Lecture 5 - Relationship between economic development and environment I @

Growing Population and Economic Growth

The relationship between economic growth and population growth is rather dynamic and multi
dimensional. Higher population growth means more labors and which in turn means high level of
production. This argument will only valid if the economy can manage its labor force properly and convert
population into productive forces. High level of labor also means high level of consumption. Extra peopele
will need resouces for their sustenance irrespective of their productive effort. Wwhether or not the economy
can manage the population or not increased population will create extra pressure on environment and its
natural resource endowment.

Important factors
o

Population growth - more people consume goods and services

Demands for resources and energy increases

More material waste and waste energy are produced

Economic growth - society produces more goods and services

Each person consumes more goods and services

More material waste and waste energy (entrophy) is produced

However, population growth does not always imply economic growth

Some important points

o

Technology and institutional arrangements impact the amount of resources, energy, and
waste that humans produce

People now recycle more glass bottles, aluminum, paper, plastics, etc

New institutions and arrangements are there to failitate this trend

Bins and collection centers where people can dispose of their wastes

Recycling centers that separates the types of waste

Industries adjusting their production processes to include recycled materials

New transportation vehicles for recycled wastes

People are now more conscious about environment and resource constraints

Technological progress has made possible converting waste to useful objects

Technology requires investment and luck

Waste energy increases monotonically

Population Growth

World Population Growth

Period

World Population

Annual Growth Rate

1 A.D.

250 million

1500 A.D.

425 million

0.035% (1 A.D. - 1500 A.D.)

1900 A.D.

1 billion

0.21% (1500-1900 A.D.)

2000 A.D.

6 billion

1.79% (1900-2000 A.D.)

The following table gives a getter picture of population growth since 1950

Page 1 of 12

Lecture 5 - Relationship between economic development and environment I @

Malthus - In 1798, Thomas Malthus predicted: Fertility and birth rates would always respond
positively to higher incomes and thus would ensure that economic prosperity and human
population would be bound by the limited amount of global resources. Population is growing
geometrically but food production is growing arithmetically
o

Malthus was a priest and economist and wrote - Essay on the Principle of Population as It
Affects the Future Improvement of Society (1798)

Land is a fixed, scarce resource and food production is limited

If the population exceeded its food production, then some people would die off.

Problem - Malthus ignored the impact of technology and through improved technology we
can increases production from scarce resources

Recent computer models predict severe shortages of resources

Usually future prices are missing from these models, as resources become scarcer,
the prices rise.

Page 2 of 12

Higher price has four impacts

Lecture 5 - Relationship between economic development and environment I @

Consumers reduce their demand for products

Sellers want to increase production of product

Development of new technologies

Exploration for new resources

Example - Petroleum - scientists predicted in the 1970s that the world would run
out of petroleum by 2000

As oil became more expensive, companies explored and drilled for more
oil

High cost oil extraction - Northern Slope of Alaska

New technologies

Satellite imaging

Drilling

Oil from shale

Davind Pimentael (1994) said: The optimum global population (the largest population that could
be supported sustainably in relative prosperity) is about two billion people.

Note that the world population is already 6 billion, far exceeding Pimentael's estimate of the
optimum global population. Behind any such estimate of optimum global population, there must be
a number of assumptions made, like technological progress, rate of growth of consumption, impact
of increasing scarcity of resources on consumption habits, estimates of stocks of resources, etc.

Biologist use a logistic growth function for species

o

It is an upside down U-Shape

Environment has a carrying capacity

o

The level of population a natural resource base can sustain without depletion, whether is be
humans or animals

Once the population passes the threshold of the carrying capacity, then population declines

Disastrous predictions for resources and environmental degradation

o

Running out of petroleum

Killing off all the fish (over harvesting)

Many species are going extinct

More people put more pressure on the environment

o

Primary energy consumption increased globally by 4.3% in 2004

As much as 60% of the global population depends on the waters of international fresh
water systems

Rivers and lakes of which basins are shared by more than two countries

Could have more wars and conflicts over fresh water

The population situation

Graph below shows how fast the world's population is growing

Page 3 of 12

Lecture 5 - Relationship between economic development and environment I @

Sources - U.N. Population Division report World Urbanization Prospects: 2003 Revision; BP Statistical
Review of World Energy June 2005; GEO Year Book 2006; WRI 2005

The developed world is 75% urban

o

The rate is accelerating in the developing world

By 2030 urban population is expected to rise to five billion or 60% of the worlds
population

Population growth rate has been slowing and is shown below

Why is population slowing? Children are expensive in both money and time
o

Many countries have close to a zero population growth rate

People delay having children, complete education; accumulate assets like a house,
car, etc.

Much of the population growth is in developing countries, HIV is impacting population

growth rates in some African countries

Page 4 of 12

Lecture 5 - Relationship between economic development and environment I @

Page 5 of 12

The followig figure gives the demographic transition. Birth rate and death rate with time

Following figure gives the growth of world population

Lecture 5 - Relationship between economic development and environment I @

Economic Growth

First, we must distinguish between economic growth and economic development.

o

Growth refers to increases in aggregate level of output.

Development refers to increase in output as well as in other human development indices

GDP
o

The traditional measure of macroeconomic performance is Gross Domestic Product (GDP)

GDP is the sum of the money values of all final goods and services produced in the
domestic economy during a year

Only market activity is included

Since there isnt a market for most environmental goods, they are not
included

In contrast, defensive expenditures (e.g. repairs after an auto accident) are

included

Problems that result:

The value of environmental amenities is not included in GDP

Depleting a stock of natural resources (e.g. oil, minerals, forests) increases

GDP, since it results in new sales

For comparison, depleting the capital stock hurts, as capital will not
be there for future generations

Similar reasoning should follow for natural resources

Growth that comes from the consumption of capital, including

natural capital, is not sustainable

Page 6 of 12

Defensive expenditures are included

Lecture 5 - Relationship between economic development and environment I @

Defensive expenditures are expenditures made to eliminate, mitigate,

or avoid damages caused by other economic activity.

For example, after a car accident, the costs to repair the car, provide
medical treatment to the victims, pay for lawyers, etc. all add to
GDP. But, has the car accident really increased welfare? A study of
Germany found that 10% of the countrys GDP consisted of
defensive expenditures.

Following usual convention goods and services are produced in the market place
o

Higher demand means higher production and lower price

Does not care much about the source of resources as long as the buyer is capable of paying
the demand of the producer/supplier then supply will be there

Technological progress is important in this process

If many industries are expanding within a country, then we have economic growth

Economic growth -increase in GDP

o

A higher GDP per capita means each citizen has more goods and services to consume

Figure below shows GDP percent-growth rate in 2007

Derivation of a Growth Model

o

Total production of goods and services in a country are treated as one large production
function for whole economy

Common in growth theory

GDPt = f ( A, K t Lt , Rt , Et )
o

GDPt is dependent on, autonomous growth, A , reflects technology, usually the intercept
in a regression equation, K t is capital, Lt is labor, E t is for energy, Rt is for natural
resources

Page 7 of 12

Lecture 5 - Relationship between economic development and environment I @

Usually equation has Et or Rt , but not both

General trend of the developing world

o

Higher population growth rates

Movement from agriculture based development to mechanized production based

development, which results in more pollution

Increasing urbanization, people are moving to the cites, because that is where the jobs are

However there are options for leakages

o

United States - environmental laws became too harsh

Compliance costs were too high

Some industries relocated to countries like Mexico and China, Weak

environmental laws, cheaper labor

These industries pollute even more shipping their products to the United States.

High U.S. incomes are indirectly creating large amounts of pollution

Japan started to outsource the production of goods and services to other Asian
countries. Japan was big investors in other countries like China, South Korea, etc.

Some countries actively seek out companies, trying to get them to invest in their
economies, Investments creates jobs, incomes, and more tax revenue

Is economic growth good or bad for the environment?

o

Requires more resources and energy

Technology can change A too, creating an offset

Government may imposes restrictions on natural resources or energy use

It is difficult to measure impacts of regulations on resources, environment, and GDP

o

Government imposes a regulations to reduce air pollution in a city

Causes higher costs

People may be healthier, live longer, work harder, pay less money for medical
problems, etc

Thus, regulations slow GDP down initially, but healthier people make GDP grow faster.

Relationship between development and population growth

Normally higher population means higher level of output.

However for the case of average productivity if the last persons productivity is greater than the
average productivity of the economy then addition of last person will increase productivity,
otherwise it will decrease average productivity

Impact of population growth on economic growth can be analyzed through the relationship

O l
= *x.
P P

Page 8 of 12

Lecture 5 - Relationship between economic development and environment I @

In the above relationship, O is the output of an economy,

capita output. l is the size of labor force and thus

P its population; thus,

O
is the perP

l
is the size of labor force as a proportion of
P

population. x is the average product of labor.

The impact of population growth on share of labor force in the population

l
and its impact on
P

the average product of labor x together determine the impact of population growth on per-capita
output

O
. Let us analyze the two impacts.
P

Labor force l is the number of people in the age group of 15 to 65. Children below 15 are too young
to work and adults above 65 are generally retired from the labor force. The impact of population
growth on labor force therefore depends on how population growth rate changes the age structure
of the population.
0

Children

15

Size of Labor Force

65
|

Retirees
Years of Age Scale

Age Structure of Population

Population growth has two effects on labor force: the youth effect and the retirement effect. Youth
effect is the extent to which population growth adds to 0-15 age group, and retirement effect is the
extent to which the growth adds to 65 and above age group. The two effects squeeze the size of
labor force in a population. Slower population growth rate economies specially experience more
retirement effect, whereas faster population growth rate economies specially experience more youth
effect. Empirical observations suggest that the youth effect is generally stronger. In other words, a
slower population growth rate actually adds relatively more to the labor force.

High level of young population will create child labor and deplete family savings (known as youth
effect).

High level of older population will increase savings (known as retirement effect)

More savings means more capital formation

Page 9 of 12

Lecture 5 - Relationship between economic development and environment I @

To analyze the impact of population growth on the labor force, one has to also consider the female
availability effect of population growth. A faster population growth rate makes relatively fewer
women available for labor force, suggesting that a slower population growth rate may add relatively
more to the labor force.

Let us now analyze how population growth impacts x . One may think that a larger population and
thus a larger domestic market size offer possibilities of exploiting economies of scale. This thinking
may be true for certain outputs in some initial range of production. However according to the law
of diminishing marginal returns, each production system eventually reaches a point where the
marginal product of labor declines as more labor is added. In other words, economies of scale vanish
after some initial range of production.

One may think that a larger population makes larger pool of savings possible, which increases
investment into the economy and thus the prospect of higher rate of economic growth. But,
empirical evidences do not support this thinking. It is the older age people that generally afford and
generate savings. A slower growing population, compared to a faster growing population, has
relatively more number of older people and thus has relatively greater potential to generate more
savings. In addition, investment in an economy does not have to depend only on domestic savings if
the economy opens up to foreign investment.

Finally, it is observed that a faster population growth rate widens economic disparity among rich
and poor. Faster population growth rate depresses wage rates relatively more than profit rates. Also,
poorer families generally have larger number of children and the percentage of income they can
spend on a child goes down with more children.

Higher population growth rate makes fewer women available to labor force, as more women
become engaged in raising children (female availability effect of population growth)

Page 10 of 12

Lecture 5 - Relationship between economic development and environment I @

Higher population growth rate raises dependency ratio of labor force. A higher proportion of
people, those who are not in labor force, depend on labor force because a very high proportion of
children make up the population (young age effect of population growth).

Higher population growth rate increases congestion on infrastructures and on open access resources.

Ecological perspective on effect of population growth on environment

There is a practical limit to the population that can occupy a certain region, which is the carrying
capacity of the region, as a rising population is likely to cause a larger environmental degradation
through increased wastes and pollution.

However, technological development may expand the carrying capacity and mitigate some of the
above problems. Paul Ehrlich, a biologist in 1971 stated the IPAT relationship between
population (P ) , economic growth or affluence ( A) , measured as output per person, technology
variable (T ) measured as pollution per unit of output, and environmental impact (I ) measured as
units of pollution is expressed as

I = P * A * T , or as
I = ( population ) * (output population ) * ( pollution output )
In the above relationship Population and Output cancel out from the right hand side, leaving
only Pollution which is the same as the left variable (I ) . What happens to environment (I ) over
time is then determined by whether the technology (T ) improves fast enough to make up for the
rate of growth of population (P ) and economic growth ( A) .
Poverty and Environmental Degradation

Poverty and environmental degradation generally coexist in a self-perpetuating cycle, the

manifestation of which is multifaceted. According to the International Food Policy Research
Institute, these related problems possess common causes such as a historically low income, rapid
population increase, land constraints, and a lack of appropriate agricultural technology. While
resource degradation occurs around the globe, the poor are most affected by it because it often
correlates directly with their food security and livelihoods.

Poverty is generally defined as a social or economic condition that has major implications for
policy. A person is considered poor when their personal income or their consumption is below a
certain line. The United Nations Development Program defines poverty as deprivation of the
individual choices necessary for a person to lead a long, healthy, creative life and to enjoy a decent
standard of living, freedom, dignity, self-respect, and the respect of others.

An increase in population in rural areas decreases farm sizes and ultimately pushes people off of
their original land. Those affected find themselves forced to migrate to more marginal land, thereby
beginning a new process of destruction in a new area and a process of environmental degradation.
More people on smaller land plots inevitably use up more of that lands resources.

Page 11 of 12

Lecture 5 - Relationship between economic development and environment I @

Because the poor do not, for the most part, own the resources they utilize, they reap no benefits
from conservation. Without incentives (especially monetary) to pursue, they most often will not
protect their surrounding natural environment. When confronted with the choice of immediate
survival versus a distant eventuality, it is only human to select the latter. Often, natural resource
exploitation can be vital to survival when a person does not enjoy other options.

Poverty and environmental damage, by and large, occur jointly. A more specifically observable
cause is land quality and the affordability of the technologies necessary to its preservation. The tools
to practice environmentally sustainable methods of farming are commonly too expensive for the
average fledgling farmer to purchase.

A good first step in both conservation efforts and the alleviation of poverty is to raise awareness
about the issues involved. Access to employment in new sectors can decrease reliance on the land.
Access to education, reproductive health information and contraception also can reduce the
population pressure. Another step is for governments to subsidize environmentally sustainable tools
and practices.

Downward Spiral Hypothesis of effect of population on environment

According to this hypothesis, a rising population worsens environment, which causes still more
growth in population, and there is downward spiral in environmental degradation. Below is an
example.

A rise in population raises use of resources, like wood resources, which raises scarcity and people
need to travel farther and spend more time to find and collect wood. This induces families to choose
to have more children as free labor resources to help collect wood, which further raises population
and reinforces the downward spiral.

Induced Innovation Hypothesis of effect of population on environment

A Danish economist Ester Boserup enunciated this hypothesis, according to which a rising
population does not necessarily cause a downward spiral of environmental degradation; actually, a
negative feedback from innovation will arrest the degradation trend. An example is below.

A rise in population raises demand for agricultural products, which raises the scarcity of land
relative to labor. This rise in scarcity induces incentives for agricultural innovation. People start
using more intensive and sustainable land management practices and farming methods, which
decreases pressure on land.

There have been some empirical studies on the above two hypotheses, and they have found
evidences of both. There are increasing evidences of regional environmental stresses from
deforestation, cultivation of marginal lands, and natural disasters, and also there are evidences of
innovations being applied. There is an emerging consensus that high population growth rate places
extra stresses on environmental and natural resources and a slower population growth rate is a good
environmental policy.

Page 12 of 12