4 SECTOR CIRCULAR FLOW OF INCOME
in relation with
ENVIRONMENTAL SUSTAINABILITY AND DOUGHNUT ECONOMY
Economics is considered to be the mother tongue of politics. It is a social science concerned with the factors that determine the production, distribution, and consumption patterns of goods and services. But this definition essentially ignores the grass root level problems in the society. Every economist has programmed to have a fixed diagram imposed on his mind about the circular flow of income.
This diagram is at the center of macro-economics and measure of economic growth. It tells us about the flow of income generating from firms to households and spending from households to firms. It involves market factors of production as well as market for goods and services. Money plays important role as a medium of exchange in this diagram and thus the growth or development is related to rise in GDP or gross domestic product. Current concept of development is merely concept of growth which could be measured in terms GDP (Gross Domestic Product) at national level, PCC (Per capita consumption) and PCP (Per Capita Production).
Growth in this model of development means a constant rise in flow of income and using resources. This rise is infinite, limitless and linear in nature. This model does not consider optimization of consumption rather emphasis on maximization of consumption.
Hence this diagram is fundamentally flawed with 4 aspects and should be replaced with the new diagram.
1. The economy is not floating on white background. It is deeply embedded in the environment drawing in matter and energy and spilling out wastes and pollution at every junction and the fundamental flow is not the money going round and round. It is the energy coming from the sun, heating earth, fuelling life and some of it bouncing back in the universe. It is our ingenuity to capture that energy and put it to use.
2. Not all work is paid. Unpaid caring work of parents raising kids as workers of next generation as its heart of life, but it is completely ignored by the main-stream economics. In the above diagram there is woman who has bucket on her head. Across sub- Sahara and south Asia women carry their body weight in water, fuel, firewood with the child on their backs. All for no pay. If you ignore that, you are ignoring the work of millions of women that keeps their family alive every day.
3. There is lot of value we create that does not get monitored. We love to co-operate and collaborate with no money changing hands. If you ignore the power of collaborative commons, you’re ignoring most dynamic and deceptive part of modern economy.
4. Those happy households getting wages and dividend are not that turned out. As we know in most high income countries, for more than decade now, ordinary household seen their income stagnant. While the very few have got high wages, high dividend and high rents and hidden behind this flow of income is the accumulation of wealth and that wealth rapidly turning into power over the economy who its run for.
Achieving sustainable development means ensuring that all people on this planet have access to the resources needed such as food, clean water, health care, and energy to fulfil their basic human rights. And this means ensuring that humanity’s use of natural resources does not yield stress on critical Earth system processes by causing climate change or biodiversity loss. We cannot behave to the point that Earth is pushed out of the stable state, known as the Holocene, which has been so beneficial to humankind over the past 10,000 years.
In the lead up to the UN Conference on Sustainable Development in June 2012 (known as Rio+20) and the High level Summit on the Millennium Development Goals in 2013, there is a constant debate on, how to draw up renewed and expanded global development goals which bring together the twin objectives of poverty eradication and environmental sustainability.
So, what if the economics does not start with money but human wellbeing and there are two sides of this story.
On the one hand, our wellbeing depends on each one of us having the resources to meet our human rights to food, clean water, health, education, housing, energy and on the other hand, it is our planetary home. For the last 10,000 years the conditions on this planet have been incredibly benevolent to human wellbeing. We had a stable climate, plentiful water, clean air, bountiful bio-diversity and a protective ozone layer and we’d be crazy to put so much pressure on these life support systems of this planet gives, that we should kick ourselves out of the very sweet spot we know as home.
Hence modelling and using mathematics that requires an economist to turn into scientist gives us the new picture of economics: – It looks like doughnut
The social foundation forms an inner boundary, below which are many dimensions of human behavior. The environmental ceiling forms an outer boundary, beyond which there are many dimensions of environmental degradation. Between these two boundaries lies an area which is shaped like a doughnut which can be represented an environmentally safe and socially just space for humanity to thrive in. It is also the space in which inclusive and sustainable economic development takes place.
In the center, the humanities putting no pressure on this planet. We can’t meet our human rights without using planets natural resources. We need to get everybody alive over that inner ring of human wellbeing of social foundation and we each have the resources to meet our human rights.
But we must stay below the outer ring, the environmental ceiling of human wellbeing and that’s to be find by 9 planetary boundaries that are been put forward by leading earth system scientists including Yowan Rockstrong and Will Stephan. We must protect the life support system of this planet making sure we don’t put so many greenhouse gases that causes climate change or massive deforestation or chemical pollution.
So this doughnut, you can think of it as the compost for the humanity in the 21st century. How do we ensure, that we all have the resources to meet our human rights but within the means of the planet and that challenges we face getting everybody out of poverty and coming back within what this planet can provide us?
And it changes our idea of progress, for 60 years now economics told us that we can measure our progress in terms of growth and it looks like line rising as global economies grows. But the doughnut tells us something different. It tells us the progress looks like balance, between using the resources to meet our human rights and protecting the planet’s life support systems and if that balance that matters then the fundamental question is that where are we now in relation with that balance?
Sadly, the answer is we are outside of the boundaries of both sides. Millions of people live below that social foundation. 1 person in 8 doesn’t have food to eat, 1 person in 5 has no access to electricity and more than 1 in 5 lives on 2$ a day. So we have to go long way to get everyone out of that system and yet we have already pushed ourselves over the planetary boundaries. According to earth system scientists we’ve gone over the climate change, we’ve gone over massively on the amount of nitrogen we use in our fertilizers and over in biodiversity loss.
Dynamics in the doughnut
The challenge of motivating the journey into the safe and just space for humanity is complex because the nature of social and planetary boundaries is interdependent. Environmental stress can intensify poverty, and vice versa. If poorly designed policies aimed at moving back within planetary boundaries can, push people further below the social foundation, and vice versa. But well-designed policies can promote both environmental sustainability and poverty eradication bringing humanity into the doughnut from both sides.
One may argue that would eradication of poverty put planetary boundaries under stress? Data available from the research imply that the social foundation could be achieved for every person alive today with strikingly few additional resources:
• Food: Providing just 1 % of the current global food supply to the additional calories needed by the 13 % of the world’s population facing hunger would suffice.
• Energy: Less than a 1 % increase in global CO2 emissions can be achieved by bringing electricity to the 19 % of the world’s population who currently lack it.
• Income: Just 0.2 % of global income is required for ending income poverty for the 21 % of the global population who live on less than $1.25 a day.
Interestingly the inequality in the wealth distribution has surprising outcomes. The biggest source of planetary-boundary stress today is excessive resource consumption by roughly the wealthiest 10 % of the world’s population, and the production patterns of the companies producing the goods and services that they buy:
• Carbon: Around 50 % of global carbon emissions are generated by just 11% of people.
• Income: 57 % of global income is in the hands of just 10 % of people
• Nitrogen: Only 7 % of the world’s population in the EU is responsible for 33 % of the world’s sustainable nitrogen is used to produce meat.
A growing global ‘middle class’ is adding to the pressure created by the world’s wealthiest consumers in the aspiration to emulate today’s high-income lifestyles. It is estimated that by the year 2030, global demand for water is expected to rise by 30 % and demand for food and energy both by 50%.
In addition, the inefficiency in practices with which natural resources are currently consumed to meet human needs for example through wasted food, leaky irrigation, and fuel- inefficient vehicle further intensify the pressure.
Social justice demands that the double objective of eradicating poverty to bring everyone above the social foundation, and reducing global resource use, to bring it back within planetary boundaries will only be achieved through far greater global equity in the use of natural resources, with the greatest reductions coming from the world’s richest consumers using wiser methods. The framework of doughnut economics brings out a new perspective on sustainable development.
Human rights advocates have long highlighted the importance of ensuring every person’s claim to life’s essentials, while ecological economists have emphasized the need to situate the economy within environmental limits. This framework puts the two together, creating a closed, circular system that is bounded by both human rights and environmental sustainability. Hence the resulting space, the doughnut, is where inclusive and sustainable economic development takes place.
How do social and planetary boundaries compare? There are important characteristics that these two concepts have in common:
• The fundamentals of sustainable development: Ensuring all people’s lives are built upon a social foundation which is essential for sustainable development, and not crossing the limits of staying below the environmental ceiling. Crossing over either of these boundaries can trigger both social and ecological crises. If poverty eradication and environmental sustainability are pursued together sustainable development can be achieved.
• Boundaries based on norms: Both the social foundation and the environmental ceiling are essentially normative boundaries. Although science has helped on giving an objective description of the planet’s biophysical reality, the question of where to set the boundaries of natural resource use is ultimately a wisdom of mankind one, based on perceptions of risk, and of the desirability of staying within the Holocene.
• Global to local: Both the local and the global matter for staying within planetary and social boundaries. For example, deforestation within a country can be a tipping will lead to localised flash flooding and soil degradation, long before it affects land-use change at the Earth-system scale. Similarly, minority social groups within a country may experience severe marginalization long before their exclusion is evident in national, and global data on social inequalities.
There is one significant difference between the environmental ceiling and the social foundation their initial states of stress. Earth-system processes were in a ‘safe space’ prior to the industrial era when human activity began to add significant stress. The aim must now be to move back into that ‘safe space’. In contrast, the human population has never all lived above the social foundation in a ‘just space’. The aim now must be for all of humanity to reach it.
What perspectives can this framework open up? Three angles.
1. An integrated vision: With sustainable development as the central concern, it is clear that everyone’s lives must be built on the social foundation of human rights while remaining below the environmental ceiling, and that economies must be structured and managed to make that possible. This framework highlights the interconnectedness of the social, environmental, and economic dimensions of sustainable development.
2. A refocusing of economic priorities: Within this framework, social and environmental stresses are no longer portrayed as economic ‘externalities’. Instead, the planetary and social boundaries are the starting point for assessing how economic activity should take place. The economy’s over-arching aim is no longer economic growth in and of itself, but rather to bring humanity into the safe and just space and to promote increasing human well-being there.
3. Metrics beyond GDP: Economic development cannot be assessed in monetary terms alone. Whether economic activity is leading towards or away from planetary and social boundaries determines just how inclusive and sustainable economic development is. Policymakers must be more accountable for the impact of economic activity on planetary and social boundaries, defined both in natural metrics like level of carbon dioxide emissions.
Table 1. An illustrative assessment, based on governments’ social priorities for Rio+20.
Social foundation
Extent of global deprivation (illustrative indicators)
Percentage
Year
Food security
Population undernourished
13%
2006–8
Income
Population living below $1.25 (PPP) per day
21%
2005
Water and sanitation
Population without access to an improved drinking water source
Population without access to improved sanitation
13%
39%
2008
2008
Health care
Population estimated to be without regular access to essential medicines
30%
2004
Education
Children not enrolled in primary school
Illiteracy among 15–24-year-olds
10%
11%
2009
2009
Energy
Population lacking access to electricity
Population lacking access to clean cooking facilities
19%
39%
2009
2009
Gender equality
Employment gap between women and men in waged work (excluding agriculture)
Representation gap between women and men in national parliaments
34%
77%
2009
2011
Social equity
Population living on less than the median income in countries with a Gini coefficient exceeding 0.35
33%
1995- 2009
Voice
E.g. Population living in countries perceived (in surveys) not to permit political participation or freedom of expression
To be determined
Jobs
E.g. Labor force not employed in decent work
To be determined
Resilience
E.g. Population facing multiple dimensions of poverty
To be determined
Sources: FAO9, World Bank10, UNStat11, WHO12, IEA13, and Solt 200914
AN ENVIRONMENTAL CEILING: PLANETARY BOUNDARIES
The planetary boundaries concept provides a strong starting point for understanding the natural resources and processes on which humanity depends for sustainable development. In 2009, the Stockholm Resilience Centre brought together 29 leading Earth-system scientists, who proposed a set of nine critical Earth-system processes with ‘tipping points’ or gradients of increasing risk. Crossing such thresholds could lead to irreversible and, in some cases, abrupt environmental change, effectively moving Earth out of the stable state of the past 10,000 years known as the Holocene which has been so beneficial to humankind. The consequences for humanity would be devastating, with the impacts falling first and hardest on people living in poverty, most of whom depend directly on natural resources for their livelihoods.
In order to keep the risk of crossing these thresholds low, it is necessary to determine a safe boundary below the threshold or danger zone of each Earth-system process, and to stay within that boundary. Together the nine planetary boundaries create what the Stockholm Resilience Centre refers to as ‘a safe operating space for humanity’. Where the international community ultimately decides to set the boundaries will largely depend on perceptions of risk, on public debate and powerful lobby groups, and on international political power. But the levels at which they are set must be informed by the best possible science of the planet’s biophysical realities.
These nine Earth-system processes overlap significantly with the environmental concerns raised by governments in their submissions to Rio+20. A first attempt by the Stockholm Resilience Centre to quantify the boundaries indicates that at least three of them climate change, biodiversity loss, and nitrogen use have already been crossed (see Table 3), and on current trends, freshwater use and land use change are rapidly moving towards their boundary levels.
Table 2. A first assessment based on the nine planetary boundaries:
Earth-system process
Parameters
Proposed boundary
Current status (as of 2009)
Pre- industrial value
Climate change
Atmospheric carbon dioxide concentration (parts per million by volume)
Change in radiative forcing (watts per meter squared)
350
1
387
1.5
280
0
Rate of biodiversity loss
Extinction rate (number of species per million species per year)
10
>100
0.1–1
Nitrogen cycle
Amount of nitrogen removed from the atmosphere for human use (millions of tonnes per year)
35
121
0
Phosphorus cycle
Quantity of phosphorus flowing into the oceans (millions of tonnes per year)
11
8.5-9.5
-1
Stratospheric ozone depletion
Concentration of ozone (Dobson unit)
276
283
290
Ocean acidification
Global mean saturation state of aragonite in surface sea water
2.75
2.90
3.44
Global freshwater use
Consumption of freshwater by humans (km3 per year)
4,000
2,600
415
Change in land use
Percentage of global land cover converted to crop land
15
11.7
low
Atmospheric aerosol loading
Overall particulate concentration in the atmosphere, on a regional basis
To be determined
Chemical pollution
E.g. amount emitted to, or concentration of persistent organic pollutants, plastics, endocrine disrupters, heavy metals and nuclear waste in, the global environment, or the effects on ecosystem and functioning of Earth system thereof
To be determined
Source: Rockström et al (2009b). Shaded areas show boundaries that have been crossed.
An important challenge to the political feasibility of respecting planetary boundaries is their implications for national policy-making and international negotiations. Climate change may be widely recognized as a global challenge that demands global governance in response, but Earth-system processes with critical local and regional thresholds such as freshwater use and land-use change make reaching international agreement more complex.
The diversity of natural resource endowments between countries (in terms of their land mass, forests, biodiversity, freshwater, marine resources, and oil and minerals), their very different histories of resource use, and their contrasting levels of economic development, add further dimensions of complexity. Given this context, the question of how to agree on fair shares of effort for staying within planetary boundaries is clearly a crucial but complex one.
The political complexity is very real, but so too are the biophysical realities of the planet. If these critical Earth-system processes are to be protected from dangerous levels of degradation, then agreeing how to manage them at regional and planetary scales is one of the most important issues of international law and governance that the international community must grapple with this century.
The doughnut economics framework can also be used to explore interactions between the boundaries. These interactions are complex and multi-layered, as illustrated below.
1. Environmental stress can intensify poverty
Crossing planetary boundaries, or their regional thresholds, can push people back below the social foundation, or prevent them from ever achieving it. The current and potential impacts of climate change, for example, including rising temperatures, shifting seasons, sea-level rise, and increasing droughts and floods seriously undermine poor people’s ability to ensure their food security, health, and access to safe water and sanitation, and further accelerate gender inequalities. Indeed, for all nine Earth-system processes, the repercussions of crossing planetary boundaries, or their regional thresholds, threaten to severely undermine human development, first and foremost for women and men living in poverty.
2. Poverty can boost up environmental stress
People living below the social foundation may be forced to resort to using resources in an unsustainable way in order to meet their most essential needs. Globally, 2.7 billion people have no access to clean cooking facilities (such as gas stoves) and so rely on traditional biomass (including wood, dung, charcoal and crop residues) and coal for cooking. Women and children spend hours each week collecting the fuels, then inhaling their fumes over smoky fires leading to an estimated 1.5 million premature deaths each year due to lung disease. Burning biomass also produces black soot aerosols and CO2 emissions, and the use of wood as a fuel can lead to local deforestation and biodiversity loss, further deepening poverty.
3. Policies aiming for sustainability can aggravate poverty
Bringing global resource use back within planetary boundaries is critical for sustainability, but this must not be done in ways that push people further below the social foundation. Yet, due to poor policy design and implementation, and in the face of extreme inequalities of power and income.
The impacts of such policies that aim to reduce pressure on planetary boundaries highlight the risk of doing so through inadequately regulated market mechanisms that bring powerful international actors together with local communities whose rights to land, water, and political participation are deeply insecure.
Table 3. Breaching planetary boundaries: human causes and impacts
Planetary boundary
Human causes of Earth-system stress
Expected consequences of crossing planetary boundaries
Climate change
Releasing greenhouse gases through: burning coal, oil, and gas; fertilizer and cement production; deforestation; livestock management; agriculture; and producing soot and black carbon.
Global temperature rise; loss of polar ice sheets and glacial freshwater supplies; rapid sea-level rise; bleaching and mortality in coral reefs; increases in large floods; abrupt shifts in forest and agricultural systems; potentially challenging the viability of contemporary human societies.
Biodiversity loss
Destroying habitats; expanding
urban land use; agriculture and
aquaculture; introducing invasive
species; mining, building dams and
transport routes.
Reduced resilience of land and marine ecosystems, especially in the face of climate change and increasing ocean acidity; large-scale biodiversity loss may lead to sudden and irreversible consequences for ecosystems.
Nitrogen use
Producing fertilizers for crops and animal feed; manure and human sewage management; burning fossil fuels and biomass; and growing leguminous crops.
Raised acidity of soils, and algal blooms in coastal and freshwater systems that deplete oxygen levels, pollute waterways and kill aquatic life – so threatening the quality of air, soil and water, and eroding the resilience of other Earth systems.
Phosphorus use
Putting excessive phosphorus into the environment by producing fertilizers, manures, detergents, and pesticides.
Depleted oxygen levels in freshwater bodies and coastal waters, risking abrupt shifts in lake and marine ecosystems.
Freshwater use
Altering river flow and extracting water for irrigation; capturing rainfall for use on crops; extracting water from water tables, for agriculture, industry and household use.
Shifts in regional rainfall and climate (e.g. the monsoon); reduced biomass production and biodiversity, decreasing the resilience of land and marine ecosystems, and undermining human water supply, food security, and health.
Land use change
Converting natural forests and other ecosystems into agricultural land, plantations, and urban settlements.
Serious threat to biodiversity and to the regulatory capacities of the Earth system, by affecting the climate system and the freshwater cycle.
Ocean acidification
Producing CO2 (which becomes dissolved in sea water) primarily through burning fossil fuels and through land use change.
Loss of calcifying marine organisms; serious impacts on the productivity of coral reefs with likely ripple effects up the food chain.
Stratospheric ozone depletion
Producing chlorofluorocarbons for use in refrigerators, air conditioners and aerosol cans.
Severe and irreversible ultra-violet radiation with especially damaging effects on marine ecosystems, and on the health of humans exposed to radiation.
Atmospheric aerosol pollution
Releasing fine particles into the air, primarily through burning fossil fuels and biomass.
Changing global rainfall patterns including monsoon systems; damaging crops and forests, and killing fish with acid rain; human health impacts and premature death due to respiratory disease.
Chemical pollution
Releasing and spreading radioactive compounds, organic compounds (such as DDT), and heavy metals (such as mercury and lead), through industrial production and waste disposal.
Reduced abundance of species, likely to create bioaccumulation of effects up food chains, with impacts on human immune systems and neuro- development; likely to increase vulnerability of organisms to stresses such as climate change.
Source: Rockström et al (2009a and 2009b) and Sutton (2011)
DISTRIBUTION DYNAMICS
The framework of social and planetary boundaries provokes the question of where the responsibility lies for pushing humanity’s use of natural resources beyond sustainable limits. Four insights:
1. Ending poverty for all today: The first imperative of sustainable development is poverty eradication, and achieving that need not be a source of stress on planetary boundaries. Data available for some critical dimensions of deprivation indicate that bringing every person alive today above the social foundation could be achieved with strikingly little additional demand on resources:
• Food: Providing the additional calories needed by the 13 % of the world’s population facing hunger (850 millions of people) would require just 1 % of the current global food supply.
• Energy: Bringing electricity to the 19 % of the world’s population (1.3bn people) who currently lack it could be achieved with less than a 1 % increase in global CO2 emissions.
• Income: Ending income poverty for the 21% of the global population who live on less than $1.25 a day (1.4bn people) would require just 0.2 % of global income.
More analysis of this kind is needed to understand the relationship between all the dimensions of the social foundation and the nine planetary boundaries, but these statistics indicate that addressing poverty need not be a cause of stress on planetary boundaries.
2. The wealthy few stress the planet: The biggest source of planetary boundary stress today is the excessive consumption levels of roughly the wealthiest 10 per cent of people in the world, and the production patterns of the companies producing the goods and services that they buy.
• Carbon emissions: Just 11 % of the global population generate around 50 % of global carbon emissions, while 50 % of people create only 11 %.
• Incomes: The richest 10 % of people in the world hold 57 % of global income. The poorest 20 % of people hold just 2 %.
• Purchasing power and electric power: High-income countries, home to 16 % of the world’s population account for 64 % of the world’s spending on consumer products and use 57 % of the world’s electricity.
• Nitrogen: Humanity is using nitrogen at four times the globally sustainable rate. The European Union home to just 7 % of the world’s population uses up to 33 % of the globally sustainable nitrogen budget simply to grow and import animal feed, while many Europeans eat far more meat and dairy products than is suitable for a healthy diet.
This excessive resource use by the world’s richest 10 per cent of consumers crowds out much-needed resource use by billions of other people aiming to meet far more modest consumption needs, within planetary boundaries.
3. The aspirations of many will keep raising the pressure: Adding to the excessive resource-use of the well-off are the aspirations of a growing number of consumers seeking to emulate today’s high-income lifestyles. Over the next 20 years, global population is expected to grow by 1.3bn people, while the global ‘middle class’ is expected to grow from under 2bn consumers today to nearly 5bn by 2030, increasing particularly in India and China.
For people moving into the lower-income end of this group, rising consumption may mean being able to afford meat, electricity, and transport for the first time transforming their lives and life-long prospects. But for those at the higher-income end, it may mean adopting lifestyles that are deeply unsustainable.
4. Demand for many resource intensive consumer products is expected to rise: The global car fleet is predicted to double, for example, and China’s per capita consumption of meat could increase by 40 % while still being well below US levels. New and expanding cities could displace 30m hectares of high-quality agricultural land by 2030, equivalent to 2 % of land currently under cultivation. Global demand for water is expected to rise by 30 %, and demand for food and energy both by 50 per cent.
As international competition for these resources grows, women and men living in poverty will be worst hit, particularly through high and volatile food prices, and land and water grabs. Securing their rights to the resources they depend upon is a top priority.
5. Inefficient use of natural resources adds to the planetary pressure: In addition to these vast inequalities of resource use are significant inefficiencies in how natural resources are transformed, recycled, and restored to meet human needs particularly for food, transport, and energy. For Examples:
• Food waste: Every year, the average consumer in Europe and North America throws away 95–115kg of edible food. Food wasted by consumers in industrialized countries each year (222m tons) is almost as high as the total net food production of sub-Saharan Africa (230m tons).
• Irrigation water: Surface water irrigation efficiency (the proportion of irrigation water that actually reaches the plant) is around 50–60 % in Japan and Taiwan, only 40–50 % in Malaysia and Morocco, and as low as 25–40 % in India, Mexico, Pakistan, the Philippines, and Thailand.
• Transport: Making incremental changes to the engines and aerodynamics of new cars could result in a 50 % improvement in the average fuel economy of all cars on the road worldwide by 2050. Efficiency improvements alone are not enough (they can lead to lower prices, which may increase total resource use – an irony known as ‘the rebound effect’), so measures to reduce total resource use are often needed to accompany them.
But any such interventions must be designed and implemented in ways that respect both human rights and planetary boundaries, so that while increasing efficient resource use, they also serve to make economic activity more inclusive and sustainable.