The Sustainability Dimension of Industrial Policy for Transition


The much (ab)used term “sustainability” describes the long-term viability of systems and policies, more specifically human activity without depleting the stock of human, economic, social and environmental capital resources. With respect to industrial policy, sustainability requires to combine long-term aspects of economic, social and environmental dimensions, in a holistic way. To promote one dimension at the expense of others violates the principles of long-term viability.

In the following I analyze some of the major aspects of sustainability, with a view to the proposal for industrial policy for transition/development (see previous posting).

Economic Dimension: economic sustainability of industrial policy does not require the design of an industry structure once and for all, because that would become non-viable, as competitiveness and other conditions change. Rather, it requires structural solutions which enable an economy to change and adapt on its own as outside factors and internal supply conditions (e.g. resource availability, infrastructure, human capital, finance) change. Not top-down imposed industry and services structures are the solution, but the inherent ability of economic actors (both entrepreneurs, workers and institutions) to enable and encourage permanent search processes with a view to adapting existing process and product innovations, in order to generate high levels of employment and move the economy towards higher value-added products as it develops. If successful, an economy will develop as it is able to “read” development and transition prospects, future demand, both domestic and foreign. The limited availability of natural resources, both minerals and hydrocarbons, forces not only increasing “resource productivity”, i.e. the ability to produce more end-products with a given amount of natural resource, but requires in the final analysis the substitution of exhaustible resources by reproducible ones. “Peak oil” and its concomitant price increase can be seen as a telling example; the increasingly visible demand for natural resources by fast growing large emerging economies, in addition to that of industrial economies, requires fast solutions in product composition and lifestyle. Successful industrial policy needs to encourage and develop such “automatic” adaptability. Whether this requires more large or more small and medium-sized companies is unclear, but it definitely requires competition to drive agents forward towards innovative solutions. Thus, the increasing merger activity in the world economy is holding back this adaptability potential.

Environmental Dimension: The existing environmental degradation in many countries and regions, the loss of biodiversity, increasing pollution and the only recently recognized threat of human-induced climate change – all these show that future economic development must not follow the old practices, but must take increasing account of environmental aspects, of the need to preserve environmental capital for future generations to use. This is true both of developed and developing and transition economies.  Most IFI have developed “defensive” (my term) environmental safeguard policies and performance requirements which are based on environmental impact assessments of projects to be financed. As a result, these projects become more environmentally compatible than without such safeguards. While IFI require such projects to conform to national environmental legislation, or even to more demanding international (e.g. UN or EU) standards, still a “zero” option, i.e. to not finance the project at all (or, even, to prevent it), is normally not considered. IFI only in very rare cases (e.g. the World Bank in Macedonia) help their client countries more actively to develop a “green” economy, by financing studies and aiding in the establishment of appropriate institutions and policies. While many IFI, especially EBRD, have started to put strong emphasis on energy efficiency, both in production, transmission, distribution and industrial use, because energy use is the prime source of climate change, their environmental assessments rarely go beyond the individual project, rather than assessing the wider environmental aspects. For instance, EBRD has financed a number of shopping malls or supermarkets at the edges of towns in its region of operations. While in general these structures will be built according to best available technology with respect to energy efficiency, the wider aspects of traffic generation, of access to the mall, of land use planning and zoning are ignored, “because they are outside to realm of the project” and are seen as  the responsibility of the public authorities in question. In such cases, while the economic rate of return may be positive and energy efficiency (in the narrow sense) observed, the total social rate of return may be negative, because traffic congestion is generated, access of persons without private cars does not exist and a number of neighbourhood stores which heretofore supplied local customers might need to close. A more context-specific “sustainability impact assessment” would consider such aspects.

In the same vain, industrial developments, large dams or transport infrastructure projects might speed up land degradation, increasing the risk of landslides, of floods and other catastrophes. Again, IFI assessment usually does not take these wider aspects into account. With respect to energy projects, it is well known that avoidance of energy use is the most environmentally positive option. This would also avoid having to build new generation capacity with its environmental effects. IFI do promote energy efficiency, but they still consider financing new generation projects, even when data show that energy use per unit of GDP is a multiple of that of more developed countries – thus implying that to invest in avoidance of energy use may be several times more socially profitable than to build new capacity, even renewable one. Such options may even be more economically beneficial, but are rarely pursued.

Reliance on energy efficiency investments also has to take account of the so-called “rebound effect”. This is also true for project-induced increases in the productivity of other resources: If resources are used more efficiently, this lowers their price, thus enabling additional customers to use it, or existing customers to use more of it. While impending peak oil has increased the oil and gas price, and has also led to increased energy and resource efficiency, total use of these resources is still higher than before, because the scarcity-induced “warranted” price is not charged. Thus, once more, wider-ranging concepts are required in order to end over-using scarce environmental and natural resources.

Social Dimension: social safeguard policies of IFI usually deal with population resettlements in case of large infrastructure or industrial projects, but also with issues of working conditions, gender, public health and safety. Again, while IFI imposition of such safeguards will usually make the project “better” than without IFI participation, “zero” options are rarely considered. It is commendable that IFI do not participate in projects which use internationally banned labor practices (child labor, slave labor, etc.). However, project finance once more limits the aspiration of social sustainability insofar as usually projects in developing/transition countries are required to use “best available technology”. This is being aided by the fact that IFI-financed projects need to be tendered internationally. Given the massive unemployment problems in many developing and transition countries, why would it not be much more socially viable to use the abundant resource, i.e. labor, much more than in labor-scarce countries? Why should countries not follow the example of industrial countries of 50 years ago when  war-devastated Europe and Japan were rebuilt using labor-intensive techniques. It is well known that high rates of unemployment create severe political, social and economic problems. Thus, it would make sense to employ as many people as possible, and not use labor-saving techniques, appropriate for countries with much higher labor costs and labor scarcity.

Another point of consideration with respect to social sustainability is the increasing trend in industrial countries to select migrants according to their educational achievement. This has led to a brain drain from transition/developing countries to industrial countries. The reason is income differentials for skilled labor and also the EU principle of free movement of labor. While transition/developing countries are generally relatively labor-intensive and capital-scarce, they are skills-scarce. The process of transition and development requires, among others, high skill levels for management, administration, science, medicine and technology. Many of these previously abundant persons (especially in the former GUS and other ex-communist countries) have since the opening of the borders left their home countries and gone towards higher pay in Europe, Israel, the US and Canada. Thus, their home countries incur a double loss: on the one hand they lose desperately required skills (which makes transition more difficult), but they also lose the educational costs which they incurred by training these persons. Programs to repatriate the diaspora, to keep highly skilled persons in the country and to train persons abroad with contracts to bring them back (see e.g. the highly successful Kazakh program) would be required.

Synopsis. Industrial policy, like economic policy in general, needs to be designed holistically, by combining sustainability aspects of economic, environmental and social dimensions. The argument that transition/developing countries have a “right” to non-sustainable forms of growth, because it is the economic  history of developed countries which has led to our environmentally non-sustainable state of the world, may be morally correct, but is factually wrong, because environmental and social problems of today have world-wide effects. Thus, IFI need to convince their client countries that to follow the footsteps of the developed countries is not an option – and that improvements in living standards in the target countries are possible even while maintaining social and environmental sustainability.IFI also need to convince their shareholders and their clients that economic progress alone – at the expense of social and environmental  dimensions – is not viable in the long run.  To be convincing, such a direction requires, however, that industrial countries themselves do not insist on maintaining their non-sustainable ways, but lead the way towards a more sustainable development.

Sustainable industrial policy cannot content itself by just promoting “green growth” and “green jobs”, even though these are important aspects. The interconnectedness of the world and its problems require not only scarcity-induced “correct” prices for natural resources, but also changes in the lifestyles of populations, new transport modes, new zoning requiring less transport, new international cooperation (e.g. solar energy transmission from Africa, instead of building multiple oil and gas pipelines ) and a reversal towards “appropriate” technologies which take account of social and environmental aspects. IFI should develop and require more holistic impact assessments of their programs and projects, in order to take account not only of the economic dimension, but also of environmental and social dimensions of human welfare.

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One response to “The Sustainability Dimension of Industrial Policy for Transition

  1. Pingback: Improved Nanoparticle Palladium-Based Electrocatalysts For Fuel Cells Developed at University of Illinois | Skin cancer Blog

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