CHAPTER 4

Inequality and Policy Choices for Sustainable Development

We have argued that sustainable development is essentially about reducing inequalities over time and across generations without affecting the wellbeing of the current generation in any adverse way. The most commonly used definition of sustainable development is due to Brundtland (World Commission on Environment and Development 1987), which states that it is about meeting the needs of the future generations without reducing the ability of the current generation to meet its own needs. Translating this definition into a practically usable proposition is difficult for a number of reasons. For instance, the perception of the needs of a society varies from individual to individual. It also changes over time. We might have many measures of wellbeing. Hence, not only are individuals different from each other, there is a plurality of measures of wellbeing too. In this chapter, we will explore some of these dimensions and see how we can arrive at a more workable understanding of sustainability. In this respect, inequality and its reduction play a critical role.

There could be deep philosophical debates about inequality and its many forms. Social and political philosophers have, however, always emphasized some form of equality across individuals and between societies. Sen (1973) has argued quite persuasively that emphasizing equality in any one aspect among individuals or across societies might open up undesirable inequalities in other spheres. For instance, if we argue that we would like a significantly reduced level of inequality in income and wealth in a society, it might open up greater inequalities in terms of opportunities to earn income and create wealth. Inequality has direct impact on natural resource use and the emission of wastes and pollution. If the current generation consumes more of exhaustible resources and wastes more, then there will be less of resources left to use in the future, worsening intergenerational inequality. If the current generation is characterized by a high degree of inequality in income and wealth, there will be adverse effects on the natural environment even if we ignore what is likely to happen in the future. For instance, the very rich with greater access to natural wealth can consume and waste much more than they need to. It could be in terms of food, fossil fuels, or water. On the other hand, the very poor in their compulsions to survive would have a tendency to overuse whatever little access to natural resources they might have. They could overwork the soil and they could overdraw water for growing crops and they could destroy forests and natural habitats of other species for short-term benefits. In both the cases, the degradation of the natural environment would be much more than a society where the rich could be a little worse off and the poor a little better off, in other words, moving toward more equality. An unequal society in a developing economy is characterized by an implicit subsidy that the poor provide for the rich. An instance of this would be the fact that most of the poor are without access to modern forms of energy such as electricity and cooking gas. As a result, the wastage of energy by the rich who are in the minority is not reflected in per capita energy consumption numbers, which in fact may be quite modest.

Intra- and Intergenerational Inequality

The impact of inequality on wellbeing goes beyond the environmental dimensions of wellbeing. There is a large literature on growing inequality in the contemporary world, both within countries and across countries (Piketty, Thomas, and Goldhammer 2014, 2015; Deaton 2013). High levels of inequality are not only risky for political and social stability, but also damaging for important quality of life indicators such as health, longevity, infant mortality, and mental illnesses. It has also been observed that a lack of social cohesion and the incidence of crime and violence, including violence toward women, are much higher in economically unequal societies. As social mobility is restricted, equality of opportunities is difficult to achieve. There is also evidence that unequal economies (both rich and poor) experience shorter spells of growth and expansion than more equal societies, making them more vulnerable to economic shocks. Inequality makes status competition more intense, which, in turn, leads to a greater social value attached to consumerism. This consumerism is often driven by rising personal debts. The value of community life and collective action are reduced. Arriving at a political consensus and implementing a national or global strategy becomes difficult. Societies with greater equality in income and wealth usually have a better quality of life in terms of health, longevity, and mortality, and people are more willing to act together for the common good.

Apart from these aspects of wellbeing that improve with equality, conditions of lower inequality are more conducive to sustainable development. It may be easier for a more equal society to arrive at a social consensus on any issue, including what might be needed to be done for the wellbeing of future unborn generations. If some resources are to be set aside as savings for the future of all generations, the costs could be borne more equitably where everybody in the current generation might make a similar sacrifice. In an unequal society, asking the poor to pay is unfair. On the other hand, asking the rich to pay might also be unfair to the poor because the living poor would be competing with a faceless future generation for scarce resources. It should be kept in mind that the aforementioned argument in favor of equality is valid only if the current generation, based on its levels of awareness, decides on some course of action for the future generations. An otherwise equal society may reach a consensus to consume and destroy all exhaustible resources. There is nothing the future generation can do to prevent this. Hence, intragenerational equality improves the lives of living people and has the potential to improve the lives of future generations, but does not necessarily translate into intergenerational equality.

Intergenerational equality, in the context of sustainability, implies that future generations’ wellbeing should not be worse off than the wellbeing of the current generation. This does not require strict equality across generations. Just as the current generation is, in many ways, materially better off than previous generations, future generations are not restricted from being better off than the current generation. There is no reason to believe that the human ability to be imaginative and innovative would not continue to result in improvements of wellbeing in the future, through better technology or better social institutions. There are some key differences between the philosophical bases for reducing intragenerational inequality and the prevention of deterioration of intergenerational wellbeing. Broadly speaking, they can be divided into two strands of arguments. The former relates to ethical questions of distributive justice. There is also reasonable agreement among philosophers and social scientists’ regarding what is to be redistributed and given to the poor. These include income, productive capital, capabilities, knowledge, skills, and rights and liberties. There could be debates about the extent of and the procedure for attaining distributive justice, however. Intergenerational justice is philosophically more problematic to handle. A typical question that is difficult to answer would be whether unborn people have rights and entitlements. Another question would be that what we consider valuable in the present generation (a certain set of assets or amenities) may not be considered valuable in the future. Indeed, the morality of a future society may be entirely different from that prevalent in the present. Hence, the question about what exactly is to be transferred to the future may be difficult to answer.

In the section that follows, we discuss some of the contentious ethical issues related to intergenerational justice.

The Ethics of Intergenerational Equity

Modern economic growth has had deleterious effects on the natural environment that are likely to be persistent, or have materialized after decades or centuries. Typical examples would be that of radioactive wastes or greenhouse gas emissions. These problems have triggered greater interest about intergenerational justice among economists. This discussion presupposes a number of things. First of all, it assumes that human beings will live forever. Second, it assumes that some form of technological improvement and progress will continue to characterize change. Finally, it presupposes that we do have some obligation to minimize harm caused to people yet unborn. Each of these suppositions can be questioned because of the fundamental asymmetry in the relationship between a living generation and an unborn generation. Many philosophers argue that rights and entitlements can characterize a living being. If the concept of duty is considered to emerge from interaction among human beings and not in any abstract hypothetical context, then people of the future have no rights or claims on the people of the present. There is another difficulty that arises when we consider a hypothetical human-being inhabiting the planet at a future date. Philosophers have pointed out that, if that a hypothetical individual faces difficulties in leading a reasonably trouble-free life (because of environmental pollution, for example), she cannot logically blame it on the current generation. The reason is simple. If the current generation had taken a different decision regarding environmental pollution, the world would have been different, with different resources, and a different population. There is no guarantee that, in that world, the hypothetical individual would have been born at all. Therefore, two different consumption (or saving) decisions taken by the current generation are not comparable because their outcomes would be experienced by two different population sets in the future.

An alternative approach would be to seek some moral justification for an action that values the wellbeing of future generations. One way of doing this would be to extend the Rawls (1971) concept of a social contract drawn up from an original position on the basis of the veil of ignorance.¹ One might, in this context, think of all humanity, born and unborn, getting into a social contract behind a veil of ignorance where it is known with certainty that some individuals will be better off than others and inequality could be significant. However, there is complete uncertainty regarding the fate of each individual in terms of actually being better off or worse off. Hence, the Rawlsian argument for providing maximum resources or wellbeing for the minimally positioned individual could be the basis of the social contract drawn up. There would be a universal consensus on this because each individual has an equally probable chance of being that minimally positioned individual, and hence the beneficiary of such a scheme. This argument provides an ethical justification for caring about the future. One might look at different individuals with different levels of wellbeing, where the wellbeing of the worst off individual would have to attain a certain minimum level. In a similar vein, philosophers like Pletcher (1981), Meyer (2003), and Passmore (1980) have argued that concern for the future, such as some general obligations to minimize harm, can be considered as justifying the provision of a minimum amount of care for future generations. The ethical basis for reducing intragenerational inequalities is very similar.

From Individual to Social Wellbeing

The measurement of intergenerational wellbeing requires some simplifying assumptions to extract certain operational directives. We will assume that each individual in a generation has a wellbeing function where the determining variable is the state of affairs faced by the individual. Each individual’s wellbeing can be represented by a numerical index. These indices can be aggregated to compute the numerical value of the generation’s social wellbeing.

Let us assume that each individual in a society has a wellbeing function denoted by W, and the level of W is a function of the state of affairs faced by the individual. Consider a set X of states of affairs with elements like A, B, C …. There are N individuals in the society, each indexed by i, that is, the wellbeing of the ith individual would be W_i. When the social state is C, social wellbeing is assumed to be the sum total of all the individuals wellbeing, denoted by

U(C) = W₁(C) + W₂(C) + ……. + W_N(C).

If we now consider different generations for all time (from now to infinity) and we assume that the current generation (t) values the wellbeing of all future generations (t + 1, t + 2,….), then we can define the intergenerational wellbeing function in the following way.

V_t = U(C_t) + U(C_t+1) + ……..U(C_∞), or for t ≥ 0,
where t = 0 represents the current generation.

As is evident, for a generation in time period t, the state of affairs is assumed to be C, which includes the consumption of food, clothing, and shelter and access to legal aid, health care, education opportunities, leisure activities, political and civil liberties, and direct amenities from the environment. It has also been generally assumed that the current generation maximizes intergenerational wellbeing, V_t.² This formulation has been used by several economists to arrive at a dynamic solution, which could determine all future states of affairs. A solution exists to this mathematical formulation, which is a set of states of affairs, .

This was first used by Frank Ramsey in 1928 in a paper where he sought the answer to the question of the level of a nation’s savings. Unlike an individual, a nation is supposed to live forever and to achieve that, something from current income would have to be left for the future. Hence, his famous question, “How much should a Nation save?” Ramsey was not concerned with sustainability explicitly. Yet, he was actually solving for a stream of optimal consumption that could be sustained by society over a long period of time. Ramsey made an important assumption that future human beings were as important as us, the current generation, and hence, their wellbeing should not be discounted just due to the accident of having a later date of birth.

Ramsey made another assumption that wellbeing increased with increases in C, but at a diminishing rate. This assumption is a standard one in economics, analogous to the concept of diminishing marginal utility. His formulation could readily accommodate two aspects of a real society, namely, uncertainty about the future and demographic growth. In the former case, wellbeing would have to be reinterpreted as expected wellbeing with some prior probabilities assigned to different states of affairs. In the latter case, with population growth, C, the state of affairs would have to be defined in per capita terms and the function W suitably reinterpreted. The alternative formulations discussed would all yield a solution in terms of a set of states of affairs with similar properties. An important property of the Ramsey result was that if each generation maximized intergenerational wellbeing, then the current generation’s choice of the set of Cs would exactly match the choice of the future generations. This is a remarkable result, with the property referred to as exhibiting ethical congruency, where the current generation’s treatment of future generations is exactly the same as the future generation’s treatment of their future generations. Ramsey showed that when the t = 1 generation came, they would choose C^*₁ and t = 2 would choose C^*₂ and so on. Each generation would choose its optimum knowing that succeeding generations would choose according with what it had planned for them.

The Sustainability Condition

We can think of the starting condition of the Ramsey formulation as a generation that has inherited a stock of productive resources from the past, including natural resources, population, produced capital, institutional infrastructure, knowledge, and technology. This stock provides a flow of income from which the generation chooses for consumption and saves the rest for the next generation. It may be noted that could be the entire stock of net national product.³ If the initial net national product is entirely consumed, it is still a sustainable outcome where the maximum current level of consumption can be reproduced forever. The net national product is the flow of income that can be generated or saved from the stock of assets that the society possesses. It is clear that must be sufficient to meet the survival needs of the current generation.

The Ramsey result may lead to some obvious questions about practical issues such as what qualifies as the survival needs of the current generation and concern for generations that will come after an infinitely long period of time. The issue of discounting has also been raised regarding the need to treat the very distant future as something clearly less important than our own needs in the here and now. There could be several responses to these concerns; for instance, if we know that the world will not be there forever, considering the infinite future does not make tangible sense, it would still remain a matter of great uncertainty as to when the end would come. Without precise knowledge of that date, we cannot decide on the terminal period where our allocation exercise would end. As far as discounting is concerned, if we do agree that the future is less important, then reworking the Ramsey formulation with a positive rate of discount could lead to an outcome where the consumption or wellbeing of a future generation could come down to zero. This result would hold if society had some exhaustible resources. This possibility as an outcome appears to be ethically unacceptable. However, if one concedes to a position that one might choose a very low rate of discount, then the future where consumption is driven down to zero could arrive at a very distant date. For instance, we could pick a discount rate low enough so that the disappearance of consumption occurs, say, a billion years from now. Most people would agree that a billion years is a sufficiently long time within which other uncertain events could be realized such as the earth being destroyed by an asteroid.

These issues would not have been of great concern had not the Ramsey result implied two problems. The first relates to the answer to the question he raised in his seminal paper, how much should a nation save. On the basis of plausible parameter values for the global economy, quick calculations reveal that the optimal rate of savings has to be somewhere near 60 percent of the global GDP (Dasgupta 2001, p. 93). No country saves 60 percent and most countries savings rates are significantly lower than even 40 percent (see table in Chapter 3). This restricts the applicability of the Ramsey model to a very great extent. Second, consider a situation where the first generation’s C (C₀) is more than adequate to meet basic survival needs. Suppose the society decides to increase its saving by a tiny amount, cutting C₀. This would increase both saving and consumption in the next period, even if by a very tiny amount. When added over an infinite time horizon, there would be an infinite increase in consumption, which makes the result unstable. Both these features can be avoided if one uses a discount rate, however small, with a minor change in the Ramsey formulation. At the same time, we have argued that there is a practical justification for adopting a rate of discount to solve the intergenerational wellbeing problem. Koopmans (1960, 1965) incorporated the discount rate into the Ramsey model by taking a positive rate of discount.⁴ His result continues to exhibit ethical congruency, and the required rate of initial saving would be much smaller than in the original Ramsey solution.

On the basis of the dynamic results of the Ramsey–Koopmans formulation, we can identify a condition for sustainable development in terms of intergenerational wellbeing. Now it is easy to realize that each generation must inherit a non-decreasing stock of productive assets from which it can create alternative states of affairs from which the intergenerational wellbeing of the next generation can be at least as big as the current generation’s. Hence, we can claim that development would be sustainable if V_t+1 ≥ V_t for all t. If one thinks that this is too strong a condition to hold for all future time, we might think of the responsibility of the current generation in terms of its own action so as to ensure V_t+1 ≥ V_t at t. The latter is a weaker condition, but fairly realistic in terms of the current generation’s decision-making.

The implications of V_t+1 being greater than V_t are that, there would be several states of affairs (Cs) in the (t+1)th time period that are better than those in the tth time period. Some of these improved states of affairs could be the result of consuming part of the productive assets inherited by the (t + 1)th generation. These have to be eliminated because it would imply that the (t + 2)th generation would have difficulty in maintaining its intergenerational wellbeing V_t+2 to be at least as big as V_t+1. Hence, a non-diminishing wellbeing (V) over time would have to imply a non-diminishing stock of productive assets or capital. Change in the stock of capital is the outcome of investment during a period of time. Hence, each generation must ensure non-negative investment for the sustainability condition to hold. Any net investment would result in an increase in productive assets for the next generation.

Genuine Investment

Productive assets are obviously of many different kinds, and the set keeps changing over time. For instance, it would include all human-made capital stock like machines and buildings. It would also include the whole gamut of knowledge and skills that human beings possess, often collectively referred to as human capital. Such capital would not only include scientific knowledge and technological capabilities, but the entire accumulated output of the human mind such as books of value and great art and music. Social institutions like democracy, judicial systems, maintenance of law and order, as well as social practices, which enhance and strengthen reciprocal social interactions or relationships of trust, are important as social capital, which contributes in a number of ways to economic productivity. Finally, we have renewable and non-renewable natural resources, biodiversity, ecosystem services, and basic life-support systems, which comprise natural capital. All of these make up the total stock of productive assets in a society. Positive investment would mean an increase in this total.

One challenge that arises in estimating the total amount of investment lies in assigning proper economic values to these assets. As is obvious from our description, many of them are non-quantifiable and most of them may not have markets from where a price could be observed. Also, market prices are typically a reflection of private costs and benefits, whereas the intergenerational wellbeing is a social concept. Society’s valuation of a productive asset need not necessarily be the same as that thrown up as a price in a private market. A way out of this problem is to take the help of accounting prices of an asset, that is, the increment in social wellbeing resulting from a small increment in the stock of that asset (Little and Mirrless 1969, UNIDO 1972).

Social wealth, K, can be defined as the sum of all types of productive capital available in a time period, t, given as follows:

K_t = Σ_ip_itM_it + Σ_jh_jtH_jt + Σ_kr_ktS_kt + Σ_mq_mtZ_mt

where p, h, r, and q are the accounting prices for manmade capital, M, human capital H, social capital, S, and natural capital, Z, respectively. The subscripts i, j, k, and m refer to the number of assets in each category. Over time, the different types of capital could keep changing, some diminishing and some increasing. However, in the net, the sum of all types of capital, that is the social wealth must not decline to ensure sustainability. Mathematically, it can be proved that the rate of improvement in wellbeing is equal to the rate of change in social wealth (Dasgupta 2010). This is sometimes referred to as genuine investment.

In this chapter, we started with discussing the tensions between intragenerational and intergenerational inequity, arguing that while improvements in intragenerational equity is a necessary condition for sustainability, it is not a sufficient one. In addition, there is a need to make genuine investments for future generations. Is the matter really so simple? We explore the idea of genuine investments further in the next chapter, while continuing to explore the meaning of sustainability.

¹ The original position refers to a philosophical prior to the formation of a society. Individuals know the social outcomes, but are uncertain about their own exact position in the order of things. Hence, in the original position, each individual is constrained by the veil of ignorance in not knowing the exact economic condition that would be realized for him or her.

² The problem reduces to maximizing for t ≥ 0.

³ Net national product is the total output of the economy after accounting for depreciation of the entire stock of productive assets.

⁴ Koopmans formulation of the problem would be Max. for t ≥ 0 where β = 1/1+δ and δ refers to the time preference of society, and β then becomes the discount factor.