Chapter 8 Sustainable Economic Development

Manuel Guitián, and Robert Mundell
Published Date:
June 1996
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Yu-Yun Wang

Time has witnessed rapid economic growth and substantial economic advancement over the half century since World War II. At the same time, human society has faced threats of resource shortages in industrial countries and increasing population pressures in developing countries. Worldwide economic development unavoidably brings to light the serious issue of its environmental and ecological impact in both industrial and developing countries. Historical experience of the past five decades tells us that economic growth cannot be achieved without consideration of the sustainable exploitation of natural resources, the protection and conservation of the environment, and an awareness of ecology. Sustainability is the dominant economic, environmental, and social issue for future economic development.

Resources and Environment

Sustainable economic development is the process in which the exploitation of natural resources, the direction of investment, the orientation of technological development, and institutional change or reform are all in coordination and harmony and enhance both the current and future potential for meeting human needs. Economic development without sustainability is not efficient or effective in the long run.

Sustainable development requires that we find new approaches to economic life, in terms of both production and consumption. It asks us to seek new levels of efficiency, to produce more with fewer resources and less waste. The fight against pollution requires new production processes, more use of recyclable materials, and the development of regenerative or recyclable output components. We must explore how goods are produced, marketed, delivered, and thrown away, and consider the impact of economic development on natural and biological processes to see how the production process can be improved. Economic growth can be achieved only through the synergy of pluralistic institutions, technological innovations, and the market economic system.

Economics, we know, is the study of how society allocates resources to satisfy human needs. An analysis of how the economic system allocates scarce resources to differing and competing ends must include both the flow of natural and environmental resources into the production process and the flow of wastes from the production and consumption processes back to the natural environment. The quality of the natural environment directly affects the standard of living of society.

Classical economics emphasized the production side and made efforts to identify productive factors, such as labor or land. Land is the fundamental factor of agricultural production. Economists of the classical school always paid full attention to the sustainable exploitation of renewable resources and attached special significance to the fertility of arable land to allow continual crop production. In the nineteenth century, it would have been unthinkable to explain the dynamics of economy without giving special attention to the sustainable supply of natural resources.

However, in the great developments of economic theory that have occurred in this century, there is little explicit mention of natural resources and sustainability. One can read the extensive literature on economic growth without ever realizing that natural resources and sustainability might be a determinant of growth potential. The literature may reflect the fact that for the first two-thirds of the twentieth century, resource, environmental, and ecological constraints were not as serious for most industrial countries as they are today.

Developing countries, owing to the pressure of population increases, have had to pursue economic progress in spite of the environmental and ecological problems that emerged during the development process. They have little sense of the problem of sustainability. But sustainable development is not simple; countries differ in time, space, and level of economic development, and sustainability is therefore quite different for different countries. The obstacles to sustainability are shaped by many factors: social issues, market mechanism, environment, resources, population, industrial structure, urban and rural hierarchy, infrastructure, and geographic conditions.

Sustainable Development and Agricultural Economy

China has had a bitter experience in this respect. In 1960, after the Big Leap Forward, the Chinese Government felt heavy pressure to supply its population with food and grain. Agricultural production, considered the foundation of the economy, was emphasized. Accordingly, a lot of money was invested in the key water control project, which was intended to combine irrigation with flood prevention. But, owing to a malfunctioning of the water project and poor management, serious ecological problems of salinization and alkalization of soil emerged in the area of the Yellow River Basin. Other serious environmental and ecological disasters also occurred.

The Yellow River Basin is a large alluvial plain. It has nearly 18 million hectares of farming land, on which 200 million people live. Grains and food used to be imported to this region from other parts of China because it was poorly harvested and did not supply the inhabitants with sufficient food. This area presents many environmental and ecological difficulties for farming. First, the Yellow River floods every year, endangering the peasants during the late summer. Second, salinization and alkalization affect most of the soil because of the high level of shallow underground water. A third problem is aridity. In addition, the soil is infertile and can store very little water. Fourth, because of overfarming and inappropriate crop rotation, the soil has become poorer over time and is seriously deficient in phosphorus. Also, owing to the energy shortage, peasants have to burn stems, stalks, and even the roots of crops, hardening the soil so that it is unable to absorb water, making the region susceptible to drought. We have to solve all these ecological and environmental problems in a comprehensive project.

In 1982, the Government initiated a huge agricultural project for the Yellow River Basin, aiming at increasing agricultural production so as to supply the population with food and grain for subsistence, chiefly by comprehensively improving the environmental and ecological conditions for farming. A model was built both for sustainable agricultural development and for optimal allocation of natural resources for agricultural production.

In the framework of the agricultural economy, the consumption structure must be consistent with the production structure to achieve economic equilibrium, and, thus, optimal resource allocation. At the same time, the production structure must be consonant with the resource structure in order to have ecological equilibrium. Ecological equilibrium makes possible a sustainable supply of available resources to meet the demand for resources necessary for agricultural production. Generally, more agricultural consumption requires more agricultural production, which requires more agricultural resources. To maintain the allocation of natural resources to agricultural production, we need the concept of resource development, which means increasing the quantity of natural resources and improving their ecological and environmental quality. Thus, exogenous factors of environment and ecology are endogenized.

The required model allocates all resources spatially and temporally to agricultural production mainly through biotransformations associated with the bio-cycle. Sustainable and optimal (Pareto) resource allocation is determined by both economic and ecological equilibrium. For an economy under certain assumed conditions, there exist economic equilibrium and ecological equilibrium. For the resource-production-consumption structure, we have

The large agricultural biosystem, which includes crop production, animal husbandry, forestry, fishery, and industrial by-products, is based mainly on manifold biological transformations and cycles. Interactions among soil, seed, fertilizer, water, bacteria, light, and heat produce complicated biological processes and, finally, agricultural produce. Agriculture has a strong natural property that emphasizes the simultaneous growth of natural resource production, which varies spatially and temporally. Hence, the allocation and development of agricultural resources have significant geographical features and the dynamic feature of time variation. However, the model is of a finite time horizon. From a dynamic point of view, we combine the turnpike theory with the stage theory of agricultural development. We have proved the existence of general economic equilibrium economy of small-scale efficiency (Wang, 1993). The agricultural economy is always associated with the ecological environment, and we must therefore deal with the environmental, ecological, and economic system, named the 3E system.

China’s agricultural economy has its own special character of small-scale efficiency. Each farmer’s production contributes only a small portion to total production and plays an insignificant role even in a small regional area. The set of the aggregate regional production possibilities displays the feature of convexity quite well. The agricultural resource allocation model is based on the theory of general equilibrium economy of small-scale efficiency. Finite aggregated producers represent the production of different regions. The aggregation of production is of a large number of diversified farmers with small-scale efficiency, who are taken for an approximate aggregation of an atomless measure space because of the insignificant contribution of each individual farmer. Using the Lyaponov Theorem, it is easy to show the production set of each region to be convex (Lindenstrauss, 1966). This explains why China succeeded in its household responsibility system of production, while Russia failed in the privatization of collective farms. Because Chinese peasants owned low levels of production capacity, they were not accustomed to collective farming through the People’s Communes, but are at ease with the family responsibility system of production.

To attain ecological equilibrium, the ecological constraint and the resource constraint in the model must be satisfied. The resource constraint and the husbandry constraint reflect resource development intertemporally. The fertility constraint states that the nutrition extracted from the soil by crops must be restored with organic fertilizer and chemical fertilizer input. The energy constraint prevents farmers from burning stems and straw. The farmers have accordingly built methane-generation pits to produce marsh gas for daily life. At the same time, they use residues of fermented feed to raise animals and animal manure to fertilize the fields, and have discovered that it is an efficient way to get both fuel for daily life and organic matter to return to the fields. The fertility constraint and the energy constraint seek to ensure field ecology, so that the ratio of soil nutrition elements, including organic matter, nitrogen, phosphorus, and potassium, to soil may be increased.

It is necessary to prevent the salinization and alkalization of the soil. By an associated submodel of salt water discharge partial differential equation, the measurement of groundwater was instituted and also checked by experimental data from an ecological experiment station. The groundwater level lies between the lowest allowable depth and the highest depth. The water transfer among different regions and efficient ways of using groundwater, soil water, surface water (from rain), and water from rivers and canals must be designed and implemented.

Soil erosion has been a serious ecological problem in the upper reaches of the Yangtze River. During the 1960s, farmers cut trees in the mountains to grow grain for subsistence and then cultivated the steep land. All these caused soil erosion. The model was adapted to study the problem by combining an associated submodel of linear partial differential equation of soil erosion. The soil erosion constraint reflects the results in the area. A twenty-year plan was instituted to return farming land whose angle of slope exceeds 25° to grow trees so as to prevent soil erosion of the Yangtze River.

Economic growth is expressed in many ways, some of them economic in nature and others social, physical, and organizational. Agricultural production was observed to pass through four distinct stages of economic development: (1) the subsistence farm, (2) the diversified farm, (3) the specialized farm, and (4) the automated farm. Agriculture in all industrial countries has passed through these four stages. For each stage of national economic growth, there is a corresponding stage in the development of the basic production cell—the farm. This correlation between the stage of national economic growth and the type of farm unit results from three factors: (1) the average national income in the nonagricultural sector and in the agricultural production cell (the family farm), (2) the agricultural input component, or labor/capital ratio, and (3) the demand for farm commodities.

The subsistence farm is characteristic of poor countries, in which annual per capita GNP amounts to $120-$150 at 1978 prices. A small minority of the population is employed in the nonagricultural sector, and the demand for agricultural produce by nonfarmers is low. Excess production is minimal and the input/output ratio is about 10 percent, similar to that in an autarkic economy. A certain portion of rural area in China is still at this stage. The diversified farm, where staples no longer constitute the principal crop, is characteristic of the transitional stage of economic development. Production is divided among various products, including fruits and vegetables, staple crops, and livestock. Excess production is marketed for a cash income. Labor is exploited more efficiently, improved technology allows product diversification throughout the year, and the farmer’s family is fully employed. In countries where the diversified farm is the norm, annual per capita GNP is $2,800. In the transition from specialized farm to automated farm, annual per capita GNP exceeds $6,000 at 1978 prices.

In the transition from subsistence farm to diversified farm, the underemployment that characterizes the subsistence farm is eliminated. Transition essentially depends on technological advances and innovations in agricultural production. As the farmer makes increasing use of machinery and other inputs, such as fertilizer, improved irrigation methods, and disease and pest control, the input/output ratio may reach 50 percent. The transition to diversified farm is possible only if there is accompanying change throughout the national economy. A market for the agricultural products of the diversified farm develops gradually. The transitional stage may last 10–20 years.

According to the principle mentioned above, when we computed the resource allocations and agricultural developments in the Yellow River Basin in 1985, most of the region was recognized to be in the early stages of the transition from subsistence farm to diversified farm. It was planned then to develop agriculture in this area to the stage of intensified diversified farm by the end of the century, at which time annual per capita GNP would be four times the 1980 level.

Through the implementation of two five-year plans, agricultural growth was surprisingly high at 5.9 percent a year. Wheat production in the Yellow River Basin increased to 30 million tonnes, about 60 percent of total wheat production in the country. From 1978 to 1994, grain production in this area increased to more than 500 kilograms per capita, and there was a large aggregated surplus of grains and crops. While the farmers of the Yellow River Basin contribute the largest portion of grain production to China’s agricultural production, their income is among the lowest in China. Therefore, it is important to change the production structure to increase the production of such economic crops as animals, fish, and sideline and reprocessed products to increase cash income. Indeed, in 1984, farmers in the Yellow River Basin began to experience difficulty selling grains, as manifested in lines of up to 2 kilometers leading to the grain station where they waited to sell grains and crops. At this time, farmers recognized the need and the opportunity to make the transition from subsistence to diversified farm. Hence, transition is necessary for sustainable economic development.

Since then, from 1984 to 1994, vegetable crops, oil-bearing crops, and the number of hogs have almost doubled, and fruits have increased threefold. Not only did the Yellow River Basin have good harvests during this time, but the environmental and ecological conditions also improved as a result of agricultural development, and the region came closer to fulfilling its potential for sustainable development. It is clear that farmers’ benefits and welfare should be taken into account. Farmers have always been viewed as grain producers, but they should also be seen as consumers in economic life. The transition through the stages should be implemented step by step if development is to be sustainable. In fact, the structure of production and consumption is changing gradually year by year.

Model for Sustainable and Optimal Resource Allocation

An agricultural general equilibrium model was originally developed for agricultural resource allocation in the area of the Yellow River Basin and was later adapted to the upper stretch of the Yangtze River, which is a mountainous area. The model is suitable for both the plains and mountainous areas.

The index set is as follows:

M1 (1, …, m1) is index sets of crops; M2 = (m1 + 1, …, m2) is index sets of animals; M3 = (m2 + 1, …, m3) is index sets of trees and fruits; M4 = (m3 + 1, …, m4) is index sets of fishing and water products; M5 = (m4 + 1, …, m5) is index sets of sideline and reprocessed products; and M = M1, M2, M3, M4, M5).

K = (1, 2, …, K) is index set of resources; T = (0, 1, …, T) is index set of time period of year; T’ = (1, 2, …, T’) is index set of time period in the year; S = (1, 2, …, S) is index set of sites.

Demand and Population

First we compute population change as follows:

Nst is population vector; Nst(a) is population of age a at site s in year t; Ast is the transition matrix of population at site s in year t;qaast, is the transition probability of population site s in year t;γast(βast) is death rate (birthrate) of age a at site s in year t;

We compute the diet programming as follows:

where xst*1,xst*2,xst*3 are, respectively, consumption vector of population, industrial demand vector, and demand in trade at site s in year t; Ua(·) is the utility of food preference at age a; B is the nutrition transformation price vector; ba* is the standard of nutrition; c0a is calories per capita; b0a is protein per capita; c and b sire, respectively, vector of contained calories and of protein in different components of agricultural products; Ist is disposable income per capita for food at site s in year t; and pst is the price vector at site s in year t.

We have the optimal solution (xa*)a=1k. Finally, we obtain the aggregated demand by population consumption and total demand for agricultural products at site s in year t:

where δst is the buffer stock.

Resources and Production

where y1mst is the m crop yield at site s in year t; y2mst is m animal product at site s in year t; y3mst is m tree or fruit product at site s in year t; y4mst is m water product at site s in year t; and y5mst is m reprocessed product at site s in year t.

where m is the type of product.

Ecological Variables and Biotransformations

The coefficients and variables related to the ecological variables and bio-transformations include the following: alpha;d alpha;u alpha;v alpha;g alpha;f is the coefficient of fertilization (marsh gas transformation); T1st is feed-to-animal transformation at site s in year t; T2st is animal-to-dung transformation at site s in year t; T3st is crop-to-fertilizer transformation at site s in year t; T4st is transformation of crops to stalks and straw at site s in year t; T5st is fertilizer-to-energy transformation at site s in year t; T6st is the bioenergetic transformation at site s in year t; Tfst is the reprocess transformation of crops, animals, wood, fruit, and/or water products at site s in year t; vst is the animal dung vector at site s in year t; fst is the chemical fertilizer vector at site s in year t; ust is stalks and straw vector at site s in year t; ust the proportion of ust to fertilizer at site s in year t; urdquo;st is the proportion of ust to fuel at site s in year t; gst is the green fertilizer vector at site s in year t; dst is the dung vector at site s in year t; est is the energy need at site s in year t; wst is wood for energy at site s in year t; mst is marsh gas energy at site s in year t; εst is the percentage of increased soil nutrition; ew, eu, em is burning efficiency; S1S2, …, S1SB represent basins; S1, …, S1 represent small basins; Q1stu is groundwater for irrigation of crops at site s in time period u of year t; Q2mstu is surface water for irrigation of crops at site s in year t; Qmstu is total water for irrigation of crop m at site s in year t; Q3stu is total water for irrigation of crops at site s in year t (inflow and outflow); Qstu (Sh) is total rainwater available in basin Sh in time period u of year t; Γmu (Qmstu) is the growth coefficient of crop m at site s in year t;; h0st, h1st is allowable shallow groundwater depth and lowest depth in time period u of year t; hst (Q1st, Q2st, Q3st) is depth of groundwater as a function of Q1st, Q2st, Q3st; skmst is the kth resource at site s in year t; δst is the vector of agricultural products to be stored at site s in year t; L1st is the area of land at site s in year t; L1mst is the area of land for crop m at site s in year t; Estθ is the soil erosion coefficient of steep land at angle θ at site s in year t; Fst is the ratio of forest cover at site s in year t (the ratio of the area of land for trees and fruits to the total area of land); Z1stθ is the land of slope at angle θ at site s in year t;E¯ is admissible soil erosion; and Rkst is the available quantity of kth resource at site s in year t. L1st = R1st, L1mst= z1mst.

Resource Constraint and Ecological Equilibrium

(1) Resource constraint:

(2) Land constraint:

(3) Water resource constraint:

(4) Husbandry constraint: yst2=Tst1yst12;yst2=yst2(yst12).

(5) Fertility constraint:

(6) Energy constraint: estewTst6wst+euTst6ust"+emmst.

(7) Soil erosion constraint: sθz1stθEstθE¯,θz1stθLst.

(8) Crop production function:


We get (yst*)sS,tT by solving the following:


According to the model, regional resource allocation programming has been computed for 14 natural regions, involving 5 provinces—Hebei, Henan, Shangdong, Jiangsu, Anhui—and 2 cities—Beijing and Tianjing. The results relating to resource production and consumption, local and global, are obtained. Detail is omitted here because of space considerations. On the basis of the computation, suggestions of implementation, strategy, policy, and institution are made for villages, counties, prefectures, and provinces in the Yellow River Basin. For the upper part of the Yangtze River, the computed results suggest a medium-term plan to return the steep land to forestry for 40 counties along the Wujing River, the Mianjiang River, the Jalingjiang River, and the Jinshajiang River. All these small rivers are branches of the Upper Yangtze River. In the model, all biotransformations are linear. Computation starts from the simple case year by year to obtain results for the initial phase, and to identify structural changes in the gradual transition. Next, we compute the five-year plans from 1985 to 2010. The buffer stock, relating to the total yield, was used with a stochastic dynamic model of agricultural supply to assess the strategy for international trade of agricultural produce, for example, to evaluate imports and domestic trade of wheat with wheat production in the Yellow River Basin.


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