Academic journal article The Journal of Developing Areas

Sustainable Development: An Empirical Illustration for Saudi Arabia

Academic journal article The Journal of Developing Areas

Sustainable Development: An Empirical Illustration for Saudi Arabia

Article excerpt

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Macroeconomics (as practiced) is about a circular flow of isolated systems, where values are exchanged between firms and households. Such exchanges are conducted in an isolated close loop system and deemed not to depend on the environment (external system). If there was no dependence on the environment, there would be no environmental degradation which translates to no pollution - which is untrue. It is convenient not to account for the environment as there is no market to price the environment as a capital. However, valuation of the environment provides a much needed understanding of an economy as a sub system and its dependence on the environment for sustainable development.

There is a clear need for advanced macroeconomic modelling and analyses that explicitly incorporate the environment, such that meaningful sustainable development policies can be formulated. Changes to the macroeconomic framework require that the macro economy behaves as an open sub system of the finite natural environment. Standard macroeconomic frameworks do not consider the inclusion of environment as a capital (Daly, 1991) because environmental capital is not easily internalized into macroeconomic models. There are a few suggested ways on how the environment could best be internalized but unfortunately, there has not been one agreeable way. When the environment is excluded, economic development may not be sustainable as the rate of environmental degradation could outpace the rate of economic growth.

Different economies use different methods and justifications to set the price of pollution. Although there are several proxies in place, the concern is whether a selected proxy provides a comprehensive representation of environmental degradation. Resource depletion also tends to be overlooked as a barrel of oil extracted now means one less barrel of oil for the future. Considering that it is not easy to quantify environmental degradation and resource depletion into a comprehensive measure of Gross Domestic Product (GDP) (Frank and Bernanke, 2009), both environmental degradation and resource depletion are not fully represented in GDP. Nevertheless, it does not mean that quantification of environmental degradation and resource depletion should be overlooked.

The aim of this paper is to highlight the shortcoming of the standard macroeconomic framework when environment is ignored in the implementation of traditional policy practices. An illustration (with reference to a leading Gulf State) is used to demonstrate the ease with which environment can be internalized in selected macroeconomic framework towards sustainable development. This paper is structured as follows. The immediate section provides an overview of sustainable development with an appreciation of the environment. Section III. presents an empirical case where environment is internalized in a simple Keynesian framework with a brief discussion on policy implication. And finally, the implications of this simple framework conclude.

SUSTAINABLE DEVELOPMENT

Sustainable development is where the natural system remains capable in offering its service to the economy. The economy is a sub system of the larger natural ecosystem; therefore, the ecosystem is considered external to the economy (Daly, 2007). From a scientific angle, sustainable development can be explained by the two laws of thermodynamics. The first law of thermodynamics states that matter cannot be created nor destroyed; it can only be re-arranged (Guggenheim, 1985). Matter is re-arranged as the environment provides material for energy input and absorbs waste. The second law is when energy is transformed from a state of low entropy (high energy) to that of high entropy (low energy) to do work. The combination of the two laws results in absolute scarcity of resources (Daly, 1991)1 and such scarcity implies that the ecosystem must be used in an efficient manner to allow for sustainability. …

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