2011: Forum Discussion Paper

The Role of Public-Private Cooperation in Enabling Green Growth

by Richard Samans / Executive Director / GGGI

Economists understand economic growth to be a function of changes in the supply of labor and capital, the efficiency by which these and other factor inputs such as natural resources are utilized and technological change. Since an economy’s workforce and capital stock tend to be relatively stable or predictable over time, its long-term growth potential (as opposed to shortterm growth prospects, which can be significantly inffluenced by fluctuations in investment, savings, net exports, etc.), is thought to be particularly dependent on gains in factor efficiency and innovation, or what economists call total factor productivity or TFP.

Green growth is a relatively new concept that has been characterized by the OECD as “fostering economic growth and development, while ensuring that natural assets continue to provide the resources and environmental services on which our well-being relies.” It is closely related to the concept of a green economy, which UNEP deffines as one in which “growth in income and employment should be driven by public and private investments that reduce carbon emissions and pollution, enhance energy and resource efficiency, and prevent the loss of biodiversity and ecosystem services.“

Toward a New Paradigm of Economic Growth
In any discussion of economic growth, an important caveat is in order: growth is not an end in itself. The fundamental objective of economic policy is not growth but rather broad-based progress in living standards. After all, growth in GDP per capita is a measure of mean, not median, progress. Moreover, it is only a partial measure insofar as it captures the production of most but not all goods and services, omitting or undervaluing some of those that improve a society’s health, security, environment, etc.

GDP growth is an imperfect proxy for the pace and breadth of progress in living standards. But while it may not be sufficient for economic success, it certainly is necessary. In all but very wealthy societies, major socioeconomic progress is simply not possible without rising employment, incomes and wealth.

Thus, both the quantity and quality (or composition) of growth matter. The ultimate objective of economic policy must be to generate what might be called BIG growth — i.e., strong GDP growth that is also Balanced in the sense of being resilient and stable rather than prone to disruptive booms and busts; Inclusive in the sense of generating broad-based social gains rather than exacerbating inequality and social exclusion; and Green in the sense described by the OECD, UNEP and others.

Green growth is therefore best understood as one part of a three-part quest to enlarge the very conception of economic growth — to create a new economic model that produces faster but also wider, more resilient and more environmentally sustainable economic progress.

Construction of this new paradigm begins with recognition that the quantitative and qualitative aspects of growth require equal and integrated attention by policymakers. This may sound obvious and uncontroversial in the aftermath of a systemic international financial crisis and during a period of rising income inequality and widespread ecological degradation. However, the challenge such parallelism poses to economists and policymakers should not be underestimated, as it represents a departure from the way the economics has been taught and economic policy has been practiced for over a generation.

While important, measures that promote the allocative e!ciency of markets and quantitative side of growth, (e.g., deregulation, privatization, trade liberalization and fiscal balance) have been systematically overemphasized relative to the three more qualitative parameters of BIG growth, sometimes to catastrophic effect, as illustrated by the recent sharp rise in unemployment, poverty and social upheaval in some countries and deterioration of fisheries and fresh water supplies in still others.

Rhetorical recognition of the need for a new growth model may now be widespread, as evidenced by G20 leader communiqués and similar pronouncements by heads of the major international economic institutions. But actual change in policy and pedagogy has only just begun. What is needed next is a more specific investigation of how and when the promotion of financial stability, social inclusion and environmental sustainability can complement and even accelerate allocative efficiency and top-line GDP growth. What specific policies and initiatives promote win-win, BIG growth outcomes, and how can governments and other stakeholders most effectively pursue them? Such an investigation in respect of green growth is the very purpose of the Global Green Growth Institute and its partner, the Global Green Growth Forum.

Strategies to Enable Green Growth: Historical Precedents
Green growth’s connection to GDP growth is comparatively straightforward, since it is fundamentally concerned with increasing the efficiency by which economies utilize one of their most important factor inputs — natural resources — through the application of existing and innovation of new resource-efficient technologies and practices. As a resource productivity agenda, green growth is intrinsically a total factor productivity agenda – i.e., a pure allocative efficiency play that also promotes social well being by reducing the environmental externalities that often accompany the exploitation of natural resources in the form of pollution, biodiversity loss, etc.

What strategies are available to government and other actors to more fully exploit green growth’s win-win, quantitative-qualitative growth potential? The answer is: the same techniques market economies have historically employed to promote economic growth more generally. These include:

  • Compensating for market failures and providing public goods
  • Enhancing competition by reducing information asymmetries and otherwise leveling the playing field
  • Reducing investment uncertainty by creating predictable rules, regulations and macroeconomic conditions
  • Reducing barriers to entry such as prohibitive initial costs or insufficient experience or data
  • Reducing barriers to economies of scale such as fragmented or inconsistent information or standards

There is a long and geographically diverse history of government policy and public-private cooperation along these lines aimed at improving the enabling environment for private investment in industries deemed to have significant potential to generate large productivity gains for the economy as a whole. Far from picking winners and losers, these interventions seek to build the underlying infrastructure of new markets by removing obstacles that distort market signals or deter the entry of a wider range of competitors and investors. They create the playing field, the rules and sometimes the basic inputs necessary to support a major expansion of investment and competition in areas considered to have a broader potential economic and social payoff”. Examples include:

Compensating for market failures: Public investment in railroads, highways and ports; laws compelling primary and secondary attendance and prohibiting child labor; provision of agricultural extension services and subsidies for land grant universities; public investment in basic health, physics and other R&D; tax preferences for orphan drugs and private pension savings, etc.

Reducing information asymmetries and leveling the playing field: public-private cooperation in the development of financial accounting and corporate disclosure standards (IASB, FASB, etc.); publicly-funded independent anti-corruption investigative agencies; nutritional labeling guidelines; vehicle and appliance e!ciency standards; etc.

Reducing investment uncertainty: establishment of independent central banks; creation of antitrust and intellectual property laws; creation of corporate governance rules and regulations in such areas of limited liability, minority shareholder protections, bankruptcy and securities registration; creation of government-sponsored lending agencies for small businesses and homeowners; etc.

Reducing barriers to entry: tariff preferences for imports from least developed countries; subsidized industrial credit to new entrants in capital intensive industries (e.g., Airbus in the 1980s); public procurement rules regarding small and minority-owned businesses; etc.

Reducing barriers to scale: national regulation and international coordination of radio and cellphone frequencies; multistakeholder cooperation in the establishment of common internet protocols (ICANN); public procurement programs for fuel-efficient vehicles; etc.

Interventions of this nature have traditionally played an important role in catalyzing the early growth and eventual scaling of young industries that went on to contribute widespread productivity improvements. Some of these strategies were literally transformational. Most required a substantial degree of publicprivate cooperation to design and implement.

International Economic Architecture for Green Growth: Creating Synergy between Top-down and Bottom-up Progress through Public-Private Cooperation

The core purpose of 3GF is to stimulate a deliberate international thought process about the kinds of government and public-private approaches of this nature that have the potential to help trigger similar waves of progress in key industries related to green growth, and to catalyze like-minded coalitions of willing and able industry and government actors to take them forward.

The projects and initiatives chosen for discussion at this inaugural Global Green Growth Forum correspond closely to these historical precedents. For example:

  • The International Partnership for Energy Efficiency Cooperation’s (IPEEC) utility-scale energy efficiency and end-user e!ciency metrics initiatives that will be discussed in an Energy Strategy Session are aimed at reducing barriers to scale by expanding common information and creating a level playing field
  • The Sustainable Energy Trade Agreement and Green Public Procurement initiatives that will be discussed in two panel sessions on Day 2 are aimed at reducing barriers to entry and scale by creating positive tariff and regulatory preferences and removing perverse disincentives
  • The Sustainable Biofuels for Aviation and Electric Vehicle Test Market initiatives that will be discussed in respective Transport Strategy Sessions on Day 1 are aimed at reducing barriers to entry and scale by pooling research and regulatory efforts, respectively, across a number of corporate actors and governments
  • The Water Resources Group and South African Renewables Initiative (SARI) to be discussed in the Water and Finance Strategy Sessions are aimed at overcoming market failures and reducing investment risks and uncertainties through the pooling of public and private resources

These initiatives fall squarely within the tradition of the governmental and public-private strategies that catalyzed growth in the railroad, television, internet, accounting, securities, airline and countless other industries that revolutionized productivity in their day. They and other initiatives like them represent the building blocks of a public-private enabling architecture for green growth that would help to accelerate the transition of manufacturing, construction, energy, water and agricultural systems to a much more resource-efficient mode of production.

In recent years, international environmental governance in general and the UN climate change negotiations in particular have focused on building top-down political architecture, i.e., national environmental commitments and international environmental goals. The purpose of 3GF and the public-private cooperation activities of GGGI is to encourage the international community to construct a complementary economic architecture — a bottom-up set of results-oriented mechanisms and institutions that create the underlying market infrastructure which can drive faster progress toward green growth by removing some of the risks, uncertainties and market imperfections that impede the engagement of additional private resources and actors into a wider competition for resource-related effciency gains.

Because it is focused on enhancing productivity growth, this public-private, green growth agenda has an inherent economic justification. Of course, it also has a compelling environmental justification, but this is a co-benefit rather than the main, let alone unique, rationale. By advancing progress on the ground, it could also have the political co-benefit of improving the chemistry of international negotiations, demonstrating that the United Nations’ objective of “a green economy in the context of sustainable development” is indeed possible and improving the readiness of countries to implement whatever climate, biodiversity, fisheries, water and other treaties diplomats agree to whenever they agree to them.

2012 is shaping up to be a crucial year for both international economic and environmental cooperation, with crises and corresponding opportunities looming on both fronts. In addition, we do not have the luxury of time to engineer a greener growth model. Investments in power, industrial and construction systems over the next ten years will lock in environmental consequences for the next forty. As governments prepare for the United Nations Rio+20 conference and expiration of the Kyoto Protocol’s first commitment period next year, they would do well to recognize the potential benefit of working with the private sector and other stakeholders to build this bottom-up, enabling economic architecture, viewing it as a natural complement to the traditional focus of international environmental governance on top-down legal framework and institutions. However, this will require non-state actors to be treated as genuine partners rather than stakeholders requiring mere consultation in a few conference side events.

Conclusions: Key Questions for Discussion at the Global Green Growth Forum
Judging from the history of industries as diverse as accounting, information technology, aviation, electricity and asset management - all of which have had a far-reaching impact on economic productivity -public-private cooperation has a vital role to play in enabling the acceleration and scale of industries related to green growth. Accordingly, we encourage participants in the Global Green Growth Forum to share perspectives on such questions as:

  • What kinds of investments uncertainties, fragmentation of information and markets, barriers to entry or scale or market imperfections they believe stand in the way of more rapid expansion of green products and services?
  • How could these obstacles be remedied through governmental, public-private or intra- or cross industry cooperation?
  • HOw might you or your organization consider contributing in a concrete fashion to the success of one or more of the ten initiatives highlighted in the 2011 Forum?
  • How should these and other bottom-up frameworks and initiatives be integrated into the broader political agenda for and governance of international economic and environmental cooperation?