Sustainable Development: Economic growth and innovation
Economic growth is generally regarded as a necessary component of any development strategies aimed at meeting the aspirations of New Zealanders for an improved quality of life. Given population growth, economic growth is necessary just to maintain the material quality of life that New Zealanders enjoy at their present levels. However, the production and consumption that make up our economic activity use the natural resources described in the chapter: Environment and Ecosystem Resilience. While economic growth also undoubtedly brings benefits in terms of increased incomes and material quality of life, there is sound evidence associating it with negative environmental and social effects. Without documenting, measuring, understanding, mitigating and where possible avoiding these negative impacts, desired levels of economic growth may not be sustainable, or may have costs to society that are unacceptable. This chapter identifies some influences on growth, and presents a number of relevant indicators of trends within the economy.
How are economic growth and innovation relevant to sustainable development?
Economic activity is closely linked to people’s material standard of living, resource use, consumption and production and, ultimately, quality of life. Economic activity is largely founded on the operation of markets. An element of the debate about sustainable economic development is the extent to which markets, if left to themselves, could produce sustainable economic development, and if they did not, what might be the most effective intervention strategies for society and governments to pursue.
Economic growth is generally regarded as a positive goal, since growth generates increased income and increased income is required for increased material well-being. However, growth involves increased use of resources, environmental impacts and social change; and increasing income now may reduce the potential for income in future. The economist J R Hicks defined income as the maximum amount that can be consumed consistent with the maintenance of wealth.1 To be sustainable, increased income must come about in a way that does not reduce the ability of the environment to keep providing at least the same level of income into the future.
Economic growth requires a political environment that facilitates this growth. Sound political, legal and bureaucratic institutions can foster the trust and confidence needed to support investment for growth. Regulation provides a way to consider economic, environmental and social outcomes in decision-making, and therefore help promote sustainable development. It can be an important tool for ensuring that long-term impacts are not ignored at the expense of short-term benefits. However, the cost of complying with regulations can be a barrier to development. High compliance costs can deter investment in marginal projects or make time-dependent projects unviable. High costs and complex processes can also mean that others affected by proposals may not be able to effectively take part in the processes of assessing risks.
Economic growth provides more work and generates more income. It can lead to wealth creation at the individual and community level, allowing people to raise their material standard of living and potentially strengthen communities. Higher incomes are generally associated with better health and housing. Wealthy countries tend to attract migrants, and higher wealth is associated with increased geographic mobility and leisure time. Despite the benefits, the gains from higher wealth can also put additional pressure on environments and infrastructure.
Increasing well-being brought about by economic growth may in turn alter patterns of economic behaviour as values change. As the basic needs of life are met, individual and community values shift towards making trade-offs in a way that may mitigate negative social and environmental impacts. For example, wealthier consumers may be more willing to pay a premium for ‘environmentally friendly’ goods; greater financial and technological wealth may enable more efficient production methods.
Some part of higher incomes can be redistributed to benefit the community, for example by providing public transport. However, the additional income generated by economic growth can also be unevenly distributed between social groups or communities, leading to differences in standards of living. Communities can be affected by uneven distribution of wealth and opportunities.
Economic growth can assist countries to cope with demographic change, and in particular to help meet the needs of an ageing population and pay for the education required to increase people’s skills.
The indicators that relate to the social impacts of economic growth are in the Living Standards and Social Cohesion chapters.
Human capital is also an input to economic growth. The fostering of economic activity based on particular industries or regions requires appropriately skilled communities of sufficient size to provide the workforce for these industries. Continued research and development needs to be supported by people with relevant skills. New Zealand’s population growth and education levels may not be sufficient to provide the human capital needed to sustain economic growth.
The contribution of human capital is discussed further in the chapter: Skills and Knowledge.
Economic activity has two broad impacts on the environment. Firstly, when resources are: non-renewable; cannot be reused or renewed as fast as they are being used; or, cannot be replaced by other resources; the stock of resources will decline over time. Secondly, production and consumption have other impacts: creating noise, air, visual or other pollution. One of the crucial issues around the sustainability of economic performance will be the extent to which economic activity and economic growth can occur without unacceptable environmental impacts.
Innovation - finding new ways of doing things - can contribute to sustainable development. Ongoing investment in science and technology aimed at more efficient resource use and reducing the negative impacts of economic activity will help deliver sustainable development. Industrial development based on this investment could take advantage of New Zealand’s strengths to help make the best use of our resources.
Advances in science and technology can help to sustain our non-renewable resources and minimise the environmental costs of economic activity, for example reducing pollution. There are a number of sectors where renewable resources could be substituted for non-renewable resources currently used in production processes. However, in many cases further technological advances are required for this substitution to be able to occur with minimal economic impact.
The indicators that relate to the environmental impacts of economic growth are discussed further in the chapter: Environmental and Economic Resilience.
Current situation and trends
Economic performance
Trade
Financial position
Regulatory and business climate
Industry and regional development
Science and technology
Factors influencing change
New Zealand’s changing population, natural resources, human capital and society all have an impact on economic growth and innovation, as does how we manage the economy itself. To meet expectations of sustained living standards, economic growth will need to be sufficient to fund increasing health and welfare costs arising from the ageing population. With the possibility of a decreasing labour force, the burden of these increasing costs may fall on fewer workers.
The availability and substitutability of resources are relevant issues. Where non-renewable natural resources are being depleted to an unacceptable extent, there are several options, for example:
- develop ways of reusing the resources where possible
- reduce the production and consumption that makes use of those resources, with a commensurate reduction in economic activity
- develop more efficient production and consumption mechanisms that allow the same output with reduced use of natural resources
- substitute renewable resources for non-renewable resources, or
- develop alternative products or services that meet the same demand but don’t require the use of non-renewable resources.
Increasing sustainability through resource substitution may require new technologies or may need to be promoted by incentives. Where the full cost of using up non-renewable resources is not factored into decision-making, market price signals may not provide sufficient incentives for the use of renewable substitutes. In some cases the technology may not yet exist, or is not sufficiently developed, to allow substitution. These are issues that may need to be addressed in the context of sustainability.
Developing human capital is an important factor for economic growth. Anecdotally, employers have indicated that there is a shortage of qualified science and technology graduates. Migration may provide a source of science and technology capability, but at some cost to the country from which the migrants come.
Some of the elements of economic activity that may influence the future for sustainable growth are:
- ongoing investment to sustain economic performance
- sufficient funds, either sourced from domestic savings or obtained from international capital markets, being available for investment
- increasing private debt, which can make businesses and the economy as a whole more vulnerable to interest rate rises and exchange rate changes
- concern on the part of some economists about the sustainable development impact of current consumer debt growth rates
- decreased savings reducing households’ capacity to absorb income decreases and unemployment, which could make the impact of economic downturns more marked
- low retirement savings levels, which may mean an ageing population has a larger impact on government finances and the economy as a whole
- continued reliance on foreign investment, making New Zealand vulnerable to the changing preferences and risk profiles of international investors
- a high reliance on foreign investment, which can result in significant outgoings that impact on the current account deficit, such as interest payments and profit distributions
- New Zealand focusing much of its export earnings and its competitive position in the world economy on industries which are very dependent on research and development
- access to technology at a reasonable cost, either domestically developed or imported from overseas
- the likelihood of increased pressure for environmental regulation, and ongoing pressure on the issue of compliance costs as pressure on the environment increases, and
- international pressure (eg arising from consumer demand or from international agreements), which may require more environmentally or socially benign production processes.
Sustainable development aims to find a way to juggle these factors to provide economic growth as well as positive benefits for the environment and society.
Data gaps or issues
Overall, market economic activity is measured by the framework provided by the national accounts. Gaps in the measurement may occur: where new industries develop rapidly; where technological change produces new products or services or leads to rapid changes in product quality; where business recordkeeping practices fail to faithfully represent economic reality; or where activities (such as compliance costs or research and development) are complex to define and measure. The nonmarket aspects of economic activity are not well served by existing statistics. Some areas where more or better data is needed include:
- Information on economic activity of Mäori. This is an area where there is limited data and considerable measurement difficulties.
- Indicators of interdependence (often referred to as indicators of decoupling). These are indicators of the relationship between economic activity and its environmental impact. One area of particular relevance to New Zealand is good measures of the relationship between farming growth and its impact on water resources and other aspects of the environment.
- Savings information. The savings data used in this report is calculated as a residual from expenditure and income information and is not yet considered sufficiently robust. The Household Savings Survey is expected to provide better insights into the distribution of savings, and assist in building a more accurate picture of aggregate savings levels.
- Information on science and technology and its impact. There is limited data available on the level of science and technology investment in New Zealand and in what sectors this spending is concentrated. We also do not have measures for productivity gains from investment, or information on the application of science and technology in the environmental area in New Zealand. These data gaps are significant for measuring past performance and estimating future trends, and to answer the question ‘where should this investment be made for long-term sustainable development?’
- The scope, cost and quality of regulation, against which to balance assessments of benefits.
- Regional information. New Zealand currently has a lack of data on regional development, or industry development below the headline categories discussed above. Given concern on regional differences in particular, discussed elsewhere in this report, there appears to be a need for data by which regional development or decline can be measured. This would also help in monitoring the effectiveness of regional development policy initiatives.
- The economic impact of tourism. The tourism data discussed above is effectively only a time series from 1997 onwards. A longer time series is necessary before definite trends can be identified.
Overall, a suitable framework for considering environmental, social and economic issues in a comprehensive manner is not available. A comprehensive set of environmental accounts is one tool that may enable many economic and environmental issues to be considered in an integrated manner. An environmental satellite account to the core set of national accounts would also assist in this. The methodologies for these are still under development internationally, but they offer the potential to provide useful frameworks for integrating economic and environmental sustainability issues.
Endnotes
Monitoring Progress Towards a Sustainable New Zealand
Economic performance
Trade
Financial position
Regulatory and business climate
Industry and regional development
Science and technology
References and further information
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This page last modified on: 08 March 2004