Journal Issue

The Environment for Development

International Monetary Fund. External Relations Dept.
Published Date:
January 1992
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Without environmental policies, development will be undermined. Without development, environmental protection will fail

In the past, development policies tended to be viewed as those that promoted growth in human activity, while environmental policies were seen as those that tried to restrict it. But in recent years, the idea of “environment as constraint” has given way to an acceptance of the “environment as partner.” Development policymakers increasingly recognize that failing to take the costs of environmental damage into account will prove to be inefficient and often ineffectual in raising incomes and well-being. Environmentalists similarly realize that for many problems—especially those in developing countries—the answer lies in faster, not slower, growth in incomes, along with sound environmental policies.

But while there is strong agreement at the conceptual level on the need to integrate policies for development and the environment, a large gap between rhetoric and practice remains. The World Bank’s World Development Report 1992 discusses how best to close this gap.

The nature of the challenge

More people have been lifted out of poverty over recent decades than in any other period in history, yet the number of very poor stands higher today than ever before. Over one billion people live in acute poverty, suffering grossly inadequate access to the resources required to give them a chance for a better life. Attacking this problem is not only a moral imperative, it is also essential for a sound environment (see “Environmental Problems and Developing Countries” in this issue).

TheWorld Development Report 1992has been prepared by a team led by Andrew Steer and comprising Dennis Anderson, Patricia Annez, John Briscoe, John Dixon, Gordon Hughes, Maritta Koch-Weser, Stephen Mink, William Magrath, Kenneth Piddington, Nemat Shafik, and Sudhir Shetty. The work was caused out under the general direction of Lawrence H. Summers. For information on ordering copies, see advertisement on page 17.

As policymakers attempt to turn this situation around, they will find themselves fighting against ever greater odds. Over the next 40 years, the world’s population will grow by 3.7 billion— an increase much greater than in any previous generation and probably much greater than in any subsequent one. Ninety percent of that rise will take place in developing countries, largely in cities, pushing population densities in many places to an extreme. World consumption of energy and manufactured goods will triple, even under more efficient patterns of use; for developing countries, the increase will be fivefold. If emission per unit of output remains unchanged, tens of millions of people will die prematurely each year as a result of pollutants, water shortages will become intolerable, and tropical forests and other natural habitats will shrink dramatically. Fortunately, such an outcome is unnecessary.

The belief that greater economic activity inevitably hurts the environment is based on static assumptions about technology, tastes, and environmental investments. In reality, however, the relationships between inputs and outputs and the overall effects of economic activity and the environment are continually changing. The key question is whether the positive forces of substitution, technological innovation, and structural change that tend to reduce environmental damage can more than compensate for any negative consequences of the overall growth in scale.

Where scarcity of environmental resources is reflected in decisionmaking—as is the case for metals and minerals, for example—these forces are very strong. Where open access to resources occurs—as is the case for water, forests, and air—environmental damage is often severe. In these situations, decisionmakers must be forced to take the true value of the resources into account. This is not easy. However, the evidence suggests that where environmental policies are publicly supported and firmly enforced, the positive forces can be just as powerful as for marketed inputs. Indeed, this explains why the environmental debate has rightly shifted away from a concern over physical limits to growth toward a concern about incentives for human behavior and policies to overcome market and policy failures.

Chart 1 shows how rising economic activity can cause environmental problems, but can also help address them. Three patterns emerge:

  • Some problems decline as income increases. This is because increasing income provides the resources for society to provide public goods such as sanitation services and rural electricity, and once individuals no longer worry about day-to-day survival, they can devote resources to profitable investments in conservation.
  • Some problems initially deteriorate but then improve as incomes rise. Most forms of air and water pollution fit into this category, as do some types of deforestation and encroachment into natural habitats. There is nothing automatic about this improvement; it occurs only when countries deliberately introduce policies that allow increased income and technical progress to be used to address environmental problems.
  • Some problems keep growing as income increases (carbon and nitrogen oxide emissions are current examples). Here, the costs of abatement are relatively high, while the costs of the damage are not yet perceived to be high—sometimes because they are borne by someone else. The key, once again, is policy. In most countries, individuals and firms have little reason to reform until the right incentives are put into place.

The chart does not imply an inevitable relationship between income levels and particular problems. Individual countries can choose policies that result in much better (or worse) environmental conditions than those in other countries at similar income levels, and technological progress has enabled countries in recent decades to develop in a less damaging manner than was possible earlier (see Chart 2).

Chart 1How environmental issues change with income levels

Source: World Development Report 1992, World Bank

Chart 2Yesterday’s problems need not be repeated

How technological change and environmental awareness have resulted in reduced soot and smoke emissions in the last two decades

Source: Shafik and Bandyopadhyay, background paper to World Development Report 1992, World Bank.

Note: Chart 1 is based on cross-country regressions for the late 1980s, and Chart 2 for the 1972-88 period. Per capita incomes are in 1985 purchasing power parity terms.

What does all this mean for how we should proceed in attacking the underlying causes of environmental damage? The Report concludes that two broad sets of policies are needed: those that seek to harness the positive links between development and the environment, and those that seek to break the negative ones. Chart 3 illustrates how these two sets of policies reinforce each other in the case of air pollution. Efficiency gains can reduce emissions considerably, but will never be enough to solve problems. New practices and technologies need to be adopted to counter the adverse impacts of growth on the environment.

Building on the positive links

Fortunately, many policies that are good for economic development and efficiency are also good for the environment. Examples of such “win-win” policies include:

Stopping policies that foster excessive resource use. Distorted prices—notably subsidized input prices—are downright harmful to development and the environment worldwide. In industrial countries, energy taxation is often skewed in favor of the most carbon-intensive fuels, especially coal (which is subsidized in Europe). In developing countries, energy subsidies cost $230 billion per year—about five times the total world volume of official development assistance. Estimates for Eastern Europe and the former Soviet Union (which account for three quarters of all energy subsidies) suggest that more than half of all air pollution would disappear if energy prices were simply raised to world levels. Other distortionary incentives include: logging fees such as those in a sample of five African countries that range from only 1-33 percent of the costs of replanting, and irrigation charges in most Asian countries, which cover less than 20 percent of the costs of supplying the water.

Clarifying property rights. When people have open access to forests, pasture land, or fishing grounds, they tend to overuse them. Providing land titles to Thai farmers has helped to reduce forest damage. Assigning property titles to slum dwellers in Bandung, Indonesia, has tripled household investment in sanitation facilities. Clarifying communal land rights in Burkina Faso has reduced soil erosion, and allocating transferable rights to fishery resources has checked the tendency to overfish in New Zealand.

Accelerating education and family planning programs. Better education is essential, as it enables the adoption of more sustainable practices in agriculture, industry, and household management and helps accelerate the transition from subsistence agriculture to intensive agriculture and off-farm employment. Providing increased access to education was found in Thailand to be the single most important policy for reducing pressure on the forests. Educating girls may be the most powerful long-term environmental policy in Africa and elsewhere; netting out other factors, a secondary education reduces the number of children born to a woman in Africa from seven to four.

Chart 3Air pollution In developing countries–three scenarios

Electricity generation from fossil fuels doubles every five to ten years in developing countries, while prices average much less than 50 percent of supply Costs. Raising prices gradually would reduce unnecessary waste in consumption, lower the rate of growth of pollution, and facilitate investment in cleaner technologies. Adding controls on particulates could reduce pollution per unit of oulput by 99.9 percent over the long term, with the savings from efficiency improvements outweighing the extra costs of introducing controls by a factor of more than ten to one.

Vehicle fuel taxes are low in developing countries (as they are in the United States) and congestion pricing is not much used. Economic reforms (gradually changing taxes to European levels and introducing a “Singapore model” of congestion pricing in larger cities) would have huge economic benefits and help to reduce pollution. But targeted policies—to encourage the use of unleaded fuels and emissions reduction more generally—would have a more decisive effect, and the costs would be a small fraction of the gains from efficiency reforms and improved health.

Source: World Development Report 1992, World Bank. (Anderson and Cavendish, background paper)

Accelerating agricultural extension and research. World grain production will need to grow annually by 1.6 percent over the next 40 years. This is considerably lower than the 2.5 percent a year achieved over the past 25 years. But many agronomists believe the coming years will be more difficult, as the scope for irrigation expansion and dissemination of green revolution techniques is reduced. Intensification must continue to provide the bulk of food increases, necessitating much better soil and water management and a continued expansion of fertilizer use. Technologies and practices already exist that would increase productivity in an environmentally sustainable manner, but applying them will require better training of farmers, better access to credit and infrastructural facilities, better managed and more accountable irrigation authorities, and the removal of price distortions against farmers. Agricultural research, which has declined in recent years, also needs to be reinvigorated at both the national and international levels.

Investing in sanitation and water supply. Given the enormity of the problem—1 billion people in the developing world are still without access to clean water and 1.7 billion lack access to sanitation—a growing number of governments are recognizing that the job is too big for the public sector. Many studies show that most people (even fairly poor ones) are willing to pay for these services if the quality is reliable (current tariffs cover only 35 percent of supplying water, so services are often poor). Numerous countries, such as Argentina, Chile, Cote d’lvoire, and Guinea, are also exploiting the skills of the private sector with great success.

Breaking the negative links

The policies and investments described above do not require a sacrifice in economic growth. But curbing other forms of damage—such as pollution from industry and deforestation—may involve such a tradeoff, at least in the near term. Addressing these problems requires that (1) the tradeoff be identified and costs and benefits of alternative policies assessed; (2) priorities and standards be set in the light of these costs and benefits; and (3) practical and cost-effective policies be designed to induce or force a change in behavior.

Assessing costs and benefits. Since the analysis in the 1950s and 1960s of hydroelectric projects in the United States, good progress has been made in incorporating environmental concerns into project analysis. But only a few governments have used such techniques to set environmental priorities and make decisions about policy tradeoffs. Moreover, not all countries can undertake this level of sophisticated analysis. Using estimates of the impact of pollution on health and productivity calculated in other countries can be a useful short-cut, coupled with simpler calculations based on domestic circumstances.

Some generalized results for pollution control include: particulate emissions from electricity generation and industry, which are a major cause of disease and cost little to solve (1-2 percent of capital costs), should be attacked vigorously everywhere; sulfur dioxide emissions, which cost much more to reduce and cause less damage in most places, are a lower priority; and lead emissions from transportation, which have very high health costs, should be reduced quickly in cities with dense vehicular traffic.

Generalizations are more difficult to make for protecting forests and natural habitats. The few serious studies suggest that the value of protecting forests to local communities and regions is often surprisingly high and the value of the land for agriculture is often lower than anticipated. Careful analysis can help clarify not only how much should be protected but also who should pay. A study in Cameroon found that protecting the Korup National Park was hard to justify in terms of narrow national interest, but easy to justify when worldwide benefits were taken into account.

Changing behavior. Such policies fall into two broad types: the “market-based” policies, which tax or charge polluters according to the amount of damage they do; and the “command-and-control policies,” which rely on quantitative restrictions.

Market-based instruments are best in principle, and often in practice, as they allow problems to be addressed by those polluters able to do so at least cost. To date the most widely used economic incentives have been indirect ones, ranging from fuel and vehicle taxes (in most industrial countries) and congestion charges (Singapore), to surcharges on potentially damaging inputs such as pesticides and plastics (Denmark and Sweden). More specific charges—such as the newly introduced carbon taxes in Europe, deposit-refund schemes for batteries (several European countries), hazardous wastes charges and performance bonds (under consideration in Bangkok), and surcharges on stumpage fees to pay for replanting (Indonesia)—are growing in importance.

Command-and-control instruments have acquired a bad name in recent years for their high costs and for stifling innovation. But in some situations, they may be the best instruments available. Where there are a few large polluters, as was the case in the industrial city of Cubatao in Brazil, the most effective means may be direct regulation. Another candidate would be managing land use in frontier areas.

Conserving scarce administrative capacity is an important consideration when choosing instruments. For developing countries, blunter instruments with fewer points of intervention will be attractive, as will self-enforcing incentives (e.g., deposit-refund and performance-bond schemes). Lessons from recent experience include:

  • Standards should be realistic and enforceable. Otherwise, the result is wasted resources, opportunities for corruption, and an undermining of the credibility of the program.
  • Controls must be consistent with the overall policy framework. Many well-intentioned policies have been thwarted by other policies pulling in opposite directions. Both China and Poland have had pollution taxes for years, but to no effect because state-owned enterprises were uninterested in profitability.
  • A combination of policies will often be required. Reducing air pollution from vehicles in Mexico City, for example, will require mandated emissions and engine standards, fuel improvements, and gasoline taxes.

Removing impediments

The principles of sound environmental management are not complex—but few governments successfully implement cost-effective policies. Political constraints frequently arise, and entrenched interests will always fight to retain the right to pollute. Better information, more effective institutions, and improved local participation can help remove such constraints.

Improving information. Governments often make decisions in the absence of even rudimentary information. Lack of knowledge in some areas—problems of soil depletion (especially in Africa), land productivity in and around tropical forests, and global atmospheric issues—is so urgent that it requires major international initiatives. Countries can reap large returns from investments in basic environmental data on exposure to emissions and unsanitary conditions, soil and water depletion, land capability, and forest and natural habitat loss. Independent commissions are proving to be a useful way for governments to draw upon technical expertise and depoliticize highly charged issues.

Enhancing institutional arrangements. In addition to the clear needs for better technical skills, adequate finance, and a clarification of environmental regulations, experience suggests four priorities. First, public agencies that carry out environmental programs, along with donors and aid agencies, need to be held accountable for the environmental impact of their activities. Second, governments need to develop the capacity to set priorities and monitor progress. No ideal blueprint exists, but a formal high-level agency for setting policies and ensuring implementation across sectors has been found to sharply improve environmental management in countries such as Brazil, China, and Nigeria. Third, where intersectoral decisions need to be made (e.g., management of water within a river basin, or protection of large populated forest areas), coordination is required. Finally, regulatory and monitoring functions need to be independent.

Involving local people. Neither governments nor aid agencies are equipped to make judgments about how local people value their environment. A participatory process is essential. Local participation also has high economic and environmental returns in implementing programs in afforestation, soil management, park protection, water management, sanitation, drainage, and flood control. Development projects that have not built upon the strengths of existing practices have often failed. Haiti’s reforestation program consistently floundered until small farmers and community groups were allowed to choose where and what kind of trees should be planted. The result: 20 million trees were planted on 75,000 family farms, instead of the originally targeted 3 million trees on 6,000 farms.

Costs of sustainable development

Policies and programs to accelerate environmentally responsible development will not be costless—politically or financially. Overall extra costs, many of which would add to employment and income growth, could amount to 2–3 percent of developing country gross outputs. These requirements, which could rise to $100 billion per year (in 1990 prices) by the end of the 1990s, would cover incremental costs for pollution control in energy and industry, and an expanded program of soil conservation, family planning and female education, forest protection, research, sanitation, water, and waste management.

While high in an absolute sense, these sums are modest in relation to the resources provided by economic growth. They are also much less than the potential for efficiency gains. The bulk of these investments will be paid by private and public enterprises responsible for the damage, and by the beneficiaries of improved environmental conditions. Even so, finance will still be required from private and official sources. Improved access to international capital markets will be essential, along with increased concessional assistance.

As for global problems, industrial countries must bear most of the costs of addressing them, especially when required investments are not in the narrow interests of developing countries. The industrial countries account for most greenhouse gas and chloroflurocarbon emissions and will benefit, along with developing countries, from the protection of natural habitats and biodiversity. The Global Environment Facility already exists as a mechanism whereby rich countries can support poor ones for undertaking necessary changes. It needs to be made permanent and expanded. But it is imperative that these grants, which represent compensation for costly local actions, not be diverted from development assistance programs.

The agenda for reform is a large one. Accepting the challenge to accelerate development in an environmentally responsible manner will involve substantial shifts in policies and priorities—not to mention high costs. But failing to accept the challenge will be more costly still.

Andrew Steer

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