Sustainable development: an empirical illustration for Saudi Arabia

The aim of this paper is to highlight the shortcoming of the standard macroeconomic framework when environment is ignored in the implementation of traditional policy practices. Many studies have identified pollution by commenting on the damages inflicted on the environment. In response, regulatory policies have been proposed to rectify and address the economic and health impacts. However, there have been very few studies centred on valuing environmental degradation and internalizing the cost of degradation to selected macroeconomic frameworks. The empirical illustration in this paper seeks to demonstrate the ease with which environmental degradation is internalized in a simple Keynesian framework with reference to a leading Gulf State – Saudi Arabia. The analysis of environmental degradation is confined to air shed depreciation in terms of carbon dioxide emissions from greenhouse gases and data is from World Development Indicators for the years 1980 to 2012. By utilizing the Keynesian framework, two income levels can be identified that is, the standard income (Y*) and sustainable income (Y**) which takes into consideration environmental depreciation. It is observed that the Kingdom’s environmental depreciation is rising for the time period on a trend basis. One important observation is the clear divergence of Y* and Y** where Y* is overstated relative to Y**. This supports the observation that Saudi Arabia’s standard income (Y*) may not be sustainable for future economic development and the Kingdom should employ sustainable income (Y**) to measure economic progress for the formulation of sustainable development policies. There are two key policy implications for the Kingdom from this study. Firstly, the Kingdom should shift away from non-renewables to renewables and whilst the renewables are being assessed for their reliability and feasibility as sources of energy; the immediate priority should focus on enhancing non-renewables efficiency and minimizing environmental degradation. Secondly, environmental capital should be maintained by investing in environmental technologies and reviewing energy options as these could potentially expand the Kingdom’s capacity through aggregated expenditure.