Cadmus

Socioeconomic and Environmental Performance: A Composite Index and Comparative Application to the USA and China

Abstract
This paper deals with an analytical framework to provide a measure of overall performance which involves both socioeconomic activities and environmental sustainability using a recent Index of well-being. The composite indicator, created by Medrano-B & Teixeira (2013), is associated with the so called “Magic Square”, a diagram stimulated by the work of Kaldor (1971). From this starting point, we introduce a set of four variables to measure their total impact on the sustainable development of regions. They are: human development index, per capita carbon dioxide, drinkable water and sanitation, and intensity of renewable energy measured as a fraction of the total generated energy. This formal approach is applied to the comparative performance of the USA and China from 2002 to 2012. As expected, environmental, socioeconomic and institutional indicators affect the level of welfare. This being the case, an important lesson to be learned is that careful regulation and policy actions, not just proposals, are required to implement a sustainable and acceptable quality of life. In this article we complete the argument by suggesting that a new paradigm is required to fulfill our desirable objectives, and get more out of our intellectual effort, capabilities and political influence.

1. Introduction
Given the current immense accumulation of negative effects on the environment, we wonder at the relative complacence worldwide with the impact of the present patterns of production and consumption. No longer is it only dreamers and visionaries who are alerting society to the deep and undesirable consequences affecting humanity as well as other species and future generations. It is actually interesting to observe the relative alienation, silence and apparent indifference of many people and governments in this matter. We need urgent action to change the present situation. However, we must recognize that actions and changes, without precise thought and clear goals, are counterproductive. In this vein, the major challenge for humanity is to develop a shared socioeconomic vision desirable to a vast majority of people and ecologically sustainable from a global perspective.

This paper is the product of a research agenda the core of which is to design a modeling framework to measure the impact of a set of variables with a composite index of welfare constructed and computed from indicators of trends. The original insight is encountered in the work of Kaldor (1971), but he was only concerned with macroeconomic variables. He did not consider environmental issues nor did he introduce equations or numerical or graphical illustrations in his analysis. Here we extend his method to include aggregated indicators on socioeconomic performance and environmental and sustainable development. We stress that due to the efforts of Karl Schiller and economists of the OECD, an intuitive geometric diagram was established in the 1970s dealing with fundamental macroeconomic variables. This representation, called ‘Magic Square’, is associated with the size of the area of a figure conceived in such a way that its four directions (N, S, E, and W) are expressed in percentages.

Medrano-B & Teixeira (2013) normalized the mentioned vectors to make them uniform. The area of the quadrangle was calculated due to the non-uniform scales of the axes. This produced an analytical transformation which allows the calculation of the area of the relevant quadrangle. The measure ends up as a composite index of welfare. Such an indicator captures the impact of the re-dimensioned components of the index. The new method was used by Firme & Teixeira (2014) focusing mainly on Brazil’s macroeconomic performance. The formal approach is expanded here in order to integrate a set of interconnected socioeconomic and ecological measures to produce a single welfare index.

We believe that a collection of composite indices is necessary for measuring multi-dimensional characteristics which would be hard to explain using a single variable. This is certainly the case with sustainable development. The latter concept remains somewhat elusive since it may encompass a wide set of issues over different time periods, regions and theoretical visions. Under this complex circumstance there is a widely shared consensus that the ecosystem is a non-ergodic dynamic structure. Omitting to describe development in a holistic perspective and to measure its impact for meaningful comparative work is a pressing problem worldwide.

Gasparatos, El-Haran & Horner (2007) argue against a reduced form approach for assessing sustainability of the ecological system. According to them, the use of a single metric to address the environment is a naïve approach to the serious threat confronting society. This is the main reason why we decided to examine the problem by combining a set of composite indicators integrating socioeconomic and ecological variables. Here, special emphasis is placed on the challenges confronted by states in transition.

The present article focuses, simultaneously, on the relationships among four composite key variables: Human Development Index (HDI), Per Capita Carbon Dioxide (CO2CAP), Drinking Water & Sanitation (WATSAN), and Renewable Energy Intensity as a share of national (total) generation of energy (SHARENEW). We highlight the main reasons accounting for the fragility of the environment by clarifying the meaning of the above variables and their significance in the process of sustainable development.

Our empirical analysis examines the comparative performance of the USA (an industrial country) and China (an emergent one). We are concerned with the conflicts between economic prosperity and welfare on the one hand, and its ensuing environmental problems on the other. Accordingly, the somewhat prevalent feeling of increasing welfare may well be deceptive and unsustainable. Therefore, solving the sustainability problems of development is required in order to reduce the major environmental threat to the present and future generations of society.

“The common position on efficient allocation of resources remains founded on self-interest and Pareto optimality and is inadequate for treating the complexity of the real world.”

Following this introduction, the paper is subdivided as follows: Section 1 centers attention on sustainability and sustainable development. Section 2 presents a composite formulation of a normalized index which measures both socioeconomic and environmental performance. Section 3 estimates socioeconomic and environmental trends for the USA and China at the beginning of this millennium (2002 to 2012). Section 4 presents some concluding thoughts, summarizes policies to promote sustainable development and highlights the main comparative conclusions about the two countries.

2. Sustainable Development and Sustainability: An Overview
It is well known, although frequently obscured, that conventional economic analysis takes for granted two twin assumptions: a) free endowments of natural resources, and b) free disposal of wastes. Accordingly, the environment is envisaged to be, simultaneously, “a horn of plenty and a bottomless sink”, as pointed out by Kurz & Salvadori (1997) in the introduction to their article. From the standard perspective of free competition, the environment is basically neglected. They argue: “production can be conceptualized as a process whose inputs are only labor and produced means of production. Thus, outputs are merely commodities”. Under these oversimplified conditions, it follows that the environment does not matter and the prices of exhaustible resources are not taken into account. From this standpoint they criticize such approaches and conclude that, despite the progress made in their own dynamic analytical framework, “many more steps will have to follow before one arrives at a moder­ately satisfactory theory of exhaustible resources”.

Indeed, we do not have a complete dynamic model on sustainable development. Such a paradigm is unquestionably desirable for a proper analysis of environmental performance in a world surrounded by uncertainties. Unfortunately, most of mainstream economics literature dealing with the dynamics of the environment tends to obscure some essential points. Although market failures and externalities are mentioned, they are considered mainly and merely as exceptions. In the same vein, along with questionable propositions connecting living standards to simple productivity, the common position on efficient allocation of resources remains founded on self-interest and Pareto optimality and is inadequate for treating the complexity of the real world.

Despite not being immediately recognized, the publication of The Limits to Growth in 1972 did mark the starting-point of an era of criticism of the unquestioned faith in the conventional analyses of the economics of environment. No doubt, an expanding network of persons, worried about the effects on both nature and humankind, started to work out some rethinking. New thought and actions led to increasing doubt and uncertainty about the sustainability of the dominant ecological and socioeconomic organization of society. Jacobs & Slaus (2013) summarize the vigorous debate between the orthodox (or standard) vision and the search for the key elements of an alternative paradigm.

Naturally, a set of seed-ideas was required to highlight the reasons that may account for the fragility of the conventional theory of growth and accumulation of capital. To do so we need to clarify the meaning of “sustainable development” and “sustainability”. It is of interest to note that Solow (2012, p. 543), a neoclassical economist, pointed out: “The questions that come to be connected with sustainable development or sustainable growth or just sustainability are genuine and deeply felt and very complex”. Those concepts have been defined in many ways, but the most quoted one is from the Brundtland Report (1987), published by the “World Commission on Environment and Development” (WCED), with the title “Our Common Future”. It states that “Sustainable Development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (p. 43). “Sustainability”, on the other hand, is currently defined as the practice of maintaining the process of productivity indefinitely—natural or manmade—by replacing resources used with resources of equal or greater value without degrading or endangering natural systems.

In our understanding the above definitions contain two underlining views: a) the concept of need is actually concerned with essential needs of the world’s poor for which overriding priorities should be given; b) the idea of limitation involves serious considerations on the state of technology and social organization on the environment’s possibility in such a way that thought and actions should meet both the present and future needs. Surely, such double foundations require that the physical planet and society should be looked at as a system that connects space and time. These may well be considered important formulations, but they are methodologically problematic, as also emphasized by Solow in the same article, page 544: “If we try to look far ahead, as presumably we ought to if we are trying to obey the injunction to sustainability, we realize that the tastes, the preferences of future generations are something that we don’t know about. Nor do we know anything very much about the technology that will be available to people 100 years from now”.

“The hardest task is to change deeply held attitudes.”

Despite the current difficulties, including the economic crisis started in 2007/08, the movement towards better socioeconomic and environmental performance produced some positive effects worldwide. For instance, one of the main outcomes at the United Nations (Rio+20) Conference held in Rio de Janeiro, Brazil, in June 2012, was the formulation of an agreement by member states to set targets for sustainable development—the future we desire. The objective sought to include the fundamental aspirations of both people and important institutions. Sustainability and the effort towards Global Footprint Network, it may be argued, are to a large degree a ‘fait accompli’. However, we need to be cautious in this matter.

Nowadays, people worldwide are more aware of global climate changes. Alarm about the increasing planetary warming is in the daily press and such global concern does not constitute a novelty anymore. The Synthesis Report of the Intergovernmental Panel on Climate Change (IPCC), in November 2014, from Copenhagen, did spread some scary statistical data and projections on the matter. In the “Approved Summary for Policymakers” (p. 3) the report mentions: “Human influence on the climate system is clear, and recent anthropogenic emissions of greenhouse gases are the highest in history”. On the same page, it also mentions that: “Each of the last three decades has been successively warmer at Earth’s surface than any preceding decade since 1850”. Furthermore, as indicated in page 7, “Cumulative emissions of CO2 largely determine global mean surface warming by the late 21st century and beyond. Projections of greenhouse gas emissions vary over a whole range, depending on both socioeconomic development and climate policy”.

In December 2014 a conference on climate, the COP20, took place in Lima, Peru. It was not a success, but kept open the possibility of some agreement in the forthcoming important meeting, the COP21, which will occur at the end of 2015 in Paris, France. It hopes to estab­lish a global accord on the subject—provided that nations will look beyond their navels and their own frontiers. No doubt, to address effectively the mitigation and adaptation of the present environmental condition, and to identify the path towards the desirable one, raise fundamental issues concerning equity, justice and fairness. They also face varying challenges and capabilities to finance the process of sustainable development.

Most people point to the success of some affirmative actions towards sustainability. However, it may be argued that it is possible to attribute the declining resistance to sustainable development to guilt, indifference and the fear of being accused of old-fashioned or backward thinking. It is important to realize that there is a veiled rationality, sometimes disguised, that can’t be ignored. A strange paradox: Sustainable development is desirable but perhaps too costly for the investment projects of most entrepreneurs. Furthermore, it has an invisible enemy: almost no one is apparently against sustainability but the hardest task is to change deeply held attitudes.

The deep understanding of the circumstances, past and present, as well as potential paths towards a desirable future, is not a simple matter. History, statistics, philosophy and values are all required in effective formulations to guide the decision makers. We know that to generate such models is a difficult task. For instance, the uncertainty or vulnerability of the variables involved, the creative and robust definition of each indicator being used, and the analysis of possible multiple correlations among them can make the comparative analysis of alternative paths quite complex.

We intend here to outline a proposal for a composite index which can evaluate socioeconomic welfare defined to include environmental performance. As pointed out by Marien (2011, p. 139), “Green growth is not a replacement for sustainable development, but should be seen as a subset, in that it is narrower in scope”. Nagan & Arena (2014) propose what they consider to be the necessary elements of a new paradigm and seek to locate the new paradigm of political economy in terms of its global reach. We add that, to aspire to and accomplish such an aim we need to construct a vision which serves the planet consciously and not only use it for its own selfish needs, as we have been doing.

In this vein, formal models with strong analytical features are desirable. The resulting empirical analyses, based on both the historical record and projections, may result in propositions for research on the transitions and dynamics of sustainable development. Our composite socioeconomic and environmental Index of Welfare is presented in the next section.

Joanílio Rodolpho Teixeira: Department of Economics, University of Brasília; Fellow, World Academy of Art & Science
Danielle Sandi Pinheiro: Associate Professor, University of Brasília; Member, Growth and Distribution
Anna Eloyr Silveira Vilasboas: Department of Economics, University of Brasília
*This research article is part of the research program of the group of “Growth and Distribution” from the National Council of Science and Technology (CNPq-Brazil). For comments, contact: joanilioteixeira@hotmail.com. We thank Rodrigo Peñaloza, René Medrano-B, Michael Marien, Wellington Carlos and Ricardo Pasini for helpful suggestions. Any errors or omissions are, of course, the responsibility of the authors.


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