Information about Europe Europa
Chapter

12 Concluding Remarks

Editor(s):
Ved Gandhi
Published Date:
June 1996
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Author(s)
Vito Tanzi

Let me conclude the seminar with two observations that are highly relevant to our discussions of the past two days and then with a few remarks on the future direction of Fund work in the environment area.

My first observation is that, as with any field of enquiry, we need facts before analysis and analysis before prescription and I am not sure that we have all the agreed facts or analytical tools or prescriptions as far as environment is concerned.

Facts. Facts regarding environmental issues are important and in the past few years we have certainly made a lot of progress in this area. The World Bank, together with NGOs and some other specialized institutions, has been instrumental in gathering and generating lots of facts about the environment, which all are essential. However, from time to time, one wonders whether the facts that we have on hand are really final facts or just transitory facts. As an example, we are told that electric cars are a solution for present-day transportation problems, but then we are also being told that electric cars would lead to an environmental disaster, because they would need large lead batteries, whose disposal would create greater problems than the problem the electric cars are trying to solve. We have to be certain about the facts before solutions to environmental problems can be presented with a certain degree of certainty.

Analysis. Except for very few countries like Norway, where serious work has been done, analytical work seems to be lagging behind facts. It may well be that the issues themselves are not precisely defined. As an example, what is the optimal basis for the taxation of environmental inputs? The truth is that, in many cases, we really do not know precisely the base on which we should apply an optimal environmental tax. We may have some broad approximation, which may or may not have much relevance (the United Nations is suggesting, for example, that we tax international airline travel as a way of achieving environmental improvement; however, the relationship between taxing airplane travel and the environment is not very clear). If we do not have a precise base that we should tax, we really do not have an appropriate environmental tax. So, in certain cases, the analysis is still at the very early stages.

Prescription. We should be hesitant to make strong prescriptions unless we are confident that our facts are right and that our analytical tools are correct. In many cases, as I have indicated, we should be hesitant to prescribe because we are unsure of the facts or the analysis. In many other cases, however, the institutions that have to carry out the prescriptions may be nonexistent. You can enact a prescription and pass a law, but if you do not have the institutions to implement the law, you cannot get very far. So, we have to make sure that the institutions are in place and that the rules will be implemented in the intended way.

My second observation relates to the reversibility of environmental damage and the role of technology in bringing it about, both of which we have not discussed in the seminar. After all, things do change over time. What may be an environmental problem at one stage (say, a beach that becomes polluted because construction material is being dumped into it) may reverse itself at a later stage when the government responsible for the beach can afford the cost of cleaning it up. So, if the environmental damage is reversible, and this relates to the sustainability issue, then maybe one can have policies that lead to some environmental degradation in the short run but that can be addressed in the medium to longer run. This, of course, also depends upon the availability of relevant technology to help solve these problems.

Let me now remark on the past and the future work of the Fund in the environmental area. We knew almost nothing about the environment four years ago but know quite a bit today, so there has been a gigantic jump in our knowledge of environmental issues. We had a similar experience when we started dealing with poverty. There was a time when the word poverty was almost unheard of in the Fund. Then we got concerned about it and began to worry about it. As time passed, this concern became quite broadly spread within the institution, so that now almost everyone, who leads a program mission to a member country, worries about the impact of the Fund program on the poorest 10 percent or 20 percent of the country’s population. I am sure that progressively, though slowly, we are moving in that same direction with regard to the environment as well.

A point that has been made frequently during this seminar is that the mandate of the Fund limits the Fund’s work on the environment as it is not the Fund’s main responsibility. In my opinion, there are certain things in the environment that we can do even now without having to go to the IMF Board or changing the mandate of the Fund. As we have discussed over the last two days, we know that environmental degradation and natural resource depletion can have an impact on macroeconomic balances and growth prospects of countries. As Fund staff become aware of these problems in the countries in which they work, I would expect that they, of necessity, would start taking into account the implications of these problems in their assessment of macroeconomic conditions as well as in their policy dialogue with the authorities of the country.

Let me give a few other examples of what we can possibly do. We have discussed today the work being done in Norway on the interplay between macroeconomics and the environment. Certainly, work of this kind could enter into the policy dialogue with our industrial country members where our role is mainly that of surveillance.

In developing countries, and economies in transition as well, where we are providing financial support for macroeconomic policy reform to help countries achieve sustainable external balances, we can encourage countries to take advantage of win-win opportunities for improving macroeconomic balances and the environment, through the adoption of sound economy-wide policies, such as price reform, subsidy reform, and liberalizing markets. We do recognize that such policies may interact with existing market, policy, or institutional failures for environmental resources. In such circumstances, the Fund staff could encourage the country authorities to adopt appropriate complementary environmental policies. Of course, such encouragement cannot and should not lead to “environmental conditionality.”

However, all of us must admit that the issues of environmental sustainability extend beyond the timeframe of the Fund-supported programs and it is not something that the Fund staff alone is capable of dealing with. Besides, we must respect the commands of our member countries, represented by their ministries of finance or central banks, that the Fund must remain a monetary institution. With regard to longer-term environmental issues, therefore, we will have to continue to rely on the World Bank and other specialized environmental institutions.

Regarding the role of the countries themselves, the point has been made here as well as in other fora, that the Fund prescribes structural adjustment policies, and, among other things, tells the country to cut its public expenditure on social services or the environment. It is important to stress that our member countries are completely independent and sovereign entities, and while we do negotiate the final objectives of the programs, it is left up to the country authorities to decide on how they wish to achieve those objectives. If they decide that they want to cut the public expenditure on social services or the environment, we can make some noises about it, but there is not much else that we can do. It is, and has to be, an internal political decision of the country as to what is finally done to achieve the program objectives. Incidentally, someone mentioned that a recent study by the Fund staff showed that social spending on education and health was not reduced in eight countries’ structural adjustment programs. In fact, a study of African countries, done by David Sahn of Cornell, also shows that structural adjustment programs led to little to no reduction in public expenditure on health and education, quite the contrary from what is normally believed.

In this connection, Cielito Habito suggested earlier that environmental projects should be insulated from cuts in public expenditures under the IMF-supported programs. Quite apart from the fact that this is essentially a decision for the authorities to make, as I said before, I see a possible problem with this approach: you open yourself to equal pressure from other groups. The environmental group is not the only group out there trying to push its objectives, you could get pressures from other groups, say, those who want to protect the spending for certain regions of the country, or for civil servants, for the aged, for defense, for sports and youth welfare, and so forth. So, one has to hope that the authorities themselves would be wise enough to decide upon the best allocation of the country’s resources.

Finally, I do not wish to minimize the problems of environmental degradation and resource depletion in many countries and we hope to be able to expand our work in the environment. There are, however, some constraints. The latest constraint is that the Fund has started reducing its staff at a time when a major activity of the Fund, surveillance, has to be expanded.

Participants

Knut Alfsen

Director of Research, Research Department, Statistics Norway, Norway

Philip Bagnoli

Research Associate, Brookings Institution

Peter Bartelmus

Officer-in-Charge, United Nations Statistical Division

Adriaan Bloem

Division Chief, Real Sector Division, Statistics Department, International Monetary Fund

Benedicte Christensen

Division Chief, Development Issues Division, Policy Research and Review Department, International Monetary Fund

Peter Clark

Division Chief, Economic Modeling and External Adjustment Division, Research Department, International Monetary Fund

Paul Cotterell

Deputy Division Chief, Real Sector Division, Statistics Department, International Monetary Fund

Wilfrido Cruz

Environmental Economist, Environment Department, World Bank

Herman Daly

Senior Research Scholar, School of Public Affairs, University of Maryland, Maryland, USA

Mohammed El-Erian

Deputy Director, Middle Eastern Department, International Monetary Fund

Salah El Serafy

Economic Consultant, Arlington, Virginia, USA

Nuri Erbas

Senior Economist, Middle Eastern Department, International Monetary Fund

Stanley Fischer

First Deputy Managing Director, International Monetary Fund

Ved Gandhi

Assistant Director, Fiscal Affairs Department, International Monetary Fund

Cielito Habito

Secretary of Socio-Economic Planning and Director-General, National Economic and Development Authority, Republic of the Philippines

Kirk Hamilton

Senior Fellow, Centre for Social and Economic Research on the Global Environment, University College London and University of East Anglia, UK

Stein Hansen

Director, Project for a Sustainable Economy, Norway; Partner, Nordic Consulting Group A.s.; and Senior Research Fellow, Fridtjof Nansen Institute, Norway

Ian Johnson

Assistant Chief Executive Officer, Global Environment Facility

Margaret Kelly

Deputy Director, External Relations Department, International Monetary Fund

Naheed Kirmani

Division Chief, Trade Policy Division, Policy Development and Review Department, International Monetary Fund

Malcolm Knight

Deputy Director, Middle Eastern Department, International Monetary Fund

Jim MacNeill

Chairman of the Board, The International Institute for Sustainable Development, Winnipeg, Canada

Ronald McMorran

Economist, Fiscal Affairs Department, International Monetary Fund

Mohan Munasinghe

Chief, Pollution and Environmental Economics Division, Environment Department, World Bank

David Nellor

Deputy Division Chief, Fiscal Analysis Division, Fiscal Affairs Department, International Monetary Fund

Kirit Parikh

Director, Indira Gandhi Institute of Development Research, Bombay, India

David Pearce

Director, Centre for Social and Economic Research on the Global Environment, University College London and University of East Anglia, UK

Ganga Ramdas

Assistant to the Executive Director, Office of the Executive Directors, International Monetary Fund

David Reed

Director, International Institutions Policy Program, World Wide Fund for Nature— WWF International

Emilio Sacerdoti

Division Chief, West Africa Division II, African Department, International Monetary Fund

Andrew Steer

Director, Environment Department, World Bank

Vito Tanzi

Director, Fiscal Affairs Department, International Monetary Fund

Michael Ward

Principal Economist, Socio-Economic Data Division, International Economics Department, World Bank

Ethan Weisman

Economist, Statistics Department, International Monetary Fund

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