All that glitters may be pure gold: the socioeconomic impact of circularity in developing countries
Architectural structure (Image: Agnieszka Cymbalak via Unsplash).

The socioeconomic impact of circularity in developing countries

A novel tool using firm–level data to assess the economic, social and environmental impact of circularity.

By Nilgün Tas, Nicola Cantore, Manuel Albaladejo, Juergen Amann and Massimiliano Mazzanti

The circular economy is critical to ensuring green and just socioeconomic outcomes through decoupling economic growth from increased resource use.1 A European Environmental Agency Report2 discusses that the transition to the green and circular economy (CE) is driven by multiple environmental, demographic, technological, fiscal and financial transitions occurring in different sectors and geographies. CE may play a pivotal role in this transition because of its potential “triple positive impact” on economic growth as well as environmental and societal outcomes.

To this date, CE’s potential triple dividend draws from developed country experiences and needs to be proven in a developing country context. Indeed, circular economy activities are typically evaluated using anecdotal case study evidence coming primarily from the Global North. The extrapolation of the conclusions in developing countries can be problematic. In particular, the lack of official (firm-level) microdata makes it challenging to understand the links between innovation, human capital investments and behavioural changes that occur in developing economies when implementing CE practices.

The NICE (National Impacts of Circular Economy) tool helps bridging this gap in evaluating socio–economic impacts of circular economy in developing countries. NICE carries three concepts at its heart: model development, sensitivity analysis and stakeholder involvement. The tool builds on the popular Input–Output model EORA3 and investigates the impacts of manufacturing firms’ resource (energy and materials) savings on economic (value-added), social (employment) and environmental (CO2 emissions) indicators in a multi-country framework. NICE pairs a powerful analytical tool, quantifying economy-wide changes, with novel firm-level data. These data are then evaluated across a wide range of economic scenarios to estimate the average aggregated effects of CE technical cooperation projects.

Applying the NICE tool to firm-level evidence from Viet Nam, Egypt, Georgia and Indonesia suggests that circularity has positive environmental effects, as expected, but also positively impacts aggregate value-added and employment; nevertheless, CE's expected triple impact is not always straightforward. and varies by sector and undertaken CE activity. It is also dependent on the structural composition of the economy, namely the historical specialization of a country on manufacturing (e.g., fashion or toy manufacturing, steel and other metallurgical products, etc.) and the technological status of countries (e.g., emissions and labour intensity of single economic sectors). Another caveat is that the economic boost associated with CE might generate a rebound effect, leading to increased emissions.

Moreover, even when there is a positive impact on economic, social and environmental indicators, the transition implies that there will be short- and medium-long-run winners and losers. NICE can capture all these economic, environmental, and social dimensions of sustainable development through its sector-based structure, which relies upon the Input-Output framework and extensive simulations, building on primary data evaluation and stakeholder involvement.

Total economic effect on value-added, 2015 prices

Note: Total effect refers to the direct + indirect + induced effect on value-added or employment, respectively.

Source: Authors.

Despite their geographical and institutional differences, research based on the NICE tool so far finds that a triple positive impact is a feasible outcome in the investigated countries. The results (see figure above and below) show that all four country-based projects led to net gains in value-added and employment except for Georgia. Georgia is the smallest project with a negligible impact but the negative sign of the value-added change confirms the need to assess country and regional-level impacts.

Total effect on employment

Note: Total effect refers to the direct + indirect + induced effect on value-added or employment, respectively.

Source: Authors.

As anticipated, the results highlight significant differences in CE impacts, depending on the magnitude of the project intervention, the economic structure and the labour intensity of the CE transition. From an environmental point of view, for example, the results show an increase in emissions in Viet Nam and a reduction of emissions in Indonesia and Georgia, indicating the necessity to carry out country-by-country analysis on the dimensions of sustainability. The impact of circular economy projects on emissions varies based on the economies´ structural composition and the emissions intensity (emissions/value-added ratio) of each sector in each country.

Net effect in terms of value-added, 2015 prices, Egypt and Georgia

Source: Authors.

The NICE tool estimates the cross-sectoral distribution of winners and losers (see figure above and below). In all four countries, the biggest loser is the “electricity, gas and water” sector, as the projects generate a reduction of sales of utility companies selling these inputs to firms. On the winners’ side, the construction sector features significant gains, presumably due to manufacturing firms increasing their gross fixed investments (e.g., in new buildings) with the financial savings they make from reduced material and energy consumption. “Electrical and machinery” and “financial intermediation and business activities” also exhibit significant gains, restressing the value of analysing the effects of CE strategies with a sector-specific lens.

Net effect in terms of value-added, 2015 prices, Indonesia and Viet Nam

Source: Authors.

Final remarks

In conclusion, the NICE tool can serve as a valuable impact evaluation tool for policymakers to understand the direct and indirect impacts of CE-related policies.

By identifying CE impacts on different dimensions of sustainability, the NICE tool can help policymakers identify and quantify trade-offs, and encourage synergies. It can also quantify rebound effects regarding emissions or materials consumption across various economic sectors, thereby anticipating future mitigation needs and stimulating a systemic approach to policymaking. In Viet Nam, for example, CE projects positively impacted value-added but carried a rebound risk in the absence of complementary policy actions to address this. The NICE tool thereby reveals that isolated actions targeting single firms or segments of the economy can even be detrimental.

The tool can also help policymakers identify how different sectors will be impacted by circularity and where challenges may arise. Winners and losers should be assessed explicitly over different time frames to construct the appropriate regulatory mix. While sectoral heterogeneity must be acknowledged, looking to convergence is essential to avoid pushing environmental problems to other sectors or geographies.

Finally, the tool should be used in conjunction with country-specific knowledge to assess CE readiness and the investments required to improve skills and promote innovation. International organizations can play a significant role in supporting these outcomes, appropriately targeted through a combination of the micro and macro analysis offered by the NICE tool.4

  • Nilgün Tas was Senior Advisor on Circular Economy at the United Nations Industrial Development Organization (UNIDO).
  • Nicola Cantore is Research and Industrial Policy Officer at the Division of Capacity Development, Industrial Policy Advice and Statistics at the United Nations Industrial Development Organization (UNIDO). 
  • Manuel Albaladejo is Country Representative for Argentina, Chile, Paraguay and Uruguay, at the United Nations Industrial Development Organization (UNIDO).
  • Juergen Amann is Economist at the OECD Centre for Entrepreneurship, SMEs, Regions and Cities (CFE). 
  • Massimiliano Mazzanti is Professor in Economic policy, and Director of the Department of Economics & Management at the University of Ferrara.

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

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