. ,. .................I 1~2 Valui the Environment ail Serageldin z wnd~~rew Steer ors 1~dior Proceedings he First Annual International Conference on ¢RA Environmentally Sustainable Development held at The World Bank Washington, D.C. 'B September 30-October 1, 1 993 9~5~Z\ Environmentally Sustainable Development Proceedings Series No. 2 ESD Valuing the Environment Ismail Serageldin Andrew Steer Editors Alicia Hetzner Editorial Consultant Proceedings of the First Annual International Conference on Environmentally Sustainable Development held at The World Bank Washington, D.C. September 30-October 1, 1993 Environmentally Sustainable Development Proceedings Series No. 2 The World Bank, Washington, D.C. (C 1994 The International Bank for Reconstruction and Development/The World Bank 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing February 1995 Second printing March 1995 This report has been prepared by the staff of the World Bank. The judgments expressed do not necessarily reflect the views of the Board of Executive Directors or the governments they represent. Library of Congress Cataloging-in-Publication Data International Conference on Environmentally Sustainable Development (lst: 1993: World Bank) Valuing the environment: proceedings of the first annual International Conference on Environmentally Sustainable Development held at The World Bank, Washington, D.C., September 30-Octoberl, 1993 / Ismail Serageldin, Andrew Steer editors. p. cm - (Environmentally sustainable development proceedings series ; no. 2) ISBN 0-8213-2882-4 1. Economic development-Enviornmental aspects-Congresses. 2. Natural resources-Valuation-Congresses. 3. Sustainable development-Congresses. 4. Environmental protection-Economic aspects-Congresses. 5. Environmental policy-Cost effectiveness- Congresses. I. Serageldin, Ismail, 1944- . II. Steer, Andrew D., 1952- . III. Title. IV. Series. HD75.6.I577 1993 363.7-dc2O 94-22189 CIP Contents Foreword v Acknowledgments vi Overview 1 1 The Road from Rio 7 Introductory Remarks Sven Sandstrdm 9 The Rio Earth Summit: A Year Beyond Nitin Desai 10 Promoting Sustainable Development: Toward a New Paradigm Ismail Serageldin 13 Welcoming Remarks Lewis T. Preston 22 The Global Challenge Jacques-Yves Cousteau 23 Implementing Sustainable Development: The Green Belt Movement Wangari Maathai 27 2 From Concepts to Policy: How Valuable Is the Environment? 33 Optimal versus Sustainable Development Partha Dasgupta 35 Valuing the Environment: Past Practice, Future Prospect David W. Pearce 47 Discussant Remarks Anne Harrison 58 Dhira Phantumvanit 62 Robert C. Repetto 64 Andrew Steer 67 Floor Discussion 69 3 From Policy to Practice: Managing Water 73 Introduction Emil Salim 75 The World Bank's New Water Resources Management Policy Michel J. Petit 76 Managing Water: The French Model Ivan Cheret 80 Discussant Remarks: Poland Janusz Kindler 93 Brazil Roberto Messias Franco 96 Floor Discussion 100 Remarks Keith Bezanson 103 Managing Water: Pakistan's Experience Shams ul Mulk 105 Discussant Remarks: Egypt Mahmoud Abu-Zeid 116 Mexico Fernando J. Gonzdlez Villarreal 119 Floor Discussion 122 Summary of the Issues David Kinnersley 124 iii iv Contents 4 The Road Ahead: A Roundtable 127 Remarks Mohamed T. El-Ashry 129 Elizabeth Dowdeswell 130 Shri Kamal Nath 134 Discussant Remarks Kamla Chowdhry 139 Herman Daly 141 Saad Ibrahim 143 James MacNeill 146 Closing Remarks Ismail Serageldin 148 5 Appendixes 153 1 "Environmental Accounting: An Operational Perspective" Peter Bartelmus, Ernst Lutz, and Jan van Tongeren 155 2 Biographies 185 Foreword The First Annual International Conference on is worth the costs. This annual series of confer- Environmentally Sustainable Development ences is intended to make a contribution at all of (ESD) was held at the World Bank on September these levels. 30 and October 1, 1993. This annual conference Some of the papers in this volume are techni- series was inaugurated a year after the 1992 Rio cal and detailed. Others are broader in scope, Earth Summit and a few months after the estab- assessing where we are heading a year after the lishment of a new Vice Presidency for ESD Earth Summit. We hope all of the papers convey a within the World Bank. The purpose of the sense of urgency that changes are necessary. The annual conference is to bring together experts overarching theme of the volume is "valuing the and leaders from around the world to address environment"-in recognition that it is the failure how development might be made more sustain- to appreciate the importance of the environment able in practice. Making development sustain- that has led to such costly impacts on human able requires progress at several levels. First, in a health, ecological integrity, and economic pro- number of areas the conceptual framework ductivity. Water is chosen as a special topic as an remains weak. Second, much needs to be learned important illustration of this theme. with regard to the effectiveness of alternative The editors wish to record their appreciation policy packages to change behavior and improve to Alicia Hetzner for her invaluable assistance in living conditions. Third, capacity to implement a bringing this volume to publication. change in direction remains weak in many coun- tries and needs to be strengthened. Finally, citi- zens and political leaders need to be persuaded Ismail Serageldin that a better way of doing things is available, and Andrew Steer v7 Acknowledgments Holding the First Annual International Con- Morao, Elizabeth Morris-Hughes, Lourel ference on Environmentally Sustainable Devel- Morrison, Leila N'Diaye, Hugh Nees, James Noll, opment was a massive undertaking. The myriad Leo Paraskevas, Jan Post, Jane Pratt, Colin Post, tasks required unstinting commitment, detailed Felicia Quarcoo, Joseph Reinhard, Rebecca Russ, planning and coordination, and long hours of Joyce Sabaya, Luisa Sambeli, Rene San Martin, hard work by many people. In addition to the Alfonso Schneider, Aissatou Seck, Binetu Seck, presenters, who are listed in the table of contents, Mariam Seck, Saydeh Shammas, Lesley great appreciation is expressed to the following Simmons, Cora Solomon, Ann Stahl, Andrew people: Richard Barrett, Eveling Bermudez, Steer, Christine Stover, Alison Strong, Richard Beaulah Bhaskaran, Eric Borset, Deborah Sukhu, Burgess Taylor, Marie Tillman, Merrell Campos, Fleurdeliza Canlas, Maria Fernanda Tuck-Primdahl, Nicholas Van Praag, Luisa Cash, Anjali Chadha, Donna Clark, John Clyde, Victorio, Dayananda Weerakkody, James Wilson, Leandro Coronel, Benaifer Devine, Felicitas Wendy Wright, Magdalen Zee-Wu. Doroteo-Gomez, Al Drattell, James Duvall, For their work and cooperation in producing Elizabeth Dvorscak, Katrinka Ebbe, Barbara this Proceedings, the editors wish to thank Ann Eckberg, May Eidi, Arlene Elcock, Claire Evans, Beasley, Anjali Chadha, Beni Chibber-Rao, Chantal Fox, Catherine Golitzin-Jones, Catherine Benaifer Devine, Elizabeth Dvorscak, Barbara Guie, Alicia Hetzner, Dean Housden, Sarwat Eckberg, Mary Hack, Eileen Hanlon, Candace Hussain, Michele Iannacci, Arturo Israel, Joel Howard, Heather Imboden, Brett Kitchen, Nancy Israel, Vincent Jayasuriya, Mubina Hassanali Levine, James McKinney, Adoracion Morao, Kirmani, Kari Labrie, Pierre Landell-Mills, Guy Hugh Nees, Cheryl Powell, Venus Saljuki, Rene Le Moigne, Stephen Lintner, Eduardo Loayza, San Martin, Erika Schelble, Cynthia Somerville, Marian Mabel, Antonia Macedo, Matthew Saydeh Shammas, Tracey Smith, Christine McHugh, Cordell McKinley, James McKinney, Stover, Alison Strong, and David Theis. Micheline Mescher, Livia Mitchell, Adoracion vi Overview Ismail Serageldin and Andrew Steer The value of the environment has been under- streaming environmental concerns into the estimated for too long, resulting in damage to Bank's activity, clearly we are still on the steep human health, reduced productivity, broken incline of the learning curve. Picking up this social structures, and the undermining of long- theme, Ismail Serageldin outlines the World term development. This is now recognized, at Bank's fourfold agenda in seeking its role in mak- least in principle, by analysts and policymakers ing development environmentally sustainable: worldwide. But how can development be made 1. Assisting our borrower countries to promote more sustainable in practice? Some elements of environmental stewardship, through lending the needed shifts in policy are clear, and were laid and policy advice out and agreed by the world's leaders at the Rio 2. Assessing and mitigating any adverse impacts Earth Summit in 1992. Of course, finding the associated with Bank-financed projects political and social will to implement such poli- 3. Building on the positive synergies between cies is a different matter. Other elements of the development and the environment needed shift are less clear and are not yet agreed, 4. Addressing global environmental challenges, even in principle, by all policymakers. And in primarily through the Global Environment some areas, a good deal more research and evi- Facility. dence will be required before behavior and poli- But he argues for more than this. The way we cies are changed. The papers in this volume-all approach and address development problems presented at the First Annual International needs to change if we are to complete the transi- Conference on Environmentally Sustainable tion from a "development versus the environ- Development at the World Bank in September ment" world to an "environmentally sustainable 1993-attempt to take stock of where we are in development" world. Our measurement of pro- the journey toward sustainable development. gress needs to be enriched by recent research on They are divided into four sections. environmental accounting. We need to go deeper in implementing a "people-first" approach to The Road from Rio development, in which the empowerment of the powerless is central to our activities. And we The first group of papers is broad in scope. need to take issues of civic society and gover- Authors were invited to assess how much nance more seriously. progress is being made toward sustainability and Nitin Desai, Undersecretary General at the to describe what kind of new development para- United Nations responsible for overseeing fol- digm is required. In his opening remarks Sven low-up to the Rio conference, provides an assess- Sandstrbm notes the particular challenge for ment of progress a year later. He notes that the development institutions such as the World intellectual contribution of Rio lay not in its cov- Bank. Despite substantial progress in main- erage of the "classical" environmental agenda 1 2 Overview (important though that is), but in injecting devel- ownership at the community level. Although not opment into the environmental debate. Rio was aligned to any political party, an organization like essentially a political process, he notes. Agenda this can, by empowering communities to im- 21 did not attempt to explore intellectual frontiers prove their own futures, raise political activism but to push the political limits. At that level, for greater democracy and accountability in gov- progress since Rio is not so disappointing as some ernment. Industrial countries and international have suggested. In three of the four fragile agencies have potentially important roles to play ecosystems for which activity programs were in supporting such initiatives and ensuring that identified, there has been movement, as there has aid programs involve true partnerships with in the global conventions. The prospects for local communities. increased financial flows remain bleak, of course, and there are a number of research topics that How Valuable Is the Environment? need urgent remedial attention. In the keynote address, Jacques-Yves Two major papers addressed the principles and Cousteau weaves the context of the current envi- practice of economic valuation of the environ- ronmental crisis and suggests the kind of change ment. How does economic theory inform the in mindset that will be required to halt the dam- environmental debate? How advanced are tech- age. As a start, we need to understand the great niques for calculating environmental values? "divorce" that has occurred between humankind And how useful are they in the real world? Partha and nature. "Man the victim," a part of nature, Dasgupta argues that economic theory has not has become a manipulator of nature, with associ- received the respect or practice it deserves in ated privileges and responsibilities. The burden environmental literature. Too often the presump- for human beings now is to "invent from scratch tion is made that conventional economics has lit- a behavior that at the same time is biologically tle to offer in analyzing issues of sustainability. In acceptable and morally satisfying." While fact, for some time modern economic analysis has progress is being made, our moral codes do not offered a precise language for discussing the pri- yet penetrate our free-market economic system. vate and social management of environmental We urgently need to recognize that the real goal assets. He shows that the concept of sustainable of production is not the product but-as development, as commonly used, is too loose to Georgescu-Roegen describes it-an immaterial have practical application and, because of its sta- "fluid," the joy of living. We also need to recog- tic assumptions, can often confuse rather than nize in our actions the value of diversity. Recent enlighten practical policymaking. In contrast, the research in biology has taught us clearly the theory of "optimal development" offers a flexi- importance of species and genetic diversity for ble, disciplined ethical framework for analyzing healthy ecosystems. The same principles apply to resource management issues over time, in a man- cultural and ethnic diversity in promoting the ner that takes the welfare of future generations health of our society. fully into account. He shows that from this frame- Wangari Maathai, founder of Kenya's Green work can emerge appropriate discount rates Belt Movement, describes the lessons that have (which will differ according to circumstance), emerged from the Movement over the past two shadow prices of environmental assets, and decades, which may help guide other initiatives required adjustments to the national accounts. To designed to make development more sustain- the extent that we are confused as to what poli- able. The Green Belt Movement, a people-driven cies to adopt, it is the fault of poor data, lack of organization that supports tree planting and edu- knowledge of ecological process and of our own cation, especially among women, has succeeded values-not of a lack of a consistent framework first and foremost because it addresses the felt of analysis. needs of the participating communities: jobs, fuel- The paper by David Pearce takes stock of cur- wood, and an end to environmental degradation rent practice, primarily in developing countries, of the land. Afforestation programs, done cor- in calculating the value of environmental assets. rectly, can meet all of these needs simultaneously, Beginning with a survey of well-tested tech- and thus can engender remarkable support and niques for capturing the "willingness-to-pay" for Serageldin and Steer 3 water and sanitation services, Pearce shows how advantages of relying more on markets and pric- valuation techniques routinely influence invest- ing to allocate water among competing uses. ment decisions to improve services provided. Under its new policy the Bank is assisting coun- Newer approaches whereby the value of assets- tries in managing water at the river basin level, such as forests-that have both local and global establishing strong legal and regulatory frame- value are measured are also surveyed. Using the works for pricing and environmental protection, example of forest conservation in West Africa, the decentralizing implementation to local authori- paper shows that protection is socially desirable ties and autonomous entities, leveraging the ini- only when global benefits are taken into account, tiative and skills of the private sector, involving and when transfers are made from those who local users in decisionmaking, and adapting and benefit to those who have to forego benefits from adopting low-cost and efficient technologies. alternative land uses. Specifically, calculations of The summary of the Bank's new water policy the valuation of global benefits of carbon seques- is followed by presentations of the experience of tration in forests may well have a significant managing water in two countries known for their impact on international transfers in the years to leadership in this field: France and Pakistan. Ivan come. Finally, the paper discusses how valuation Cheret's paper on the French experience traces techniques increasingly are being used to adjust the evolution of water management over the past national accounts to reflect natural capital in a three decades. The 1964 Water Act was a mile- manner analogous to humanmade capital. While stone in French water policy. Spurred by the good progress has been made in recent years on sharply growing demand for water, coupled with national income adjustment, there is not much rapid urbanization and industrialization, the evidence that such exercises are yet influencing 1964 Act introduced the concept of water quality national-level policymaking. This will require objectives and established the river basin as resolving a number of technical disputes among the central unit of decisionmaking. Basin practitioners and developing simpler "short-cut" Committees (or water "parliaments"), which rep- methods of adjustment. An appendix to this vol- resent all public and private stakeholders, set pol- ume (by Peter Bartelmus, Ernst Lutz, and Jan van icy on both quality and quantity issues. Policy is Tongeren) draws upon recent World Bank- implemented by Water Boards, also correspond- United Nations work to provide a practical guide ing to the six major river basins of the country. to adjusting national income accounts for the Three instruments are available to the water par- environment. liaments in ensuring appropriate allocation and use: regulation, incentives, and dialogue. Econo- Managing Water mic instruments are widely used to combat waste and pollution, with carefully calibrated effluent Water resource management was selected as a and user charges supplemented by financial special topic to illustrate the importance and dif- assistance for investment in water saving and ficulty of recognizing environmental, health, and pollution reduction. Management of the water productivity values in making decisions about system is often delegated to private operators, allocation and use. No natural resource is more while the community or government retains vital for life than water, yet current use practices ownership of equipment and assets. The basic are not sustainable from either an economic or an law was strengthened in 1992 to enhance the environmental perspective. Michel Petit begins powers of local communities, establish a unified the section by describing the World Bank's efforts legal structure, and take into account new pollu- to improve water management through its new tants, especially from agriculture. Water Resources Management policy. Based on How applicable is the French system to other the Bank's experience of having lent more than countries' circumstances? This question is $34 billion for water development over the years., addressed in brief papers by Janusz Kindler for the new policy seeks to balance two considera- Poland and Roberto Franco for Brazil. Both of tions: the need for a holistic management these papers argue that the French model, with approach that gives due weight to longer term its emphases on stakeholder participation in factors and to protecting ecosystems; and the decisionmaking, public-private partnerships, 4 Overview river basin focus, and the use of a heterogeneous The Road Ahead package of regulations and incentives for quality and quantity control, is potentially strongly The volume ends with a series of statements applicable to their countries, although both made during the roundtable that concluded the papers note the political obstacles to introducing conference. Participants were asked to assess the such systems. prospects for real progress in the coming years A paper by Shams ul Mulk describes the evo- and to identify key issues requiring remedial lution of water management in Pakistan. As in action. The participants, all recognized leaders in France a major change in water policy occurred the field of sustainable development, included in the early 1960s, although for different reasons. Elizabeth Dowdeswell, Kamal Nath, Kamla In Pakistan it is the growing demand from irri- Chowdhry, Herman Daly, Saad Ibrahim, James gated agriculture that has dominated water pol- MacNeill, and Mohamed El-Ashry. Ismail icy. Beginning in the 1960s, green revolution Serageldin then made closing remarks. Among technologies, combined with increased irrigation the many insights shared, a number of common and chemical inputs, offered fourfold increases in themes emerged: wheat and rice yields. The Water and Power * First, while further progress is urgently Development Authority (WAPDA) had the task needed in applying valuation and other tech- of preparing comprehensive water plans and niques, we know enough to take action today. undertaking a massive series of investments in While we need to refine our understanding of irrigation and power generation. While this sys- sustainable development, we must not allow tem has been remarkably successful in enabling the intellectual stimulation of the exercise to dramatic increases in food production, weak- divert us from the action needed now. As the nesses-including weak financial sustainability, Zen proverb says, "After enlightenment, the inadequate participation of beneficiaries in pro- laundry" In this regard the action stemming ject design and maintenance, poor inter- from the Rio Earth Summit has been disap- provincial water allocation mechanisms, and pointing. inadequate attention to the ecological functions * Second, among the changes needed is the of water-have needed to be addressed in subse- forceful introduction of environmental values quent laws and policies. into the everyday incentives facing citizens, Two brief papers assess the relevance of the corporations, and policymakers. Charges, Pakistan experience to Egypt (Mahmoud Abu- taxes, and national income accounting need to Zeid) and to Mexico (Fernando Villarreal). Both reflect scarcity values of environmental and note a good deal of similarity in the piecemeal natural resources. As we strive to refine our development of policymaking in Pakistan, estimates of these values, the perfect should whereby the early push for investments in agri- not be the enemy of the good. cultural growth is followed by a recognition that * Third, while Rio brought the North and it could have been done better, and a growing South together in an agreement of potentially awareness of the importance of financial, envi- historic consequence, it is clear that real ronmental, and social sustainability of water progress will require much more "active lis- management. A final "round-up" paper by David tening" between and among nations. The Kinnersley notes that a common thread to the agendas of rich and poor nations are not papers on water might be titled "towards a new identical, and the trade-offs as well as coherence," whereby technical expertise in the the complementarities between economic design of water systems is supplemented by growth and environmental protection need environmental and social expertise. He identifies to be carefully weighed. A recognition of the the two factors that most seem to separate the disproportionate share of the global atmos- newer, more sustainable approaches from the pheric commons enjoyed by industrial coun- older crisis-ridden approaches as involvement of ties, and a willingness to pay for it, could be local stakeholders and a pricing system that a crucial way of financing investments in reflects water's true scarcity. developing countries. Serageldin and Steer 5 * Fourth, progress will require that what may to priorities and for designing solutions that will some seem obstacles to sustainable develop- work. A recognition of the role of societies in ment be turned into opportunities. For exam- managing natural resources and motivating ple, the globalization of the world economy, changed behavior is also vital. although carrying the prospect of social and * Finally, changing hearts and minds is as environmental damage, also carries prospects important as changing policies. Indeed, it is for benign technology transfer and the oppor- only through a much deeper appreciation of tunity for introducing principles and policies the urgency of the needs of today's poor and for environmentally responsible economic the potential threats facing the citizens of development. So, too, even the current short- tomorrow that the required policy changes ages of financial resources can be used to lend will be formulated, sustained, and enforced. force to the argument for a new approach. Economic values can help direct the needed * Fifth, the social dimension of ESD requires change in course, but ethical and moral values much greater attention. Listening to people is must provide the motivation. essential for ascertaining their valuation of Part One The Road from Rio Introductory Remarks Sven Sandstrom We all know that environmental issues are com- our 1993 fiscal year; we are assisting all our poor- plex and that we still have much to learn. At the est member countries with the design and imple- World Bank we are very aware of the steepness of mentation of national environmental action plans the learning curve and the importance of listening (NEAPs); and we are working with the United to and learning from our partners in the field. We Nations Development Programme (UNDP) and hope to make this First International Conference the United Nations Environment Programme on Environmentally Sustainable Development an (UNEP) to address international issues through annual event and thus benefit from bringing our strong support for the Global Environment together people from all over the world for an Facility (GEF). In short, environmentally sustain- exchange of views. The scheduling of the confer- able development is being mainstreamed into the ence immediately after the World Bank/Inter- Bank's overall work on poverty reduction. national Monetary Fund Annual Meetings is Our newly created Vice Presidency for quite deliberate. Our hope is that many of the eco- Environmentally Sustainable Development is nomic and finance officials attending the meet- building up our stock of skills and expertise, and ings will be tempted to stay on and participate in at the same time ensuring two-way communica- the important topics that will be debated here. tion with our colleagues outside the Bank. This The World Bank is first and foremost a devel- conference is an important part of the dialogue. opment institution, but experience has taught us Its main objectives are to: that development that does not safeguard the * Provide a forum for a candid exchange of environment will surely fail over the longer term. ideas among environmentalists, economists, Equally, programs for environmental protection social scientists, policymakers, and others on that exclude development also will fail. environmental strategies The main message of World Development * Take stock of where we stand a year after Rio Report 1992 was that promoting development and * Raise awareness and focus on priorities in line protecting the environment are mutually rein- with Agenda 21 forcing-with many "win-win" links between * Enable Bank staff to interact and listen to our the two. This was also the main message of the colleagues in other organizations and to share Earth Summit. lessons of experience and best practice. Working with our partners, the Bank has been The bottom line is not only to identify ways in following up on the consensus reached in Rio and which the Bank's work can more effectively pro- moving from words to action. For example: envi- mote sustainability but also to improve under- ronmental assessment is now integral to the standing among the groups who make up the preparation and the implementation of all the environmental community. Given the magnitude projects that we finance; lending for environ- and complexity of the environmental challenge, mental purposes is the fastest growing segment partnership is the key to progress-and this con- of our portfolio, amounting to $2 billion during ference is an important step in that direction. 9 The Rio Earth Summit: A Year Beyond Nitin Desai Let me try to place Rio in perspective. Many of us and farmers. A variety of processes led not just to share the concern that the drive and dynamism a statement of demands from such interest that was shown in Rio seems to be dissipating, groups and governments but to what is much that actions to implement what was agreed in Rio more interesting: commitments by these groups have not materialized. This may partially be a on what they need to do to pursue sustainable natural reaction to the fact that we are switching development: a business charter, the trade modes from focusing on policy development to unions' statement, and the statement that came focusing on policy implementation. Reviewing from the Farmers' Association in Reykjavik, the policy implementation can never be quite as local authorities, and others. exciting and attention-getting as developing Finally, Rio was a consensus-building process agreements among diverse nations. among nongovernmental organizations (NGOs) and But there is more to it. First, we should under- activist groups. It is essentially because of the stand what the Rio process was because, in my activities of NGOs, who represent the common view, process is as important as product. Rio was, interest at the field, national, and international above all, a consensus-building process. Consensus- levels, that this issue is on the political and deci- building among governments was the most impor- sionmaking agenda. These groups saw the Rio tant element, and getting that consensus-on a process as a vehicle to push the ideas and agen- program of action for sustainable development, das that they had been pursuing, sometimes in Agenda 21; the Rio Declaration; the Climate the wilderness, for many years. One of the most Change and Biodiversity Conventions, which interesting and exciting things about the NGO were signed at Rio-was the centerpiece of that process in Rio was how soon even the activist process. NGO groups switched from focusing attention However, Rio was much more than that, only on what they wanted others to do to what which is why it attracted attention. It also they themselves ought to be doing. involved the process of consensus-building in the The end product of this process, Agenda 21, is scientific community. We would not have had the a vast sprawling program of action with 40 chap- climate change treaty without the parallel process ters, 115 program areas, and 2,500 activities. We of consensus-building through the Intergovern- can group what governments talked about and mental Panel on Climate Change (IPCC) process. agreed around a few major themes. A similar process operated for the Biodiversity 1. One set of themes came from the classical Convention and Agenda 21. environmental agenda: management of toxic Rio was also a consensus-building exercise chemicals, hazardous wastes, and pollution among the non-state actors important in deter- management. This set was understandable as mining production and consumption decisions: an extension of an agenda that had been business groups, trade unions, local authorities, started much earlier in Stockholm and pur- 10 Desai 11 sued by the United Nations Environment of Rio, progress continues. We continue to make Programme (UNEP) and others. Rio must be progress in the climate negotiations, the biodi- seen as accelerating global action on common versity negotiations, and even in the Basel environmental problems. Convention on Hazardous Wastes. I am very 2.The hallmark of Rio is that it injected develop- hopeful that we will have a strong process on ment into the environmental debate, development chemical safety. In these areas Rio has helped not in a simplified, purely conceptual sense expedite actions that were underway and to but in terms of programs: for sustainable agri- secure commitment. culture, human settlements, cleaner produc- Although it is perhaps not an area of major tion technologies, and fresh water. concern, I do not yet see a real commitment to We subsequently did an exercise in which we pursue the other programs dealt with in the Rio asked a group of people to look through the pro- process that "appear" to concern national prob- grams of Rio and label them as developmental or lems. An artificial distinction sometimes is made environmental. Except for a handful of programs between national and global issues. Is forestry a that were clearly environmental, the group could national issue? A global issue? Is land manage- not agree on whether any particular program ment a national issue, a global issue? could be labeled clearly developmental or clearly In addition, little has happened regarding the environmental. This was the success of Rio: the commitments to implement the programs that extent to which it tried to integrate a classical dealt with objectives that are not purely environ- developmental agenda with a classical environ- mental but that include a developmental compo- mental agenda. nent. These are the programs that deal with the For example, Rio is not just a general call to critical issues relating to sustainability of con- address poverty. Rio and Agenda 21 attempted to sumption patterns; poverty; population; and integrate two different strands of developmental land, water, and forest resources in developing action. One strand focused on resources and the countries. programs for water, resource, and land manage- I am not saying that nothing has begun. In the ment. The other strand delivered assistance to four ecologically fragile areas identified in poor households to help them improve their Agenda 21-countries prone to decertification livelihoods. Both strands have existed for a long and drought, small island countries, coastal time in developmental programs. Agenda 21 areas, and mountain areas-strong processes for attempted to link these two programs by saying action have begun in the first two. These that if there is a program for rangeland manage- processes could crystalize many Agenda 21 com- ment in Africa, include in it a component that also mitments regarding land, water, and forest takes into account the Masai herdsmen and their resource management problems. livelihood. If there is a program for decertifica- There is also a lack of precision and clarity in tion management in the Sahara, then include in it the pursuit of one dimension of the means of the nomads who depend on the resources of that implementation: what was called technology desert for their livelihood. Conversely, if we tar- transfer, but which we now are thinking of in a get antipoverty programs, include in them a more complete way as including education, train- resource management component. This attempt ing, public awareness, technology development to integrate developmental and environmental and transfer, and science. All of these are essen- concerns is clear, for instance, in Agenda 21's dis- tial interventions in addressing the capacity of cussion of forests and fresh water. individuals, communities, and countries to cope 3. Another characteristic of Agenda 21 is that it with the problems of sustainable development. addresses the means of implementation. The two There is some movement in these areas, but much key issues are finance-providing assistance more will have to be done to give practical to developing countries to implement the expression to the commitments made at Rio. commitments which were included in I come finally to the issue of finance, perhaps Agenda 21-and technology transfer. for many countries one of the greatest disappoint- Where do we stand on these issues? Concern- ments of all. This issue took a long time to negoti- ing the narrow, purely environmental objectives ate at Rio, but the commitments have not come 12 The Rio Earth Summit: A Year Beyond forth. The picture for development assistance is example of an area in which we need a dramatic bleak. Fortunately, the reform of the Global shift in the way in the way we integrate projects, Environment Facility (GEF) is underway and programs, and plans at the field level. Much should be completed by December. But finance is more work needs to be done in methods of sec- partly tied to the lack of commitment on support- toral planning for land, water, forest manage- ing sustainable development projects and pro- ment, human settlement management, and for grams in developing countries. Looking ahead a industrial management. year or tvo, if I were to come back to this confer- The second, related area is the methods or pol- ence and have to repeat what I just said, we would icy instruments to realize these objectives. Plans have lost the opportunity that Rio presented. We are not implemented directly. A good agricul- still have time, and I do hope that specific finan- tural plan for an area will not get implemented cial commitments will be forthcoming. simply by drawing up that plan. Governments do Rio was essentially a political exercise. People not own that land. Governments do not take deci- describe Agenda 21 as a road map, but it is a road sions on what to do with the land. Many here- map with great uncharted territory around the pioneers like David Pearce, Partha Dasgupta, roads. It was not an attempt to explore intellec- Robert Repetto-have worked in this area. We tual frontiers. It was an attempt to push the polit- need to develop specific proposals on taxes, fees, ical limits of agreement, in which it succeeded. and charges, and on ownership and property Conferences such as this one can play an impor- structures. These changes are necessary to give tant role in filling out that uncharted territory, more practical expression to what has been stated which we will need to do if we are going to trans- in Agenda 21 about sustainable agriculture, late the commitments of Rio into action, on both forests, and human settlements. the programmatic and the finance sides. I want to mention expanding the boundaries of It would be invidious of me to suggest the pri- our analysis. We tend to think as economists, sci- orities for action, but I will mention two that entists, or technicians, but increasingly we feel strike me, as a former practitioner of the not- the need to integrate these disciplines. We need very-reputable art of economy-wide planning. people, for instance, in the area of climate change The first is the way we look at sectoral planning. who have enough science to be able to talk about We have inherited approaches to sectoral plan- carbon cycles, enough engineering to be able to ning that are very product-oriented: special pro- talk of energy efficiency, and enough economics grams for rice, for fertilizer development, for to talk about energy taxes. Where are such peo- pesticides. We have lost a focus on the area, the ple? Where are the research programs that bring ecosystem, the region, the farm. For this reason together such groups for this purpose? we end up with agricultural projects that fight I welcome the initiative of this conference and the local climate or local topography rather than look forward to substantial contributions from it working with them. Sectoral planning is one to fill out the uncharted areas in Agenda 21. Promoting Sustainable Development: Toward a New Paradigm Ismail Serageldin It is a privilege to be here with you at the First the destruction of our patrimony of natural Annual International Conference on Environ- resources. mentally Sustainable Development to discuss From the World Bank's point of view, how- the most pressing issues of our time, namely, ever, this does not translate only in terms of the how humanity will have to reassess its develop- protection of the pristine environment and the ment practices to promote the well-being of the conservation of the rare orchid, important as disadvantaged, the weak, and the poor while these may be. For us, it is very much about peo- respecting the limits of our ecosystem, both as ple. It is about recognizing the need to give to provider of materials and as sink for the wastes people the rights to clean air, clean water, and fer- of production.' tile soils. The starting point of my discussion will be the Today, such rights are denied to a vast part of consensus around environmentally sustainable humanity development that was dramatically manifested * One billion people live on less than a dollar at the Rio Earth Summit in 1992. My remarks day. therefore will be in two parts. * One billion people do not have access to clean First, I will sketch out what the Earth Summit water. in Rio achieved and what the World Bank has * 1.7 billion people have no access to sanitation. been doing since Rio. Second, I will address the * These three figures together result in two to more profound issues of the shift in the develop- three million imminently avoidable infant ment paradigm with which we are grappling to deaths a year. give meaning and substance to the idea of * 1.3 billion people, mostly in cities in the devel- Environmentally Sustainable Development. oping world, are breathing air below the stan- dards considered acceptable by the World Rio and the Ongoing Journey Health Organization. - Seven hundred million people, mostly Rio was very much a process, in which we women and children, suffer from indoor air learned about the interdependence that links us pollution due to biomass burning stoves that all as co-travellers on Spaceship Earth, and in is equivalent to smoking three packs of ciga- which we started to define the mutual responsi- rettes a day. bilities that we all have to one another, to future * Hundreds of millions of poor farmers have generations, and to the globe. At Rio people said difficulty maintaining the fertility of the soils enough to air pollution, enough to water pollu- from which they eke out a meager living. tion, enough to the problems of pollution on land To this stock of problems, we are adding a that are frequently accompanied by human de- flow of new challenges due to population growth gradation of unspeakable proportions. Enough of that averages 90 million persons a year. 13 14 Promoting Sustainable Development: Toward a New Paradigm Collectively, this means that, over the coming The Bank since Rio: A Fourfold Agenda generation, food production will have to double in ways that are less dependent on pesticides and Since Rio, and throughout this last year, the chemical fertilizers than we experienced in the World Bank has adopted a fourfold agenda that previous generation. It means that the cities of the can be summarized as follows: developing countries will have to cope with an 1. Assisting our borrowing countries in promot- increase of at least 160 percent over their current ing environmental stewardship sizes. Finally, it means that the management of 2. Assessing and mitigating any adverse impacts our natural resources should be done in a much associated with Bank-financed projects more thoughtful fashion than that practiced to 3. Building on the positive synergies between date, which led to the ravages and despoliation development and the environment with which we are all familiar. 4. Addressing the global environmental chal- Against this set of current and future chal- lenges. lenges, we, the citizens of the earth, have three major pieces of international legislation as refer- Promoting Environmental Stewardship ences: the Climate Change Convention, the Biodiversity Convention, and the Montreal Regarding assisting countries in environmental Protocol on Ozone. Of these, only the Montreal stewardship, the Bank is helping in the definition Protocol is operational with targets and funding. of strategies and is providing lending for environ- Much remains to be done to bring the other con- mental projects. About $2 billion were committed ventions to the same level of implementation, not last year alone for predominantly environmental to mention to tackle the other problems not cov- projects, bringing the total Bank portfolio of such ered by conventions. projects to $5 billion, up from almost none five Rio was a major step in achieving these years ago. More importantly, the Bank is increas- objectives. We can see the beginnings of addi- ing support to environmental management. This tional instruments being developed. There was last year we committed $173 million to support the adoption of the Rio Declaration on environmental management, bringing our portfo- Environment and Development. There was the lio of environmental management projects and adoption of a framework of principles for a project components financed so far up to about global consensus on forests. There was an $500 million. We are also assisting in the expan- agreement to negotiate a desertification con- sion and dissemination of knowledge. vention, and the Global Environment Facility But sound environmental stewardship is (GEF) was endorsed as an interim funding rooted in sound developmental and environ- mechanism for the two Conventions on Climate mental strategies, which must be based on prop- Change and Biodiversity. And, of course, there erly identifying the right priorities, and these are was the milestone adoption of Agenda 21 as the very much country specific. Is air pollution of a framework for global action on the environ- major priority? It depends where. In Mexico City, ment and development into the next century. it certainly is. Look at these stunning statistics: While far from guaranteeing success, or even 12,500 deaths per year due to high particulate lev- laying out the global consensus in operational els; 11.2 million working days lost; 140,000 chil- terms, these achievements are milestones that dren requiring remedial education linked to the we must take as the starting points for further lead levels; and 46,000 adults who suffer from action if the dreams and the opportunities that hypertension, of whom at least 330 die every year. seemed so close in Rio are not to disappear from So, for Mexico, air pollution is a priority. Thus our grasp. it is a problem that the Bank is working on with They are milestones along the road that we the Mexican authorities, supporting their efforts have traveled together and we must continue to with a $280 million loan for dealing with air pol- travel together. lution in Mexico City. But it is not the only prior- One can rightly ask, therefore, what has the ity for Mexico's environmental authorities, and at World Bank been doing since Rio? the last World Bank Annual Meetings held in Serageldin 15 September, 1993 in Washington D.C., an impor- and farther afield all the time. The solutions all tant agreement was signed between Mexico and involve empowering women. This means that the Bank that provides up to $1.8 billion in Bank investing in people, in human resource develop- financing for environmental projects over the ment, must pay special attention to girls' educa- next three years. tion. Girls' education is probably the single most The key point is that environmental priorities important measure that we can adopt to promote will vary from country to country, and the Bank both development and sound environmental pol- should stand ready to assist each with its particu- icy over time. lar problems. Beyond air pollution, other forms of Investment in people must also include pop- pollution could be a major priority in some of the ulation programs to recognize the pressure that cities of the developing world. There is possibly the global population is putting on all of us, and disposal of toxic wastes in parts of the former these must be accompanied by the provision of Soviet Union. In Niger it could very well be the maternal and infant health care. problem of overgrazing. But whatever it is, the for- The efficient management of resources is the sec- mulation of these strategies, we believe, should be ond leg of the win-win strategy. Just how ineffi- the result of a consultative participatory process in cient the current management of resources the countries themselves. This is how we hope actually is can be quite striking. Sadly, a large that the National Environmental Action Plans part of this mismanagement is induced by gov- (NEAPs), which are now being promoted in many ernment policy. Energy subsidies in the develop- countries, will be done. ing world account for $230 billion a year. That is four to five times the total volume of Official Assessing and Mitigating Adverse Impacts Development Assistance (ODA) going from the North to the South. That is environmentally The second point of the fourfold agenda is unsound, economically unsound, and wasteful assessing and mitigating adverse impacts where of resources that could be going towards other they occur, and that includes environmental and uses. social assessment, as well as economic assess- Likewise, many of the subsidies that exist ment. The Bank has published much on environ- today are, in fact, for extractive and destructive mental assessment procedures so I will not go industries. In the case of logging, for example, into detail on this point. It is well known and well average stumpage fees are a fraction of the cost of understood. reforestation. Among African countries sampled in 1988, the best example recouped less than a Building on 'Win-Win" Strategies quarter of the cost of reforestation, while the worst recouped about one percent of the cost. So Conversely, I would like to dwell on the third subsidies were going to private loggers whereas, point of the fourfold agenda: building synergies in fact, the full restitution to the public commons between development and the environment. The was not taking place. key is the recognition that proper development helps environmental protection and vice versa. Addressing Global Challenges This is the "win-win" strategy It is, to my mind, the most promising area to focus on. There are The fourth point of our fourfold agenda is two parts to this item of our fourfold agenda: addressing global challenges. We have to recog- investing in people and promoting the efficient nize that national activities do have global payoffs use of resources. and that this is an area in which much can be done Investing in people is particularly important. to promote the global agenda from a national sov- Let us recall that it is the poor who suffer the most ereignty decisionmaking framework. There are, from environmental degradation, especially of course, global activities recognized as such, women. When drought hits, it is the poor who and it is for these that special instruments like the suffer. Women are responsible for getting water, Global Environment Facility (GEF) have a special just as they have to gather fuelwood from farther and crucial role to play. 16 Promoting Sustainable Development: Toward a New Paradigm Among these national activities that have address the disparities between the North and the global payoffs is the use of renewable energy South. It is important to remind ourselves, as the sources such as solar or wind and the recycling of UNDP's 1993 Human Development Report did so waste. All of these are local activities that have a eloquently in the now-famous "champagne profound global impact. glass" graph, that the richest 20 percent of the On the global side, the GEF has been desig- world receive about 83 percent of the world's nated as the interim funding mechanism for the income. The poorest 20 percent of the world Climate Change and Biodiversity Conventions. It receive 1.4 percent. This is a huge disparity, both is also likely to come into its own as a promising in consumption patterns and in pollution. For the instrument of international cooperation, prefig- average of the poorer 80 percent (not just the poor- uring the international cooperation between the est 20 percent) versus the average of the richest 20 North and the South and the intensive collabora- percent, the figures are the following. The average tion of the different agencies of the UN system. person in the South consumes about 70 percent of Clearly, the current negotiations for the replen- the calories, 58 percent of the proteins, one-third ishment of the GEF will be arduous, and many of the fat, and about 6 percent of the paper, 9 per- issues remain to sort out, but with goodwill and cent of the steel, and 8 percent of the energy, that dedication it is the fervent hope of all concerned the average person in the North consumes. that these will be fruitfully concluded in the near This means that energy consumption is twelve future. times as high for each person in the North as for However, when talking of global issues, we each person in the South. What this argues for is must go beyond those covered by the GEF or the not just sound strategies for people in the South, current conventions. We should also address the but certainly for looking again at the consump- population issue. I do not think that we can envis- tion patterns in the North. I do not necessarily age a world population growing at the current mean going back to the horse and buggy days. rate without serious strains to the links between Switzerland, which by no stretch of the imagina- people and their environment, not to mention tion is a deprived country, has a per capita water problems of carrying capacity in some ecosys- consumption that is about one-fifth of the United tems. Yet, whichever scenario we choose- ither States. On energy consumption levels, the differ- the base case scenario or the rapid decline sce- ence between Switzerland, or Japan for that mat- nario-we seem to be destined to have at least ten ter, and the United States is also about one-half. billion people on the globe, almost twice as many The per capita consumption of energy in Brazil, as we now have today, by the end of the next cen- China, Costa Rica, or India is a very small fraction tury. And the great bulk of these new billions of of that. The per capita consumption issues must people, will be in the developing countries. be looked at as well, and these argue for changes Beyond the numbers, there are issues related in the patterns of the North as much as they argue to population dynamics. In the developing for sound practices in the South. world, we are talking about new household for- If we think in terms of the global commons, mation. People will be coming into age groups and the contribution on the debit side, in terms of that will be demanding jobs in the marketplace, pollution and the use of the environment as a generating economic activity, and creating more "sink," contribution in terms of CO2 emissions, or stresses on the environment already affected by in terms of global waste production and pollu- the patterns of settlement and activities of a tion, then, of course, the disparities are also very rapidly expanding population. Therefore, coping large. India's per capita contribution of average with the root causes of high fertility becomes annual tons of carbon emitted into the atmos- absolutely essential. I will say again that the only phere is very small compared to Canada or the way that we will have a major impact on these United States, and this is true of most developing issues is through the empowerment of women at countries, except for the former Soviet Union, the grassroots. where levels are relatively high because of the In parallel to talking about these global popu- nature of their industrial activities. lation challenges, we have to talk about consump- Such disparities would encourage us to think tion; and if we talk about consumption, we must in terms of tradable permits. Low income coun- Serageldin 17 tries with a large population could trade permits cerned about an operational definition to guide based on proportional population rights to use individual investment decisions. environmental services (both to consume and to For us at the World Bank, the idea of Environ- pollute) with some of the richer countries. While mentally Sustainable Development (ESD) finds this is not currently on the agenda of interna- its expression in a triangle, which, not by coinci- tional negotiations, there is something there for dence, is also the logo for the ESD Vice- us to reflect on. Presidency. This triangle recognizes that whatever we are Equipping Ourselves for the Task talking about in terms of sustainability has to be economically and financially sustainable in terms To build capacity to deal with this fourfold of growth, capital maintenance, and efficiency of agenda, we are seeking to equip the Bank better use of resources and investments. in terms of staffing as well as procedures. But But it also has to be ecologically sustainable, more importantly, we are trying to cooperate and here we mean ecosystem integrity; carrying with the international community, international capacity; and protection of species, biodiversity, agencies, bilateral agencies, governments, NGOs, and natural resources. Ecological sustainability is and academicians, to enhance our understanding the domain of the biologist, the physicist, and the of the issues, improve the quality of our work, chemist, not so much that of the economist and share our experiences, and enable us collectively the financier. The units of measurement are dif- to do better for all of us everywhere. ferent, the constructs are different, and the rea- soning is different. Beyond the Tasks-A Paradigm Shift However, equally important is the social side, and here we mean equity, social mobility, social But what we are really concerned with is not sim- cohesion, participation, empowerment, cultural ply how many dollars have been provided in this identity, and institutional development. The last year, but how we understand the shift that is social dimension is the domain of the sociologist, beginning in the way in which we deal with the the anthropologist, and the political scientist. It is, business of development. In this sense, I would to my mind, an essential part of the definition of like to go back to defining Environmentally Sustain- sustainability, because, let me remind you, the able Development (ESD) for the Bank and for all of neglect of that side leads to institutions that are us who are working at this task at the World incapable of responding to the needs of society. In Bank. such cases, societies become dysfunctional and We all start, I think, like everyone else, with are incapable of mediating internal disputes and the Brundtland Commission's definition, which claims of different social actors. In extreme cases, is that sustainable development is development societies disintegrate, as we have seen in Somalia, that meets the needs of the present without jeop- in the former Soviet Union, in the former ardizing the ability of future generations to meet Yugoslavia, and in Zaire. In such circumstances, their own needs. As the Brundtland Commission when societies have neglected that social part of recognized, we have a question about the issue of developmental sustainability, there is no possi- needs. Needs are fairly straightforward when we bilitv of talking about either environmental pro- are talking about the people who live on less than tection or sound economic development. This a dollar day and who have no access to clean social issue is one that I will come back to more water. Needs are less clear when we are talking than once. about the household with three cars, four televi- The World Bank is known as an economic sions, and two VCRs. These households obvi- institution; therefore an economic outlook is likely ously also have needs, but the extent of what to be confronted when addressing the non-eco- these "needs" comprise is not clear, and the defi- nomic issues. Here it is important to highlight the nition of needs is not as sharp and clear as it was limitations of such an approach and to give the in discussing the poorest of the poor. non-economic disciplines their due. For even if Second, the issue of technology and social you look at the same triangle, now with the eyes organization becomes important if we are con- of the economist, and we reduce the economic 18 Promotitng Sustainable Development: Toward a New Paradigm objective to growth and efficiency, the ecological look at physical accounting, as Karl-G6ran Maler objective to natural resource management, and and others have advocated, stock and flow analy- the social objective to reduction of poverty in sis as well, but we surely cannot capture every- terms of some number of people below a poverty thing and boil it down to a single number, no line and equity in terms of income distribution- matter which methodology will be adopted, and even this reductionist view poses problems. On it would be a mistake to try to do so. the link between the economic and social objec- As we move "from policy to practice," we tive lies some of the most controversial parts of must bring to bear that holistic viewpoint to look current economic policy: targeted interventions, at the way of dealing with different issues: water, income distribution, employment generation, land, air, species. Take the issue of water. Water subsidies. On the economic-ecological link lies has to be recognized both as a basic need and a some of the most recent, cutting edge work being scarce resource. Water is now looked at in a frag- done by the people who will be addressing the mented way-by agriculturists as irrigation, by session on environmental assessment, valuation people in the municipalities as water supply and of natural resources, internalization of externali- sanitation, by environmentalists in terms of ties, and time and discount rates. water quality and natural resources. This frag- It is most appropriate, therefore, that our first mented set of views has led to an inadequate concerns in dealing with the ecological-economic management of water resources and to scarcity of link should address national income accounts, clean water in locations of need as well as to pol- time and discount rates, uncertainty and risk, and lution and degradation of natural river systems. internalizing externalities. Again, these shortfalls primarily affect the I emphasize on national income accounts poor, who have no access to clean water. It because they have been given an undue attention impacts also on sanitation, both as an input and in many international discussions. They are an output. We need to change this fragmented important, but they are only one measurement of way of dealing with the problem, to think of reality, and a fairly faulty one. As they now stand, water systems holistically, to think of entire river national income accounts give no value to a for- basins such as the Indus River or the Nile, to think est standing up. If it gets cut down, it contributes about how to manage this scarce resource in an to national income accounts. But we at the World effective way to be able to plant the trees of Bank, with colleagues elsewhere, have made a tomorrow, to efficiently irrigate the crops of significant effort to try to introduce environment- tomorrow, and to provide treated water to all so ally adjusted national income accounts. that the next generation will have access to clean Two key studies were made, one for Mexico, water for all their lives. one for Papua New Guinea (PNG). The PNG study is particularly relevant in the sense that if we go The Social Dimension: Putting People First from a GDP set at a hundred in the conventional way, through various rounds of adjustments, to a But let me return to that famous triangle, that tri- net environmentally adjusted domestic product it angle which is our logo, because I believe that in turns out to be 84. That difference of 16 points is all of the intense discussions on water or other relevant because for four out of the five years for issues, we do not pay enough attention to the which this calculation was made, local consump- social side. I would like to address the social side tion was significantly higher than that 84, which today because, for me, the social dimension, may imply that national natural capital was being putting people first, has to be at the heart and the depleted and counted as an income stream. It may core of any developmental activity. There is no or may not have been the case, but it clearly calls possibility of dealing with environmental issues for more thorough analysis. without addressing the social dimension. Whatever the real story is, I would like to point By social I mean focusing on the well-being out that what we have now is inadequate, and that and empowerment of people. Take, for example, whatever we do, no single number will be suffi- the issue of indigenous peoples. Nineteen hundred cient. We may have to look at wealth accounting and ninety-three was the United Nations as well as income accounting. We may have to International Year of the World's Indigenous Serageldin 19 People. We tend to think of indigenous people as vices-credit, extension, training-that increase living in harmony with nature, but the fact is that the returns to the assets held by the poor, starting in many countries they tend to be oppressed with their labor. minorities. They tend to have problems of land That this can be done at the level of the poorest tenure, they tend to live in massive poverty, and of the poor has been effectively and convincingly we must dare to address the aspects of their real- demonstrated by several important examples, ity, not just the cultural aspects, important as notably, the Grameen Bank of Bangladesh. these are. We must recognize that their culture The Grameen Bank serves the needs of the enriches us all but that at the same time they need poorest of the poor on this planet. The landless to be empowered to live the kind of decent life rural women of Bangladesh account for the vast that we take for granted. bulk (93 percent) of the bank's approximately 1.5 When we talk about social issues, we must, of million borrowers, and they are also its owners. course, go back to the issue of the role of women. The Grameen Bank lends US$20 million each No matter how many times we say it, it is not month and is working in 32,000 of the 68,000 vil- enough because certainly not enough is being lages in Bangladesh. The bank provides loans done. Women in many parts of the developing averaging $100 and enjoys a repayment rate aver- world are not receiving adequate education and aging 98 percent-far better than most "develop- are being massively discriminated against. ment banks" lending to entrepreneurs in the Amartya Sen, sturned us all with an essay that developing countries. The success of the he called "More Than 100 Million Women Are Grameen enterprise is a lesson that the most Missing!"2 By calculating the human cost of dis- insurmountable obstacles yield to determination. crimination against the girl child, it was found It is a testimonial to what confidence in the that, in fact, 100 million young girls had died in empowerment of the weak and the marginalized infancy due to inadequate care vis-a-vis boys. can achieve. We have to empower women, both by edu- Not only do the Grameen borrowers repay cating them and by giving them access to assets, their loans, they prosper. One follow-up study has credit, and other tools of increasing the returns on shown that most Grameen borrowers take addi- their labor as has been done by several organiza- tional loans after repaying their current loans and tions such as the Grameen Bank. improve their income levels by about 35 percent a Education, again, remains the tool that over year. More importantly, the Grameen Bank assists time will be the most essential instrument of its members in finding self-respect and dignity change. Not surprisingly, we have found that and in becoming agents of development in their education of girls correlates closely with civil lib- immediate communities. Grameen members erties in society. Therefore, the structure of civil adopt a 16-point self- and community-improve- liberties will become particularly important in ment program, which appears to be highly effec- promoting the social side of the triangle. tive. Grameen provides additional services to its This brings me to the core of what I have to say members, including some insurance for decent about the issues of social development: the issue burial and exceptional assistance through mutual of empowerment. Empowerment is to reach the support in times of personal or family crises. In an poor and the marginalized of society: the poor area in which most government programs have farmers who live on marginal land or small- failed and in which few NGOs have succeeded in holder agriculture throughout the world, the expanding the scale of their operations, Grameen, unemployed and the dispossessed among the banker to the poorest of the poor, is a signal suc- urban poor, the mother and child among the poor. cess deserving recognition and praise. It is to reach all of them and give them the oppor- Some argue that Grameen's operations, or at tunity to take charge of their own futures, not just least its programs for expanding its network, are to have a say about it but to take charge of their not viable without a slight subsidy Whatever the own destinies. merits of this argument, one can think of few more Empowerment is not an abstract notion. It deserving avenues for spending public and inter- means giving access to assets to those who have national funds than supporting Grameen-type no assets, and it means providing access to the ser- operations and other such deserving enterprises. 20 Promoting Sustainable Development: Toward a New Paradigm The Civil Society munity is a far stronger explanatory variable than the structure of the economy of the regions to pre- How do we relate these issues to the problems of dict their institutional performance and socioeco- governance and developmental performance, nomic development. which we intuitively feel are all interrelated? The It seems clear, therefore, that a strong, dense, answer is to look at the problems of the civil soci- horizontally structured civic society of voluntary ety, and its key constituent building blocks, the associations is very likely to promote good gov- structures of the civic community. ernance and nurture sustained socioeconomic In a landmark study presented in Making performance. Development partners would be Democracy Work: Civic Traditions in Modern Italy, well advised to nurture a strong voluntary civic Professor Robert D. Putnam of Harvard community to promote sustained development University and colleagues have made a convinc- over the long term. ing case that the existence of civic community is What can we do then about this? As develop- not only the precursor and guarantor of good ment institutions, I think we should support not governance but also the key to sustained socioe- just development in the broadest sense but the conomic development.3 civil society. Strong civic community is defined as a pre- To promote the civil society, as development ponderance of voluntary horizontal associations, in institutions, should be willing to promote partic- contrast to hierarchical vertical associations, and the ipation in the operations we finance in the coun- density of these voluntary horizontal institutions, tries where we are engaged in a developmental throughout the society. A matrix of voluntary dialogue with the authorities. Promoting effec- horizontal associations is found in prosperous, tive participation will promote not only more rapidly developing northern Italy while the less effective implementation of the operations being developed, less effective south of Italy is charac- financed but also community building among the terized by autocratic vertical institutions. poor as an instrument of change and as a foun- But which is cause and which is effect? Does dation for the future. This can be done. There are the north of Italy have a dense network of hori- many such community-based organizations or zontal institutions (choral societies, soccer clubs, associations that need our support. They are parent-teacher associations) because it is rich and found at the village level, among fishermen's can afford them? Or is it rich because it has good, groups, or herders, associations. Sometimes, they responsive government nurtured by long-stand- are highly organized local development associa- ing citizen involvement in many such voluntary tions, as in the Republic of Yemen, for example. horizontal institutions? Putnam and his col- There are endless community possibilities that leagues went back to data from the nineteenth need to be supported and invigorated. and the beginning of the twentieth centuries, when the socioeconomic structures and levels of Governance development were similar in some northern provinces and some southern provinces but the In addition, of course, the World Bank as an insti- horizontal and vertical slants of their civic associ- tution can help in dealing with the framework ations were differentiated. They tested the within which these institutions exist thus raising hypotheses as to what best explained the the overall question of governance. We can pro- observed socioeconomic structures and civic mote good governance by promoting trans- institutional structures of northern and southern parency, accountability, pluralism, participation, Italy in 1970, when the Italian government aban- and the rule of law. For between good governance doned its 100-year-old centralized administration and civic associations, there will be good and and created twenty virtually identical regional responsive institutions. There will be involve- governments, and what would best explain their ment of local communities capable of creating disparate performance today, twenty years later. institutions that do not unravel, that do not lead The results of their research are compelling. to the loss of that third corner of the triangle, the They indicate that the prevalence of civic com- social dimension. Serageldin 21 Toward a New Paradigm women who are carrying the burden of this con- tinuing degradation and discrimination. We need For us, therefore, the issue is not just a matter of to do it for the future generations for whom we nuts and bolts. It is a profound matter of dealing are stewards of this globe, and-dare I say it-we with a paradigm of development. It is a profound need to do it for Mother Earth herself. matter of recognizing that we should leave behind the dichotomies between development Notes and the environment and think in terms of envi- ronmentally sustainable development. This shift 1. This presentation was supported by a series of slide's. is required if there is to be real progress. Progress 2 Amartya K. Sen, "Women's Survival as a Develop- is always accompanied by paradigm shifts that ment Problem" (Comments prepared for the 1700th seem somehow difficult and dangerous at the Stated Meeting of the American Academy of Arts and time that they are envisaged. We need to promote Sciences, March 8, 1989); Sen, "More Than 100 Million a paradigm shift in the way we think about devel- Women Are Missing," The New York Review of Books 37 opment, towards thinking holistically about (20) (December 20,1990): 61-66. envirnmentlly sstainble dvelopnent.3. Robert D. Putnam (with Robert Leonardi and environmentally sustainable development. Raffaella Y Nanetti), Making Democracy Work: Civic Tra- We need to do this for the poor and the mar- ditions in Modern Italy (Princeton: Princeton University ginalized of the world. We need to do it for the Press, 1993). Welcoming Remarks Lewis T. Preston I have two things to do this evening. The first is My second task tonight is to introduce the to welcome all of you to this conference. Over the conference's keynote speaker, Jacques-Yves last several years, the Bank and almost every- Cousteau. I met him for the first time at the Rio body else has recognized that there can be no conference and like everybody else was capti- development unless it is environmentally sus- vated by him over a delightful lunch. The phrase tainable. "ahead of his time" comes to mind. For more than This is just not the flavor of the month. The fifty years, he has been a leading spokesperson concept of sustainability is integral to everything for the protection of the global environment and we are trying to do: poverty reduction, growth, underwater world. Through his numerous and improving the quality of people's lives. books, films, and public appearances, he has been The Bank's commitment is unequivocable. witness, conscience, and catalyst on sustainabil- Lending for environmental purposes is now the ity issues. fastest growing segment of our operations. And it When Ismail Serageldin confessed to me that is a priority concern in all our programs from our he was planning this event, he told me he was new work in the West Bank and Gaza to our more looking for a keynote speaker who would be rec- traditional work in Sub-Saharan Africa and South ognized the world over for his technical expertise Asia. So we hope this conference can become an and at the same time would serve as an inspira- annual event. I also hope it can become an impor- tion to the conference. I said, "Good luck" and tant dimension of the Bank's effort to be open, to told him that finding such a person would not be listen, and to learn. We value your contributions. easy, but he has done it. 22 The Global Challenge Jacques-Yves Cousteau The purpose of my remarks is to stress the posi- fundamental biological laws. This rebel- tive or negative relationships of the environment lion is the essence of man's destiny; it is today with the principles of market economy, the honor of our condition. It gives new with moral values, with thermodynamics, as well meaning to our life, but it is clear that one as with biology What we human beings are all cannot refuse the norms of life without living now, whether we are volunteers or not, is taking serious risks. The most striking an extraordinary, but exceptionally dangerous, example is the demographic imbalance adventure. And we have a very small number of that we have created: hygiene and medi- years left to fail or to succeed in providing a sus- cine, the very expressions of our splendid tainable future to our species. refusal of our natural, biological situa- Our life has become an adventure because- tion, have almost tripled the average as Jean Hamburger, president of the French human life expectancy so that on a planet Academy of Sciences, described so well-after whose treasures are limited, the popula- three million years of hazardous existence, "man tion has grown and continues to grow the victim," who had no weapons and no protec- incredibly fast.' tion to survive in very rough natural surround- ing and was forced to submit to the harsh laws of That explosion is due to the fact that our new the jungle, resented his own precariousness. As set of anti-natural values- generosity, solidarity, soon as he settled in communities and felt safe pride in our first medical victories over tradi- from all natural dangers, he divorced from nature tional evils-had been enthusiastically applied and decreed his own rules. We wanted to respect long before we developed their logical counter- individuals. We haughtily refused sickness, pre- part, birth control. Our lack of synchronism mature death, and natural selection that had war- between part and counterpart shows that we ranted for 30 million years a quasi-miraculous have been very slow to understand that our rev- demographic equilibrium among the innumer- olutionary new course, replacing harsh natural able living species. We seek justice, while the rules by our own ideals, implied new duties and story of life was built on the disparity of the perils. From victims of nature, we had to become chances of each creature. relentless protectors of nature. This breach of contract with natural, proven We have not yet fully realized that our recent standards is extremely recent, maybe only 10,000 divorce from nature is irreversible. Our ancestors years old, and was probably at the origin of long ago burned the bridges. This implies for morals. As Jean Hamburger wrote: modern human beings the overwhelming burden to invent from scratch a behavior that is at the Then, with humans, the spirit blew for same time biologically acceptable and morally the first time-a spirit of revolt against satisfying. Some of these new duties have been 23 24 The Global Challenge fulfilled already by our democratic world: the prises to homes so that everyone gets richer. This abolition of slavery, the Nuremberg Tribunal to serves as the principle for all evaluations of eco- judge war criminals, the outcry against racial dis- nomic situations. But economy is not a circuit. crimination, or the founding of the Red Cross. But Non-renewable resources run out while waste progress has been made one skirmish at a time piles up. The precious goods vanish while value- without a clear consciousness of the conse- less rubbish grows inexorably. quences at stake. If we want our precarious The neoclassical market equilibrium can exist endeavor to succeed, we must convince all only if the participants are already granted their human beings to participate in our adventure, subsistence, as in a successful agrarian commu- and we must use urgently, but cautiously, the lat- nity. But when humans cannot choose between est possibilities of science. work and leisure, but only between work or star- Our rejection of the law of the jungle came vation, the picture is very different, writes from our minds, not from our genes. Somehow, Professor Georgescu-Roegen. In fact, he adds, the in the complex structure of our DNA, is engraved real goal of "production" is not the "product;" it our instinct to submit to the harsh laws and prin- is, in fact, an immaterial "fluid," the joy of living. ciples that have made the success and diversity of And the GNP is nothing else than the "national life. The moral laws and principles that we have cost of the joy of living."2 We all know that, the invented, preferred, and adopted will take a long earth and its resources being limited, "sustain- time to infiltrate our genetic heritage. able" growth is impossible. When, as ecologists, We realize now that the subtle trail of our orig- we use the expression "sustainable develop- inal wildcat nature has been saved, has grown, ment," we know that we mean development of and finally blossomed in the free market princi- quality, not development of quantity. But the neol- ple, the cornerstone of all our modern economy. ogism lends itself to confusion, and communities The free market economy is by far the most effi- in need believe it means that a growing popula- cient system. The collapse of the Communist tion will someday live like California stars. world is mainly due to the fact that in the com- Another approach is that, according to the sec- petition between East and West, the liberal econ- ond law of thermodynamics, time and all omy of the West was much more efficient than the processes in the real world are irreversible. The planned economy of the East. However, once the reason we still have illusions about "balanced East-West competition is over, a closer look leads economic circuits" or "balanced market prices" is to unanswered questions. The triumphant "free that, during the past century, gigantic sources of economy" has resuscitated natural selection, as concentrated but exhaustible energy were dis- merciless in the stock exchange as it is in the jun- covered, and we forget that they are non-renew- gle, and fierce competition instead of declared able. Our type of economy, as our own lives, mutualism and stimulation. cannot exist without concentrated energy. Such Market-based economics is primarily con- fatal shortages-I do not want to use the word cerned with quantifying the flow of goods, ser- "entropy" because it is more difficult to do so, vices, and money and defines value according to that is what it is all about-cannot be cured by what people are willing to pay for something. manipulating prices. Most of the potential buyers This is a receiver-based system of value as con- of those raw materials cannot participate because trasted to one that quantifies value according to they are not yet born-future generations. what was involved in the production of a good or Accordingly, today's market prices confirm the service. If a donor-based value system were used, dictatorship of present times over the future. A we would find such things as forests, species, multidisciplinary analysis shows that ecology clean water, and education to be of tremendous and economy are difficult to reconcile. value. Of course, they are of great value even The problem is even more arduous if we though people are not willing to pay much for include in the picture the internal environment of them. Clearly, our present economic system of humans. The environment must not be consid- ecological value is flawed. ered as just the surroundings, the theater set on Economy is described as a circuit. Work and which we conduct our lives. It encompasses our goods, capital and money circulate from enter- behavior, our moral code, our traditions, our lan- Cousteau 25 guage. Even if we have rejected the Darwinian "primitive" cultures have been the first to suffer laws, we remain biological creatures and must the consequences of the arrogance and the pur- listen to a number of warnings from nature. Dr. suit of hegemony that has motivated history since Peter Raven, the famous director of the Missouri antiquity. Botanical Garden, is one of the most active apos- Today, science has demonstrated that the mul- tles of biodiversity-the crucial subject of the tiplicity and variety of cultures, whether primi- Biodiversity Convention signed at the Rio "Earth tive or sophisticated, constitute the irreplaceable Summit" Conference and later by the USA. "If we treasure of humankind. But Sumer, Egypt, simply allow," says Raven, "vast numbers of Mongolia, Greece, Rome, and many other super- organisms to become extinct, without even trying states, enraptured by their own might, have labo- to learn about their properties, we will not only riously destroyed a few powerful civilizations have foregone the chance to preserve them, but and crushed hundreds of more modest cultures, we will never know how we might have used thus impoverishing our patrimony forever. them, appreciated them, loved them or done any- It is commonplace for developing countries to thing else with them."3 state that modern colonialism has replaced guns Thus, biodiversity is a major prerequisite for a with money. It could be said with total plausibil- sound, sustainable environment. When we speak ity that if cultural hegemony were sought, it is of biodiversity, we mean diversity of species, of modern media that would replace guns-with ecosystems, but mainly of genetic diversity, the "innocent" help of money. I say "innocent" in within a species, that guarantees the capability of spite of the countercurrent character that money adaptation. The greater the genetic variability the acquires when it becomes a source of power and more robust a species. Equally, the greater the speculation instead of playing the role of irre- number of species composing an ecosystem-I placeable tool for exchanges. I also say "inno- mean a community-the stronger the ecosystem cent" because the economic aspect of cultural to resist environmental changes. This powerful colonization is totally irrelevant. We need cul- natural bond between biodiversity of ecosystems tural freedom as we need the air we breathe, a and their capacity to endure adversity is a funda- symbol of liberty we refuse to buy. We need cul- mental postulate, and has recently proven to be tural diversity as we need gastronomies, unintel- dramatic. In the USA, the former Soviet Union, ligible languages, freedom, and democracy We and many other countries, ambitious, gigantic need time, not only to produce but also to think, farms adopted single species agronomy to to create, and to enjoy life. improve efficiency, but they harvested famines But the protection of cultures goes well instead. There are plenty of examples. A few are beyond a platonic declaration of intentions, well the monoculture of citrus in Florida in 1984 and beyond a derisory communication skirmish in Brazil in 1991, and the monoculture of corn of between Goliath and David symbolizing images in the USA in 1970 and in USSR in 1972. against words, the "me" generation against If each species depends on several others, mutualism, competition against stimulation. each will easily survive the disappearance of one. Whatever marks these ripples have left in history, Moreover, the greater the number of species, the we now have to make sure that there will be an easier it will be for us to select a variety that will awakening of global public opinion to save the adapt to an environmental disaster, such as a cli- mixed borders and the flowering profusion of our matic change. In summary, the greater number of motley cultural jungle. We have not yet reached species, the stronger the ecosystem. such levels of thinking. The theorem of biodiversity applies not only In the course of my adventurous life, I have to ecosystems but also to concepts, such as liter- been witness to many cultural shipwrecks. Most of ary, musical, and artistic concepts. The multiplic- these tragedies resulted from the confrontation of ity and differences of and between cultures are two peoples, two different ways of living, one of the essential factors in the robustness of our civi- them unilaterally declaring its superiority. But the lization. This is even more important as we have means used as criminal weapons varied greatly. seen how our irreversible divorce from nature When my ship "Calypso" arrived in Terra del has weakened our own future. What we call Fuego in 1972, we investigated the Fuegian 26 The Global Challenge Indians of the island named Onas. There was civilization flourishing: we must protect its diver- only one woman left, aged 82. All other Onas had sity. We must refuse to see patrimonies sold off as been chased with guns as if they were game. The consumer products. pretext? Darwin himself had written that the The goal of civilization is to ensure to all a cer- Onas were closer to animals than to men. tain "quality of life" adorned by a fundamental In Chile in 1973, we studied the remaining 37 "joy of living." As democracy implies sharing, Kawashkiar Indians. Fifteen years later, there one of our priorities is to improve the fate of the were none left. They had been employed as min- least favored people (about three-fifths of the ers and had been unable to adapt. The Niassi, a world population). But the individual share of war-like people, were living on the island of Nias, the pie will, to a certain unknown extent, shrink west of Sumatra. We anchored in the Bay of while the population grows. Lagundi and found colorless citizens of The riddle is so complex that it cannot be Indonesia: they had kept no memory of their solved by sheer economics nor by ecology, ancestral culture. The elders had erected monu- genetics, moral values, thermodynamics, biolog- ments of stone to leave a trace of their passage so ical nor cultural diversity. More than ever before, that they would not be forgotten, but one century the World Bank, the International Monetary ago, their chief had been converted to Protestant- Fund, United Nations Development Program, ism and most of their legacy had been eradicated. and the UN Commission for Sustainable The missionaries had annihilated the Niassi way Development are confronted by such problems of life faster and more completely than centuries as: How should we share our limited enx iron- of war. ment between humankind needing more and In Brazil, the Yanomami are now persecuted more space (if only to survive) and another and slaughtered just because gold has been found indispensable community named wildlife? in their traditional province. The Mentawai from Questions of that sort underline inevitable the Indonesian island of Siberut, still proud of dilemmas about the limited but unknown habit- their independent way of life, are threatened by a ability of the sphere we live on. more unexpected and insidious menace, a men- The carrying capacity of planet Earth varies ace we always considered a blessing-educa- greatly even if its limits are fixed forever. Its value tion-which in this case consists of replacing a should be calculated, but we would need an weak culture by a strong one and which, while it extremely complicated equation with many vari- impoverishes our global civilization, instills new ables while these variables inter-react according blood in a people who would have been elimi- to specific but constantly changing rules. We nated anyway in a few decades. must not be discouraged by such complexities. Finally, the most significant example for the Our hopeless calculations can be simplified by rest of the world is the self-genocide of the the use of common sense, goodwill, and love. Pascuans, a tribe of Polynesians who had settled in 700 A.D. on small Easter Island and prolifer- Notes ated, in 900 years, from 200 people to 70,000 peo- ple, succumbing to a total lack of resources due to 1. Jean Hamburger, L'Aventure humaine (The Human overpopulation. Adventure). No citation available. 2. Economist Nicholas Georgescu-Roegen. No cita- These examples of cultural waste teach us a tion available. lesson. We have only one way to keep our proud 3. Peter Raven, personal communication. Implementing Sustainable Development: The Green Belt Movement Wangari Maathai The initial idea of the Green Belt Movement was honesty, accountability, transparency, and conceived in 1974 in Nairobi, Kenya, during a responsibility. It is leaders with such qualities political campaign for a partner who was seeking who are more likely to create an enabling envi- to represent Nairobi's Lang'ata constituency in ronment that could address the issue of urban Parliament. poverty and unemployment. But populations In the course of that political campaign it change slowly and tend to live for now. In our became obvious to me that constituents were part of the world they tend to vote for leaders committed to candidates who could dish free who have encouraged dictatorship. Under such funds to them, promise jobs and easy access to the leadership it is difficult to promote protection of national resources, promise cheaper essential the environment. commodities, and generally demonstrate a The Cold War rivalries made it easier for this capacity to give-rather than create an enabling form of governance to flourish in many parts of environment for-a better quality of life. The con- the world, especially on the African continent. stituents were not thinking of creating jobs for Therefore, it is important to examine the type of themselves but of being given jobs. However, the relations and cooperations that should emerge only way they could get those jobs would be to in the post-Cold War period. What type of devel- sack somebody else! This thinking is encouraged opment will be adopted? It is the right time for by leaders and constituents alike and makes it the World Bank to address the issue of valuing possible for many politicians to practice nepo- the environment even as countries pursue tism, tribalism, and corruption. To bribe the vot- development. ers, leaders turn to misuse of the national To respond to the question of how valuable is resources like allocation of forests areas, wet- the environment, I would like to use the example lands, and catchment areas. That is hardly the of the Green Belt Movement. Is the Movement an way to promote sustainable development and environment and development organization, or protect the environment. it a political and a subversive movement? Environmental education is necessary and During those days of looking for votes, I devel- should be given to both leaders and citizens. The oped a personal commitment to those who had poorer the people, the more they put their hope assisted my team. I knew that the expected reward in their leaders rather than in themselves. Most of for those supporters was jobs. But I also knew that the people from whom votes were being solicited there were no employment opportunities that were from sprawling Nairobi slums, where such could satisfy the demand. One day an idea came attitudes are prevalent. Now, twenty years later, to mind: Why not create employment for them by voters are still being bribed to vote for candidates planting trees? It took time to develop the activity, who are opportunists and are unlikely to pro- but it worked, and the Green Belt Movement even- mote democratic principles and practices like tually was born out of this idea. This was, of 27 28 Implementing Sustainable Development: The Green Belt Movement course, not politics but development. The reason The campaign to plant trees in large numbers it attracted attention is that it addressed the felt started in earnest in 1977 during the United needs of the participating communities. Nations Conference on Decertification in The political experience I have described is Nairobi. During those years the Movement pur- one of several exposures that eventually con- chased tree seedlings from government tree nurs- verged and gave birth to the Green Belt eries and gave them free of charge to women to Movement. Another influence had to do with a plant on their farms. This was the arrangement seminar that I attended that was organized by partly because the Movement had no tree nurs- members of the National Council of Women of eries of its own but also because tree seedlings Kenya and at which the speaker described causes were heavily subsidized by the government. of malnutrition, illnesses associated with it, and However, there was a problem. First, government areas in which the condition was prevalent. We tree nurseries were so far away that only people were surprised to hear that the diseases were who had cars or could afford to hire transport common in areas that had high financial income could benefit from that facility. The poor small- from cash crops (coffee, tea, pyrethrum, and scale farmers could not reach the government dairy products), that is, a comparatively affluent tree nurseries and waited until an annual tree community. In such areas one expected to find no planting festival during which time most tree malnutrition and associated illnesses. It turned seedlings given out died because they were not out that one of the reasons for this poor health attended to even if they were planted. was that trees had been cut to make way for this This situation has since improved because tree high-potential and income-generating agricul- nurseries were later decentralized and were ture. There was a fuelwood crisis so many lower- moved closer to the people. But in those days, income women used agricultural residues to many of those seedlings died before they were cook. For this reason families opted for fast-cook- even given to the farmers to plant. It was clear ing and partly processed foods, all of which were that farmers wanted to plant trees only if they had rich in carbohydrates and poor in proteins and them near them. One of the appealing aspects of vitamins. This link between the availability of the Movement was that it took trees to the peo- fuelwood and the choice of diet made me think ple. Any person could walk to the tree nursery about women and the possibility of their planting and take away a few seedlings at a time conve- trees so that they could have adequate energy to nient to her or him. cook the right kind of food for their families. With the establishment of community tree We could have chosen to initiate a campaign nurseries, demand for seedlings rose sharply. to educate women about balanced diets and the Long before the government decentralized its different types of foodstuffs that they needed to afforestation activities, women groups were plant and eat, but the choice of a tree planting encouraged to start small tree nurseries that they activity was a good choice at the right time. We could operate on their own. Initially, government chose an activity that made it possible to get to the foresters assisted the women with basic technical root cause of the problem, that is, addressed the knowledge on tree nursery management. The issue of energy for the poor in the rural areas. The women were very good at adapting the methods women needed energy more urgently than they learned from the foresters. They overcame knowledge! We immediately started contacting many obstacles including lack of seeds, water, rural women's groups. The response was very shelter, soils, animals, and the delicate work of encouraging. The activity is the very type needed handling minute tree seeds and seedlings. for the protection of the environment. It coin- Ever since then, the movement has grown by cided with the government's declared policy to leaps and bounds, and the women continue to be promote health and the well-being of all its citi- the main force behind its success. The planting of zens. It was not politics. It was environmentally trees by women is, of course, not politics but sound development. The reason women's groups development. The government's policy on refor- responded so positively was that tree planting estation in particular and community develop- was addressing another felt need: the fuelwood ment in general is that they should be crisis! participatory. Taking tree seedlings to the back- Maathai 29 yards of those who do the planting did the trick, be paid for doing what the foresters should have and thousands of farmers (men and women) been doing. Instead, such people argue, women responded by collecting thousands of seedlings should be encouraged to sell their seedlings to the from the tree nurseries. The same response came farmers. Our reaction is that since one is dealing from schools, which planted trees mostly to cre- with poor rural people, money should be made ate windbreaks, provide shade, and keep dust available, even by the government, to pay the down. All these people were responding because women for the great work which they do. Women trees met their felt needs. appreciate the funds they get and indeed will For women the initial objectives for planting abandon the tree nurseries if they are not given trees was to get firewood and food (fruits), and to even that US$0.40. It should be recognized as an provide building and fencing materials, shade, important incentive. Besides, why do people and authentic beauty (some farmers have accept to pay foresters with tax money and object remarked how even the birds have come back). to the comparatively small compensation for Tree planting quickly became an honorable activ- women who have done such a comparatively ity for men, women, and children. It was not an superb job? If there is one group that should be activity for the rural poor or just for the women. commended for effectively carrying out govern- It was now an honorable activity. Happily, some ment's policy on community afforestation it is communities were really hungry for seedlings! these women's groups. The Movement introduced a procedure that a During the many years that tree planting has rural community could follow and ensure not been carried out in the countryside, educational only that trees are planted but also that they are seminars have been conducted for the partici- tended and that they survive. Tree seedlings were pants so that they can expand the objectives and issued to farmers free of charge. This approach the scope of the Movement. In the process many made it possible for any farmer to take as many people have understood that the environment is seedlings as she or he was able to plant and take the base upon which all other development care of. Many small-scale farmers are peasants depends. They now understand that no progress who practice subsistence agriculture. They are can be made when the environment is neglected, poor. They could never plant the millions of trees polluted, degraded, and over-exploited. Many the country needs if they had to pay for them. It people also have come to appreciate that taking is in the common interest of the country to give care of the environment is not the responsibility tree seedlings free of charge and to encourage tree only of the government but of the citizens as planting even by the poor. well. This awareness is empowering and brings The Movement has become very popular with the environment close to the people. Only when grassroot participants, especially women. How- this happens do people feel and care for the ever, men are just as enthusiastic and do not see environment. the activity as a woman's work, even though Many governments and financial institutions women provide the initiative and the major force. like the World Bank have development policies In time men are able to appreciate the economic that are expected to take into account the envi- value of trees as well as the multiple role trees play ronmental impact of any project undertaken. But in the lives of their families. Again, the Movement many development experts and planners do not meets felt needs. take note of regulations that are intended to pro- Although farmers get seedlings free of charge, tect the environment, and the ordinary people. the women who grow them get paid a token of Profits, expediency, and political and corporate appreciation of about US$0.40 per seedling that interests have taken priority over the environ- survives on farmers' land. The counting of the ment. National resources are treated as personal surviving seedlings for payment may take properties by some governments and are months after the seedlings are issued to farmers. exploited and destroyed under the pretense that That is little money compared to the work that the the country is being developed. women do. It is meant to be an encouragement. A community whose consciousness about the Even then many people have a problem with importance of the environment is high will raise the payment and argue that women should not concern when sections of the environment are 30 Implementing Sustainable Development: The Green Belt Movement threatened. On several occasions the Movement responsible to those who elect its members in free has objected to proposed development projects and fair elections. Such a government is in a posi- that were being implemented without any envi- tion to assist the current generations to meet their ronmental impact assessment. The reaction of the needs of the generations to come. politicians has been to condemn the Movement Environmentalists do not make the economic and accuse it of being political, anti-government, and the political policies that may protect or and antidevelopment. Citizens entrust their gov- adversely affect the local or the global environ- ernments with national resources and expect ment. Politicians do. We must stay close to them, them to institute laws that protect these resources and monitor their policies, decisions, and actions. from any form of abuse. Most, if not all, govern- If they do the right things, we should applaud ments have ministries of environment that for- them. If their actions threaten life, we must chal- mulate policies to guide industries and the lenge them and demand that justice be done to the people on how to meet felt needs without environment. Occasionally, the Movement has destroying the environment and natural played that role but has paid a heavy price for it. resources. But if governments lack political will How could international cooperation for envi- to apply laws, regulations, and agreements to ronmentally sound development be restructured which they have subscribed, only an informed in the future? It all depends on what the North and involved community can stand up for the perceives to be the strategic value of the South to environment and demand development that is the North. What value is Africa, for example, to sustainable and that is friendly to the environ- the North? What trade-offs are worth consider- ment. This is the reason that environmentalists ing, and are trade and markets the only reasons spend a lot of time and energy either consulting Africa should be worth working with? Does or confronting their governments to protect the Africa have a role in a world that is growing more environment and promote environmentally interdependent and that is advocating for a friendly development projects. global development strategy? From the examples above, it is quite obvious During the Cold War era, for example, the that the Movement is not a political organization. North made it possible for Africa to accumulate Neither are the participants political merely debts it cannot now pay without sacrificing the because of their association and active participa- lives of millions of its people who now live in tion in the planting activities of the Movement. debilitating poverty. It was expedient not to push Individual citizens may, of course, decide to par- friendly countries to pay the debt because of the ticipate in the politics of their countries. They may superpower rivalries. Now that the Cold War is decide to associate themselves with specific polit- over, will African states be forced to pay those ical parties. I am, for example, closely associated debts no matter what the price in terms of human with the political campaign to introduce and nur- sacrifice? Or the price to the environment? How ture a more democratic governance in my coun- can one speak of development under such cir- try. Such campaigns have been associated with the cumstances? Which values will motivate the Forum for the Restoration for Democracy North to consider the debts and the conse- (FORD), the Middle Ground Group (MGG), and quences of trying to pay them on schedule or the campaign to end the ongoing politically moti- even to pay them at all? Problems like migra- vated tribal clashes through a pressure group tions, refugees, the escalating internal conflicts, known as the Tribal Clashes Resettlement drugs, and diseases like AIDS can be solved only Volunteer Service (TCR). All these efforts are try- through global cooperation. Some peoples ing to ensure that the country does not slide back should not be sacrificed so that others can con- to dictatorship under which it is impossible to tinue to develop. The environment should be protect the environment or to develop as if people valued as much in poor countries as it is valued matter. Our agenda is the environment and devel- in rich countries because the environment is a opment without destruction. We know that the common resource to all human beings. But at the environment cannot be adequately protected by moment is the part of the world that has the dictatorial governments. We believe in a trans- capacity to assist willing to cooperate? Will it parent government that is accountable and take advantage of those who need the coopera- Maathai 31 tion? Will it destroy their environment because The Green Belt Movement is an effort to raise their environment is of less value? people's awareness on the need to protect the envi- Of course, as in the past, the North could be ronment everywhere. It is an effort to empower motivated by self-interest, particularly for a people to force that agenda at the social, economic, source of markets. However, a poor South can and political levels. It is an effort to make environ- hardly be a good market. To be a good market, the mentally sound development the agenda for the South has to improve its economic performance coming years. It is based on the belief that only the and show a capacity to grow and buy from the citizens can save the planet, and therefore they North. Even from a simplistic viewpoint this must be mobilized and empowered to take their would mean that the North would have to assist destinies into their own hands. The enemies of the the South with its debilitating debt and fluctuat- environment are the enemies of the people. The ing commodity prices. former have political and economic power. They It would also have to assist the South to are doing everything to frustrate that vision. But develop forms of governance that allow citizens since we are here at the World Bank discussing to utilize their creative energies more produc- environmentally sound development, I am con- tively and to improve their earning, and therefore vinced that everything changes in time. In the end, purchasing power. In Africa this would also the will of the people will win and save the planet. include support for democratization and the cre- Everything is possible. There are many positive ation of instruments that serve the people with signs in the world. Sustain hope. I am sure that the justice and truth. Bank will think globally but act locally Part Two From Concepts to Policy: How Valuable Is the Environment? Optimal versus Sustainable Development Partha Dasgupta Summary the management of the environmental resource base. The theory is overarching, and it offers us Popular writings on the environment do not take an account of related, but derived notions, such economics seriously' Often enough, they do not as "social discount rates" (Section 2), "accounting do so even when written by trained economists. prices" (Sections 4-6), and "net national product" Such writings read as though economic analysis (Section 4), each of which is a necessary concept is of no use when so profound and pervasive a fea- for as practical a task as the evaluation of projects ture of our lives as the environment is the topic of and policies. This is what makes the theory oper- discourse. In this paper I show that modern eco- ational. I show that "social discount rates" are nomic analysis has for some while provided us themselves accounting prices, so are devoid of with a language in which to discuss the private meaning unless the numeraire commodity is spec- and social management of environmental ified. Thus, there is no contradiction between resources. In some cases the prescriptions are those who claim that the well-beings of future gen- sharp and precise; in others, they are outlines, but erations ought not to be discounted and those only because of the deep uncertainties we face who argue that future incomes ought to be dis- about the nature of ecological processes and about counted at a positive rate. I also show that income our own values, not because we do not have a pre- discount rates could well be negative if average cise language in which to think them through. income is expected to decline over time (Section The environment is a gigantic capital asset. 2). Recent simulation models of global warming For this reason the theory of intertemporal eco- suggest that nothing substantial needs to be done nomics is the right place for us to begin. I show in the near future about greenhouse emissions.3 that the idea of "sustainable development," as it This conclusion is odious to environmentalists, is typically thought of, is far too loose to be of any who feel that this only proves economic analysis use. The sharpest formulation of the idea2 suffers to be incapable of capturing essential features of from the drawback that it is totally anchored to such global problems. I show that these simula- the present: no net accumulation of the overall tion models assume that average incomes will capital base is recommended (see Section 1). In rise continually, even during the periods when short, it is foolishly conservative: if an economy global warming is expected to take its toll. This happens to be poor in its resource base today, the makes positive discounting of even these distant formulation condemns it to poverty in perpetu- future incomes a defendable move. If, on the ity. In contrast, the theory of "optimal develop- other hand, it were to be assumed that future ment," developed in the 1960s by the late Tjalling incomes would decline because of global warm- Koopmans, among many others, offers us a flex- ing (due to agricultural failures, loss of infra- ible, but sufficiently disciplined, ethical frame- structure, dislocations of people), then these work in which we can frame questions regarding same simulation studies would recommend the 35 36 Optimal versus Sustainable Development use of negative discount rates on incomes during 1. Social Objectives, 1: Sustainable the periods of decline. This would amplify future Development income losses and alter the recommendations. I show that economic analysis alerts us to the Much attention has been given in recent years fact that in a market environment there are sys- to defining sustainable development. One tematic biases towards an excessive use of envi- early thought-that whatever else it may ronmental resources and that this bias runs even imply, it must imply non-negative changes in into the pattern of technological discoveries and the stock of natural resources (such as soil and adaptations (Section 5). In short, the market soil quality, ground and surface water and their mechanism is "unfriendly" towards the environ- quality, land biomass, water biomass, and the ment unless it is curbed suitably The theory calls waste-assimilation capacity of the receiving for a need to estimate "accounting prices" (or environments)-is a non-starter-not because "shadow prices") of environmental goods and it is an undesirable goal, but because it is an services; and it simultaneously instructs us to impossible goal. However, leaving this aside, move to a new concept of national product (net of there is the weakness that the requirement is the depletion and degradation of our natural cap- imposed as a matter of definition on the deter- ital stock) for use in the evaluation of projects and minants of well-being (the means of production policies. The theory also offers a precise account of well-being), not on well-being itself. of how net national product ought to be esti- Presumably, the focus of concern should be pre- mated. In Section 4 I summarize the findings.4 sent and future well-being, and methods of determining how well-being is affected by pol- Introduction icy.6 History, introspection, and experience with analytical models since the early 1960s tell The World Commission on Environment and us that reasonable development paths would Development (Brundtland Commission) popu- involve patterns of resource substitution over larized the phrase sustainable development in con- time, and also of substitutions among resources nection with the use of environmental resources,5 and various types of capital stocks, including and sustainable continues to be the focal point of knowledge and skills. much of the writings on the environment. One immediate question that the notion of Unfortunately, the emerging literature has on sustainability raises is this: What should be sus- several occasions been developed independently tained? The answer that it is current well-being of both intertemporal welfare economics and the that should be sustained is not coherent because theory of optimal development, two subjects that current well-being is not given from outside but have provided us for over twenty-five years with is determined by private and public choice. So the a language for discussing intergenerational jus- thought occurs that it should be maximum sus- tice. In the event, writings on sustainable devel- tainable well-being.7 However, even though it is opment often start from scratch, and some coherent, this prescription suffers from the weak- proceed to get things hopelessly wrong. ness that its acceptance would condemn all In this paper I shall argue that "sustainability" future generations to the mercy of today's pro- offers only a guideline, albeit an important guide- ductive base: the principle recommends that line, for social policy in a world with manufac- there should be no net accumulation of the base. tured capital and natural resources (Sections 1-2). This is hard to justify on a priori grounds if tiny Paradoxically, sharper prescriptions are obtain- amounts of net accumulation can improve future able only if we appeal to something wider, namely, living standards greatly.8 a normative criterion that enables us to identify To be sure, a number of authors writing on what we may call optimal development (Section 2). sustainable development have recognized that However, to operationalize the notion of optimal the starting point for questions on intergenera- development requires that we understand the tional justice ought to be the distribution of well- related concepts of accounting prices and net being over time. But the thought that, barring national product. Part of my task here will be to see exhaustible resources, a just distribution of well- how these ideas hang together (Sections 3-6). being implies that all capital stocks ought to be Dasgupta 37 preserved retains an emotional pull. For example, 2. Social Objectives, 2: Optimal Development, elaborating on the notion of sustainable develop- Discount Rates, and Sustainability ment, von Amsberg writes: In a remarkable set of contributions, Koopmans Under [the] guidelines for intergenera- conducted a number of thought-experiments on tional resource distribution, the endow- intertemporal choice to see the implications of ment of every generation would include alternative sets of ethical assumptions in plausi- the sustainable yield of the earth's nat- ble worlds.'" Underlying Koopmans's program ural capital plus the benefits from of research was the premise that no ethical judg- resource depletion of natural capital if ment in such abstract exercises as those involving adequate compensation is made to future resource-use should be taken as being decisive. generations .... Owning land would only We should instead play off one set of ethical include the right to harvest the sustain- assumptions against another within plausible able yield of the land while leaving the scenarios, see what their implications are for the capital value intact.... distribution of well-being, and then appeal to our The guidelines for intergenerational varied intuitive senses before arguing policy. For resource distribution could be imple- example, he showed that we can have no direct mented through a sustainability con- intuition about the validity of discounting future straint ... The purpose of the sustainability well-beings unless we know something concrete constraint is to ensure some minimum about feasible development paths. As the set of level of welfare of future generations and feasible paths in a world with an indefinite future a guarantee that a basic stock of natural is enormously complicated, the reasonable thing capital is passed on to the next genera- would be to work with alternative discount rates tion.9 on well-being and see what they imply. Although seemingly innocuous, this suggestion represents Two constraints? No doubt some index of nat- a radical break with a philosophical tradition, ural capital would have to be preserved if a min- stretching from Ramsey to Parfit that has argued imum level of welfare for the future is to be against discounting future well-beings without guaranteed. Why then introduce it as an addi- first having studied its distributional conse- tional constraint? Preservation of the index quences across generations in plausible worlds."2 ought to be derivable from the optimization That this tradition is otiose was demonstrated by exercise. Mirrlees and Chakravarty, who showed that in A second weakness of the formulation is plausible economic models, not to discount this: it offers no ethical argument for imposing future well-beings could imply that the present either of the side constraints. A more general generation be asked to save and invest around 50 (and intellectually firmer) approach would be percent of gross national product.13 This is a stiff to allow future generations' well-beings to be requirement when GNP is low. reflected in a function that is defined over the For simplicity of exposition, let us assume that well-beings of all generations. In other words, population size is constant over time (t), and that the idea is to appeal to an aggregate social well- generation t's well-being is an increasing function being function. Such a tactic would enable us of its level of consumption (C), which we denote also to experiment with different degrees of by W(C). We assume time to be continuous. Let rc substitutability between different generations' be the set of feasible consumption paths-from the levels of well-being. The demands on the pre- present to the indefinite future-and let rw be the sent generation could well be stiffer in this corresponding set of well-being paths. We take it framework than that it be required merely to that there is no uncertainty, and that Iw is ensure that some minimum level of well-being bounded. Imagine that there is an underlying eth- is guaranteed for future generations.'0 This ical preference ordering defined over Iw. point of view was adopted by the late Tjalling Alternative policies are therefore to be evaluated Koopmans in his formulation of the problem of in terms of this ordering. Koopmans showed that intergenerational justice. under a plausible set of assumptions, this ordering 38 Optimal versus Sustainable Development can be represented by a numerical function (which where cx(C,)>O is the elasticity of marginal well- we may call aggregate well-being possessing the being at t.'6 Moreover, along a full optimum, the "utilitarian" form):'4 consumption rate of discount equals the produc- tivity of capital (that is, the social rate of return on 0fW(C,)exp(-8t)dt, where 6 > O.'5 (1) investment). This is the famous Ramsey Rule. Iso-elasticity offers a simple, flexible form of Now (1) may look like classical utilitarianism, W(.). So let us assume that but it is not. There is nothing in the Koopmans axioms to force a utilitarian interpretation upon W(C) = -C<, where ax is a positive constant. (3) W. Moreover, (1) involves discounting future well-beings at a constant rate (6 > 0). In short, pos- In this case the optimality criterion reflected in itive discounting of well-being is seen to be an (1) depends only upon two parameters: ax and 6. implication of a set of ethical axioms that, at face Obviously, the larger is 6, the lower is the weight value at least, would appear to have nothing to awarded to future generations' well-beings rela- do with discounting. tive to that of the present generation. The moral When conducting analytical experiments of Mirrlees's computations was that introducing with alternative assumptions embedded in (1), this sort of bias would be a way of countering the it makes sense to go beyond the Koopmans advantages to be enjoyed by future generations, axioms and allow for consideration the case should the productivity of capital and technolog- where 6= 0. It also makes sense to go beyond the ical progress prove to be powerful engines of axioms and to consider unbounded well-being growth in well-being.17 functions. In this way we are able to test models Nevertheless, consider the case 6 = 0. As an to see what all this implies for public policy and example, let us assume that a = 2.5 (a not implau- the choice of discount rates in social cost-benefit sible figure if W(C) were to be based on revealed analysis. On the other hand, purposeless gener- preferences). If the rate of growth of optimum con- ality should be avoided. So we will assume that sumption at t is, say, 2 percent, then pt = 5%. It will W(C) is strictly concave, to give shape to the idea be noticed that the larger is cx, the more egalitarian that intergenerational equity is valued as an eth- is the optimal consumption path. As ax -* -, the ical goal. well-being functional represented in (1) resembles It is as well to begin by noting that discount more and more the Rawlsian maxi-min principle rates in use in social cost-benefit analysis are as applied to the intergenerational distribution of "consumption discount rates." In first-best situa- consumption (and thus well-being). This in turn tions, they equal "income discount rates." (They means that, even in productive economies, opti- are also sometimes, misleadingly, called "social mal growth in consumption is slow if cc is large. In discount rates," and are different from market the limit, as ax - oo, optimal growth is zero. From interest rates in second-best situations; see equation (2), we can now see why the consump- below.) If consumption is expected to grow, then tion rate of discount is bounded (and how it man- the discount rate used in cost-benefit analysis ages to equal the productivity of capital) even in would be positive even if 6 were taken to be zero. these extreme parametric terrains.'8 This follows from the strict concavity of W(C). To Social discount rates are percentage rates of see this recall that, in discrete time the consump- change of intertemporal relative shadow prices. tion rate of discount at time t is the marginal It follows that, unless the optimizing economy is social rate of indifferent substitution between in a steady state, social discount rates typically consumption at times t and t+1 minus 1. This depend upon the numeraire that has been means that it is the percentage rate of decline in adopted."9 As equation (2) makes clear, the well- discounted marginal well-being over the interval being discount rate differs from consumption [t, t+l]. Let pr denote this. Reverting to continu- rates of discount. This is not an obvious point, ous time and the "utilitarian" form in (1), it is an and it continues to be misunderstood in a good easy matter to confirm that deal of the environmental literature that is critical of social cost-benefit analysis. Modern philoso- p, = p(CQ) = 6 + a(C,)[dC,/dt]/C, (2) phers writing on the matter make the same mis- Dasgupta 39 take and conflate well-being and consumption paths that are ethically indefensible on prima rates of discount. They argue that 5 should be facie grounds. The implications of this frame- zero and then criticize the practice of discounting work for social cost-benefit analysis and national future flows of consumption in social cost-bene- income accounting are central to the evaluation fit analysis.20 and choice of public policies (Sections 4-6). Although simple, the Koopmans formulation spans a rich variety of ethical considerations. 3. Second-Best Optima, Global Warming, Among other things, it tells us that consumption and Risk rates of discount do not reflect primary value judgments: they are derived notions. They are Analyzing full optima (that is, first-best alloca- essential when we try to implement optimal poli- tions) helps fix ideas. In reality, a vast array of for- cies by means of cost-benefit analysis of projects. ward markets are missing (due to an absence of Notice that in equation (3), W(C) is property rights, transaction costs, or whatever). It unbounded below. If 6 = 0, this ensures that very is a reason why, typically, market rates of interest low consumption rates are penalized by the opti- ought not to be used in discounting future mality criterion reflected in (1). On the other incomes in the social evaluation of projects and hand, if 6 were positive, low consumption rates policies. by generations sufficiently far in the future would The phenomenon of global warming offers a not be penalized by (1). This means that unless good instance of what this can imply. The atmos- the economy is sufficiently productive, optimal phere is a global commons par excellence, and consumption will tend to zero in the very long greenhouse emissions are a byproduct of pro- run. As an illustration of how critical 6 can be, duction and consumption activities. In short, Dasgupta and Heal, and Solow showed in a there is market failure. Social cost-benefit analy- model economy with exhaustible resources that sis needs to be undertaken with these failures in optimal consumption declines to zero in the very mind. Consider then that a number of simulation long run if 6 > 0, but that it increases to infinity if studies on the economics of global warming have o = 0.21 It is in such examples that notions of sus- indicated that the social costs of doing much to tainable development can offer some cutting counter the phenomenon in the near future power. If by sustainable development we wish to would far exceed the benefits because the bene- mean that the chosen consumption path should fits (for example, avoiding the submergence of as a minimum never fall short of some stipulated, fixed capital in low-lying areas, and declines in positive level, then it follows that the value of 6 agricultural outputs) would appear only in the would need to be adjusted downward in a suit- distant future (that is, a hundred years and able manner to ensure that the optimal con- more).23 In these studies future costs and benefits, sumption path meets with the requirement. This when expressed in terms of income, are dis- was the substance of Solow's remark that, in the counted at a positive rate over all future periods, economics of exhaustible resources the choice of even when doing nothing to combat global 6 can be a matter of considerable moment.22 warming is among the options being considered. On the other hand, by sustainable develop- These results, quite rightly, appear as some- ment we could mean something else: that well- thing of a puzzle to the many who imagine that being (and, therefore, consumption) must never global warming will result eventually in declines be allowed to decline. This is a stiffer requirement and dislocations of incomes, production, and than the one we have just considered. If 6 is less people. They find it odd that "economic logic" than the productivity of capital, the valuation cri- has been shown to cast a damper on the idea that terion reflected in (1) ensures that the optimal anything really drastic needs to be done in the consumption path will satisfy the requirement. immediate future to counter it. Perhaps then, or This follows immediately from equation (2) and so it is on occasion thought, when deliberating the Ramsey Rule. We may therefore conclude that environmental matters, we ought to use social the Koopmans program is all-encompassing, and rates of discount that are different from those in that concepts of "sustainability" are useful in use in the evaluation of other types of economic pruning out of consideration those consumption activity. 40 Optimal versus Sustainable Development We have seen in the previous section why this options. Environmentalists have frequently inter- would be a wrong thought. On the other hand, preted the idea of sustainable development in using a constant discount rate for the purposes of this light. simulation in the economics of global warming is One way of formulating the idea of keeping not sound either. If global warming is expected to future options open is to study the structure of Vc lead to declines in (weighted) global consump- (which, recall, is the set of feasible consumption tion over some extended period in the distant paths, from the present to infinity) in terms of the future, then the logic underlying formula (2) resource and capital base a generation inherits would say that over this same extended period from the past, and to consider only those actions consumption rates of interest could well be nega- on the part of the generation that, as a minimum, tive. If this were so (and it would certainly be so preserve rc. Thus, writing by K and S the stocks if 6 = 0), then from our current viewpoint, future of manufactured capital (including knowledge losses due to global warming could well be and skills) and environmental resources, respec- amplified; they would not be reduced to negligi- tively, let Ict(&, S) denote the set of feasible con- ble figures by the relentless application of a con- sumption paths defined over [t, oo). To preserve stant and positive discount rate. It is then entirely future generations' options would be to insist possible that far more aggressive policies than are that rc'c jc'+` for t > 0. This idea was suggested implied by current simulation models to combat by Dasgupta and Heal and subsequently global warming are warranted. explored by Solow.28 Introducing risk into the theory of optimal It has two problems. First, but for the simplest development raises additional questions, and of economies (for example, the one-good econ- avoiding future disasters that could arise from omy29), rc'(tK S) is so complicated a set that noth- global warming provides another reason why ing directly can be gleaned about the nature of more aggressive current action may be called for. policies that preserve options. Second, and more Here lies another weakness of most numerical importantly, it is an unsatisfactory approach to models of global warming:24 all estimates are the notion of intergenerational justice because it point estimates, so the downside of risky situa- pays no heed to the worth of options. But worth tions does not get to play a role. The theory of cannot be measured except in terms of well- rational choice under uncertainty (that is, the von being. So we are back full circle to notions of Neumann-Morgenstern-Savage theory) instructs aggregate well-being. To be sure, uncertainties us to expand the space of commodities and ser- about current stocks (for example, numbers of vices by including in their description the event species), and about future needs, wants, technol- at which they are made available. It tells us that ogy, and climate need to be introduced-say, in the appropriate generalization of (1) is the terms of the expected value of aggregate well- expected value of the sums of flows of (possibly being. But this is only to remind us of a central discounted) well-being. truth: the worth of keeping future generations' Optimal development when future technol- options open should be seen as a derived value. ogy is uncertain has been much studied within In other words, the worth should be assessed in this framework.25 Risk of extinction of the human terms of an overarching notion of aggregate well- race provides an additional reason for discotmt- being. The theory of option values (see Section 6) ing future well-beings. If the possibility of extinc- is based on this insight. tion is judged to be approximately a Poisson process, then the modification is especially sim- 4. Project Evaluation and the Measurement ple: it involves increasing the well-being discount of Net National Product rate by the probability rate of extinction.26 Uncertainty about future possibilities and the There are two ways of assessing changes in aggre- fact that economic decisions can have irreversible gate well-being. One would be to measure the impacts, together provide us with a reason to value of changes in the constituents of well-being value flexibility.27 The underlying idea is that the (utility and freedoms), and the other would be to present generation should choose its policies in a measure the value of the alterations in the com- way that helps preserve future generations' modity determinants of well-being (goods and Dasgupta 41 services that are inputs in the production of well- ought not to be a matter of private consumption being). The former procedure measures the value alone. One reason for this view is that they both of alterations in various "outputs" (for example, display strong externalities and are at once merit indices of health, education, and other social indi- goods.32 Another reason is that the credit and sav- cators), and the latter evaluates the aggregate ings markets work especially badly for the poor value of changes in the "inputs" of the produc- in poor countries. In short, the theory has always tion of well-being (namely, real national income). informed us that a community's personal con- A key theorem in modern resource allocation the- sumption would not tell us much about its health ory is that, provided certain technical restrictions and education statistics. As this is standard fare are met, for any conception of aggregate well- in public economics, one can but conclude that if being, and for any set of technological, transac- the majority of poor countries have a bad record tion, information, and ecological constraints, in the provision of public services, it is not due to there exists a set of shadow (or accounting) prices philosophical error on the part of their leader- of goods and services that can be used in the esti- ships, nor a lack of knowledge of resource alloca- mation of real national product. tion theory: it is something else. In any event, The index in question has the following prop- reliance on national income as an indicator of erty: small investment projects that improve the aggregate well-being does not reflect any partic- index are at once those that increase aggregate ular brand of ethics. Its justification rests on a well-being.30 We may state the matter more gen- technical result in economics and is independent erally: provided the set of accounting prices is of the ethical stance that is adopted. unaffected, an improvement in the index owing to To be sure, if real national income is to reflect an alteration in economic activities reflects an aggregate well-being, accounting prices should increase in aggregate well-being. This is the sense be used. Recall that the accounting price of a in which real national income measures aggregate resource is the increase in the maximum value of well-being. Moreover, the sense persists no mat- aggregate well-being if a unit more of the ter what is the basis upon which aggregate well- resource were made available costlessly. (It is a being is founded. In particular, the use of national Lagrange multiplier.) Accounting prices are, income in measuring changes in aggregate well- therefore, the differences between market prices being is not restricted to utilitarian ethics. and optimum taxes and subsidies. This provides The theorem should be well-known, but it us with the sense in which it is important for poor often goes unrecognized in development eco- countries to "get their prices right." Moreover, by nomics, and today the use of real national income real national product for an intertemporal econ- as an indicator of economic development is held omy, we mean real net national product (NNP). in disrepute. For example, Anand and Ravallion The accounting value of the depreciation of fixed criticize the use of national income in assessing capital (and by this we mean both manufactured relative well-beings in poor countries on grounds and natural capital) needs to be deducted if the that income is a measure of opulence and not of index of national product is to play the role we are well-being (nor, as they say, of "capability").31 assigning to it here.33 Thus, NNP, when correctly They assert that using the former for the purposes measured in a closed economy, reads as follows: of measuring the latter constitutes a philosophi- cal error and imply that development planners NNP = Consumption would have been better placed to make recom- + net investment in physical capital mendations in poor countries if only they had + the value of the net change in human capital read their Aristotle. The authors divide national + the value of the net change in the stock income into personal income and public services, of natural capital and show that there are a number of countries - the value of current environnmental damages. with a better-than-average personal income per (4) head that display worse-than-average social indi- cators, such as health and basic education. We are regarding consumption as the But it has long been a tenet of resource alloca- numeraire in our measure of NNP. So the "values" tion theory that public health and basic education referred to in equation (4) are consumption 42 Optimal versus Sustainable Development values, and they are evaluated with the help of in turn that wrong sets of projects get chosen-in shadow prices. Net national product ought ide- both the private and public sectors. ally to be computed in an intertemporal, optimiz- The extent of the bias will obviously vary from ing economy The optimization exercise enables project to project, and from country to country, but one to estimate accounting prices. These prices it can be substantial. In their work on the deprecia- can then in principle be used for the purposes of tion of natural resources in Costa Rica, Sol6rzano project and policy evaluation even in an economy and others have estimated that in 1989 the depreci- that is currently far off the optimum.34 ation of three resources-forests, soil, and fish- An alternative way is to think of public policy eries-amounted to about 10 percent of gross as a sequence of reforms. Accounting prices in domestic product and over a third of gross capital this framework would be estimated from the pre- accumulation.8 Resource-intensive projects look vailing structure of production and consumption better than they actually are. Installed technologies (and not from the optimum). If the economy has are usually unfriendly towards the environment. a convex structure, then a sequence of such reforms would in principle take the economy ulti- 5. Biases in Technological Adaptation mately to the optimum.35 Expression (4) reflects the correct notion of NNP in both frameworks.36 One can go further: the bias extends to the prior It is useful to note here that the convention of stage of research and development. When envi- regarding expenditures on public health and ronmental resources are underpriced, there is education as part of final demand implicitly little incentive on anyone's part to develop tech- equates the cost of their provision with the con- nologies that economize on their use. The extent tribution they make to aggregate well-being. This of the distortion created by this underpricing will in all probability results in an underestimation in vary from country to country Poor countries poor countries.37 We should note as well that cur- inevitably have to rely on the flow of new knowl- rent defensive expenditure against damages to edge produced in advanced industrial econo- the flow of environmental amenities ought to be mies. Nevertheless, poor countries need to have included in the estimation of final demand. the capability for basic research. The structure of Similarly, investment in the stock of environmen- shadow prices there is likely to be different from tal defensive capital should be included in NNP. those in advanced industrial countries, most By "investment," we mean the value of net especially for non-traded goods and services. changes in capital assets, not changes in the value Even when it is publicly available, basic knowl- of these assets. This means that anticipated capi- edge is not necessarily usable by scientists and tal gains (or losses) should not be included in technologists, unless they themselves have a feel NNP. As an example, the value of the net decrease for basic research. Often enough, ideas devel- in the stock of oil and natural gas (net of new dis- oped in foreign lands are merely transplanted to coveries, that is) ought to be deducted from GNP the local economy; whereas they ought, instead, when NNP is estimated. Answer to the question to be modified to suit local ecological conditions as to how we should estimate NNP should not be before being adopted. This is an occasion in a matter of opinion today: it is a matter of fact. which the use of shadow prices is of help. It cre- Current estimates of NNP are biased because ates the right set of incentives both among devel- depreciation of environmental resources is not opers and users of technologies. Adaptation is deducted from GNP. Stated another way, NNP itself a creative exercise. Unhappily, as matters estimates are biased because a biased set of prices stand, it is often bypassed. There is loss in this. is in use. Prices imputed to environmental There is further loss associated with a different resources on site are usually zero. This amounts kind of bias: that arising from biased demand. For to regarding the depreciation of environmental example, wherever household demands for goods capital as zero. But these resources are scarce and services in the market reflect in the main male goods, so we know that their shadow prices are (or for that matter, female) concerns, the direction positive. Profits attributed to projects that of technological change would be expected to fol- degrade the environment are therefore higher low suit. Among poor countries, we would expect than the social profits they generate. This means technological inventions in farm equipment and Dasgupta 43 techniques of production to be forthcoming in plex. There are now standard techniques of eval- regions where cultivation is a male activity (there uation for commodities like irrigation water, fish- would be a demand for them); we would not eries, timber, and agricultural soil.40 The same observe much in the way of process innovations techniques can be used for estimating losses asso- in threshing, winnowing, the grinding of grain in ciated with water-logging and overgrazing. They the home, and in the preparation of food. Thus, rely on the fact that the environmental resources cooking in South Asia is a central route to respira- in question are inputs in the production of trad- tory illnesses among women: women sit hunched able goods. As long as the flow of all other inputs over ovens fuelled by cow dung, or wood, or in production are held constant, the accounting leaves. It is inconceivable that improvements in value of changes in their supply can be estimated design are not possible to realize, but entrepre- directly from the value of the resulting changes in neurs have little incentive to bring about such outputs. technological innovations. Household demand For commodities such as firewood and drink- for them would be expected to be low. ing and cooking water, the matter is more com- The argument extends to collective activity in plex: they are inputs in household production.4" general, and State activity in particular. In poor This means that we need estimates of household communities, men typically have the bulk of the production functions. As an example, trans- political voice. We should then expect public deci- portation costs (in particular energy costs as mea- sions over rural investment and environmental sured in calories) for women and children would preservation also to be guided by male prefer- be less were the sources of fuelwood and water ences, not female needs. Over afforestation in the not far away and receding. As a first approxima- drylands, for example, we should expect women tion, the value of water or fuelwood resources for to favor planting for fuelwood and men for fruit household production can be estimated from trees, because it is the women and children who these energy needs. In some situations (as on collect fuelwood, while men control cash income. occasion with fuelwood), the resource is a substi- And fruit can be sold in the market. Such evidence tute for a tradable input (for example, paraffin or on this as we are aware of is only anecdotal. But kerosene); in others (as with cooking water), it is as it is confirmed by theory, it is reasonable to a complement to tradable inputs (for example, imagine that this must quite generally be true. food grain). Such facts allow us to estimate Such biases in NNP as we have identified here accounting prices of non-marketed goods in occur in advanced industrial countries as well. So terms of the accounting prices of marketed then why do we stress their importance in the goods.42 context of poor countries? The reason is that poor The approach outlined above allows us to cap- people in poor countries cannot cope with the ture only the known use-value of a resource. Its same margin of error as people living in rich shadow price may well exceed this. The reason is countries can: a 10 percent drop in the standard that additional values may be embodied in a of living imposes greater hardship on a poor resource stock. One additional value, applicable household than a rich one. Recall, too, that the to living resources, is their intrinsic worth as liv- rural poor are especially dependent upon their ing resources. (It is absurd to suppose that the local environmental resource base.39 Losses in value of a blue whale is embodied entirely in its well-being due to an underpricing of this base are flesh and oil, or that the value of the "game" in absorbed by them disproportionately. The esti- Kenyan safari parks is simply the present-dis- mation of accounting prices of environmental counted value of tourists' willingness-to-pay.) resources should now be high on the agenda of The idea of "intrinsic worth" of living things research in the economics of poor countries. (sometimes called their "existence value") is inherent not only within traditional religious sys- 6. Environmental Accounting Prices: tems of ethics, but also in the modern "utilitarian" The Valuation Problem tradition. Therefore, the question is not so much whether living things possess intrinsic worth, but, How we should estimate accounting prices is a rather, about ways of assessing this worth. It is complex question, but it is not uniformly com- almost impossible to get a quantitative handle on 44 Optimal versus Sustainable Development intrinsic worth. The right thing to do is to take Notes note of it, keep an eye on it, and call attention to it in public debate if the resource is threatened with 1. I have gained much from discussions over the years extinction, on the subject matter of this paper with Geoffrey M. Heal, Karl Goran-Maler, and Robert Solow. Some of the rnaterial What is the point of basing shadow prices here has been taken from Dasgupta and Maler, "Poverty solely on use-value when we know that resources Institutions and the Environmental Resource Base," in J. often possess intrinsic value as well? It is that Behrman and T.N. Srinivasan, eds., Handbook of Development such estimates provide us with biased shadow Economics, vol. III (Amsterdam: North Holland, 1994). prices, and this can be useful information. For 2. See Partha Dasgupta, "Some Altemative Criteria for example, in his classic paper on the optimal rate Justice between Generations," lournal of Public Ecotnomics 3 example, in his classic paper on the optimal rate (1974). See also Robert M. Solow, "Intergenerational Equity of harvest of blue whales, Spence took the and Exhaustible Resources," Review of Economic Studies shadow price of these creatures to be the market (Symposium on the Economics of Exhaustible Resources) value of their flesh, a seemingly absurd and 41(1974). repugnant move.43 But he showed that under a 3. See, for example, W.D. Nordhaus, "To Slow or Not to wide range of plausible parametric conditions, Slow: The Economics of the Greenhouse Effect" would b(Department of Economics, Yale University, New Haven, would be most profitable commercially for the Conn., 1990, Mimeographed). international whaling industry to agree on a 4. See Partha Dasgupta and Karl Goran-Maler, "The moratorium until the desired long-run popula- Environment and Emerging Development Issues," tion size were reached, and for the industry to Proceedings of the Annual World Bank Conference on subsequently harvest the creatures at a rate equal Development Economics (Supplement to the World Bank to t ppaosuaaeidEconomic Review and the World Bank Research Observer to the population's sustainable yield." In other (Washington, D.C.: World Bank, 1991). See also Dasgupta words, preservation is recommended solely on and Maler, "Poverty, Institutions and the Environmental commercial ground. Resource Base." But if preservation is justified when the 5. World Commission on Environment and shadow values of blue whales are estimated from Development, Our Common Future (New York: Oxford their market prices, the recommendation would, University Press, 1987). obviosly, e renforcd iftheirintrnsic orth 6. Well-being is a most comnplex notion and is multi- obviously, be reinforced if their intrinsic worth dimensional. The concept is explored at length in Partha were to be added. This was the point of Spence's Dasgupta, An Inquiry into Well-Being and Destitution exercise. (Oxford: Clarendon Press, 1993). Here I shall simplify and There is another source of value of environ- think of it as an aggregate, scalar measure. See below. mental resources, which is more amenable to 7. Solow, "Intergenerational Equity and Exhaustible quantification. It arises from a combination of Resources." See also Partha Dasgupta and Geoffrey M. Heal, Economic Theory and Exhaustible Resources (Cambridge: two things common to them: uncertainty in their Cambridge University Press, 1979). future use-values, and irreversibility in their use. 8. Solow explored this line of thought only because it is (Genetic material in tropical forests provides a a possible interpretation of Rawls's principle of intergenera- prime example.) The twin presence of uncer- tional justice; Solow was not commending it. See Solow, tainty and irreversibility implies that, even if the "Intergenerational Equity and Exhaustible Resources." See 'ainty also J. Rawls, A Theory of Justice (Oxford: Oxford University aggregate well-being function were neutral to Press, 1972). But it can be argued that Rawls himself was risk, it would not do to estimate the accounting not prescribing intergenerational maxi-min, but something price of an environmental resource solely on the else. On this, see Dasgupta, "Some Alternative Criteria for basis of the expected benefit from its future use. Justice between Generations." Irreversibility in its use implies that preservation 9. J. von Amsberg, "Project Evaluation and the of its stock has an additional value-the value of Depletion of Natural Capital: An Application of the dif- I oSustainability Principle" (Environment Department extending society's set of future options. (I dis- Working Paper no. 56, World Bank, Washington, D.C., 1993) cussed this in a wider context in Section 3.) Future 15-16. options have an additional worth because, with 10. This issue was the focus of Partha Dasgupta and the passage of time, more information is expected G.M. Heal, "The Optimal Depletion of Exhaustible to be forthcoming about the resource's use-value. Resources," Review of Economic Studies (Symposium on the Economics of Exhaustible Resources) 41 (1974); and This additional worth is often called an option Solow, "Intergenerational Equity and Exhaustible value.45 The accounting price of a resource is the Resources." See Dasgupta and Heal, Economic Theory and sum of its use-value and its option value. Exhaustible Resources, chaps. 9-10, for an elaboration. Dasgupta 45 11. See Tjalling C. Koopmans, "Stationary Ordinal ed., Allocation under Uncertainity: Equilibrium and Optinzality Utility and Impatience," Econometrica 28 (1960); Koopmans, (London: Macmillan, 1974); D. Levhari and TN. Srinivasan, "On the Concept of Optimal Economic Growth," Pontificiae "Optimal Savings under Uncertainty," Review of Economic Academiae Scientiarum Scripta Varia 28 (1965). Reprinted in Stidies 36 (1969); F.H. Hahn, "Savings and Uncertainty," The Econometric Approach to Development Planning Review of Economic Studies 37 (1970); Dasgupta and Heal, (Amsterdam: North Holland, 1966); Koopmans, "Objec- "The Optimal Depletion of Exhaustible Resources"; Partha tives, Constraints and Outcomes in Optimal Growth Dasgupta, Geoffrey M. Heal, and M. Majumdar, "Resource Models," Econometrica 35 (1967); Koopmans, "Representa- Depletion and Research and Development," in M. tion of Preference Orderings with Independent Compo- Intriligator, Frontiers of Quantitative Economics, vol. III nents of Consumption," in C.B. McGuire and R. Radner, (Amsterdam: North Holland, 1977). eds., in Decision and Organization (Amsterdam: North 26. See, for example, Mirrlees, "Optimal Growth When Holland, 1972); and Koopmans, "Representation of Technology Is Changing"; Partha Dasgupta, "On the Preference Orderings over Time," in McGuire and Radner, Concept of Optimum Population," Review of Economic Decision and Organization. Stidies 36 (1969); Dasgupta, The Control of Resources (Oxford: 12. See E Ramsey, "A Mathematical Theory of Saving," Basil Blackwell, 1982); Dasgupta, "Resource Depletion, Economic Journal 38 (1928); and D. Parfit, Reasons and Persons Research and Development, and the Social Rate of (Oxford: Oxford University Press, 1984). Discount," in R.C. Lind, ed., Discountingfor Timne and Risk in 13. See J.A. Mirrlees, "Optimal Growth When Energy Policy (Baltimore: Johns Hopkins University Press, Technology Is Changing," Review of Economic Studies 34 1982). (1967); and S. Chakravarty, Capital and Development Planning 27. K.J. Arrow and A. Fisher, "Preservation, Uncertainty (Cambridge, Mass.: MIT Press, 1969). and Irreversibility," Quarterly Journal of Economics 88 (1974); 14. Koopmans, "Stationary Ordinal Utility and C. Henry, "Investment Decisions under Uncertainty: The Impatience." Irreversibility Effect," American Economic Review 64 (1974). 15. Koopmans's theorems were proved under the 28. Dasgupta and Heal, Economic Theory and Exhaustible assumption that time is discrete. In Koopmans, Resources, chap. 9. See also R.M. Solow, "Sustainability-An "Representation of Preference Orderings with Independent Economist's Perspective" (Department of Economics, Components of Consumption" and "Representation of Massachusetts Institute of Technology, Cambridge, Mass., Preference Orderings over Time," the ethical axioms are 1991). imposed directly on Fc, and W(.) is obtained as a numerical 29. R.M. Solow, "A Contribution to the Theory of representation. Economic Growth," Quarterly Journal of Economics 70 (1956). 16. See, for example, K.J. Arrow and M. Kurz, Public 30. See Dasgupta, An Inquiry into Well-Being and Investment, the Rate of Return and Optimal Fiscal Policy Destitution, chaps. 7 and 10. The technical restrictions (Baltimore:JohnsHopkinsUniversityPress,1970). amount to the requirement that the Kuhn-Tucker 17. J.A. Mirrlees, "Optimum Growth When Technology Theorem is usable, that is, that both the set of feasible Is Changing." allocations and the ethical ordering reflected by the 18. See Dasgupta and Heal, Econonmic Theory and aggregate well-being function are convex (see Appendix Exlaustible Resources, chaps. 9-10. 2). The assumption of convexity is dubious for pollution 19. Therefore, unless the nulmeraire has been specified, problems, and we will study the question in Section 14. the term "social discount rate" is devoid of meaning. Nevertheless, in a wide range of circumstances, it is pos- 20. See, for example, Parfit, Reasons and Persons; and T. sible to separate out the "non-convex" sector, estimate Cowen and D. Parfit, "Against the Social Discount Rate," in real national income (or product) for the "convex" sector, P. Laslett and J.S. Fishkin, eds., Justice between Age Groups and present an estimate of the desired index as a combi- and Generations (New Haven, Conn.: Yale University Press, nation of the real product of the convex sector and esti- 1992). mates of stocks and their changes in the non-convex sec- 21. See Dasgupta and Heal, "The Optimal Depletion of tors. This is a simple inference from M.L. Weitzman, Exhaustible Resources"; and Solow, "Intergenerational "Optimal Growth with Scale-Economies in the Creation Equity and Exhaustible Resources." of Overhead Capital," Review of Economic Studies 37 22. R.M. Solow, "The Economics of Resources, or the (1970) and R. Portes, "Decentralized Planning Resources of Economics," Americant Econonmic Review Procedures and Centrally Planned Economies," American (Papers and Proceedings) 64 (1974). Economics Review (Papers and Proceedings) 61 (1971). 23. See Nordhaus, "To Slow or Not to Slow: The 31. S. Anand and M. Ravallion, "Human Development Economics of the Greenhouse Effect." in Poor Countries: On the Role of Private Incomes and 24. See, for example, Nordhaus, "To Slow or Not to Public Services," Journal of Economic Perspectives 7 (1993). Slow: The Economics of the Greenhouse Effect." See also Amartya K. Sen, Inequality Reexamined, (Oxford: 25. See, for example, E.S. Phelps, "The Accumulation of Clarendon Press, 1992). Risky Capital: A Sequential Analysis," Econometrica 30 32. R. Musgrave, Theory of Public Finance (New York: (1962); J.A. Mirrlees, "Optimum Accumulation under McGraw Hill, 1959). Uncertainty" (Faculty of Economics, University ot 33. See Dasgupta and Heal, Economic Theory and Cambridge, Cambridge, England, 1965, Mimeographed); Exhaustible Resources; J. Hartwick, "Natural Resource, Mirrlees, "Optimum Accumulation under Uncertamty: The National Accounting, and Economic Depreciation," Journal Case of Stationary Returns on Investment," in Jean Dreze, of Public Economics 43 (1990); Dasgupta and Maler, "The 46 Optimal versus Sustainable Development Environment and Emerging Development Issues"; Karl Erosion in Java: A Natural Resource Accounting Goran-Maler, "National Accounting and Environmental Approach " (Environment Department Working Paper Resources," Journal of Environmental Economics and Resources no. 18, World Bank, Washington, D.C., 1989); and Robert 1 (1991); and Ernst Lutz, ed., Toward Improved Accountingfor C. Repetto and others, Wasting Assets: Natural Resources the Environment (Washington, D.C.: World Bank, 1993). and the National Income Accounts (Washington, D.C.: 34. See, for example, I.M.D. Little and J.A. Mirrlees, World Resources Institute, 1989); for forestry Ken Project Appraisal and Planning for Developing Countries Newcombe, "An Economic Justification of Rural (London: Heinemann, 1974); and Lyn Squire and Herman Afforestation: The Case of Ethiopia" (Energy van der Tak, Economic Analysis of Projects (Baltimore: Johns Department Paper no. 16, World Bank, Washington, HopkinsUniversityPress,1975). D.C., 1984), and Dennis Anderson, Economics of 35. See, for example, Partha Dasgupta, S. Marglin, and Afforestation: A Case Study in Africa, Occasional Paper no. Amartya K. Sen, Guidelines for Project Evaluation (New York: 1 (Baltimore: Johns Hopkins University Press for the United Nations, 1972); and E. Ahmad and N. Stern, The World Bank, 1987); and for the latter three R. Sol6rzano Theory and Practice of Tax Reform for Developing Countries and others, Accounts Overdue: Natural Resource (Cambridge: Cambridge University, 1990). Depreciation in Costa Rica. 36. For a simplified exposition of the connection 41. The classic on household production is G. Becker, A between these two modes of analysis (reforms and opti- Treatise on the Family (Cambridge, Mass.: Harvard mization), see Dasgupta, Thle Control of Resources, chap. 5. University Press, 1981). 37. If education is regarded as a merit good, and not 42. See Karl Gbran-Maler, Environmental Economics: A merely as instrumental in raising productivity, then its Theoretical Enquiry (Baltimore: Johns Hopkins University accountingpricewouldbethatmuchhigher. Press, 1974) and "Welfare Economics and the 38. R. Sol6rzano and others, Accounts Overdue: Natural Environment," in A.V. Kneese and J.L. Sweeney, eds., Resource Depreciation in Costa Rica (Washington, D.C.: World Handbook of Natural Resource and Energy Economics, vol. 1 Resources Institute, 1991). (Amsterdam: North Holland, 1985). 39. See, for example, Dasgupta and Maler, "The 43. A.M. Spence, "Blue Whales and Optimal Control Environment and Emerging Development Issues." Theory," in H. Gottinger, ed., Systems Approaches and 40. See, for example, for irrigation water G. Brown Environmental Problems (Gottingen: Vandenhoek and and C.B. McGuire, "A Socially Optimal Pricing Policy Ruprecht, 1974). for a Public Water Agency," Water Resources Research 3 44. During the moratorium the whale population (1967); for fisheries C.W. Clark, Mathematical Bioecono- grows at the fastest possible rate. In Spence's numerical mics: The Optimal Management of Renewable Resources computations, the commercially most profitable duration (New York: John Wiley, 1976), R. Cooper, "An Econo- of the moratorium was found to be ten to fifteen years. mist's View of the Oceans," Journal of World Trade Law 9 45. See Arrow and Fisher, "Preservation, Uncertainty (1977), and Dasgupta, The Control of Resources; for soil and Irreversibility"; and Henry, "Investment Decisions fertility W. Magrath and P. Arens, "The Costs of Soil under Uncertainty: The Irreversibility Effect." Valuing the Environment: Past Practice, Future Prospect David W. Pearce What Does It Mean to for example, versus forest conservation. If envi- "Value the Environment"? ronmental assets have inviolable "intrinsic rights," then much economic development is Strictly speaking, there is no activity that can morally unsound. If the rights of the people rightly be called "valuing the environment." whose livelihoods are subsequently put at stake What economists do is to seek measures of indi- are allowed, then we have a conflict of rights and viduals' preferences for environmental improve- no clear decision rule that enables us to choose the ment or conservation, or individuals' loss of "right" course of action. Both of those positions well-being because of environmental degrada- would be applauded by some philosophers and tion or from losing an environmental asset. They many environmentalists, but they do not add up, find those measures in the concepts of expressed I suggest, to a constructive view of social choice in or revealed "willingness to pay" (WTP) and the context of economic development, however "willingness to accept compensation" (WTAC). suited they are to armchair philosophizing. They then make certain assumptions about our ability to aggregate these individual valuations. Why "Value the Environment"? The shorthand for this activity-"valuing the The Consequences of Asymmetry environment"-is convenient, but misleading to many. It implies that there is only one source of The previous brief discussion establishes the value-human preferences. Utilitarianism is only main reason for "valuing the environment": one of a number of value systems, and we all choices have to be made; hence there is a need to know that its practical counterpart-benefit cost compare the net social gains of one policy option analysis as practiced in modern project apprais- with that of another. If we accept the al-suffers from various ethical drawbacks.' The WTP/WTAC indicators as our measuring rods, aggregation assumption also has its own prob- money becomes the convenient unit of account.3 lems, notably that of "interpersonal comparisons If there were markets in all gains and losses, the of utility."2 economist's task would be relatively simple. The But while benefit-cost analysis has problems, value of marketed outputs and inputs could be so do alternative paradigms for making social compared for each option, and that with the high- choice. Indeed, some of them appear fundamen- est net gain would be "socially preferred."4 But tally unsuited to the practical, real world choices the pervasive problem with environment is that that have to be made. In the context of this con- so many environmental assets are not mar- ference, those choices relate to the conflict keted-there are no values to compare with those between the conservation of environmental assets from economic development. Pursuing the trop- and traditional patterns of economic develop- ical forest example, what actually gets compared ment: clearance of tropical forest for agriculture, is the net return from agriculture, livestock, or 47 48 Valuing the Environment: Past Practice, Future Prospect timber with the market value of a conserved for- opment was more likely to arise in high income est, which is zero or close to zero. Not surpris- contexts. This historical experience has tended to ingly, clearance and logging win the day. There is reinforce the assumption that environment is an an asymmetry of valuation. The "economic play- "income elastic" commodity, something we ing field" is biased against the conservation worry about only when basic needs have been option because, if there are economic values in met and we move into a high consumption phase conservation, they have no market, or only an of development. To some extent, therefore, the incomplete market. asymmetry of valuation reflects human This is the link between economic valuation preferences-there are no markets in envi- and sustainable development. However sustain- ronmental commodities because there is no able development is defined,5 the "bottom line" is demand for those commodities. Once the not debatable: the environment needs to be higher demand emerges, the markets get created. And on the development agenda if there is to be sus- the demand is more likely to arise when things tainable development.6 That much follows from get bad than when they appear to be satisfactory. the simple observation that environmental ser- The Climate Change and Biodiversity Conven- vices invariably do go unvalued, so that paths of tions, The Montreal Protocol, the Global development based on the asymmetry of values Environment Facility, the various attempts to get noted above must, of necessity, be economically our oceans cleaned up-can all be seen as exam- inefficient. We need only the observation of miss- ples of markets emerging in response to crisis. ing or incomplete markets to reach this conclusion. One of the features of the sustainable devel- The inefficiency arising from asymmetric val- opment debate has been a questioning of this uation occurs at all levels. At the project level, the income elasticity assumption. For the poor, the computation of net social benefits is distorted environment is an integral part of development unless environmental impacts are properly val- until such times as technological substitutes can ued. At the sectoral level, we have no mechanism be provided. This is true of fuelwood and fodder, for comparing sectoral priorities unless we have other forest products, water supply, water qual- some idea of relative net social gains from sec- ity, soil and soil nutrients. There is a direct depen- toral investment and change. And at the national dence of livelihoods on natural resources in their level, we will continue to be tempted to use GNP unprocessed state. Clean air may be something as an indicator of national well-being until we we can wait for until it can be afforded. Clean have an acceptable measure of gross national water and biomass energy are not. product (GNP) modified for the depreciation of There is a second dimension of the sustainable environmental assets-some sort of "green development debate that is highly relevant to the national income." The valuation issue is therefore valuation issue, namely North-South transfers. pervasive to the way we encourage economic The Brundtland Commission,8 the Rio Conven- development, and this justifies the attention tions and Agenda 21 have focused a lot of atten- being paid to it. tion on the issue of both the scale and nature of the transfers between rich and poor countries. Valuation in Practice: Leaving aside some of the rather silly estimates of Developing Countries' Experience required transfers that circulated at the Rio Earth Summit, there is an important issue of how these Most, but not all, of our experience in economic transfers can be determined. They can be thought valuation is in the rich world of the Organisation of as comprising two components: an equity com- for Economic Co-operation and Development ponent based on what the North ought to trans- (OECD) countries. To some extent this is not sur- fer to the South for developmental reasons, and a prising. Not only did the idea of "efficiency in self-interested component based on the transfers government" arise first in the developed world,7 necessary to secure the North's own collective giving rise to a whole set of procedures for deal- benefit from conservation and environmental ing with non-market products such as defence, improvement in the South. In the former case we health, education and environment, but the con- need to uncover the South's own "local" WTP for flict between environment and economic devel- environmental improvement. In the latter case Pearce 49 we need to elicit the North's WTP for the South's looking at actual choices, the trade-off between environment. We provide examples of each of money and time can be determined. Time saving these. is one of the benefits of water supply improve- To date, the most successful applications of ment. In this case, if water quality is invariant economic valuation techniques in the develop- among sources, time savings will generally ing world have been in the context of water sup- define total benefits. The Ukundu study found ply, sanitation, and forest functions. The that users of vendors and kiosks were revealing available case studies have been summarized in high WTP for time savings, of the order of 8 per- Pearce and Whittington.9 A few examples are cent of incomes. given here. Extensive further detail is available A study in Brazil used the contingent valua- for water and forests10 and for natural habitats tion approach, which essentially involves asking and biodiversity.)' people either directly what they are willing to pay, or less directly what their choice would be if Local Values: Water and Sanitation they were faced with certain prices for the service in question.'3 The question took the form, "If you The first cases concern the value of water supply are required to pay X, would you connect to the and sanitation. Traditionally, water supply new supply or use an alternative supply?" Three investments have been evaluated by rules of different areas were surveyed, some with thumb related to assumed willingness-to-pay for improved services available to which households basic services. Since the service is usually sup- might or might not be connected, and some with- plied to the poor, the assumption has been that out. In the "without" cases some had services only the most basic provision-public taps and planned with an announced tariff; others hand pumps-is warranted. No one is willing to expected a service but did not know of what kind pay for better, more elaborate services. This or what the tariff would be. From the survey the "basic needs" philosophy would be satisfactory probabilities of being connected were estimated, if the resulting public supplies were reliable. and these were fotmd to behave as predicted. The However, perhaps one in four public supply sys- higher the price and the greater the distance to tems are not working at any one point of time, the source, the less likely was connection. WTP while use rates of tlose that do work are low- estimates were also obtained from the question- only one-third of people connected to public sup- naires. The results provide not just an estimate of ply systems in C6te d'Ivoire and Kenya actually the average WTP, but also indicate how house- use them. Yet the benefits of such systems, in holds would respond to higher prices, an impor- terms of public health and time saving, are clearly tant consideration if revenue-raising is a concern. substantial. Households' true willingness to pay Maximum WTP for a yard tap was around 2.5 is, therefore, worth estimating. times the prevailing tariff and some 2.3 percent of The World Bank's program of work on eco- family income. Some "strategic bias"-deliberate nomic valuation of water supply has adopted under-reporting of WTP-was probably present basically two approaches to deriving economic so that true WTP was probably higher than this. values: dichotomous choice and contingent valuation. Equity considerations could be taken care of by With dichotomous choice one can observe providing relatively highly priced services to the how people choose between alternative means of better off and using revenues to cross subsidize water supply involving different allocations of the needs of the poor for free public taps. time. In Ukundu, Kenya, villagers could choose Fewer than 300 million people lived in devel- between water from vendors who visit the house, oping country urban areas in 1950. Today the fig- water sold at "kiosks" in the village, and water ure is over 1,300 million. By 2000 it will be 1.9 from the well.12 In terms of collection time, relative billion. By the year 2000 there will be 200 cities to use of the well, house delivery saves the most with populations over 1 million, 150 of which will collection time and collecting from kiosks the be in developing countries. The cost of the neces- least amount of time. In terms of expenditure, sary infrastructure for this urban development is household vending costs the most, then kiosk enormous. As with water supply generally, sani- water, with well water being the cheapest. By tation systems tend to be primitive for the poor, 50 Valuing the Environment: Past Practice, Future Prospect and subsidized systems of the less primitive Worldwide Fund for Nature (WWF) initiated a schemes tend to benefit the middle and upper program of conservation, centered on a manage- income classes. As with water, willingness-to- ment area of 126,000 hectares plus a surrounding pay is generally assumed rather than estimated. buffer zone of 300,000 hectares. A similar pro- Charges above 3 percent of household incomes gram was initiated for Oban National Park just are thought not to be affordable. across the border in Nigeria. In Kumasi, Ghana, WTP for sanitation was esti- Economic valuation of the rainforest's bene- mated through a contingent valuation approach. fits was carried out to assist with the process of The options were water closets with a piped raising development aid funds to conserve the sewage system and ventilated pit latrines area.15 Benefits of conservation were then com- ("KVIPs"). The latter represent a far cheaper pared to the costs of the conservation project plus option for sanitation than connecting sewers and the foregone timber revenues. While the frame- installing water closets. Households varied work for analysis was the total economic value according to the systems already in place. Some concept, existence and option values were not had water connections and could therefore be directly estimated. The procedure involved esti- asked their WTP for a water closet and a KVIP. mating direct and indirect use values to Cameroon Households with water closets could be asked and then seeing what the existence and option how much they would be WTP for a connection to value would lhave to be to justify the project. Since the sewer, and so on. KVIPs can operate without it was thought that the non-use values would water connections. The results showed that house- reside mainly with people outside Cameroon, the holds without water closets were WTP roughly the focus of attention for non-use values was on see- same sum for a WC or a KVIP. In terms of WTP for ing what international transfers might be needed. KVIPs, households with bucket latrines bid the The results are shown in box 1 below. lowest price; those using public latrines bid signif- icantly higher prices (around 30-35 percent more), reflecting the inconvenience and lack of privacy of Box 1. The Korup Project the public systems. Overall mean bids of around $1.50 per month compare to average existing Benefits and costs to Cameroon expenditures of about $0.50 per month. Corn- (Present values, million CFA, 1989 prices) paring WTP with the costs of provision of KVIPs (Discount rate = 8%) and WCs, WTP was found to be less than costs of Costs of conservation project supply Given that sanitation systems yield exten- Resource costs - 4475 sive external benefits in the form of public health, Foregone forest benefits a subsidy would probably be justified (the benefits timber 353 of improved health were not estimated). The study forest products - 223 showed that the required subsidy for a WC system -5051 for Kumasi would amount to some $60 million. The required overall subsidy for the KVIP system Benefits of conservation project would amount to some $4 million."4 Use of forest products + 354 Tourism + 680 Local and Global Values: Forest Conservation Indirect use benefits Korup National Park lies in Southwest Province, Protection of fisheries + 1770 Cameroon. It contains Africa's oldest rainforest, Flood control + 265 over 60 million years old, with high species Soil productivity + 130 endemism. There are over 1000 species of plant, + 3199 and 1300 animal species including 119 mammals Net benefits to Cameroon - 1852 and 15 primates. Of the total listed species, 60 Economic rate of return (ERR) 6.2% occur nowhere else, and 170 are listed as endan- gered. Continued land-use changes are putting Net benefits to Cameroon if substantial pressure on the rainforest. The the discount rate is 6% + 319 Pearce 51 From the standpoint of Cameroon, the project on the basis of freshwater inundation in high appears not be worthwhile because there is a neg- water periods and saltwater in low water periods. ative net present value of some 1852 million CFA If the forest were to disappear, peak flows from at 8 percent discount rate, although there is a the forest would increase, bringing added sedi- modest positive net present value if the discount ment and less salinity. Basically, the mangrove rate is lowered to 6 percent. But the analysis cov- swamps would no longer function as the habitat ers only some of the components of total eco- for the rich fish species that make up both the on- nomic value. What of existence and option and offshore fisheries. Since the link between the values? These were not estimated directly rainforest and the offshore fishery is less estab- Instead, the issue becomes one of asking whether lished than the link to the inshore fishery, only the rest of the world would be willing to pay 1852 damage to the onshore fishery was estimated. million CFA (in present value terms) to Cameroon This was valued at the market value of fish and, to reflect these option and existence values. One as a check, at the income derived from the fishery way of testing this is to look at existing conserva- The flood alleviation benefits were calculated tion transfers through debt-for-nature swaps. by looking at the expected value of the income Translated into a per hectare basis, the required losses that would accrue if there were a flood. The transfer for Cameroon is just over 1000 ECUs per soil fertility benefits were based on a broad brush km2. Debt-for-nature swaps have implied various assessment that, if the forest disappeared, cash valuations ranging from as low as 15 ECUs per crop yields would decline by 10 percent. km2 (Bolivia) to around 1600 ECUs per km2 (Costa The implicit minimum requirement for an Rica). Given the high species endemism and international transfer (the "rainforest supply diversity of Korup, values of 1000 ECUs or more price") was estimated by taking the present value would seem justified. The conservation of Korup of net costs (the 1852 million CFA) and dividing forest becomes justified in economic terms pro- by the present value of the hectarage that could vided this transfer actually takes place. be identified as being protected by the conserva- The resource costs are based on budgets and tion project-some 500,000 "hectare years." This plans in the Korup National Park Master Plan, net produces the value of 3600 CFA per hectare per of compensation payments (which are internal year, or some 1060 ECUs/km2. transfers) and other costs regarded as being not Notable omissions from the study are attributable to the conservation project. The fore- twofold: no attempt was made to assess the value gone forest benefits include timber from potential of the forest to local people over and above its use commercial logging (the 353 million CFA) and value; and no attempt was made to estimate the some foregone traditional uses of the forest, net contribution to CO2 emissions from defor- mainly hunting, which would be forbidden estation. Both omissions are likely to reduce the within a designated national park, and which can- net present value deficit shown in the table. not be offset by diverting activity elsewhere (the However, only the former will lower the rainfor- 223 million CFA). This proscription of traditional est supply price because CO2 benefits are likely to uses affects some 800 villagers within the national attract a negligible if not zero willingness to pay park boundaries. In the long run, however, other on the part of Cameroon citizens. The CO2 bene- residents, mainly some 12,000 people on the fits will, however, make it more likely that the rest periphery, will be able to continue their traditional of the world will pay for rainforest conservation use of the forest, which they would not be able to (that is, it affects the rainforest demand price). do if deforestation continued. Thus, while one How relevant the CO2 benefits can be is illus- group loses benefits, another, larger group gains trated below. (the 354 million CFA). The tourism figure is con- jectural and is based on an eventual 1000 visitors Global Missing Markets annually by the year 2000 and their expected expenditure adjusted for the shadow wage rate. The final example of valuation raises an interest- The fisheries item is important. Rainfall in the for- ing issue relating to the North's willingness to pay est feeds several rivers that feed into large man- for environmental improvement in the South. grove areas rich in fish. The mangroves prosper Economists are used to speaking of "market 52 Valuing the Environment: Past Practice, Future Prospect failure" as a major factor in explaining environ- If tropical forested land is converted to pas- mental degradation, along with misdirected inter- ture or permanent agriculture, the amount of car- ventions by governments themselves.16 Market bon stored in secondary vegetation is equivalent failure relates to the inability of markets to to the carbon content of the biomass of crops account for the social costs of economic activity: planted, or the grass grown on the pasture. If a the upstream polluter, for example, does not pay secondary forest is allowed to grow, then carbon for downstream pollution unless forced to do so will accumulate, and maximum biomass density by regulation or some form of pollution taxation. is attained after a relatively short time. But market failure is not just a local phenom- Box 2 illustrates the net carbon storage effects enon. Many environmental assets have global of land use conversion from tropical forests and economic value. This is most pronounced and closed primary, closed secondary, or open forests least understood for biological diversity, but to shifting cultivation, permanent agriculture, or extends to global climatic change. Pursuing our pasture. The negative figures represent emissions tropical forest example once more, all forests of carbon; for example, conversion from closed store carbon so that, if cleared for agriculture, primary forest to shifting agriculture results in a there will be a release of carbon dioxide that will net loss of 194 tC/ha. The greatest loss of carbon contribute to the accelerated greenhouse effect involves change of land use from primary closed and hence global warming. To derive a value for forest to permanent agriculture. These figures the "carbon credit" that should be ascribed to a represent the permanent change that will occur in tropical forest, we need to know (a) the net car- carbon storage as a result of the various land use bon released when forests are converted to other conversions. uses, and (b) the economic value of one ton of car- The data suggest that, allowing for the carbon bon released to the atmosphere. fixed by subsequent land uses, carbon released Carbon will be released at different rates from deforestation of secondary and primary according to the method of clearance and subse- tropical forest is of the order of 100-200 tons of quent land use. With bumi,ng there will be an carbon per hectare. immediate release of CO2 into the atmosphere, The carbon released from burning tropical and some of the remaining carbon will be locked forests contributes to global warming, and we in ash and charcoal that is resistant to decay The now have, leaving aside catastrophic events, sev- slash not converted by fire into CO2 or charcoal eral estimates of the minimum economic damage and ash decays over time, releasing most of its car- done by global warming. Recent work by bon to the atmosphere within ten to twenty years. Fankhauser suggests a "central" value of $20 of Studies of tropical forests indicate that significant damage for every ton of carbon released.17 amounts of cleared vegetation become lumber, Applying this figure to the data in box 2, we can slash, charcoal and ash. The proportion differs for conclude that converting an open forest to agri- closed and open forests; the smaller stature and culture or pasture would result in global warm- drier climate of open forests result in the combus- ing damage of, say, $600-1000 per hectare; tion of higher proportion of the vegetation. conversion of closed secondary forest would Box 2. Changes in forest land use and carbon release (tClua) Shifting Permanent Original C agricuilture agriculture Pasture Original C 79 63 63 Closed primary 283 -204 -220 -220 Closed secondary 194 -106 -152 -122 Open forest 115 -36 -52 -52 Note: Shifting agriculture represents carbon in biomass and soils in second year of shifting cultivation cycle. Source: David W. Pearce and K. Brown, "The Economic Value of Carbon Storage in Tropical Forests," in S. Weiss, ed., The Economics of Project Appraisal and the Environment (London: Edward Elgar, 1993). Pearce 53 cause damage of $2000-3000 per hectare; and con- such as roads and schools; human capital in the version of primary forest to agriculture would form of the stock of knowledge, skills, and give rise to damage of about $4000-4400 per capabilities; and environmental assets. Just as we hectare. Note that these estimates allow for car- measure net national income (NNP or NDP) as bon fixation in the subsequent land use. GNP less depreciation on the human-made capi- How do these estimates relate to the develop- tal stock, so we need to make adjustments for any ment benefits of land use conversion? We can illus- depreciation (or enhancement) of environmental trate with respect to the Amazon region of Brazil. capital. At its very simplest, then, we would Schneider reports upper bound values of $300 per expect to see a modified GNP figure obeying a hectare for land in the Paragominas area of Para, formula such as: and a range of only $15 to $150 for land in Rondonia.18 If we take a "carbon credit" value of gNNP = GNP - 6Km - 8Kn $2000, the figures suggest carbon credit values are at least 7 times and could be over 100 times the where g signifies "green" or "adjusted" net price of land in Rondonia. These "carbon credits" national product; WKm is depreciation on human- also compare favorably with the value of forest made capital assets; and SKn is depreciation on land for timber in, for example, Indonesia, where natural capital. estimates are $2000-2500 per hectare. These figures Annex 1 shows how such a formula might be suggest the scope for a global bargain. The land is expanded to cover non-renewable resources, worth $300 per hectare to the forest colonist but renewable resources, and pollution damage. several times this to the world at large. If the North Unfortunately, the experts are not in agree- can transfer a sum of money greater than $300, say, ment as to how a gNNP measure should be esti- but less than the damage cost from global warm- mated. The competing methodologies are ing, there are mutual gains to be obtained. summarized in the identities below. The names of Note that if the transfers did take place at, say, prominent authors are linked to the different $500 per hectare, the cost per ton carbon reduced approaches, but it should be stressed that there is is of the order of $5 tC ($500/100 tC/ha). These a wide spectrum of opinion among them. Note unit costs compare favorably with those to be that the last one relates to wealth rather than achieved by carbon emission reduction policies income, and at least one country (Canada) is pur- through fossil fuel conversion. Avoiding defor- suing the idea of modified wealth accounting. estation becomes a legitimate and potentially Wealth accounting has obvious links to a measure important means of reducing global warming of sustainable development if a condition for rates. sustainable development is taken to be at least a constant stock of all assets.20 Valuation and the National Accounts gGDP = GDP + ES +/- ED, - IR (1) Significant effort has gone into both the theoreti- cal and practical problems of adjusting measures gNDP = NDP + RDIS - RDEP - ED2 (2) of GNP to reflect environmental concerns.'9 The basic idea is that "true" or "sustainable" income is NW = NFA + TAm + TAn (3) thatflow of income that leaves the capital stock of the economy intact. Intuitively, we can no more sus- where: tain an economy by mining its capital stock than gGDP = "Green" gross domestic product a businessperson can survive by depleting his or ES = The value of environmental services her own capital. The link to the concept of sus- ED, = Environmental damages that are tainable development is obvious: no develop- deducted according to one school of ment path can be sustained beyond the short run thought and added according to if it involves running down national assets. But another, depending on how GDP is assets in this context have to be construed far measured more broadly: they include the conventional IR = Invested resource rents human-made (or "reproducible") capital assets gNDP = "Green" net domestic product 54 Valuing the Environment: Past Practice, Future Prospect RDIS = The value of resource discoveries measures that avoid the often high cost of RDEP = The value of resource depreciation detailed exercises. ED2 = Environmental damage that in this case is deducted from net product Valuation: Where Next? DE = Defensive expenditures NW = National wealth What can we learn from this quick tour d'horizon NFA = Net financial assets of the valuation issue? There are several proposi- TAm = Human-made tangible assets tions we can make: TAn = "Natural" tangible assets * The moral debate about the underlying ethics Further detail is given in Hamilton and others.21 of economic valuation will continue. This The underlying policy perspective is that reflects the wider debate about neoclassical because decisionmakers are influenced by mea- welfare economics generally, of which sures of GNP, it is essential to have a modified environmental valuation is one part. measure of GNP - green GNP (gGNP) so that * The number of valuation exercises has in- those decisionmakers receive the right signals creased rapidly and shows no sign of abating. about the "true" progress of the economy. How- * Valuation is essential if we are even to ever, countries that have experimented with approach the correction of distorted develop- adjusted income measures, including those that ment paths based on the asymmetry of values eschew adjusted monetary measures in favor of for the environment and for "development." conventional GNP allied to sets of physical Valuation is not inimical to development. It is resource accounts ("satellite accounting"), reveal a corrective against wrong and unsustainable very different motives for wanting a modified set development. of accounts. A survey by Hamilton and others * The experience to date with valuation in the shows that a few seek to develop "sustainability developing world shows us that it can be very indicators" (Canada); several seek to improve successful in eliciting the social value of basic their macroeconomic planning capabilities to needs such as water and sanitation. This trace out the implications of economic decisions, enables such values to enter into project and not surprisingly this is the focus in those appraisal in place of "rules of thumb" that countries with a strong macro-planning back- have been used hitherto. ground (Finland, Norway, Sweden); and some * Since developing country valuation exercises have clearly followed a trend without any partic- so far have been confined mainly to water and ular "philosophy" in mind.22 sanitation, we have little idea as yet about the The other, perhaps more controversial, obser- sectoral priorities that would emerge if we vation is that the extent to which modified compared such investments with other income accounting alters belhavior has yet to be investments. Hazarding a guess, it seems tested. Unquestionably, it has led to a number of likely that local valuation exercises will: insights, especially in underlining the extent to a. Reinforce the view that what we might which countries, both developing, for example, term "environmental basic needs invest- Philippines23 and developed, for example, the ments"-water, biomass, sanitation- United Kingdom24 have failed to re-invest rents have very high social rates of return from the exploitation of resources. Given the b.Raise the profile of water pollution control Hartwick-Solow rule on re-investing rents for investments due to the strong link between sustainable consumption, we can truly say that water pollution and human health certain countries have been, and are, living off c. Reveal high rates of return to soil erosion capital assets of a relatively short-lived nature. control and nutrient investment. There is also the whole "consciousness raising" * As far as the global values of tropical forests aspect of modified income accounting. How far it and other "biodiversity havens" are con- will feed into changes in political behavior is very cerned, those who pin their hopes on the likely to depend on (a) further resolving the dis- global value of genetic materials through putes between the experts as to the "right" way biotechnology or pharmaceuticals are very to modify the accounts and (b) finding short-cut probably backing low value opportunities.25 Pearce 55 Far greater potential exists in terms of the val- conversion, the main source of environmental ues of carbon storage and use and non-use loss. There is a high likelihood that a very high values for diverse systems. We know a good percentage of land conversions are carried out deal about carbon values, but next to nothing for zero or negative net gains: the resulting about global biodiversity values. The latter incomes barely compensate labor, leaving are the greatest challenge to the "economic nothing as the gain in rent. If the development valuers." Global "missing markets" do a lot to gain is zero, or near zero, then it requires little explain the skewed development paths of by way of positive economic value for envi- resource-rich countries, and hence the loss of ronmental services to justify conservation. so much of the world's environmental assets. * Finally, valuation is an integral part of most * Perversely, while we are making efforts to modified national accounting systems. value environmental benefits and damages, Getting the analytical exercises into the real we very often have little idea about the oppor- political arena, where we can observe behav- tunity costs of conserving environmental ioral change, will require some resolution of assets. That is, we know very little about the the existing methodological debate and the development "benefits" that accrue from land development of rapid appraisal techniques. 56 Valuing the Environment: Past Practice, Future Prospect Annex An Approach to Modified Income For renewable resources (subscript j), the princi- Accounting ple is the same, but we now have to allow for the natural growth rate of the resource g(XI) and its This annex is based mainly on Hartwick.26 harvest rate H.. The net growth [g(X1) - H.] is then Conventional GNP is defined as valued at the royalty PF - MCj. This second extension now produces: GNP = NNP + 8Km (1) NNP = GNP - 6Km - JP, - MCj][Qj - Nj] where 6Km is depreciation on human-made cap- + YJP- MC] [g(X1) - H] (6) ital. We need to extend this to allow for natural capital Kn and for pollution damage. Take natural Note that if the harvest rate exceeds the growth capital first. Above is extended to rate, the last bracketed expression is negative and NNP falls. GNP = NNP + 6Km + 6Kn (2) For pollution damage, let Dk be theflow of pol- lution of type k in physical units; Pk is the shadow Hence price of pollution damage (estimated, for exam- ple, by contingent valuation), and MCk is the mar- NNP = GNP - 6Km - 6Kn (3) ginal cost of pollution abatement. There are two effects of pollution: one on households-the How is 6Kn measured? disutility of pollution-and this will equal the For non-renewable resources, Hartwick shows flow of pollution multiplied by the shadow price that for each kind of natural capital (Kn1), it is of pollution, that is, P kDk; and the other, on pro- given by: duction-and this will equal MCk.Dk. The sunm of these two impacts is then: 6Kni = [Pi- MCjI[Qi - Ni] (4) (Pk + MCk).Dk where Pi is the shadow price of the resource ( = market price in a competitive economy) and this needs to be deducted from GNP to get to MCj is the marginal cost of extraction NNP. Thus, if Dk > 0 there is more pollution and Pj-MCj is then the user cost or royalty on the a positive value of damage Pk.Dk to householders resource. and this should be deducted from GNP. Hence Qi is output of the resource (its "draw down") NNP < GNP. If pollution damagefalls, that is, Dk Ni is new discoveries. < 0. Both P and MC are positive, so the expression So, the first extension gives: (Pk + MCk) Dk is negative, and since it is being deducted from GNP, the effect is to add to NNE. NNP = GNP - 6Km - ,jP, - MCj[Qi - Nj] (5) NNP > GNP. So the final expression for NNP is: where subscript i refers to non-renewable resources. NNP = GNP- 6Km -i[P, - MC,][Qi - N,] If Ni > Q, NNP grows relative to the conven- + _ I.[PI- MC ][g(X) - H] tional definition. Otherwise it is less. (Note: the - Y;k[Pk + Mik]Dk (7) way in which new discoveries are treated here is open to dispute.) Pearce 57 Notes 15. J. Ruitenbeek, "Evaluating Economic Policies for Promoting Rainforest Conservation in Developing 1. For a recent statement, see D. Hausman, The Inexact Countries," (Ph.D diss., London School of Economics, and Separate Science of Economics (Cambridge: Cambridge 1990); J. Ruitenbeek, Economic Analysis of Tropical Forest University Press, 1992). Conservation Initiatives: Examples from West Africa 2. J. Elster and J. Roemer, Interpersonal Comparisons of (Godalming, United Kingdom: World Wide Fund for Well-Being (Cambridge: Cambridge University Press, Nature, 1990); J. Ruitenbeek, "The Rainforest Supply 1991). Price: A Tool for Evaluating Rainforest Conservation 3. This is quite different from saving that compensa- Expenditures," Ecological Economics 6 (1) (uly 1992). tion, for example, should always be thought of in terms of 16. David W. Pearce and Jeremy J. Warford, World cash. Other goods and replacement assets may be more without End: Economics, Environment, and Sustainable appropriate, but they can be related back to money in the Development (New York and Oxford: Oxford University resulting calculus. Press, 1993); Robert C. Repetto, World Enough and Time: 4. The aggregation problem arises again. There will Successful Strategies for Resource Management (New Haven: be gainers and losers under each option. Benefit-cost Yale University Press, 1986). analysis proceeds on the assumption that gainers do not 17. S. Fankhauser, "Evaluating the Social Costs of CO, actually have to compensate losers-"hypothetical com- Emissions" (CSERGE Working Paper, Centre for Social pensation." But if losers are not compensated, they are and Economic Research on the Global Environment, actually worse off, which has obvious implications for University College London and University of East Anglia, distributive justice. 1993). 5. John Pezzey, Sustainable Development Concepts: An 18. R. Schneider, "The Potential for Trade with the Economic Analysis. Environment Paper no. 2 (Washington Amazon in Greenhouse Gas Reduction" (LATEN D.C.: World Bank, 1992); David W. Pearce, Economic Values Dissemination Note no. 2, Environment Division, Latin and the Natural World (London: Earthscan Publications, America Technical Department, World Bank, Washington 1993). D.C., 1993). 6. World Commission on Environment and Develop- 19. Yusef J. Ahmad, Salah El Serafy, and Ernst Lutz, ment (WCED), Our Common Future (Oxford: Oxford Uni- Environmental Accounting for Sustainable Development versity Press, 1987). (Washington, D.C.: World Bank, 1989); Ernst Lutz, ed., 7. R. McKean, Efficiency in Government through Systems Toward Improved Accounting for the Environment Analysis (New York: Wiley, 1958). (Washington, D.C.: World Bank, 1993). 8. WCED, Our Common Future. 20. Robert M. Solow, "On the Intergenerational 9. David W. Pearce, D. Whittington, and S. Georgiou, Allocation of Natural Resources," Scandinavian Journal of Project and Policy Appraisal: Integrating Economics and Economics 88 (1) 1986). Environtimenit (Paris: Organisation for Economic Co-opera- 21. K. Hamilton, David W. Pearce, G. Atkinson, A. tion and Development, 1994). Gomez-Lobo, and C. Young, "The Policy Implications of 10. Pearce, Economic Values and the Natural World. Natural Resource and Environmental Accounting." 11. David W. Pearce and D. Moran, The Economic Value (Report to the Environment Department, World Bank. of Biological Diversity (London: Earthscan Publications, Centre for Social and Economic Research on the Global 1994); and K. Brown, David W. Pearce, T. Swanson, and C. Environrnent, University College London, 1993). Perrings, Economics and the Conser'ation of Global Biological 22. Hamilton and others, "The Policy Implications of Diversity (Washington, D.C.: Global Environment Facility, Natural Resource and Environmental Accounting." 1993). 23. Wilfredo Cruz and Robert C. Repetto, The 12. X. Mu, D. Whittington, and John Briscoe, Enivironmenital Effects of Stabilization and Structlural "Modeling Village Water Demand Behavior: A Discrete Adjustment Programs (Washington, D.C.: World Resources Choice Approach," Water Resources Research 26 (4) (1989). Institute, 1992). 13. John Briscoe, P. de Castro, C. Griffin, J. North, and 24. David W. Pearce, ed., Blueprint 3: Measuring 0. Olsen, "Toward Equitable and Sustainable Rural Water Sustainable Development (London: Earthscan Publications, Supplies: A Contingent Valuation Study in Brazil," World 1993). Bank Economic Rev)iew 4 (2) (1990). 25. Pearce and Moran, The Economic Value of Biological 14. See D. Whittington, D. Lauria, A. Wright, K. Choe, Diversity. J. Hughes, and V. Swarna, "Household Demand for 26. J. Hartwick, "Natural Resources, National Improved Sanitation Service in Kumasi, Ghana: A Accounting and Economic Depreciation," Journal of Public Contingent Valuation Study," Water Resources Research 29 Economics 43 (1990). (6) (1991): 1539-60. Discussant Remarks Anne Harrison There is agreement that what we want to do with fying what we mean by an economic asset. Those accounting measures is to change the conven- of us who have been involved with the revision tional way in which we measure production so of the System of National Accounts (SNA) spent that we take appropriate account of environmen- some time fighting for a definition and ended up tal issues. But there is very little agreement over with the following: the whole range of issues of hiow we do it. I would like to talk about some of the issues that have An economic asset is an entity over which come up in these two papers, point to the areas ownership rights are enforced by institu- on which I think there is fairly general agreement tional units, individually or collectively, or agreement is well on the way, but highlight and from which economic benefits are some areas where agreement is further away. derived by its owner(s) by holding or using.it over a period of time. What Are Economic and Environmental Assets? You may have some reservations about it ini- tially, but if you can come up with a better and This statement appears in David Pearce's paper: more satisfying definition, many people would "'True' or 'sustainable' income is that flow of be very glad to hear it. Working from this basis, income which leaves the value of the capital stock we then decided that we need to think about the of the economy intact" [addition in italics mine]. level of wealth of an economy, and we need to It is not enough to say that sustainable income is work out a taxonomy for it. the flow of income that leaves the capital stock Table 1 lists different types of assets, starting intact. We are talking about the value of the cap- with financial assets and liabilities. For non- ital stock. Among humanmade assets we contin- financial assets, we tend to differentiate between ually substitute one sort of capital asset for produced and non-produced. They are not quite another, and we have to raise the possibility that the same as the difference between manmade and we can do the same with environmental assets. natural assets that are referred to in the Pearce Clearly, we do not mean that to maintain capital and Dasgupta papers because some natural stock intact, petrol in the ground has to stay in the assets that are cultivated are included within ground. We have to think in terms of substi- standard measures of production. It is only those tutability, a major area to which we have to pay that are not cultivated in that sense that we treat attention. as non-produced. Next, I want to talk about what we mean by But even within the second list of the non-pro- capital assets. It is clear that economic assets are duced assets, not all of them are necessarily "good things," but not all good things become included in conventional accounts. We include economic assets. We have to be careful in speci- only those that are drawn into the production 58 Harrison 59 process: sub-soil assets that are being exploited So these are the lists of assets that we can con- are included whereas those that remain econom- sider, and it is the list above the dotted line, and ically nonviable at the moment are excluded. possibly including the first set below the dotted Thus, we can make an additional list of environ- line, that we wish to consider preserving or of mental assets that are currently excluded from which we wish to consider preserving the value the SNA, which will have the same basic head- when we make estimates for gross national prod- ings as those above but which are not yet drawn uct and net national product. into the production process. Towards the end of his paper, David Pearce Clearly, it is possible to extend the sort of analy- has a couple of equations showing the alterna- sis that we are used to doing in national accounts tives to accounting and showing variations. to include these items. One of the characteristics of Another way of looking at it is shown in table 2. those that are listed above the dotted line is that At the top is what we generally include in ownership can and is established over these, and national accounts: a measure of gross national on the whole we can find prices that represent product and then a measure of net national prod- them. Over the first set below the dotted line, own- uct that takes out the consumption of fixed capi- ership could be established, and probably some tal on produced assets. Next, we have three sort of valuation could be placed on them. variations put forward by different people in But there remain some items, such as the slightly different circumstances. oceans and people, for which it is rather difficult The first one is the most simplistic: we leave to do either of these things. On the whole, within gross product unaltered, but for net product we the national accounts we do not yet regard people take off consumption or depreciation not only for as being economic assets. People obviously have produced assets but also for non-produced worth. They are often economically productive, assets. The second alternative is to say that we but they are not, thankfully, generally bought and should not leave gross product unaltered. We sold in the marketplace with skills that can be need to make an addition to the gross product as transferred from one person to another. well as make the two deductions to reach net product. The third option is that we still change gross product, but by making a deduction, not an Table 1. Assets constituting wealth in a wide sense addition. Financial assetsAiabilities It may be easier to look at these variations as Non-financial assets shown in 1. Produced assets shw nfigure 1 "Man-made" In the base case, the bulb at the top is gross Cuopivated product; the bulb at the bottom is net product. Non-produced assets Land Drawn into Option 1 leaves the gross product unchanged Subsoil assets production process but depresses net product. Option 2 leaves net Non-cultivated biological resources product unchanged but increases gross product, Water resources Land Not/not yet drawn into but the difference between the two is the same, Subsoil assets producton process as in Option 1 (that is, AD = BE). Option 3 Biological resources Water resources Air Figure I Schema of Table 2 Oceans People Base Opbon I Option2 Opbon 3 Table 2. Possible relations between GNP and NNP E ------------------- ---------- GNP 1 K, NNP = GNP - 8K D ----- ------ ----------------A (I) gGNP = GNP v K, g NNP = gGNP - 8 t - BK,,Kp gNNP _ __ _ __ _ __ _ ( IN-i KC --_ _______ _____ S, (2) g GNP = GNP + 8 I gNNP =gGNP- iK, - 8K~ B (3) gGNP = GNP - K B g NNP = g GNP - 6 K, A - KA 60 Discussant Remarks depresses gross product but leaves net product talk about normal losses. We deal with excep- where it is under Option 1. In the base case and tional losses separately Option 3, the difference between gross and net Therefore, if exceptional losses do not come product is only 5 Kp; in both Option 1 and Option out of depreciation for produced assets, then in 2, it is 5 Kp + 5IKn. parallel the discoveries should probably not be To a large extent there is agreement on the dif- knocked off the depreciation for the non-pro- ferences between gross and net measures. There duced assets. So on the whole, in the first equation is less agreement about which one we keep con- my inclination would be to take out the term N. stant, if either. Figure 1 is one way in which I I have little problem with the second equation would characterize the remaining discussion although I think in practice for many renewable about how we should alter GDP, if at all. resources, the marginal cost of extraction is prob- ably not so relevant in the equation. We can usu- The Adjustment for Depletion ally simply take the market price times the of Natural Capital difference between the growth during the year and the offtake. There are three elements to an adjustment for The real problem comes with the third adjust- consumption of natural capital: depletion for ment-for degradation. This is an area about nonrenewable resources, depletion for renewable which a great deal of discussion continues and lit- resources; and degradation. The two formulae in tle consensus has yet emerged. Let me try to illus- table 3 come from David Pearce's paper. The first trate some of the problems with a notional one shows the difference between the quantity example that does not initially have to do with extracted of a nonrenewable resource less the dis- the environment. Suppose we think about a man- covery, and we multiply it by a price that is the ufacturer of cigarettes, and we say that it costs 100 difference between its market price and the mar- to make the cigarettes. The immediate costs are ginal cost of extracting it. It is, in effect, therefore, 45, leaving value-added of 55. Households con- the value of the petrol in the ground if we take sume the cigarettes, spending 100 on them, and P-MC as a measure of its unit value. because they are not good for their health, they I would argue and a number of other people also have to spend another 20 in putting good the would argue that in that equation it is not appro- damages that they incur to their health. These fig- priate to have N for the new discoveries. If we ures appear in the first column of table 4. suddenly win a million dollars in a lottery, would The logic that says that the pollution costs we really regard that as being our income in this should be borne by the producer means that we year? It is true that we could spend it and still be would change the numbers as follows (see col- as well off at the end of the year as we were at the umn 2): output is still 100, but the costs have beginning, but it is not a very prudent way of pro- increased from 45 to 65 because the producer will ceeding. We would not typically assume that it pay for the health costs. His or her value-added was income. Similarly, if we have an earthquake goes down, and households still have to spend as there was in India this morning, and there is a only 100 because they now get free health care massive loss of capital stock, we would not nor- provided courtesy of the tobacco manufacturer! mally take that capital loss off the income for This does not seem to me to be likely. In the India this year. Within depreciation, we generally real world the tobacco manufacturer would increase the cost of his/her product to cover the Table 3. Pearce's equations for depletion extra costs, as in column 3: output would go up of natural resources Depletion of non-renewable resources Table 4. "Environmentally adjusted" account for cigarette (I) 8 K = (P - MQ -N) production and consumption Depletion of renewable resources Output 100 100 120 (2) 8 K. = (P - MC)g(X) - M) Intermediate consumpbon 45 65 65 Value-added 55 35 55 Key: 8 K, = Depletion N = New discoveries Household consumption of P = Price g(X) = Natural growth cigarettes 100 100 120 MC = Marginal cost M = Ctftake 20 Q = Quantity extracted heafth 20 Harrison 61 to 120, his costs would stay at 65, but his value- for others? If we think that it is appropriate to take added would revert to where it was originally, externalities into account for environmental and households would go back to spending 120 goods, why do we not do so for cigarettes, for because the cost of the cigarettes have gone up. confectionery if it is bad for teeth, for fast cars This case is oversimplified because some con- which also kill people? Why stop at the purely sumers would be put off by the increase in the environmental issues? price of cigarettes and a new supply/demand If we want to measure the cost of fetching equilibrium would be reached, say at 110 instead water in terms of the energy expended and the of 120. Basically, the process of including prices time taken, why do we not do that for other types that were not included before changes the whole of production? For subsistence agriculture, we picture. We cannot simply move things from one typically value the value of rice or maize grown bit of the equation to another and assume every- by its price if it were sold, but we could measure thing stays the same. When we want to take pol- it the same way that we would do for water, so lution costs into account, we end up in a modeling why don't we? situation in which we have to worry about elas- I would like to end by making a reference to ticity of demand for all products in the production the measure of GDP as welfare. Most national cycle affected by the new costs. It is not just as sim- accountants fight very hard against the idea that ple as saying we will knock something off GDP, GDP is a measure of welfare. It might be a mea- perhaps on two sides, once on the demand and sure of welfare. It certainly is not the only mea- once on the supply side, to get to what we want. sure of welfare. There are serious problems in trying to find a single number to tell us every- National Accounts, the Environment, thing we want to know about an economy. The and What Else? report produced by UNICEF last week called The Progress of Nations compares and contrasts very This is one of the problems that I have with the good measures of welfare for many countries proposal for how to deal with the consumption of with their GNP and shows that there is an almost non-produced assets. I have problems, too, about complete lack of correlation.' consistency. Why do we take a system and change the valuation for part of it rather than Note have a whole new system in which we use a dif- ferent set of valuation rules all the way through? 1. UNICEF, The Progress of Nations (New York: UNICEF If we think that we need to do certain things House, 1994). for environmental goods, why do we not do them Discussant Remarks Dhira Phantumvanit Environmental valuation rarely has been tion the long-term implications of resource use employed in the developing world. This empiri- than are those who are more economically stable. cal tool has been used in Thailand. There has Practical problems in applying economic tools been, for example, a study of the willingness- to environmental valuation in the developing to-pay of users in the central park in Bangkok, world also have limited their use. In particular, Lumpini Park. The national Global Climate there is a lack of basic data linking environmen- Change response strategy also makes use of this tal quality with health and with the performance tool, and a 1993 World Bank report, Thailand: of the national economy, let alone data on biodi- Managing Environmental Impacts in a High-Growth versity or assessments of spiritual values on the Economy, attempts to assess the health costs of environment. Thailand recently tried to devise a various forms of urban environmental problems strategy for tackling water pollution in the Chao to set priorities for remedial action. But these are Phraya River, which runs through Bangkok, but isolated cases. the lack of data linking water quality and the Thus, when the debate turns to the ethics and health of nearby residents made it difficult to esti- techniques of environmental valuation, one of the mate the economic benefits from investing in first issues that springs to my mind concerns the sewage treatment systems, not to mention the limited application of these techniques to the valuation of aesthetic values associated with such developing world. an investment scheme. If we consider the basis of willingness-to-pay, perhaps this will give us some idea of the prob- Global Climatic Change lems of the ethics of implementation. Understand- ing the position of those valuing the environment Regarding opportunities in the application of val- provides an insight into the difficulties of appli- uation techniques for global issues, for example, cation of this economic tool. The value placed on global climatic change, I agree that these may be environmental quality is likely to be different very useful tools in the move towards more sus- between the rich and the poor, the educated and tainable development. However, they should be the uneducated. The "upside-down U" curve is used in association with policy measures that ensure often cited in this regard. We should not expect the that the poor in the developing world do not lose out. poor to be as enthusiastic about paying for envi- If the North is willing-to-pay the South to conserve ronmental quality as the rich, particularly when theirforests to serve as carbon sinks, there are bound the issues concerned are very distant from their to be problems in distributingfinancial compensation day-to-day lives, as, for example, global warming. fairly. There are also differences between groups in For example, we recently completed a res- their estimation of option values. Those in abject ponse strategy for the Government of Thailand poverty are far less likely to take into considera- based on "no regrets" policy. Actions proposed 62 Phantumvanit 63 include energy conservation and expanding resources to complement external inputs. This is reforestation in addition to the economic and something that new avenues of environmental social policies of the government. In adopting a financing, such as the Global Environment "no regrets" approach, it is possible to circumvent Facility, should not disregard. the problems of estimating the likely impacts of global climate change in Thailand. Nonetheless, National Accounting there is a need for economic valuation as a step towards setting priorities in policy implementa- David Pearce has outlined some of the problems tion. The role of reforestation and energy conser- with national accounting as practiced and sug- vation in tackling global climatic change at the gests methods to produce a green measure of national and international level is a particularly national product. One fundamental problem that interesting area of study. I can foresee comes simply from the difficulties in Our study in Thailand indicates that the mag- assessing the "credits" and "debits" in the nitude of carbon reduction by reforestation is national account. How do we value the extinction large, compared with other alternatives. Fuel of a species of animal? We can hardly balance this switching from high to low carbon content fuels "debit" with increases in the numbers of another plus demand-side management on power use species. and better efficiency in transportation can reduce Finally, let us turn to green national account- CO2 emissions by 10 to 12 percent. On the other ing in the developing world. I am often asked to hand the conservation of forest resources can comment on the relevance of environmental reduce CO2 emissions by about 20 percent. The national accounting to Thailand. My standard average net cost per ton of carbon sequestered in response is that it remains very much a spectator Thailand is between US$4-8, a figure that is much sport for developing countries. I cannot foresee lower than the environmental damage of US$20, our national governments adopting these tech- as suggested by Frankhauser.' And the latter niques until they have been seen to be tried, does not include the economic value of biodiver- tested, and standardized in the Organisation of sity that a policy of forest conservation would Economic Co-operation and Development save. (OECD) countries first. Developing world gov- Nonetheless, the use of fossil fuels is damaging ernments are particularly concerned that such to the environment in other ways and is likely to assessments of our national accounts will pro- increase throughout the developing world unless duce a lower per capita GNP estimate. This may alternative sources of energy can be found to sup- change the economic rating of the country and port moves towards economic development. hence the position of donor organizations and In the debate surrounding the means to tackle foreign investors. global climatic change, there has been a justifiable Novel ideas are always welcome, but, in my emphasis on finding the most cost-effective way experience, novel means to manage the environ- to reduce CO2 emissions. There has also been con- ment often remain of more interest to the arm- sideration of the size of the countries, the amount chair philosophers whom Professor Pearce of greenhouse gases emitted, and the fragility of mentions than they are translated into practice. the recipient countries. The point I should like to The challenge is to develop these tools so that raise is that there has perhaps been too little con- they can be applied throughout the world within sideration of the growing ability of people in var- the constraints of a real-world setting. ious countries, including some developing countries, to appreciate option values in setting Note forestry and energy policies. Hence, countries with good economic track records will be in a 1. Frankhauser citation not available. position to generate additional domestic Discussant Remarks Robert C. Repetto If the accounting framework that the World Bank blades of the sawmills in the absence of any sus- and other development agencies use to construct tainable timber management. There have been their economic analyses leaves out important cat- fisheries projects that provided the equipment to egories of benefits and costs, or counts as benefits deplete fish populations more rapidly There what are actually costs, it is almost inevitable that have been agricultural projects that accelerated those analyses will lead the Bank and other agen- the depletion of soils and groundwater. cies to wrong decisions. The accounting frame- Bank economists, such as Jerry Warford, have work is seriously deficient, and there is ample written years ago on the need to apply a user cost evidence that in the past this has contributed to to projects that deplete natural capital.1 However, faulty decisions. a recent review by von Amsberg notes that many The Bank's main mission is to raise incomes in project appraisals either do not include a user developing countries, especially the incomes of cost for resource depletion where one is needed the poor. But the accounting framework mea- or assign a zero default value for natural capital.2 sures income incorrectly, failing to distinguish Obviously, this situation should change. The between the yield on productive natural assets appropriate decision criterion for project evalua- and the consumption or depletion of the assets tion consistent with good welfare economics, themselves. Even though poor households in which Partha Dasgupta's paper plainly sets forth, developing countries are disproportionately includes the cost (or benefit) of net changes in the dependent on natural resources, most of which stock of natural resources. are rapidly deteriorating in productivity, the The effects of a faulty accounting framework accounting framework in use today fails to treat are not limited to individual project appraisal. natural resources as productive capital and fails They can also be found in sectoral activities. For to record the loss of this natural capital as disin- example, the World Bank is an important sup- vestment or capital consumption. porter of agricultural research through the The World Bank has done a great deal in Consultative Group on International Agricul- recent years to strengthen its environmental tural Research (CGIAR) network and a major assessment of projects and to seek out projects lender for agricultural modernization. However, that contribute to economic and environmental although the CGIAR is now paying much more goals. Nonetheless, it is not surprising that in past attention to issues of sustainability in agriculture, years, using this faulty analytical framework, the the criterion that CGIAR researchers have been World Bank and other multilateral development using to judge whether a potential technological banks have financed projects that did little more innovation in agriculture represents an improve- than facilitate the stripping of natural assets. At ment has not included a user cost for natural least one multilateral development bank (MDB) resource depletion or the loss of natural capital. has financed forestry projects that sharpened the Recent research has shown that when these costs 64 Repetto 65 are factored in, less intensive but resource-con- the environment. John Dixon, Andrew Steer, serving production systems, which have been Herman Daly, David Wheeler, John O'Connor, slighted by the agricultural research establish- and others have spearheaded these efforts. Much ment, actually have higher potential returns. more could be done. The World Bank has the The effects of a faulty accounting framework largest and most capable group of development also distort macroeconomic analysis and policy. economists and related professionals in the Stabilization programs supported by the world. It has the largest financial resources of any International Monetary Fund are designed to development agency. It has the best access to data prevent an excessive accumulation of internal and information of any development agency. It is and external debt, that is, an unsustainable rise in in a position to take a leadership role and to make national liabilities. They are explicitly based on a major contribution to progress in this area. the assumption that the productive capital stock Relative to these capabilities, the Bank so far is fixed in the short-run. In other words, they are has done little. It has spent a great deal of time on designed to stabilize one-half of the national bal- reviews of methodology. However, the method- ance sheet, the liabilities side, paying little atten- ological framework was established years ago, by tion to the other half, the asset side. the likes of Dasgupta, Heal, Weitzman, Solow, However, the level of indebtedness a country Samuelson, Maler, and Hartwick. There are no can sustain is closely tied to the level of its pro- fundamental methodological problems. The ductive assets. Recent studies have shown that in principles of asset valuation are well understood. several countries that went into so-called debt cri- The issues are largely those of adapting those sis in the 1980s, the loss of productive natural principles to the needs of specific applications, resource assets had been proceeding at a higher availability of data, and institutional capabilities. rate than the increase in external indebtedness. The UN's System of National Accounts (SNA) The loss of natural resource assets reduced poten- already includes national balance sheets in which tial income and exports with which the debt land, subsoil minerals, forests, fisheries and other could have been serviced. Yet, this fact was com- natural resources are included. The SNA guide- pletely overlooked because, while financial sta- lines for valuing such assets have been accepted tistics monitored changes in debt position, the for decades. The principles of asset valuation macroeconomic accounting framework gave no adopted in those balance sheet accounts are indication of the depletion or loss of natural equally applicable to the income, product, and resource assets.3 Moreover, in at least one coun- investment accounts. try case study, research has shown that policies The Bank has also supported three rather designed to reduce the rate of accumulation of quick and dirty country case studies based on debt had the unintended-and unexamined- readily available statistical information, at a consequence of accelerating the loss of natural cost of roughly $50,000 each. In fact, developing resource assets.4 countries are out in front of the Bank at this These examples proceed from project to sector point. Efforts are already underway in more to national level. I have emphasized the pitfalls to than a dozen developing countries to construct which a faulty accounting framework can lead. I natural resource accounts. A recent conference could just as easily give examples of the benefi- hosted by the Organization of American States cial uses and insights that corrected accounts (OAS) for agencies responsible for constructing have provided. Both kinds of experience indicate national accounts in all countries in the Western that an investment of World Bank resources to Hemisphere demonstrated strong interest in generate and apply better accounting frame- natural resource accounting. Participants in works, accounts that assign appropriate values to that OAS conference formulated a proposal for natural capital, is fundamental to the mission of cooperation among Western Hemisphere coun- sustainable development. tries in training, technical assistance, and infor- In the Environment Department and in Ismail mation exchange. Developing countries already Serageldin's new vice-presidency, and indeed see the need and are making efforts to change, throughout the Bank, there are people who have and they are asking for the Bank's support and supported efforts to put appropriate values on assistance. I respectfully urge that the Bank join 66 Discussant Remarks with the UN and other multilateral agencies to Sustainability Principle" (Environment Department provide that support. Working Paper no. 56, World Bank, Washington, D.C., 1993). 3. Wilfredo Cruz and Robert C. Repetto, Accounts Notes Overdue: Natural Resource Depreciation in Costa Rica (Washington, D.C.: World Resources Institute, 1991). 1. Jeremy J. Warford and David Pearce, World without 4. Wilfredo Cruz and Robert C. Repetto, The End (New York: Oxford University Press, 1993). Environmental Effects of Stabilization and Structural 2. J. von Amsberg, "Project Evaluation and the Adjustmenit Programs: The Philippines Case (Washington, Depletion of Natural Capital: An Application of the D.C.: World Resources Institute, 1992). Discussant Remarks Andrew Steer It is good to follow Bob Repetto, especially when tomorrow's generations from the natural capital he is giving the World Bank advice. We are doing stock not be less than that enjoyed by today's gen- much more than you suggest, Bob, but even so, eration. Partha Dasgupta would argue that such we should be doing more. I have just three com- a constraint is quite arbitrary and may lead to ments on what we have heard this afternoon. sub-optimal intertemporal welfare. Hence the First, how valuable is the concept of sustain- title of his paper. But which of the two of these ability in theory and in practice? Partha Dasgupta distinguished economists is correct? David, are argues that while the concept of "sustainable" you making progress on applying the sustain- development is useful in motivating enthusiasm ability constraints in practice? Partha, do you for the environment, it has no useful meaning in agree that in the real world, we need some (albeit theory-and hence, presumably none in practice. arbitrary) rules of thumb to give some assurance He takes the economist's stance: if we do the that tomorrow's citizens can lead the good life? intertemporal optimization right, and use the right Second, we economists need to know our own shadow prices, the correct policies will simply fall limits. There are some things that we cannot put out of the analysis. This approach will serve us money value on with any accuracy. Often, values much better than simply assigning "sustainabil- imputed to the environment by human beings ity" rules, which inevitably will be arbitrary stem from deeply held spiritual and cultural When my good friend Herman Daly read that, roots. Contingent valuation can shed light on he was very troubled because he saw a serious those values, but the empirical problems associ- threat to real world policymaking from theoreti- ated with such techniques are well known. cal economics. In the real world, it is not possible For many environmental assets, these non- to do the careful intertemporal optimization cal- measurable values may be the most important of culations, using correct shadow prices. And it is all. This need not be a problem as long as we because of this, presumably, that David Pearce adopt a sensible attitude towards the estimation would support supplementary sustainability of economic values, that is, that such estimates conditions. Elsewhere, David has argued that a are only partial. The job of the economist is to do concern for the long-term environment calls not as good a job as possible in estimating those val- for an adjustment of discount rates, but it may ues that can be measured, and this should be (for precautionary reasons) call for the imposition respected by all as one important input to the of special constraints to ensure that future gener- decisionmaking process, but not the only one. ations' welfare is protected. Thus, for example, to Decisions need to be informed not only by such be on the safe side, we may choose to require that calculations but also by the expressed views of the value of natural capital does not decline people through open discussion and the political below today's level. This would provide some process. This point explains why sound environ- broad assurance that the welfare accruing to mental policymaking can operate only in an 67 68 Discussant Remarks atmosphere of participation and democracy-a by Ernst Lutz, which presents the findings of point that Ismail Serageldin made. three case studies-Mexico, Papua New Guinea, In practice, unfortunately, economists tend to and Thailand.3 condescend to policymakers when decisions are I have some sympathy for Dhira made on "non-economic" grounds, and environ- Phantumvanit when he says that national envi- mentalists tend to harshly criticize economists ronmental accounting is still a spectator sport. whose valuation exercises suggest that, on eco- Institutions like the World Bank, the nomic grounds, the costs of protection outweigh Government of Thailand, or Dhira's institute the benefits. have to decide how to allocate their scarce Calculations of the economic costs and bene- resources. How much to allocate to adjusting the fits of averting global warming illustrate these national accounts will depend on the circum- points. When economists have attempted to cal- stances. On the one hand, it is important that we culate the economic costs of global warming-as not go overboard on this issue, and pre-empt too in William Cline's excellent book, The Economics much of the scarce resources of environmental of Global Warming'-the justification for strong and statistical agencies. (A report we have just action today is marginal at best. Such calculations completed documents how six different method- should not lead economists necessarily to oppose ologies have been recommended to the authori- action. Nor should they lead environmentalists to ties in Indonesia, causing all kinds of con- exaggerate numbers or argue for artificially low fusion.4) Similarly, we do not want to get too discount rates so as to bias the results in their arcane in the methodology when the quality of favor. The real reason we should do something the basic data remains unacceptably poor. On the about global warming is not that it is going to other hand, however, it is important that we not affect the economics of our lives 200 years from get overwhelmed by the difficulties involved. now. Rather, it relates to the much deeper spiri- Short-cut measures need to be devised for situa- tual and moral reasons associated with the fact tions in which data are weak, and many more that you and I do not want to hand on to our chil- resources need to be allocated to improving the dren's children a world that is very different from quality of basic data. the one we inherited. While, in principle, such Above all, given the large number of options, values could be captured by economists' tools, in the choice of indicators and the types of adjust- practice, they cannot with accuracy. For more on ment to the national accounts need to be driven this, and on choosing discount rates, I recom- by policy-relevant questions of importance to mend an interesting debate in Finance & Develop- development practitioners. ment between Nancy Birdsall and myself, on one side, and William Cline on the other. The articles Notes are entitled, "Act Now on Global Warming-But Don't Cook the Books" and "Give Greenhouse 1. William R. Cline, The Economics of Global Warming Abatement a Fair Chance."2 (Washington, D.C.: Institute for International Economics, Third, I would like to raise the issue of 1992). 2. Nancy Birdsall and Andrew Steer, "Act Now on national accounting for the environment. The Global Warming-But Don't Cook the Books"; and Whlliam World Bank has been very heavily involved in R. Cline, "Give Greenhouse Abatement a Fair Chance," this whole process with our colleagues at the Finance & Development 30(1) March 1993:3-8. United Nations Statistical Office (UNSTAT). We 3. Ernst Lutz, ed., Toward Improved Accounting for the hae,oredasmall unit in the Environment Environment, An UNSTAT-World Bank Symposium (Washington, D.C.: World Bank, 1993). A paper describing Department at the Bank to advance this debate the findings and recommending strategies for the future is and to provide technical assistance when Appendix 1 of this volume. requested. We have just completed a book, edited 4. Internal World Bank report. Floor Discussion In addition to the panelists' responding to the discus- because of the external damages they cause, for sants' remarks, the process was opened up to enable the example, motor driving, which causes congestion audience to express their concerns and ask questions. on the roads, or because they are bad for us, for Their questions included (1) whether the World Bank example, not wearing a helmet when riding a will engage the world's spiritual traditions in the value bike. I do not think there is any conceptual diffi- decisions and moral questions inherent in valuation of culty in distinguishing these two cases. The con- the environment, and (2) the economic implications of cept of "merit goods" would cover the including or not including disabled persons in devel- desirability of taxing activities because there are opment, and the issue of participation. intrinsic harms in engaging in them. Anne's third point was that GNP is not a mea- Panelists' Responses sure of human well-being. I do not know anyone who thinks it is. It is net national product, or NNP, Partha Dasgupta: Anne Harrison raised a num- when properly measured, that is an index of well- ber of questions. First, should accidental discov- being. NNP measures well-being in the following eries be included in measures of NNP? The sense: small policy changes that would increase answer is, if the likelihood of such discoveries is NNP simultaneously would increase the level of uninfluenced by policy, that is, if the discoveries well-being. Contrariwise, policy changes that are totally serendipitous, then "no." More accu- would decrease NNP would simultaneously rately, it is a matter of indifference whether or not reduce well-being. we include them in the estimates. The reason is In saying this, I hope it is realized that NNP is that, at the margin, policy choice will be unaf- not independent of our notion of human well- fected by the prospects of accidental discoveries being. The valuation of goods and services is because the latter are, by hypothesis, uninflu- dependent on the latter. In short, NNP is based on enced by policy! shadow prices, not market prices (unless the two On the other hand, discoveries are not a mat- sets of prices coincide). Thus, there is no contra- ter of luck. They also involve expenditures of diction between what I am saying here and the resources, that is, research and development. In claim that is increasingly made that there are other words the likelihood of new discoveries is countries with high GNP per head and low life influenced by R&D expenditure. Given this fact, expectancy at birth and countries with low GNP discoveries should be included. and high life expectancy at birth. The consump- Anne's second point concerned the taxation of tion of services such as primary health care is motor cars on account of their causing accidents. known to possess strong externalities. Public eco- So do alcohol and tobacco cause "accidents," and nomics has for long made it clear that on their we do tax them. There are two points about such own markets will not produce an adequate goods. Governments may wish to tax activities amount of this kind of good. NNP, when correctly 69 70 Floor Discussion measured, uses shadow prices for all goods and haps people tend to overlook that we have already services. For this reason NNP would be expected acknowledged that it is an important concept. to be congruent with human well-being, which Regarding our international agreements, people includes life expectancy at birth as a component. tend to rush straight to the articles of agreement This brings me to the point that David Pearce and overlook the preamble. It is worth reminding and I tried to make earlier. Estimating NNP is as ourselves that in the framework Convention for much an art as a science. We understand the prin- Climate Change we adopted a sustainability prin- ciples quite well now. How many corrections we ciple. In the Biodiversity Convention, we adopted choose to make to market prices is not something a sustainability principle. In Europe we are nego- that theory can tell us. tiating a new acid rain protocol. That protocol Regarding the notion of sustainability, I still speaks of eventually achieving critical loads of find it lacking conceptual sharpness. I do not acid deposition, and a critical load is a zero dam- think it has helped us understand matters. Con- age load. It is a sustainability principle. If we look sider, for example, the thought that some index of at the preambles to the conventions and if we look capital ought to be preserved to sustain con- at Agenda 21 and at the legislation coming from sumption. Along a sustainable path some capital the European Community, they speak of the pre- stocks will, presumably, get reduced, for exam- cautionary principle, which is by and large a prin- ple, coal stocks; while others will improve, for ciple of sustainability. example, water equality, hopefully. In short, there I am glad that valuation and participation were will be a changing mix of capital assets along the raised because they are perhaps something we chosen sustainable path. Thus, to create the index have overlooked: the process of eliciting people's of capital that, by implication, must be preserved, preferences is also a process of participation. I have we will need shadow prices, or some surrogate of been working for a few months with the social ana- shadow prices. Where will we get these shadow lysts in the Bank on the resettlement issue. It is prices? Plainly, we will need a valuation criterion intriguing to find that rarely does anybody ask the to obtain them. Thus, we are back to the notion of resettled, What are you willing to accept? How do optimal policies, and the prior question of the dis- you value your assets? These are things that per- tribution of well-being across generations. haps the valuation exercise has to show. The final question that was raised concern- Here we also have a potential collaboration ing the need to look after disabled people is among the disciplines of which Ismail spoke at immensely important. I would like to add that the beginning. For far too long, economists have a great deal of the "disability" to which the neglected what sociologists and anthropologists questioner alluded is experienced by widows have to say. and girl-children in poor countries. Ismail Serageldin: We have had a very lively David Pearce: In his discussion Andrew Steer debate. I would like to end with two observa- asked if had I modified my views on discounting tions. First, the question is valid that much of and sustainability. The answer is no because if what we have been discussing does involve one reads carefully what we said, what I was questions of moral and spiritual decisionmaking arguing then and am arguing now is that we have and commitment to the welfare of others-of the an obligation to conserve what we would call crit- unborn, of future generations. Andrew Steer ical natural capital, which is really the life sup- rightly reminded us that many of these choices port functions of the world in which we live. are not going to be strictly economic choices Thus, I would acknowledge the existence of sub- anyway. stitution between forms of capital up to a point, But perhaps what we need to carry from this and I would acknowledge the role of valuation. I discussion is that we need to move further; not hope I came across as both acknowledging it and wait for the perfect answer to all the questions, advocating it. but move in steps. Much of what exists in current Sustainability is not the only criterion for mak- national income accounting is by convention and ing choices about intergenerational transfers. is not necessarily correct, but it is something that Nonetheless, it is an important concept, and per- we have adopted and we use it knowing full well Floor Discussion 71 its limitations. In this sense, on some things such everything to a single measure. Obviously, no as use costs, we should be using something other doctor would say that he or she could diagnose than zero value, rather than spending our time everything about a patient simply by measuring arguing about exactly what it should be. These the patient's temperature and knowing whether are immediate steps we should all be taking. the person is running a high fever. I would also like to emphasize that it has not This does not mean that we should throw been the position of the World Bank to argue that away all the thermometers. There are still values GNP per capita is the sole measure. This view of in knowing whether people are running fevers or the Bank seems to be perpetuated in the press, but not, but we also need to know a lot more, and this it certainly runs counter to the slew of indicators is very much what the World Bank and all of us that are published every year in the World Develop- are trying to do. Every one of the speakers and ment Report. Every WDR contains 50 to 60 pages discussants on this panel has contributed much of statistics including the single page of basic sta- to what we should be doing in the months and tistics. We have never said that we would reduce years ahead. Part Three From Policy to Practice: Managing Water Introduction Emil Salim The Rio Summit in June 1993 reminded us that intrusion into estuaries and coastal aquifers; and there will be an increase in demand for fresh water pollution caused by agriculture and indus- water for drinking, sanitation, irrigation, indus- try, sewage, dams, and river diversion schemes. try, urban development, hydropower generation, With the projected increase of demand, which fisheries, transportation, recreation, and, in gen- will be met by reduced flow of water combined eral, the healthy functioning of nature. There will with an increased rate of contamination and pol- be an ever increasing competing pressure for lution, it is clear that many countries are facing a water throughout the years to come. serious problem regarding fresh water supply. Meanwhile, the supply of fresh water, both on Such a situation calls for a water resource man- the surface and in the ground, is declining caused agement framework and policy with the follow- by deforestation, loss of water catchment area, ing major points: and global climate change, which is already * Increasing water use efficiency affecting parts of China. The quality of fresh * Enhancing the capacity of nature to catch water water is also negatively affected by salt water * Eliminating water pollution. 75 The World Bank's New Water Resources Management Policy Michel J. Petit Water is critical for human survival. That is why but let me first mention some salient facts that governments in most countries see, and have provide its context. always seen, an imperative need to become involved in its overall management. This has The World Bank and Water Resources been true as far back as Hammurabi's Water Code in ancient Mesopotamia. Yet in most of the devel- From its early days the World Bank has had a very oping world, water resources are not being used active assistance program for water resources efficiently and sustainably. Moreover, given the management. By the end of 1991 the Bank had environmental sensitivity of river and under- lent over US$34 billion for water projects, over ground water systems and the multiple demands half of which was for irrigation. Present lending from domestic consumers, industrial users, and plans envisage a continued active involvement in farmers, the management of water resources is water resources management: US$18.3 billion are complex and difficult. projected to be lent for water resource invest- Countries are now faced with increasing diffi- ments by the Bank during 1993-98. culties in meeting the demand for inexpensive, clean, and reliable water supplies. A new Water Use and Future Demand approach is called for-one that recognizes that water is both a basic need and a scarce economic Human use of water has increased more than 35- resource. The time to adopt it is now because the fold over the past three centuries. Recently, long gestation time of water investments and water withdrawals have been increasing 4 to 8 policies is such that what we do now will affect percent per year, with the bulk of the demand the next generation. This new approach is set out arising in the developing world. Sixty-nine per- in the World Bank's water resources policy, which cent is used for agriculture, 23 percent for indus- was approved by the Board of Directors in May try, and 8 percent for domestic uses. In Asia and 1993.1 This policy seeks to balance two funda- Africa over 85 percent of the water is used for mental considerations: agriculture. Average consumption rates vary * The need for a holistic management approach widely with per capita consumption in North that gives due weight to longer term factors and Central America being over twice that of and to protecting the ecosystems Europe, three times that of Asia, and seven times * The advantages of relying more on markets that of Africa. and pricing to improve the allocation of water With the world's population growing from 5 among competing users. billion now to at least 8 billion by 2025, and assum- I would like to highlight the key concerns that ing steadily rising living standards, the demand have guided the preparation of this policy paper, for water will increase dramatically. Feeding these 76 Petit 77 populations alone will place huge new demands facing steeply rising costs of new supplies- on the world's irrigated agriculture. sometimes twice or three times previous costs. Food Production Environmental Water Requirements One-third of the total world's food production Besides supplying water to domestic, industrial, comes from irrigated land. Since 1950 the irri- and agricultural users, countries are increasingly gated area has grown by 2.5 times-a key factor faced with major environmental problems in allowing food production to keep up with the related to the management of water resources. growth in food demand. It is noteworthy that For example, fisheries and wetlands depend on over the past twenty-five years, the expansion of continuous river flows of reasonable quality and irrigation has accounted for over one-half the are threatened by growing extraction. increase in global food production. However, it is Moreover, in many places ground water becoming increasingly difficult to sustain this resources are seriously at risk from over-exploita- expansion. The costs of new irrigation infrastruc- tion and contamination by urban and agricul- ture are rising rapidly, and there are growing tural pollutants and salt water intrusion. In the environmental concerns about large projects and case of fossil groundwater, greater attention the over-exploitation of groundwater. Conse- needs to be given to possible future uses for these quently, new irrigated areas are not likely to be resources now before they become exhausted. the major source of new food supplies. Rather, the There are cases where non-renewable groundwa- focus must be on more efficient use of water in ter that could be an important source of water for existing irrigation systems. This challenge is par- future domestic or industrial use is being ticularly acute in countries where some of the pumped to irrigate low-valued crops. water currently used for irrigation will need to be reallocated to other uses. Improved Management Domestic and Industrial Uses All of these considerations lead us to the irre- futable conclusion that water resources must be With regard to domestic needs, about 1 billion better managed. Current practices are not sus- people in developing countries do not have tainable from either an economic or an environ- access to potable water, particularly the rural mental perspective. In many countries, water is poor, and 1. 7 billion have inadequate sanitation grossly misallocated, with low-valued uses con- facilities. As a result, waterborne diseases impose suming a significant share of the resource while a huge burden on many countries. Unsafe water high-value uses face shortages. Inefficiencies is implicated in the deaths of more than 3 million abound. For example, unaccounted-for water people and causes about 900 million episodes of amounts to 58 percent of the water delivered in illness each year. A safe water supply is literally Manila's water supply systems and about 40 per- a life and death issue. cent of the water delivered in most Latin Improving access to water and sanitation also American cities, compared to only 8 percent in makes good economic sense. For example, in just Singapore. Some of the losses are due to poor the first ten weeks of the 1991 cholera epidemic in design and management while others arise from Peru, losses from reduced agricultural exports the low price charged for water. For example, a and tourism were estimated at $1 billion-more recent review of World Bank-financed projects than three times the amount that the country had showed that the effective price charged for water invested in water supply and sanitation services was only about 35 percent of the average cost of in the 1980s. With the fast growth of population supply, and, for irrigation water, the effective and rapid urbanization in developing countries, prices cover an even smaller share of average domestic and industrial water demand are costs. expected to rise sharply. However, both domestic Let me summarize the weakness of current and industrial users in urban areas are already practices: 78 The World Bank's New Water Resources Management Policy * Fragmented water resources management water resources, management that is suitable leading to wasteful investments and uncoor- for a country's needs, resources, and capabil- dinated management ities. Such a framework will allow the incor- * Excessive reliance on over-extended govern- poration of cross-sectoral and environmental mental agencies lacking the proper incentive considerations in the design of investments structure and leading to poor service quality and policies by recognizing the interactions * Underpricing of water and lack of cost recov- between the various elements of a river ery, resulting in excessive and wasteful water basin's ecosystem. use, misallocation, and inviable water service * Supporting reforms placing greater emphasis entities on incentives for efficiency and financial * Inadequate delivery of water and sewage ser- accountability by promoting financially vices to the poor autonomous water entities, privatization, and * Over-centralization of the delivery of water community ownership. This would entail services and the lack of stakeholder, commu- increased reliance on pricing as a manage- nity, and private-sector involvement, yielding ment device that reflects scarcity and encour- a vicious cycle of unreliable service, low will- ages efficient utilization of the resource. ingness to pay, and a further decline in capac- * Helping governments in establishing a ity to provide service strong legal and regulatory framework for * The neglect of water quality, health and envi- dealing with the pricing, monopoly organi- ronmental concerns leading to environmental zations, environmental protection, and other degradation, poor water quality, and human aspects of water management that are not suffering. adequately handled by unrestrained market forces. The World Bank's New Policy * Supporting governments' efforts to decen- tralize water service delivery responsibilities The Bank's new approach was developed with to local governments and to transfer some of inputs from outside organizations, such as the these functions to the private sector, to finan- United Nations Development Programme cially autonomous entities, and to commu- (UNDP), the Food and Agriculture Organization nity organizations, such as water user of the United Nations (FAO), the World Health associations. Organization (WHO), and the United Nations * Enhancing the capacity of governments, staff, Environment Programme (UNEP), as well as and related institutions at the central and local intensive consultation with the nongovernmen- levels to manage water resources through tal organizations (NGOs) from both developed support for training in various aspects of and developing countries. It also reflects the main water management. principles recommended in Agenda 21 during * Prescribing and encouraging the participation the Rio Earth Summit. of beneficiaries and affected parties in plan- At the core of the new policy is the adoption ning, designing, implementation, and man- of a comprehensive management framework that agement of water activities. calls for water to be treated as an economic good * Assisting governments in taking an active role with multiple potential uses. It recommends a in protecting, enhancing, and restoring water more decentralized system of service delivery, quality and water dependent ecosystems, and greater reliance on pricing, and fuller participa- in abating water pollution. The Bank will tion of water users in the management of water increase its support to governments' efforts to supply systems. It encourages countries to improve and expand sanitation and waste- develop national water strategies with coherent water collection and treatment. and consistent policies and regulations across * Prompting and supporting greater priority to sectors. Let me briefly underline the main fea- the provision of adequate water and sanita- tures of the Bank's new approach: tion services for the poor, thus helping to stop * Assisting countries in the development of a the spread of disease in crowded low-income comprehensive analytical framework for areas. Petit 79 Supporting research, development of low- Implementation cost options, and adaptation of technologies for irrigation distribution, water supply and This is an ambitious agenda. In most countries its sanitation, flood control, pollution monitor- implementation will be gradual, dealing first with ing, and waste treatment. priority issues, which differ from country to coun- try. Programs must be tailored to the institutional Future Financial Needs capacity of the country. In many cases, capacity will need to be enhanced, and this takes time. The financial requirements to meet future Implementation of the policy paper's recommen- demands for irrigation, hydropower, and water dations within the Bank will take time, too, as staff supply and sanitation investments in developing skills must be upgraded, skills mixes adjusted, countries are estimated to be US$600-700 billion and procedures developed and improved. None- over the next decade. The Bank will be able to theless, the process has already started, and the finance only a small share of this. Part of the cap- new water policy paper provides overall guid- ital will have to come from water users them- ance for our trip on the long road ahead. selves. This reality implies that the stronger emphasis on cost recovery and private sector Note involvement promoted in the policy paper will be absolutely necessary if countries are to meet 1. World Bank, Water Resources Management: A World their domestic water and food supply needs in Bank Policy Paper (Washington, D.C.: World Bank, 1993). the next century Managing Water: The French Model Ivan Cheret This paper, which was commissioned by the which successively affected the western and World Bank, describes the system of water man- southern parts of France. agement used in France, drawing particular Water is a very important economic and attention to its specific and original aspects. The social commodity in France: environmentrelated aim is not to provide an exhaustive description of expenditure concerning water is estimated at the system, which is necessarily complex at both about $10 billion a year, with over half of this legal and institutional levels, but to facilitate a amount being spent on pollution control. About clear understanding of it by concentrating on its 150,000 people are permanently employed in underlying logic and the original options and water-related jobs in France. mechanisms that have been developed in France. The paper begins with a description of how Administrative Organization of France the French water management system has changed over half a century and then highlights France covers an area of 549,000 km' and has a two original aspects: population of 55 million. The population density 1.The management of water resources, in par- is of the order of 100 inhabitants per km2. The ticular the institutional and planning aspects smallest administrative unit is the Commune (of 2. The management of urban water supply and which there are about 36,500), followed by the sewage services by, in particular, bringing in Dipartements (95), and the Regions (22). private operators. Each Commune, from the largest (Paris) to the smallest (about ten inhabitants), elects a local Water in France council and a mayor to take care of its adminis- trative functions. The mayor and his or her local Each year France receives some 450 billion cubic council decide what facilities will be provided in meters of rainwater, of which 250 billion m3 the Commune, particularly with regard to water evaporate quickly or are absorbed by plants. The supply and sewage services, and are responsible other 200 billion m3 feed aquifers, rivers, for levying the taxes to finance them. The same streams, and lakes. Half of this volume is techni- laws apply to large cities as to small Communes cally and economically usable. About 30 billion because theoretically they assume the same m3 is abstracted, with about half of this amount responsibilities. used for cooling thermal power plants. Each Departement in France elects a council In an average year, overall precipitation is of that has the power to grant financial aid to the the order of 800 mm, while in a dry year it may Communes, particularly for drinking water and be as low as 600 mm. Water shortages can be sewage services. The Region has essentially a much more serious in some areas than others, as planning role and is administered by a regional shown by the droughts of 1976, 1982, and 1989, council. The boundaries of Departements and 80 Cheret 81 Regions were fixed in accordance with human fac- based on a variety of texts that nonetheless have tors and do not necessarily take into account the the same dual aim of fair distribution and, more courses of rivers and streams, nor their catchment recently, a certain minimum quality. Until 1964, areas. Thus, the administrative division of the water rights were dominated by the Code Civil of country into Departements and Regions is not 1804 and, above all, by the law of 1898. According always adapted to a sound consideration of to this law, the State made a distinction between water resources management problems. rivers and streams in the public domain and those not in the public domain, and had the pow- Evolution of Water Policy in the Post-World ers strictly required for operating inland water- War II Era ways and avoiding abuse of water. This law of 1898 also recognized the right of a landowner- Until the post-war years, the demand for water whether private or public-to use (but not to remained well within the capacity of resources own) the water that the land receives and the that were available locally or were easily obtain- ground water in the subsoil. able, even if conflicts between users did arise in Thus, landowners could use rainwater falling some places. The allocation of water to a particu- on their land, as well as spring water, within the lar use-urban, industrial, agricultural, or inland limits of their requirements. Those occupying waterways-was generally made without notice- land bordering rivers that were neither navigable ably prejudicing the other uses. This situation nor floatable, that is, not publicly owned, could with virtually no competition promoted a user- use the water within certain limits. As for based management system. Even so, this did not in groundwater, it was considered an "accessory" of any way hinder the development of water the land, and the owner was free to use it within resources in France. It was essentially during the certain depth limits, defined by local regulations. period between the two world wars that the major It is also important to mention the law of 1917 dam and irrigation projects were constructed. on "hazardous establishments," the first of its kind in the developed countries. The aim of this Institutional Aspects law was to control the harmful effects and pollu- tion caused by industrial activities. The Compagnie Nationale du Rhone, created in the 1930s before the Tennessee Valley Authority, The Needjfor Change: Tile 1964 Act paved the way with regard to the multipurpose development of a major river. In the post-war years, France experienced con- The responsibilities for water resources were siderable demographic and economic growth at that time divided among: (the GNP in constant francs tripled between 1949 * Ministry of Agriculture for rural water sup- and 1969), resulting in a substantial increase in plies (irrigation, water supply, and sewage for the demand for water and, a considerable rise in rural communities) all kinds of pollution. * Ministry of Public Works for shipping and Around this time France, which had always flood protection been a rural nation, experienced the phenomenon * Ministry of Industry for industrial and power of urban concentration that Germany and Great requirements Britain had experienced several decades earlier. * Ministry of the Interior, administrative super- Urban water requirements thus quickly visor of the Communes increased, resulting in corresponding growth in * Ministry of Health for aspects relating to domestic pollution. At the same time, the indus- hygiene trial revival of the country accentuated the pres- * Ministry of Finance for questions of finance. sure on water resources and considerably increased the pollution of the natural environ- Legal Aspects ment. In addition, irrigation needs grew as exten- sive areas outside the traditionally irrigated zones French legislation in matters pertaining to water of the south became equipped with irrigation distribution and use has for many years been facilities. Finally, this period saw the completion 82 Managing Water: The French Model of the hydropower development program-with It was therefore necessary to change from a a significant impact on river regimes-and the userbased water management system to an inte- commissioning of thermal power plants, which grated or holistic approach. are particularly large consumers of water. To prepare a new water policy based on these Very quickly, a number of water shortages and principles and instituted by legislation, a pollution problems appeared-resulting from Permanent Secretariat for the Study of Water constant, uncontrolled use of water resources and Problems was set up in 1960. Its work resulted in the various types of pollution, especially urban the drafting of a bill at the end of 1963 concerning and industrial, affecting the quality of surface water distribution and pollution control. The bill water and groundwater. Local conflicts became was finally adopted at the end of 1964. more common. Gradually, a greater awareness of At this stage, it is well to remember the impor- the limits and vulnerability of water resources tant political and administrative changes that developed among the public, local officials, and France was undergoing during this period and the more "sensitive" user groups, such as fisher- that made it possible to envisage such profound men's associations. reforms in water management. While the entire Public authorities were therefore confronted economy was centralized in the hands of the with conflicts among users, whether the prob- State after the Second World War, there was a lems were quantitative, in particular the amounts gradual emergence and growth in the financial used in times of drought; or qualitative, espe- autonomy of local and regional authorities (the cially the industrial pollutant and toxic outfalls in Regions were created in 1963). We should also rivers. These user conflicts then developed into take into account the economic forces existing at conflicts among administrative bodies, often that period, not only the more traditional groups, leading to complex and difficult situations. such as the farmers, but also the industrial and This increasing number of difficult situations town lobbies. The reform of the water manage- gave rise to the reassessment that began in 1958 ment system owed its success in large part to its and resulted in the Water Act of 1964. A Water ability to adapt to the economic, administrative, Commission was set up in 1959, a sort of "think- and political circumstances. tank" comprising the various parties involved in The law of December 16, 1964 has profoundly water management. This commission outlined a modified water policy strategy in France: number of general principles, which at the time * It established legislation and regulations for were quite innovative even if today they may pollution control, introduced the notion of appear somewhat commonplace: quality objectives, and set timetables, placing * In the same hydrographic basin, and even more the emphasis on solidarity among users with so in the same sub-basin, there is increasing regard to these objectives. interdependence among users who abstract * It increased the policing and supervisory water in the same natural environment. A powers of the State as well as the means for strong feeling of solidarity must be developed settling disputes and introduced the notion of between users to encourage each one to mini- the catclhment area for dealing with water mize pollutant outfalls. problems. * Rational water management is possible only if * It introduced an economic dimension to identify it is recognized that water has an economic the financial resources necessary for the value, a notion that has been underlined as a investments that have to be made, particu- result of competition among uses. Similarly, larly through the creation of the Basin pollution has a real economic impact. Committees (Comites de Bassin) and the Water * The water resources of a given basin (ground- Boards (Agences Financieres de Bassins). water and surface water) must be considered Thus, the foundation for water management as a single resource, and, as such, long-term in France was established and put into concrete planning of water development and protec- form. The system is underpinned by three princi- tion is required, taking into account the needs ples of equal importance: regulation, incentives, of all users and the impact of all abstractions and dialogue. Effective implementation of the law and outfalls in the basin as a whole. has since involved two main aspects: Cheret 83 1.Development of government action with * Introduction of an original system of planning respect to antipollution measures * Upgrading the powers of the Communes, par- 2. Introduction of economic means of interven- ticularly with respect to sewage services tion through the Water Boards. * Increasing consultation with elected represen- The establishment of the Water Boards was tatives and water users, and openness followed in 1971 by the creation of a Ministry of towards the general public. the Environment, which prepares water policy, All these measures are in line both with past sets regulations, and organizes planning. The practices and current European and world trends. Ministry of the Environment supervises the Water Boards, which in 1990 became known as Water Resource Management the Agences de l'Eau. Modern water management practices in France Regular Updating: The 1992 Act were introduced by the 1964 Act and improved and adapted over the years, specifically by the Since 1968, when the law came into force, consid- 1992 Act. Water is now considered as part of the comn- erable improvements have been made in every mon hleritage; its management is based on an integrated area of water management in France, but none of and balanced approach that aims at both satisfying the basic principles of the 1964 Act have been users and preserving the natural environnment. called into question. However, a certain number The present French system involves every of new factors have appeared during this period: level of the administrative machine-State, * Recurring drought lasting several years Regions, Departements, Communes; the users; the * New types of pollution, in particular related elected representatives; at the basin level, the to farming practices Basin Committees (Comites de Bassin); and the * Insufficient development in the field of waste- mainstays of the organization: the Water Boards water treatment (cleansing rate of the order of (Agences de l'Eau). 40 percent in 1989) This section describes the institutional struc- * Inadequate consideration of the problem of ture of water management in France, the recently stormwater. introduced management planning tools, and, In view of these factors it was necessary to because of their importance and originality, the renew and upgrade existing facilities, particu- Water Boards. larly since France has had to meet requirements stemming from European directives on water Institutional Structure management in force since 1975. Preparation of the 1992 Act began in 1984. The Act aimed at: Central lezvel (State). The trend over recent * Remedying the inadequacies and disparity of years has been to group the scattered bodies with existing legislation and eliminating obsolete responsibilities in the field of water management clauses within the Ministry of the Environment or its * Improving the effectiveness of water policing agencies. A Water Directorate (Direction de l'Eau) * Expressing the uniqueness of the water domain was set up in 1992 within the Ministry of the (oceans, surface water, groundwater) in the Environment to strengthen the role of the State in form of appropriate legislation and regulations the area of water management, to exercise more * Facilitating the role of local authorities in effective supervision and coordination of the water management affairs Water Boards, and to provide fresh impetus for * Promoting balanced management of water the decentralized external services. and aquatic environments. In preparing its water management policy, ini- Among the most innovative aspects of the Act tiating and monitoring water use regulations, of January 3, 1992, the following are worthy of and planning organization, the Water Directorate mention: receives guidance from: * Recognition of water as part of the nation's 1.The Mission Interministerielle de l'Eau (Inter- heritage ministerial Water Commission), which repre- * Setting up a unified legal system sents thirteen ministries 84 Managing Water: The French Model 2.The Comite National de l'Eau (National Water These committees facilitate dialogue and solidar- Committee), which consists of representatives ity among members. The composition of the of the different categories of water users, river Basin Committee is fixed by ministerial order and basin authorities, and the government, and comprises three groups: expresses opinions on national water man- 1.Users, qualified local dignitaries, and repre- agement policy. sentatives of socio-professional groups, mak- In 1992 the Ministry of the Environment set up ing up the largest group (40 to 45 percent of decentralized external services known as Direc- seats) tions Regionales de l'Environnement, or DIREN 2.Representatives of the different authorities (Regional Environmental Directorates). The role (Regions, Departements, Communes) (account- of these services in water management is ing for 36 to 38 percent of seats) described later. The Ministry of the Environment 3. Representatives of the State (19 to 23 percent calls on the external services of other ministries- of seats). Agriculture, Public Works, Health, Industry-for The total number of committee members assistance, particularly in its policing role. varies between 61 and 114, depending on the basin. This organization, which deliberately lim- Hydrographic basin level. The fundamental con- its the influence of the State, reflects the desire to cept introduced by the 1964 law was the creation promote the role and responsibility of the differ- of an inseparable tandem covering the major ent actors-users and elected representatives-in river basins: the Comite de Bassin, an authentic each basin and to encourage them to reach agree- river basin "water parliament," which defines the ment. The Basin Committee, which generally water policy in the basin; and its "govemment," meets twice a year, is systematically consulted the Agence de Bassin, which implements the pol- and must give its approval onfees (redevances) and icy defined by the Comite de Bassin. the basis for their calculation. These are presented The 1964 Act resulted in the division of France by the Water board along with its action program. into six hydrographic basins or, more exactly, The Basin Committee's executing agency is groups of basins, a division that was formalized the Water Board, an administrative public body in 1966 by decrees relating to the Basin that comes under the responsibility of the State in Committees and Water Boards. The six basins two fields. In technical matters it answers to the correspond to the following: Ministry of the Environment (Water Directorate) 1.The country's four main catchment areas while in financial matters it is responsible to the (Garonne, Loire, Rh6ne, and Seine), to which Ministry of Finance. Each Water Board has a secondary basins were attached Board of Directors comprising twenty-six mem- 2. Two specific border basins, in the north and bers who are generally appointed or elected for northeast of the country, in areas of dense pop- sixyear terms: ulation and intense industrial activity. * Eight representatives of the State for each min- The limits of these basins correspond to the istry concerned by water problems watersheds and are generally not the same as the * Eight representatives of the different user cat- administrative limits. The main characteristics egories elected by the representatives of this (area and population) of these basins are shown same category on the Basin Committee in table 1. * Eight representatives of the regional authorities Each basin has its Basin Committee, which (Communes, Departements, Regions) elected in defines water management policy for the basin. the same way * One representative (elected) of the personnel Table___________________________________ Iof the Water Board River bcsin Area (krn2) Population (1990) * The Chairman of the Board of Directors, Adour-Garonne II 5,000 5.700,000 - appointed by decree for three years. Artois-Picardie 20,000 4.600,000 .. The Water Board directors are appointed by Loire-Bretagne 1 56,000 11,500,000 order of the of the Environment. The Rhin-Meuse 31.300 4,100.000 Ministry Rh6ne-Mediterrannee-Corse 129.000 12,400,000 Water Boards are the key elements in the organiza- Seine-Normandie 97,000 17,700,000 tional structure established to manage French water Cheret 85 resources. The tasks and resources of the Water common heritage and the fact that its protection Boards, and the results they have achieved, are has been declared as being in the general inter- analyzed in the third part of this section. est, with an improved range of administrative Under the 1992 Act, at the basin level the sanctions to match, have considerably increased Prefect of the Region where the Basin Committee the legal basis for the actions and powers of has its main offices is assigned the role of the Prefets de Departement. Furthermore, like the Coordinating Prefect for the Basin (Prefet Coordon- Prefets de Region coordinating the basin, the Pre- nateur de Bassin). He or she implements and coor- fets de Departement are invested with local "crisis dinates State policy with respect to the policing powers" in the event of accidents, drought, and management of water resources and ensures floods, or shortages. that the actions of the State are coherent. The The Departement is the basic administrative Prefect is assisted by the regional Environmental level for State intervention in the policing and Directorate, which thus acts as Basin Delegate. management of water resources and aquatic The Coordinating Prefect therefore has an essen- environments and in preparing and following up tial role in providing impetus in water manage- planning documents. The Departement offices of ment matters. This is clearly seen in planning, for the ministries concerned (Public Works, Agricul- it is he or she who takes the initiative in prepar- ture, Inland Waterways, Industry, Health) come ing the Water Management and Development under the authority of the Prefet. Master Plan for the basin. Increasing domestic pollution has resulted in almost every Departement setting up Technical Regional level. The Region is responsible for Assistance Services (SATESE) to provide help for regional planning. Consequently, it plays an the operators of sewage works. The financing of essential role in implementing water policy by these services is generally shared by the Departe- integrating the development of water resources ment council and the Water Board. The technical in regional development plans. The Regions are assistance services cover three main areas: represented on the Basin Committees and on the 1. Preparing reports on the operation of sewage Water Boards. The Regions can allocate subsidies treatment works, and provision of assistance for studies and works related to water manage- as needed ment. Most of their operations are carried out 2. Monitoring structures to ensure that health within the context of contracts with the State. standards are met At the regional level, State intervention in 3.Collecting data with a view to awarding water affairs is through the Prefet de Region, who purification bonuses, as explained later. coordinates the decentralized services of the State The State subsidizes the Departements for in implementing measures that go beyond the works related to water supply and sewage sys- limits of the Departement. In this role he or she is tems. These funds are drawn from the financial assisted by the services of the regional Environ- resources of the National Fund for the Develop- mental Directorate (DIREN) and, for industrial ment of Water Supply Systems (FNDAE). This problems, the Regional Directorate for Industry, fund receives some money from a surtax on water Research and Environment (DRIRE). consumption, but gets its primary funding from It should be remembered, however, that the a tax on the PMU (national tote betting system). Prefet de Region where the Basin Committee has Gradually, especially since the decentraliza- its head offices plays a particularly important role tion legislation of 1983, the Departements have in coordinating and implementing State policy, supplemented and subsequently taken over the He or she also ensures the unity and coherency of role of the State. The present participation of decentralized State actions in the Regions and Departements in the water and sewage invest- Departements concerned by the basin. ments of the Communes (in the form of subsidies) accounts for 15 to 25 percent of total investment, Departement level. The State is represented by depending on the size of the Communes. a Prefet de Departement, whose powers were sig- nificantly strengthened by the 1992 Act. Indeed, Commune level. For more than a century, the the recognition of water as part of the nation's Communes benefitted from the provisions of the 86 Managing Water: The French Model Codes des Communes, which gave them responsi- perimeter of the sub-basins corresponding to the bility for the water supply and sewage services. hydrographic units. The law of 1992 defines in greater detail the oblig- The SDAGEs are prepared by the Basin ations and financial resources of the Communes Committee at the initiative of the Pr6fet de Region with respect to sewage. These provisions enable for the basin, and cover a period of five years. them to meet the deadlines fixed for respecting Users and locally elected representatives are thus European directives, especially the European involved in the preparation of the Master Plans Communities (EC) Directive of May 1991, which through the Basin Committee. The preparation of stipulates that community sewage systems must the Master Plan also brings together the repre- be completed over the entire territory by sentatives of the Region and Departement. December 31, 2005. After the Master Plan has been adopted by the With regard to the management of water sup- Basin Committee, it has to be approved by the ply and sewage services, the Communes have a administrative authority, thus underlining a cer- monopoly that can be exercised directly by the tain preeminence of the State in water manage- Communes or groups of Communes (local utilities ment matters. Then the Master Plan is made responsible for serving about 25 percent of the available to the public. population in France), or by delegation to a pri- The SDAGEs also ensure the coherency of the vate operator. Water Resources Development and Management This possibility of delegating the manage- Plans (SAGEs). The latter are drawn up for the ment of water and sewage services has been writ- sub-basins corresponding to hydrographic units ten into the local community law (Code des or aquifer systems, or for a group of sub-basins, Communes) for more than a century and consti- and define the general objectives for the use, tutes an original aspect that is specifically French. development, and quantitative and qualitative For this reason it is the subject of a special section. protection of surface and ground water resources Through the preparation of Water Manage- and aquatic ecosystems, as well as the preserva- ment and Development Plans, local authorities tion of wetlands. now have an important role to play in resource The preparation, revision, and monitoring of planning. It should be remembered that they are a SAGE are the responsibility of a special com- represented on the Basin Committees and conse- mission. The commission consists of representa- quently on the Boards of Directors of the Water tives of the local community, accounting for Boards. about half the members; representatives of users, owners, riverside dwellers, professional organi- Planning Tools zations, and associations, accounting for about one-quarter of the members; and representatives An original system of planning the development of the State and its public bodies, including the and management of water resources was institu- Water Boards, who account for the other quarter tionalized by law in 1992. This law lays down the of the group. From its composition, it is clear that procedures to be followed concerning the polic- this commission aims to involve all the parties ing and management of water resources at two concerned by water management as much as pos- geographical levels: the entire hydrographic sible at the local level, by structuring it around the basin and the individual hydrographic unit (river local community. or aquifer). The draft SAGE is made available to the pub- The Water Resources Development and Manage- lic for two months to obtain their opinions and ment Master Plan (SDAGE) thus determines, for a observations. After any necessary modifications basin or group of basins, policy orientations for have been made, the SAGE is submitted to the sound water resource management. Taking into authorities concerned and the Basin Committee account the main programs put forward by the for their opinions, then approved by the admin- public authorities, it defines, in a general manner, istrative authority. Subsequently, the Plan is the objectives concerning water quantity and made available to the public. quality as well as the development works to be To make it easier to meet the objectives of the carried out to reach these objectives. It defines the SAGE, the law provides for the possibility of Cheret 87 establishing a public body (Communaute Locale de Boards use two economic instruments to combat l'Eau /Local Water Community), which will act as wastage and pollution: the owner for public works, structures, and 1. On one hand, the fees (redevances) paid by installations executed in pursuance of the objec- water users and polluters according to the vol- tives of the SAGE. ume of water used or the pollution caused. This hierarchy in the planning process This is the principle of "thle user/polluter pays." (SDAGE/SAGE) is to a large extent inspired by 2. On the other hand, financial assistance urban planning procedures (urban planning and ("aides"): money collected in fees is reinjected development master plans/land use plans). As in water-related economic channels to help with urban planning, it is a relatively complex the public or private sector save and purify procedure supervised by the State but involving water by investing in water conservation and considerable participation from the different par- antipollution techniques and equipment. This ties concerned, in both its preparation and its is the principle of "those who protect water implementation. receive help. " Water Boards Action programs. Financial actions imple- mented by the Water Boards (collection of fees When they were set up in 1967/1968, the Water and distribution of financial aid) are carried out Boards (Agences Financieres de Bassins, now known within their pluri-annual (generally five-year) as Agences de l'Eau) were assigned a dual role: action programs, which are presented by the * A main role in taking part in the financing of Water Boards to their Basin Committees. The general works in the basin decree governing the creation of the Water Boards * A subsidiary role involving water-related specifies that the amount of the fees levied by a research studies. Water Board is fixed according to the various This second role, although not of great impor- expenses that the Water Board will have to meet tance compared with the first, is nevertheless not within the context of the pluri-annual action pro- negligible. Each Water Board operates rainfall gram, and is approved by the Prime Minister and flow-gauging networks and data bases, upon recommendation by the Interministerial which provide them with detailed knowledge of Water Commission. The action program, which the basin. The Water Boards conduct individual thus legitimizes the fees, is the basic instrument and joint studies and research projects in certain that determines both their nature and their fields related to their activities, such as nitrate amount. and pesticide pollution, rain water management, The action programs must necessarily be in and accidental pollution. The results are pub- keeping with the socioeconomic options taken at lished and distributed to interested agencies and the national level, particularly with regard to individuals. The Water Board also provides assis- general water policy. In terms of volume, the tance and expertise, particularly with regard to action program has no limits other than the level the training of water management personnel. of fees. These are voted by the Basin Committees However, the main role of the Water Boards is of which nearly two-thirds of the members are still to provide financial incentives. The Water water users and thus subject to the fees. There is Board is neither owner nor contractor of works thus a form of self-regulation in the process of implemented for improving and preserving drawing up the programs. water resource. Its involvement in such cases is The action program of each Water Board com- purely financial. prises three sections: The general community must learn that it is 1. Analysis of the problems existing in the basin, unacceptable to waste or pollute water. It is not hence the value of information provided by sufficient simply to promote awareness of this the gauging networks and data bases precious heritage. The public must be made to see 2. List or type of operations to be carried out, the advantages of not wasting or polluting assessment of their cost accompanied by an water-or at least causing less pollution. To estimate of the assistance that the Water Board achieve this, there must be incentives. The Water expects to provide 88 Managing Water: The French Model 3. Fee system to ensure the program's financial * Towns and urban centers that abstract and equilibrium. consume large amounts of water and produce The types of action covered by the program pollutant loads may vary considerably from one Water Board to * Industries that, in general, abstract and con- another, depending on their characteristics and sume little water but cause many different priorities. These actions generally concern: types of pollution * Development, planning, and protection of * Farmers, who abstract a lot of water during water resources, through financial assistance certain periods and cause widespread pollu- for operations such as the protection of water tion of rivers and groundwater catchment areas, the development and main- * Inland waterways tenance of rivers, and water demand control, * The French Electricity Board (EDF), which ab- or structures of general interest such as regu- stracts and consumes large quantities of water. lation dams The Water Boards distinguish two types of * Water pollution control, regardless of origin, fees: the "pollution"fee, related to discharges into particularly by providing assistance for the the natural environment, and the "resource" fee, construction, extension, or refurbishment of related to abstraction and consumption. sewage works and sewage networks, but also through help to improve industrial processes "Pollution" fee and purification bonus. Pollution with a view to reducing pollution fees are based on the volume of pollutant load • Improvement and security of drinking water discharged into the natural environment. For supplies, for example through financial assis- domestic pollution, the fee is based on the total tance to establish special treatment proce- population. Each inhabitant contributes to the dures and install interconnection systems in cost by means of a surtax on the price of water, areas in which the water supply is particularly which is then transferred by the water utility to vulnerable. the Water Board. For nondomestic pollution, the The action program does not generally iden- amount of pollution is either measured or esti- tify each individual operation that may benefit mated in terms of a lump sum on the basis of the from financial assistance but identifies the types activity concerned. of operations and structures that are eligible, the The above fees are grossfees and correspond to level of financial assistance (percentage of the the gross pollutant load before any purification cost of the operation) from the Water Board for treatment. When, as is most frequently the case, each category, and the nature of the assistance waste treatment plants have been installed, the (grant, interest-free loan, loan), depending on the community or industry is awarded a purification legal status of the beneficiary, whether public bonus, which is deducted from the gross fee (associations, public corporations, State) or pri- levied to obtain the netfee. vate (industry in particular). The amount of pollution fees is fixed by each Water Board to balance its antipollution program. Waterfees. Under French law, Water Boards are The rates are adjusted geographically according authorized to collect fees from public or private to the quality priorities and objectives defined by persons who contribute to the deterioration of the Basin Committee. water quality, who abstract water from the water In 1987 gross pollution fees amounted to about resources, or who modify the water regime in US$350 million (for all Boards), or 60 percent of part or all of the basin. In such cases, these are the total revenue of the Boards, while purification "active" or "responsibility" fees. bonuses accounted for US$75 million, or 15 per- Another type of fee may also be collected from cent of total Water Board expenditures. public or private persons benefiting directly or indirectly from works or structures completed "Resource" fees. These fees are used to cover with assistance from the Water Boards. Such fees part of the program for quantitative water manage- are known as "passive" or "beneficiary" fees. ment, that is, to finance storage reservoirs, water Anyone who pollutes, abstracts, or consumes distribution systems, and irrigation structures. water is subject to the fee. This includes essentially: The resource fee is a combination of two fees: Ch6ret 89 1.The fee for "water abstraction or modification service in the Communes. The same is true of of the water regime," the amount of which is waste water disposal and treatment. The determined according to the volume of water Communes have the exclusive power to grant the abstracted, measured, or estimated right to use public land within their boundaries. 2. The "consumption" fee, determined by a coef- Since this right is granted to only one operator for ficient-depending on water usage applied water supply and/or sewage, these services are to the net consumption. This coefficient is, for defacto monopolies. example, 0.20 for water distribution and 0.70 For many years, neighboring Communes and for sprinkler irrigation. clusters of Communes have tried to settle their Like the "pollution" fee, the "resource fee" for infrastructure problems by creating joint bodies the water supply system is collected as a surtax such as intercommunal associations, urban com- on the price of water, which is then transferred by munities, and districts, to which they have dele- the water utility to the Water Board. gated their powers, in particular concerning Resource fee rates vary considerably, depend- water supply and sewage services. The result is ing on, for example, whether they apply to that there are over 4,600 intercommunal services groundwater or surface water, whether the throughout France. Water supply and sewage requirements in the area are high or low, or services in the community are under the techni- whether abstractions are regular throughout the cal, administrative, and financial supervision of year or concentrated in the dry period. the State (Ministry of the Interior) while the In 1987 resource fees collected by the Water Ministry of Health is responsible for monitoring Boards amounted to US$85 million, or one-quar- the quality of water that is distributed. ter of the amount collected in pollution fees. Under French law, communities have the power to create and manage water distribution Water Board budget. For the sixth five-year pro- and sewage services provided to the public. This gram (1992-1996), the total budget of the Water is known as direct management, and concerned Boards amounts to about US$7.5 billion (1991 about 25 percent of the French population in 1992 prices), distributed as shown in table 2. (as opposed to 70 percent in 1945). Communities The Water Boards' total budget for the sixth also have the legal right, when they feel it neces- five-year program is nearly twice as much as the sary, to delegate all or part of their task to a private budget of the fifth five-year program (1987-1991). operator. This is known as "delegated" management, The total cost of works subsidized by the Water and may be implemented in a wide variety of Boards will increase as shown in table 3 (1991 ways: management contract, lease contract, con- prices). cession contract, or any combination of these. This reflects the considerable efforts being A local community may use a private opera- made to reduce all types of pollution, whether tor for various technical or financial reasons, but domestic, industrial, or agricultural. such action often results from: * The increasing complexity of water supply and Management of Municipal Water Supply sewage tasks: increasingly refined treatment and Sewage Services The Code des Communes stipulates that water dis- Table 3 tribution is an industrial and commercial public Total costs (US$ miflions) 5th 5-year progrom 6th 5-year program Table 2 Urban and rural sewage 4,100 7,700 Industrial pollution control I,100 1,900 Revenue Expenditures Improvement of agricultural practices -600 Water Board fees Financial assistance Watersupply 1r700 2.700 Polluton fees: 68% Grants: 40% Water resource development 700 . 100 Resources fees: 14% Loans: 25% ron ment 700 400 Purification bonuses 12% Environment Loan repayments: 18% Operation: 9% Total 7,800 14,400 Research, development, and Amount of financial assistance gauging networks: 14% provided by Water Boards N.A. 6,200 90 Managing Water: The French Model processes in response to the deteriorating qual- 1. "Gerance," in which the operator ensures the ity of raw water; sophisticated purification operation of the services only, for which it processes required to meet increasingly higher receives a lump sum payment standards concerning wastewater; manage- 2. "Regie interesse," in which the operator is also ment of an increasing number of consumers involved in determining the tariffs and The problems encountered by the community receives, in addition to remuneration, a sum in generating sufficient funds to ensure main- that correlates to the service management tenance and replacement of equipment and to results. finance the development of water and sewage These formulae gradually have been replaced systems. by contractor-type contracts in which the opera- Nevertheless, the Communes always have con- tor takes full responsibility for proper use of facil- trol over the management method selected with- ities and accepts the financial operating risks for out outside interference, in particular from the a fixed price within the framework of a long-term administrative supervisor. contract. Two such contracts may be identified: 1. Lease contract (affermage), the most wide- Different Management Systems spread form of delegated management in France. The operator (fermier) is responsible Under direct management, the community is for managing the service while the commu- responsible for the creation, development, and nity is responsible for building new struc- management of its water supply and sewage ser- tures, including related financing. vices. The community creates the necessary struc- 2. Concession contract. The operator (the con- tures and renews them as required, with work cession-holder) is responsible not just fo. performed by its own personnel. It fixes the rates managing the service at his or her own risk and is responsible for its own expenditures and but also for financing and building structures. revenue. This direct management by the commu- nity, without outside assistance-integrated man- Lease and concession contracts. These two types agement in EC terminology-is conventional and of delegation represent the great majority of con- will not be discussed here. tracts involving delegated management in Delegated management, whatever form it may France, and constitute one of the most original take, involves delegating management to a private aspects of French water management. operator. However, in every case, the community For both lease and concession operations, the retains ownership of the structures and equip- government prepares model or typical specifica- ment. In France delegation concerns only the manage- tions sheets that provide a framework for draw- ment of water supply and/or sewage services and does ing up the contracts. Each community wishing to not involve the transfer of structures and equipment, lease or grant a concession for its water supply or even when they arefinanced by the private operator. In sewage services adapts such specifications to its certain countries, for example, the British Water own characteristics and needs. Thus, new types Authorities, the involvement of the private sector of contracts have started to make their appear- is accompanied by a transfer of assets. In such ance, for example, "hybrid" contracts that fall cases, privatization can be said to be virtually defin- between a lease and a concession. Some leases itive, but this term cannot be applied to the French may include small concessions, in which the situation, in which delegation of management operator is no longer solely responsible for the responsibilities is reviewed periodically building of structures. However, the legality of Delegated management can generally be delegated management contracts is in the end divided into two types, depending on whether checked by the government, in this case by the the possible operating deficit is borne by the com- Prefets de Departements. munity or by the private operator. The initial contracts for the delegation of man- When management of water supply and agement are generally awarded following a call sewage services is not provided at the risk of the for tender, on the basis of specifications prepared private operator but at the risk of the community, by the local community in accordance with their it may be one of two kinds: specific needs. When the contract reaches the Cheret 91 expiration date, its extension, with modifications The Price of Water in France to take into account new conditions, is generally renegotiated with the current operator. France has approximately 13,000 water supply ser- A leasing contract generally lasts for twelve vices and as many sewage services. There are there- years, a relatively short period, which explains fore at least 13,000 different prices for water. Recent the popularity of this type of contract. A conces- surveys revealed differences in average prices sion lasts between twenty and thirty years. The between regions of 20 to 50 percent, with an ex- length of this type of contract allows the conces- treme ratio of 1:20 between the lowest and highest sion holder to cover initial investment costs with- prices observed (approximately US$0.17 to 3.40). out having to resort to excessive tariffs. The The most important reasons for such price dif- contract may be terminated by the community in ferences are: the event of a particularly serious offense by the * Presence or absence (rural Communes) of operator. This, however, is extremely rare. sewage works, the cost of which is reflected in An important aspect of the change from direct water bills management to delegated management concerns * Quality and proximity of available water the integration into the new system of commu- resources nity personnel, often somewhat numerous in * Population served (economies of scale) relation to real needs. The integration of all or * Impact of recovering investment costs for some of the personnel, and their status in the new works, which can vary considerably across structure, may constitute an important criterion WRgions in selecting the operator. These considerations * Cost of maintaining structures and equip- concerning community personnel are then speci- ment, in other words, the quality of facilities. fied in the contract. Generally, a water bill in France is made up as Contracts also specify which works, within shown in figure 1. the area covered by the lease or concession, are the responsibility of the collectivity and which Figure I are the responsibility of the operator (new works, Water Board fees 1 2% renewal, maintenance, repairs to main struc- tures). They also give details of responsibilities Seweragend with regard to connections and water meters. 30% 6% Regarding pollutant outfalls in the natural environment and quality of distributed water, the contracts refer to the regulations in force. In this area, both leaseholders and concession hold- ers come under the control of the Ministry of FNDAE Health. % Finally, tariffs are determined in the contracts. 1 r Tariffs generally include a fixed part (subscrip- tion) and a part that is proportional to consump- tion (binomial tariff). The tariff is established on The following examples illustrate the wide the basis of the forecast operating statement, range of water rates in urban areas in France which is submitted by the operator in support of (prices given in US$ per cubic meter, including his or her bid and takes into consideration the sewage and taxes): foreseeable changes in income and expenditure over the duration of the contract. This document, Aix-en-Provence (1992) 1.07 which is noncontractual, facilitates contract Bordeaux (1992) 2.68 negotiations. The contracts also include inflation- Calais (1992) 1.61 indexed water tariff revision clauses. Revision of Creil (1993) 2.70 water rates takes into account, in particular, the Grenoble (1992) 1.79 changes in salaries and social charges as well as Lyon (1992) 2.50 the cost of energy and chemicals. Paris (1993) 1.79 92 Managinig Water: The French Model Table 4 In US$/m3, excluding taxes Current pnce Future price Community Water Sewge Total Water Sewage Total Rural commune 0.36 0.00 0.36 2.55 1.50 4.05 Small town 0.89 0.74 1.63 1.89 1.54 3.43 Average town 1.34 0.79 2.13 1.50 1.14 2.64 Intercommunal association 2.14 1.25 3.39 2.21 1.66 3.87 Rouen (1992) 1.96 I.A small, under-equipped rural Commune Saint-Etienne (1993) 2.45 2. A small town with insufficient sewage Soissons (1993) 2.53 3. An average-sized town Versailles (1992) 1.96 4. An intercommunal association equipped with standard facilities. The considerable investments that will have The results of this simulation are presented in to be made in the coming years, particularly to table 4. comply with European Community directives on Increases will be greatest where current sewage, will also significantly affect the price of prices are the lowest and thus will help reduce water by the turn of the century. the price differences that have been observed A simulation study was carried out using four until now. types of fictitious cases: Discussant Remarks: Poland Janusz Kindler Poland covers an area of 312,000 km2 and has a cause water pollution in Poland to be generally population of approximately 38 million in com- much higher than in France. parison to France, which covers 549,000 km2 and Since early 1990, dramatic political, economic, has a population of 55 million. Poland's popula- and institutional changes in Poland have affected tion density is thus in the order of 123 inhabitants every aspect of life, including water resources per km2 while France averages 100 inhabitants management. Central planning by the state has per km2. About 62 percent of Poland's popula- been almost completely abandoned, and there is tion live in cities and towns: 43 cities have over a strong movement toward decentralization and 100,000 inhabitants. Administratively the coun- privatization. The institutional system is under- try is divided into 49 voivodships, whose role is going significant change, leading to a strongly comparable to that of French departements increased role for local self-governing authori- -regional representation of national govern- ties. Responsibility for municipal water supply, ment. Each voivodship is divided into muni- water treatment, and ownership of the infra- cipalities (gminas) which since 1990, as was the structure is being transferred to municipalities. In case before the Second World War, are locally this respect, the situation is similar to France, elected self-governing bodies. where the commt"unes are responsible for the devel- Unlike France, which is divided into six well- opment and management of its water supply and defined river basins, Poland is divided into only sewage services. two major basins: the Vistula (about two-third of Poland's state subsidies for water resources the country's area) and the Odra. These two management and protection are generally ending rivers drain to the Baltic Sea. The average fresh- and being replaced by subsidies or loans from water availability in France is 3,420 m2 per capita environmental and water funds. Varied compared to only 1,730 m2 per capita in Poland. approaches to project financing are promoted, Indeed, Poland is one of the most water-scarce including enhanced local sources of revenue countries of Europe. This is well illustrated by the from taxes and user charges, user taxes on poten- fact that the average runoff from all of Poland is tially polluting substances, and private invest- about the same as the runoff from the Rhone ments that supplement traditional public-sector River Basin in France, which is one-third the size. and budgetary resources. In spite of these efforts, At the same time, water use per $1,000 of gross local resources remain limited, at least in the national product in Poland is about 2.5 times short term. Drafting new legislation (including higher than in France, which is an indication of new Water Law) as well as enforcement of new Poland's great potential for water conservation regulatory arrangements is difficult in this period and demand management. The combination of of political, economic, and social transition. scarce water resources, their extensive use, and According to the 1974 Water Law, the Ministry insufficient wastewater treatment capacities of Environmental Protection, Natural Resources 93 94 Discussant Remarks: Poland and Forestry (MEPNRF) is responsible for water charges. Thus, the current practice of collecting policy throughout Poland. This responsibility these charges will be modified; this function is to includes long-tenn strategic planning, water be transferred from the voivodship agencies of quality and effluent standard setting, and pricing MEPNRF to the new Regional Water Authorities. policy. At the regional level, water resources are In addition, the Authorities would monitor use of managed by the voivodship agencies of the min- both surface and groundwater water resources in istry. These offices issue water withdrawal and the region, develop and operate water manage- wastewater discharge permits; they also collect ment information systems, prepare multi-annual all water and wastewater fees and charges. These action programs, initiate research and explora- funds remain partially at the disposal of the tory work, and develop guidelines, such as water voivodship; a portion, however, is transferred to allocation principles and limits on wastewater the National Fund for Environmental Protection disposal for integrated water use in their regions. and Water Management. The guidelines will have to be coordinated Regional agencies of MEPNRF operate within among the Regional Authorities for the entire the administrative boundaries of individual Vistula and Odra basins. The guidelines also are voivodships. However, as a result, even relatively to be used in issuing water withdrawal and small river basins are often under the authority of wastewater discharge permits, which process several voivodships. Frequent conflicts of interest remains in the hands of the MEPNRF voivodship have been observed between water users and agencies. Since each of these agencies operates in administrative bodies, often leading to complex some part of the river basin only, the water use and difficult situations, especially in the fre- guidelines will be the main instrument for inte- quently recurring dry years. As with France prior grating and coordinating effort across each basin. to 1964, the need for a change towards river basin The Regional Water Committees, composed management was gradually acknowledged in of the representatives of state government Poland. In 1989 establishment of river basin (national and voivodship), local self-governing authorities and introduction of the "polluter authorities, and water users, are charged with pays" principle was officially endorsed by all water policymaking in the basin. Each committee concerned. is responsible for the approval of action programs In 1990 close collaboration was established developed by the Board; development of invest- between France and Poland in natural resources ment priorities and basin-wide financial policy management and environmental protection. At (distribution of funds collected by the Regional the MEPNRF in Warsaw, the Bureau de Water Authorities and setting up pricing policy Cooperation franco-polonaise dans le domain de for water withdrawal and wastewater disposal); l'environnement (BCFPDE) was set up, focusing and the overall supervision of the activities of primarily on water resources management. Regional Water Authorities. About a year later, a mixed group of Polish and Although the legislative process concerning French specialists drafted a new Water Law pro- the new Water Law has not been completed, in viding for the establishment of Regional Water 1991 seven Regional Water Authorities Basin Authorities and Regional Water Councils. They were established. Three are in the catchment are named "Regional" to reflect the fact that their basin of the Odra River and four in the Vistula boundaries follow hydrographic regions (sub- River basin. Their boundaries follow the hydrog- basins) of the only two major basins in Poland- raphy of the country, but, unfortunately, until the of the Vistula and Odra Rivers. Except for some passage of new Water Law, they cannot perform modifications reflecting specific Polish condi- their main function of collecting water and waste- tions, the functions and responsibilities of these water charges. Thus, for the time being they are institutions are quite similar to those of their responsible primarily for the preparatory work to French counterparts, namely, Water Boards and introduce a new basin-oriented system of water Basin Committees. resources management. With the assistance of Under the proposed law the Regional Water BCFPDE and the French International Office for Authorities would be responsible for collection of Water, over thirty Polish specialists from the water withdrawal and wastewater disposal Regional Water Authorities and the MEPNRF Kindler 95 participated in the extensive hands-on training process is going quite slowly. However, it is hoped program in France. At the French Agences de l'Eau, that by early 1994 the new Water Law will be oper- each course participant was given the opportu- ational and the new Regional Water Authorities nity to take part in day-to-day activities of his or will quickly prove their value to the country her French counterpart. These contacts led to To conclude, the French experience in the area direct twinning arrangements between some of water management does apply to Poland. The Polish Regional Water Authorities and French shift to basin management and planning is rec- Water Boards. ognized throughout Poland as a logical and nec- In 1993, without waiting for the new Water essary step. However, development of full Law, Poland initiated the process of setting up working relationships between the administra- Regional Water Councils. Most of the Councils are tive structure of voivodships and the new Regional now established, and after the first few meetings, Water Authorities and Councils is an intricate it is already obvious that these basin-wide "water process that has just begun. While supporting the parliaments" are beginning to play an extremely concept of basin management, voivodships never- important role in the country. They provide theless are losing part of their authority over unique fora for discussion of a number of difficult water finances to pay for local operations issues, and, importantly, they give all parties con- (although voivodships are represented on the cerned a sense of ownership and participation. Regional Water Councils). At present, the adoption of the new Water Law It has to be recognized that France took sev- is the most pressing issue. Regional Water eral decades to decentralize and refine its water Administrations are working well, but they can- management system. A blueprint can not be not play their proper role until the new Water Law transferred to any other country and be expected gives them power to collect water and wastewater to work immediately. The principles are correct, fees and charges. Unfortunately, the legislative but the devil is in the details. Discussant Remarks: Brazil Roberto Messias Franco France's experience does apply to Brazil. For the Decentralization last ten years I have been managing environmen- tal control agencies in Brazil at the state and fed- A strong legal and regulatory framework, incen- eral levels. In my experience the most important tives for efficiency, incorporation of environmen- environmental problems are water quality and tal considerations, and use long-term factors are water quantity. How do we manage water in a components of decentralization. Implementation country like Brazil? Let me show you, first, how of all of this, as it is happening in France, is cer- we adapted the French experience to the tainly possible for Brazil and other countries, but Brazilian case. it is not easy. Brazil is the largest country in South America Comparing the historical evolution of water with 8.5 million square kilometers. It is a federa- resources management in France and Brazil, we tion of 26 states and the federal district. The cap- can find legal and institutional coincidences that ital, Brasilia, is in the center. Some of the states are occur in different periods of the histories of both very large. The state of Amazonas has 1.5 million countries. Ivan Cheret's excellent paper says that square kilometers. Brazil is 17 times the size of in France the first, or primary, water management France. law dates from 1878. This law distinguished If we look at the principal hydrographic basins between public and private domain and recog- in Brazil, 20 percent of the fresh water of the earth nized the right of the landowners to use the water. comes from the Amazon Basin. How can we man- Brazil passed what we call the Code of Waters, age a basin that is so large and so complex? The or Law of Waters, in 1934. It has the same defini- important French experience on water resources tions that we find in the first French law but management is one of the most creative we can focused on hydropower. As many as five decades find today and prescribes recommendations that ago, in the mid-1930s, Brazilian authorities already are similar to the World Bank's new approach to believed that we should have an important hydro- water resources management policy. power policy for the development of the country. Another idea that we can see in both the Participation Brazilian and the French history of water resources management is France's creation in Participation is a very precise concept. It is very 1930 of a Compagnie Nationale du Rh6ne, a national easy to say that people must participate, but how company for the multipurpose development of a do we do it? When we turn to practice, our day- major river. This company was created before the to-day mission, it is very difficult to facilitate peo- Tennessee Valley Authority (TVA) in America. ple's participation because those participating in In 1956 Brazil also created an entity to coordi- water resources management have many differ- nate the development of the Sao Francisco River ent interests. Valley, today called the Compania de Desenvolvi- 96 Franco 97 mento do Vale do Sdo Francisco-the Sao Francisco rivers of the southern region-which comprise Development Company. Other countries also cre- the Parana-La Plata Basin. Many of those ated companies through the regional develop- hydropower plants were generating more than 1 ment using water together with other natural million kilowatts. That means they are enormous resources that were found in their areas. dams with enormous environmental impacts Later, as described in the Cheret paper, France that were not measured at that time. When those legislated the New Water Act. How did France dams and plants were built, there was almost no come to its present legislation and institutional environmental control in Brazil. arrangement? As a response to the phenomena of From 1970 to 1980, water supply and sewage urban concentration and economic growth that services also were centralized with incentives to arose between 1949 and 1969, which increased every one of the Brazilian states to create water the pollution and number of hydropower and and sanitation companies. Therefore, one of the thermal power plants, in 1959 France set up the important experiences we had at the local or Water Commission with the participation of the municipal level was the management of the water various parties involved and outlined the princi- resources, especially with regard to sanitation. ples for the Water Act of 1964. There was a very important foundation of the Judging from the Cheret paper, 1964 is a very Ministry of Health, a special Health Service, important date in the history of water resources which was a kind of central authority that advised management because in 1964 French law intro- every municipality how to manage water and duced the notion of quality objectives, a notion that sanitation. This experience has been changed by stillseems to be absent in many nations'legislation. the new experience of delegating the centralized The Water Committees and the Water Boards public management of water resources to the seem to me the most important point of this states' water and sanitation companies. French management system. The Water Thus, whereas in Brazil we had a period of Committees and Water Boards include the par- centralization, now we come to a new idea, a new ticipation of users, states, and local authorities. era, a new period: how to decentralize again, how The French law of 1964 often seems to use regu- to give back authority to the local institutions, lations, incentives, and dialogue as principles for how to build up the states' capacity to manage water management. These seem to me absolutely their water resources. correct, but I do not know how to apply them. It Presently, in 1993, the National Congress is is not easy to apply dialogue when the question discussing a new law creating the National Policy of power is involved: the division and concentra- for Water Resources. This proposal would divide tion of power. Brazil into three large hydrographic regions. In 1992, the French system arrived at a new Brazil is such a large country that, again, we Water Law, with the explicit recognition of water would have to put together many basins in each as part of the nation's heritage, but based on the hydrographic region. The Amazon River Basin in same principles as the 1964 Act. the north of the country is the principal one. The We had in Brazil during all of those years a second region would be the eastern region, where democratic evolution of the French system of the Sao Francisco is the principal river and the water management. At almost the same time only one that flows directly to the Atlantic Ocean. urban concentration and new industries came to The third region would be the area of the Parana Brazil. This kind of development that came to River, which flows southward, entering the France after the second World War came in Brazil Atlantic Ocean between Buenos Aires and after 1955 or 1956, especially from 1970 to 1980. Montevideo. Politically, the situation in Brazil was quite dif- But in the Congress there is much resistance to ferent. We were under a military dictatorship this proposal legislation. The wealthy are a prob- with a concentration of political power at the cen- lem. In addition, regarding the French experience, tral level, and important financial resources were France has the Water Committees and the Water used in hydropower plants-Furnas, Itaipu, Boards, and they are under the supervision of the Tucurul, Sobradinho, and many others, espe- Minister of Environment. There are important cially in the Sao Francisco River Basin and in the governmental sectors in Brasilia that ask, "How 98 Discussant Remarks: Brazil does it work?" The main difficulty is that they are towns have these Municipal Councils for the against this new environmental control system. Environment, but the process has begun. Add to this mix the Ministry of Mines and Energy, To conclude, despite all of these problems, the a sector that has a tradition in Brazilian develop- French model does apply to Brazil. However, ment of making dams: they want to maintain the there are problems in applying this model. The status quo without adding an environmental first is the problem of scale since Brazil is so much impact assessment to the sector. bigger than France. It is difficult. Who will head the water man- The second problem is the question of federal agement system? Would a Department of Water organization. Brazil has federal rivers that go belong to the Mining and Energy Ministry, or to through more than one state, and state rivers. The an Environmental Ministry that works and exists federal law is country-wide, and the state's law is in Brazil's current environmental control system? at the level of the state. Every state also has an About twenty years ago, in 1973, the assembly, or Congress. France's law had to be Brazilian Environmental Policy and Control adapted to Brazil, and the various state laws had System was created. As I mentioned, Brazil is a to be adapted to one another. Brazil's new consti- large federal republic and would have three lev- tution gives the right to every state to be more els of environmental control and environmental restrictive, but never less restrictive on environ- policy. These levels were created in 1981 by the mental matters and environmental standards Federal Law 6938. than all others. At the federal level is a coordinating institu- The third problem is the question of institu- tion called the Ministry of the Environment. tional arrangement. In Brazil and in some other Decisions are taken by a National Environmental countries, many sectors refuse to work together Council (CONAMA). This National Environ- with the environmental sector. Many people still mental Council is very interesting because it believe that environmental control is an obstacle functions with the participation of several sectors to real development. I saw this reaction when I of the society: industry, nongovernmental orga- met with authorities from several Latin American nizations (NGOs), and all states are represented countries. They think that environmental control in this National Environmental Council. There is is good for the developed countries, but not for a Brazilian Institute for the Environment those that are trying to develop. (IBAMA), which was created in 1989. Six thou- There are also international aspects and inter- sand people work there so it is a large and impor- national difficulties in trying to build a French tant agency. But it has a weakness: it has not model of water management in Brazil. France, for worried about water resources management instance, belongs to the European Community until now. (EC). The EC already has laws and regulations Every state of the federation also has one sec- specific to water. This is has not yet happened in retary who works with environmental problems. South America. In Brazil we share the La Plata Some states have a special Secretary for the Basin with some countries, the Amazon Basin Environment, and in some others, the sector is with others. The South America countries must joined with Planning, for instance, or with make this water management policy together. Natural Resources Management, or with Science The fourth problem in adapting France's and Technology. (There are many Secretaries of water management system to Brazil is the price Science, Technology, and Environment.) of the water. In South American countries water Decisions about an environmental policy also prices cannot be as high as the prescribed price of are made by the States' Environmental Councils. water in France. There are state environmental agencies in every My final comment is that the management of state, including Brasilia. water resources is very important to all human- Brazilian federal law also prescribes at the kind, to every country. We must always be vigilant local level for every one of the 4,000 Brazilian about what is happening to our water. In Brazil municipalities the creation of one Municipal today only 6 percent of sewage is treated-94 per- Council for the Environment. At present fewer cent of sewage is not treated at all. In many other than 5 percent of Brazilian cities and Brazilian countries, in poor countries especially, the situa- Franco 99 tion is not so different. In his opening presentation management systems, taking into account envi- yesterday Ismail Serageldin showed slides that are ronmental aspects, and having significant partic- representative of the environmental horrors that ipation of users and society. Democracy, have happened in the developing world. participation, and environmental protection are I think that the World Bank, the Inter- essential to the implementation of environmen- American Development Bank, and multilateral tally sustainable development. and bilateral financing agencies should consider It is easier to say than to do it. In my opinion the following as previous conditions to many the main objective of national governments project loans: environmental control laws, irriga- should be, like those agencies' objectives, to lay tion laws, hydropower sector and sanitation pro- out the conditions for this environmentally sus- grams, implementation of water resources tainable development. Floor Discussion Audience members voiced their concerns and ques- buy water through vendors at very high prices, tions, raising the following issues: (1) the costs of much higher prices than the rich pay, Of course, reaching higher standards and the relative merits of they buy very few gallons a day, but however penalties and subsidies in meeting standards; (2) how poor they are, they do pay the French system articulates between the central The pricing mechanism is a tool that can be imposition of water quality standards from the used in favor of the poor. There are a number of European Community in Brussels and the delivery of examples in developing countries. I addressed services locally; (3) how to reconcile looking at water pricing structures with fees for the rich when I sectorally, particularly with regard to agriculture, mentioned having different pricing mechanisms. with sustainable development and "the polluter pays"; In large cities like Abidjan or Tunis, the water (4) empowerment of the poor, specifically how the Bank company is told to charge different prices. Those will take the poorest rural populations' water needs who consume less than 10 liters a day do not pay into account when Bank financial support often for water. Those who use from 10 to 20 liters a day diverts water to the big cities, causing drought in rural pay a little more, and those who consume 500 areas; (5) regional integration when two or more coun- liters per capita pay a much higher fee. This tries share and dispute the same water source; (6) who higher fee paid by the rich helps to subsidize the sets the valuation and pricing structures for water, poor, even in a private company wlhich often seem to result in the poor being charged For example, in Tunisia there are pricing while the rich, who use much more water, are under- mechanisms whereby those who consume very charged; (7) whether the French or Polish example small amounts of water pay very low prices, and should be used by poorer countries, or whether they the more water they consume, the higher the rate. should use their own low-cost ways of developing their In the Western world, in this country, the average basic water supply; (8) mountains are the "water tow- consumption of a family is between 200 and 500 ers" of the world and continuing to neglect mountain liters per capita per day In other countries some ecosystems has a big effect on water. people survive with only three liters a day. There are different mechanisms. On the rural Panelists' Responses side, there has been a major effort in India to develop handwater pumps through local partici- Guy Le Moigne: Michel Petit had to leave and pation and local industry. Again, the comprehen- asked me to answer these challenging questions. sive approach does have a meaning. There are The gentleman from India questioned the World cases in India where the Bank financed some irri- Bank's role in ensuring that the poor of India have gation projects with electric tubewells, and we access to water when they cannot afford to pay. completely dried up the water of the poor people The Bank is fully aware of this difficulty. We have and the farmers. Water had to be brought by to recognize, however, that in many poor coun- truck. It is a very challenging difficulty, but we are tries, the poor, when they have no alternative, fully aware of it and trying to do our best. 100 Floor Discussion 101 The integration in Bangladesh, India, and many of the watersheds, of course, have to Pakistan of the international water rivers is a very address the mountain issue. Each country is sov- delicate subject. The World Bank does have a pol- ereign. We have to convince them that these are icy based on two major principles. One is the delicate projects that comprise many aspects. But principle of appreciable harm. We are not pre- we are increasingly conscious of these issues, and pared to participate in the financing of a project there is now a major effort to address them. that would cause major harm to another country. The second is the principle of equity. Ivan Cheret: Concerning the first question about The two principles can be contradictory. tariffs and money, when a deciding body, a par- Countries feel that the equity should influence the liament, be it French, British or European, decides principle of appreciable harm, but World Bank on quality standards, the body never speaks policy considers that appreciable harm is a full pri- about the economic impact of those standards, ority. For example, Nepal, focusing on the equity the investments that will be needed, and the price issue, says, "The World Bank should finance a big consequences. Thus, when, after some of the project in my country." Then India says, "This pro- most recent laws, my chairman told the media ject would cause India appreciable harm." that these new laws would double the prices, in Bangladesh is at the other end. On the Ganges many of our municipalities a host of people said, River, the Bangladeshi, to whom you refer, are con- "That is incredible. What are those private com- cerned by the diversion of water by India during panies doing?" But he told the truth. Obeying the dry season. In this scenario each country is standards costs money. unhappy The World Bank is very willing to pro- When one controlling body thinks only about vide good offices to facilitate a negotiated agree- prices and the other controlling body thinks only ment among the three parties, but the countries about standards, there is a problem. As the gen- have to request the Bank to get involved. tleman from the United Kingdom said, we must In another famous case between India and have a global approach to the project. Pakistan, the Bank helped work out an agreement Regarding taking a sectoral approach to water between the two countries to share waters of the and the problem of agricultural pollution from Indus Basin that has worked reasonably well ever fertilizers and pesticides, people from the agri- since. Mr. Shams ul Mulk could perhaps touch cultural side participate in the Water Parliaments, briefly on this. and these questions are deeply discussed. These The issues of technical cooperation, local River Boards have given grants under whose expertise, and stakeholder participation are a terms the agricultural people use less fertilizer, major challenge. Michel Petit referred to the thus losing production, and we see whether mon- implementation of the Bank's water policy. I just etary compensation can help to solve these prob- returned from Bangladesh, where there is major lems. The solutions have to stem from the field, Flood Action Program under preparation. from the very local organizations. We have two or Bangladesh is well known for its floods, but what three such experiences underway in France right I saw was a flood of foreign consultants. There is now, successfully as far as I know. very little local capacity building. We are becom- The Water Parliaments bring all the parties ing ever more aware of the need to develop the together, and their ultimate aim is for each party local capacity, possibly through partnership. We to express his or her own problems so that all par- are preparing guidelines for stakeholder partici- ties understand. If we leave the problem to the pation. Bangladesh has developed guidelines for Minster of Agriculture on the one hand, the stakeholder participation so there is hope. This is Minister of Environment on the other hand, and definitely the new trend. But as Mr. Kindler and the Water Resources Board on another hand, they Mr. Messias Franco said, it is easier said than done. will fight among themselves. But in these Water On the fate of the mountain people, Mr. Ives is Parliaments, they seek solutions together. Each absolutely correct. There is no Cousteau for the party sees why the money is used and why it is mountains. Erosion in the mountains is a major useful that maybe a paper pulp production com- challenge. However, more and more Bank pro- pany or a city give some money to an agricultur- jects address water management protection, and ist in order that he or she use fewer pesticides. 102 Floor Discussion Setting up this French experience was diffi- Roberto Messias Franco: Last year in Brazil we cult. From the first conceptualization to the final invited a French corporation to address the ques- vote, the law took five years. From the vote of the tion of water resources management. What was law to the first implementation of these Water impressive or surprising was how easily people Boards in the regions took four years. I had to and local authorities could observe this experi- devote ten years of my life to see the successful ence and positively evaluate the question of par- implementation of the law. Without one person ticipation and how strong is the resistance of the pushing for ten years, we cannot achieve any- technological side, especially in the sectoral areas thing in our countries. like mining and energy. They resist participation in the water use decisions. Janusz Kindler: Regarding charges, in Poland there is some delay in the legislative process lead- Emil Salim: To sum up, the discussions on water ing to the new Water Law. Until this law is resources management have emphasized five passed, water charges are being collected by the major points: regional administration, not by the new Regional 1. Decentralizing water service Water Authorities. 2. Encouraging participation of beneficiaries What has been proposed is a fundamental and the affected parties in water management change. It is a question of diverting the money to 3. Emphasizing incentive systems to achieve a different channel. No one should be surprised efficiency that the legislative process goes slowly, but there 4. Building strong legal and regulatory frame- are clear indications that in 1994 the new law will works be passed. 5. Capacity building. Remarks Keith Bezanson We will now move from theory to practice by attempts to internalize prices and get the account- drawing on the experience of Pakistan. We will ing right are essential. The main lesson he told us also benefit from comments on that and other is that we must persevere. If I may paraphrase experiences relating to Mexico and Egypt. what he said: it is important not to make the per- We will raise questions about real lessons fect the enemy of the good. learned. What are the experiences or lessons, both Again, our question is: what works? Are there positive and negative, that can be extracted from indications of directions for new research and the practical experiences of those who manage new thinking on policy that can be derived from water resources in these three countries? And, our panelists' experiences? going back to yesterday's discussions, what do Allow me to suggest that one question that these experiences tell us about theory and the should be very clearly on the table today is adequacy of theory? whether the real constraints are indeed good the- Does practice confirm the correctness of those ory. Are the real constraints not related to other who yesterday reminded us of the importance of factors-institutional, political will, societal getting the prices right? Does practice confirm expectation, or a plethora of nonspecific, amor- that price signals are important and that without phous factors that have to do with the way peo- respecting such signals choices are difficult and ple react within their societies and interact with bad practices follow? To what extent can our the- their environments? ory be applied in the pragmatic, real, political, We should also question whether deductive institutional, and human settings of Pakistan, reasoning should not be replaced by a more Mexico and Egypt? inductive approach. Should not theory derive We also learned yesterday that price signals more from practice than the other way around? I do not always work. I remember Professor would like our panelists to address this as well. Dasgupta referring to the notion of trying to get Yesterday we did not touch specifically on all prices right as otiose. He mentioned that qual- what we would consider to be good water man- itative and cultural factors may prove very diffi- agement theory. I have written down four points cult to internalize within our economic or cost that may comprise guidelines to what might be accounting models. good theory. I will share these with you and invite What do we do then in pragmatic and man- the panelists to address these points for their ade- agement terms to deal with that which we cannot quacy or inadequacy and relate them to their quantify and which may have deleterious, pragmatic national experiences. indeed, even irreversibly negative effects on * First, we cannot deal withi water entirelyfrom the quality of life and environment? supply side. We must also deal with demand. In summarizing yesterday's discussion, Ismail In most of the cases I know of that deal with Serageldin stated that, although imperfect, our current and projected gaps between supply 103 104 Remarks and demand, there is a clear conclusion that it interface between sound theory, sound eco- will prove easier, cheaper, and less environ- nomics, and sound institutional develop- mentally damaging to cut demand rather than ment is something that we should touch on to increase supply. today. * Second, with regard to guidelines to good * Four, most of the efforts in water management policy, we cannot separate issues of water qual- throughout the world focus on household ityfrom those of water quantity. In many cases, consumption. The gains from such efforts are what appear to be deficiencies in quantity are rather small for one simple reason: household deficiencies in quality. That is, there is water use is less than one-fifth the total water enough water, but it is seriously degraded, use worldwide. Most use is industrial and that either naturally or by the intervention of includes, of course, the generation of electric- human behavior. If we hold in abeyance nat- ity. We must inform our action and investments ural degradation, which is caused mainly by with due regard to marginal cost-benefit analysis. minerals and salts, experience and research In developing countries the preponderant use show that it is almost always cheaper to is irrigation. Shams ul Mulk's paper states that avoid pollution than to clean it up. 70 to 90 percent of the total water availability * Third, yesterday's discussion demonstrated in Pakistan that has been captured is used for that almost all issues of water problems irrigation. Indeed, his paper informs us that 97 require careful attention to economics. I take percent of Pakistan's flow-through in its river this as sine qua non. However, all solutions to system per year is already diverted for irriga- water would appear also to involve major tion. These figures raise a number of impor- changes in institutional arrangements. The tant policy questions. Managing Water: Pakistan's Experience Shams ul Mulk Pakistan has a total area of about 804,000 km2 of Moreover, water, not land, is the critical con- which about 415,000 km2 in the north are covered straint for development of agriculture. by snow-clad mountains, huge ice fields, narrow Irrigation is the key to Pakistan's agriculture. valleys, and low foothills.' The Indus River and Of the cultivated area of about 21 million hectares its tributaries emerge from these mountainous (Mha), 16.2 Mha are irrigated. Although agricul- terrains and flow for about 1500 km through ture's share in the gross domestic product has 320,000 km2 of flat alluvial plains before the main declined from 53 percent in 1947 to 26 percent in Indus flows into the Arabian Sea. recent years, it is still a crucial sector of Pakistan's In January 1992 Pakistan's population was economy. Agriculture employs 54 percent of the estimated at 117 million. Pakistan is growing at a labor force and contributes 70 percent of the high annual rate of 3.1 percent, and its population country's foreign exchange earnings. Irrigated is projected to increase to about 150 million by the agriculture provides more than 90 percent of the year 2000. The population is unevenly distrib- country's total agricultural production and is an uted. Of the four provinces, Punjab has the largest important factor in the robust growth perfor- population (56.1 percent) followed by Sindh mance of the economy. (22.6 percent), North West Frontier Province (NWFP) (13.1 percent), and Baluchistan (5.1 per- Water Resources cent). The distribution reflects the difficulties of topography, climate, and water scarcity. Pakistan is endowed with substantial water Population density is highest in irrigated areas. resources although they are inadequate for irri- According to the 1981 census, two-thirds of gating the available land. The average annual Pakistan's population are rural and live in 45,000 flow of the Western Rivers (Indus, Jhelum, and villages while the rest live in 415 urban centers. Chenab) amounts to 161 billion cubic meters Eighty-five percent of the villages have fewer (Bcm). Inflows from other tributaries, including than 2000 persons, and 8 of the 415 urban centers surplus flows from the Eastern Rivers allocated to account for half the urban population. India, contribute about 20 Bcm increasing the total to 181 Bcm. Of these, some 131 Bcm are with- Irrigated Agriculture drawn by the canals, about 11 Bcm are lost in the rivers, and the remaining 39 Bcm flow to the sea. Pakistan's climate is arid to semi-arid. Annual The Indus plains are underlain by alluvial rainfall is uneven and less than 200 mm over most deposits of considerable depth varying from over of the Indus plains while evaporation is high, 300 meters in the northern plains to 60 meters in ranging from 1300 mm to 2800 mm. Water is the the lower areas of the basin. The groundwater most precious resource of Pakistan because vir- reservoir extends over about 16.5 Mha and is tually nothing can grow without irrigation. recharged annually up to 56 Bcm by seepage from 105 106 Managing Water: Pakistan's Experience the rivers and irrigation network. However, the However, a small part of the 131 Bcm of canal quality of groundwater varies widely; only 10 water and the 48 Bcm of pumped groundwater is Mha of the plains are underlain by usable ground- also used for other sectors. Urban and rural sec- water and receive an annual recharge of about tor water use for domestic and industrial pur- 36 Bcm. In 1988 total pumping of usable ground- poses hardly exceeds 4 percent of the river flows water was 41 Bcm, about 10.5 Bcm by public tube- diverted into the canals. Most urban and rural wells and the balance by private tubewells. The water demands are met from groundwater. Over installation of private tubewells has been increas- 50 percent of village water supply is provided by ing at an annual rate of 6 percent, and it is esti- small private hand pumps. In areas where mated that total pumping from these tubewells groundwater is saline, canals are the main source alone amounted to 42 Bcm in 1992, far in excess of of water supply. In Sindh province, including the usable annual recharge. Karachi City, where most areas are underlain with saline groundwater, 92 percent of the urban Irrigation and Drainage water needs are met from surface water resources (canals and lakes). Surface water is also the The Indus irrigation system is an extensive net- source of water supply for Islamabad because work of three major reservoirs, 19 barrages, groundwater, although usable, is rather deep. 45 canal commands, and over 107,000 water- Pakistan's urban population is increasing at a courses. The five rivers of the basin-Indus, faster rate than its rural population. However, Jhelum, Chenab, Ravi, and Sutlej-are integrated future water requirements for urban and rural by 12 inter-river link canals to optimize use of domestic and industrial use are estimated to their highly seasonal flows. The storage reser- remain small-about 12.6 Bcm by the year 2010 voirs do not have enough capacity to regulate the and 19.6 Bcm by the year 2020. Moreover, most of seasonal flows. The system has about 61,000 km these uses are not consumptive uses and return to of canals and distributaries and about 1.6 million the system, although with degraded quality. km of watercourses and field channels. Pumping The hydropower plants on the rivers and from usable groundwater is carried out by canals are operated to meet the irrigation 13,000 Salinity Control and Reclamation Project demands as the first priority. Water requirements (SCARP) large-capacity (85 liters/sec) tubewells, of inland lakes for development of fisheries, and 1500 medium-capacity (43 liters/sec) public of irrigated forests in the Indus plains, are met by tubewells, and about 324,000 small-capacity (up irrigation canals. Navigation is confined to 732 to 28 liters/sec) private tubewells. km of the lower reach of the Indus River because More than 14,000 km of surface drains have the barrages upstream do not have navigation been constructed over the years, and more are locks. under construction or planned. However, the flat topography of the Indus plains and the problems Management of Water Resources of disposing off the drainage effluent without degrading the usable surface and groundwater The policies, strategies, and practices for effective resources are major constraints. The SCARP tube- management of Pakistan's water resources have wells in the usable groundwater areas helped to evolved and been improved during the past 100 reduce the waterlogging problems, but their suc- years, and this process continues. Although sev- cess in the saline groundwater areas has been lim- eral major events during this period, such as ited by the lack of effective arrangements for rapid development of new projects, improved disposal of the pumped water. The use of tile technologies, changes in objectives, and inter- drainage in Pakistan is very limited. The existing provincial water disputes, led to changes in poli- drainage system of the Indus Basin is inadequate. cies and management practices, the pre- and post-1960 eras have distinct characteristics in Water Use in Other Sectors terms of the roles of institutions and their perfor- mance. This section describes the key features of The agriculture sector is the major user of water Pakistan's water resources management prac- resources, both surface and groundwater. tices in these two periods. il Mulk 107 Water Management before 1960 public interest." The allocation policy defined the "prescriptive rights" (rights acquired by custom) Legal framework. Before partition of the sub- and the rights of riparians along the river banks, continent into the independent republics of India who practiced sailab irrigation. The policy of and Pakistan in 1947, the government of British treating "existing uses" as sacrosanct became the India at Delhi administered the provinces water law. The Canal Act included provisions for through governors and delegated to them wide drainage, protection of irrigation works, penal- powers for managing all subjects except defense, ties for misuse of water, and the powers of canal communications (railways, strategic highways, officers to ensure efficiency of water use. post, and telegraphs), federal taxes (income, cus- Following the Canal Act, several acts, manuals, toms), and foreign affairs. Agriculture, home and regulations were introduced, such as the Land affairs (security), industry, irrigation, water sup- Acquisition Act, Manual of Professional Orders, ply, roads, public health, and local development Revenue Manual, Settlement Act, and Manual of were regarded as provincial subjects and were Irrigation Practice, that provided policy and tech- managed by the governors. The Central Govern- nical guidelines for the irrigation and revenue offi- ment at Delhi provided financial support for cers for developing irrigated agriculture. development of these provincial sectors. Irrigated agriculture in the Punjab and Sindh Institutions. Initially, the Public Works in the nineteenth century was limited to sailab Department was established with separate (flood) irrigation along the rivers and to uncon- "branches" dealing with irrigation, buildings and trolled inundation canals, which received sup- roads, public health (water supply and sanita- plies when the river levels were high. The area tion, and electricity including hydropower). With irrigated by these methods was small, and the the expansion of irrigation, a separate Irrigation success of the crops depended on the size and Department headed by the Secretary to the duration of floods, which varied from year to Government was established. By the 1940s the year. The frequency of famines, therefore, was irrigation network was so extensive that the high. Expansion of irrigated agriculture was not Punjab Irrigation Department had four secre- possible without constructing weirs (headworks) taries, two for operations and maintenance, one across the rivers to control the water levels and for development projects, and one for adminis- divert the river flows to the canals on a sustain- tration and personnel management. The depart- able basis throughout the year. ment was responsible for planning, designing, The need to avoid famines or to reduce their constructing, operating, and maintaining the irri- frequency was also important to avoid unrest in gation works. It was also responsible for certain the northern provinces of the subcontinent, aspects of revenue work (recording irrigation which were the main source of recruitment to the areas and crops, assessing water charges, and set- army. There was also the need to settle retired tling farmers' water related disputes). army veterans and to provide employment to The Agriculture Department was responsible loyal subjects who had supported the British gov- for agricultural research, production of quality ernment during the 1848 mutiny. The develop- seeds, agricultural extension, livestock, and ment of water resources of the Indus River and its forestry. Some of these functions were subse- tributaries provided the opportunity to achieve quently assigned to new departments. The these objectives. Revenue Department was responsible for settle- In 1873 the Central Government enacted the ment of farmers in the irrigation project areas, "Northern India Canal and Drainage Act," which assessment of crops, and collection of land rev- provided the legal framework for expansion of enue and water charges. irrigated agriculture in the Punjab and the NWFP. A similar act, "The Sindh Irrigation Act, 1879," Investnient planning. Irrigation development was passed to achieve the same objectives in programs were prepared by the provincial irriga- Sindh, which was a part of the Bombay province tion departments. It was an innovative and pio- at that time. These Acts set out the policies for neering effort because there was no experience allocation, regulation, and use of river flows "in within the subcontinent or outside to guide the 108 Managing Water: Pakistan's Experience development and use of the water resources of water to as many farmers as possible, to spread rivers carrying heavy sediment loads during the village settlements widely rather than concen- high flow season. Punjab led the pioneering trate them in large centers, to ensure low opera- effort. Each province developed its own plans. tion costs, and to minimize human interference. The concept of comprehensive basin planning did The system was intended to avoid crop failures not exist. The irrigation systems were developed rather than to promote high cropping intensities. in stages, and the completion of one canal system The flat topography and gentle slopes of the was followed by planning the next system. The Indus plains proved ideal for dividing the pro- first series of canal systems used all the water that posed irrigated area into 25-acre (about 10 hec- could be diverted up to canal capacities from the tares) squares on plans and transposing this rivers during the kharif (rainy) and rabi (post- design in the field. Village sites, pasture grounds, rainy) seasons and acquired water rights for their mandis (market centers), rural roads, and other historic uses. The second series of canal systems facilities were marked on the plans and similarly were allocated what was left. Thus, the systems transposed to the site. However, inadequate atten- that were developed last received supplies only tion was given to planning the drainage system. during the kharif season and suffered serious The canal systems were designed to use the water shortages in the sowing and maturing crop run-of-the-river supplies to maximize cropped periods if river flows were unfavorable. area, minimize water consumption, and simplify Each provincial irrigation department had a operation and administration. They were planning office at its headquarters. Punjab estab- intended to provide "equitable distribution" of lished a large Central Designs Office (CDO), the available river supplies without considera- which was responsible for planning and design- tion of the actual crop needs at various stages of ing new projects and addressing technical and their growth. operational problems that could not be resolved River flows were diverted by weirs into main by the field staff. The Irrigation Research Institute canals and subsequently into branch canals, dis- of the department pioneered developing models tributaries, and minors, and finally to outlets that and testing innovative designs of barrages, river supplied the farmers' watercourses. Each water- training works, canal falls and other hydraulic course was a miniature irrigation network with infrastructures. The competition between Punjab field channels up to 16 km long and a command and Sindh to excel in innovations was keen. area that varied in size from 100 to 300 ha. Sindh was ahead in planning and designing the Farmers received water in proportion to their flood bunds (embankments) along the lower land holdings. Because the outlets flowed contin- Indus; its Bund Manual was used as a guide by uously with varying discharges depending on the other provinces. available supplies in the distributaries and The financial feasibility and economic justifi- minors, the canal officers fixed the warabandi cation of the projects prepared by the irrigation (water tax) for each watercourse defining the departments were reviewed by the provincial turnaround sequence of water use by the farmers finance departments and approved by the respec- and the number of hours of their entitlement for tive provincial governments, but their technical water application. The irrigation operations in feasibility was the responsibility of the irrigation the outlet commands continued day and night, departments. New projects were financed by the rain or shine, except when the canals were closed provincial governments with financial support during high floods to avoid heavy silt entry or for from the Central Government. Operation and maintenance and repairs. maintenance (O&M) and extensions and improvements (E&I) expenditures were financed Water management. The basic water manage- fully by the provincial governments. ment unit is the irrigation division, which is vested with full powers for managing the O&M Strategy and design of the irrigation system. The and revenue work. The division usually has 3 or policy objectives described earlier called for a 4 subdivisions, and each subdivisional officer strategy that emphasized an extensive rather manages 3 or 4 overseers (engineering staff) and than an intensive irrigation system to provide 3 or 4 zilladars (revenue staff). The zilladars are ul Mulk 109 usually qualified agricultural graduates, and root zone, with most losses occurring in the each zilladar manages 4 to 5 patwaris (field rev- watercourse commands. enue staff). The subdivision normally managed 1500 to 2000 ha of irrigated area. It has three main Water charges and cost recovery. Farmers pay functions: water management, maintenance of land tax, which is based on the productive value the irrigation works, and revenue work. of the land. In addition, farmers in the irrigated Water management involved such functions areas pay water charges, which are based on the as operation of the irrigation network, silt man- area irrigated and the types of crops grown. Food agement, water gauge and discharge observa- and fodder crops (wheat and maize) are charged tions, annual hydraulic surveys of the canals and at a lower rate than cash crops (cotton, sugarcane, distributaries, and measurement of outlet dis- and fruits). The rates are increased periodically, charge capacities. These activities are essential to but they are still low and constitute only a small maintain the designed capacity of the channels part (about 5 percent) of the farmers' investment and outlets to ensure equitable distribution of costs. However, until recently, the water charges water. The silt problem is addressed in various covered both investment and O&M costs, and the ways, for example, by still pond operation at Irrigation Department was a major source of rev- headworks, use of silt excluders and ejectors, enue to the provincial government, particularly designing non-silting canals, and silt clearance in in the Punjab. Since 1975, however, the water the distributaries and minors. The hydraulic sur- charges are not sufficient to cover even the O&M veys provided the basis for preparing budgets for costs because O&M costs increased considerably maintenance, extension, and improvement due to aging of the canal systems, the pumping works. costs of SCARP tubewells, and heavy inflation, The revenue work included such functions as while the water charges remained at low levels. measuring the area irrigated and the crops grown during the sowing and maturing crop periods; Interprovincial water disputes. As the run-of- assessing crop losses due to frost, hailstorms, or the-river supplies of the tributary rivers (Jhelum, floods; preventing misuse or waste of water; and Chenab, Ravi, and Sutlej) were increasingly used settling farmers' water related disputes. The zil- through successive irrigation development pro- ladar is required to check 100 percent of the pat- jects in the Punjab, Sindh became concerned wari's measurements while the subdivisional about their possible impact on its existing and officer checked 30 percent of the zilladar's and pat- future irrigation uses on the main Indus. There wari's measurements. This management system was a Sindh-Punjab dispute at every stage of new was standard practice in the Punjab. The irriga- developments in the Punjab. These disputes, tion revenue staff duplicated some functions of however, were settled through negotiations or the civil service staff to ensure proper recording arbitration by independent commissions set up of irrigated area and assessment of water charges. by the Central Government. The main agree- The importance attached to these functions is ments executed over the years on allocation of indicated by the fact that the subdivisional officer water to the provinces were the Tripartite Agree- devoted almost 50 percent of his or her time to ment of 1920, the Anderson Commission Award revenue work, and was required to spend 20 of 1935, the Rau Commission Award of 1942, and nights per month in the field. No other depart- the Sindh-Punjab Agreement of 1945. ment was so closely involved in the affairs of Soon after division of the subcontinent into the farmers as the irrigation staff. independent states of India and Pakistan, a seri- To ensure integrated management of run-of- ous water dispute arose between the two coun- the-river supplies, inter-river link canals were tries concerning the sharing and ownership of the constructed. Subject to the capacity of the canals, waters of the rivers flowing through the Indian the river supplies of all rivers, except the Indus, territory. The dispute was resolved with the good were utilized fully. However, the long canals and offices of the World Bank, and the Indus Water the extensive network of field channels in the Treaty was signed in 1960. The treaty allocated the watercourse commands resulted in low delivery three Eastern Rivers (Ravi, Beas, and Sutlej) to efficiency of 35 to 40 percent from canal head to India and the three Western Rivers (Indus, 110 Managing Water: Pakistan's Experience Jhelum, and Chenab) to Pakistan. An Indus Basin timely resolution of inter-provincial water dis- Development Fund was established with finan- putes through negotiation and arbitration, and cial assistance from the World Bank and donor the challenges provided by inter-provincial com- countries to construct the Mangla and Tarbela petition to excel resulted in rapid development of Dams, and a system or inter-river link canals and the irrigation systems. barrages to replace Pakistan's uses on the Eastern While the extensive irrigation networks made Rivers. These events underscored the need for a the Indus Basin the granary of the region, they new approach to management of Pakistan's water also caused negative environment effects. The resources as discussed in the next section. most significant adverse effects, which were threatening the very sustainability of the success Intersectoral water allocation and use. Irrigation achieved, were the twin menaces of waterlogging remained the dominant use of Pakistan's water and salinity. To mitigate these negative effects of resources before 1960. Rapid expansion of cities irrigation, the Punjab Irrigation Department such as Karachi and Lahore started after 1947 due initiated research and reclamation activities, to the influx of refugees. The main constraint was established the Ground Water Development not the availability of water, but the slow devel- Organization, constructed a series of surface opment of water supply and sanitary facilities in drains, and installed public tubewells to supply the urban areas. The pace of development of the additional water required for reclamation. industries also increased only after 1947. However, these measures were inadequate to However, there were no significant problems in address the formidable and increasing problems meeting their water requirements from irrigation of waterlogging and salinity, and by the end of canals. The future water requirements of sectors the 1950s some 40,000 ha of cultivated lands were other than irrigation were not given as much going out of production annually. attention in planning as they deserved on the assumptions that they would constitute a small Water Management after 1960 part of the total requirements and that they would receive high priority as in the past. The post-1960 period was marked by events that had major impacts, both favorable and unfavor- Achievements and problems. The pre-1960 able, on the efficiency of water resources man- achievements of the provincial irrigation depart- agement in Pakistan. New institutions were ments were remarkable. The objective of avoid- created; green revolution technology greatly ing famines was fully achieved; the Indus changed the potential of irrigated agriculture; the irrigation systems were greatly expanded; new twin menaces of waterlogging and salinity irrigation technologies were developed, and the received serious attention; basin planning studies Indus Basin became the granary of the region. for comprehensive development of water The success of water management was consistent resources were undertaken; the International with the objectives and policies of designing an Irrigation Management Institute established its extensive irrigation system to serve as many peo- major branch office in Pakistan; and investments ple as possible. Equitable distribution of water in the water sector increased. This section deals was an important criteria for judging success with the impact of these events on the effective- and, despite occasional shortages at the tail out- ness of water resources management in Pakistan. lets, this objective was largely achieved. The irri- gation institutions had strong planning and New institutions. (a) WAPDA: The Water and designing offices and research centers. Manage- Power Development Authority (WAPDA) was ment and decisionmaking was decentralized, created in 1958 to prepare a comprehensive, uni- and recovery of both capital and O&M costs was fied plan for development and use of the water effective despite the low level of water charges. and power resources of Pakistan. The WAPDA Although the concept of planning and develop- Act also provided for preparation of projects and ing the Indus Basin as a single hydrological unit programs concerning irrigation, drainage, water- did not exist, the plans developed by the logging and salinity, and inland navigation. The provinces to serve their respective interests, the Act envisaged that the works constructed by ulMulk 111 WAPDA would be transferred to the concerned (c) Other organizations: Other organizations agencies for operation and maintenance. initiated by the Punjab provincial agriculture The WAPDA organization became opera- department included Command Water Manage- tional in 1959-60. Its main activities on the water ment (CWM), Agriculture Extension and Adap- side were construction of the Indus Basin tive Research (AEAR), Water Use and Soil Program (IBP) formulated in connection with the Reclamation (WUSR), and Farmer Joint Manage- Indus Waters Treaty, development of the Salinity ment (FJM). They were intended to provide sup- Control and Reclamation Program (SCARP), and port and advice to farmers on water use and planning and development of the water extension. resources of the Indus Basin. WAPDA completed the Mangla and Tarbela Dams and the series of Green revolution technology. Green revolution barrages and link canals of the Indus Basin technology was introduced in Pakistan in the Program with remarkable success within the 1960s. The use of new varieties of seeds with transition period specified in the Indus Waters appropriate applications of fertilizers and pesti- Treaty. As regards the SCARP Program, by 1992 cides increased wheat and rice yields four to five WAPDA completed 44 SCARP projects involving times the normal yields in irrigated areas. 12,800 irrigation and 1800 drainage tubewells, Initially, Pakistan achieved remarkable success 9000 km of surface drains, and 5700 km of pipe by using this technology, but it was soon realized drains. Additional projects involving construc- that the irrigation system that was designed to tion of 3000 drainage tubewells, 4400 km of sur- provide run-of-the-river supplies could not pro- face drains, and 10,000 km of pipe drains are vide water in the quantities and at the time under construction or planning stages. required by the new seed varieties. Farmers who Many comprehensive basin planning studies had private tubewells to supplement canal sup- were also carried out during 1960-92. They plies were able to achieve higher yields, but those include Harza's Master Plan (1964), the Indus depending solely on canals achieved less than Special Study (1967), the Revised Action Plan optimum results. (RAP) 1979, and the Water Sector Investment Planning Study (WSIPS) 1990. These studies pro- Private tubewells. Although the use of tube- vided a framework for development of the water wells for pumping groundwater for water supply resources of the Indus Basin and dealt with issues and other uses was known before, the existence concerning agriculture, irrigation, drainage, and of a huge groundwater reservoir of usable water hydropower. The Indus Special Study (1967) pro- for irrigation and reclamation identified by vided the basis for establishment of the Tarbela WAPDA's investigations, and its successful Development Fund. exploitation by SCARP tubewells opened the (b) OFWM and WUAs: The On Farm Water way for rapid development of private tubewells. Management (OFWM) organization was estab- Farmers realized that they could use the ground- lished in 1981 to rehabilitate watercourses and water below their land. By 1991 some 324,000 pri- organize Water User Associations (WUAs) to vate tubewells were developed, and their total maintain the watercourses and field channels. contribution amounted to about 50 percent of the Farmers requesting assistance under the OFWM canal supplies delivered at the outlets in the 10 projects were required to form a WUA registered million hectares of irrigated lands underlain with under the provincial ordinance. OFWM provided usable groundwater. Farmers used canal and to each WUA a vehicle for carrying out construc- tubewell workers conjunctively, sold water to tion and O&M activities, the opportunity for a their neighbors, increased crop intensities, and collective voice in planning and operating irriga- used the green revolution technology effectively. tion and drainage facilities, and a mechanism for conveying irrigation related extension informa- Water management. One would expect that the tion. By 1991 about 17,000 WUAs were estab- availability of large storage reservoirs, the facili- lished. The OFWM projects financed lining the ties provided by the inter-river link canals, the first kilometer of the watercourse with free labor additional water resources provided by the huge contributed by farmers. ground water reservoirs, and the new institutions 112 Managing Water: Pakistan's Experience of WAPDA, OFWM, and others would provide meet, and in the race for establishing water rights great opportunities for comprehensive manage- based on actual users, valuable storage suppliers ment and effective use of the surface and ground- were not used productively. water resources of Pakistan. However, these The ad hoc distribution arrangements contin- opportunities were not adequately utilized, and ued until the Water Apportionment Accord, in some respects the effectiveness of water which defined the respective shares of the resources management deteriorated instead of provinces, was signed in 1991 by the Prime improving for reasons discussed below. Minister of Pakistan and the Chief Ministers of the four provinces. The GOP passed an act in Interprovincial water disputes. The water dis- January 1992 establishing the Indus River System pute between India and Pakistan was settled with Authority (IRSA) for implementing the provi- the signing of the Indus Water Treaty in 1960, but sions of the accord. A study carried out by the inter-provincial disputes on allocation of storage World Bank in 1992 using the Indus Basin Model water from the reservoirs included in the Indus (IBM III) for crop production optimization under Basin Program continued for more than thirty the Water Apportionment Accord scenario years. First, the Indus Basin Development Board showed that there was substantial scope for (IBDB) set up by the Government of Pakistan increasing crop production up to $100 million (GOP) in 1960 defined the allocations and the pro- annually through proper management of the cedures for operating the Tarbela reservoir, but its water supplies and that significant reduction in recommendations were not accepted by some the system shortages could be achieved both in provinces. In 1968 a Water Allocation and Rules rabi and kharif seasons without increasing the Committee was constituted to fix water alloca- existing canal capacities. The study indicated the tions and reservoir releases. The committee sub- benefits foregone due to inadequate management mitted its report in 1970, but no decision was during the two decades of the post-Tarbela taken on its recommendations. In October 1970 period. the Justice Fazle Akbay Committee was estab- lished to address the allocations issues. Again, no Stakeholder participation. The comprehensive action was taken on its recommendation. In 1977 basin studies prepared by WAPDA and the con- GOP established a commission comprising the sultants had little stakeholder participation, the Chief Justices of the provinces headed by the stakeholders being the provincial irrigation and Chief Justice of the Supreme Court of Pakistan. agriculture departments and the farmers. It was The commission's report was submitted in 1982, a top-down approach largely managed by for- but no decision was taken. In March 1982, GOP eign consultants. No serious attempt was made directed the Chief Justice of the Supreme Court to to blend the successful experience of foreign recommend the allocation of water to the countries with the political, social, and adminis- provinces, but no action was taken on his April trative realities of Pakistan's irrigated agricul- 1993 report. ture. Every report rightly pointed out that the These results indicate the contrast in deci- existing irrigation system, which was designed to sionmaking during the pre- and post-indepen- distribute water equitably without taking crop dence (1947) periods. The lack of decision on needs into account, was not suitable to meet the allocations had serious adverse effects. The green revolution technology's requirements, but provinces tended to withdraw as much water as none of the reports provided a program to they could even when it exceeded crop needs address this issue. Coordination between and caused damage to the canals. When Tarbela WAPDA and irrigation departments, between Dam was completed, WAPDA did not have an irrigation and agriculture departments, and agreed basis for releasing water for irrigation, between OFWM and irrigation departments was and a Water Distribution Committee was estab- poor. There were more turf battles than team- lished to decide the storage releases ad hoc. This work. It is difficult to evaluate the cost of such arrangement adversely affected power produc- management problems, but the inability to tion at Tarbela. The irrigation demands from the implement the proposed basin programs as provinces were often more than Tarbela could planned was partly due to the lack of effective ul Mulk 113 coordination and stakeholder participation in but now they are not sufficient to cover even planning. those. The low cost recovery is affecting the abil- The lack of a unified, integrated, and coordi- ity and willingness of the provincial govern- nated effort is probably one of the reasons why ments to provide adequate funds for O&M. The some of the projects did not succeed as well as canal systems are deteriorating due to inade- they should have. OFWM organization's quate maintenance. approach to develop WUAs did not work well. The low revenue from water charges is also Apparently, farmers perceived the WUAs as a due to the difficulty in assessing the canal irri- means to obtain free labor for watercourse gated areas in the watercourse commands, where improvement. Once this was done, many WUAs farmers are using both canal and tubewell water. became dormant. The OFWM staff shifted from There are no water charges on the area irrigated one project to the next, and their relationships by private tubewells. Moreover, some 15 percent with farmers were not sustained. The irrigation of the outlets in the tail reaches of distributaries zilladars and patwaris were in the field and had and minors have been closed by the farmers long-term relationships with the farmers, but because they were receiving little or no canal sup- they were not involved in the OFWM projects. plies. They are now depending solely on their pri- Some WUAs were successful, but they were vate tubewells and do not pay water charges. The exceptions. canal water saved by the closed outlets is being used somewhere in the system, but it is not fetch- Conjunctive use of water. Farmers use their pri- ing revenue because water charges are not based vate tubewell water conjunctively with canal sup- on the volume of water delivered to the outlets. plies. They also sell water to their neighbors. WAPDA surveys indicated that water trading is Institutional weaknesses. (a) Background: Water being practiced on 70 percent of the watercourses is developed and used to meet the needs of a soci- in the sweet water zones. However, neither ety. These needs are subject to qualitative and WAPDA nor the Irrigation Department has plans quantitative changes over a period of time. Water for introducing conjunctive use of river flows, resources management must, therefore, be a storage water, and groundwater in the system. dynamic process that has a built-in mechanism to Whether they are located in sweet or saline ground- respond to the changing variables. water zones, the canals are drawing water based on The traditional institutions responsible for their historic rights as though private tubewells did water resources management have been in the not exist. Equitable distribution of water was an government sectors that are by their very nature article of faith of the irrigation department in the static in methods and procedures, ruled by prece- past, but now there is inequity in distribution at all dents, and rarely innovative even when a chang- levels of the irrigation systems. ing scenario demands it. The decision to establish Private tubewells are increasing at the rate of WAPDA as a semi-autonomous institution in the 6 percent annually. It is recognized that uncon- public sector was an attempt to rectify this situa- trolled and unregulated groundwater use is tion. The experience has been successful. Water replete with serious consequences and could lead resources management goes beyond the stages of to movement of saline groundwater to the sweet planning and project management. Water poli- water zones. This is already a serious problem at cies should ensure the productive and beneficial the tails of distributaries and minors, where sur- use of the resource. Pakistan lacked an organiza- face water is short and farmers have resorted to tional setup to oversee the entire cycle of water excessive groundwater pumping. management. This institutional deficiency is serious. Water charges and cost recovery. Despite Irrigated agriculture is the most important sector increased water resources and higher incomes, of the economic structure of Pakistan. There are water charges are low. They amount to only about Departments of Irrigation (for water input) and 5 percent of the total agricultural inputs and 5 of agriculture (for agricultural inputs), but there percent of the net-farm income. Until 1975 water is no administrative institution that reflects the charges were adequate to meet the O&M costs, multidisciplinary nature of irrigated agriculture. 114 Managing Water: Pakistan's Experience The task of directing endeavors to meet the ulti- ronmental and development planning institu- mate need of sustainable agricultural production tions has led to the conclusion that substantial and environmental protection becomes difficult benefits can be derived by exploiting existing in such an institutional vacuum. institutional structures. This becomes all the Progress in institutional development in more relevant given the shortage of environmen- Pakistan has been achieved with the creation of tal expertise and financial resources. Pakistan's WAPDA, but WAPDA's charter does not cover the existing institutions-the irrigation departments entire water cycle. The management of water (PIDs) at the provincial level and WAPDA at the use-the important part of water resources man- federal level-should be entrusted with the agement-is the responsibility of the departments responsibility to address the environmental of the provincial governments. Traditionally, the aspects associated with irrigation and drainage. Provincial Irrigation Department had the respon- In the medium to long term an environmental sibility of conceiving, implementing, operating, capability should be introduced in each PID to and maintaining the irrigation and drainage sys- enable consideration of environmental aspects tem. Over almost a century, the Irrigation Depart- and, where applicable, oversee environmental ment acquired enviable expertise. However, impact assessment. In the short term the main when the demands on the system charged quali- environmental capability with regard to the tatively and the complexity of the system water sector should lie with WAPDA, which increased, these departments did not show the should assume greater responsibility for pro- needed dynamism. gram and system planning, economic appraisal, The Revised Action Plan (RAP) 1979 identi- environmental assessment and monitoring, and fied the irrigation-related institutions as the key evaluation of both environmental and socioeco- to optimize agricultural productivity in the nomic impacts. In line with this policy WAPDA Indus Basin. It gave detailed recommendations should undertake: for strengthening such institutions at the fed- * Planning strategic drainage networks eral, provincial, and project levels. It also rec- * Assessing the macro environment and identi- ommended the creation of new institutions to fying key effects and impacts coordinate the policy, planning, and manage- * Proposing water sector strategies that take ment functions. The key element in the institu- these into account tional development strategy proposed in RAP * Overseeing environmental impact assessment 1979 was to close the institutional gap between of major undertakings water as an input to agriculture and agriculture * Appraising programs and projects from both itself. Although some progress was made on social cost-benefit and environmental view- other recommendations, this core issue has points remained largely unimplemented. The WSIPS * Monitoring and evaluation (M&E) of socioe- 1990 also gave detailed institutional proposals, conomic issues identifying once more the close relationship of * Overseeing environmental impact M&E the Irrigation Department and Agriculture * Drafting legislation concerning groundwater Department as the key factor to optimize output observation and tubewell development of irrigated agriculture. * Coordinating a national master plan for irri- Protection of the environment is a global con- gation water and drainage effluent quality cern. Irrigation and drainage activities are central monitoring and analysis. to many environment-related issues. Environ- To implement the above tasks, WAPDA mental protection would require extension, mod- should be strengthened. This should include pro- ification, and capacity building within existing moting the powers and status of both environ- institutions. mental and economic planning units, and In the field of irrigation and drainage, envi- creating the positions of a Chief Environmentalist ronmental impacts and effects tend to cross many and Chief Economist, who should have the grade sectors. While the institutions dealing directly and status of the Chief Engineer for Water with them should have broader interest, the Resources Planning. These three chiefs and their assessment of the wider responsibilities of envi- constituent divisions would make up the core for ul Mulk 115 all WAPDA's planning and evaluation activities, agencies have recognized institutional capability and might be called the "Planning and as one of the major issues in the Pakistan water Evaluation Group." The accompanying tasks to sector. However, adequate steps have not been be carried out in other organizations and other taken to implement the recommendations of areas of institutional building would be essential these studies. to complete the picture. No set of policies and no strategy for water Note resources management would be possible with- out the development of institutions appropriate 1. This summary of the conference paper by Shams ul to address the complexity and multi-sectoral Mulk was prepared by Syed S. Kirmani, World Bank natureof the tasks of water resources manage- consultant, and approved by Shams ul Mulk. Copies of nature of the tasks of water resources manage- the original 200-page paper, illustrated and documented ment. This matter is being debated in profes- with maps and tables, can be obtained from Shams ul sional and official circles in Pakistan. RAP 1979 Mulk, Chairman, Pakistan Water and Power Develop- and WSIPS 1990 recognized it as an important ment Authority, 705 Wapda House, Shahrah-i-Quaid-i- factor for increased productivity of irrigated agri- Azam, Lahore, Pakistan, telephone 92.42.6366911, fax culture. A number of missions from international 92.42.6278837. Discussant Remarks: Egypt Mahmoud Abu-Zeid First, the organizers of the conference were quite history in irrigation and agriculture that dates intelligent when they asked us to comment on back thousands of years, and each is character- lessons to be learned from Pakistan, and not ized by having a very intricate irrigation network lessons from France and other countries, to be starting from large dams to hundreds of thou- applied in Egypt. The latter could have made our sands of kilometers of canals and drains that task quite complicated. transfer water to the different agricultural areas. Second, it is very important to see how the I will comment on some of the certain princi- Bank could help the developing countries transfer, ples and major issues presented in Mr. ul Mulk's or at least make use of, some of the experiences or paper that are of special importance to Egypt. lessons that can be applied to other countries. The First, for Egypt, as for Pakistan, water is the cor- convening of this conference is one way of doing nerstone for development. The two countries are it, but there must be additional ways to make in the middle of a process of unprecedented pop- available the experiences of countries to others. ulation and economic growth, which puts pres- The paper prepared by Shams ul Mulk reflects sure on agriculture and other water users. the experience and actual practice of an immense Second, the concerns about the quality of the package of policies and applications in the field environment are rapidly increasing, and water is of water management in Pakistan. Undoubtedly, prominent among these concerns. More people there are numerous lessons applicable to Egypt and different groups are interested in water poli- and to many other developing countries. How- cies than in the past. This fact will create demands ever, it is also true that there are major differences for broader consideration in terms of water poli- between Egypt and Pakistan, the most important cies than we may have experienced before. of which is the scale of a country whose irrigated Third, Egypt, and definitely Pakistan, are land exceeds 40 million acres, whose water moving towards a more open market-oriented resources are over 240 billion cubic meters a year economy. This will place different demands on encompassing several major rivers, and whose water policies in terms of valuing, recovering recent population is 122 million. capital recurrent costs, and sustaining the water In comparison, Egypt's agricultural land, system. which is mostly irrigated, amounts to 7.4 million Historically, water has been a critical compo- acres. Its water resources do not exceed 59 billion nent for the development of Egypt. It is becoming cubic meters. Ninety-five percent of its water a major constraint. All natural available fresh originates from one river, the River Nile, which is water resources have been exhausted. The future shared by nine countries, and Egypt is located as of water use in Egypt depends on the better use its tail end. and management of the existing water resources. Nevertheless, despite these vast differences, The population of Egypt exceeds 59 million each of the two countries has its eminent ancient and is expected to go to 70 million by the year 116 Abu-Zeid 117 2000 and 110 million by the year 2025. The per cover vast areas. Reasons for these problems have capita share of land declined from 0.5 acres per been studied and are recognized to be due mainly person in 1897 toO. 1 acres per person in 1992. The to the misuse of irrigation water and delays in per capita share of fresh water resources is now implementing proper field drainage systems. 950 cubic meters per person per year and will About 4 million of Egypt's 7.4 million acres of land drop to 350 cubic meters per person by the year have been provided with field drainage systems. 2025. You will recall the figures that Mr. ul Mulk Pakistan's experience in implementing and stated. Most of Egypt's water uses are within the managing the Salinity Control and Reclamation agricultural sector: 84 percent for agriculture, 8 Project (SCARP) program is immense. The dual percent for industry, 5 percent for municipalities, purpose of tubewells and the Water and Power and 3 percent for navigation. Development Authority (WAPDA) policy to Turning to water and environmental issues, as transfer public wells to private ones is quite inter- population increases, industrial development esting to Egypt. The Delta and the Nile Valley proceeds, agricultural production intensifies, and aquifers are fed mainly through excess irrigation the demands on the limited water supply greatly water and seepage from the irrigation systems. increase. To meet these competing demands, both The majority of tubewells in Egypt are private countries are giving more attention to the reuse of and used mainly for irrigation. There are about water-recycling. This means that water being 24,000 private tubewells and not more than 3,000 used must be kept as high quality as possible. wells owned by the government. The latter are There is a growing concern that the very limited used mainly for domestic use supply. water resources are becoming increasingly pol- Egypt's aquifers are managed by its Ministry luted because of excessive and improper use and of Public Works and Water Resources and the that both countries will have to bear heavy costs Water Research Center through licenses and in terms of the health and productivity of their monitoring of extractions of groundwater. The populations unless actions are taken to improve use of skimming wells and scavenger wells, resource management. where lenses of thin fresh water exist, is of par- In Egypt there is still insufficient information ticular interest in the coastal areas of Egypt, and available on water quality, and this lack requires it is known that these kinds of wells require a high strengthening water quality monitoring pro- degree of precision in operation and manage- grams and water quality management. ment of the system. Early in 1991 the Government of Egypt Moving to the water resources management decided to prepare an Environmental Action Plan experiences, the historical development of water (EAP) to strengthen the management of the envi- resources management plans, policies, and ronmental affairs in Egypt. With the assistance of related institutions in Pakistan is an enormous the World Bank and donor countries, the Action wealth of experience and educational material for Plan was adopted in May 1992. water resources managers and policymakers. Of Mr. ul Mulk referred to a vast hydrologic net- particular interest to Egypt is Pakistan's multi- work in Pakistan. Both countries are introducing purpose planning approach. I do not have time to new technologies in this area. Egypt has started a give details on that with respect to Egypt-basin telemetering system whereby hydrologic and planning for integrated development, conjunc- water quality data of the Nile and major canals and tive use of surface and groundwater, and the drains are transmitted through a meteor-burst institutional arrangements over exploitation of technique to central decisionmaking centers. groundwater and intrusion of saline, provincial Regarding the problems of availability of allocation on a seasonal basis, and creation of spare parts and the degree of sophistication of the semi-autonomous water planning and manage- telemetering system, Pakistan's experience ment institutions. In contrast, in Egypt the would be of great help to Egypt with respect to Ministry of Public Works and Water Resources is the future expansion of the system. the custodian of the national water resources. The The area of salinity control was also stressed basic planning and management of such by Mr. ul Mulk. Both Egypt and Pakistan suffer resources is carried out by the Ministry Planning from salinity and waterlogging problems that Sector. 118 Discussant Remarks: Egypt Concerning the farmers'involvement in man- required for the system. The balance between aging the system, Egypt has started a National economic efficiency and the ability of farmers to Irrigation Improvement Program, which was pay will influence the cost-recovery level. based on considerable research work similar to Regarding research, I would like to mention the that conducted in Pakistan. Egypt's National salt balance studies, which are also carried out in Irrigation Improvement Program establishes Pakistan, with the associated risks of pollution in Water Users Associations and an Irrigation both countries. For the Nile Delta, 18 million tons Advisory Service. This program now covers of salts are imported to the system with irrigation about 400,000 acres. It will take some time until water and 32 million tons of salts go out of the sys- the whole country is covered. tem annually. The need for continuing leaching is Regarding water rates and prices, in Pakistan clearly justified. A water multiplier, which is about water has been traditionally conceived as a pub- 1.6 for Egypt, resulting from recycling of the irri- lic good. In Egypt, water rates are still a sensitive gational drainage water may be seriously affected issue. Water as a public commodity has been the if pollution of such waters continues. support for the prevailing policy. This position is In conclusion, water is a vital natural resource consistent with Islamic religious teachings, and for both Pakistan and Egypt. The two countries supporters of this perspective point to the essen- have long traditional experience with handling tial role water plays in a nation entirely depen- water. The experience of Pakistan towards com- dent on the Nile for food and livelihood. prehensive water resources management and the Moreover, most of the water-using farmers are development of appropriate institutions would found among the poorest segments of the society, benefit Egypt, which is facing new challenges and inexpensive irrigation water provides a regarding the complexity of the multi-sectoral direct and obvious mechanism to help this group. nature of water resources development, manage- However, very serious studies have been con- ment, and use. ducted towards establishing a cost recovery pol- Again, I suggest that the World Bank encour- icy that will involve recovery of all or part of the age different countries to make use of similar operation, maintenance, and rehabilitation costs experiences. Discussant Remarks: Mexico Fernando J. Gonzalez Villarreal My comments, although, related to Shams ul as much as in Pakistan. However, if we take only Mulk's paper, are relevant to what has been said the arid and semi-arid parts of our country, where up to now about the concept of sustainable two-thirds of the population and 70 percent of development and how to go from concept to industrial activity and most of the irrigated land policies and from policies to practice or to policy are located, in that two-thirds of the country, implementation. water availability is pretty much the same as in My first reflection deals with Mr. Cousteau's Pakistan. This arid two-thirds is where all of our speech about cultural diversity. I think we are problems are. talking here about another kind of diversity-the Regarding the physical setting, our relevant water diversity-and that has historic, political, difference is that, whereas to irrigate 60 million social, economic, and ecological aspects that have hectares in the Indus Basin, Pakistan has built 3 to be considered before seeking a solution. But we dams, 18 barrages, and 60,000 kilometers of canals, can learn from this diversity, and we can adapt it to irrigate hectares over 6 million hectares, Mexico to our own countries. has to build 1,300 dams, about 2,000 barrages and Related to those comments, there are these about the same length of canals, and about 25 common issues. We have heard about different hydrological systems. Thus, the physical setting is countries with different problems, but at the end, a bit different, but the problems are the same. in 1975, those issues were raised in Plata, and they We agree with Mr. ul Mulk on the need for talked about very much the same issues: compet- new approaches to water management and the ing jurisdiction among institutions, excessive need to advance rapidly on those aspects. In government intervention, deterioration of the addition, although increasing demands in the infrastructure due to lack of resources for mainte- concentration of population and economic activ- nance and operation, and increasing pollution. ity are definite factors for most water imbalances, At the same time in Mexico the First National it is also clear that the real challenge rests on the Water Plan was formulated. Its main conclusion achievement of efficient water use and the con- was that there was enough water in the country, servation of the environment. but it had to be managed carefully. Therefore, in Mexico, policy reforms are ori- Pollution was a growing problem. The goal ented in three main directions: that was set-and it was very conservative-was 1. The development of the infrastructure needed to leave things as they were; in other words not to eliminate the existing gaps, which affect to increase the pollution problem. That goal was mainly the poor, and to meet increasing not achieved. The situation got worse. demands In comparing the situations in Pakistan and 2. Achieving greater water use efficiency Mexico, one difference is that fresh water avail- 3.Giving higher priority to water pollution ability per capita in Mexico is about three times abatement and control. 119 120 Discussant Remarks Regarding these three orientations, I am going The River Basin Councils are the mechanisms to speak about three issues: the legal and institu- through which state and municipal governments, tional framework, the role of water users and the the users, and other interested groups share the changes in the government's role that arises from responsibility for planning and management of that role of water users, and sustainable agricul- the nation's water resources. ture development. River Basin Councils sanction regional water plans to define water allocation policies and Legal and Institutional Framework negotiate specific responsibilities for plan execu- tion and financing. Under the Mexican Constitution, water is a Mr. ul Mulk's emphasis on the water appor- national property to be administered by the fed- tionment accord for the solution of water dis- eral government. Water can be used only through putes among provinces and the proposal for the authorization by the corresponding federal creation of an Indus River System Authority authority. Policy reforms require a new institu- resembles a model adopted in Mexico for the tional and legal framework since the approach Lerma River Basin, where full water develop- adopted in Mexico rested on a delicate balance ment has taken place and severe water pollution between government regulation and use and par- problems have occurred. ticipation as well as an introduction of market Through the creation of the respected River mechanisms and the promotion of private invest- Basin Council, in which five state governments ment and collaboration. participate together with representatives of all Thus, in 1989, the National Water users within the river basin, water allocation Commission was created as the sole federal rules have been defined and adopted and a very authority to deal with water management, as intensive program for water quality restorement regards both quantity and quality. A new is underway. national water law was enacted in December Each year one objective was to preserve the 1992 to provide a regulatory framework for water Lake of Chapala, which is the downstream user management that reinforced the role of the of the river. It is considered a national asset. National Water Commission. Through this River Basin Council the five states The Commission has been set up to coordinate agreed that one of the objectives was to provide investment programs in the water sector. It enough water of adequate quality to preserve the defines priorities and constraints according to lake. This agreement speaks to the advantages both the evolution of water balances in each of the about river basin management in which we cre- country's river basins, and the national and ate a sense of solidarity among users all through regional developmental objectives. the river basin. The Commission also plays an important role The basic cell of the new institutional setting in the fiscal policies related to water levies as well is the user. The new legislation promotes the for- as their collection. Institutional and sectoral coor- mation of a strong Water Users Association to dination is provided at the federal level by the enhance water management-irrigation as well Technical Council established as the National as water supply-within collective systems. Water Commission's working body The Council, Greater participation of the private sector is which resembles a true water cabinet, is presided legally a clear matter of national interest. over by the Minister of Agriculture and Water Mechanisms for such participation in the con- Resources. Its members include the heads of the struction of infrastructure and the provision of ministries related to water management. The water services have been defined. Council oversees the Commission's programs Additional features of the new law include and performance. more effective mechanisms to regulate the over- The participation of water users and inter- exploitation of aquifers and other national waters, ested third parties is a prerequisite in mandatory especially by upgrading the existing system of water planning as well as in the formulation of water rights and introducing market mechanisms. specific management rules to regulate water use Regulations are combined with a system of water at the level of specific river basins. fees or levies that act as pricing mechanisms. Villarreal 121 Special attention is given to water quality con- tion district includes more than 5 and up to 20 User servation and pollution control including that Associations. The program has involved complex from non-point sources. A system of permits has negotiations with over half a million farmers. been established and coupled with a fiscal policy As of today, more than 1.5 million hectares of fees decided on the polluter-pays principle. have been transferred to 199 User Associations Other environmental concerns, such as pro- involving around 200,000 users. Financial self- tection of wetlands and due consideration to min- sufficiency for all operation and maintenance imal flows, are also considered under the new costs has been achieved in most irrigation dis- law. tricts. Rehabilitation projects are being imple- Mexico's national water law explicitly estab- mented and are partially financed by users. In the lishes technical development as its main objective last three years, water use efficiency has in guiding water management and development. increased from 59 to 64 percent. By the end of the It is still "the devil is in the details." next year, 88 percent of the total area will have been transferred. The Users The strengthening of Water User Associations is going the same way in the Water Supply Sector, Within this new policy framework, the National in which the program is based on the consolida- Irrigation and Drainage Program and the tion of water utilities at the city level. Thus, the National Water Supply and Sanitation Program new strategy for water management in Mexico were launched. They both involve heavy invest- relies heavily on the constitution of Water User ment with financing from the World Bank and Associations. That is one of the key issues in any the Inter-American Development Bank for sustainable water management program. With- development, but what is interesting is the new out a strong User Association to which the cen- role attached to water user organizations. tralized responsibilities authority, the task is To increase the efficiency and productivity of almost impossible. existing irrigation systems, a task for which gov- Finally, regarding sustainable agricultural ernment used to assume full responsibility, a management, once the Water User Associations strategy was initiated in 1990 to transfer to users have been reinforced, a new farm project is being the management of 78 large irrigation districts, developed in which the User Associations will which account for 50 percent of total irrigated take more responsibility. Thus, the role of the gov- land or 3.2 million hectares. ernment has changed. It is not doing things for Implementation has required the creation of the users, but assisting the users to do things and User Associations, each responsible for managing providing technical and financial assistance. irrigation systems of 10-15,000 hectares with Sustainable water development means a new role which negotiations are carried out to design and for the government. It is one not of doing things, implement actions for achieving financial self-suf- but of leading our cultural change in which the ficiency, enhancing water use efficiency, and orga- users strengthen their organizations, bear the nizing the operation and management of the costs they impose, and have a stronger con- irrigation district as a whole. Typically, an irriga- science about the environment. Floor Discussion Audience members voiced the following concerns and point does participation become destructive, cost questions: (1) the importance of conceptualizing a sus- ineffective? At what point does it introduce so tainability model block by block, developing holistically many variables that no decision can be made? At from country to region to the globe; (2) the importance what point in dealing with large issues can we of engineers and economists talking together to share localize them? I agree with the concept, but is their knowledge instead of operating in isolation; (3) there anything in the experience that suggests how important have empowerment and participation of how we can move to a more inclusive, more par- local beneficiaries been in the different experiences we ticipatory model without losing the gains of more have heard? (4) which types of institutions-private comprehensive, more strategic national and sector, governmental, or NGOs-have been most suc- transnational conceptualization and planning? cessful in ensuring that investments in water projects last? (5) what mechanisms are being used to make pro- Shams ul Mulk: The huge system of Mangla and jects sustainable in the long term-market-based, par- Tarbela Dams and link canals was necessary to ticipatory, or some otherform? (6) what is the view of replace the waters of the Eastern Rivers (Ravi, the Pakistan Water and Power Development Authority Beas, and Sutlej), which were allocated to India (WAPDA) on the economic efficiency of the massive under the Indus Waters Treaty. The main justifi- investment by the World Bank and the Pakistan gov- cation for these huge investments was the peace- ernnient in Mangla and Tarbela Dams and a series of ful settlement of a serious water dispute between link canals, particularly the huge storage investments Pakistan and India. What is the economic worth of Mangla and Tarbela? of peace? It may be difficult to quantify but the decision to finance these works reflected the Panelists' Responses judgments of Pakistan, the World Bank, and the donor countries that the investment was fully Keith Bezanson, moderator: Regarding partici- justified. Subsequent experience of the benefits pation, Mr. Aguilar of Mexico [representing Mr. of including the Mangla and Tarbela storage Villareal] emphasized this in his presentation. It reservoirs in the irrigation system and the inte- is probably not, as my children say, politically gration of the rivers through the link canals correct to question participation. It is one of the demonstrated that the system was economically driving forces in the body politic today, impelling viable. The investment in Tarbela Dam was paid institutions, including the World Bank, to reach back by its power benefits within a decade after out in a more inclusive way. "Inclusion" of others its completion. in the planning and conceptualizing process is Thus, in my opinion, the investment in one more phrase fast becoming a cliche. How- Mangla, Tarbela, and the link canals has been one ever, at the risk of being heretical, I would like the of the best. Not only has it given Pakistan better panelists to address this question as well: at what control of its water resources, but also Tarbela 122 Floor Discussion 123 now has a powerhouse of 3,740 megawatts. It mation Project (SCARP) tubewells. In the future started with 700 megawatts as a part of the Indus. 13,800 tubewells will be transferred to the private Mangla has 800 megawatts, and 200 are being sector, and the fresh groundwater area will be added. The link canals have provided us with entirely a private initiative. transfer capability. We had to have that capability because some of our rivers are early rising and Keith Bezanson: There was a generic question some have surplus water. Unless we had these regarding the thinking on the new indications of inter-river link canals, we would not have good and the major directions in how we make water control of our water resources. sustainable. Regarding the missing linkage between engi- neers and economists, many things are missing. Shams ul Mulk: There has to be a significant Water projects have been conceived previously input into research. The deceptively simple inter- by uni-disciplinary forces or uni-disciplinary action between land and water is a very complex organizations. Sustainability is multi-dimen- phenomenon. Problems are generic only in their sional. To address these problems adequately, we description, not necessarily in their solution. Where must conceive of multi-disciplinary professional we have not accepted this principle, we have suf- inputs in projects. We have to develop these insti- fered. What is needed is site-specific, project-spe- tutions, and the earlier the better. Otherwise, we cific, area-specific research for application of a will continue to have problems in the projects. particular technology before it is accepted used When there is a problem at the design stage, if we on a large scale. This research would test its valid- defer it to the construction stage, we pay a heavy ity on the basis of parameters, which we must price. decide and design beforehand to ensure sustain- Regarding the beneficiaries and the Water ability. In Pakistan in 1991 we conducted a major Users Associations (WUAs), Pakistan has a mix study on the environmental assessment of the of two types of water systems: public and private. drainage sector. We have concluded that, rather Long before water systems became private else- than a project or program approach, we should where, they had been privately managed in lay down strict environmental safeguards or cri- Pakistan for hundreds of years. However, we teria for projects. As Mahmoud Abu-Zeid said have not yet been able to develop privately held very rightly, Egypt has the problem of what to do institutions that can take over a system with an with 30 million tons of salt. Pakistan is faced with average canal command of 1 million acres. the problem of about 60 million tons of salt, of For us the problem is size. We tried with the only which 9 million tons are washed away; 51 water courses through the WUAs. Unfortunately, million tons stay in the system. Making sustain- that experience has also been a mix of success and able water projects requires a lot of work, and I failure. We are pursuing it, but we have disin- entirely agree that we have to pursue that work vested in the public Salinity Control and Recla- from a multidisciplinary standpoint. Summary of the Issues David Kinnersley The thread running through these presentations through decentralization. Participation does not can be summarized in the words, "Towards a need to mean indecision. I do not think we should new coherence." I stress the new coherence take it as suggesting indecision. Participation because much of what we have heard has means, partly, moving away from the rivalry of described some masterpieces of technical coher- government departments, and that is a much big- ence. The Pakistan story is wonderfully coherent ger source of indecision and incoherence than in technical terms, but the paper explains that it public participation ever is. If you want to see a was much less coherent in economic terms decision delayed, watch two government depart- because its ability to maintain itself, even to meet ments trying to take different decisions on the operating and maintenance costs, deteriorated as same subject. the system got older. That seems to me a charac- There are two linkages here. One is essentially teristic of much water management in that it is, in economic. We have heard this morning about a sense, not all that coherent, but it has been very prices. In praise of the French system, Mr. Cheret durable for two reasons. First, historically, it has talked about prices, but he also talked about not been under so much stress as it is under now. grants and loans. He was talking about recycling Second, a great deal of water use depends on money, not just taking it from people and bury- habit and routine, and people do not like their ing it, and not taking it from people and giving it habits interfered with. They do not readily to the government. The French system agrees the change their habits and, therefore, the system has fees and recycles the money. a durability despite its incoherence. I emphasize this point because the British Nobody has ever suggested that water is fat- passed new water laws in 1963 at almost exactly tening yet I want to suggest that our discussion is the same time as the French. Working from the about putting communities on a diet in their use of same time, we have a much more disappointing water. We are also saying that government alone record than the French. If I had to give a crisp cannot put people on diets, and we are daring to answer as to why our record has been disap- say that engineers are not good for dieting because pointing, I would give two reasons. First, we they always want to provide more and more. never succeeded in getting enough local partici- If we want people to diet, we have to tell them pation. Our local government system, which has there is not any more. Even if we think there various shortcomings and various strengths, might be a little more, we tell them there is not never developed enough positive identification any more. with a river basin system. In these discussions we have seen that most Second, we were afraid about the pricing. We people were quite good dieters. This is the point put prices on abstractions, and it took something at which coherence joins with participation. like thirty years to put pricing on discharges. We There has to be coherence through participation put pricing on discharges in 1991, and, even then, 124 Kinnersley 125 we put it on in a very limited way. We have put damage. I tire of economists talking about how on cost recovery pricing, not incentive pricing. much improvements cost. What we are talking Considering that Britain is a much more crowded about most of the time is reducing damage, and island, great deal of the weakness of our system that is not the same thing as an improvement: the derives from that. "cost" is a cost to ourselves in self-discipline as The purpose of the economic links is signalling much as in economic terms. because we have got to have a signalling system What these points amount to is speaking for all of the participants in a decentralized sys- about sustainability. There is a great case for tem. Another purpose isfunding because we must speaking about sustainability in terms of water have money to do what needs doing. A third rea- because I believe that ordinary people all over the son for the economic linkage is incentives and moti- world often understand a great deal more about vation. The system has to motivate local people. sharing water and the implications of that than Water professionals are hardworking, serious we assume they do when we just think it is a mat- people but they have one shortcoming. They talk ter for experts. The level of public understanding, a certain amount to one another, but they gener- even among farmers, about sharing water, is ally are rather silent. Water is not a subject that actually much higher than expert documents they talk about in the street because it is a matter often suggest, and this is a major step to sustain- of habit. To make effective participation and ability. decentralization and new coherence, water pro- To those of you who are obviously troubled fessionals have to become communicators. They about more aggressive pricing of water. I think have to communicate so that people understand pricing is going to come because water is getting what the issues are. If they communicate well, scarce, but it does not mean that water will be they will reduce transaction costs. They need to treated like any other supermarket commodity. speak about more equal sharing of water. They In my view, water will always be special and dif- need to speak about more efficient sharing of ferent from other commodities, even when it is water, and they need to speak about reducing priced. Part Four The Road Ahead: A Roundtable Three Questions: One and a half years after Rio, what has been achieved? What are the most interesting things you have learned in the last two years that have changed your view? What are the questions we don't know now but should know in five years? Remarks Mohamed T. El-Ashry Thus far the discussions have moved us from con- able development. Rio has clearly taken us cepts to policy, and from policy to practices. This beyond problem identification, and, difficult as session will move us from practices to action. I they may be (as the governor said), actions are must share with you a short true story about an now needed and on a scale that matches the chal- ultraconservative United States governor who lenges before us, actions that are informed by the gave a dinner speech on the environment. After- lessons of the last two to three decades. ward, a friend of mine who knows the governor Clearly, one of these lessons is that the social well, said to him, "Your speech rivaled any by the dimensions of development and the environment president of the Sierra Club. How come?" The cannot be ignored and that people must be placed governor answered, "The rhetoric of the environ- at the center of sustainable development. This, as ment is so wonderful. Unfortunately, the policy you recall, is the third side of the ESD triangle, the and the implementation are very difficult." triangle that is also the symbol of this conference. To a large extent these difficulties on the pol- In this regard, I would like to inform those of you icy and the implementation sides explain the who do not know that we have established in the meager progress on the sustainable development Environment Department in the World Bank a front since the Rio Conference, as reported by Social Policy Division to assist our Bank col- Nitin Desai. After Rio there do not seem to be any leagues in addressing this important dimension great ideological or philosophical disagreements of sustainable development. on the importance of environment and the need The road forward is not a matter of new for sustainable development. The disagreements approaches. It is a matter of pragmatic and prac- are more on the how than on the what. tical actions stemming from many years of Yet, as we have heard from many speakers, research, analysis, and documentation, much of it both social and environmental change are mov- by many of you in this room. Our next two speak- ing at a very rapid pace and not in the right direc- ers have both the knowledge and expertise to tion. The more than 1 billion poor and hungry in address these important issues of implementa- the world cannot wait until all issues are fully tion. One of them will represent the international debated, resolved, and agreed. We know enough institutional perspective; the other will present to take the necessary actions to pursue sustain- the developing country perspective. 129 Remarks Elizabeth Dowdeswell I come from Kenya. Had it not been for the sense- Taiwan were also preceded by wide-ranging land less murder of one of my staff in the last two reforms in the 1950s that increased economic weeks and the fear, anger, and hopelessness of opportunities, narrowed gaps in income distrib- my colleagues, my approach to this meeting ution, and opened up avenues for social mobility might have been quite different. I am impatient. for wide segments of the population. Without For me the question of new approaches has to these, it is doubtful whether these countries start right now. would be where they are today. Furthermore, the In Kenya more than half the population are world at large around us has changed. The sea- teenagers or younger. The future generations are change in international affairs with the fall of the already born. The agricultural sector has reached Berlin Wall has concentrated the minds of leaders the limits of its absorptive capacity; retaining a everywhere and dominates the global political growing population in the countryside would agenda, forging new frameworks and arrange- accelerate environmental destruction. The only ments for international political stability and alternative is migration to the cities and towns, cooperation. but there are few jobs and economic opportuni- On the economic front, the global political ties, dramatically fewer than are needed. changes and the advent of a new world order Nevertheless, urbanization is proceeding at have greatly accelerated the momentum toward breakneck speed. Already faced with massive the establishment of a one-model world economy unemployment and underemployment, Kenya based on markets and liberal economic princi- also faces the prospect of having to create an ples. The establishment of such an integrated additional three million jobs by the end of this global economy may have been unexpected; it century for youths entering the labor market for may even have been a response to the political the first time. Failure to meet the needs and aspi- necessities of the moment. But it has also come to rations of its burgeoning urban population will be seen by many as the opportunity to provide guarantee continued political and social instabil- the global economy with the long periods of sus- ity for Kenya in the future. tained growth that have eluded it for many In an urban setting rural forms of subsistence decades. This growth is envisioned particularly are no longer feasible so it would be foolhardy to through the creation of larger markets and the say simply that the answers lie in past experience. opening up of new ones, especially in Eastern Kenya's dilemma is mirrored in many, if not Europe and South and East Asia, with billions of most, developing countries although it may take new potential consumers. different forms. And for those who point to the Given this possibility and given the domestic Dragons and Tigers of east Asia, I would remind pressures for jobs and economic growth facing us that the present economic successes of coun- political and business leaders in virtually every tries such as Malaysia, the Republic of Korea, and advanced industrialized country, this is an 130 Dowdeswell 131 opportunity that, from the point of view of those opment, thus setting the foundation for both in positions of responsibility in both the economy human progress and environmental viability and the government, cannot be squandered. through the next century But as I hear pledges to The question that immediately arises, how- work for sustainable development from the ever, is whether this pursuit of a deepening and mouths of Boy Scouts, farm laborers, environ- expansion of the global economy under market mental activists, heads of multinational corpora- conditions as it is being pursued now is compat- tions, politicians, chambers of commerce, ible with or complementary to the pursuit of sus- Greenpeace, and indigenous peoples eking a sub- tainable development. Or does it constitute a sistence living from a marginal environment, I strategic and direct shift away from the commit- question whether all these groups could really ments that we made at Rio? Are we engaged in have embraced sustainable development so two parallel pursuits that are at cross-purposes? unquestioningly and so fast. Is it coming down to a choice between sustained One of the lessons that I have learned in my growth or sustainable development? Or are there very short tenure at the United Nations is the compatibilities and complementarities between imprecision of language. In a multi-lingual this globalization of the economy and sustainable atmosphere, one becomes aware very quickly development that can be exploited and pursued? that the same word used by two people can mean Is it possible for one to piggyback on the radically different things. For example, the World other? Globalization favors the introduction, Bank has been one of the organizations that has simultaneous dissemination, and implementa- committed itself to a future through sustainable tion of new ideas and methods. The establish- development. But now comes the hard part: ment of new institutional arrangements and deciding for it and for our respective organiza- frameworks for cooperation, including regional tions exactly what sustainable development markets, offers the opportunity to introduce prin- means. ciples, standards, and regulations favoring sus- Herman Daly of the World Bank is very aware tainable development, and to some degree this is of the many uses to which the term "sustainable occurring. development" can be bent. Writing last summer, But on the other hand, it is equally true that he noted that currently the term "sustainable accelerating global economic growth through development" is used as a synonym for the oxy- intense exploitation of new markets in particular moronic "sustainable growth." It must be saved has serious implications for both the integrity of from this perdition. I sense the flaw that makes the planet's environment and the rate of natural sustainable development so easy to agree to in resource use. It therefore has serious implications principle yet so hard to implement. If we equate also for achieving sustainable development and sustainable growth with sustainable develop- the kind of equilibrium between development ment, we are on the wrong track. To grow, Mr. and the environment that is in the long-term Daly writes, means to increase naturally in size by interest of us all. the addition of material through assimilation or One would think that I would be content in accretion, whereas to develop means to expand or the post-UNCED period. After all, Agenda 21 realize the potentialities of, to bring gradually to and the ancillary agreements that were reached in a fuller, greater, or better state. In other words, that Rio succeeded in giving political legitimacy to when something grows, it gets bigger; when this concept of sustainable development. The Rio something develops, it gets different. Summit was the successful culmination of two In very much this way, the earth and its decades of continuous effort and hard work on ecosystems develop or evolve. Given finite the part of many to place the environment at the resources, however, it does not grow. Its subsys- center of the development debate and to make tem, the economy, must eventually stop growing key environmental and natural resource issues but continue to develop. If we are not using the strategic factors in economic decisionmaking phrase "sustainable development" to mean dif- globally as well as nationally. ferent things but are singing from the same song The general expectation was that the 1990s sheet, then it remains to all of us to further artic- would become the decade of sustainable devel- ulate this theme of sustainable development so 132 Remarks that our other partners in a sustainable future- awareness, facilitated in great part by the infor- corporations, governments, NGOS, and citizens mation and communications revolution, any around the world-know what we mean. model of development that does not satisfy in the The Rio Declaration is fairly specific on this short and medium term such basic human aspi- point. The plain-language version of the decla- rations as a steady job, secure shelter, daily food, ration stresses that development today must not and greater opportunities for one's offspring will undermine the development and environment not be politically viable. needs of present and future generations. It We are entering an era of mass participation in underscores that to achieve sustainable develop- decisionmaking. The nature of civil society is ment, environmental protection shall constitute changing rapidly, especially in developing coun- an integral part of the development process and tries. We as policymakers and as thinking indi- cannot be considered in isolation from it. And viduals must respond to this challenge, and here finally, it says that nations should reduce and the past may not be a proper guide toward the eliminate unsustainable patterns of production future. Rather, we must respond creatively and on and consumption. the basis of equality with those whose needs we These are elements that we must build into serve, and this is best done through an approach our economic future. We cannot pay lip service to advocated by sustainable development. sustainability. It must be the fabric of our daily Although in my impatience and perhaps my national and global existence. When we say sus- naivete, I would ask us very simply to agree that tainable development, we mean a sustainable we can return to the original meaning of the word future, a sustainable life. We do not mean the sus- "development," meaning to unfold more fully, to taining of exponential growth until the resources bring out all that is contained. We need to reclaim run out. the word "development" to mean the unfolding Let me underscore the view Mr. Serageldin of the potential of all the peoples of this earth. expressed yesterday-the development aspects The second thing that I want is action. The Rio of sustainable development, especially the focus Summit and Agenda 21 were statements of intent on meeting the immediate necessities of people, on the part of governments and the international on the alleviation of poverty, on participation, community. Following up on that expression of and on providing people, especially those in the commitment, turning sustainable development lower socioeconomic rungs of society with into an operational reality globally, nationally, avenues for advancement and mobility. In short, and locally, and turning it into coherent and com- the focus on human development. Such an plementary policies and programs are not easy approach is as pragmatic and realistic as it is tasks. Doing something new for the first time innovative and attuned to the changing realities involves the risk of false starts and mistakes. This of the developing world. is a learning process for us all, and it may require Poverty contributes significantly to environ- course corrections, responses to unanticipated mental decline, especially in rural areas of devel- problems, and certainly new approaches. oping countries, just as it is a drag on economic We have to learn by doing, but the most and social development. By focusing on its alle- important thing is that we make sure we are viation, we also help to achieve the two principal going to continue to do the "doing." Otherwise, goals of sustainable development. Participation sustainable development stands the risk of join- in decisionmaking, real empowerment, not only ing the catalogue of good intentions of the inter- allows people more control over their daily lives, national community and, in particular, of the but it also forces them to take responsibility for United Nations. This list ranges from import sub- new policies, thus ensuring social acceptance for stitution to integrated development, from basic innovation rather than generating resistance and needs to the new international economic order, opposition to it. all of which in their time caught the imagination The final test of any model of development is and fired the enthusiasm of the world commu- its social acceptability and consequently political nity. All of them were consequently marked for sustainability. In a world that is rapidly drawing priority attention by policy and decisionmakers together with rising levels of education and only to pass from center stage as the political Dowdeswell 133 momentum favoring them faded and circum- start making some reasoned and reasonable stances changed. assumptions and start down the path. It is time to remind ourselves that we have I believe that this challenge will be met and been here before. In this post-UNCED period we that the basic philosophy of sustainable develop- simply must move from talking about principles ment will carry the day because it is in our self- and concepts. We must move from defining so interest as is human survival. This realization precisely the cost-benefit analysis to prove that may come to all of us later rather than sooner, but there is a benefit to cleaning up a dirty river when it will come. we know intuitively that there is a benefit to a Ultimately, the final proof that we are on the clean environment. There is a Zen saying: "After path to sustainable development may be that we enlightenment, the laundry." After the continu- never have to mention the word again. We will ing process of conferences, studies, and negotia- have internalized its basic concepts and princi- tions, surely now it is time to leave the talking ples so much in our everyday routines and prac- behind. tices that they appear as the norm, just like a The striking conclusion that I drew from the whole number of innovative ideas that in their first meeting of the Commission on Sustainable time were labeled as utopian and even subver- Development was that governments were say- sive but that today raise barely an eyebrow. One ing, "Help." We all know we are saying the right of these, of course, is the idea of democracy itself. thing, but we just do not know how to do it. I Let me conclude with one piece of good news guess I am really tired. I am tired of the rhetoric that is symbolic of why, notwithstanding my des- and the excuses. I want us to recognize that we peration over the last couple of weeks, I continue are creating for ourselves a Tower of Babel if to have hope. I want this audience to be the first each of us tries to define sustainable develop- to know that as of today, we have thirty ratifica- ment in our own way for our own benefit. What tions for the Biodiversity Convention, and it will we are really talking about is a paradigm shift in come into effect on December 31, 1993. That is less the way we live and the way we do business in than a year and a half after Rio, and it is some- this world. Consequently, we cannot go on thing that people said could not be done-and, in declaring one thing on the philosophical level- fact, was done notwithstanding the distinct lack espousing the principle of sustainable develop- of support of many countries around this world. ment-while everything we do-our rules or There is hope on some of the most basic issues methods of operating-point us in another that we face. direction entirely. When we talk about new approaches, the The paradox is that for some of us, while our most fundamental new approach is simply one of spirit may be moving ahead, the practice lags far changing mind-set. As we define the ecological behind. All of our efforts now must not be in ground rules for sustainability, I hope that we can defining to death the concept of sustainable remind ourselves to think like people of action development but in simply accepting the shift and act like people of thought because there and translating it into a workable reality. Let us really are only two choices in life. We can either not spend all of our time and effort getting our accept things as they are, or we can assume economic models perfect before we start to act. responsibility for changing them. I am counting We are reasonable and intelligent people. Let us on the latter. Remarks Shri Kamal Nath The challenges that confront us are vast and man- industrial development. In rich countries, where ifold. The imperatives of providing for our peo- environmental protection is itself an industrial ple an ever-better life, in every sense of the term, activity, it contributes to GNP; but in biomass- have deep and tangled ramifications. This based subsistence economies, the costs of elabo- exchange of ideas to further our understanding of rate and highly technical pollution control sustainable development and the true value of measures can be exorbitant. There is no doubt the environment will have far-reaching conse- about the long-term benefits of environmental quences in shaping a correct appreciation of the protection, but costs and benefits accrue at differ- inter-relationships between the human and nat- ent levels of society, and reconciling these in the ural economic functions. National economic poli- short term is where the problem presents itself. cies are, after all, to some extent an expression of The Rio process has brought about a greater how environmental resources are valued. clarity in our understanding of the contextual The nature of environmental degradation, relation between environmental degradation, and the interdependence it creates among nations affluence, and poverty. The 1987 Brundtland has become a driving force for multilateral coop- Report pointed out that developed countries, eration. Rio initiated the process of a global part- with only 26 percent of the world's population, nership based on shared values relating to the are responsible for about 80 percent of the natural environment, its use, and its conserva- world's consumption of energy and minerals, tion. The significance of Rio is the recognition that and about 40 percent of the food. The priorities environmental quality as an essential life support and agenda of the developing countries-indeed, system is a common concern. This concern is not of the world-which got recognition in Rio, are in more important than national interests, but it is danger of being relegated to the background. One an important factor in the shaping and realization and a half years after the unprecedented Rio of national interests. It follows that the interna- Earth Summit, what "extra" has been done for tional community needs to consciously design commitments to Agenda 21? This is a question to systems that improve upon existing resource which I can find no pleasing answer. allocation mechanisms, and valuing the environ- It may be premature to assess and comment ment is the fundamental step in that direction. upon the developments that have taken place The essential characteristic of international since the Earth Summit. However, it cannot be environmental problems is reciprocal externali- denied that there is a growing sense of impatience ties. Countries both contribute to environmental and a feeling that the bold political initiatives of damage and suffer from it. But they do not do Rio have been submerged in diplomatic rhetoric either in equal amounts. Some economists feel and that despite some positive events, funding that it is a myth to argue that there is no essential and other commitments are still much below the conflict between environmental protection and expectations raised at the Summit. We, by which 134 Nath 135 I mean all of us-in this room, in this city, on this If sustainable development needs to go planet-cannot allow this disillusionment to beyond being the buzzword it has unfortunately spread. Rio holds our hope for the future. If we become, and be translated into a reality, it allow it to be snuffed out, we will not be forgiven requires not just adequate and equitable distrib- by future generations. We must be imbued with ution of "ecological space," but also adequate a sense of urgency and commitment. "financial space." As Indian Finance Minister Dr. While a framework for multilateral coopera- Manmohan Singh said to the World Bank only tion had been agreed upon at Rio, the global envi- last week: ronmental facility, which is the principal instrument for the transfer of what some call- Efficient domestic policies are a necessary, erroneously-"green money," seems to restrict but not a sufficient condition for the alle- the objectives of the Environmental Conventions viation of poverty and sustainable devel- by limiting incremental costs to "agreed global opment. It is also necessary to accelerate environmental benefits." This distinction is at the flow of concessional finance to under- best fuzzy, and many conclusions based upon the take new investments and modernize the wide latitude of interpretation it affords are not economy. supported by sound science: bio-geo-chemical cycles that determine the quality of the environ- Sustainable development means that we inter- ment make no distinction between the national nalize the costs that are being externalized. It also and global levels. The distinction in effect trans- means that we take the present and the future, the fers development aid away from vital needs in short-term and the long-term, into account; and developing countries to so-called global con- especially in developing countries, it means that cems, which really enhance the affluence of we consider the welfare needs of the poor, the developed countries and does not ameliorate the "safety net" as it is called. scope or scale of the problems faced by the poor, The international market tends to externalize who are the vast majority of the human race. This the ecological costs of its commodities. Somehow, concern has been voiced in the UN's Commission we have to build into the costs the payments, for on Sustainable Development (CSD) and in the on the use of others, shares of the global commons, going negotiations in the Environmental Con- for example the atmosphere. Sustainable devel- ventions. To maintain the momentum of Rio, an opment is expensive, but we have to make a early resolution to set up identifiable and effec- choice. Within the next fifty years, some 95 per- tive mechanisms for transfer of financial cent of the world's additional labor force will be resources and technology based on equity con- added in the developing world, but this huge siderations is essential. increase will make only 5 percent of the world's Societies that draw on the ecosystems of other financial investment. societies that are dependent on local biodiversity It is also true that the burden of the expected for their survival and food security need to com- doubling of population in the developing coun- pensate them. In fact, the opposite is happening tries in the same period will have a lower adverse at present. Reversing trade and capital flows to impact on the environment than that exerted by correct the present imbalances requires a thor- the 10 percent of the world population added in ough consideration of trade barriers, prices of developed countries. This is neither a plea nor a primary commodities, improvement in the terms justification for continued population growth, of trade and interest rates, and new funds. but a warning that only a change in the patterns of Otherwise, how can developing countries grow consumption and of economic relations coupled with to service their debts, and at the same time pro- an urgently honest and concrete effort to imple- vide for the "better life" that comes with devel- ment Agenda 21 will help us. We have a choice opment, without over-exploiting their natural sustainable development, or mass poverty with resources? The General Agreement on Tariffs and its concomitant problems of law and order, war, Trade (GATT) should not be looking at the rela- and mass migration. In fact, we have no choice.... tionship between "trade and environment," but The harmonization of environmental stan- between "trade and sustainable development." dards has to come in with the harmonization of 136 Remarks international living standards. Only then will the protection of this priceless biodiversity has gone potential gains form international cooperation be largely unrecognized by the world community. realized. Because of increasing globalization, we Debts and deficits are very enthusiastically eval- cannot put a boundary around the economies of uated in fiscal terms. What about the lost oppor- States, nor would we wish to do so. It is not tunity costs in relation to forest conservation, and within the purview of a non-economist to go for that matter, in relation to any ecological con- deeply into this, but there is no denying the fact servation an economically poor society embarks that proper valuation of the environment will upon? place us and our future generations in a better Bio-geo-chemical cycles are the essential position, and equip us with tools superior to life-support systems. So far we have recognized those we have at present to analyze our situation only the importance of the carbon-cycle and of and to attempt solutions. biodiversity; we need to give equal importance to In India we have started the process that we the water cycle. I see the problem of water becom- expect will lead to proper accounting of natural ing one of the major environmental issues of the resources. I have stated in many fora how India's twenty first century. In india we have started forests are sustainably used and give sustenance work through some of our major academic and to millions of poor families and their cattle. They scientific institutions to look at our resources of give them food, fodder, fiber, fuel, and medicine, water, forests, biodiversity conservation, air, soil, none of which is given monetary value. The total coastal zone biodiversity, flora, and fauna. Even annual input of our forests into the Indian econ- aesthetics and valuation of ethno-knowledge fig- omy is estimated at $10 billion. I would like to ure in this list because we do not believe the exer- emphasize that this huge figure does not come cise will be of any value if considerations of from logging, which has practically been stopped existence-value or equity do not enter the picture. in our country, but only from lops and tops and The Delhi Declaration issued recently by the First headloads, and is generated not at all on an orga- Ministerial Conference of the Forestry Forum of nized commercial basis. This is a direct subsidy Developing Countries explicitly called for pre- from the forests that sustains the living standards cisely this kind of valuation. This declaration had of the rural poor and the forest dwellers. I suspect the backing of almost forty developing countries, that the non-valuation of the usufruct results in a including Brazil, China, India, Indonesia, Kenya great degree of complacency on the one hand and and Malaysia. ignorance of the magnitude of sustainability on It is all very well to talk about natural resource the other. accounting, but this can be a valid process only India's commitment to the preservation of when the price tags attached to resources are forests is such that we did not even consider valid, and not the result of artificially depressed financing our way out of our balance of payment or artificially shored-up terms of trade. Economic problem by resorting to the commercial exploita- development essentially means conversion of the tion of our forest resources. The total woody bio- natural capital into human-made capital. This mass of Indian forests is estimated at 5,000 progression is how economies move from rudi- million cubic meters, valued at more than $500 mentary stages to complex and developed stages. billion-and that is not counting the usufruct, the This is what the North did to develop. For devel- biodiversity, and the forests' value as opment to be sustainable, the exploitation of the carbon-sinks. Monetizing a relatively small por- natural capital must be sustainable. But if coun- tion of this would render India into a debt-free tries were to get so little in return for their natural nation overnight. Far from doing this, we have resources that they cannot meet even their cur- chosen of our own free will to conserve out rent consumption needs, then naturally they forests, and even to opt for the import of routine would just keep consuming their natural requirements of pulp and timber. We are thus resources and not move towards a modern and managing what is essentially a national resource sustainable economy. Finally, the natural capital in the interests of human at large. But the finan- would dwindle, and they would be left with cial resources we have been required to raise and nothing. This is precisely what is happening to the sacrifices our people have had to make for the the South. Nath 137 Externalization of the ecological costs makes the value of the options foregone not just by the economies that are already strong and flourishing immediate user but by all others affected by its sustainable while it makes those that are relatively use. Overuse of the assimilative capacity of the underdeveloped become unsustainable. Devel- atmosphere has to be paid for. This requires joint oped economies can import their food and raw empirical research by ecologists, economists, material requirements and then produce value- anthropologists, and other social scientists while added products, earning enough for still more doing a valuation of the environment. imports. Thus, their own environment remains But will economic valuation by itself take us protected and pristine while they deplete the nat- "where we want to go" as Partha Dasgupta asks? ural resource base of poorer countries. We have to think this through carefully. Human What we do not seem to realize is that the ingenuity is not to be scoffed at, and there are per- earth is one, and environmental degradation in haps no realizable limits to where it can take us. some other part will eventually catch up with us. But the problem arises when it does not take us There is no place to hide on the planet if the planet anywhere or promises more than it can achieve. itself is in danger. To what extent can we use eco- Science and technology are powerful aids to nomic instruments to achieve environmental human progress, but it has been repeatedly ends? If market prices for commodities imported demonstrated that they can be double-edged, as from developing countries reflected the internal- with advances in nuclear science or, in the ization of the ecological costs, this would provide absence of predictive knowledge as with chloro- some amount of the "financial space" I spoke fluorocarbons (CFCs) when they took us to the about earlier, leading to sustainable develop- wrong place through what seemed a correct ment. Internalization of ecological costs would route. While valuing natural resources, we must provide the financial wherewithal to plant trees, keep these pitfalls in mind and keep at the back to set up pollution treatment plants, to build a of our minds the need to constantly test hypothe- safety-net for the poor, and to link this with eco- ses with real life experience. logical regeneration. In this regard there are some I must also caution our environmental valuers questions we need to consider. Who puts the that there are ecologists in our midst who worry value on the environment is important because that economic valuation and market-based envi- the market alone, as it is presently constructed, ronmental policy instruments will only take us cannot do the valuation; the value is much more further down the path of ruin. Their fears are than the market price. This implies greater com- based on the "clout" that economists enjoy every- munity involvement; the community has to where and the possibility of their valuation exer- determine the composition and the value of the cises being treated as the last word. Therefore, goods and services that produce well-being. We assigning a "value" to natural resources could are familiar with the "Not in My Backyard" syn- reinforce "business as usual," with development drome in the location of hazardous units. and consumption following the same old unjust, National income figures also do not reveal the unsustainable, and wasteful patterns as before real composition of income or the real beneficia- with the added patina of a mathematical justifi- ries. Valuation will be also a social, and not cation! These fears are realistic. Statistical tools merely a technical or economic, question and and methodologies of valuation, however com- must be recognized as such. plex, cannot provide for all possible contingen- While developing methodologies for valuing cies. In any case, we cannot push economic the services provided by natural resources, we models to the point that it appears that a life of have much to learn from the indigenous knowl- simplicity is not worth living. Poverty has to be edge, social objectives, and local institutions that conquered, and economic amelioration in devel- characterize the transactions related to common oping societies is a must. But, if such societies property resources. For example, 33 percent of have values of equity, conservation, and commu- the developing countries, energy requirements nity life that are keeping them together and are met by renewable bio fuels as against 3 per- happy, we should not lightly break them up. cent of those of the developed countries. The Yet we cannot be oblivious that this is a world "social use" value of a resource should include in which people are coming together faster than 138 Remarks ever before due to advances in informatics; structural adjustment and the pains of integrat- therefore the impingement of our lifestyles on ing into the global economy. Will the North now one another's is becoming inevitable. Economic make a commitment to undergo structural valuation of environmental resources or no, we adjustments, especially to account for the eco- can ignore the effects of either too much poverty logical debt it has incurred over the years? A bet- or too much consumerism only at our collective ter world can emerge only if pain is equally peril. The South is undergoing the travails of shared. Discussant Remarks Kamla Chowdhry Since I was not present at Rio, my comments are ment's. As Nitin Desai mentioned, considerable based on the people I have met, the meetings I consultation and consensus-building took place have attended, and my impressions of what has in Rio. The emergence of the NGOs' voice in emerged from the Rio conference. national and international fora is becoming a First, Rio brought North and South together, reality after Rio. This will enrich future dialogue and they tried to listen to each other with greater and hopefully result in more transparent and understanding of each other's point of view. equitable decisions. In the last eight to ten years What emerged was not only a greater under- that I have attended international meetings, it has standing of the environmental the problems and been largely the government's point of view that concerns of the South, which Kamal Nath has was presented to audiences. There is now a very ably stated, but the realization that the greater acknowledgment that the voice of the South's emphasis is different from problems and people may be different and that there is a need issues of the North. In meetings I have attended to relate differently to governments and people. since Rio, the climate of listening between North In the Narmada Dam project the World Bank and South has improved very considerably. finally listened to the voices of the NGOs talking There is still a long way to go to try to under- on behalf of the displaced people, but also to the stand the North's point of view or the South's voices of people who believe in an alternative point of view, but we have taken the first step. form of development. This legitimacy of NGOs They may be faltering and halting steps, but it is that emerged from Rio will have many repercus- likely to increase as time goes on. sions. From Rio emerged a vision; yet, as Elizabeth The second highlight was the legitimacy that Dowdeswell mentioned, not much action has the NGOs' participation acquired. The NGOs taken place. Nitin Desai, too, expressed concern made a significant contribution in Rio. The sig- thattheconsensusbuildingofRiohasnotresulted nificance is that the voluntary sector, the NGO in action so far. Why has there been no action? sector, which has a different point of view on When someone asked Mahatma Gandhi why his many issues from the government, as Wangari political movement had such great success in Maathai so ably pointed out, acquired visibility mobilizing the country, he said, "My life is my and legitimacy To have the NGOs represented in message." For Rio's vision to be fulfilled, we also bodies like the World Bank and other interna- need to say "My life is my message." tional agencies, to realize that it is not only the If we were to ask our environmental leaders to government's point of view that matters in dis- what extent their lives are a message to the peo- cussions before such audiences, is a significant ple, we could perhaps understand why so little step forward. NGOs are closer to the people at the action has emerged. We have discussed issues of grassroots and local problems, and often their economic growth, new ways of accounting, valu- perceptions are very different from the govern- ing the environment, new technologies to solve 139 140 Discussant Remarks environmental and poverty issues, and safe- and does not accept the widening disparities guarding the earth, but ethical and moral issues between the rich and the poor. If Rio is to suc- are generally pushed under the carpet. I was ceed, leadership on ethical and moral grounds, happy therefore in the session on economics that as was provided by Gandhi, must emerge to lead ethical and moral issues were raised. the environmental movement. This leadership Fundamentally, I believe economic growth would emphasize equity, justice, and compas- and the removal of poverty, hunger, and malnu- sion for the oppressed. In a final sense environ- trition are not merely functions of economic mental concerns are moral and ethical, and until planning or technological innovations but stem we recognize this, there will be only talk and no from a moral force that does not accept hunger action. Discussant Remarks Herman Daly I would like to continue in the line that Elizabeth These three corrections are overdue. We Dowdeswell began by expressing a certain impa- should all be embarrassed as economists that we tience with the slowness and lack of action, and have not yet been effective in getting them to think in terms of three kinds of actions with enacted. which we might begin very soon. The second principle would be: tax through- First is what I would call a remedial action, put more, and tax income and value added less. and this is the basic principle: stop counting nat- Through-put is the material and energy flow ural capital depletion and liquidation as income. How from the environment through the economy and can one disagree with that? Just stop doing that. back to the environment as waste. The principle There are three areas in which I think we need to is to tax that which we want less of and do not tax stop this error. First is the system of national that which we want more of. Do not tax value accounts (SNA). We need to improve these. This added, but rather that to which value is added. has already been talked about a lot. I will not say We want more value added; we want more any more about it. income; and we want to reduce depletion and Second, at the micro level of project evaluation, pollution so let us tax these things. This is not the here also we fail to count natural capital depletion as same as Pegovian taxes, whereby we try to esti- a cost. Therefore, it enters into net revenue. It thus mate social costs and correct for them by taxes, biases upward the rate of return on projects that which is a very difficult thing. This is a blunt deplete natural capital relative to all projects that instrument. It just says we have to raise a certain do not deplete natural capital. It is a very important amount of public revenue by taxing something. step toward sustainable development to count user Why not tax those things that we want less of. In costs correctly I hasten to add that in the World doing so, we will raise their prices and increase Bank this is done as best practice (in the natural gas resource efficiency. This can be sold politically as sector). It is not, however, yet general practice so we revenue neutral, simply shifting the tax from need to push that all the way in the system. income onto through-put. We would need to Third, is the area of balance of payments account- retain an income tax on high incomes to offset the ing. For many countries when the depletion of regressivity of the resource tax, but this would natural capital is exported, it enters into the cur- not be so difficult. rent account and gets considered as income. It The third point is much broader and more should be reclassified to the capital account. If the general: recognize and adapt to a very basic andfun- International Monetary Fund and others would damental change in the pattern of scarcity. We must do that, some countries that appear to have bal- recognize that human-made and natural capital are ance of trade surpluses would have deficits fundamentally complementary. That is, a fishing financed by the transfer of capital abroad. Deficits boat is not worth much unless there are popula- imply different policies than surpluses. tions of fish in the sea. They are complementary. 141 142 Discussant Remarks At the margin, they are substitutes, but basically Since I am an economist, many of you expect they are complements. me to tell you a fairy tale, and so in closing I When goods are complements, when factors would not disappoint. Just a little vignette from are complements, the one in short supply is the Hans Christian Andersen's story of the Snow limiting factor. Thus, currently, the fish catch is Queen. A little boy in Copenhagen was playing limited not by human-made capital-the number in the snow with his sled, and he decided to hitch of fishing boats-but by remaining natural capi- a ride on the Snow Queen's chariot as she drove tal-the number of fish in the sea and their capac- through town. He tied up his sled, got an exciting ity to reproduce. ride across town, and then decided he was going Likewise with forests and sawmills: sawmills to untie his sled. But his hands were frozen, and are human-made capital; forests, natural capital. he could not untie the knot. When you get that What limits cut timber production is not the close to the Snow Queen, it is very cold. number of sawmills anymore: it is the remaining So out she went from the town, faster and forests and their capacity to grow. Economic faster, to her ice castle up in Lapland. The little logic tells us that we should maximize the pro- boy was beginning to experience a rather legiti- ductivity of the limiting factor in the short run, mate sense of urgency, and in his panic he and we should invest in increasing its supply in decided that he should say his prayers. He tried the long run. to recite the Lord's Prayer, but all he could Economic logic stays the same, but what remember was the multiplication tables, the changes over time is the pattern of scarcity. recitation of which did not comfort him. I think Human-made capital used to be the limiting fac- the reason for that in the story is this insistence on tor. Nowadays, natural capital is more and more perfection. Prayers are imperfect. The multiplica- the limiting factor. We should shift our econo- tion table is perfect. Another point that Elizabeth mizing effort more onto natural capital. We Dowdeswell made is that we have to resist being should invest in natural capital in the long run. seduced by our desire for perfection. Let us just How? By reviving the old Marshallian notion of say some imperfect prayers about sustainable investment as "waiting"-through following and development and untie the knot to perpetual allowing the regeneration of natural systems- growth. Later we can run it through the multipli- and by investing in substitutes, particularly cation table, and try to cross-foot our rows and resource efficiency. columns to weed out errors. Discussant Remarks Saad Ibrahim When I was an undergraduate student in 1960, a Vice Presidency for Environmentally Sustain- Prime Minister Nehru of India came to visit able Development (ESD) after Rio means that Cairo. At that time he was a very good friend of some important actors were actively listening; Nasser. Nehru wanted to meet the new genera- and they have been acting. Our conference today tion of Egypt so they collected a number of us is a case in point. student activists, and we visited Nehru. One In preparation for this conference, I asked my question on our minds was why India had used staff in the Ibn Kahldoun Center for Develop- force to liberate the Portuguese colony of Goa ment Studies to do a content analysis of the fre- when Nehru was the successor of a great paci- quency of the words "Rio," "Earth Summit," fist, Gandhi, who preached satia-graha (non- "sustainable development," "development," violence). "environment," and all related words that have In his very dignified, subtle way Mr. Nehru become interchangeable, using June and July said, "Young man, do you know the difference 1992 as a benchmark or rough index of public between a saint and a statesman?" "No," I said. media concern. Six months later, we ran through "Well," he said, "a saint preaches truth, regard- the frequency of these words in the same print less of who is listening, but the politician or the media. In three of our daily newspapers we statesman, while also claiming to preach the found that frequency of the three, four, or five truth, always has to count how many people are interchangeable words dropped from the 100 listening. Gandhi was a saint; I am a politician. index of June and July1992, to 53 in January 1993, That is why I used force." to 30 in April, to 11 percent in June 1993, one year I start with this story because the question of after Rio.' listening in Rio-one of the great achievements One of the foibles of social scientists, espe- that emerged, if nothing else-was a process, the cially sociologists, probably is to read too much Rio process. The North and the South got into the significance of such quantitative indica- together, and they listened to each other. The tors. The terms "recency," "immediacy," and question is was it an active listening? Those who "primacy" refer to public focus and public atten- are training us in conflict resolution start with this tion vis-a-vis any issue. Elizabeth Dowdeswell principle of "active listening": not just hearing, expressed apprehension that the words "sus- but truly listening to one another. Active listen- tainable development" or "environmentally sus- ing means taking to heart what we listen to, react- tainable development" may fade away as have ing, giving feedback, and taking action. When many of the celebrated phrases coined in the last one year and several months later we review four or five decades. I share her fear that "envi- what happened in Rio, I am afraid that even the ronmentally sustainable development" may go reports by UN agencies seem to say very little. down in history to join that long list of once- But the fact that the World Bank has established favorite phrases such as "import substitution," 143 144 Discussant Remarks "basic needs," "integrated development," and But who is listening to us? Who is listening to "self-reliance." With these alerts I wanted to this group of development experts, scientists, focus on the heartening thing that Ismail and academicians? Are the ones who are pollut- Serageldin made very clear in his eloquent and ing and undermining the environment listening moving opening presentation-that the "miss- to us? Are they putting forward the kind of ing link" in the ESD triangle is the social or socio- finances that are needed to clean up the planet? cultural dimension, something to which I doubt it. They are not here. I looked at the list economists and natural scientists probably have of participants and did not find any representa- paid lip service all along but have never actively tives of the great multinationals of the world, nor listened. did I find people like my own fellow villagers. If environmentally sustainable development Are we going to be like Nehru's "saints," preach- is not to go down as one more legacy, that socio- ing the truth in the wilderness regardless of who cultural component is the one that we have to is listening? hang on to. What does the social component We here today are a group of academicians, mean? It does not mean "bringing" people back intellectuals, and experts of good will who are into participating in the development process trying to get the rich of the world to actively lis- because whoever "brings" people back in can ten and, even better, to do something. The poor, always kick them out. People have to come in vol- people like my or Kamal's fellow villagers, could untarily on their own and as full participants. listen if we could speak to them in the language "Participation" and "empowerment" are words they can understand, if we can put environmen- that we probably have to stop and think about in tally sustainable development in a paradigm that more meaningful and operational ways. We have they can relate to. used words such as "mobilization" in the last In Egypt we have an example in a small vil- three or four decades, without realizing that lage, Bassiasa, of 500 people. It is an isolated unless it is followed by "participation," the hamlet. Twenty years ago only five people could inevitable result will be mass frustration. read and write. As a result of a small-scale exper- "Participation" and "empowerment" mean iment in the use of bio-gas and solar energy to that people have to do for themselves what generate power, introduced by one of the five nobody else including the World Bank can do for educated individuals in the village, a develop- them. The moment that people recognize that mental chain reaction was triggered. That one act they have to do for themselves what the state caused the villagers to demand to learn how to and other international organizations cannot do read and write. Every adult in the village is now for them, then we are really on the road to true literate. environmentally sustainable or sustainable Their real income per capita increased eight development. times between 1973 and 1993. The people in In the introductory remarks to his paper Bassiasa, who have not added one acre of land to Kamal Nath talked about how people in his vil- their property, have managed to form five differ- lage could not relate to the big words he uses. His ent associations to deliver goods and services to village in India could have been my village in the villagers. Numerous small enterprises Egypt. I have a weekly television program that sprouted, including small land reclamation in highlights local development initiatives. I may Sainai, several hundred kilometers away, in what use big words, such as "environmentally sus- the old village calls "New Bassiasa." Other vil- tainable development" occasionally. Then peo- lagers around Bassiasa have caught the same ple in my village ask me what they mean, and I spirit and are following suit. have to explain to them. What Kamal said about This is an example of what Ismail Serageldin his village probably applies to three-fourths of said yesterday about keeping associations alive today's human beings. They do not understand as a means or a moving spirit in development. what we are talking about. Our group here today These villagers have done for themselves what is caught between wanting to help the "needy" no Egyptian state could have done for them, and and wanting to stem the impulses of the this is what empowerment is. If we want to trans- "greedy." late the sociocultural side of the ESD triangle Ibrahim 145 operationally, it is empowerment through non- Note governmental organizations (NGOs). This is how people learn to organize, create new soli- 1. Aymen Khalifa, "Media Report on the darities, and generate new opportunities. Frequency of Reporting and the Interest in Environmental Issues in the Egyptian Local Empowerment is to enable people, to give them Newspapers" (Environment Division, Ibu Khaldoun a chance to do for themselves what nobody else Center for Development Studies, Cairo, Egypt, Nov. 5, will or can do for them. 1993). Discussant Remarks James MacNeill Elizabeth Dowdeswell spoke of her impatience, a mental purposes is now the fastest growing seg- feeling that I know we all share, and Kamal Nath ment of our operations," I recalled a dinner at spoke of the very real dilemmas that politicians OECD in the early 1980s on the occasion of its face on these issues. I would like to make two or annual meeting of finance and foreign ministers. three additional points about the politics of these I was then OECD's Director of Environment in issues. Two of them are positive, and one is not so Paris. It was during that long period of stagfla- positive. tion. Environment had disappeared from the The panel was asked to comment on progress polls. since Rio, but at the opening, I found my mind I found myself sitting opposite the permanent going back not eighteen months but some thirty head of treasury of a member country that shall years to 1965, when I attended my first interna- go nameless. Late in the meal he clinked my glass tional meeting on the environment, seven years and said, "Jim, you will be pleased to know that before Stockholm. It was a very small meeting. at my request the head of personnel of my depart- Very few people were interested. There was no ment has devised a set of questions to weed out media. And here we are, almost thirty years later, all candidates for positions in our department twenty-one years after Stockholm, attending the who betray the slightest sympathy for the envi- First Annual International Conference on ronment. You guys with your bleeding hearts and Environmentally Sustainable Development on soft heads have no place in the central councils of the occasion of the Annual Meetings of the World any nation. " Bank and International Monetary Fund. My response was X-rated. But if the poor fel- That contrast says something to me, and I low, now dead, is looking down on this First hope it says something to you. It says that these Annual International Meeting on Environmen- values and ideas that we all share, ideas that have tally Sustainable Development on the occasion of been wrapped and rewrapped over the past three the Annual Meetings of the World Bank and IMF, decades, and that are now so ably and eloquently he must be spinning in his grave. personified by Liz Dowdeswell and other lead- These values and ideas are moving into the ers, have come a very long way in a very short central councils of nations, industry, and multi- time. lateral banks. But, and this is my next point, we The road from there to here has gone through still have a very long way to go and a very short many deep valleys and over a few very high time to get there. No one who has lived through peaks. I would like to tell one brief story to illus- the past eighteen months since Rio can fail to trate this point. Last night when the President of understand just how far we still have to go. The the World Bank was saying things like, "There last eighteen months have confirmed what most can be no development unless it is environmen- of us know in our hearts, that the international tally sustainable," and "Lending for environ- and domestic politics of these issues, and of the 146 MacNeill 147 policy changes that we are advocating and that While this is very disappointing, I persist in were summed up so eloquently by Herman Daly, being optimistic. I expect that over the next cou- are difficult at the best of times and almost impos- ple of years, perhaps a little longer, we will see the sible at the worst of times. beginning of another turnaround, as we have so And these past two years have been the worst often over the past three decades. Environmental of times. Apart from the two weeks in Rio itself, cycles-cycles of awareness and poll pressure for 1992 and 1993 have not been years of the envi- action-tend to follow economic cycles with a ronment and sustainable development. We have time lag of months or a couple of years. been living through one of the worst environ- Moreover, if we look back over the past three mental recessions that I can recall. This is not to decades, every peak in the environmental cycle say that there has not been some progress. has been higher than the preceding peak because Internationally there have been some excellent we are starting at a higher baseline of awareness appointments. We have seen movement in indus- each time. try-the Business Council for Sustainable The last peak was in 1988. It was strong Development (BCSD) in Geneva and other orga- enough in all OECD countries to force all of the nizations. The election of a sympathetic govern- Group of Seven leaders and many others to ment in the United States must be noted. In my undergo a public baptism as a born-again envi- country I could cite the work of the International ronmentalist. It was strong enough to force a Development Research Centre (IDRC). In Rio the change in rhetoric. But it was not strong enough Canadian prime minister announced a new man- to force any change in the demographic and eco- date for IDRC and a floor for its budget. Since nomic and fiscal and sectoral policies underlying then, under Keith Bezanson, IDRC has been mov- the dismal trends. These trends continue to accel- ing ahead with great vigor. erate. Perhaps next time poll pressure will be But by and large governments have been in strong enough to force real policy change. retreat on most of the promises that they made in Perhaps sometime before the turn of the century, Rio, certainly on finance, which is the ultimate this Annual Meeting on Environmentally test of political rhetoric. In Rio, OECD govern- Sustainable Development will be held not just ments promised to move to devote 0.7 percent of after but just before the World Bank/IMF Annual their annual GNP to the environment as soon as Meetings. It could then set some of the environ- possible. It is urgently needed. Recall what mental parameters within which the ministers Elizabeth said about Kenya: 0.7 percent does not can act-parameters that reconcile the Bank's tra- offer very much financial space, to use the tenn ditional goals for sustainable growth with the employed by Kamal Nath, but it offers some, and imperatives of sustainable development to which it was a part of the Rio bargain. Yet most OECD Elizabeth referred. leaders returned home and promptly cut their If that were to happen sometimes in the next budgets, and diverted much of the remainder few years, it would represent real progress. elsewhere. Closing Remarks Ismail Serageldin It is an awesome task after two days of excep- do now. That was the time, about twenty years tionally rich discussion to attempt to bring it all ago, when the engineers ruled. Economists have together and answer the unanswered questions. come a long way since then. Now we see the soci- Let me begin by responding to the concerns ologists coming on, and rightly bringing to the expressed by many about what was not covered. fore issues about empowering people, active lis- Precisely because it is impossible to address an tening, and participation-in short, trying to issue like Environmentally Sustainable Develop- change the processes by which development ment in one conference, precisely because we institutions like the Bank make decisions. These believe that it should be more a process than a issues will affect our approaches as profoundly as product, precisely because we are cognizant of the economists did in changing the way people the evolving nature of it, do we call this an annual looked at projects from twenty years ago to the conference. present. We had to make hard choices. We could have This is not to say, of course, that environmen- picked sanitation or biodiversity or issues deal- talists, the third leg of our triangle, have not been ing with forests; but for this First Annual active. They have been extremely active! International Conference on Environmentally But the problem is that there has not been a Sustainable Development we decided to focus on broad and all-encompassing vision that could tie valuation of the environment since it impacts so together these multiple dimensions into a holistic much on the work of economists, a topic of con- paradigm. In his keynote address Captain cern to many environmentalists. We also focused Cousteau reminded us that we human beings all on the issue of water, which touches so many are engaged in an exceptionally dangerous aspects of everyone's life. adventure: we have divorced ourselves from the To pull together the various pieces of the rules of nature. In the arrogance of power granted many valuable contributions to this conference, to us by new technology and by the ability, for the as an organizing principle I will remind you of first time, to bend nature to our will, we thought the logo of this conference: the triangle. Our tri- that rules no longer matter, that there were no lim- angle has three equal sides: environment, eco- its to what we could do and where we could go. nomics, and sociology. The technical dimension For a few short moments, it did seem that way. is the manner in which a proposal or an idea is In 1969 Neil Armstrong walked on the moon. formulated, an idea that must be put into that tri- That same exciting journey also contributed to angle and tested to establish its viability on each our seeing the Earth as never before, to sensing of the three dimensions: economic, environmen- the fragility of our planet, to recognizing an tal, and social. atmosphere that needs protection. In the last I remember when economists in the Bank felt twenty years or so from Stockholm to Rio a grow- as lonesome as sociologists and anthropologists ing consensus has taken hold-albeit at different 148 Serageldin 149 paces in different disciplines-that interconnect- about, the ethical concerns that we must bring to edness and interdependence are very much the the tasks at hand, if we are to serve this large, order of the day, and that we human beings are marginalized group of humanity. part of, not separate from, the larger whole. One out of five human beings goes hungry Therefore, we must, as Captain Cousteau every day. This is a stunning figure at a time when reminded us, recognize that this divorce from the food surpluses are being destroyed, when subsi- rules of nature cannot continue. We have to think dies are being provided to limit production in dif- again. We have to think about and respect genetic ferent parts of the world, and when distribution diversity, as well as cultural diversity. systems are left to mechanisms whose efficiency In short, this unprecedented rate of change in is unknown. Exactly two months from today, we our times requires changing paradigms. To illus- will hold another conference with the specific trate with one stunning image about the speed of intention of rededicating the World Bank's change with which we live today, think in terms poverty efforts towards the issue of hunger. of visiting the Smithsonian Institution here in Surely we cannot talk about poverty red uction- Washington, D.C. There, visitors can see the very or even that more esoteric term, "alleviation"- small aircraft used by the Wright Brothers in 1903 without dealing with that most extreme form of for the first powered flight by human beings; and poverty, hunger. I rejoin the comments of my nearby is another small craft, the Spirit of St. Louis, friends who spoke about sanitation because in which Lindbergh crossed the Atlantic twenty- hunger and sanitation are in a very profound four years later, in 1927. That little plane repre- sense basic needs, not just needs in a biological or sented the peak of technology after twenty-four economic sense. They are also essential to human years of effort! Only forty-two short years later, dignity. The definition of absolute poverty is a Neil Armstrong walked on the moon. In the last state that is beneath human dignity. ten years, we have witnessed changes in telecom- Saad Ibrahim asked, "Where are the heads of munications, in financial transactions around the large multinational organizations in this group?" world, in the globalization of markets that make As I look at the representatives of many govern- many of the old ways of thinking about sectors ments and agencies in this audience, we are a and markets obsolete. So it behooves us all, if we group who should be able to matter. We are a want to be relevant to this world, all the more if group whose voice and opinions must matter, we want to be active participants in it, to rethink and we have the instruments by which we can the way we approach problems. make these changes. These changes will be pro- In this spirit I would like to recall the earlier found, and not simply by the sheer value of the comments made by President Lewis Preston and money that will be provided-because the World Managing Director Sven Sandstrom. They Bank has provided a lot of money! In a few short stressed that the World Bank is an institution that years, we have invested over $5 billion in envi- is profoundly committed to a development mis- ronmental components of Bank-financed pro- sion. Its development mission must ensure that jects. As Mr. Preston said, we invested some $2 the systems, the markets, the procedures, are, in billion in environment in the last year, and we reality, working for the vast majority of human- recently committed $1.8 billion to Mexico alone ity. Our mission must, therefore, also recognize for environmental projects over the next three that today at least twenty percent of humanity are years. The money is there. But much more signif- being completely marginalized, and this is not icant is the ability to permeate, to integrate in acceptable. practically everything that is being done, from These marginalized people are found in south macro policy to sectoral policy to actual design of Asia and Sub-Saharan Africa. They are also operations, the multiplier effect that comes from found in pockets of poverty everywhere in the internalizing the concepts of environmentally world. There are poor people in rich countries, sustainably development-social, environmen- just as there are rich people in poor countries. We tal, and economic-in the holistic view. have, therefore, to rededicate ourselves to the In this sense we can make a big difference. The profound change in attitude and to emphasizing World Bank Group commits $15-25 billion a year, the ethical concerns that Liz Dowdeswell spoke which affects something like $40-60 billion of 150 Closing Remarks total investment. Over a decade this translates to nomics. Just as by adopting economic analysis, over a half a trillion dollars in the developing no one claimed that we no longer needed the world that would be affected by the perspective expertise of the engineers, today there is much to that collectively we can bring to bear among gov- be learned by going for other types of skills while ernments and institutions. not foregoing the skills of the economists and the Here I return to the specific comments of var- value that they bring. ious participants. Nitin Desai reminded us of the This point came through clearly in our dis- value of looking at sustainability from the whole cussion of water resource management. Among and sectoral perspectives rather than breaking it so many other topics that we could have picked, up into small pieces. Unquestionably, most peo- why did we pick water? We feel very strongly ple recognize that the prevalent practice in eco- that water is likely to become one of the biggest nomics is not sufficient. Nobody, least of all the environmentally sustainable development issues World Bank, assumes that any single measure- at the beginning of the next century. As we turn gross national product, net national product, from the second to the third millennium, we are gross domestic product-is sufficient to capture likely to find that it is not oil but water that will the reality of the situations we deal with, and we be the scarcest commodity, certainly in many need to improve our indicators of progress. parts of the world. But we also need to move forward without If the world's population grows from 5 billion waiting for perfection. Rather than going through now to 8.5 billion by the year 2025, this represents the elegant and careful discussions that Partha an increase of 650 percent in terms of water con- Dasgupta, David Pearce, and the discussants at sumption associated with current trends of the valuation panel made, I would like to bring growth, which are very limited for the poorest of my own vision to this discussion. When we are the poor and certainly for the bulk of humanity. seeking, as Partha Dasgupta said, representations These huge increases will be added to the 1 bil- of truth, representations of what we see through lion people who already have no access to clean economics are only a partial view. water, and the 1.7 billion who have no access to On one level human beings are nothing more sanitation. Water is a life and death issue for than three buckets of water and a handful of min- many people and is likely to become more so. erals held together by chemical reactions. This I was pleased that the water resources man- view has served us well in science and in medi- agement panel recognized the need to stop the cine, and has brought about major improvements fragmentation of looking just at bits and pieces in well-being for human beings. But it is clearly a and come back to this holistic view. David partial view. It misses completely the difference Kinnersley referred to it as a sort of a coherent- between a Hitler and a Mother Teresa, between a based participation. Stalin and a Mozart. It misses all the qualities that We need to do much more on participation. make us relate to other people as human beings. Wangari Maathai's eloquent plea reminded us Reducing a society to the sum of its economic that in addition to dichotomies between the rich and financial transactions is the equivalent of and the poor, the North and the South, there are reducing it to three buckets of water and a hand- often dichotomies between elites and the people. ful of minerals. It is a reductionist view. It has its This image was picked up with moving elo- uses, and we should be very much aware that it quence by Minister Kamal Nath when he spoke is an important exercise, just as for science it is about the village and how it relates to the con- often useful to adopt this reductionist view. But cerns of others. we also have to understand the limits of this view. Thus, we come full-circle to the need to Therefore, as we heard from the economists' change the paradigm through which we look at panel, there should also be no claim that eco- and diagnose problems. We need to change the nomic measurements alone are capable of cap- way we arrive at what we think are the solutions. turing everything that we need to capture about We need to realize that the way we approach the human society. identification and the implementation of the We need to have a more holistic view, one that solutions is itself a solution. Only by involving recognizes both the value and the limit of eco- people in their own destinies, in decisions that Serageldin 151 affect them, will we be able to put together the This brings me to the concept of how we apply safeguards against going astray and making participation in practice. How do we make it wrong decisions. more than a buzzword? How do we make We are aware of the answers. In my opening empowerment the centerpiece of participation? slide presentation I showed the hand of Le How do we define the roles of the different actors Corbusier building the model city, which epito- in the decision process? mized a philosophy of the 1930s that specialized The solution is leaping at us from the very technicians had the answers and that they were problems that we are complaining about. We are going to make development work. We have complaining about the lack of funds that are learned since then that this is not the case. It is, in available from government sources. We are com- fact, the most basic human right for all peoples to plaining about the inability of the Organisation have a say in their own destinies, to improve their of Economic Co-operation and Development destinies, to be themselves. It is inconceivable (OECD) countries, given their deficits, to provide that we should remove the notion of freedom the 0.7 percent of GNP that they promised at Rio. from the notion of development. We could con- We are complaining, in country after country, ceive of the hypothetical possibility of a society of about how government deficits are constraining well-fed, well-educated slaves, but that is government ability to do this and that. There is nobody's image of development. Ideas about much to be done in redistribution within gov- human rights, about the right to participate, the ernment budgets right now. Nevertheless, the right to have a say in the future, the notion of idea that the solution to every problem is to cre- empowerment, must be central to our develop- ate a parastatal agency funded out of a budget ment paradigm. and headed by someone at the level of deputy As we move in this direction, we must con- minister, which was the prevalent view in most sider the place of democracy, and good gover- countries in the developing world up to ten years nance. Two stunning facts speak of the value of ago, is no longer viable. That option is no longer good governance and democratic participation. available. First, there is no record of famine occurring in a Decentralization and devolution of power democratic country. Professor Amartya Sen has from the federal to the state to the community to documented in a massive study with Jean Dreze the most local sort of organization have become that even where there is persistent and chronic necessities. It is not even a matter of options, of malnutrition, the extreme forms of massive death choosing to do so or not. The alternative has been by starvation that accompany famine have never foreclosed. There is something profoundly use- occurred in any country that was democratic. ful in the current financial crisis that most coun- Second, in this century of killing and slaugh- tries are undergoing because this crisis will give ter, there is no record of two democratic countries those of us who argue for a paradigm shift fighting a war with each other. (I do not consider stronger evidence that the paradigm shift is some of the emerging states in Eastern Europe upon us. Change is here, and we must embrace and Central Asia as established democracies yet. it or be trampled by it. They are still in a transitional stage.) Surely this I also would like to caution against the notion must tell us something about where we should be that somehow we will do away with govern- going and to what we should be looking for the ment-that between the trends towards global- future. ization and localization, devolving down to local While institutions like the World Bank, by communities and recognizing world markets, statute, cannot get involved in the political governments will wither away. We would be mis- dimensions of democracy, the work we do in pro- taken to replace the discredited ideology of sta- moting good governance through transparency, tism with an equally fallacious ideology that free accountability, pluralism, participation, and the markets will solve everything. rule of law is important to lay more solid foun- We need to temper the ruthless efficiency of dations for developmental activities. Indeed, the market with a compassionate and caring from a development paradigm perspective, the state. Without it, the meaning of government, the work on participation is especially relevant. associative nature of the expression of society 152 Closing Remarks itself, has no content. We have to accept this as a solutions and implement them, and thereby basic premise. Governments have important moving forward, bit by bit, on a constructive roles to play. Their function will be to create an path of change. enabling environment in which people and orga- For this purpose I stretch out my hand to all of nizations can blossom. you here and to many who are not here to say that Neglect of the political dimension, the viabil- at the World Bank we want to do our share. We ity of the institutions, and the political processes want to make sure that this paradigm shift will be of participation in decisionmaking all would a profound one. We intend to bring to bear what- lead toward the disasters that we see in Somalia ever we can in terms of consensus building, ana- and Yugoslavia and Zaire. It is with this pro- lytical rigor, and morale suasion so that we do not found belief that we are embarked on a jour- lose sight of the tremendous predicament of that ney-a journey in which we look at the problems fifth of humanity who live in abject misery. The differently, and we look at the solutions differ- poorest of the poor, those whom most of the past ently. We are not seeking the holy grail of some efforts have failed to reach effectively, and for perfect solution. Rather, we are seeking to whom there is hope only if we shift our percep- change the processes by which we identify the tions to the new. Part Five Appendixes Appendix 1 Environmental Accounting: An Operational Perspective Peter Bartelmus, Ernst Lutz, and Jan van Tongeren 156 Appendix I Abstract The purpose of this paper is to summarize the more practical recommendations of the handbook The economic dimension of development, that is, and to illustrate the key steps that need to be taken economic growth, has been overemphasized in the in implementing these recommendations by past.a As a consequence, distributional aspects, the national statistical services. This overview also is environment, and other dimensions of develop- intended to facilitate a better access to the complex ment have been neglected. The message of "sus- methodologies of integrated accounting for plan- tainable development" is to incorporate these ners, decision makers, and others interested in dimensions in comprehensive broad-based devel- learning about and using an operational instru- opment planning. ment for merging environment and economics. Some attempts at measuring such develop- ment by means of an overall index such as the Notes "Human Development Index" have been made, but with limited success. Integrated environmen- a. The draft of this paper submitted to the First Annual tal and economic ("green") accounting, is there- International Conference on Environmentally Sustainable Development was revised by two of the authors and pub- fore, more narrowly focused on addressing a lished in 1994 as United Nations Department for Social number of more obvious deficiencies of conven- Information and Policy Analysis (DESIPA) Working Paper tional national accounts with regard to the envi- Series no. 1. The views expressed herein are those of the ronment. A satellite System of integrated authors and do not necessarily reflect the views of the Environmental and Economic Accounts (SEEA) World Bank nor of the United Nations. The designations has been developed by the United Nations and terminology used are those of the authors. This paper is intended to make the results of research Statistical Division (UNSTAT). The concepts, available in preliminary form to encourage discussion and classifications, and methods of such accounting to elicit comments. Comments should be addressed to have been issued in a handbook entitled Peter Bartelmus or Jan van Tongeren, Statistical Division, Integrated Environmental and Economic Account- Department for Economic and Social Information and ing.b This handbook incorporates the results of Policy Analysis, Room DC2-1652, United Nations, New York, NY 10017, U.S.A. many research and field studies, expert group b. United Nations, Integrated Environmental and discussions, and pilot studies in Mexico, Papua Economic Accounting (Sales no. E.93.XVII.12) (New York: New Guinea, and Thailand. United Nations, 1993). Environmental Accounting: An Operational Perspective 157 Contents Introduction I. Adaptation of National Accounts for Environmental Analysis A. Supply and Use Accounts B. Asset Accounts/Balances C. Identification of Environmental Elements in the SNA 1. Environmental protection expenditures 2. Environmental accounting elements in other volume changes of assets II. Modification of the SNA: Toward a System of Integrated Environmental and Economic Accounting (SEEA) A. Environmental Costs and Capital Accumulation at Market Values B. Incorporation of Environmental Costs and Capital Not Reflected in Market Values C. Environmentally Adjusted Economic Aggregates III. Valuation of Natural Assets in the SEEA A. Market Valuation of Natural Resources 1. Valuation methods 2. Measurement and valuation in natural resource accounts 3. A case study: subsoil assets in Papua New Guinea (PNG) B. Maintenance Valuation of Environmental Assets IV. Implementation of Integrated Accounting A. National Programs of Environmental Accounting 1. Pilot compilation 2. Benchmark compilation 3. Annual compilation of reduced-format accounts 4. Special studies 5. Coordination of national activities B. International Cooperation V. Use of Integrated Accounting in Planning and Policy Analysis A. Sustainability of Economic Growth B. Accounting for Accountability C. Outlook: Limits and Prospects of Green Accounting Notes Boxes 1. Objectives of integrated environmental and economic accounting 2. SNA accounting identities 3. SNA asset accounts categories 4. Classification of tangible non-produced assets in SNA and SEEA 5. Classification of Environmental Protection Activities (CEPA) 6. Capital accumulation in EDP calculation 7. Methods of market valuation of natural resource stocks and stock changes 8. The use of net prices for the valuation of subsoil assets of Papua New Guinea 9. Prevention and restoration activities in maintenance costing 158 Appendix I 10. Valuation of environmental impacts in Papua New Guinea 11. Definition of sustainable economic growth 12. Capital accumulation and productivity in Mexico and Papua New Guinea Figures 1. 1993 SNA, supply and use with asset balances for economic assets by type and industry 2. 1993 SNA, supply and use with asset balances for economic assets and separate identification of environmental elements 3. SEEA, supply and use with asset balances for economic and environmental assets, including costing of depletion and degradation 4. Impacts on environmental quality-Papua New Guinea Tables 1. Measurement and valuation in natural resource accounts 2. Accounts for subsoil assets in Papua New Guinea 3. Comparison of user cost and depreciation of mineral resources in Papua New Guinea 4. Comparison of conventional and environmental accounting indicators: Mexico and Papua New Guinea Environmental Accounting: An Operational Perspective 159 Introduction Joint workshops organized by the United Nations Environment Programme (UNEP) and National accounts have provided the most widely the World Bank set out to examine the feasibility used indicators for the assessment of economic per- of physical and monetary accounting in the areas formance, trends of economic growth, and the eco- of natural resources and the environment and to nomic counterpart of social welfare. However, the develop alternative macroindicators of environ- new emphasis on sustainable development, in par- mentally adjusted and sustainable income and ticular by the Earth Summnit, the United Nations product.' A consensus emerged in the workshops Conference on Environment and Development in that enough progress had been achieved to de- Rio de Janeiro aune 3-14, 1992), draws attention to velop the links between environmental account- the need for a broader assessment of growth and ing and the United Nations System of National welfare by modified national accounts. Accounts (SNA). In this context two major drawbacks of con- Parallel to this revision, the Statistical Division ventional accounts have been stressed. In their of the United Nations (UNSTAT) has developed assessment of cost and capital, national accounts methodologies for a System of integrated Environ- have neglected (1) the new scarcities of natural mental and Economic Accounting (SEEA), issued resources that threaten the sustained productivity as an SNA handbook on Integrated Environmental of the economy and (2) the degradation of envi- and Economic Accounting.2 Various components of ronmental quality, mainly from pollution, and the SEEA were tested in case studies in Mexico, consequences on human health and welfare. In Papua New Guinea, and Thailand. Those studies addition, some expenditures for maintaining found that environmental accounting not only is environmental quality are accounted as increases feasible but also can provide, even in tentative in national income and product, despite the fact form, a valuable information base for integrated that such outlays could be considered as a main- development planning and policy The main objec- tenance cost to society, rather than social progress. tives of the SEEA are presented in box 1. Box 1. Objectives of integrated environmental and economic accounting (a) Segregation and elaboration of all environment-related flows and stocks of traditional accounts The segregation of all flows and stocks of assets, related to environmental issues, permits the estimation of the total expenditure for the protection or enhancement of different fields of the environment. A further objective of this segregation is to identify that part of the gross domestic product that reflects the costs necessary to compensate for the negative impacts of economic growth, that is, the "defensive expenditures." (b) Linkage of physical resource accounts with monetary environmental accounts and balance sheets Physical resource accounts cover the total stock or reserves of natural resources and changes therein, even if those resources are not (yet) affected by the economic system. Natural resource accounts thus provide the physical coun- terpart of the monetary stock and flow accounts of the SEEA. (c) Assessment of environmental costs and benefits The SEEA expands and complements the SNA with regard to costing * The use (depletion) of natural resources in production and final demand * The changes in environmental quality, resulting from pollution and other impacts of production, consumption, and natural events, on the one hand, and environmental protection and enhancement, on the other. (d) Accountingfor the maintenance of tangible wealth The SEEA extends the concept of capital to cover not only human-made but also natural capital. Capital formation is correspondingly changed into a broader concept of capital accumulation allowing for the use/consumption and discovery of environmental assets. (e) Elaboration and measurement of indicators of environmentally adjusted product and income The consideration of the costs of depletion of natural resources and changes in environmental quality permits the calculation of modified macroeconomic aggregates, notably an Environmentally adjusted net Domestic Product (EDP). Source: Peter Bartelmus, "Accounting for Sustainable Growth and Development," Structural Change and Economic Dynamics 3 (2) (1992): 241-60. 160 Appendix 1 In the absence of an international consensus environmentally adjusted indicators. This is on how to incorporate environmental assets and achieved by the incorporation of produced and the costs and benefits of their use in national non-produced (natural) asset accounts in the accounts, the Statistical Commission of the 1993 SNA, which are elaborated and expanded in United Nations requested UNSTAT to develop an the SEEA. The implementation of the 1993 SNA SNA satellite system for integrated accounting thus would produce a first-step (limited) version rather than to modify the core system of the SNA of the SEEA. For this reason the adaptation of and itself. This approach was confirmed by the transition from the SNA-to obtain a broader sys- United Nations Conference on Environment and tem of integrated accounting-is discussed in Development (UNCED) in its Agenda 21 in 1992. some detail. On the other hand, as part of the revision of the Figure 1 shows how the data systems for pro- SNA, selected elements of environrmental duced and non-produced (natural, non-financial) accounting are already elaborated in the SNA.3 assets can be integrated into one table of supply They include the classification of non-produced and use and asset accounts. Such integration is tangible (natural) assets, the incorporation of essential for integrated environmental-economic asset accounts, and a separate chapter on satellite analysis as it permits extending and linking con- accounts that deals with, among other things, the ventional accounts and accounting identities, links between the SNA and integrated eco- incorporating environmental assets and changes nomic-environmental accounting. Such linkage therein. Box 2 lists those identities in terms of the is a prerequisite for a meaningful comparison of "blocks" of figure 1. conventional economic and environrmentally adjusted indicators. A. Supply and Use Accounts Reflecting the controversial nature of some of the methodological proposals, in particular those Figure 1 introduces two classifications for the fur- on the monetary valuation of non-marketed envi- ther breakdown of its supply and use blocks. The ronmental "externalities," the handbook has first classification is by industry, based on the been issued as an interim version. It addresses International Standard Industrial Classification numerous technical questions of valuation, accounting procedures, and classification, and also discusses alternative solutions. In practice Box 2. SNA accounting identitie and at this stage of development, it thus might The supply and use accounts in figure 1 reflect three not be easy to choose among different approaches basic national accounts identities: and methodologies.4 * The supply-use identity: The objective of this paper is, therefore, to - output + imports = intermediate consumption provide a more concise guide through the intri- + exports + final consumption cacies of integrated environmental and economic + gross capital formation accounting. A step-by-step discussion of how to * The value added identity: implement the SEEA will be applied as far as pos- - value added = output - intermediate sible, providing elaboration and concrete materi- consumption - consumption of fixed capital *The domestic-product identity, which only holds als from country studies in text boxes and tables. for the economy as a whole: Cross-references to the handbook facilitate its - netdomesticproduct(NDP)=finalconsumption consultation for further details and explanations. + gross capital formation + (exports - imports). The incorporation of the asset balances in figure 1 1. Adaptation of National Accounts for adds another set of identities that explain the differ- Environmental Analysis ence between opening and closing stocks of assets by flows during the accounting period. For produced and non-produced assets, the balances are defined as: Sections I and II demonstrate how the SEEA is *Closing stocks = opening stocks + gross capital derived from the overall national accounts frame- formation - consumption of fixed capital work, the recently revised 1993 SNA.5 Close links + other changes in volume of assets + holding between the two systems are maintained, facili- gains/losses on assets. tating the direct comparison of conventional and I Environmental Accounting: An Operational Perspective 161 (ISIC), and is applied vertically to the blocks of the two classifications at the same time, the blocks output, intermediate consumption, and value of output and intermediate consumption become added.6 The second classification is by products, "make-and-use matrices" with cross-classifica- based on the Central Product Classification tions of output and intermediate consumption by (CPC), and is applied horizontally to the blocks industry and product. The blocks of imports, of supply (output and imports) and use (inter- exports, and final consumption are vectors with mediate consumption, final consumption, capital a single breakdown by products. The block of formation, and exports).7 As a result of applying value added is a set of vectors consisting of Figure 1. 1993 SNA, supply and use with asset balances for economic assets by type and industry Asset balances by type of assets Non-produced Produced assets economic assets Opening stocks of Opening stocks of produced assets non-produced economic assets Supply and use accounts lSIC CPC Output Imports CPC | Immediate l ll consumption Exports Final consumption Gross capital formation consumption Consumpbon of Consumption offixed capital fixed capital: produced assets Value added, l net/\IDP Asset balances by industry: Produced assets, non-produced assets Other changes in volume Other changes in volume Ofheroduch edasss involum of non-produced of produced assets economic assets Holding gainsAosses on Holding gainsAosses on Holding gains/losses on non-produced produced assets economic assets Closing stocks of Closing stocks of produced assetsnon-produced produced assetseconomic assets Explonatons: ISIC = Intemational Standard Industrial Classificabon of All Economic Activities (United Nations, Internotional Stondord lndustrnol Clossification of All Economic Activities (Sales no. E.90. XVII. I I) (New York: United Natons, 1990)) CPC = Provisional Central Product Classification (Unied Nations, Provisional Centrol Product Clossifcotion (Sales no. E.9 I .XVII.7) (New York: United Nations, 1991)) 162 Appendix I compensation of employees, net indirect taxes, The account for other volume changes in pro- and operating surplus. duced and non-produced assets is one of the most Gross capital formation and consumption of relevant accounts of the SNA for environmental fixed capital are the only supply and use blocks analysis, reflecting environmental impacts on nat- that intersect with the blocks of the asset accounts. ural and other assets. Economic appearance of As a consequence, gross capital formation is non-produced assets (K3) covers the additions to cross-classified by the type of products that are non-produced assets that are used or made avail- distinguished in the rows of the supply and use able for production activities, including additions section of the table and by type of assets that are to proven mineral reserves, virgin forests that are distinguished in the asset accounts or balances added to the economic reserves used in lumbering, (see Section I B). Within the latter, a distinction is and land that is cleared for use in agriculture or the made between produced and non-produced development of human settlements. Further addi- assets and corresponding capital formation. tions to non-produced assets are natural growth of The above-mentioned identities apply also to non-cultivated natural resources (K5), which refers the different categories of the CPC and ISIC. The to the growth of natural biota that are not produced supply-use identity holds for each product cate- assets. Economic disappearance of non-produced gory that is distinguished in the supply and use assets (K6) covers all aspects of depletion of min- rows of the table and the value added identity eral assets, forests, and other natural resources, as holds for each industrial sector. The identity between supply and use of products is compli- Box 3. SNA asset accounts categories cated, however, by the use of different valuations in supply and use. The supply blocks of output Opening stocks and imports are valued in basic prices-exclud- ing trade and transport margins and taxes on Capitalformation products less subsidies-and uses are in pur- P.51 Gross fixed capital formation chasers' values that include the tax, trade, and P.52,53 Changes in inventories transport margins. To maintain the identity in (acquisition less disposal of valuables) value terms between supply and use, an addi- K.2 Acquisition less disposal of non-produced tional column vector of those margins could be K. (non-financial) assets introduced for each product. Consumption of fixed capital Other changes in volume of assets B. Asset Accotints/Balances K.3 Economic appearance of non-produced assets The two columns of the asset balances for pro- K.4 Economic appearance of produced assets duced assets and non-produced assets in figure 1 K.5 Natural growth of non-cultivated are further detailed in terms of transactions in the biological resources S Bxtdiffer- K.6 Economic disappearance of non-produced SNA. Box 3 lists those transactions for the dfe-assets r ent blocks of figure 1. K.7 Catastrophic losses Gross fixed capital formation, changes in K.8 Uncompensated seizures inventories, and consumption of fixed capital K.9 Other volume changes in non-financial generally refer to additions to and reductions in assets not elsewhere classified (n.e.c.) the value of produced assets such as buildings, K.12 Changes in classification and structure roads, machinery, and stocks of commodities. However, gross fixed capital formation may also Revaluation K.11 Nominal holding gains/losses include additions to non-produced assets such as improvement of land, cost of transferring land Closing stocks and other non-produced assets between owners, and reforestation. The value of capital formation Note: Codes refer to SNA transaction and balancing is added to the value of non-produced assets, but items (Inter-Secretariat Working Group on National Accounts, System of National Accounts (Sales no. separately "depreciated" as other changes in vol- E.94.XVII.4) (New York: United Nations, 1993)). ume (see box 3). Environmental Accounting: An Operational Perspective 163 well as the degradation of non-produced assets. Box 4. Classification of tangible non-produced Economic appearance of produced assets (K4) assets in SNA and SEEA (in parentheses) refers mainly to additions to the stock of produced assets in the form of works of art, historical monu- AN2 Non-produced assets (2) ments, and the like, which heretofore had not been AN21 Tangible non-produced assets recognized as economic assets. (2.1 non-produced natural assets) The categories discussed so far refer to AN211 Land (2.1.3 land with ecosystems and changes in assets that are a consequence of eco- soil) nomic decisions that may or may not affect the AN2111 Land underlying buildings and structures (2.1.3.2.1) environment. The remaining categories in box 3 AN2112 Land under cultivation are either caused by economic decisions but have (2.1.3.2.2 agricultural land) no environmental impacts (K8, K12), or reflect AN2113 Recreational land and associated surface catastrophic losses (K7) that may have environ- water (2.1.3.2.4, part of 2.1.3.3) mental impacts but are not directly caused by AN2119 Other land and associated surface water economic decisions. (2.1.3.2.5, part of 2.1.3.3) Produced assets (in figure 1) may include natural AN212 Subsoil assets (2.1.2) assets such as livestock for breeding, orchards, 1lan- AN2121 Coal, oil, and natural gas reserves (2.1.2.1 fossil/subsoil assets) tation, timber tracts, and inventories of agricultural AN2122 Metallic mineral reserves crops standing on the land or stored after harvest- (2.1.2.2 metal and other ores) ing. Growth of cultivated assets is treated as gross AN2123 Non-metallic rnineral reserves (2.1.2.3) fixed capital formation, and growth of agricultural AN213 Non-cultivated biological resources crops is treated as changes in inventories. Non-pro- (2.1.1 wild biota) duced assets in the SNA refer only to economic assets, AN214 Water resources (2.1.4 water) that is, assets over which ownership rights are N.A. (2.1.5 air) enforced and which provide economic benefits to Source: Inter-Secretariat Working Group on National their owners. Their products are generally valued in Accounts, System of National Accounts (Sales no. the market, either directly or indirectly (see Section E.94.XVII.4) (New York: United Nations, 1993); and m A 1).The SNAdassifcation f the tngible United Nations, Integrated Environmental and Economic III A 1). The SNA classification of the tangible Accounting (Sales no. E.93.XV1112) (New York: United non-produced assets is shown in box 4, together Nations, 1993), Annex IV. with a cross-reference to the-more detailed-SEEA classification (CNFA, in parentheses). The SEEA cat- egories of non-produced natural resources are simi- gories of its classifications, notably those of the lar to those of the SNA but in principle include all asset accounts as shown above. Further informa- non-produced natural assets, not only "economic" tion can be obtained by disaggregation of SNA ones. An important category of non-produced assets transactions and classifications without modify- in SEEA is air, which is not included at all in the SNA ing the basic accounting structure. This approach as it does not (yet) represent an economic asset. has been applied in various satellite accounts (in a An alternative breakdown of the asset bal- narrow sense) that aim at providing greater details ances by industry is suggested in figure 1 as a sep- of transactions in particular areas such as health, arate block. Asset balances by industries that education, and, indeed, environment.8 Integrated distinguish between produced and non-pro- Environmental and Economic Accounting discusses duced assets should be particularly useful in trac- such environment-related disaggregation of the ing the effects of industrial activities on different SNA in a separate version (chap. II), referring to natural resources. environmental protection expenditures and non- financial asset accounts. Figure 2 illustrates this C. Identification of Environmental Elements disaggregation in terms of the building blocks of in the SNA figure 1 by highlighting the environmental com- ponents of those blocks. The SNA already contains information that is related to environmental concerns. Part of this 1. Environmental protection expenditures. Envi- information is explicitly identified in various cate- ronmental protection services are identified 164 Appendix 1 Figure 2. 1993 SNA, supply and use with asset balances for economic assets and separate identification of environmental elements Asset balances by type of assets Non-produced Produced assets economic assets | Opening stocks of | | Opening stocks of produced assets non-produced economic assets Supply and use accounts lSIC CPC Output Intermediate con- Final consumption, other sumption, other than Exports than expenses for envi- Gross capital formation, other than produced expenses for environ- ronmental protecton assets for environmental protection mental protection Intermediate con- nal consumption Gross capital forma- CPC sumption, expenses expenses for environ- tion, produced assets for environmental mental protecton for environmental protecbon protection Consumption of fixed capital: produced Consumption of fixed capital, produced assets for environmental other than for environmental protection protection Consumption of fixed Consumption of fixed capital: produced capital: produced assets, for environ- assets for environ- mental protection mental protection Value added, Depleton net/l9DP Dpleo Depletio netfl'IDP ~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~produced economic Depletion Degradation of non- produced economic | Asset bolances by assets reflected in Degradation industry: market values of Produced assets, assets non-produced assets Other accumulation of Other accumulaton produced economic of non-produced eco- Other l assets | | nomic assets Accumulation Other changes in vol- Other changes in vol- ume of non-producedt ume of produced economic assets, Other assets, other than other than depleton, Volume degradation degradation, and Changes other accumulation Holding gains,llosses | |Holding gainsAosses Hon produced assets on non-produced on produced assets economic assets Closing tocks of Closing stocks of Closng stckss o non-produced : produced assets | | economic assets Explonotions: See figure 1. Environmental Accounting: An Operational Perspective 165 within intermediate consumption of industries, 2. Environmental accounting elements in other final consumption by government and house- volume changes of assets. Figure 2 groups the data holds, and investment (capital formation). De- recorded under other changes in volume in the preciation of assets used in environmental SNA into categories of depletion and degrada- protection is also recorded separately from con- tion, and other accumulation and volume sumption of fixed capital of other assets. changes. Depletion and degradation that apply to Separation of environmental protection ex- non-produced assets are accounted as produc- penses requires the identification of, on one hand, tion costs in the SEEA-contrary to the SNA, in establishments that produce environmental goods which those items are part of other volume (waste/pollution treatment facilities, filters, or changes, outside the production accounts. cleaning materials) and protection services and, on Depletion of non-produced economic assets the other hand, similar expenses for environmen- refers to the depletion of natural resources. tal protection that are not identified as separate Degradation of those assets (part of K6 in SNA; establishments in the SNA. The latter may range see box 3) includes quality changes (including from simple cleaning activities to maintenance of restoration of quality) and degradation of land environrnental protection equipment. In-house and other non-produced natural assets due to construction of environmental protection facilities economic uses or due to the discharge of residu- is not included in such "ancillary" activities since als. Other accumulation elements are additions to own-account construction is always dealt with as the volume of economic non-produced assets that a separate establishment in the SNA. are caused by economic decisions, such as new The headings of a draft Classification of finds of subsoil resources, or transfers of land and Environmental Protection Activities (CEPA), pro- natural assets to economic use (part of K3 in the posed in Integrated Environmental and Economic SNA). The remaining flows of other volume Accounting, is reproduced in box 5. CEPA changes are those that are not caused by economic includes only those categories that are an imme- decisions but have political, natural, or other diate response to environmental degradation non-economic causes that affect the economic caused by production units, the government, and households. It does not cover activities related to Box 5. Classification of Environmental health protection and cure that are in response to Protection Activities (CEPA) effects borne (usually by others than those who caused them) and that are sometimes referred to 1. Protectionofambientairandclimate(prevention as part of a broader concept of "defensive expen- of air pollution,treatment of exhaust gases) ditures."9 Details of the accounting procedures 2. Protection of ambient water, excluding ground for the "externalization," that is, creation of a new water (prevention of water pollution, industrial pre- "environmental protection industry" within the treatment plants, sewage, treatment of cooling water) SEEA framework, are discussed as a separate ver- 3. Prevention, collection, transport, treatment and disposal of wastes (collection, transport, treatment of sion of the SEEA in the Integrated Accounting waste, and prevention of waste generation) (chap. V). 4. Recycling of wastes and other residuals The separate identification of environmental 5. Protection of soil and ground water (decontami- protection expenses provides a comprehensive pic- nation of soil, cleaning of ground water) ture of the efforts that have been undertaken by the 6. Noise abatement (traffic, industrial process noise) different sectors and institutions of the economy to 7. Protection of nature and landscape (protection protect the environment. Input-output analyses of species, habitats; erosion, fire, and avalanche could assess the direct and indirect value added protection) 8. Other environmental protection measures (edu- contributions to gross national product (GDP) in cation, training, administration) connection with environmental protection ex- 9. Research and development. penses, including employment created by such expenses. Such accounting also could indicate how Source: United Nations, Integrated Environmental and caialotptratios are affected by investment in Economic Accounting (Sales no. E.93.XV11.12) (New York: capital-output rote equipmentm United Nations, 1993), Annex 111. environmental protection equipment. ____________________ 166 Appendix 1 Figure 3 SEEA, supply and use with asset balances for economic and environmental assets, including costing of depletion and degradation Asset balances by type of assets Non-produced Other no-produced Produced aoets economic assets "enironmentor assets Opening stocks of Opening stocks of Opening stocks of] produced asseu non-produced eco- other non-produced SuppIy and use accounts nomic assets asset 1SIC cpcI Output B ]0 Intermediate con- Final consumption, sumption, other than other than expenses Gross capital formation, other than produced expenses for envi- for environmental assets for environmental protection ronmental protection protection Intermediate con- FiaGmross capital forma- sumption, expenses expensespon, tion, produced assets for environmental expenses for envi- or envionmental protection protection Other accumulaion of Other accumulation o Other accumulation of Other produced economic non-produced eco- other non-produced Aeeumlation asses nomic assets assets Consumption of fixed capital, pro- duced assets other Consumption of fixed capital, other than pro- than for environ- duced assets for environmental protection mental protection Consumption of fixed Consumption offixed capital, produced capital, produced assets for environ- assets for environ- mental protection mental protection I Cost of depletion of duced economic asetr Depltion non-produced eco- a nomnic assets | | Degradaion of non- Cost of degradation produced economic of produced and assets reflected in non-produced assets market values of mreflected in market assets _ values of assets Degradation Degradaion of pro- Degradation of non- Cost of degradation duced assets not produced economic Degradation of other of produced and refleded in market assets not reflected in non-produced assets non-produced assets values market values not reflected in mar-lil|liI I ket values g ' ' ~~~~~~~~~~~~~~~~~~~~~Net capital accumulationl nValue added, | l l f net/NDf adjusted e c Other changes in vol-| Other changes in vol- andful degadtio m of pelOh rcagsi oduce ume of non-produced ume of other no)n-pro- |tior and degradationl ume of produced economic assets, lduced economic assets, Other deg ti other | other than depletion, other than depletion. Volme | Asset balances by | degradation and other | | degradation, and degradation, and other Changes industy lc| u |t | other accumulation accumulaton Produced assets, non-produced assets Holding gainsAosse on non-producd on produced assets e o a Ic] t k f | |~Closing stocks of non-| C Closing stocks of pro- Clsn tcso o- Closing stocks of other duced assets produced economic non-produced assets lxpfnoions See figue assets E'xplonations: See figure I . Environmental Accounting: An Operational Perspective 167 system. They include seizures of assets by gov- that cause the depletion and degradation. The ernments (K8), and destruction by natural and items constituting other accumulation of non-pro- human-made disasters (K7). duced economic assets are shown together with gross fixed capital formation. II. Modification of the SNA: Toward a System In general, it will be possible to identify sepa- of Integrated Environmental and Economic rately the cost of degradation, as reflected in mar- Accounting (SEEA) ket price changes of economic assets, only in severe cases of degradation that can be traced Section I describes the first-step version of the unequivocally to their causes (production/con- SEEA, as derived from the SNA, by introducing sumption activity). Examples are industrial acci- additional environmental detail without chang- dents such as oil spills that contaminate urban or ing SNA concepts and accounting procedures. For agricultural land property, or environmentally more comprehensive environmental-economic unsound production (cultivation) and waste dis- analysis, modifications in the SNA are required. posal resulting in land degradation (erosion and These are discussed in Integrated Environmental contamination). In those cases, conventionally and Economic Accounting as further "versions" of measured value added should be adjusted to a the SEEA. The following describes two basic mod- more realistic value that measures more accu- ifications whose implementation appears to be rately the contribution of the-degrading-sec- more practical than other SEEA versions. They are tor to net domestic product. An example of such (1) the second-step version of the SEEA that sim- analysis are cost estimates of land degradation in ply shifts elements of other volume changes as Costa Rica.10 environmental costs to the production/income Gross fixed capital formation that refers to accounts, and (2) a third-step version that produced assets and other accumulation of attempts to cover non-economic "environmental" non-produced assets together defines a new con- assets by replacing SNA's market valuation by a cept in environmental accounting called gross maintenance-cost valuation. The different valua- capital accumulation. The capital accumulation tion methods, estimation procedures, and consis- concept could replace gross capital formation in tency problems encountered in both market- and integrated growth analysis. Such analysis would maintenance-cost valuation are discussed in recognize the usually neglected role of natural Section III. As a consequence of those valuations, assets in the growth of output. alternative "green" indicators of value added, net domestic product (NDP), and capital formation B. Incorporation of Environmental Costs and can be calculated. Figure 3 illustrates these modi- Capital Not Reflected in Market Values fications by highlighting elements shifted within or added to the SNA. In addition to the elements of other volume changes, reclassified to cost, and other accumula- A. Environmental Costs and Capital Accumulation tion, figure 3 includes environmental cost and at Market Values asset categories that are not reflected in the mar- ket values of assets. Those elements refer to pol- The shift of the depletion, degradation, and accu- lution of environmental media (air, water, land) mulation elements of other volume changes in the and the depletion and contamination of wild SNA to the production and capital formation species and ecosystems that are not economic accounts in SEEA is shown in figure 3 as a reloca- assets. Degradation effects are included even if tion of figure 2 blocks. This rearrangement does they are not recognized in the market values of not require additional data beyond those required assets. Alternative valuations can be applied, for figure 2. The depletion and degradation blocks notably maintenance costing, discussed below in are presented together with the consumption of Section III B. fixed capital as additional negative entries that The alternatively valued (costed) environmen- reduce the value of non-produced assets. At the tal cost items are allocated to the industries and same time, positive counterpart cost items are consumers causing the environmental depletion imputed to those industries and final consumers and degradation. Degradation or depletion caused 168 Appendix 1 by households is treated as cost of household pro- nation-are also accounted for in the SEEA accord- duction activities, identified as a separate industry ing to cost-caused or cost-borne principles (by res- in the SEEA. Environmental degradation caused idents or the "rest of the world"). by the government is recorded as an additional cost An important part of depletion and degrada- item of production of government services. tion affects non-economic, "environmental" (in a However, if the government removes degradation narrow sense) assets. They are assets such as air, effects through clean-up activities, such reduction oceans, rivers and lakes, forests, or lands "in the in degradation is treated as a decrease in govern- wilderness," which are not used for economic ment consumption and an increase in capital for- purposes (see the "environmental assets" column mation because the quality of assets is improved. in figure 3). Complete asset accounts can be com- Cross-boundary effects-across the borders of the piled for most of those assets in physical terms as suggested in figure 3 with the possible exception Box 6. Capital accumulation in EDP of air. These physical asset accounts are fully elab- calculation orated in Integrated Accounting (chap. III). Degradation and depletion effects can be off- SNA defines Net Domestic Product as: set by environmental protection (expenses) in the form of produced capital formation. For example, NDP = C + I + (X - M). reforestation may replace virgin forests that had been depleted or degraded. Such reforestation is non-produced economic assets ( + A - A d) capital formation, that is, the production of (pro- non-prouet capitnormiat (Ap +npec duced) assets. As those assets do not add to the replaces: the identity value of an economic asset, they should be con- becomes: sidered as enhancement (increase) of environ- EDP = C + (Ap.ec + Allpec - A ,,mpe,7) + (X - M) mental assets. where C. Environmentally Adjusted Economic NDP = Net Domestic Product Aggregates C = Final consumption When all environmental cost and other accumu- I = Net capital formation X = Exports lation are expressed in value terms, alternative M = Imports aggregates of NDP, final consumption and capi- EDP = Environmentally adjusted net Domestic tal accumulation can be derived that still meet the Product basic accounting identities described in box 2. AP. = Net capital accumulation in produced Deduction of environmental costs from NDP assets thus obtains an environmentally adjusted net Anpec= Net capital accumulation in non-produced domestic product (EDP). The defining equations Anpe,a= Depletion and degradation in environmen- of NDP and EDP, in final demand categories, are tal assets. shown in box 6. To maintain the identity, the negative element for the 111. Valuation of Natural Assets in the SEEA economic counterpart of changes in natural assets other than economic assets (-A,,p.env;) is added. This As indicated in Section I B, natural assets are val- implies that expenditures and, in particular, net cap- ued in monetary terms in the SNA only if they are ital accumulation of economic assets are only partly under the controlled ownership of economic derived from net product of economic activities reflected in EDP; an important part of the expendi- agents and provide actual or potential economic tures may reflect the transfer of environmental assets benefits to their owners. These economic assets are and/or their services to economic activities. This can accounted for with a positive monetary value in be shown more clearly by re-arranging the terms in the balance sheets of the SNA. All other natural the above EDP identity as follows: assets obtain a zero economic value and thus are not recorded in monetary balance sheets but EDP + Ae,,v C + ( + Anp ec) + (X - M)p could be presented in physical asset accounts. Environmental Accounting: An Operational Perspective 169 Most of the changes in economic natural assets are ing in identifying changes in the values of natural recorded as "other volume changes"-outside the assets, already accounted for in asset accounts as production and income accounts of the SNA. other volume changes. These volume changes The SEEA treats these environmental impacts include the depletion of natural resources, as well as cost and introduces them into the production as their degradation from pollution and other accounts as "imputed" values. However, the lim- degrading activities-to the extent that the itation of this approach, which deals with eco- underlying environmental impacts are reflected nomic assets only, is that it excludes, by in changed market values of those assets. Section definition, all other environmental assets. The II A explains that part of the SNA category of depletion and degradation of air, water, forests, other volume changes is shifted in the SEEA as or biota in the wilderness have been considered environmental cost to the production accounts. as "social costs" of economic growth and devel- Market values have to be compiled or esti- opment for which economic activities should be mated in principle for both the stocks and made accountable (see Section III B). These changes therein. In practice, it might be easier in aspects of natural assets are captured as addi- some cases to value observed (physical) changes tional environmental costs in alternative valua- only than to assess the total available stock of a tions of the SEEA. natural resource. Integrated Accounting introduces three cate- gories of monetary valuation of natural assets, 1. Valuation methods. Stocks of non-produced changes therein, and effects on human welfare fixed assets that are marketed, such as land, could therefrom. Accordingly, three different basic ver- be valued by applying the market prices sions of the SEEA are proposed. One version (IV observed in statistical surveys of market transac- 1 in Integrated Accounting) applies a market valua- tions. If these assets are not marketed, the market tion approach, which rearranges only environ- prices of similar assets could be used. The flow of mental changes already contained in the asset services of marketed, but not produced, fixed accounts of the conventional SNA. A second ver- assets can be estimated by using data on rents or sion (IV 2) uses a maintenance valuation, which leases that were actually paid for the permission estimates the costs that would have been to use these or similar assets. required to keep the natural environment intact Stocks of depletable natural assets such as sub- during the accounting period. The third version soil assets or wild biota usually do not have a mar- (IV 3) combines the market valuation of the first ket price, as they are rarely sold/bought in total. version with a contingent valuation approach to A number of methods to estimate the market assess the environmental costs borne by indus- price/value of the stocks of scarce (depletable) tries with those borne by households (as welfare natural resources, and, by implication, changes in losses from environmental deterioration). the value of stock (between the beginning and the The three versions reflect to an increasing end of the accounting period) have been pro- degree problems of consistency of valuations and posed and applied in practice. Box 7 presents for- of data availability. The handbook focuses, there- malized descriptions of prevalent approaches fore, on the first two versions as widely applica- whose assumptions, advantages, and drawbacks ble guidelines for environmental accounting. The are briefly discussed in the following. third version, based on contingent valuation a. Discounted (present) value of natural resources. (willingness-to-pay and similar approaches), and A market value of natural assets can be calculated other versions (which extend the production by using the prices of the goods extracted or ser- boundary of the SNA) are intended more for ad vices provided by those assets as the future sales hoc analyses and research than for routine data value, reduced by the exploitation costs (net collection. They are not discussed further here. return). If the exploitation is spread over a lengthy period, the flow of future net returns has A. Market Valuation of Natural Resources to be discounted as indicated in box 7. In some cases, the reserves of depletable natural assets The first-step, market-valuation-based version of and exploitation rights are marketed. The market the SEEA is the closest to conventional account- prices then will reflect to a high degree the 170 Appendix 1 Box 7. Methods of market valuation of natural resource stocks and stock changes Present-value method: The present value V0 of a natural resource is the sum of the expected net revenue flows N,Q1, discounted at nominal or real interest rates r for the life T of the asset: 1= °(1+ r)' where Nt is defined as the total unit value of the resource less the costs of extraction, development, and exploration, and Q, is the quantity exploited over the period t. Net-price method: The value of the resource at the beginning of period t, V,, is the volume of the proven reserve R, (or EQt over the lifetime of the resource) multiplied with the difference N, between the average market value per unit of the resource p, and the per-unit (marginal) cost of extraction, development and exploration c,: V, = (p1 - c,)R, = N1R, The net-price method is based on the Hotelling rent assumption, which claims that in a perfectly competitive mar- ket, the price of a natural resource rises at the rate of interest of alternative investment, offsetting the discount rate. Accordingly the Hotelling rent, defined as the difference between the price of the resource and the marginal cost of extraction, would reflect the unit value of the natural resource stock. Replacement-cost estimates: The basic idea is to treat exhaustible resources as renewable because of exploration and discoveries, estimating incremental annual unit costs of adding reserves to the reserve base. The unit cost of booked reserves is multiplied by the number (units) of remaining established reserves to obtain an economic value of total reserves.a This rather speculative (about expected discoveries) method is more experimental in nature and is therefore not further discussed in the text. Depreciationldepletion of a natural resource stock: Depreciation of a natural resource stock can be calculated sim- ply as the difference between the values of the stock-as calculated above-at the beginning and the end of the accounting period. An alternative approach, which does not address the valuation of the stock or reserve but focuses on potential income generated from extraction (sales) has been proposed by El Serafy.b If R is the annual net revenues from the sales of the resource, assumed to be constant over its lifetime (of n years), a "true income" element X can be calculated such that R - X represents a "capital" element whose accumulated investment at an interest rate r during the n years would create a permanent stream of income of X (per annum). X is calculated as X = R [1 - 1/(1+r)"+'] and the user cost R - X = R/(1+r)"+', that is, the discounted (last) net revenue. Notes a. A. Born, Development of Natural Resource Accounts: Physical and Monetary Accountsfor Crude Oil and Natural Gas Reserves in Alberta, Canada. Statistics Canada, 1992, 43-45. b. Salah El Serafy, "The Proper Calculation of Income from Depletable Natural Resources," in Yusuf J. Ahmad, Salah El Serafy, and Ernst Lutz, eds., Environmental Accounting for Sustainable Development. A UNEP-World Bank Symposium (Washington, D.C.: World Bank, 1989),10-18. expected net returns from the exploitation of the than sectoral, level. In addition, the choice of the resource since investors would base their deci- discount rate is controversial, with proposed sion of buying an asset on relative present values (real) rates ranging between 0 and 17 percent.'2 of future net income streams." b. Net-price method. A simplified method that However, it is difficult to estimate future neglects future (discounted) losses of net returns returns and costs of natural resource exploitation from resource depletion, the "net-price valuation," by economic sector (agriculture, forestry, mining, has been proposed and applied in various stud- construction) or type of natural resource used by ies.13 As shown in box 7, the value of a natural different sectors. Estimates would require infor- resource is thus calculated as the product of the mation on availability of future stocks (reserves), quantity of the natural resource stock and the net prices, and interest rates, which are usually avail- price. The net price of the asset is defined as the able, if at all, only at the microeconomic, rather actual market price of the raw material minus its Environmental Accounting: An Operational Perspective 171 marginal exploitation costs including a "normal" in the discounted value of a resource, for example, rate of return of the invested produced capital. In over one year of exploitation, assuming that the the case of non-renewable (mineral) resources, this yearly net returns are the same for the remaining stock comprises only the "proven reserves" that life of the resource.17 Apart from this-simplify- are exploitable under present economic conditions ing-assumption, the above-mentioned contro- and, therefore, have a positive net price. The net versy surrounding the choice of a discount rate and price method could also be applied in the cases of the question of availability of appropriate invest- wild biota and water as long as these natural assets ments of the user-cost allowance (for maintaining are considered as economically exploitable assets. the capital base of production) also impair the gen- This valuation method for estimating stock eral validity of this approach. In addition, this values can, of course, also be applied for valuing approach does not address the role (availability volume changes of natural assets in the account- and consumption) of natural capital in particular ing period. In the case of depletion of natural production processes, that is, their sustainability. If, assets such as wild biota, subsoil assets, or water, on the other hand, the maintenance of income flows the net price method calculates the value of (irrespective of their domestic or foreign origins) is depletion by multiplying the depleted quantities envisaged, the user-cost allowance might gain rel- of the natural assets with the net price. evance in estimating a (more) sustainable national The general validity of the Hotelling rent income figure. assumptions, underlying the net-price method, has been questioned. Where a natural resource 2. Measurement and valuation in natural resource reflects different qualities, marginal exploitation accounts. Different concepts, definitions, data costs increase with lower-quality resources sources, and estimations have to be used for mea- extracted, and the rents on marginal tons would suring physical quantities of natural resource increase at a rate lower than the interest rate.'4 As stocks and changes therein and for applying a consequence, the Hotelling rent would overstate monetary values to these quantities. For the most natural resource depreciation. This effect is com- commonly applied net-price method, the follow- pounded if average costs are used instead of mar- ing steps are required: ginal costs, assuming that, in general, marginal a. Establishment of the physical asset account, costs exceed average costs. The net-price method which, according to the SEEA (Integrated can thus be considered an "upper limit on eco- Accounting, table 3.6), can be described in simpli- nomic depreciation," an assumption that has been fied terms as: confirmed at least by one empirical comparison of (1) Opening stocks the present values of oil and gas reserves (in (2) Depletion Canada) with their net-priced values.'5 (3) Degradation of land c. User-cost allowance. For the depletion of (4) Discharge (and treatment) of residuals exhaustible resources a "user-cost" valuation has (5) Other volume changes been proposed as an alternative. The idea is to (6) Closing stocks. convert a time-bound stream of (net) revenues Physical accounts are fully elaborated as a from the sales of an exhaustible natural resource separate version (III) of the SEEA in the Integrated into a permanent income stream by investing a Accounting. They represent an important data part of the revenues, that is, the "user-cost base, either for the direct management of partic- allowance," over the lifetime of the resource; only ular natural assets, or as data input into physical the remaining amount of the revenues should be models of environment-economy interaction (for considered "true income."16 Given a particular example, input-output analysis). In principle, net revenue for an accounting period, the calcu- general equilibrium models can expand such lation of the user-cost allowance is straightfor- modeling into the analysis of price formation and ward, requiring only two additional parameters, consequently the estimation of monetary aggre- the discount rate (r) and the lifespan (n) of the gates. An example of such expansion of physical resource (see box 7). resource accounts into macroeconomic and gen- It can be shown that the user-cost method is a eral equilibrium modelling is the Norwegian special case of defining depreciation as the change approach to environmental accounting.'8 Of 172 Appendix I course, the usefulness of such modelling depends c. Valuation of items (1), (2), and (5) of the asset to a great extent on the validity of the underlying account (Step (a.) above) by multiplying them assumptions about production, consumption, with the net price of (b)(3). The valuation of items and investment functions and the existence of (3) and (4) is carried out (in market values) by overall general equilibrium in the real-world direct observation of (changes in) market values; markets. in other words, quality changes in natural b. Determination of the net price of the resources are usually neglected by the net-price resource, consisting of the following steps: method unless they affect the productivity of pro- (1) Determining the market price of differ- duction processes. ent resource categories d. Determination of the value of the closing (2) Assessing the total factor cost, including stocks by applying the net price at the end of the a normal return to capital, of producing accounting period to the remaining resource one unit of those resource categories stock (item (6) of Step a). (3) Calculating the net price as the difference e. Estimation of a revaluation item as the between (1) and (2). remaining difference between opening stock plus Table 1. Measurement and valuation in natural resource accounts Forests Minerals/oils Soil Fish A. Physical accounts 1. Opening stocks Standing volume of timber, Froven reserves Estimated biomass trees > I Ocm (20 cm),, for selected species thereof; actually commercialized 2. Mditons Growth, reforestation, Discoveres, upward revisions (part of other volume plantation' changes in SEEA) 3. Reductions Harvesting, deforestation Depletion Soil loss and productivity Estimated sustainable (depletion and part (forest conversionb), decrease due to soil yield and actual catch of other volume changes logging damage (waste'), erosion, volume of soil of selected species in the SEEA) fire damage, stand mortality' erosion in fertilizer terms (kg of fertilizer per kg of nutrient lost) 4. Net change (net Net change Net change capital accumulation in the SEEA) 5. Closing stocks See opening stocks B. Unit value Stumpage value of standing Net prce/rent (average wellhead Per-ha cost of revenue lost timber (FOB export pnces phced/FOB export price minus from 1% of productivity loss, minus production and production and capital costs), per-ha cost of replacing lost capital costs) replacement costs (exploration nutrents with commercial and development cost) per unit fertilizer exploitedd C. Monetary accounts Net price/rent valuation Present value of future net cash flows Capitalized value Depreciabon of fishery of all of the above, from produdion for stocks only,d of net revenue lost assets as annual user-cost valuation reserves at replacement cost value,d from soil loss, change in the for deplebon only' net-price valuabon for all of the above, nutrent replacement capitalized (sustainable user-cost valuation of depleton only,' cost of soil loss rents) value of assets a. Papua New Guinea: Peter Bartelmus, Ernst Lutz, and S. Schweinfest, integrated Environmental and Economic Accounting: A Case Study for Papua New Guinea.' Environment Working Paper no. 54 (Environment Department, World Bank, Washington, D.C., 1992). b. Philippines: Department of Environment and Natural Resources (DENR), Republic of the Philippines, and United States Agency for International Development (USAJD), "The Philippine Natural Resources Accounting Project, Executive Summary" (Manila: International Resources Group, Ltd., 1 991). c. Mexico: Jan van Tongeren and others. 'Integrated Environmental and Economic Accounting: A Case Study for Mexico.' Environment Working Paper no. 50 (Environment Department, World Bank, Washington, D.C., 1991). d. Canada: A. Bom, Development of Natural Resource Accounts: Physical and Monetary Accounts for Crude Oil and Natural Gas Reserves in Alberta, Canada. Stabstics Canada, 1992. Source: Robert C. Repetto and others, Wasting Assets, Natural Resources in the Nabonal income Accounts (Washington: World Resources Institute, 1989); and/or R. Sol6rzano and others, Accounts Overdue: Natural Resources Depreciabon in Costa Rica (San Jose, Costa Rica: Tropical Science Center and Washington, D.C.: World Resources Insbtute. 1 991 ) unless otherwise indicated in footnotes. Environmental Accounting: An Operational Perspective 173 volume changes and closing stock (neglecting net price in this year reflects the pessimistic expec- measurement and other errors) in monetary tations about the profitability of the mine(s). terms. Table 3 compares the calculations of user costs This generic approach will vary for the mea- with those of the net-price-based depreciation surement and valuation of different types of nat- (see box 7) of mineral resources. The user cost is ural resources. Table 1 gives a synoptic view of considerably lower (ranging between 12 percent some of those approaches actually applied in case and 46 percent of the depreciation allowance). studies. This is not surprising considering that the user-cost method would split up the net return 3. A case study: subsoil assets in Papua New from sales (equalling the depreciation amount Guinea (PNG). Concrete problems encountered in without appreciation) into a true-income and a applying the net-price method in a country with user-cost element. Table 3 also illustrates differ- very limited statistics regarding its natural ences in the relative importance (with regard to resource base are described in box 8. The value added generated) attached to depletion in box illustrates some of the initial difficulties and the mining sector by the two valuation methods. provisional solutions that might be typical for The above consideration of the net-price values establishing natural resource accounts in less as upper limits should be borne in mind when developed countries. Those resource-dependent comparing these figures. countries are indeed the ones that most urgently need a rational assessment of natural resource B. Maintenance Valuation of Environmental Assets stocks and their exploitation for production and consumption purposes. The market-value approach covers only those nat- Table 2 presents an example of accounting for ural assets that have an economic value (in the subsoil assets of copper, gold, and silver mines in SNA sense), in other words, that are connected PNG. For the years 1986-88, discoveries, included with actual or potential market transactions. It under other volume changes, contributed to an does not include environmental assets, such as air, increase in the value of the mineral stock. The ces- wild land, waters, and species. Nor can it account sation of activities in the Bougainville mine in 1989 for all environmental functions of "economic" led to a negative adjustment of the extractable (and assets if those functions have not been reflected extracted) mineral assets. A slump in mineral in the economic (market) valuation of natural prices resulted in negative net prices in the same assets. To obtain a more comprehensive picture of year. Under the above-discussed assumptions, the the changes in the value of the environment, a Box 8. The use of net prices for the valuation of subsoil assets of Papua New Guinea Data available from quarterly reports of the Department of Minerals and Energy included reserves (t, kg), pro- duction (t, kg), unit values (Kina) and estimated lifetimes of the reserves by mine and mineral. In the absence of cost data per unit of mineral extracted, a net price could not be calculated for each mineral and the net value of total annual mine production (deducting also an estimate for a normal return to capital) had to be used instead as the indicator of depletion (cf. table 1). Even those values, based on detailed cost-structure information of the mines were difficult to obtain, and in some cases "net values per unit of ore" had to be extrapolated for years for which no cost information was available. Published or otherwise revealed or estimated information on "net earnings before taxation" thus can generally be expected to be fraught with assumptions and uncertainties. In the next step, opening stocks in monetary terms were calculated by multiplying net revenue with lifetime estimates of the mines. Those estimates were based on assumptions about production patterns and future earn- ings by the mining companies themselves. Clearly those estimates are quite ambiguous and should be revised by using net prices for different minerals and estimates of proven reserves rather than "hiding" behind opaque life- time estimations. Source: Peter Bartelmus, Ernst Lutz, and S. Schweinfest, "Integrated Environmental and Economic Accounting: A Case Study for Papua New Guinea." Environment Working Paper no. 54 (Environment Department, World Bank, Washington, D.C., 1992) and unpublished material. 174 Appendix I Table 2. Accounts for subsoil assets in Papua New Guinea (million Kino) 1986 1987 /988 1989 1990 Opening stocks 1,750.0 2,648.7 3,683.7 1,584.4 -154.7 Deplebon -126.8 -209.7 -106.3 -25.2 -180.7 Other volume changes 9.0 122.8 175.6 -383.3 0.0 Revaluation 1,016.5 1,121.9 -2.168.6 -1,330.6 N.A. Closing stocks 2,648.7 3,683.7 1,584.4 - 154.7a N.A. Note: The data presented reflect vanous assumptions and do not consider the intermediate stages from initial prospecting until the reserves are "proven." If all the leases for minerals prospecting and developing were auctioned off yeary, the incremental values would reflect additions to the capital stock. a. The negative value is not considered an accurate representation of the value of mineral reserves in PNG by the technical specialists working on the country, illustrating the difficulties in producing quantitative estimates of expected (future) retums from mines operating under uncertain political conditions. Source: Peter Bartelmus, Emst Lutz, and S. Schweinfest, "Integrated Environmental and Economic Accounting: A Case Study for Papua New Guinea." Environment Working Paper no. 54 (Environment Department. World Bank, Washington, D.C., 1992). 14. Table 3. Comparison of user cost and depreciation of mineral resources in Papua New Guinea (mi/lion l i S 2 i'; w t 0 > 1 ; 5 L 7 g<. x b2_w ' . .: .,.> , ,. .__