . d - g.Kn/Km i ^ \ Y-/a.Kn
Areas C and D (including the full employment boundary) represent the situations usually covered by the conventional environmental economics literature. The typical neoclassical situation occurs at the points precisely on the full employment boundary. There is no consideration at the effective demand problem because every factor o f production is considered to be fully employed. On the contrary, excessive nominal demand should be contained in order to avoid inflation. In both areas, the impact o f reducing resource depletion is unambiguously positive because sustainability is increased without facing the risk o f short term unemployment.
The symmetric situation is described in area B, the typical Keynesian situation. There is no sustainability problem, and unemployment is the only problem to be solved. Hence, an increase of the activity level should be pursued, and depletion can be stimulated together with investment.
The situation in area A is far more complicated, and is closer to the reality o f developing countries in economic and environmental crisis. The best policy recommendation is to increase the investment level, because this promotes economic activity and increases the accumulation of capital. However, as discussed above, economic policy has limited power in the determination of investment level. Private and foreign investment are determined exogenously to governmental decisions, and the expansion o f public investment has important funding constraints. In developing countries, the control o f resource depletion is a much easier instrument to deal with, and in many circumstances, the only instrument available. However, the two policy objectives present contradictory guidelines to depletion management. On the one hand, depletion should be stimulated in order to increase the employment level. On the other hand, depletion should be decreased in order to achieve sustainability.
The difference in the two areas concerns policy recommendation about investment. Increases in nominal investment would result in more inflation (reduction of real consumption through forced savings), but getting closer to a position of sustainability. In area C, it is not a positive recommendation, because the economy is already sustainable, but in area D it may be interesting. Nevertheless, this conclusion is unlikely to occur in reality, because inflation tends to depress real investment. Reduction of the depletion rate is a much easier, safer and more efficient way to reduce nominal aggregate demand in both situations.
Tliis dilem m a illustrates the controversy about adjustment program m es in developing countries. Defenders argue that adjustment reforms are essential to private business, favouring investment. In this case, the contradiction is solved through the rise in the investment level. Path a in figure 3.4 illustrates this optimistic point o f view: the economy moves in the direction o f the full em ployment and sustainability boundaries simultaneously.
Figure 3.4 Structural adjustm ent policies: alternative perspectives
Y*/a.Km
d - g.Kn/Km
Y*/a.Kn
Nevertheless, many critics argue that certain adjustment policies (particularly the ones connected to stabilization objectives) result in the opposite impact on investment. They argue that the contraction o f public investment, the increase o f interest rates due to tough monetary policies, and the fall in real wages will depress rather than stimulate private investment. The consequent increasing unem ploym ent and poverty will result in faster depletion o f local resources. This pessimistic situation is illustrated by path b: falling investment is partially compensated by raising depletion, and the econom y moves even farther from the locus o f sustainable positions.
An intermediate result is also possible. Empirical studies have shown investment increasing in successful adjustment experiences, but accompanied by increased depletion. In other words, economic growth may be achieved at the cost o f losing natural resources. Path c illustrates this situation; the economy moves upwards and rightwards, coming closer to the full employment boundary. The impact on sustainability will depend on the net balance between the increase of produced assets and the decrease o f natural assets.