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Economic Policy & Sustainable Development

Economy-wide Policies and Sustainable Development

Macroeconomists have traditionally focused on aggregate economic indicators and relationships, such as the link between inflation and unemployment or the role of monetary and fiscal policy in economic growth. However, macroeconomic analysis is also highly relevant to the study of natural resources and the environment.
Early research focused on the role of resource scarcity in determining relative returns to factors of production (land, labour and capital), while more recent studies have examined the inflationary effects of commodity booms. In contrast, the latest literature concentrates on the environmental impacts of urbanization and industrial growth, or on the acceleration of natural resource depletion when policies are enacted to promote private investment and increase output. In the development arena, much recent research has been prompted by the adoption of more liberal, market-oriented policies by many countries, and in particular by the promulgation of macro-economic stabilization and structural adjustment programmes by the Bretton-Woods institutions and other donor agencies.

Research on the environmental impacts of macroeconomic policy reform in developing countries includes theoretical and cross-sectional analysis, as well as case studies in Africa, Asia, the Caribbean and Latin America. These studies suggest that supply-side and public sector reforms have had mixed effects on the natural environment. While increased competition often leads to more efficient use of natural resources, these benefits may be swamped by the scale effects of increased output. In other words, where significant environmental externalities exist, first-best macroeconomic policies may not be welfare enhancing. Nevertheless, a distinction may be drawn between macroeconomic policy reforms that have unambiguously positive impacts, from both a (narrow) economic perspective and an environmental point of view, and other reforms that have mixed, uncertain or delayed effects.
Underlying recent debate and research is the failure of conventional macroeconomic models and indicators to account for environmental degradation, including depreciation of natural capital, the damage costs of pollution, and defensive expenditure. A related challenge is to improve understanding of how consumer preferences for different environmental benefits change as economies develop and incomes rise (the so-called "Environmental Kuznet's Curve" debate), and the implications of these changes for environmental policy.

In CREED two case studies focused on this theme. One, in Cote d'Ivoire, assessed the impact of macroeconomic and sectoral policy reforms on environmental quality and the sustainability of economic growth, while the other, in Thailand, focused on the macroeconomic impact of environmental policy reform. In the latter case, a CGE model of the Thai economy was used to explore the macroeconomic and inter-sectoral impacts of alternative forest and water pricing policies. Both of these case studies illustrate the complexity of the linkages between macroeconomic and environmental policy and performance, and the serious challenges involved in modelling these relationships.

Research in the PREM Programme will focus on the following priorities:
· Collaborative research on the links between economy-wide policies and environmental quality, and between environmental policy and macroeconomic performance. Research will focus on the relation between natural resource scarcity/abundance and economic development, and between income and the demand for environmental benefits.
· Proactive engagement with economic policy-makers in developing countries to develop practical methods to account for environmental and social impacts, and to devise more sustainable economic reform packages or mitigating measures. This will include collaboration with programmes related to National Strategies for Sustainable Development (NSSD).
· Integrated assessment of macroeconomic, social and environmental performance, through "green accounting" and new indicators of sustainable development (e.g. "Green GDP", satellite resource accounts, the Human Development Index, etc.).


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