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									        Sultan Qaboos University
        College of Engineering
        Department of Electrical & Computer

Presented by:
Arif S. Malik
Associate Professor

Objective of the Presentation

   What is Sustainable Development?
   What is Discounting?
   Rationale for Discounting
   Discounting Effects on Project Selection
   Arguments in Favor of Discounting
   Arguments Against Discounting
   Systems Thinking and Discounting
   Conclusion

What is Sustainable Development?
• Development that meets the needs of the present
  without compromising the ability of future generations
  to meet their own needs. (Brundtland Commission,
• A minimum conditions for developments to be
  sustainable, is the requirement that the combined
  capital stock (man-made and natural) should not
  decrease over time.
• Natural capital stock, in this context, is the stock of all
  environmental and natural resource assets, from oil
  in the ground to the quality of soil and groundwater,
  from the stock of fish in the oceans to the capacity of
  the globe to recycle and absorb carbon.
 What is Sustainable
 Development? (Cont‘d)
Conserving the natural capital stock will serve
the following goals:
  –   Justice in respect of the socially disadvantaged;
  –   Justice between generations;
  –   Justice to nature;
  –   Economic efficiency;
  –   Aversions to risks (such as droughts, severe
      weather conditions etc.) which may arise if the
      environment is left for degradation.

   What is Sustainable
   Development? (Cont‘d)
• The emphasis on sustainability implies a
  greater concern for the future and for the
  future generations.
• The past models of the development process
  assumed that the ‗future will look after itself‘,
  whereas, the sustainable development
  approach acknowledges that the ability of the
  future to do this can be seriously impaired by
  actions taken now.

  What is Discounting?
• Discounting is a standard technique used for making
  inter-temporal decisions in which future is given less
  weight than the present.
• Discounting procedures are fundamentals to the
  theory and practice of cost-benefit analysis, which is
  based on the premise that individual preferences – as
  measured in monetary term – are the appropriate
  standard for evaluating proposed projects and public
• The discount rate is the rate at which society as a
  whole is willing to trade off present for future benefits

  Rationale for Discounting?
• The usual and most common argument given is
  because a dollar received today is more valuable
  than one received in the future. There are generally
  three main reasons used for applying a positive
  discount rate.
• Pure Time Preference: humans are generally
  impatient and prefer instant gratification to waiting for
  long-term benefits.
• Opportunity Cost or Marginal Productivity of Capital:
  dollars can be invested today, earning a positive rate
  of return.
• Risk: there is uncertainty surrounding the ability to
  obtain promised future income. That is, there is the
  risk that a future benefit will never be realized.          7
 Effect of Discount Rate on
 project selection
        Project A                Project B
Costs ($)    Revenue($)   Cost ($)    Revenue ($)
 10,000             0      15,000            0
    0           5000       5,000             0
    0           4000         0           6000
    0           3000         0           6000
    0           2000         0           6000
    0           1000         0           6000
    0               0        0           6000

                          Effect of Discount Rate
                                                      Project A
                                                      Project B
Net Present Value





                               0%   5%   10%    15%      20%      25%

                                         Discount Rate
     Arguments in Favor and Against
   Discounting (Pure Time Preference)
Arguments in Favor             Arguments Against
• Empirical evidence           • The individual time
  suggests that humans           preference is not
  value immediate or near-       necessarily consistent
  term resources at higher       with individual lifetime
  levels than those              welfare maximization.
  acquired in the distant      • There is a more general
  future.                        view shared by many
• It is further argued that      economists that there
  society, which consists of     seems to be no "ethical"
  sum of its living              justification for putting a
  individuals, also prefers      utility discount into the
  the present to the future.     social welfare function 10
      Arguments in Favor and Against
    Discounting (Pure Time Preference)
Arguments in Favor                 Arguments Against
• Furthermore, the dominant        • The value judgment is
  underlying value judgment          improperly expressed.
  of Western economic                The argument is that it is
  philosophy is that people‘s        tomorrow‘s satisfaction
  preference should count.
                                     that matters, not today‘s
  Hence it is difficult to argue
                                     assessment of
  with the proposition that if
  people prefer the present          tomorrow‘s satisfaction
  over the future, then pure       • Future generations
  time preference indicates          cannot represent their
  that discount rates are            interests in today‘s
  positive.                          markets and political
                                     debates                   11
 Pure Time Preference
• But the question is any positive social
  discount rate used in a project that
  creates costs and benefits that are
  separated over a long period of time will
  discriminate the future generations and
  that is against the very spirit of
  sustainability; the definition of which
  says ‗meeting today's needs of
  development without compromising
  future generations' ability to develop‘.
        Arguments in Favor and Against
    Discounting (Opportunity Cost of Capital)
Arguments in Favor                    Arguments Against
• The opportunity cost of capital     • The opportunity costs of
  is the expected financial return      consumption are determined
  foregone by investing in a            by the marginal return to
  project rather than in                capital, which, in turn, depends
  comparable financial                  on investment levels, which
  securities. Theoretically, firms      depend upon how highly future
  invest up to a point where the        benefits are weighted. If
  rate of return on marginal            society as a whole valued all
  projects is equal to the interest     future periods equally, it would
  rate. Consumers‘ plans to save        continue to invest until the rate
  are brought to equality with          of return on those investments
  producers‘ plans to invest and        (and, thus, the opportunity
  the ruling interest rate reflects     cost) was driven to zero. That
  both the time preference of           opportunity costs are the result
  consumers and the rate of             of valuing future outcomes
  return on capital                     less, not a reason for doing so.13
  Arguments in Favor and Against
  Discounting (Opportunity Cost of Capital)
• But there is an argument against using low or zero discount rate
  that it will encourage more investment overall, and this will
  increase the demand for resources and environmental services.
  In author‘s view this argument is not valid as we see that in the
  case of national economic development, the investment portfolio
  would consist of all projects to be carried out within the capital
  budget constraint as determined by the availability of the foreign
  exchange and local currency so the investment will only take
  place within the budget constraints and only those projects will
  be carried out that are economically justified and
  environmentally less harmful. As far as the private firms and
  businesses are concerned the government can impose resource
  taxes to discourage those projects which may harm the
  environment excessively.

 Arguments in Favor and Against
 Discounting (Opportunity Cost of Capital)
• On the contrary we can observe that high
  discount rates used in developing countries
  under the ‗prescription‘ of World Bank and
  other lending agencies are a cause of much
  environmental degradation as the selection of
  such rates opt for short-term measures
  designed to satisfy immediate wants, and at
  the expense of sustainable practices. In turn,
  poor prospects arising from environmental
  degradation actually assist in generating the
  poverty that causes high discount rates
  (poverty-trap).                                15
           Arguments in Favor and Against
                Discounting (Risk)
Arguments in Favor                    Arguments Against
• Public projects involve             • While adding risk premium to
  uncertainty and risk. When            the discount rates it is being
  public projects are undertaken        assumed that the scale of the
  there is a chance that future         risk increases exponentially with
  benefits will not be fully            time. There is no reason to
  realized or realized at a higher      believe that the risk factor takes
  level than estimated .The             this particular form and so the
  further out into the future these     allowance for it through a single
  benefits are expected to be           discount rate adjustment is
  realized, the greater the risk        invalid. This argument is widely
  that some unexpected event or         accepted by economists.
  factor will occur and diminish        Usually, the preferred method
  the value of the future benefit.      for dealing with uncertainty is
  This uncertainty is handled by        directly to adjust benefits and
  adding a risk premium to the          costs and not to change the
  discount rate.                        discount rate.                  16
  Systems Thinking and Discounting
• McLaughlin and Davidson [14] describe systems thinking as:
• "Seeing Whole Patterns. . . . It‘s time for us to make the next
  leap in consciousness to wholistic thinking — to seeing whole
  patterns. In contrast with the prevailing linear paradigm, the New
  Paradigm sees everything as interconnected and
  interdependent . . . .Thus it is critical to keep the large picture—
  the whole system—in mind in order to create any kind of lasting
  solution and to avoid undue focus on effects, rather than dealing
  with causes that may be part of another system altogether.
• Wholistic thinking or ecological thinking — seeing how
  everything affects everything else — is finally beginning to
  influence other national policies, such as economics, where
  piecemeal solutions never work, since all sectors of a nation‘s
  economy are interrelated and interdependent with the world
  economy. The systems view sees the world in terms of
  relationships and integrated wholes whose properties cannot
  be reduced to those of smaller units."                              17
 Systems Thinking and Discounting (cont‘d)
• Perhaps, we would have to go a long way to
  find a clearer or more complete exposition of
  pure ‗Systems Thinking‘ than that contained
  in the above slide. The depletion of ozone
  layer or increase in greenhouse gas
  emissions or the pollution of oceans is no
  more a concern of a single society presently
  living in any country. Similarly, society is no
  more a collection of living individuals whose
  preferences should count. Let us investigate
  the pure time preference and opportunity cost
  of capital concepts from the holistic viewpoint.
 Systems Thinking and Discounting (cont‘d)
 Pure time Preference
• When the pure time preference argument is
  looked from the holistic viewpoint a question
  can be asked whose time preference are we
  talking about: whose capital and wealth are
  linking whose time? Is it the present society
  living in USA or Canada or is it in some
  African country? And what about the
  generations to come who will take care of
  their time preferences? Therefore, from
  holistic point of view pure time preference
  argument is ethically and morally indefensible
  in the selection of discount rate.             19
 Systems Thinking and Discounting (cont‘d)
 Opportunity Cost of Capital
• Before analyzing the opportunity cost of capital
  concept with holistic viewpoint let us first examine the
  practical implication of this concept for selecting
  discount rates in different countries. Since the
  opportunity cost is linked to the prevailing conditions
  within a given country, the discount rate tends to
  vary, often significantly, from country to country. For
  developing countries the discount rate used is much
  higher than the industrialized countries to reflect the
  scarcity of capital and the much larger profitability of
  new investment projects that compete for limited
  financial resources.

 Systems Thinking and Discounting (cont‘d)
 Opportunity Cost of Capital
• Now as we see we have different discount rates for
  different countries so a project considered ‗good‘ in
  USA may not be ‗economically justified‘ in India. For
  example, a large coal-fired power plant which
  generates millions of tons of greenhouse gases
  annually may be economically justified in one country
  but may not be a good project in another country
  because of the use of different discount rates for
  selection of the project. Consider the holistic
  approach and we see that the harm to environment is
  the same whether such kind of project is carried out
  in USA or in India. So in this regard the discount rate
  should not be linked to opportunity cost of capital in a
  country but in sustainability context to environment.
• The paper has argued against using the practice of
  discounting. It has been shown intuitively that both the
  time preference and the opportunity cost of capital
  arguments are in conflict when we take the holistic
  approach to the environment.
• When the pure time preference argument is looked from
  the holistic viewpoint the question is whose time
  preference we are talking about – a society living in a
  developed world or a society living in less developed
  world or a society yet to come.
• When the opportunity cost concept is seen from holistic
  approach we find that there are different opportunity
  costs for the same project, having same global
  environmental impacts, done in developed world or in
  some underdeveloped world and hence there is no
  agreement on the same discount rate.
          Conclusions (Cont‘d)
• What is clear from this is that we need a paradigm shift –
  a complete change in perspective. There is a need to
  engage meaningfully with a complex systems approach
  to social and natural systems. While the full implications
  of the quantum change in perspective have yet to filter
  down to the level of general consciousness the forest
  has been cleared and the path is open
• No doubt there may be reluctance due to powerful
  vested interests related to both cognitive belief systems
  and to the institutional position. But with courage and
  commitment the harmful effects of untrue economic
  theory can be challenged. Both the time preference and
  the opportunity cost concept are the tools to support the
  institution of interest. But as we see both cannot stand
  in the way of systems thinking.
        Conclusions (Cont‘d)
• Interest and usury cause injustice and
  major financial inequality in the society.
• The practice of usury – lending money and
  accumulating interest on the loan – can be
  traced back 4,000 years. But it has always
  been despised, condemned, restricted or
  banned by moral, ethical, legal or religious
• Let us see what great religious scriptures
  say about usury.
  Quran on Usury
Those who take usury will rise up before
God (on the Day of Resurrection) like one
whom Satan (the Evil One) by his touch has
driven to madness. That is because they
claim: "Trade is the same as usury." But
God has permitted trade and forbidden
usury. Those who after receiving admonition
from their Lord, desist, will be forgiven for
the past; their Judge is God. But those who
go back to usury are companions of the
Fire; they will abide therein for ever.
  Qur'an 2: 275
  Quran on Usury
God will deprive usury of all growth, but will bless
deeds of charity with increase. For God does not
like the ungrateful sinners. Qur'an 2: 276

O ye who believe! fear God and give up what
remains of your demand for usury if ye are indeed
believers. Qur'an 2: 278

O ye who believe! devour not usury doubled and
multiplied; but fear God; that ye may
prosper. Qur'an 3: 130

Prophet Muhammad‘s Last
―……..Remember that you will indeed meet
your LORD, and that HE will indeed reckon
your deeds. God has forbidden you to take
usury (riba), therefore all riba obligation shall
henceforth be waived. Your capital, however,
is yours to keep. You will neither inflict nor
suffer inequity. God has judged that there
shall be no riba and that all the riba due to
`Abbas ibn `Abd al Muttalib shall henceforth
be waived……..‖

  Usury in Western Philosophy
Many of the early Western philosophers including Plato,
Aristotle, Cato, Cicero, Seneca and Plutarch were critics
of usury. In the legal reforms (Lex Genucia) of the
Roman Republic (340 BC), usury and interest were
banned. However, in the final period of the Republic,
the practice was common. Under Julius Caesar, a limit
of 12 per cent was imposed due to the great number of
debtor, and under Justinian it was set at a mean
between 4 per cent and 8 per cent
  Old Testament on Usury
Nehemiah 5:7
 I pondered them in my mind and then accused the
 nobles and officials. I told them, "You are exacting
 usury from your own countrymen!" So I called
 together a large meeting to deal with them
Nehemiah 5:10
 I and my brothers and my men are also lending the
 people money and grain. But let the exacting of usury
Nehemiah 5:11
  Give back to them immediately their fields, vineyards,
  olive groves and houses, and also the usury you are
  charging them—the hundredth part of the money,
  grain, new wine and oil."
  Old Testament on Usury (Cont‘d)
Psalm 15:5
  who lends his money without usury and does not
  accept a bribe against the innocent. He who does
  these things will never be shaken.
Ezekiel 18:8
  He does not lend at usury or take excessive interest.
  He withholds his hand from doing wrong and judges
  fairly between man and man.
Ezekiel 18:13
  He lends at usury and takes excessive interest. Will
  such a man live? He will not! Because he has done
  all these detestable things, he will surely be put to
  death and his blood will be on his own head.
  Old Testament on Usury (Cont‘d)
Ezekiel 18:17
  He withholds his hand from sin and takes no usury
  or excessive interest. He keeps my laws and follows
  my decrees. He will not die for his father's sin; he will
  surely live.

Ezekiel 22:12
  In you men accept bribes to shed blood; you take
  usury and excessive interest and make unjust gain
  from your neighbors by extortion. And you have
  forgotten me, declares the Sovereign LORD.

 Usury on the Cross
Holy Prophet Jesus (peace be upon him) was
sent to the people to confirm God's
commandments and remind them the Message
of God. According to Matthew's Gospel, Jesus

"Do not think I have come to destroy the
Law or the Prophets. I have come, not to
destroy, but to fulfill.
[The Bible, Matthew 5:17]

  Usury on the Cross (Cont‘d)
The prohibition of usury was adopted as a major campaign
by the earliest Christian Church, following on from Jesus'
expulsion of the money-lenders from the temple.

The decrees of the Hebrew Bible were revived and a new
reference to usury in the New Testament was added. Based
on the authority of those texts, the Catholic Church of the 4th
century AD banned the clergy from charging interest, a rule
that was later extended in the 5th century to the laity.

In the 8th century, under Charlemagne, usury was declared
a criminal offense. The anti-usury movement gathered force
in the late Middle Ages and reached its peak in 1311 when
Pope Clement V totally banned the practice and declared null
and void all secular law defending it.
  Oldest References to Usury
• The oldest references to usury are found in religious
  manuscripts of India, dating back to 2000-1400 BC
  where the 'usurer' is associated with any interest
  lender. In the Hindu Sutra (700-100 BC) as well as in
  the Buddhist Jatakas (600-400 BC) there are many
  references to the payment of interest, along with
  expressions of disdain for the practice.
• Reference:

  Demon on the Move
• This 'demon' governs current global relations,
  condemning most of the world population to living
  under the sign of debt: i.e., each person born in Latin
  America owes already $1,600 in foreign debt; each
  individual being conceived in Sub-Saharan Africa
  carries the burden of a $336 debt, for something that
  its ancestors have long ago paid-off. In 1980 the
  Southern countries' debt amounted to $567 billion;
  since then, they have paid $3,450 billion in interests
  and write-offs, six times the original amount. In spite of
  this, that debt had quadrupled by the year 2000,
  reaching $2,070 billion.
• Reference:
           Conclusions (Cont‘d)
• God does not want to see such circumstances between
  humankind, created by human greed. It is very clear
  from the Jewish, Christian and Muslim religious
  scriptures that social values built on the structure of
  usury certainly cause God's anger.
• Eliminate the interest and we see that there is no need of
  discounting. By eliminating the interest we are:
   – Reducing the environmental risk
   – Reducing the poverty in developing world
   – Reducing the gap between rich and poor
   – Reducing the unemployment problem
   – Reducing the problem of inflation
   – Increasing the economic efficiency
   – Safeguarding the interest of future generations etc. 36

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