The inextricable links between poverty and the environment

In recent years, rising environmental and societal concerns have changed the way we look at economic development.

In the social sphere, events such as the Arab Spring, and rising and persistent youth unemployment in many advanced economies, have cast doubts on how far economic growth figures alone tell the whole story.

In the environmental sphere, the consequences of resource scarcity have made prominent headlines: political tension across the Nile basin following disputes about water access, for example, or the detrimental effect on water availability that mining activities across China and Mongolia have had.

These events have changed the prevailing development agendas, leaving citizens, policy-makers and businesses alike with the overwhelming feeling that the environment must be included in the growth equation.

Environment and poverty are closely inter-related. Pressure on natural resources increases the costs of access to water, food and energy, exacerbating poverty levels and putting a strain on international development plans. The World Bank estimates that 44 million people recently fell into poverty on the back of increasing food prices caused by natural disasters.

Against this backdrop, the Forum published its sustainable competitiveness framework in its Global Competitiveness Report 2012-2013. It assumes that competitiveness – defined as a country’s ability to foster productivity, efficiency and innovation – remains the single most decisive factor for economic growth in the long run.

Yet, when we add social and environmental considerations to this idea of competitiveness, we reach a higher concept of long-term prosperity, in which economic dividends are spread fairly among all contributing citizens and which includes a healthy environment and ecosystem.

The underlying rationale for sustainable competitiveness has been absorbed by policy-makers and businesses alike. For example, the “virtual water trade” framework, proposed 10 years ago, argues that countries with abundant water supplies should produce and export goods with a higher water content to regions where water is scarce.

This indirect water exchange makes more sense that physically transporting water across borders at great expense.

In another example, United Nations Statistics are promoting new aggregate national accounting standards that include the environmental impact in the system of national accounts.

Although some economists consider regulations and standards a drag on competitiveness at company level, the business community is actually starting to realize how important responsible business practices are from an economic point of view.

Resource scarcity is now a real business concern, as science increasingly proves the link between resource availability and prosperity. Water scarcity, for example, reduces the amount of energy that a hydroelectric power plant can produce, thereby increasing operational costs. Similarly, competition for raw materials and commodities can increase prices and reduce profits, particularly in economic hard times when consumer demand is low.

According to Forbes, environmental reporting is becoming “a new business imperative”, as investors begin to understand the importance of the environmental performance of companies. Also, the public is becoming more aware of environmental standards and putting more pressure on companies, boycotting and protesting against those they consider irresponsible.

Consequently, some companies – Oracle and Toshiba among others – have started using environmental accounting and reporting methods to keep track of their environmental impacts. This practice not only shows that the company cares about the environment, but also ensures that environmental considerations inform business strategy.

As unemployment rises, businesses are being asked to reconsider the role they play in society. Rather than simply waiting for the economy to recover and general demand to pick up, they are now being encouraged to create job opportunities even in the downturns.

Finding a balance between economic prosperity, inclusion and environmental responsibility, poses many challenges and requires a change of mentality. National governments must co-operate while listening to the voices and the needs of the business community and civil society.

The World Economic Forum hopes that its initial work on Sustainable Competitiveness can become a platform for discussion towards the definition of a new, more balanced development model.

Author: Roberto Crotti is a Manager and Quantitative Economist for the Global Benchmarking Network team at the World Economic Forum.

Image: A village woman carries firewood as others rest under a tree after they migrated due to shortage of water on the outskirts of Sami town in the western Indian state of Gujarat. REUTERS/Ahmad Masood