Source: World Bank, World Development Report 1992, p. 4.

The World Bank's view is that developing countries should give highest priority to those problems that directly affect large numbers of people. For most, but not all, developing countries, these comprise the first four in the table above.

The Basic Issues of Development and the Environment

1. The Definition of Sustainable Development.

The term "sustainable development" was brought into common use by the World Commission on Environment and Development (the Brundtland Commission) in its 1987 report, Our Common Future. The Brundtland Commission defined "sustainable development" as "meeting the needs of the present generation without compromising the needs of future generations." To economists, this generally requires that the overall stock of capital assets remains constant or rises over time. The overall stock of capital assets includes not only manufactured capital (plant and equipment) but natural resources or natural capital.

In principle, sustainable development should be incorporated into national income accounting. One suggestion for doing this follows.

A concept we already calculate is net national product (NNP):

NNP = GNP - DM , where DM = depreciation of manufactured capital

Since GNP = C + S (where S includes both private and government saving):

NNP = C + S - DM

If S > DM each year (saving for capital investment exceeds depreciation of the capital stock), then consumption, C < NNP. Since consumption is less than national product, that consumption is sustainable.

If S < DM each year, then C > NNP and therefore the level of consumption is not sustainable.

If we estimate the depreciation of the stock of natural capital/natural resources (DN) then it can be included in a calculation of sustainable NNP (NNP*):

NNP* = GNP - DM - DN = C + S - DM - DN

The interpretation is the same as above, only this time we have taken into account the depletion of society's natural resources in determining whether consumption is sustainable or not.

In practice, official estimates of national output do not include natural capital since the necessary data do not exist at present. Work continues and someday may yield such data. In the meantime, the UN and the World Bank encourage nations to keep resource and environmental account, even imperfect ones, to supplement their official national income accounts.

Some crude estimates of the above concepts follow [Handout to class]:

[Table from: Gillis, et al. The Economics of Development, 4th edition, p. 181.]

These estimates, which must be interpreted with caution, suggest that savings in Costa Rica and Brazil exceed depreciation of manufactured and natural capital, and therefore that consumption in the two countries is sustainable at current levels. Mexican savings, on the other hand, is less than depreciation, and thus Mexican consumption is not sustainable.

2. The Links between Population, Resources, and the Environment.

Rapidly growing third world populations are associated with land, water, and fuelwood shortages in rural areas and urban health crises stemming from lack of sanitation and clean water.

3. The Links between Poverty and the Environment.

Worldwide, the richest people and the poorest people wreak the most havoc on the environment. In the third world, poverty is a major (if not the major) factor in environmental degradation. High population growth and high fertility are often blamed for environmental destruction. However, it can be argued that it is poverty that leads to both environmental destruction and high population growth. The poor are often landless or have insecure tenure rights and lack access to institutional resources (credit and inputs). These realities prevent them from making resource investments that would help preserve the environment. Thus, dealing with poverty is essential to dealing with environmental degradation.

4. The Links between Economic Growth and the Environment.

Some people believe that increasing economic growth and environmental destruction go hand-in-hand. However, this is not inevitable, as the World Bank found when it correlated some simple indicators of environmental degradation with per capita income (World Bank, World Development Report 1992, p. 10).

Some problems decline as income increases. This is because increasing income provides the resources for public services such as water and sanitation. When individuals no longer have to worry about survival, they can devote resources to investment in conservation.

Some problems initially worsen but then improve as income increases. Most forms of air and water pollution fit into this category. However, the eventual improvement is not automatic; it usually results when policy ensures that resources are devoted to reduce environmental problems.

Some indicators of environmental stress worsen. Emissions of carbon and nitrogen oxides and of municipal wastes are examples. For these abatement is relatively expensive and the costs associated with the emissions are not perceived as high - possibly because they are borne by someone else (they are classic negative externalities).

Note that there is nothing automatic or natural about the correlation of these environmental indicators with income. How they move vis-a-vis each other depends on the particular circumstances of individual nations and human choice as reflected in institutions and government policy.

5. The Links between Rural Development and the Environment.

To meet the expanded food needs of rapidly growing third world populations, it is estimated that food production in developing countries will have to double by the year 2010. Because land is being heavily utilized by today's populations, meeting these output targets will require radical changes in the distribution, use, and quantity of resources available to the agricultural sector. These changes must include the introduction (or reintroduction) of sustainable methods of farming.

6. The Links between Urban Development and the Environment.

Rapid population growth accompanied by heavy rural-urban migration has led to unprecedented rates of urban population growth. Few governments are prepared to cope with the strain this places on existing urban water supplies and sanitation facilities. Congestion, vehicular and industrial emissions, and poorly ventilated household stoves also influence the tremendously high environmental costs of urban crowding. These costs include the lost productivity of ill or diseased workers, contamination of existing water supplies, destruction of infrastructure, and increased fuel expenses incurred by people having to boil unsafe water. These conditions are exacerbated by the fact that much urban housing is illegal as migrants squat on vacant land and construct rickety slum housing. This makes large portions of urban populations ineligible for government services, and the insecure tenure may discourage slum dwellers from making their own investments in sanitation.

7. The Link between the Environment and the Global Economy.

While the burgeoning environmental movement of the 1970's exhibited a marked concern for global environmental threats, the global focus expanded more in the 1980's. Increased evidence confirmed the internationalization of environmental issues. The major development was the recognition that many resources are shared, either directly in a physical sense or indirectly as a shared value. Shared physical resources include river systems that serve several countries (such as the Nile which serves Egypt, Ethiopia, and Sudan), the oceans beyond exclusive economic zones, and the carbon cycle. Shared value means that a resource may be located wholly within one country, but that its economic value benefits other countries as well. Indeed value to other countries may be greater than the value to the host country, as many argue in the cases of the tropical forest and many endangered species. Such problems require regional or global solutions. Controversy exists over exactly what sacrifices need to be made and which nations should make them.

The Economics of Environmental Degradation

Most mainstream economists believe that, within a single country, properly working (efficient) markets are the most effective mechanism available to promote efficient resource use, reduce environmental degradation, and generate sustainable development. However, this is true only if there are no market failures. One set of market failures are known as externalities - costs that are borne by the population at large but not by individual producer, or benefits that accrue to society but cannot be captured by producers. The most important externalities are those caused by the depletion or degradation of natural resources, including the environment. If resources are depleted at rates faster than they can be replenished or substituted by human-made capital, development will be unsustainable. The basic principles of environmental economics follow.

1. The Problem of the Commons.

[Describe the destruction of the village commons used for grazing animals in pre-industrial England].

Lesson: When access to a limited resource is open and free (i.e. additional people using the resource are not required to pay the additional costs they impose on all users of the resource), the resource will be destroyed. This applies to grazing on an open range in the US west or the African savannah, open access to timberlands in Brazil, Ghana, and Thailand, and open access to fishing grounds in the North Atlantic. Even traffic congestion in a city like Bangkok, Mexico City, or New York fits the description: each new vehicle causes worse traffic jams forcing all previous entrants to drive more slowly.

2. Externalities.

External costs and benefits are at the core of the common resource problem. A new producer creates higher costs for all previous entrants, or all producers impose external costs on the general population. Thus, more of the resource-depleting or polluting goods and services are produced and consumed than would be the case if participants took account of the external costs their own actions impose.

We can depict this graphically. Suppose that generating electricity using coal as fuel pollutes the air. This imposes external health costs on the general population. In the graph, the supply of electricity curve (S) reflects the private marginal costs (PMC) of generating electricity. Since generating electricity imposes external costs the social marginal costs (SMC) exceed private marginal costs. The external costs are the vertical distance between PMC and SMC. The curve labeled D represents the demand for electricity.

Price of electricity

[GRAPH DRAWN FROM GIILLIS, et. al.]

Quantity of electricity

Since electricity producers make decisions based on private costs only, they produce QM electricity with a corresponding amount of pollution generated. The market price of electricity is PM. This implies that more electricity and pollution are generated than are optimal for society. Taking into account the external costs of this activity, less electricity (Q*) should be produced. Electricity should also cost users more (P*).

3. Sustainable Harvests.

Most common resources are renewable: they can regenerate themselves given time. The village common or open rangeland reproduces grass each year. Fish breed new stocks and forests reseed themselves. Air and water cleanse themselves of pollutants through biological, chemical, or mechanical transfers. It is possible to exploit renewable resources sustainably if annual harvests do not exceed the annual growth rate of the resource.

For renewable resources, three questions arise:

a. What is the maximum sustainable harvest?

b. What is the economically optimal harvest?

c. What is the danger of overexploiting the resource to the point of irretrievable loss or extinction?

a. What is the maximum sustainable harvest? On the graph below, as the level of fishing effort (E) increases sustainable revenue (TR), which is equal to the number of fish caught times a constant price per unit, changes. Revenue at first rises as fishing increases because the amount of food increases relative to the number of fish who must feed. Sustainable revenue peaks at E2, the biologically determined maximum catch, and then begins to fall until the fish cannot reproduce fast enough to replace the catch. Ultimately extinction occurs at E3.

b. What is the economically optimal harvest? The optimal harvest occurs when net revenue or profit (TR-TC) is at its maximum or where MR = MC. Assuming total costs (TC) are linear, this occurs at E* in the graph, which is less than the maximum sustainable catch. Note that TC is assumed to include a normal profit so that whenever TR is greater than TC, the fishermen earn more than they could earn in alternative occupations or they earn a resource rent.

TR, TC

[Graph from Gillis, et. al.]

Effort (E)

c. What is the danger of overexploiting the resource to the point of irretrievable loss or extinction? The fishery model described above is another way to describe the common resource problem. If fishing effort expands beyond E2, the individual fishermen expending the additional effort impose costs on the other fishermen in the form of a reduced catch and therefore reduced revenues overall. If fishing is done by small independent operators who have open access to fishing waters, the level of effort will increase as long as extra effort yields net revenue (i.e. as long as TR exceeds TC). This occurs until effort has expanded up to E1 where TR just equals TC. There is overfishing relative to what is optimal for society (E*). However this catch is sustainable. The question is can profit-maximizing fishermen cause extinction? This could occur if the average cost of fishing was so low that the TC line intersected the TR curve along the dashed extinction line, as it does below. The rationale for assuming such low costs is that once a fisherman has acquired his boat, net, and other capital equipment the cost of fishing is essentially only the opportunity cost of his time.

TR, TC

[Graph from Gillis, et. al.]

Effort (E)

One might assume that once overfishing became apparent, fishermen in their own self-interest would reduce their effort (below E3). However, individual fishermen have no incentive to do so because the benefits of reduced effort accrue not to the individual but to the other fishermen. The exhaustion of fisheries in the North Atlantic, in the Humboldt Current off the coast of Peru, and in some lakes in Africa shows that this is more than just a theoretical possibility.

4. The Value of Time.

The optimal of fish to harvest is more complex than presented so far. In fact, the decision is how much fish to harvest each period. In such a multiple time period framework, the optimal amounts to harvest each period are the levels at which the discounted present values of marginal net revenue (MNR) each period (0...n) are the same:

MNR0 = MNR1 x (1/(1+r)) = MNR2 x (1/(1+r)2) = MNR3 x (1/(1+r)3) = ... = MNRn x (1/(1+r)n),

where r = the discount rate.

5. Criticisms of the Neoclassical Model.

The neoclassical model assumes that markets function properly, which means, among other things, that all market participants have perfect information and that producers maximize profits. These assumptions may not be valid in many developing countries where markets are often non-existent or do not work well. Nevertheless, markets are being established and even maturing in many such countries, so the neoclassical model is increasingly capable of offering useful insights into the environmental problems of developing countries.

Another criticism is that, while the neoclassical model shows how market failures lead to inefficient resource allocation and how these inefficiencies might be mitigated, such models do not provide insight into how market failures and their solutions influence equity.

Policy Solutions

1. Solutions that Follow Directly from the Neoclassical Model.

a. Taxes set to bring private marginal costs into line with social marginal costs in order to internalize the external costs [show graphically].

b. Marketable permits to pollute to minimize the costs of pollution control.

c. Direct government regulation, especially where taxation is not feasible.

d. Clearer definition and enforcement of property rights and resource ownership to encourage rural and urban owners of property to invest in environmentally friendly activities such as household sanitation and clean water.

2. Other Solutions.

a. Community involvement in environmentally friendly projects.

b. Programs to improve the economic alternatives of the poor so they can reduce environmentally destructive activities, especially in rural areas. These include provision of credit and access to irrigation and sustainable farming techniques.

c. Correcting government policy failures that have encouraged environmental degradation in the past. These include pricing resources below market price which encourages overuse. Also, governments should eliminate policies which encourage people to cut down rainforest, such as subsidies for farming in the rainforest and provision of logging rights for short periods (20 year leases when it takes at least 70 years for cut forest to regenerate).

CLASS 3

SLIDES FROM TRIP TO BRAZIL

CLASS 4

DISCUSSION OF CASE STUDY: INDUSTRIAL POLLUTION AND CUBATAO

Readings:

Baer, Werner. The Brazilian Economy, pp. 329-334, 350-352.

Page, Joseph A. The Brazilians, Ch. 11.

Method of Instruction: Discussion

The discussion will be allowed to move in any direction that the students wish to take it, within reason. However, the major goal will be to emphasize the following issues.

Why Cubatao Was Called "The Valley of Death."

Extent of pollution in Cubatao and its impact on health (negative externalities).

Main Causes of Industrial Pollution in Brazil in General and in Cubatao in Particular.

1. During the industrialization of the 1960's, the most rapidly growing sectors were those with the highest pollution potential: chemical-petrochemical, metal products, and transportation materials.

2. Many industries were concentrated in one area (like Cubatao) which in turn caused concentrated levels of pollution.

3. Until the 1980's, the growth of industry occurred behind protective barriers and with minimal government regulations (like environmental ones) that would be perceived as adverse to profits. This resulted in the incorporation of technologies that were not the most advanced and that were not environmentally friendly.

Solutions Put into Place and Extent of Success.

After a 1982 explosion followed by the burning of 7000 liters of gasoline killed more than 100 persons, the authorities acted. The Company of Technology for Basic Sanitation and Water Pollution (CETESB) of the state of Sao Paulo identified 230 sources of pollution and brought 206 under control. Industry spent $450 million on pollution abatement and the government levied $25 million of fines between 1983 and 1990. Licensing of new activities has been in place since the 1970's.

CLASS 5

DISCUSSION OF CASE STUDY: RAPID URBANIZATION AND THE ENVIRONMENT

Readings:

Baer, Werner. The Brazilian Economy, pp. 334-340.

"Latin America's Drift to the Cities." The Economist. (on Sao Paulo and Curitiba).

"Home Remedies Are Best." The Economist.

Method of Instruction: Discussion

The discussion will be allowed to move in any direction that the students wish to take it, within reason. However, the major goal will be to emphasize the following issues.

Types of Environmental Degradation in Urban Areas and Negative Externalities.

1. Air pollution (mostly due to autos).

2. Garbage.

3. Inadequate disposal of wastes leading to water pollution and associated diseases and health problems.

Main Causes.

Urban environmental degradation is mainly the result of Brazil's uneven development, i.e. the highly uneven distribution of income. Thus, air pollution and excess garbage are due mainly to the habits of the rich. Inadequate disposal of wastes is due to the concentration of the poor in inadequate areas, badly served by public services like water and sewage systems.

Solutions Put into Place and Extent of Success.

1. Programs to limit cars on certain days in, for example, Sao Paulo. Not that successful--people buy or borrow second cars to use on the days that their primary car is not allowed on the road.

2. State government project to clean water in Rio de Janeiro.

3. Cingapura Project to build adequate housing on the sites of favelas in Sao Paulo.

Curitiba.

This city stands out for having improved public services dramatically in the 1970's and 1980's. Programs include recycling programs for garbage ("Garbage which Is Not Garbage" and "Green Exchange"), environmental education programs for children, and the public transport system.

Why Curitiba is different from other Brazilian cities:

1. Curitiba is relatively wealthy.

2. Tremendous leadership: Jaime Lerner.

CLASS 6

DISCUSSION OF CASE STUDY: THE AMAZON AND DEFORESTATION

Readings:

Todaro, Michael P. Economic Development, pp. 355-358, 648-655.

Baer, Werner. The Brazilian Economy, pp. 344-349, 352-354.

Page, Joseph A. The Brazilians, Ch. 12.

"Trees and the Law." The Economist (February 7, 1998).

Method of Instruction: Discussion

The discussion will be allowed to move in any direction that the students wish to take it, within reason. However, the major goal will be to emphasize the following issues.

The Amazon and Deforestation

Negative Externalities Associated with Deforestation.

1. Deforestation results in regional climate change and increases the probability of flooding. This is because the forest regulates the water cycle, i.e. maintains a fairly homogeneous distribution of rainfall and a certain stability of river flows throughout the year.

2. Interrupts the nutrient cycle that takes place between the vegetable cover and the top soil. Once trees are cut, the soil is rapidly depleted of nutrients which reduces agricultural yields.

3. Exacerbates the "Greenhouse Effect."

4. Reduces biodiversity.

Who or What Has Destroyed the Rainforest?: " The Problem of the Commons" and Government Policy Failures.

1. Cattle ranchers responding to the stimulus of official incentives and subsidies.

2. Migrants from poorer regions in search of land.

3. Loggers interested in hardwood.

4. Mining enterprises .

5. Land speculators.

6. Hydroelectric projects.

Why did the Brazilian Government Strive to Develop the Amazon in the 1960's and 1970's?

1. Military objective: fear that foreigners would invade the Amazon.

2. Social pressures resulting from drought and poverty in the northeast of Brazil.

Government Policies and Programs which Have Encouraged Degradation of the Amazon:

1. Investment tax credits: Brazilian corporations could obtain up to a 50% tax credit against tax liabilities if they invested the savings in the Amazon. Many cattle ranches, which lay claim to large areas of forest, were started under this program, particularly in Para and northern Mato Grosso.

2. Subsidized credit for crops and livestock.

3. Infrastructure projects: the East-West trans-Amazonian highway and the North-South Cuiaba-Porto Velho highway opened up the area for migration.

4. Failure to enforce laws on the books. For example, a code which required all farmers to maintain 50% of their area with the original vegetation has been "on the books" since the late 1960's, but not enforced.

5. Inflation has increased land speculation in the Amazon. Purchasers of land often clear them for cattle ranches because the land requires less maintenance than it does for traditional farming.

What Can Be Done?

1. Increase the efficiency of rainforest use through sustainable forestry.

2. Develop markets for alternative rainforest products; for example, medicines.

3. Encourage debt-to-nature swaps.

4. Enforce existing laws: new law which makes environmental degradation a criminal offense, SIVAM.

5. Discuss the extent to which foreign nations, particularly developed countries, should contribute to the effort, since they share the benefits of rainforest preservation, which is a public good.

PRINT BIBLIOGRAPHY

Antle, John M., and Gregg Heidebrink. "Environment and Development: Theory and International Evidence." Economic Development and Cultural Change 43 (April 1995).

Baer, Werner. The Brazilian Economy, 4th edition (West Port, CT: Praeger Publishers, 1995).

Findley, Roger W. "Pollution Control in Brazil." Ecology Law Quarterly 15 (No. 1, 1988).

Gillis, Malcolm, Dwight W. Perkins, Michael Roemer, and Donald R. Snodgrass. Economics of Development, 4th edition (New York: W.W. Norton, 1996).

"Home Remedies Are Best." The Economist (April 17, 1993).

"Latin America's Drift to the Cities." The Economist (October 14, 1995).

Laurance, William F. "Fragments of the Forest." Natural History (July/August 1998).

Litvan, Daniel. "Dirt Poor: A Survey of Development and the Environment." The Economist (March 21, 1998).

Page, Joseph A. The Brazilians (Reading, MA: Addison-Wesley, 1993).

Pearce, David W. and Jeremy J. Warford. World Without End: Economics, Environment, and Sustainable Development (Oxford, England: Oxford University Press, 1993).

Schneider, Robert R. Government and the Economy on the Amazon Frontier. (Washington, DC: The World Bank, 1995).

Todaro, Michael P. Economic Development, 6th edition (Reading, MA: Addison-Wesley, 1996).

"Trees and the Law." The Economist (February 7, 1998).

World Bank, "World Bank Says World's Worst Slums Can Be Transformed." Press Release, June 3, 1996.

World Bank. World Development Report 1992: Development and the Environment. (New York: Oxford University Press, 1992).

INTERNET TEACHING RESOURES

In the Amazon (www.igc.org/intheamazon).

This web site is maintained by Jonathon Skov, an economics graduate student at the University of California at Berkeley, who is doing dissertation research in the state of Rodonia in Brazil. He writes in a non-technical way on the economics of many of the issues related to sustainable development in Brazil. For example, he has pieces on ecotourism and ranching in the Amazon.

FILMOGRAPHY

Challenges and Change: The World Bank Today.

This film was produced in the 1990's by the World Bank. While it promotes the World Bank's specific perspective on development, it nevertheless indicates that the Bank believes that the condition of the environment is very important for sustainable development. This film does a good job relating environmental concerns to overall development policy and showing how such concern influences the design of World Bank projects.

India: Environment and Industry (Films for the Humanities and Sciences)

A twenty-minute film about how limestone mining in the Dehra Dun Valley of India has led to pollution. The film attempts to assess whether developing countries like India can afford to protect the environment.

CASE STUDIES

Pew Case Studies in International Affairs

(Internet address: sfswww.georgetown.edu/sfs/programs/isd/files/cases/pew)

Golich, Vicki and Terry Forrest Young. Debt-for-Nature Swaps: Win-Win Solution or Environmental Imperialism? 1993.

This case provides a grounding in debt-for-nature swaps, which promise to alleviate, though not eliminate, the international debt burden and environmental pollution.

McCleary, Rachel M. Development Strategies in Conflict: Brazil and the Future of the Amazon. 1990.

This case brings to light how the policies of Brazilian Presidential Administrations, from Vargas (in the 1950's) to Sarney (in the late 1980's), have contributed to the destruction of the Amazon rainforest.

John F. Kennedy School of Government-Harvard University

Case Studies in Public Policy and Management

(Internet address: ksgwww.harvard.edu/cgi-bin/AT-CasewebAbstractssearch.cgi)

Gomez-Ibanez, Jose. The Paraguay-Parana Waterway.

This case explores how the program proposed in 1996 to allow year-round barge operations on the Paraguay-Parana river system was dramatically scaled back because it threatened to harm the environment of the Patanal wetlands.