Partha Dasgupta: Economy and Nature

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Good economy requires that we manage nature better

The past 70 years have been a success story in many ways. We are healthier, live longer and, on average, have a higher income than our predecessors. The proportion of the world’s population in absolute poverty has fallen dramatically. As we benefit from advances in technology, modern science, and food production, we may think that humanity has never been so good. Global GDP has risen enormously since the 1950s (see graph), and global economic output is 15 times higher.

Behind these achievements, however, lies a simple truth that has profound consequences not only for the way we think and act in business, but also for our lives. All of the wealth we have enjoyed depends on the nature that surrounds us and of which we are a part – from the food we eat, to the air we breathe, to the decomposition of our waste, to towards opportunities for relaxation and spiritual fulfillment. But the biosphere has shrunk during this time. Current extinction rates are about 100 to 1,000 times higher than the background rate – the normal process of species loss – over the past million years. And they speed up. The graphic shows the Living Planet Index, which records the abundance of mammals, birds, fish, reptiles and amphibians. Between 1970 and 2016, the global population of the species declined by an average of 68 percent. A recently published report by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services shows that 14 of the 18 assessed global ecosystem services are in decline.

We have exhausted nature’s resources by extracting natural resources, depleting the soil’s nutrient supply, destroying fish stocks, etc. – and using nature as a sink for our waste – for example by burning fossil fuels. As a result, the biosphere has been severely degraded; Some ecosystems like coral reefs are on the verge of collapse.

Certain events can make us think for a moment. The COVID-19 pandemic has led many to question the sustainability of our relationship with nature, as illegal wildlife trafficking, land use changes and habitat loss are the main causes of emerging infectious diseases.

supply and demand

Earlier this year the Economics of Biodiversity: The Dasgupta Review, published on behalf of the UK Treasury. In this study I tried to show how economics overlooked nature. By combining our knowledge of the biosphere from geosciences and ecology, review sets a framework for incorporating nature into our economic thinking and provides a guide for change through three broad, interconnected transitions.

The first is to ensure that our demands on nature do not exceed what is available. What we ask of nature (the “ecological footprint”) has far exceeded nature’s ability to sustainably meet these demands for several decades, with the result that the biosphere is being degraded at an alarming rate.

This persistent overshoot of demand threatens the prosperity of present and future generations and poses a significant risk to our economies and well-being. Technological innovations – for example those that are geared towards sustainable food production – play an important role so that our demands on nature do not go beyond what is available.

But if we do not exceed the limits of what nature can offer and at the same time want to satisfy the needs of the human population, consumption and production patterns must also be fundamentally restructured. Policies that change prices and behavioral norms – for example by aligning environmental targets along entire supply chains and enforcing standards for reuse, recycling and sharing – can accelerate efforts to break the links between harmful forms of consumption and production and the natural environment.

Population growth has a significant impact on our demands on nature, including future patterns of global consumption. Supporting community-based family planning can change preferences and behaviors and accelerate demographic change, as can women’s access to finance, information and education.

Including wealth

The second transition is to change our measure of economic success. A necessary step in this direction is the redesign of the instruments of economic measurement. GDP remains a critical measure of economic activity when it comes to short-term macroeconomic analysis. But it is not a suitable measure of long-term economic performance. This is because it doesn’t tell us how the choices we make will increase or decrease an economy’s assets, especially its natural assets.

Instead, we should use a measure that takes into account the value of all stocks of capital – produced capital (roads, buildings, ports, machines), human capital (skills, knowledge), and natural capital. We can call this measure “inclusive wealth”. Inclusive wealth, which includes all three types of capital, shows the benefits of investing in natural assets, as well as the tradeoffs and interactions between investing in different assets. Only with this more complete picture is it possible to understand whether a country is economically prosperous. New Zealand’s “wellbeing budget” and the use of “gross ecosystem products” in China are examples of the review of the steps taken to get a more complete picture.

By way of illustration, the export revenues of natural resources (e.g. primary products in the tropics) do not reflect the social costs of their removal from the environment; In other words, the trade in these goods does not take into account how the degradation process affects the ecosystem from which they originate or the long-term consequences for these communities. So there is a transfer of wealth from countries that export raw materials to importing countries. The implication is more than ironic: the expansion of international trade may have contributed to a massive transfer of wealth from poor countries to rich countries without this being recorded in official statistics.

Of course, it is not enough to only consider natural assets. We have to invest in nature. This requires a financial system that directs financial investments – public and private – into economic activities that increase our inventory of natural goods and promote sustainable consumption and production. Investing can also mean just waiting; If left alone, nature grows and regenerates.

Institutional failure

This brings us to the third transition: reshaping our institutions to enable change. At the core of our unsustainable engagement with nature lies in a profound institutional failure. The value of nature to society – the value of the various goods and services it offers – is not reflected in market prices. The open sea and atmosphere have fallen victim to freely accessible resources and the so-called tragedy of the commons. Such price distortions have led us to invest relatively more in other assets, such as produced capital, and too little in our natural assets. And since many components of nature are mobile, invisible, or silent, the effects of a number of our actions on ourselves and others – including our descendants – are difficult to track and neglect, leading to widespread externalities.

To exacerbate these biases, governments almost everywhere are paying people more to exploit nature than to protect it. A conservative estimate of the total global cost of subsidies that harm nature is around $ 4 to 6 trillion per year.

A flourishing nature supported by a rich biodiversity is our ultimate safety net. Just as diversity within a portfolio of financial assets reduces risk and uncertainty, diversity within a portfolio of natural assets – biodiversity – directly and indirectly increases nature’s resilience to shocks and reduces risks to the services we rely on.

A flourishing nature supported by a rich biodiversity is our ultimate safety net.

Much more global support is needed to increase financial institutions’ understanding and awareness of natural financial risk. Central banks and financial regulators can do this by assessing the systemic extent of these risks. At the heart of the global financial safety net, the IMF can play an essential role in its oversight and financial and technical assistance, both in assessing and managing these natural risks.

the next steps

With heightened awareness of nature’s place in our lives, a message conveyed to us through the pandemic, this year is crucial in reshaping our economy and our economic and financial decision-making. World leaders will gather for two conferences – the UN Convention on Biological Diversity (COP15) and the UN Climate Change Conference (COP26) – to discuss the inextricably linked problems of climate change and biodiversity loss.

The only way to combat this biodiversity crisis is through transformative change that requires sustained commitment from actors at all levels – from citizens to international financial institutions such as the IMF. The Economics of Biodiversity Review highlights success stories from around the world and shows that the kind of change needed is possible. We need to redeploy the ingenuity that enabled humanity to grow so great to bring about the transformation necessary to rethink our relationship with nature. We and our descendants deserve nothing less.


PARTHA DASGUPTAis the retired Frank Ramsey Professor of Economics at the University of Cambridge.

Opinions in articles and other materials are those of the authors; they do not necessarily represent the views of the IMF and its Executive Board or IMF policies.

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