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Sustainable Growth Criteria Minimum benchmarks and scenarios for employment and the environment

Joachim H. Spangenberg1, Ines Omann, Friedrich Hinterberger

Sustainable Europe Research Institute, Grosse Telegraphenstr. 1, D 50676 Cologne, Germany and Schwarzspanierstr. 4/7, A-1090 Wien, Austria,

Accepted for publication in Ecological Economics

Abstract The relationship of economic growth and environmental impact has spurred fierce debates between growth optimists referring to the phenomenon of the environmental Kuznets curve, and pessimists referring to the limits to growth. However, no operational set of simple criteria has been developed so far to assess the sustainability of a given growth pattern. This is all the more true for measures combining environmental and social criteria. The paper undertakes to sketch out such criteria, and to assess them by applying them to transdiciplinary sustainability scenarios and model simulations with PANTA RHEI, one of the most complex models of the German economy. Theoretical considerations, as well as the empirical work with the model, demonstrate that there are indeed trade offs between economic growth and environmental impacts, and a positive correlation of growth and employment. Nonetheless, it is still possible to develop carefully orchestrated strategies that combine economic competitiveness, low unemployment rates and an easing of the pressure on the environment. Social and technical innovation, reduced working time, a modernised social security system, green taxes and salary increases proportional to labour productivity growth are essential parts of any such strategy. The triple effectiveness of such strategies regarding environmental, social and economic sustainability is demonstrated by the model runs.


Sustainability Scenarios, Sustainability Benchmarks, Prism of Sustainability, Social Sustainability, Material Flows, Environmental Policy Instruments, Full Employment

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Sustainable Growth Criteria

Minimum benchmarks and scenarios for employment and the environment

1. Introduction A wealth of literature has already analysed the effect of economic growth on employment and on energy and resource consumption. According to the findings, the medium-term trend in continental Europe is characterised by moderate growth, more or less stagnant resource consumption and slowly declining levels of unemployment, and by rising income disparity (Hinterberger et al. 1999, Fischer-Kowalski 2000). While it is unrealistic to expect that economic growth per se (if only high enough) would improve distributional justice and reduce environmental pressures (for a critique of the Environmental Kuznets Curve hypothesis see Spangenberg (2001a)), it has been demonstrated that a delinking of growth and environmental pressures (emission levels and increasingly resource input) is possible in both the short and the medium term. This, however, does not happen automatically but needs deliberate policies. Green taxes, energy saving measures, employment subsidies and the like have all been repeatedly suggested (for an overview on international eco-tax studies see Bosquet (2000), for the German studies Klingert et al. (1998b)). Several studies from Malthus (1803) to Meadows (1972) and beyond, have reflected on the long-term limits to economic growth, considering the coupling factor between economic growth and environmental pollution as more or less constant at least in the short and medium term, and only slowly changing in the long run. Still others see no limits to the potential substitution of resources as a result of emerging or as yet unknown technologies. This latter perspective is largely based on a large portion of technologicaloptimism, simplified risk analysis and/or discounting techniques e.g. cost-benefit analysis which discount future damage down to current irrelevance. Explicit sustainability criteria for the assessment and comparative analysis of the sustainability of the respective growth pattern in real (physical and social) terms are, however, missing. Nonetheless, sustainable growth has recently become an issue of international debate, at the EU (CEC 2001) and OECD (1999, 2001a). However, these debates are not based on criteria that have to be fulfilled in order for growth to be sustainable. Basically, economic development can be regarded sustainable as long as it produces non-decreasing benefits without being environmentally or socially unsustainable. Opposed to that, the OECD assumed a continuous and unconditioned growth to be synonymous with sustainable growth, confusing sustained growth with sustainable economic development. Others would argue that a growth rate below zero (i.e. dY < 0) would be a necessary (Meadows 1972) or even sufficient sustainability condition even in the short to medium term. This argument, however, tends to mix two aspects of sustainable development: the need to reduce the scale of the economy measured by its physical throughput (Daly 1991), and the sustainability criteria which apply to the inherent growth dynamics of a market economy. The criteria presented in this paper refer to the latter aspect, suggesting necessary but not necessarily sufficient criteria for growth to be sustainable. They are tools to test whether or not development is moving in the right direction, but they give no indication of whether the development is fast enough to meet certain sustainability standards in due time, like full employment by 2020 or a factor 10 reduction of material flows by the middle of the century (Schmidt-Bleek 1994). The desired speed of development, however, cannot be based on purely environmental considerations, as from a sustainability point of view it needs to reconcile environmental, social, economic and institutional wants, demands,

and needs at least in the the long term and in a balanced fashion. This does not deny the immediate necessity to act with respect to pressing environmental problems, but it does call for benchmarks on how that action should be taken to incorporate social and economic concerns. Without this balancing effort, sustainability criteria risk being of limited operational value. This paper suggests semi-quantitative criteria for the sustainability of economic growth by deriving them from a multi-dimensional concept of sustainable development (section 2). Some of the non-economic elements of such a sustainability concept are quantifiable (for example, unemployment, income distribution and resource consumption), and these have been used to develop necessary environmental and social minimum conditions for growth to be sustainable (section 3). Like a compass, they indicate correctness of the development direction (e.g. an absolute delinkage of economic growth and resource consumption); however, they are no speedometer, i.e. they cannot indicate whether the progress towards a sustainable state is fast enough (for this, a quantified target would be needed). For this reason, they are not sufficient criteria, i.e. they do not single out sustainable policies, but are capable of identifying those definitely not sustainable. We still consider this to be a valuable approach to policy assessment and to the development of operational, integrated strategies of sustainable development. That such strategies are possible, meeting environmental as well as social criteria, and that the criteria developed are able to distinguish different qualities of development processes is demonstrated in a simulation study (section 4). The econometric input-output model PANTA RHEI (Meyer et al. 1999) was used to develop a Business As Usual (BAU) scenario, a growth based one and one integrated sustainability scenario (Hans-Bckler-Stiftung 2000, 2001). Together with the quantitative sustainability targets based on the environmental space concept (Spangenberg 1995), these scenarios are also used to demonstrate how compass and speedometer can be applied together to assess the sustainability of a complex set of policy measures. The BAU scenario turns out to be socially and environmentally unsustainable, the growth scenario has severe flaws from an environmental point of view, whereas the integrated approach demonstrates how to reconcile environmental, social and economic concerns in the medium term (up to 2020). In the very long run, however, ongoing growth may lead to conflicts with the absolute limits of the environment that cannot be overcome by technical means (section 5). While new policy approaches will be needed to deal with such problems, for the medium term the currently available political tool box offers enough instruments to turn the development pathway in the desired direction (Hans-BcklerStiftung 2001). There is indeed an alternative! 2. Sustainability

Sustainability as described in Agenda 21 has four dimensions: social, economic, environmental and (implicitly) institutional, as highlighted by the four categories of sustainable development indicators chosen by the UN Commission for Sustainable development CSD (UNDPCSD 1996, UNDSD 2000). The environmental and the social dimension are comparatively well established, with the former comprising all bio-geological processes and the elements involved in them (frequently referred to as "environmental capital, including all natural resources) and the latter referring to all intra-personal capacities such as skills, dedication and individual experiences ("human capital"). The economic dimension ("man-made capital") includes all forms of economic activities, their means and actors. However, the dividing line between natural and human made capital is far from being unambiguously defined, e.g. in cases like agri- and aquaculture.

The institutional dimension ("social capital", World Bank 1997; Habisch 1998; OECD 2001b) is essentially inter-personal, i.e. societal, covering the system of rules governing the interaction of the members of any society (Czada 1995). These rules are called institutions; they provide the means of societal decision making and their effectiveness is reflected in good (or bad) governance (Faucheux 1998). In turn, this system is the necessary precondition for economic activities and determines their form, from subsistence economies to communist systems or in free market globalised trade. Economically relevant institutions include organisations such as chambers of commerce, mechanisms, e.g. markets, and orientations, preferred directions of societal development such as that contained in the economic logic of efficiency. For society at large, other orientations such as justice play a much more dominant role. It is obvious that institutions not only constitute a dimension of sustainability in their own right, but are essential parts of the economic and to some degree the social dimension as well. Institutions can thus either be self-referential, i.e. referring to the institutional objectives, or can serve other dimensions. The latter can also be considered as providing interlinkages between the institutional and the other three dimensions of sustainability. Thus, environmental legislation is a formal institutional mechanism for the benefit of the environmental dimension, whereas an attitude emphasising gender equity and leading to equitable sharing e.g. of household work, is an informal institutional orientation (OECD 2001b, Spangenberg 2002). The notion of four different forms of capital (man-made, human, environmental and social) is extremely helpful in communicating the overall as well as the economic importance of all four dimensions of sustainability, in particular to those decision makers used to thinking in economic terms. The terminology also makes it obvious that the different capital stocks, in their role as production factors, need investment to maintain and/or enhance their productive capabilities and thus their ability to contribute to wealth creation (Daly 1996, Spangenberg 2001b). The notion of capital stocks used in this paper should, however, not be misunderstood to imply that the respective capital stock must be quantifiable in monetary terms. The approach in this paper is not based on the concept of monetarised and more or less substitutable capital stocks, but on the assessment of environmental and social capital in real terms. The differentiation of four capital stocks or four dimensions of sustainability must not be understood as denoting the permanent interaction of the economic, social, institutional and environmental subsystems, but as a reference to their inherent specificity, with respect to time pattern, rhythm, driving forces and units of measurements. In terms of systems analysis, each of these dimensions comprises a complex, non-linear, self-organising system which can be cultivated by setting proper framework conditions, but which cannot be controlled by direct intervention (Hayek 1973, Hinterberger et al. 1996, Sachs 1997). Consequently, the triple complex of embedded systems is even less manageable. We therefore suggest the use of a few broad framework conditions rather than detailed rules of intervention when pursuing a specific sustainability concept. According to the multi-dimensional concept of sustainability a blueprint of a sustainable society can hardly exist, as a multicriteria optimisation process necessarily results in a range of options, not in one absolutely preferable outcome. Sustainability, then, can be characterised as the long term preservation of the viability of the overall system and its components (Bossel 2000). In a dynamic system this includes not only a certain degree of resistance (the ability to resist externally enforced changes), but even more its level of resilience (the ability to recover from and to adapt to pressures). The resulting state of the system is not a static balance, but a dynamic, evolutionary process of permanent change. In this process, sustainability can be regarded as a benchmarking criterion, distinguishing those states of the system that still have the potential to serve human

needs in the long run from the ones no longer sustaining human civilisation and consumption patterns. Figure 1: The Prism of Sustainability

To characterise this dynamic concept of sustainability, neither single indices nor static scenarios are the appropriate tools. They have to be complemented by dynamic models. Furthermore, indices of sustainable development like the Index of Sustainable Economic Welfare, ISEW (Daly, Cobb 1990, Cobb 1994) or the Genuine Savings Calculations (Pearce, Atkinson 1993, Hamilton 1999) are widely used as simple tools to overcome problems arising in communicating the message of sustainability. However, this strength is also their weakness: while they are capable of telling a story in a clear-cut manner, due to their limitations the story that they tell cannot but be incomplete and may therefore lead to inappropriate conclusions, to say the least. Monetarisation of the four types of capital raises fundamental questions (see e.g. the debate in Ecological Economics 1998). These are often based on different pre-analytical visions and diverging value systems and cannot be solved by means of scientific argument. Therefore, this paper does not base its arguments on monetarised capital stocks. Instead it focuses on flow variables like total consumption Y, labour L, and resource consumption R, which are easier to measure, be it in monetary (Y measured as GDP) or real terms (R in tons and L in persons) (Hinterberger et al. 1997). Doing so provides the opportunity to avoid oversimplification of the indicators, and to integrate them into a harmonised structure, the prism of sustainability (see figure 1), which serves as a simple communication tool, linking the different indicators regardless of whether they are measured in physical or monetary terms. The prism demonstrates the different dimensions, their interlinkages and - if combined with quantifiable indicators - the differentiated trends towards or away from sustainability of a society in a complex, but coherent and easily understood way. As we have already dealt with the economic (Hinterberger et al. 1996), environmental (Schmidt-Bleek et al. 1998, Spangenberg et al. 1999) and institutional (Spangenberg 2002) dimensions in some detail, this paper focuses on the (inter)linkages between economic development (i.e. growth), employment and the environment.

Sustainability conditions: interlinking dimensions

The environment-economy interlinkage The first linkage to be dealt with is the one between the environmental and the economic dimension of the prism. For this, a criterion in the form of an inequality including one indicator per dimension of sustainability, is developed. Growing environmental problems, on local as well as global levels are threatening the longterm development potential of industrialised economies. The industrial metabolism seems to require too much throughput in relation to the carrying capacities of global environmental space. Quantitative targets are as pointed out in section 2 a key condition in distinguishing potentially sustainable strategies from those really sustainable. The targets we use are derived from the Environmental Space concept (Opschoor, Reinders 1991, Weterings, Opschoor 1994, Spangenberg 1995). They constitute an upper limit of resource consumption based on ecological research regarding the carrying capacity of natural systems plus the equality principle. Exaggerated material flows, energy consumption and intensive land use are the primary driving forces behind most environmental stresses such as climate change, ozone depletion, loss of biodiversity, waste generation, acidification, eutrophication etc. This does not refer to the effect of, the toxicity of specific substances (Lorek, Spangenberg 2001). The targets derived from this concept are a reduction of energy consumption by (Factor 4, Weizscker et al. 1997), of material flows by 9/10 (Factor 10, based on a global reduction by half plus equitably shared consumption, Schmidt-Bleek 1994) and an end to intensification of land use by 2050, starting now. These figures are slightly more ambitious than the governments sustainability target and correspond to the reductions achieved so far (energy intensity: -17%: 1990-1999, resource intensity: -14%: 1994-1999). They can be realistically achieved only if additional policy measures are taken. Given this analysis, the total resource consumption (material flows, energy and land) is an appropriate description of the long-term environmental disturbance potentials (Schmidt-Bleek 1998), and its reduction turns out to lead reliably to a de-escalation of most environmental problems, although not proportionally. Thus, the total resource consumption can be understood as an indicator for the environmental dimension. In the past few decades, we have seen a relative delinkage of energy consumption and material flows from economic development, with both factors stabilising despite significant growth. On the other hand, this implies that an absolute delinkage, i.e. an absolute reduction of the environmental impacts was not achieved despite all efficiency gains (Hinterberger et al. 1999). Since nature does not care how much wealth creation was the side effect of the damage done to it, the absolute level of impact is the core of the current environmental problems. If we accept that we are already close to the limits of natures carrying capacity, following the precautionary principle, industrial economies should reduce the total throughput of resources R. Formally, this means that the total mass of resources used should decline, dR < 0 (1) Economic growth (dY) is often seen as one indicator for economic sustainability; for a discussion see Daly (1996). To assess the environment-economy interlinkage, we define Y/R as the resource productivity (frequently referred to as eco-efficiency). R can be accounted for either in the three categories mentioned (material flows, energy use, land use), or for the sake of simplicity and involving slight error simply counted as material flows in tons, or Total Material Requirement TMR (Adriaanse et al. 1997).

Only if in a given period of time this productivity increases faster (or drops slower) than the volume of output Y, is an absolute reduction of R achieved. This criterion dY < d(Y/R) (2) is a necessary condition for environmentally sustainable strategies; as mentioned before it is not a sufficient criterion. It implies that economic growth can only be environmentally sustainable if it is accompanied by resource productivity increases at a higher rate than the growth rate. This relative limit to growth leads to an absolute reduction in resource use and thus in environmental pressures. While dependent on dynamic use patterns and technologies in the short to medium term, in the long run it poses quite severe restrictions. The growth potential of resource productivity is limited by the laws of thermodynamics (see e.g. Georgescu-Roegen 1971, 1976): as a perpetuum mobile is not possible, the economy cannot completely dematerialise or run on no energy or land. Consequently, there are physical limits to the maximum resource productivity possible, but they have never been quantified (indeed they are almost certainly theoretical limits as economic limits would probably be reached much earlier). The social-economic interlinkage Targets for the social dimension of environmental space depend on the cultural background in which they are applied; for some examples from affluent countries see (Omann 2002). In industrial societies, paid employment is central to the economy and society. The social status of each citizen, self-image, social integration and security are determined mainly through participation in the labour market. Not only mass unemployment but also qualitative changes in the character of paid work and its participative structure therefore have a serious effect on all areas of social life. Poverty, social exclusion and health problems are often the result. Reducing unemployment from the current unacceptable levels (9.0% for women, 7.0% for men, of these 15.7% young people is the top social sustainability objective in Europe (CEC 2002)). However, what is considered to be an acceptable level of unemployment and what is the preferred length of the working week varies throughout the Union. For EU countries like Germany, a level of about 3% registered unemployed can be considered as full employment (the US counts differently), and the preferred working week amongst European workers is about 33 hours/week (Schulze Buschoff 2000). If we regard the increasein the number of employed people at least in Europe, as an indisputable precondition of social sustainability (once the employment problem were solved(distributional issues might be taken as the next priority and could be dealt with in a similar fashion), i.e. as one key indicator for this dimension, the total active labour force L must grow. Formally speaking dL>0 (3) The total output Y can be written as L multiplied by the labour productivity Y/L, measured as the average per capita production. The number of people employed, L, increases only if during a period of time the economy grows faster than the average production per capita, that is if dY > d(Y/L). (4) This relation is a positive statement, not a normative one. It describes reality: a precondition for more employment in absolute terms (necessary, although not sufficient for social sustainability) is that the overall labour productivity of the economy grows slower or declines faster than economic growth.

The production per capita is given as the average output per working hour Y/h multiplied by the average working hours per capita h/L. Y/L = Y/h . h/L (5), The labour productivity Y/L depends on the hourly productivity Y/h as well as on the number of working hours per person h/L. It increases with growing labour productivity per hour and decreases with reduced working times. So weekly working time, part time jobs etc. are captured here in their effect on employment through their effect on the average working time. As a condition for an increasing number of employed people is dY > d(Y/L) = d(Y/h . h/L), (6) ceteris paribus the increase in hourly labour productivity Y/h must be lower than the economic growth dY, i.e. d(Y/h) < dY. Where this is not the case the working time h/L has to decrease sufficiently to offset increases in Y/h to keep the increase d(Y/L) below the total economic growth dY. The minimum condition of socio-environmental sustainability Combining inequalities (4) dY > d(Y/L) and (2) dY < d(Y/R) we can conclude that as a necessary precondition economic growth can only lead to a sustainable path, if d(Y/L) < dY < d(Y/R) (7). This inequality of sustainability provides a necessary condition for socio-environmental sustainability. As a minimum condition, it helps to distinguish growth patterns that are definitely not sustainable from those that might be so. For a sufficient criterion, quantitative aspects would have to be added, accounting for whether or not the difference between the terms is significant enough to reach quantitatively defined target values in a time frame defined as necessary in a science based political process. 4 Simulation and results

The workability of the theoretical criteria derived in section 3 has been empirically tested using the results of simulations of different sustainability scenarios. These were developed during the transdisciplinary research project Labour and Environment, which was commissioned by the German trade unions research foundation, the Hans-Bckler-Stiftung (Hans-Bckler-Stiftung 2000). One of the methods used in the project was the development of alternative scenarios, their quantification and simulation (Spangenberg et al. 2001). Simulation runs were conducted with PANTA RHEI, a highly complex econometric inputoutput-model for Germany (Meyer et al. 1999). In this kind of model, the lack of a predetermined theoretical concept such as that found in the general equilibrium approach, is compensated for by the emphasis on an extended empirical database. PANTA RHEI is built bottom-up and fully integrated. The former term means that each sector of the economy has been modelled in great detail and that the macroeconomic aggregates have been calculated by explicit aggregation within the model. Fully integrated refers to a model structure that takes into account the input-output structure, the complexity and simultaneity of income creation and distribution in the different sectors, its redistribution among the sectors, and its use for the different goods and services the sectors produce in the context of globalising markets. In this way one succeeds in describing properly the role of each sector in interindustry relations, its role in the macroeconomic process as well as its level of integration into international trade (Bockermann et al. 2000).

PANTA RHEI describes the inter-industry flows between the 58 sectors, their deliveries to personal consumption, government, equipment investment, construction. In addition changes in stocks, exports, as well as in prices, wages, output, imports, employment, labour compensation, profits, taxes, etc. for each sector as well as for the macro economy are covered. In addition the model describes the income redistribution in full detail. Furthermore, PANTA RHEI is the only econometric model available, which also captures energy consumption, material flows and, since 2000, land use. It is thus well positioned to simulate integrated sustainability policies and to assess the impacts of different strategies on competitiveness, welfare and environmental space consumption (Spangenberg et al. 2001). The results provide insights into possible changes in and trade-offs between social, economic and environmental variables such as economic growth, unemployment rate and material flows due to the application of specific policy instruments. Three scenarios were developed, one integrated sustainable development scenario, which provides the basis for the elaboration later on in this paper, one supply-side based "cost cutting scenario as a reference, and one demand side focussed, presumably sustainable "growth scenario". The central element in the cost cutting scenario is reducing the burden of costs on firms, in particular the burden of wage costs. This is achieved through wage moderation, increased flexibility in collectively agreed provisions and reductions in indirect labour costs. Additional cost reductions, such as in public spending, are also suggested. The growth scenario is a primarily demand oriented scenario. Aside from one environmental criterion (reduction of CO2-emissions) it focuses on economic growth in order to reach full employment and generate a stable financial basis for the social security system. The integrated scenario is based on an ecological-economics theoretical background and is thus broader in its focus. The main ideas are derived from the critique of the prevailing policy approach regarding the environment. Alongside the realisation of environmental goals (reduction of CO2-emissions and material flows), this scenario emphasises the social components of sustainability (employment and basic income), as well as the economic (e.g. innovation and competitiveness) and institutional (e.g. participation and gender issues) dimension. The quantifiable elements of the scenario were transformed into model assumptions and then implemented in the scenario as inputs for the simulation; and for aspects that could not be implemented directly due to the specifics of the model, auxiliary calculations were performed. Besides the instruments as presented in Table 1, a variety of additional strategies in the fields of education and research, land use, transport and revaluation of non-compensated and/or honorary work are suggested in the scenario, albeit not realised in the model runs due to quantification problems. Obviously, a number of open research questions results from this (employment effects of transfers, equity issues, etc.). However, the variables that are important for the arguments of this paper, - GDP, labour productivity and total material input are quantifyable and were simulated with PANTA RHEI. The draft of the scenario went through a process of consultation with representatives from trade unions, environmental NGOs, feminist groups, the churches and political parties and was discussed in a final hearing with scientists from economics, social and environmental sciences. The scenario is thus based on a transdiciplinary approach (Mittelstra 1992), and rightfully claims to be an example of post-normal science (Funtowicz, Ravetz 1993) More details about the scenarios are provided by Bockermann et al. (2000) and Hans-BcklerStiftung (2001). The model itself determined growth rate, employment effects and the resulting levels of energy consumption and material flows, but without being able to fully incorporate specific assumptions e.g. on technology improvements (aside from a more general assumption regarding across the board technological progress , based on historic trends), or sector

specific model assumptions e.g. for the transport sector. These caveats were taken into account when interpreting the modelling results. After having translated the scenario into PANTA RHEI variables (see table 1) the model was used to quantify and balance the proposed new expenditures (on R&D, basic income, public investment) with new sources of revenues (from introducing energy taxation and a Material Input Tax MIT) and with the proposed modifications of existing ones (curbing and restructuring subsidies, differentiating the VAT to support personal and social services). On the employment side, a number of assumptions was made regarding labour productivity and working hours. The key element in this respect is a wage policy increasing salaries in line with labour productivity of 2.2% per annum which is higher than in the cost cutting scenario (1.9%), but slightly diminished as compared to the growth scenario (2.4%). The latter rate is due to the competition of labour and resource productivity for limited investment finance. This increase in salary was then assumed to be paid out half in cash and half in reduced working time, resulting in increasing incomes, combined with decreases in working time. Furthermore, a contribution to employment from increasing numbers of part time jobs was expected, albeit on a limited scale, since only the more privileged groups of workers can afford to shorten their working time significantly without salary compensation as illustrated by Volkswagenin Germany (Hildebrandt; Linne 2000). The main environmental targets for 2050 that the scenario was designed to support (for the background reasoning see section 3) were a 90% reduction of material flows, a 75% reduction of energy use, and a stop of additional land-use by the year 2050, with intermediate steps to be completed by 2020. Economically, the target was stable development and maintaining international competitiveness (indeed the model foresees a rising trade surplus which is only slightly overcompensated by the increase of ODA to 0.7% of the GDP and by an additional 2% transferred to the EU for the integration of Central and Eastern Europe). Socially, the target was a substantial decrease in the unemployment rate, higher income equality, and a revaluation of non-paid voluntary work (something no quantitative model can express). Unfortunately the model provides no information about income distribution, but the decrease of the unemployment rate was significant. Neither the scenario nor the simulation included any targets for economic growth rates, but a declining GDP growth rate was expected. Selected scenario inputs are given in table 1. Table 1 : Selected elements of the scenario used as inputs in PANTA RHEI Parameter
Real wage Working hours are reduced, in particular the average working week Transfers abroad

Orientation on labour-productivity per hour About 50% of the increase in productivity is transformed into reduction in working hours in different forms Foreign aid is increased to 0.7% of GDP by 2010, payments to the EU increase to 2% of GDP by 2010 and then remain constant. Quantitative tax on material flows, gradually increased to 60 DM/ton by 2020. Tax on emissions, gradually increased to 250 DM/ton by 2020. Restructuring and reduction between 2000 and 2020 following ecological criteria One third of the revenues gained by a cut in subsidies is used for investment in some economic sectors

Material Input Tax CO2-Tax Subsidies Investment Plan


Expansive financial policy Expenditures on research Value Added Tax

Discount rate lowered by 1% Doubled between 2000 and 2020 Gradually raised to the EU-average (20%), however, reduced VAT of 10% for certain products which are chosen using social, cultural and ecological criteria based on current trends, continued low birth rate (1.3 per woman), increasing life expectancy (male: 75.5 yr., female: 81.7 yr.) and slightly increasing immigration (5.5 Mio 1998-2020) are assumed. Employment rate continuously increasing due to higher share of women seeking work. not set but calculated from the assumed average working time per capita, the calculated economic growth rate and the assumed productivity trend

Population and employment rate

(Total working hours and employment)

This kind of simulation with PANTA RHEI was a challenge in two ways. First such integration of physical flows into economic models is quite new, and secondly no quantitative simulation of a material input tax with a macro-econometric dynamic model had been undertaken before. Main results of the scenario - simulations The main results of the simulation for the aforementioned integrated scenario are shown in table 2. It shows the trends of resource consumption and employment, thus allowing them to be comparedto the minimum sustainability criterion developed above. It is certainly not our claim that the simulation results predict the future in a strict if then sense. They show possible futures under empirically and theoretically sound assumptions, but they cannot claim to cover the full complexity of reality. Given this caveat, the model results are in line with a recent comparison of 139 eco-tax simulations from 56 studies, showing decreasing resource consumption in 84% of the relevant scenarios, and slightly increasing employment in 73% (Bosquet 2000). In the integration scenario, the economy remains on a stable growth path despite the introduction of some far reaching new economic instruments such as a material input tax (MIT), affecting a wide range of parameters in the model. Annual growth is at 1.9%, faster than in the cost cutting scenario (1.6%), but lower than in the growth scenario (2.2%). Other economic data such as the balance of payments, the balance of trade, the inflation rate, investments etc. are within a normal range. The government budget even turns positive before 2020, giving enough room for the stepwise introduction of the negative income tax foreseen in the scenario but not quantified in the model simulation. Table 2: Results of the simulation (selected indicators) Indicators 2000 2005 GDP in 1991 prices (billion ) Unemployment rate (%) Labour productivity (/h)
1741.2 12 40 1919.5 10.6 44

2088.4 9.2 47

2271.5 6.3 51

2455.7 3.3 54


Average annual working hours Disposable income (109 )

1459.1 1084.8

1382.9 1150.3

1319.4 1208.1

1267.8 1283.7

1226.3 1375.5

Balance of trade (109 ) Budget deficit (109 , surplus = -) Consumption (109 ) CO2-emissions (106 t) Total Material Input (106 t)
Population Labour force

22.6 10.8 984.9 856.3 8667 82.1 40.5

24.8 7.7 1055.2 761.3 7542.3 82.0 41.0

20.6 9.2 1113.6 723.1 6817.3 81.9 41.2

34.8 4.3 1183.3 717.3 6458.8 81.3 41.2

51.9 -6.0 1268.5 726.8 6257.8 80.7 41.2

In the simulation, the rate of unemployment decreases from 12% in 2000 to about 3% in 2020 (i.e. 1.2 million unemployed). This would help to reduce other social problems such as poverty, social exclusion, psychological and socialisation problems and the like. Working time per capita per year decreases, the average weekly working time in 2020 is about 27 hours per week. The available income increases by close to 30%. Effects of a more flexible retirement age regulation and the revaluation of non-paid forms of labour (Spangenberg, Lorek 2001c) are not captured, however. As for the environmental indicators, both CO2-emissions and material inputs decrease in absolute terms despite the growth of the economy, indicating an absolute delinking. Material inputs are reduced by 28% within 20 years, while the long term target was minus 90% within 50 years. A decomposition analysis shows that the two sectors most affected by this reduction are the mining of coal and ore/salt, while market based services and private organisations benefit most (Hinterberger et al. 2000a). Given the limited capacity of the model to reflect specific mechanisms increasing resource productivity, such as the introduction of closed recycling loops triggered by the changed fiscal environment, and given the limited possibilities to implement specific measures for the housing and the transport sector foreseen by the scenario, the result is impressive. It meets not only the necessary condition provided by the inequalities derived earlier, it also satisfies the sufficient criterion by being well in line with the quantitative target. Concerning CO2-emissions, a reduction by 14% from 2000 to 2020 emerges as a result of the measures included in the simulation. However, a number of policy measures already taken in the period 1994-2000 could not be included in the scenario, nor could a number of technical improvements. While the measures taken in the scenario lead to an annual reduction of 1.5-2.0% p.a. when run in different models (Hans-Bckler-Stiftung 2000, p. 357), the reference values differ significantly between the models. Other models taking such assumptions into account indicate reduction in CO2 emission to be twice as high (Klingert et al. 1998a). By including a number of specific scenario assumptions regarding transport efficiency policies, plus housing improvements and the full range of fuel switches and the technological options available, the detailed but technology-oriented IKARUS model is even able to predict reductions of CO2-emissions of up to 60%. Even if a realistic perspective is somewhere in between, in terms of highlighting the potential for reducing greenhouse gas emissions to a justifiable minimum as suggested by the IPCC (2000), the results are still


encouraging. This assumes of course that sufficient political will is present for the implementation of such socio-environmental reform. Table 3 provides the data needed to relate the modelling results to the sustainability criteria derived earlier.
Table 3: Results in absolute terms and growth rates of selected indicators.

Indicator/Absolute numbers GDP in 1991 prices (bio ) MI (Mio t TMI) CO2 (Mio t) Unemployment rate (%) Indicator/Growth rates GDP (%) MI (%) CO2 (%) resource productivity (%) labour productivity (%)






8667 856.3

7542.3 761.3

6817.3 723.1

6458.8 717.3

6257.8 726.8

12 10.6 9.2 6.3 3.3 2000-2005 2005-2010 2010-2015 2015-2020 2000-2020 1.97 1.70 1.69 1.57 1.74 -2.74 -2.32 4.84 0.92 -2.01 -1.02 3.78 0.57 -1.07 -0.16 2.80 0.65 -0.63 0.26 2.21 0.56 -1.61 -0.82 3.40 1.55

Source: Hans-Bckler-Stiftung 2000, Hinterberger, Omann 2000b; simulations with PANTA RHEI.

The results show that in the scenario resource productivity increases faster than GDP, so that material inputs and CO2 emissions decline in absolute terms despite a growing GDP. While labour productivity per hour grows faster than GDP (2.2% to 1.9% p.a.), per capita production grows more slowly. This reflects the reduction of working time (-0.9% p.a.), resulting in an increase of gainful employment (the number of employed persons increases by 1% per year from 2000 to 2020). The minimum condition of socio-environmental sustainability (7) d(Y/L) < dY < d(Y/R) is therefore fulfilled, which means that the simulation results demonstrate the feasibility of such a development path. Nonetheless, it would be false to assume that the trade-off between economy and environment has therefore been overcome. There is a negative correlation between unemployment and growth, and a positive one between growth and resource consumption. In figure 2 it can be seen, that the growth paths of GDP and resource productivity are likely to cross in the long run. The policy strategies recommended in the scenario and integrated into PANTA RHEI temporarily lead to an absolute decoupling (Luks 1995) of economic growth and resource depletion, but in the long run additional policy measures will be necessary to cope with the effects of continued economic growth. The same holds true for unemployment: appropriate policies can manage to reconcile employment, environmental sustainability and economic growth by striking a temporary balance between these forces, but they do not overcome their fundamental antagonism. In the long run, the growth effect poses a serious challenge. With the modelled trends continuing, it would outgrow the resource productivity increases around 2030. Obviously, additional measures are needed to reach the reduction targets in the second quarter of the century. However, how an absolute limit on resource consumption (put into practice e.g. by introducing tradable input certificates with degressive volumes) would influence the economic dynamic and thus employment is as yet unknown. Unemployment poses less of a challenge after 2020 due to demographic trends which act to secure full employment even with a shrinking active labour force.


Figure 2: growth rates of resource productivity, labour productivity and GDP

G r t r es ofr ow h at esour pr ce oductviy,l i t abourpr oductviy percapia and G DP i t t

Growth rat

resource productivity labour productivity per capita GDP

0 19942000 20002005 20052010 Year s 20102015 20152020

For the next few decades, the core task will be that of managing the turn around.For this, as the scenario has shown, the currently available tool box is well suited, and the inequality of sustainability is a suitable tool for monitoring whether or not this crucial task is being positively implemented. For the necessary fine tuning, reduction targets will still be needed, although they may be allowed to vary in order to reflect circumstances. Irrespective of such adjustements however, the minimum mathematical condition, as defined here, should be upheld everywhere. 5 Conclusions

In this paper we presented a set of mathematical conditions that can be interpreted as socioenvironmental minimum requirements for sustainable development in a macroeconomic perspective: i.e. growth must create employment while reducing material throughput. At least for the German economy, this seems possible, as extensive modelling exercises have illustrated. However due to model constraints, restriction on land use including land rent taxation were not simulated, although land is one of the key resources and rent traxation a potentially major, but so far rather untapped source of government revenue. Exploiting it might even permit to substitute non-distorting land and resource rent taxes for labour taxes (Bosquet 2000), thus supporting the reduction of working hours per capita. Nonetheless the present scenario fulfils the minimum requirements, and the calculated rate of economic growth appears to be an intermediate one, with inflation under control and the balance of payment stable. The simulation indicates that there can be transition strategies towards a sustainable society, thus diminishing environmental impact as well as unemployment.


Their core elements have been identified as (Hans-Bckler-Stiftung 2001, p. 44 ff):


Environmental and social shaping of structural change, Promoting innovation and technology development, Reducing the quantity and improving the quality of paid work and working hours, and Providing incentives to change consumption patterns.

Resolving the policy goals of limited scale and full employment internalises ecological and social limits, not just costs, and paves the way for markets to facilitate a macroeconomic adjustment towards the optimum (Lawn 2001). The model applied is a medium term one; it does not capture the long term problems of absolute limits in resource productivity and the resulting limits to growth, and nor does it capture international aspects of the globalised economy and its dynamics. However, as far as they are economically viable, the strategies developed could be the starting point for the transformation of our economies towards sustainable development. They would help buy time to adjust the institutional regulation mechanisms and readjust the systems of global governance in order to provide the appropriate frameworks and incentives for more growth-independent economic development. Such intermediate but realistic approaches are urgently needed, otherwise the current, rather abstract theories of sustainable development will simply be made obsolete by the reality of unregulated global markets. List of Acronyms: R Y L h Y/L Y/h Y/R total throughput of resources total output of an economy total active labour force working hours labour productivity hourly labour productivity resource productivity



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