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Outline
- Abstract
- Introduction
- Research Methodology
- Model Description
- Analysis and Discussion
- Policy Testing
- Conclusion
- The Way Forward
- Bibliography
- Annexure
A Discussion on Sustaining the Dynamic Linkages between Renewable Natural Resources and the Economic System
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Introduction
Sustainability of economic growth in a finite resource environment has long
been questioned and acknowledged as a complex issue. (Forrester 1971;
Meadows et al. 1972; Meadows et al. 1974). Complexity arises because of
potential non-linearities in the relationships among economic and ecological
variables (Hoffman 2010). Limited understanding of such complex relationships
coupled with the paradigm of continued growth can and
has resulted into the over exploitation and degradation of
natural resources, including those that are renewable in
nature (Millennium Ecosystem Assessment 2005). Unless
these resources are infinite their consumption will result in
high subtractability,[2]
leading to severe resource depletion and
ultimately resource exhaustion (Ireland 2013). Therefore,
one of the key challenges is to maintain a sustainable stock
of resources. This is particularly difficult in an economic
system where consumption and production are considered
very likeable elements to measure the success and growth
of the economy (Boulding 1945). If the resources are not
managed well, it could lead to their irreversible decline. This
in turn could result into an economic contraction or sustained
economic depression (Tverberg 2013). Such impacts of
resource depletion on the economy seem implausible due
to long-time delays involved from the declining stock of
resources to the decrease in the flow of goods. However, it is
only prudent to have proactive economic policies which could
avoid such impacts and foster a balance between economy
and resources.
In this paper, we view economic growth and resources
from a systems perspective to learn how the delayed
feedback effects from resource depletion will impact the
growth of the economy in the long run. It highlights, in a
simplified manner, the hidden perils of blindness towards this
slow feedback from decline in renewable natural resources to
the production of goods in the economy.
Our study is based on the following three postulates which
we test through the modelling exercise.
-
A stock of renewable resources with a defined carrying
capacity would pose binding constraints on the economy
to sustain its growth.
-
Once these constraints, in form of limits to resource
extraction, are reached the economic GDP will peak and
decline.
-
This peak and decline would arrive much after the
resources have already crossed their irreversible decline
threshold.
Resource Extraction and Economic Limits
Studies suggest that the trend of collapse of some
economies and civilizations (e.g. Easter Island,
Sumerians, etc.) have been a phenomenon driven mainly due
to environment degradation and resource limits (Tverberg
2013). For instance, until fossil fuels came into widespread
use, civilizations regularly grew within their finite spaces before
they collapsed due to factors like those of ecological stress, soil
degradation, deforestation, climatic changes (Montgomery
2007; Chew 2001; Tainter 1990). The economic process of
growth in consumption of resources is a natural progression
of an economy moving from cheap and easy to the difficult and
costly to extract resources. This process takes the economy
towards its limits to growth. The natural preference of nascent
economies is usually to begin with the most feasible resources
available for extraction (Tverberg 2013). Gradually as the
economy expands, these resources begin to deplete and over
the years deplete faster than they can regenerate themselves.
After years of extraction, the economy is left with less of these
resources, making it increasingly difficult for them to extract.
This raises the cost of extraction, thus making previously
feasible resources uneconomical. The economy now migrates
to explore previously unfeasible resource options, thus making
the extraction and production expensive. As costs continue
to soar and extraction limits are reached, the economy finds
it difficult to sustain the level of output. This indicates that
economic limits would restrict the resource extraction much
before the resources are completely exhausted, but not
before the depleting resources have already created a delayed
feedback on the economy with a potential to cause economic
contraction. Unless the economic policies are proactive and
sensitive towards the state of resources, the resources would
continue to deplete until their binding constraints are reached
which would restrict the economy ’s growth.
Research Methodology
System Dynamics
Given the complexity involved in the interactions between
economy and resources, the problem of management of
resources must be seen through the lens of complex
systems. Unlike optimizing problems, which lend
themselves to analytic solutions, complex systems may
be best understood using dynamic simulation techniques (Hoffman 2010).
Long-term simulations of the relationship between
economy and resources could provide useful insights about the
binding constraints of resources (Hoffman 2010). System
dynamics (SD) is an approach best suited to understand such
non-linear behaviour of complex systems over time using
stocks and flows, internal feedback loops, and dynamic rates
of change (Massachusetts Institute of Technology MIT). The
methodology was conceived in the late 1950s at the MIT
by Jay Forrester (Forrester, 1961, 1969). SD as a modelling
discipline holds the potential to unveil the impish nature
of complex systems and uncover the relationships
between variables which are responsible for behaviour of
the system. It also provides the reader with an opportunity
to go through the model structure and study the
linkages in a more transparent manner (Wiesmann n.d.).
The model structure and parameters used in this study
are not meant to provide a forecast or prediction but is
intended to set up a model environment where simulations
could be used to test assumptions and policy implications.
Thus the simulation graphs do not show any value of
parameters on the y axis since the emphasis is on the
behaviour of parameters over time. The model is launched
for 200 years to capture the delayed feedbacks and its
long-term impacts on economy and resources.
Model Description [3]
This model consists of two sub systems—Renewable Natural
Resources and the Economy.
Renewable Resources
The resource stock is taken as a reservoir of renewable
resources comprising of forests, ground water, and fisheries.
Its Initial value is kept at 1,000 billion kg and carrying capacity
is fixed at twice its initial value, i.e., 2,000 billion kg. These
resources regenerate at 2% and can grow upto their
carrying capacity.
Economy
The Economy is yet to develop and the pace of its growth
represents growing population and economic development.
Initial wealth in economy is kept at INR 20 billion split across
Producers, Sellers, and Household. Economy’s growth rate
is assumed to be bell shaped over simulation time. It starts
with 1% reaches a maximum of 7% and then falls back to
1%. This represents the five stages of economic growth and
development beginning with traditional economy and reaching
full prosperity (Rostow 1959). Gross Domestic Product of
the Economy is calculated as a sum of flow of production of
goods (shown as cost of production) and value addition to
the economy (shown as growth in GDP). The economy is
considered to be a closed system having no interaction with
external environment, synonymous to World Economy or an Isolated Economy.
Resource Intensity of Economy
Resource intensity is an exogenous variable in the model.
It is a measure of the resources needed for the production
and processing of goods in the economy. It therefore also
measures the efficiency of resource use in the economy.
Resource intensity is measured as kilograms of resources
consumed per unit of economic output. Its initial value is
kept at 1 kg/rupee.
Parameters for Base Run
Wealth in Economy = INR 20 billion
Economy ’s Growth Rate Curve = 1% to 7%
Resource Intensity of Economy = 1 kg/rupee
Renewable Resources = 1,000 billion kg (carrying capacity = 2,000 billion kg)
Natural Resource Regeneration Rate = 2%
Endogenous Feedbacks of Renewable Resources and Economy
Figure 1 illustrates the growth dynamics in the natural
resource system and the economic system, in the absence of
any interactions between them.
The growth of natural resources depends on its own level
of stock. An increase in resource stock would result into
an increase in its regeneration flow, thus creating a positive
reinforcing loop. But its growth is not compounding infinitely.
This is because natural resources have a carrying capacity
of their own which limits their maximum achievable level of
growth (Schreiber n.d.; Ford 2009). In the model, natural
resource carrying capacity is assumed to be twice the
resource’s initial stock indicating that the resource stock has
potential to grow. This is expressed in the model by making
the regeneration flow a function of the resource stock
density (Figure 3). As the density approaches its maximum,
the regeneration rate tends towards zero. [4]
Similarly, the regeneration flow also declines due to
a decline in the resource stock. If it falls below a particular
threshold level, its regeneration rate would tend towards
zero. Therefore, a continuous decline in the resource stock
could breach the threshold levels leading to non-renewability
of the resource. It is in-between these two stages of resource
reaching its carrying capacity and irreversible degradation that
it is available for sustainable harvest.
The case of economic growth is somewhat different.
Its growth is taken as exponential in nature (Johnston
2014). Unlike the resource growth dynamics which has
an endogenous growth limit due to its carrying capacity, the
economy does not seem to have any such carrying capacity
of its own. Although its growth reaches maturity, the rate of
growth does not reach zero and the economy continues to
grow, albeit at a slow rate. Thus, the economic growth curve
represents exponential pattern for most part of the simulation,
while the resource stock grows and achieves stagnation.
Figure 1: Comparing Natural Resource and Economic Growth as Isolated Systems
Source: TERI Research
Figure 2: Linking Natural Resources and Economy
Source: TERI Research
Interaction between Resource and Economic System
The economy comprises of households, industry (producers),
and the market (vendors and suppliers). The industry uses
renewable resources for production of goods using labour
and capital from households. The process of production of
goods results into flow of income to households (as payments
for cost of production). Within the model, the income is spent
by households for purchase of goods from the market through
vendors/sellers directly through producers. These vendors/
suppliers in the market procure goods against payments
to the industry. The model has a closed-loop income flow
between consumers (households), industry (producers), and
the market (vendors and suppliers).
Resource extraction for production of goods is shown as
a function of resource intensity of the economy. This means
that if the intensity is kept constant, an increase in the rate
of growth of economy would result in an increase in the rate
of extraction of resources. However, if limits of resource
extraction are achieved, then the production of goods is likely
to fall. If the resources are degraded beyond repair their
regeneration rates would also fall. The resource would start
behaving as a non-renewable resource, i.e., it will have no
regeneration flow. This would result in a peak of production
of goods beyond which production would fall. Under this
scenario, a falling production against a growing demand would
result in inflationary pressure.
Analysis and Discussion
Base Run: Overshoot and Collapse of Economy and Resources
The base run (Figure 3) shows four phases of growth and
collapse in the resources and economy. They are:
Phase I where both Renewable Resources and GDP are
growing, followed by phase II where resources achieve a
maximum growth rate while GDP continues to grow. In phase
III resources begin to decline while GDP growth continues, and
finally Phase IV where GDP peaks and collapses accompanied
by irreversible decline in resources.
In the simulation run (Figure 3) as long as the resource
consumption is lower than its regeneration, the resource
stock is able to grow (Phase I). As the economy grows, the
extraction of resources for production purposes also increases.
This leads to a point where resource extraction equals
resource regeneration and resource growth stagnates (Phase
II). Further due to continued economic growth the resource
extraction becomes greater than resource regeneration. This
results into a gradual decline in the resource stock while the
GDP continues to grow (Phase III). However, a declining
resource stock would pose limits to extraction for production
of goods. These limits eventually lead to a peak and fall in GDP
accompanied by irreversible decline in resources (Phase IV).
Figure 3: Base Run: Overshoot and Collapse
Source: TERI Research
Base run outcomes confirm our postulates that resources
with a defined carrying capacity pose binding constraints on
economy’s growth, once these constraints are reached the
GDP will peak and decline and that this decline would happen
much after the resources have crossed their irreversible
threshold.
Inflationary Pressure and Demand Correction
As shown in Figure 4 the demand for goods in the economy
keeps growing even while the production of goods falls.
This creates a gap between demand and supply of goods
due to which inflationary pressure starts to build up.
This results in growing GDP due to rising prices, despite
decreasing production. This is depicted in Figure 3 through
the spike in GDP. A persistent rise in prices would result in
demand correction. This results in an overall contraction in
the GDP due to demand correction and falling production.
The economy then moves to a state of reduced demand,
reduced production, and a depleted resource stock. This
is a situation where the enterprises become unprofitable,
unemployment increases, and resources are in their degraded
state. It is not a desirable state for any economic and
social system.
While there exist policies which aim at preventing such
a situation, this paper tests the potential of three key policy
measures and analyses if they are able to avoid the overshoot
and fall of economy and resources.
Policy Testing
Policies which often surface as popular solutions to sustain
economic growth and conserve the environment are tested
and enumerated in Figures 5, 6, 7, 8, and 9. They are:
1) Improving resource efficiencies i.e. more economic
output per unit of resource
2) Improving resource efficiency and Restoration of
resources, i.e., green growth
3) Green growth and expansion of resource base due
to technology advancements or new discoveries, i.e.,
increase in the stock of resources
Policy 1: Improved Resource Efficiency
Model Parameters for Testing Resource Efficiency Policy
Economy ’s Growth Rate = 1% to 7%
Resource Intensity of Economy = reduced to 0.5 kg/rupee from 1 kg/rupee
Natural Resource Regeneration Rate = 2%
The scenario models outcomes of an intervention which
results into increase in resource efficiency of the economy by
50%. This implies that the economy will consume half the
resources compared to the base case. The result shows that the
economy would grow more and for a relatively longer duration
as compared to the base case (Figures 5 and 6). The GDP of
the economy nearly doubles against the base case scenario
while its peaking gets delayed. However, the four phases of
growth and collapse remains the same. This shows that while
improving resource efficiency of the economy is able to sustain
growth for relatively longer time it still is unable to avoid
the overshoot and fall in the economy.
Figure 4: Demand Supply Gap and Demand Correction
Source: TERI Research
Figure 5: Base Run: Overshoot and Collapse
Source: TERI Research
Figure 6: Policy Testing: Increasing Resource Efficiency
Source: TERI Research
Policy 2: Resource Regeneration/Restoration and Green Growth
Model Parameters for Testing Green Growth Policy
Economy ’s Constant Rate = 1% to 7%
Resource Intensity of Economy = reduced to 0.5 kg/rupee from 1 kg/rupee
Natural Resource Regeneration Rate = increased to 3% from 2%
The above scenario models outcomes of an intervention
which, in addition to improving the resource efficiency,
results into increase in the resource regeneration rate by
50%. This implies that the economy is actively involved in
the resource restoration process. However, the carrying
capacity of the resource remains the same. Thus, although
the rate of regeneration increases, the maximum growth in
stock of resources would remain the same. The simulation
results indicate that the economy would grow more and for
a relatively longer duration (Figures 7 and 8). The GDP of the
economy grows relatively more as compared to the resource
efficiency scenario while the peaking is delayed by few years.
However, the ultimate outcome remains the same, i.e., decline
in resource stock and overshoot and decline of economy.
Figure 7: Resource Efficiency Scenario
Source: TERI Research
Figure 8: Policy Testing: Resource Efficiency and Green Growth
Source: TERI Research
Policy 3: Expansion of Resource Base (technology advancements or new discoveries)
Model Parameters for Testing Expansion of Resource Base
Economy’s Growth Rate = 1% to 7%
Resource Intensity of Economy = reduced to 0.5 kg/rupee from 1 kg/rupee
Figure 9: Policy Testing: Expanding Resource Base
Source: TERI Research
Natural Resource Regeneration Rate = increased to 3% from 2% of new resources. This results into increase in the availability
Initial Stock of Renewable Resource = increased to 2000 of resource stock which also results in an increase in its
trillion kgs from 1000 trillion kgs carrying capacity. Through newer technological innovations/
In this scenario, doubling of the initial resource stock (red developments or by identifying a new potential portfolio of
line in the graph) is taken as the hypothesized case resulting resource for the economic growth, an economy is able to
from either a quantum leap in technology through continuous sustain its economic growth longer as compared to earlier
policy push towards new R&D initiatives or due to discovery policies (Figure 9). However, the ultimate outcome still
very much remains the same, i.e. fall in resource stock and overshoot and decline of economy. This shows that resource
expanded resource base due to technology advancements.
Figure 10: Combined Scenarios
Source: TERI Research
Conclusion
Our model is successful in testing the impact policy choices have
expansion into newer portfolio of options also fails to avoid
on the resources and economy. It also proves our postulates
overshoot. This would be applicable to a scenario even where
correct. The four stages of growth and collapse hold true even
resource base increases beyond twice its initial value till it has a
under conditions of improved efficiency, green growth and carrying capacity.
This indicates that the issue of limits to economic growth is not
primarily due to limited resource base or inefficient resource
extraction. As long as the economy grows and its resource
consumption exceeds the regeneration, over a period of time
the resources would deplete. A peak and decline in economy
then is an inevitable outcome under any scenario (Figure 10).
The following are the insights derived from this model
which help develop a theoretical understanding on the
key dynamics responsible for causing the counterintuitive
outcomes:
-
The stock of resources has a carrying capacity beyond
which it cannot grow while there is no carrying capacity
of the economy to restrict its own growth.
-
If the rate of resource extraction/consumption is more
than the regeneration rate of the resources, over a period
of time the resource stock will deplete.
-
The resource regeneration flows depend on the stock of
resources. A continued reduction in resource stock would
push the resource towards its threshold level beyond
which it would not be able to regenerate itself making the
renewable resource behave like non-renewable resource.
If a dynamic equilibrium [5]
between the resources and economy
is to be achieved then the natural resource consumption
rates will have to be moderated through economic policies.
At present there are hardly any existing examples in the
policy discourse which may have considered reducing the
consumption as a measure to achieve the balance between
the economy and the resources. In this respect empirical
studies, aimed at finding real world solutions, would need to
be done based on the theoretical construct that this paper
offers. The research could focus on the following questions to
improve the body of knowledge using which solutions could
be deliberated upon.
-
How to identify the threshold levels of natural resources/
ecosystems, on which key economic sectors depend,
beyond which the resources can not repair/regenerate
themselves?
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What interventions can prevent breaching these
thresholds?
-
How such interventions could be tested and incorporated
into policies to make the economy more proactive?
The Way Forward
The real world complexity of resource regeneration
dynamics and economic growth poses serious challenges
for policy making. This paper demonstrates this complexity
in a simplified manner. However, further empirical research
followed up with deliberations on the nature of policies to
sustain resources and economy needs to be done. A safe
environment where such policies could be tested should be
created. Computer modelling techniques which can model
complex systems should be used to test policy assumptions.
This could make the policymakers aware of some of the side
effects or unintended consequences of the proposed policies.
A conscious effort of managing consumption in a way to allow
the stocks of renewable resources to regenerate, before
their decline becomes irreversible, should be made. Designed
economic contraction to provide adequate time for renewable
resources to regenerate and increase their stock levels could
be considered as an option to avoid the overshoot and fall
of economy and resources. This of course calls for further
research in modelling the dynamics of growth-degrowth of
economies and its implications on renewable resources.
Notes
[1] Renewable Natural Resources, such as forest, ground water, and fisheries. Energy is excluded for the purpose of this study.
[2] The degree to which one person’s use of resource diminishes other’s use.
[3] Complete model structure, equations, parameter values, and description of each variable are provided in the Annexure.
[4] Dx/dt = rx(1-x/K), where r is the intrinsic rate of growth of the population, K is its carrying capacity and x is the population density. Solving this differential equation would give a functional relationship which depicts the results of the natural resource growth.
[5] A state of balance between changing processes.
Annexure: Model Equations, and Data
- Extreme Conditions Test
- Sensitivity Runs
- Model Equations
- Full Model Structure
LINK TO THE ANNEXURE
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