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5 Positive Time Preference and Environmental Applied Econometrics and International Development Vol. 18-2 (2018) POSITIVE TIME PREFERENCE AND ENVIRONMENTAL DEGRADATION: THE EFFECTS OF WORLD POPULATION GROWTH AND ECONOMIC ACTIVITY ON INTERGENERATIONAL EQUITY, 1970- 2015 Christopher E.S. WARBURTON* Abstract This paper investigates the effects of population growth and economic activity on intergenerational equity and environmental preservation. Time series data from 1970 to 2015 suggest that positive time preference, induced by poverty and virtually unrestrained economic activity, pose dynamic and systemic risks to environmental preservation more so than the population growth. With the aid of economic models and empirical evaluation, the paper concludes that the viability of environmental conservation will ultimately be dependent on levels of poverty, life expectancy, the availability of diverse sources of income, restrained commercial consumption of environmental resources, and the preference for long-term investment. Keywords: Cointegration, Conservation, Environmental Degradation, Foreign Direct Investment, Intertemporal Consumption, Overlapping Generations, Pollution, Population Growth, Poverty, Saving JEL Classification: O13, O14, O15, O44, Q53, Q54 1. Introduction This paper investigates the effects of population growth and economic activity on intergenerational equity and environmental preservation. Time series data from 1970 to 2015 suggest that positive time preference, induced by poverty and virtually unrestrained economic activity, pose dynamic and systemic risks to environmental preservation more so than the population growth. With the aid of economic models and empirical evaluation, the paper concludes that the viability of environmental conservation will ultimately be dependent on levels of poverty, life expectancy, the availability of diverse sources of income, restrained commercial consumption of environmental resources, and the preference for long-term investment. The equitable use of environmental resources is nothing new, but it started to gain noticeable and accelerated multilateral attention in the 1990s. Multilateral population policies (facilitated by United Nations Conference on the Environment and Development) and the signing of the Kyoto agreement to foster a global climate policy became evident indicators of the movement to preserve the environment. The judicious use of environmental resources has been controversial; partly because of divergent self-interests and less forceful multilateral policies. Over the years, and without adequate compensation, nations that were slow to grow or catch up with richer nations have espoused a sense of entitlement to extract resources just as their rich counterparts had done in bygone years. It was also fashionable to argue that financial wealth can compensate for environmental degradation through a substitution channel. The basic idea is that capital can be decomposed into interdependent and offsetting components, with one or more of the components offsetting the depreciation or __________ * Christopher E.S. Warburton, Ph.D., Department of Political Science and Economics, East Stroudsburg University, PA, USA. Email: [email protected] 5 Applied Econometrics and International Development Vol. 18-2 (2018) degradation of another to ensure the constancy of aggregate capital over time. Consider the composition of capital as defined by Equation 1: K= Kn + Kh + Km; (1) where K is for total capital stock, Kn is for natural capital stock, Kh is for human capital stock, and Km is for man-made capital stock. The natural capital stock includes renewable and non-renewable (critical) natural resources that are irreparable and susceptible to extinction. While some of these assets can be monetized, their true social value is usually indeterminate; a problem that is more pronounced when monetary and social values become impractical.1 Equation 1 provides a theory for a school of thought that supports weak sustainability. Implicitly, if K is not declining—as a result of offsetting changes in the assorted categories of capital stock—then there should be reason to accept some measure of sustainability. The idea that Km can replace or substitute Kn is problematic and not entirely convincing. A relatively appealing view has been to preserve Kn in pecuniary and or physical terms (strong sustainability). It is noteworthy that a subset of capital, which is essential for human existence (critical capital), cannot be substituted by other forms of capital. The bifurcated approaches pose interesting conceptual developments in the literature and the approaches have been summarized pretty well by Hanley et al. (2013). Two strands have been identified: (i) the outcome approach and (ii) the chance approach. In the outcome approach, there is a presumption that consumption is linear and insusceptible to diminishing returns. This may very well be the case when life expectancies are very short as those in some African countries (see Table 4). The chance (equity) approach requires contemporary generation to equitably save proportional capital stock for a subsequent generation. Essentially, saving must be somewhat equal to consumption. The issue of sustainable development has become a matter of population dynamics, positive time preference, saving or investment, and intergenerational equity or ethics, which is sometimes presumed to be subjective and complicated by preferences for appropriate discount rates. Obviously, the issues are not as simple as they might seem and the central variables are usually confounding and subject to careful analysis. Exogenous conditions or circumstances, policy contingencies, and data interpretation, tend to complicate the economic analyses. For example, population data must be studied carefully. The data may occasionally project growth without death rates and life expectancies. However, the data are almost always contingent on policy choices that may or may not be implemented. This paper is designed to investigate some of the central issues outlined above. 1 Human capital is also beset with its own form of degradation. Structural and long-term unemployment devalue the worth of human capital. In many societies, investment in human capital is rapidly diminishing, with no assurance of a reversal in the downward trend. This means that the retraining that is so essential to salvage structural unemployment is not readily available. The man-made category of capital includes all man-made facilitators of production; viz: machinery, roads, computers etc. Invariably, this form of capital is conspicuously associated with social policy in the form of capital consumption allowance; see Hanley et al (chapter 6) for further reading on the decompositions of capital and sustainable development. 6 Applied Econometrics and International Development Vol. 18-2 (2018) In the next Section, I discuss some historical theories of population and sustainable development. In Section III, I discuss the issues of intertemporal consumption and positive time preference with the aid of Diamond’s overlapping-generations model and Romer’s exposition. The importance of saving (conservation) is highlighted in the Section as a prelude to the consumption and long-term investment problems, which are discussed in the subsequent Section. Econometric discussions of global output and long-term investment for sustainable development are provided in Section V. Concluding remarks and policy implications are provided at the end of the paper. 2. The population-development literature The enhancement of human welfare has been periodically punctuated by the issue of population growth and concerned theorists have provided several propositions to deal with population growth. Though the problem of population growth was well known in the eighteenth century, the Reverend Thomas Malthus became the first theorist to successfully provide a celebrated theory of population growth in his work work, Essay on population (1798). Evidently, Malthus was concerned about the geometric progression of population growth, relative to the arithmetic progression of food supply (output). He somberly predicted that without diseases, wars, and untimely death (positive checks), food supply will not keep pace with population growth that doubles every 25 years. A schematic representation of the Malthusian theory has been provided in Table 1, which shows how population growth was expected to progressively outpace food supply by large margins. Today, though the Malthusian projections have not materialized in the doleful form that was envisaged in the eighteenth century, the relationship between population growth and output continues to excite controversy over resource allocations across generations. Table 1: The Malthusian Theory of Doom Years 1 25 50 75 100 125 150 175 200 Population 1 2 4 8 16 32 64 128 256 Food Supply 1 2 3 4 5 6 7 8 9 1960 1985 2010 X X X X X X World Population 3.032 4.846 6.93 X X X X X X GDP per Capita 450.72 2618.28 9513.31 X X X X X X Source: Van den Berg, 159. World Population and GDP per capita (current US$) by author (datasource:worldbank.org). Malthus was convinced that population will double every twenty five years. Blaug (1997) questions the Malthusian data: “From dubious American data that did not distinguish between fecundity and immigration, he [Malthus] inferred that an unchecked population will double itself every 25 years, implying a growth rate of just under 3 per cent per annum (actually, rates of 5 percent per annum seem to be biologically possible)” (Blaug,
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