India Environment Portal Knowledge for change

Figuring out natural costs

• 29/06/1992
• UNEP

ECONOMICS is going green. According to a growing band of experts, now labelled "green economists", sustainable development can only be achieved if economic theory can be utilised to determine sustainable natural resource use patterns.

Oscar Wilde once alleged that while economists may know the price of everything, they know the value of nothing. Environmental economists seem set on rectifying this image. They have built their theory on giving value to what was earlier regarded as valueless and have convincingly argued against treating nature as the provider of a perpetual free lunch.

Their efforts have had some impressive results. International bodies like the Organisation for Economic Cooperation and Development (OECD), the United Nations Environment Programme (UNEP) and the World Bank (WB) have come to accept these concepts. A number of countries have set up systems of "natural resource accounting" and, in 1993, the UN System of National Accounts (SNA), which is used to calculate a country's GNP, is going to be modified within this new framework under the auspices of the UN Statistical Office (UNSO).

"The only way to get the environment on to the economic agenda is to demonstrate that the environment matters to the economy," says David Pearce, director of the London Environmental Economics Centre (LEEC) and perhaps the most effective advocate of green economics. He urges economists to work towards this. "Then," he confidently predicts, "the rest, including a more rational appreciation of environmental functions and values, will follow."

But is this faith misplaced? Recent assessments indicate that building the necessary "political will" to implement the theories of environmental economics will be an uphill struggle and that, particularly in the developing world, fundamental issues of inequality and vested interests have to be addressed before "the rest" can indeed follow.

The economist defines "income" as the maximum that you can consume without eventually impoverishing yourself. Green economists argue that the notion of sustainability is so fundamental to the concept of income that "the term 'sustainable income' ought therefore to be considered a redundancy".

Yet conventional national accounts have, it seems, made serious departures from sound economics and common sense. The system of national accounts has itself contributed to the sorry state of the world's environment because it has undervalued nature's contribution to our welfare. Part of the problem is that there is no recognised "market" in which environmental goods and services are bought and sold. They have, therefore, always been undervalued or ignored.

Thus, under the System of National Accounts (SNA), the convention to which all nations adhere, GNP is measured without putting any value on natural resources. Neither do they take into account the depletion of natural resources. To make matters worse, the money spent on cleaning up pollution is shown as actually increasing the GNP, thus giving the impression of growth and prosperity.

Green economists, therefore, argue that conventional accounting is particularly unreliable either as an indicator of the health of the nation or as a guide to informing policy choices. They set out to focus on these defects in the accounting system and explore ways in which the impact of resource degradation can be measured by formulating natural resource accounts. But what is perhaps the most crucial task they set for themselves is to design methodologies of cost-benefit analysis which can enable policy-makers to make better choices. For example, if deforestation results in dung being diverted for use as fuel rather than fertiliser for agriculture lands, it means that long-term sustainability is being sacrificed for short-term needs.Green economists have paid a lot of attention to the issue of "physical" versus "monetary" accounting of natural resources. The debate is whether accounting should be directed towards preparing sets of "physical" accounts, showing a balance sheet of the "stocks" of natural assets and accounts of the "flows" of materials and natural resources through the economic process; or whether, on the other hand, environmental assets and services should be "monetised" in order to integrate environmental values fully into the national accounts to produce a measure of "sustainable net national product".

Resource accounting in the North Natural resource accounts based on the "physical" rather than the "monetised" model were pioneered in Norway and have also been developed in France and, more recently, in Canada. By contrast, a "monetary" approach has been taken in USA and Japan, focussing on the effect of environmental policies on economic performance and welfare.

While both the French and Norwegian systems have been the subject of much scrutiny and have been held up as models for the developing world, a recent reassessment of the Norwegian experience by Birger Solberg of the Agricultural University of Norway suggests that the operation has not been without its own political problems and that there are many potential problems involved in trying to instal similar systems in the developing world (See box: Finding the political will).

One of the first and perhaps most frequently quoted demonstrations of placing an appropriate value on natural resources is the work of Robert Repetto and others of the Washington-based World Resources Institute (WRI) in Indonesia. The WRI team tried to take into the national account the depreciation of oil, timber and topsoil resources. In doing so, they found that the official annual growth rate of 7 per cent between 1971 and 1984 would have to be reduced to 4 per cent.

More recently, the WRI has undertaken a broadly similar approach in Costa Rica, showing that if proper account were taken of the depreciation of forests, soils and fisheries resulting from economic activity over two decades (1970-1989), the measure of the country's economic growth would be about three-quarters of the 4.6 per cent per annum average.

In Thailand, a recent study by the World Conservation Union (IUCN) took a different approach. It set out to investigate how economic incentives could be used to support the conservation of biodiversity in the context of a booming economy, powerfully linked to overseas markets, tourism and capital. The project involved Thai economists and natural resource scientists and covered a range of sectors, including fisheries, mangroves, forests, nature tourism and wildlife. Economic incentives were defined for each sector along with submissions for policy changes.

The studies were taken seriously enough to be discussed with the Prime Minister and other ministers and officials and incorporated into the planning process for the country's Seventh Five-Year Plan.

Another approach has been to study particular habitats, such as tropical rainforests or wetlands, and to formulate methodologies which could be applied wherever that particular ecosystem is found. For example, Brazil, Indonesia and Zaire are all suffering from a rapid loss of tropical forest cover. A study by Edward Barbier and his colleagues at the LEEC shows that the pattern of deforestation in the Brazilian Amazon has been the direct result of a deliberate development strategy aimed at the expansion of corporate forestry, agricultural and mining interests, regardless of their environmental consequences. The study found that this strategy had ignored the "non-market" values of forests and had severely distorted the true economic returns of so-called development projects.

Economic botanist Charles Peters and his colleagues, Alwyn Gentry and Robert Mendelsohn, have evolved a different approach in evaluating the Amazonian rainforest. The team deliberately shifted the emphasis of financial appraisal away from timber to the exploitation of the economic potential of minor forest produce like fruits and latex. The study discovered that, compared to the financial revenue derived from logging and clearing activities, the returns from sustainable exploitation of other products could be as much as two or three times higher.

How will it help the South?
Going by all available data, it appears that there is a wide disparity between the manner in which Third World economies value their natural resource base today and the way those resources would be priced and managed if sustainability were central to economic planning.

Green economists argue that the South must incorporate the new approaches to national accounting, project appraisal, and the use of economic instruments to control pollution that are being developed and applied in the North.

Acknowledging the diversity of environmental, political and social conditions in the South, Jacques Theys of the French ministry of environment has put together a number of "common features" that green economists will have to reckon with.

First, Theys argues, the importance of the traditional "non-market" sector, dominated by non-remunerated activities, including self-production, self-consumption and barter, will have to be recognised. He also urges economists to be very sceptical of traditional statistical assessment methods based on averages when dealing with societies with extreme disparities in incomes and consumption patterns. These inequalities, he argues, result from, or are exacerbated by, the superimposition of a "modern" economic system which ties the international trade and capital markets to the traditional, "non-market" system in which the vast majority continue to live.

It's also important to bear in mind the fact that many developing countries are highly dependent on trade with the outside world, often on terms set by international markets over which they have little or no influence. The importance of exports and the low priority given to sectors producing for the domestic markets reduces the effectiveness of national mechanisms for regulating resource supply.

Finally, Theys cautions that the sort of "environmental problems" afflicting the South are different from those of the North, and on which much of the theory and methodologies of environmental economics in the North have been developed. While pollution control and conservation of the natural environment for recreational or aesthetic reasons have been the focus in the more affluent nations, the problem that the poorer countries face is the disappearance of the resource base on which the very survival of millions of people depends. The lacunae
In many developing countries, there is a chronic shortage of reliable data and of personnel with the skills needed to implement environmental accounting. Investing in these areas may not be high priorities for cash-strapped governments. Henry Peskin, of the Washington-based Resources for the Future, has predicted that the feasibility of environmental accounting in many developing countries may depend on their ability to use data that was originally compiled for other purposes.

Peskin and others have also pointed out that the methodologies devised in the North may well be quite unsuitable for developing countries. For example, to assess values by reference to an individual's "willingness to pay" for a better environment seem pretty irrelevant outside the consumer-oriented societies of the North. These techniques work quite well in USA, for instance. One study has shown that North Americans would be prepared to pay $4.43 per month for improving the view of the Grand Canyon.

But to assume that the subsistence farmer in Africa can work out his or her "preferences" in the same way is absurd. Yet no one seems to have come up with an alternative.

Kirit Parikh, of the Indira Gandhi Institute of Development Research in Bombay, has argued forcefully for southern countries developing their own methodologies, rather than waiting for developed countries to impose theirs upon them. "Valuation of village commons is one such extremely important issue for us, which would need methods developed by us," he says.

Parikh also feels that the models worked out in the developed countries are inadequate in that they fail to address the issues of equity and poverty. According to him, since environmental degradation affects the poor particularly severely, in estimating the loss in value, distributional effects have to be taken into account.

All environmental programmes reflect a conflict of interests. A problem like land degradation might be given low political priority because the people affected have little political influence.

Suppression of information, promotion of overzealous and misleading "facts" (See box: The price of a tree) and denial of freedom to publicise and criticise failings in government policy all contribute to the continued mismanagement of environmental resources.

However, the governments of the Third World cannot take all the blame. There are the international capital markets to be considered. They operate in ways that militate against sustainability. The high levels of accumulated foreign debt, the scarcity of new flows of foreign capital and the depressed prices in the world's commodity markets have combined to accelerate the exploitation of natural resources in the scramble for hard currency. The competition among developing countries to attract foreign capital through multinational investment at any cost means that the environment has been relegated to second place, as India's own recent liberalisation moves bear out.

In balance, there has been a great deal of hard and significant work in the field of environmental economics. While the hard-core "deep ecologists" may still argue that reducing nature to dollars and cents is not just distasteful but downright unethical, green economists have made a convincing case for bringing the environment into national policy-making. But there is a limit to how far their formulae and equations can take the world onto the path of sustainability.

Delivering sustainability, they are learning, is not just a question of data collection and discount rates. It involves facing up to the harsh realities of inequality, vested interests, standards of public administration, and the inherent biases of the international markets. But there is no doubt that the discipline of green economics is bound to grow.