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THE WORLDBANK Public Disclosure Authorized InternalDiscussion Paper

ASIA REGIONALSERIES

ReportNo. IDP97

Public Disclosure Authorized Sustainabilityas IntergenerationalEquity: The Challengeto EconomicThought and Practice Public Disclosure Authorized Richard B.Norgaard June 1991 Public Disclosure Authorized

The views presented tere e ffioseof the author, and thy shouldnot be interted as reflecting ose of the World 8ank. ASIA DIRON NGIONP SS

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IDP2 The LPborFore PWauicpe of Woman1 thdRepublc of Korea: Evoltdo andPolcy bsm C. OGootam May198S P. Iqbal

IDPIS TheRole of Exchae Rte Pdicy in Four Eat AdenCountries Saog-WooNam Ma 1988 D. Loilger (81388)

IDP28 TheSmall-Scale Bateapr CreditPrp (S.S.E.P.) Under the Secod and Thrd Calcut Urban D wvdopmtProject F. Kabhast March 1988 F. Kahncrt (81413) (CUD?PD andCUDP l) - AnAsxmen

IDP3.S Ir TaxPicy Mvice: Lessonsand UnresolvedI_ fromAda Eqxper H. Feidg June 1989 H. Floelig(81413)

IDP36 Direl Tam and Fisa Poliy Isse: An mUuratlonfor BEastAda A. Virmni Jun. 1989 H. FloisIg(81413)

IDP37 CommodityTaxation In Seleed Caouni In SotaEt and Bat Ada Z. Shlizi June1989 H. Fledsig(81413)

IDP38 TaxAnayis InDeveoping CountrySettgS R. Musgrave June1989 H. Flesdg(81413)

IDP39 Indoesia Etern Shods Policy Ress and Adjutmet Performace S. Abmod Jaw. 1989 Saq Ahmed(82467)

IDP42 An Analys of theNatre of W.T.Dk July 1989 R. Zaglu (80433) UnemplYMetIn SdiLa andK. Lang

IDP44 Awitg Poor RUal Arms Trough Grunwater Irigon F. KIhaht August1989 C. Chamberin(81409)

IDPS1 Educaton Dveopmet in Asia: A Comparvo StudyFocussing on Cost Je-Pag Tan Ocor 1989 Joe-PengTan (81408) and Fling suw AlainMinget

IDP52 Chiese form, bIflion naddho Allocain of Invetomuin a Soili Economy OklayYzl Ocober 1989 OktayYenal (81415)

IDP63 Pbic Pdicy to Prote n : TheEpOiee of theEast Asin NIC and Less_ for Thaild D. Dollar Mv 1990 D. Dolar (80518)

IDP6S A Study of tbe Poor in Sri Lak C. Roose June1990 Y. Huang (80434)

IDP68 Heal SectorFiaig in Asa C. GriMn Augut 1990 Joe-PangTan (81408)

Note: Eta copqsmy be obainedfrom the Asiainf otio ServiceConter. SUSTAINABILITYAS IINTERGENERATIONALEQUITY: THE CHALLENGETO ECONOMICTHOUGHT AND PRACTICE

Richard S. Norgaard

ABSTRACT RichardB. Norguardis Associate Professor,Energy and ResourcesProgram, University of Califomia (Berkeley,California 94720). He wrote this discussionpaper as a Visiting ResearchFellow in the Office of the Chief Economistof the Asia Regionin early 1991. RichardB. Howarth,an economist th the AppliedScience Division of the LawrenceBer- keley Laboratory,prepared the ff . presentedin Appendices2 and 3, wrote the text of Appendix3, and contributedgenerally as the coauthorof earlierarticles from which many of the points in this discussionpaper follow. The paper evolved in responseto the challengingreactions of numerousBank staff who attendedtwo seminarsbased on early drafts and of the attendeesof a Depanmentof Economicsseminar at the Universityof Californiaat Davisand at the workshopon sustainableagriculture sponsored by the Science Councilof Canadaand Canadian Agricultural Economics and Farm Management Society held in Winnipeg. SarmaJoyanthi produced the graphics. SUSTAINABILITYAS INTERGENERATIONALEQUITY: THE CHALLENGETO ECONOMICTHOUGHT AND PRACTICE

ABLEOF CONTENTS

Page

0. ExecutiveSummary 1. The Challengeto DevelopmentPolicy 5 2 The Challengeto EconomicThought 13 3. Sustainabilityas IntergenerationalEquity 16 4. ReframingEnvironmental, Forestry, and ResourceEconomics 20 5. The Discount Rate Controversy 28 6. IntergenerationalAsset Transfersand Capital Markets 33 7. The Transfer of Natural and Other Assets to Future Generations 38 8. Sustainabilityand CapitalTheory: Dilemmasof Asset Aggregation 41 9. The Challengeto EconomicPractice 44

Appendices Al. The Challengeof SustainingTropical Rainforests 52 A2. An IntergenerationalCompetitive Equilibrium Model of a Non-Renewable 56 ResourceEconomy A3. An IntergenerationalCompetitive Equilibrium Model of a RenewableResource 62 Economy A4. Monitoring and Distributive Mechanismsfor Tropical Rainforests 68 Bibliography 72 SUSTAIANAUTYAS INTERGENERATIONALEQUiTY: THECHAULENGE TO ECONOMICTHOUGHT AND PRACTICE

Richard D. Norgaard

'Our theories ... are rays of light, which illuminatea part of the target, leavingthe rest in darkness. ... It is obviousthat a theorywhich is to performthis function satis- factorily must be well chosen;otherwise it will illuminethe wrong things. Further, since it is a changingworld that we are studying,a theory which illuminesthe right things at one time may illuminethe wrong things at another.'

John R. Hicks (Wealthand Welfare:Collected Essays on EconomicTheory. 1981. pp. 232)

EXECUTIVESUMMARY

0.1. This paperpresumes the intemationaldiscourse on the sustainabilityof development is concernedwith a) the rights of future generationsto the servicesof naturaland produced assets and b) whether formal and informal institutions which affect the transfer of assets to future generationsare adequateto assurethe quality of life in the long-run. Sustainability is primarilyan issue of intergenerationalequity. The noneconomicdiscourse on sustainability is clearly about caring for the future.

0.2. Conversely,this papercontests the implicit premisesof economicsas now practiced. FiMat.in the face of the sustainabilitydebate, many academicand practicingeconomists still assumethat technologywill offset resourcedepletion and environmentaldegradation. Tech- nologicaloptimism may or may not be appropriate,but it is not inherentto economicreasoning. Second, existing theory on intertemporalresource allocation, oft cited to justify practice, tacitly assumesthat current generationshold all rights to asets and should efficiently exploit them. Ibi. there has been an Implicit assumptionthat the mechanismsaffecting the maintenanceand transfer of assetsto future generationsare both working optimallyand are unaffectedby current economicdecisions. The interplaybetween institutions and environmentalmanagement Is now well recognized,but analysesto date have only addressed marketdistortions and the Internalizationof externalities. While new technologieshave dramatically increasedpeople's ability to use resourcesand degradeecosystems, no analyses have been undertakenof the adequacy of Institutions for protecting the rights of future generations. This paperaddresses each of these working premisesof economics. Suiabityas Int o a Equity Page2

0.3. Differentintergeneratioial distributions of assetsare as5 ciated with differenteffici- ent allocationsof resources.This paper is informed by threeoverlapping generations models. Thefirst, availablein the academicliterature, is a partialequilibrium model which illustrates how alternatedistributions of rightsto a stockresources across generations affects the efficientallocation of resources.The second, presented in Appendix2, is a generalequilibrium modelwhich Illustrates a stockresource economy in whichconcem for the futue is achieved throughincome transfers to future generations.The third, presentedIn Appendix3, is a generalequilibrium model which illustrates a renewableresource economy in which concem for the future occursthrough the oldergeneration's utility from the utility of the younger generationas well as its own. Thesemodels demonstrate how resourceuse, consumption, and prices,including interest rates, change with differentlevels of concernfor the future.

0.4. Whileenvironmental, forestry, and resource economics are concemed with the longterm,this concemhas been rooted in the presumptionthat marketfailures prevent the maintenanceof resourcesfor future generations.Hence improvements in long-termallocation havebeen pursued in termsof internalizingenvironmental externalities. While environmental extemalitiesare no doubta problem,suboptimal allocations due to inappropriatedistribution betweengenerations cannot be solved solely by correctingextemalities. Indeed, intemalizing externalitieswithout protectingthe future can hastenresource exploitation.

0.5. Intertemporalgeneral equilibrium models incorporating overlapping generations and resourceconstraints demonstrate that the efficientallocation of resourcesis a functionof intergenerationaldistribution. Whilethis "finding"is theoreticallyelementary, it is at odds with the understandingsabout allocation and valuation developed through partial equilibrium modelingundertaken in environmental,forestry, and resource economics. A few economists are now admittingthat economiesmay not achievesustainability because sustainability is a matterof equityrather than efficiency.But to date,these economists advocate achieving equitythrough imposing environmental and resource constraints on economicefficiency conceivedin a partialequilibrium framework. The modelsinforming this discussionbetter illuminethe problemand provide new insightsby incorporatingequity into a generalequilibrium modeland observing how equity affects efficiency. While maintaining natural capital through constraintsmight protectthe future,thinking of the problemas oneof how this generation expressesits concemfor the next highlightsthe importanceof institutionsand social values affectingbequests and othermechanisms.

0.6. Manyeconomists, as well as environmentalists,have notedthat discountingthe benefitsreceived and costs bomeby future generationsin projectanalysis is contradictory with a concemfor sustainability.While lower discountrates give greaterweight to the future,using rates different than market rates, or what markea.rates would be without distor- tions, resultsin inefficientuse of capital. Oneof the insightsfrom framingsustainability in a generalequilibrium model is that with a transferto future generationsthe efficientallocation of resourcesresults in new levelsof savingsand investment,a shift in the types of in- Su irAlityas Inteeational Equity Page3 vestmens,and a differentrate of Interest.Thus the discountrate, father than beingan in- stUmentalvariable for protecing Xt future, variesas the future is protected.

0.7. A distinctionmust be madebetween investments to improvethe welfareof current generationsgiven their consumptiontime preferenceand socialdecisions to transfermore resourcesto future generations.The benefitsfrom changingfrom one level of protecting future generationsto anotherare not discounted.Cost-effectiveness criteria are usedto determinethe optimalinvestment package to meetintergenerational transfer goals to protect future generatkions.

0.8. Marketsthemselves do not providefor intergenerationalequity any morethan they providefor intragenerationalequity. "TrickleAhead is no moresuitable as an operating normfor developmentthan is OTrickleDown". ThereIs certainlygood reason to believethat historicasst transfermechanisms, to the extentthat they havenot beenbroken down by development,are not adequateunder modem technologies, current population levels, and globaleconomic interconnectedness. While adequate levels of assetshave been transferred from onegeneration to the next In manycultures over long time periods,very little is known aboutthe cultural moresand institutionalmechanisms which havefacilitated transfers. Modemcapital markets may fail to bothmaximize the welfareof the currentgeneration given its consumptiontime preferencesand meetthe currentgeneration's goals of transferring assetsto futuregenerations. Redistributive failure may occur because private redistribution has publicgood aspects. In addition,severs a;e probablyunable to determineor control whetherthey arereceiving a retumfrom investmentswhich will be transferredto futuregen- erationsor from investmentswhich are depleting the assetsthat mighthave been transferred to future generations.This impliesthat assetmonitoring and guidancemechanisms are nm ededto supplementcapital markets.

0.9. Thedetermination of the optimalintergenerational distribution of rightsto assetsis Impossiblewithout an intergenerationalwelfare function. The widespreadacceptance of sustainabilityas anobjective of development,however, indicates that sustainabilityitself can be treatedas a minimumcriterion of intergenerationalequity. Economicscan assistin the interpretationof what sustainabilityas a minimumcriterion means in practice,the extentto which it is beingmet, andthe viabilityof the institutionswhich assurethat it is beingmet. Economicreasoning and empirical methodologies can assistin analysesof historicand cur- rentlevels of assettransfer, in analysesof whetherthe quantitiesof assetstransferred meet minimalsustainability criteria, and analysesof changesin andthe currentviability of Insti- tutionsaffecting the formation,maintenance, and transfer of naturaland other assets. While thereis considerablescope for economicanalysis to informsocial decisions with respectto sustainebility,economists need to be careful that they do not fallaciouslycritique redistributionsto futuregenerations based on efficiencyarguments which implicitlyassume the currentgenertion has no responsibilitiesto the future. S13aq Page4

0.10. Economists'historic emphasis onefficiency, implicitlytaking thexisting distribution of asts asa given, haslimited their abIity to perceiveand respondto the challengeof sus- tainabliity. Thisemphasis logically evolved through economists' participation in progresive insttutionsestablishd, In part,to circumventthe irrational" politicsof distribution.Accept- ing the existingdistribution of incomealso justifies the useof data generatedby markets, therebygiving economic reasoning empirical grounding and scling. Economistscan partici- patemore ffectivelyin the diversesocial decisonmaking arenas in which intergenerational equitydecisions are beingmade if they use economicanalysis to complementother types of analysisrather than assume that economicreasoning is a sievethrough which other forms of reasoningmust pass.

0.11. Fromthe operationalperspective of developmentassistance agencies, addressing the sustainabilityof developmentwould further the shift away from projectanalysis toward countrylevel and policy analysis as well as towardincreased country dialogue. At the level of projectanalysis, emphasis would needto be givento how projectsaffect the formation, maintenance,and transfer of assetsto future generationsas wellas to efficiencyanalyses.

0.12. Pursuingsustainability as intergenerationalequity leads to quions with respectto whethercapital markets can facilitate both investments to meetthe currentgenerations consumptiontime preferenceand transfers to meetits concemfor futuregenerations. Such an explorationreinforces the concems expressed by theoristsinvestigating intertemporal general equilibriumand exhaustible resource allocation that stfficient actorsmust have a globalview for thingsto work out right. Sucha globalview mustincorporate knowledge from the na- turalsciences and information generally beyond that providedby marketsto avoidbeing my- opic. Intemationaldevelopment agencies as majoractors with excellentaccess to global informationrhould playa key role in the synthesisand useof sucha globalview.

0.13. Thepaper presents sociological explanations of how economicsevolved to helpiden- tify how it becamethe way It Is andto give perspectiveon how sustainabilitychallenges the discipline.The footnotes also provide considerable commentary and extensive reference to the socio-economicliterature outside of the technocraticprogresive or neoconservative stancesthat economiststypically take towardspolitics. SUSTAINABIUTYAS INTERGENERATIONALEQUITY: THECHALLENGE TO ECONOMICTHOUGHT AND PRACTICE

1. THECHALLENGE TODEVELOPMENT POLICY

1.1. In Westemand westemized societies, the primary promulgators of values, knowledge, andcollective action are separate institutions. And yet linkages between church, science. and thestate are necessary in spite of theprinciple of separation.How could govemmental agencies,unable to returnto theirgoveming bodies on everydecision, determine what abould be donewithout appealing to values,and, apart from science, ascertain how OM to do it? For questionsof economicdevelopment. such linkages were effectively made through the firsthalf of the 20thcentury by progressivetechnocrats - engineers, agricultural scientists, foresters, and,later, professional planners. The public sanctioned these professionals to act - to com- binepublicly-held values with scientific knowledge - on its behalf.This sanctioning was rooted in a commonvision of progressand a sharedfaith in howWestern science and technology couldaccelerate development,u

1.2. Ectnomists,with their more encompassing definition of efficiencyand explicit belief In positivism,helped fill the voidafter World War II. Economistsrapidly asumed positions in themachinery of govemmentindemocratic and authortarian, and capitalist and socialist states alike.During this sameperiod, economists' progressive optimism for the possibilities of material plentyfor all the peopleof the worldalso carried them, naivelyfor sure, to the head of the globalpursuit for economicdevelopmentXA A repertoire of practicaleconomic experience and understandingas well as argumentsdeveloped to justifypractice rapidly accumulated. The intemationaldiscourse on the sustainabilityof developmentchallenges these understandings andbeliefs accumulated since World War II.

1.3. Thestyle of intemationaleconomic development that actually unfolded was a product of a myriadof differentfactors in differentplaces, but economists assumed the burden of try-

1. I use the term progressive technocrat" in the sense formalized by the thinking of Auguste Comte (A general View of PostLvism, 1848) and as implmented in Western countriesbeginning with the progressive era at the last turn of the century. The term incorporatesthe general belief that much of the subjective, folly of politics can be avoided by the use of technical experts who provide "ob- jectivem knowledge with respect to what can be done and then implement legislative decisions effectLvely, rationally following established rules or scientific laws. Por an Lnterprotation of the evolution of progressive thlnking in economic. as a material, earth-bound, extenaLon of Judeo-Christian progressive be- lefo, see Robert B. Nlelson (Reaching for Heaven on arth"he Theloalcal ealnineof Nga9nmiau,1991). 2. ?or reflections on the rise of economists ln governmentsthroughout the world includig in internationaldevelopmnt agencies,see JosephA. Pechman(Gd) (Th Role of Iconam.istLA 2Goermnt An XntSernAIOGa Peranective,1989). Sustnabiity as Integneational Equity Page6

Ingto guide,explain, and rationalize the developmentprocess. Their representations were soon challenged,however, by others,typically with naturalscience training, who interpretedthe developmentprocess quite differently. In the late 1960s and early 19709, scientistsconcerned with populationgvowthk and resourcescarcity4' argued that the numberof peoplecould not keep doublingand that the courseof development,for rich and poor nations alike, had to becomemore resourceconserving. While these Interpretationsincorporated technological ch3nge.they did not optimisticallyassume that endogenouslygenerated technological change would automaticallybe sufficientto resolvewhatever problem might arise. As the decadeof the 1970s progressed,problems in environmentalmanagement were beginningto becomeob- vious to more and more people. Technologiesinitiated for developingnations conflictedwith understandingsrecently acquired in the industrializednations. Greenrevolution technologies, for example,with their greaterneed for fertilizersand pesticides,were beingadopted in developing countriesat the sametime as concernsover energyscarcity and the miste of toxics In developednations were rising. Newtechnologies finally seemedto be propellingthird world developmentabout whenpeople in the industrializedNorth realizedthat new technologiescan be expectedto have unforeseeable,undesirable consequences. And the unforeseenand un- desiredwhich appearedin the South seemedespecially so.

1.4. In other cases,development seemed to be propelledalong an environmentallyand cul- turally destructivecourse due to a multitudeof interactivecauses within and betweenpoor and rich nations. The causesof deforestationin the tropics, for example,have been both very complexand specificto differentlocations and time periods. Eventhough instigated by a con- fluence of different interactive causes in different places, the rise in deforestationrates matcheda growingpublic awarenessIn industrializednations of the Importanceof biodiversity. Similarly,the rise In conflicts with tribal peoplescoincided with a risinginterest in the cultural survivalof the few traditionalpeoples still on the globe.

1.5. It is importantto keep in mind that both the dominantvision of what development couldbe, commonlyattributed to economists,and the stanceof its critics, customarilythought of as environmentalists,are broadlybased and rather amorphous.The historic roots of each intertwine with Westemtraditions, religion, philosophy, and science,and with the experience of developednations. Recently,each has alsoacquired new roots springingfrom the traditions and experienceof the culturesand environmentsof developingnations. Neithereconomic nor environmentalreasoning starts with axiomsengraved in stone. Most peopleeclectically ascribe to a mix of both pattems of thinking and perceiveboth economicgains and environmental losses. And yet, as the debateover the courseof developmenttook public form duringthe 1980s, one couldrightfully interpret'economism' and 'environmentalism as separate,incon-

3. Paul R. Zhrllch (lhe Pooulation Bomb,1968) and Paul R. Shrlich and Anne thrlich b=22 lationRDlosLon, 1990).

4. Donolla . Meadows,at a. (The t h ,m 1972). Susainabilityas IntergenerationiEquity Page7 gruoussecular religions.IL While they are mostnoted for their differenceswith respectto values,it is alsoimportant to bearin mindthat eachis backedby differentcombinations of Westemscience and understanding,different interpretations of the prospectsfor and consequencesof new technologies,and different judgments as to the appropriatenessof alternative responsesto uncertainty.

1.6. Duringthe 1980s, there was a positivefeedback between how development unfolded, the rise of new understandings,the shift in publicviews toward environmentalism, and in- creasedacceptance and demand for moreparticipatory apptoaches to developmentplanning 1 Thesemutually reinforcing phenomena provided the politicalbase for environmentalactivists to challengethe most visible development institutions and most unsustainable development projects. TheWorld Bank assumed the bruntof the attackfor its participationin the Polonoreste Projectlocated in Brazil'sregion of the Amazontropical rainforest in the Stateof Rondonias Duringthe clashesof the 1980s, both economists and environmentalists pursued parts of their strategysuccessfully. Economists effectively pressed the casefor freemarkets to increaseeffi- ciencyand enhance the abilityof developingcountries to meettheir debt obligations. At the sametime, environmentalists successfully convinced national govemments to establishbiologi- cal reservesto protectkey species,areas of unusualbiodiversity, and uniqueecosystems. Withoutresolving primary conflicts, development activities assumed a bimodalnature - part conventionaldevelopment, pan biologicalconservation.

1.7 Duringthe 1980s, however, many environmentalists began to acknowledgethat hun- gry peoplecould neither live by norleave biosphere reserves alone. With this realization,some environmentalistsbegan to acceptthe challengesof designingand implementing alternative developmentstrategies.E Simultaneously, many in the internationaldevelopment community

5. WilfredBeckerman (Iconomists, Scientists, and EnvironmentalCatastro- phe, 1972)and DanielS. Luten (EcologicalOptimism in the SocialSciences, 1980) explore the dichotomous positions from the perspective of social and naturalsci- entists respectively. 6. The trend from a progressive to participatory approach in politics and administration parallels the trend in science from the belief that the sciences would progressively merge into one correct way of undorstanding an objective, static reality to the understandingthat knowing is a human activity with multiplelogical patterns of thinkingabout the complexitiesof a world we have shapedand are continuingto shape. The importanceof this epistemologicalshift to economLcsis elaboratedby RobertR. Nelson (op cit, chapter 7) and by Richard D. Norgaard (The Case for MethodologicalPluralism, 1989). 7. stephonSchwartzman (Bankrolling Disasters: international Development Banks and the Global Environment,1986). 8. This transitionmight best be demarcatedby the decisionof the Xnterna- tionalUnion for the conservationof Natureand NaturalResources (XUCN) to design and implementconservation strategies ln cooperationwith nationalgovernments (lUCK, World conservation stratga LivinaRsource C2nservaion for Sua- tainablef gMloamt,1980). The IUcN effort soon encounteredthe difficult questLonsof equitywhich they addressedin a major internationalconference on (continued...) Sustnablity as InerenerationalEquity Page8

beganto openlyacknowledge the environmentalconsequences of conventionaldevelopment. Yeta thirdfactor contributed to the changingdynamic. Development planning and implementation continuedto graduallyshift in two apparentlycontradictory directions. At the projectlevel, it clearlymoved away from progressivetechnocratic toward more participatory approaches. The internationaldevelopment agencies began to workdirectly with nongovernmentalorganizations andto encouragethe governmentsof developingcountries to usethem both for advice andproject implementation.&L At the sametime, the emphasisof developmentagencies shift- ed away from projectstoward institution building, policy dialogue at the highestlevels of government,and economic restructuring to meetlending criteria. The combinationof these factorsdiffused much of the debatebetween the two secularreligions, transforming the conflict intoa prolongeddiscourse on the meaningof andpossibilities for sustainabledevelopment. Theseminal work of the WorldCommission on Environmentand Development institutionalized the exchangeof views). Duringthis period,intemational aid agenciesas well as most nationalgovernments adopted the objectiveof sustainabledevelopment.u"

1.8. A declineof faith in the inevitabilityof progressis an importantcomponent of the internationaldiscourse on sustainability.mLObviously if peoplehad retained the fLith theyhad in progressover the pastseveral centuries, they would not be concernedabout sustainability. Whetherone believes in progressor not, of course,has little impacton whethersustainability is actuallya problem. Lossof faith is attributedin the developingworld to the excessive

8.(...continued) that theme, (Peter Jacobs and David A. Munro Conservationwith Zaultv: S;rategies for SustainableDevelo=ment, 1987). IUCN is currently negotiating a new document that better incorporates the diverse concerns and knowledge of representatives and experts from the developing countries (Carina for the Wotrld A Strt%eag for Sustainability, draft 1990).

9. This shift is confirmed and elaborated by Wilfried P. Thalwitz and Nosen Qureshi, two senior vice presidents of the World Bank (ParticipatoryDevelopment: A New Imperative of Our Times, 1991).

10. World Commission on Envirorment and Development (Our common Future, 1987).

11. The World Bank established an environmental unit in 1971, initiated projects with environmental objectives in 1974, President Clausen (Sustainable DevelopmentsThe Global Imperative, 1981) and President Conable (xxx, 1986) spoke to the ecological basis of sustainabilityin their earliest speeches, and by 1987 sustainability was an announced policy (Philippe Lo Prestre, The World Bank and the lnviromMUnta Challenee, 1989; World Bank, 1987).

12. Only 36% of Americans in early March 1991, at the peak of enthusiasm after 'winning" the war with Iraq, thought the future for the next generation will be better than life today, up from 28% in June 1990 (Robin Toner, *Poll Finde Postwar Glow Dimmed by the conomy"). While critiques of the idea of progress date from the writLng of Georges Sorel*at the turn of the century (ThM Illusion of Prcoareu, 1908) on through to Christopher Laech in the present (MMn True and Only avan: prooreand Its Critics, 1991), attention to the decline ln faith is relativoly recent (Almond, Gabriel A., Marvin Chodorow, and Rey Har- vey Pearce (eds) Z= m , 1982; and Robert Nesbit (LaY01ary of th2 Idea 2na gs ,, 1980). Suswnabiltyas InrgeneationaI Equity Page 9

promisesof developmentrelative to the resultsand in boththe developing ond theindustrialized worldsto the recognitionthat new technologies inevitably have unforeseen, and perhaps catas- trophic,environmental and social consequences.

1.9. Thetransition in beliefsled ethicists to ponderquestions of intergeneratlonalequityand the responsibilitiesof currentgenerations to futuregenerations.JJ John Rawla' 'veil of ignorance'is ofteninvoked with the question:"if youcould not choosethe generation into which youwould be born, what rule for environmentaland resource management would you choose?" If we acceptthe premiseof environmentalscientists that planetearth is fit for peoplebecause of the way natureevolved, all but incurablegamblers would choose a rulethat assuredthat the naturalpatrimony stays intact between generations. Each generation would have the right to enjoythe servicesfrom naturalassets, but the assetsthemselves must be passedon to the next generation.And in fact suchrules already exist for visitorsto nationalparks, holders of riparianwater rights, tenants of farmlandand buildings,and beneficiariesof charitable trustsA. Environmentalethicists argue that the wide acceptanceof the idea that develop- mentmust be sustainableimplies an extensionof suchcontractual relations to the biosphere as a whole. EdithBrown Weiss Integrates questions of intergenerationalequity with issuesof the rightsof otherspecies in an encompassingnotion of 'planetary trust" whichassures com- munaland generational, rather than individual, rights. Herplanetary trust concept accepts that peoplelive in a global,intertemporal commons and have responsibilities to othersas well as rights. Individualrights may be the best operationalapproach for specificcases, but Weiss makesa strongcase that the notionthat naturecan be dividedinto partsand over time and generallyassigned as individualrights is inappropriateas an initial,overarching framework for approachingintergenerational equity.&

1.10. Thus,during this finaldecade of the 20th century,there is a pasticheof dialoguesbe- tweenpeople with differenteconomic, environmental, and ethical understandings working in internationalagencies and academic institutions. Joined by leadersof nationalgovernments, nongovernmentalorganizations, and traditional cultures, from industrial and developing nations

13. See, for examples grnest Partridge (Rsonsibilities to Future Genera- tions EnviromentalEthics, 1981), Bryan 0. Norton (EnvLromental Ethice and the Rightsof Future Generations, 1982), J. Baird Callicott (Xntrinsic value,Quantum Theory, and Environmental Ethics, 1985), Christopher Store (Earth and- ther Ethices Th Case for Moral Pluralism, 1987), Thomas errry (The Drea 2f the M5Arh*1989), and J. Ronald Engel and Joan Gibb angel (Ethicsof nvironment and Develo9 ntt Global Challenue. International Res2ons, 1990). 14. John A. Rawls' (A 1heorv of Justice,1971). 15. Rawl's voll of ignorance is used by Edith BrownVeics (InEa.lnaa.t. Fture enekations:xintarnatinal Law. mmon Patrioy and Intje nrational FMLC, 1989) in the derivation of her ethical position. See alsoo Anthony D'Amato (Do We Have a Duty to Future Generations to Preoerv the Global Svilroraent?, 1990), Lothar Gcnding (Our Responsibility to Future Generations, 1990), and EdithBrown Weiss(Our Rightsand Obligationsto FutureGcnerations for the Environment,1990). Susinability as Intrgenetonal Equity Page 10 alike,this discourseis steadilytransforming our understandingof the desirableand the possible. At the sametime, noveljoint efforts betweendevelopment agencies and nongovem- mentalenvironmental organizations such as the TropicalForestry Action Plan are providing new, sharedexperiential knowledge. 12 Thusto a largeextent the politicalchallenge of sustainable developmentis past. Sustainabledevelopment is accepted as policy. Elaboratingpolicy goals into practice,however, still presentsa considerableconceptual challenge in light of howearlier politicaland institutional environments affected the evolutionof economicreasoning.

1.11. An Importantcavtt is in order. Whilethere is considerableagreement that develop- mentmust be sustainable,there is now lessrareement on what developmentshould be and how 'it' mightbe achieved.This uncertainty is affectingthe public'sperception of the nature of theproblems which economists should address and the socialenvirons in whicheconomists work. Theconceptual solution advocated in this paperfor understandingsustainability, for example,has implicationsfor how economistswork with the politicalprocess. Thought and practiceneed to evolvein the contextof threekey factors.

1.12. First,with the declinein faith in progress,many peoples are expressing less interest in joiningthe 'modern project"and more interest in definingdevelopment locally and in terms of theirown cultures.The rising respect for culturaldiversity is providingsafer haven for tribal peopleswhile the revitalizationof traditionalcultures threatens the veryexistence of key nations. Thesearch for sustainabledevelopment itself, furthermore, is leadingin manydirections. And thereis reasonto arguethat a culturallymore diverse world might be more sustainable be- causeit wouldnot have*all of its eggsin the samebasket." Theenvironmental ravages of war stemmingfrom cultural differences and the increasedlikelihood of ecoterrorism,however, couldvery easily more than offset this gain. In anycase, the reculturalizationof the worldwill affect how the benefitsof differentcourses of developmentare perceived,the technologies used and henceenvironmental impacts to be avoided,and the pressureson particular resources.

1.13. Second,the dramaticrise of non-governmentalorganizations is partly due to theinabil-

16. World Bank staff assumeda major role in this discourse. Key works by Bank staff and consultantsincludes Yusuf Ahmad, Salan El-Serafy, and ErnstLutz, (fnvironmentalAc2ontina for Sstainable Develo_ent, 1989), MichaelZ. Colby (Bnviromentalmanagement in DevelopmenttThe Evolutionof Paradigms,1990), HermanS. Daly and John S. Cobb (Par the Comon Good: Redirectingthe Scanom TowardCommunity. the Znvironmenttand a Susta+iableFuture$ 1989), Robert Good- land and Gerge Ledec (NeoclassicalEconomics and Principlesof SustainableDe- velopment,1987), and John Pezzey (EconomicAnalysis of SustainableGrowth and SustainableDevelopment, 1989). 17. The TropicalForestry Action Plan was initiatedin 1985 by the World ResourcesInstitute with the help of the RockefellerFoundation and joinedby UNFAO, UNoP, the World Bank and eventuallya wide varietyof non-governmental organizations,natLonal governments, and bilateralaid organizations. TFAP'@ chaotlc evolutLonand mixed experienceare leadingto a major reorganization (RobertWinterbottom, aLk LJtock: The 1oical Forestry-ActionPlan After Five ,aara, 1990). Suganabilityas Intergenetior Equity page11 ity of nationalgovemments and international agencies to designand implement projects techno- craticallyfrom capital cities. Someinteresting symbioses have evolved between large, central agenciesand small, dispersed non-governmental organizations. And yet non-govemmentalorg- anizationsare also political forums for greaterparticipation. With reculturalizationand greater participation,projects are increasingly being designed to meetthe minimumcriteria of diverse partiesrather than designed to meeta singleefficiency criteria.

1.14. Third,progressive scientists and resource managers, responding to the summonsto more fully manageenvironmental systems, discovered that their knowledgeis highlyfrag- mentedand not readilylinked. While economists contemplated the optimalapplication of pesticides,agronomists could not showthe relationshipbetween rates of useand crop yield, soil scientistsand hydrologistscould not predicthow muchpesticide would actuallyend up in groundwateraquifers, and agricultural chemists could not explainhow pesticidesbroke down in soilsand beyond. Manyhave argued the needfor a substantialincrease in environmental monitoring.yet to the extentour knowledge really is fragmented,we havelittle basisfor deter- miningwhat should be measured. Well before the internationaldevelopment agencies accepted sustainabilityas a developmentcriteria, an accumulationof experiencewas forcingthem to be increasinglycognizant of interrelationsbetween objectives and sectors as wellas moreaware of the culturalcontextuality of the developmentprocess. Concernfor environmentallinkages seriouslycompounded the numberof interconnectionsthat neededto be considered.And yet the fragmentednature of ourknowledge is a fact that hasnot goneaway. Economicanalysts haveto interactwith environmentalscientists directly to asess the levelof knowledgeavail- ablein the designand analysis of projects. Economictheory needs to developin consonant with our increasedawareness of our limitedunderstanding of the fragmentednature of knowledgerather than assume coherence.

1.15 In light of the above,it is probablybest to think of the participantsin the discourse on sustainabilityas beingeither "progressives" or *environmentalists". Both'progressives 3 and*environmentalists' agree that thereis an unacceptablyhigh likelihood that development as now implementedis unsustainable.This unsustainabledevelopment path is illustratedin Figure1 as the "consensus"path. But there is disagreementor. the courseof action. "Progressives"believe that sustainabilitywill comethrough pushing the modernproject to completion;most assume a technocraticapproach. T'hey argue that sustainabilitywill require a significantexpansion in agricultural,forestry, and other research to implementmore environ- mentallycompatible technologies, significantly more environmental monitoring and assessment, and designnew institutionsto internalizeexternal costs. Theyenvision sustainability as a matterof fully optimizingpeople's interaction with nature. Environmentalistsview the chal- lengesustainability poses the modernproject quite differently. Environmentalists are split be-

18. The nature of environmntal science and how Systems sre understood is elaborated in tiorgaard (Snvronmenatal Science as a social Process, 1990). Sutalnabilityas Intergeneaional Equity Page12

T1i m e

Figure1 tweentechnocrats who thinkthe new environmentalscientists have reasonable answers and populistswho put more emphasis on changing values, reculturization, and developing traditional knowledge.Technocratic environmentalists argue that there is little hopefor achievingthe op- timizationrequired with higher levels of economicactivity in lightof theInadequacies of current environmentalmanagement institutions and weakness in systemic ways of understandingand manipulatingthe environment.Populist environmentalists argue for nowlifestyles with les technocratichierarchy. From both environmental perspectives, however, sustainable developmentis onlyseen as possible by reducingthe overall level of economicactivity, redistributing wealthto the poorso that they will not becomeworse off in the process,and then developing truly new technologicaland organizationalaltematives through which development might be sustained.

1.16. Economistsdevised their theory to fit the wayquestions were asked within the techno- craticsocial structure in whichthey worked. The rise in participation,the trend toward reculturization,and new epistemological understandings areaffecting how economic problems are beingdefined and the organizationalmilieu in whicheconomists operate. Susalbility asInbtergenationl Equity Page 13

2. THECHALLENGE TO ECONOMICTHOUGHT

2.1. Forsome economic sectors, the courseto sustainabledevelopment is cler. Intema- tionalassistance agencies, for example,are having little difficulty deciding the appropriate direction for energysetora. Increasingthe efficiencyof powerplants, transmission systems, and end-useappliances, while irnportant to the reductionof greenhousegases, is frequently justified on narroweconomic efficiency grounds alone. Theopportunities to investin improvedeffici- encyare considerable, giving us some time beforewe mustdetermine how muchadditional In- vestmentIs justifiedto stemglobal climat change.The sheer mass of opportunitiesfor con- servationcertainly challenges the abilityof the Intemationalcommunity to mobilie sufficient capital,expertise, and technology. Going from policyto practicein the onergysector, however,presents few challengesto economicthought and practice.

2.2. In the caseof tropicalrainforests, on the otherhand, the currentperiod of transition betweenopposing world views to a pragmaticunderstanding of sustainabledevelopment Is far morechallenging. k is intellectuallyexciting. even emotionally inspiring, to beamong the econ- omistsand ecologists exploring the multitudeof relationshipsbetween economic and environmentalsystems.)u But it Is alsoa periodof fesidualtensions, heightened appreciation of the Inherentweaknosss of everyconceptual construct for thinkingabout development, and acute awarenessof the needto reacha consensuson howto onceagain make the connectionsbe- tweenvalues, knowing, and ways of organizing.Because of the localecological and cultural complexitiesof tropicalrainforests and because of theirglobal importance to biodiversityand climate,picking and following a courseof actionhas been especially difficult. Thespecial challengesof tropicalrainforests are explored in Appendix1.

2.3. At first, economistspresumed that this challengecould redily be metthrough minor elaborationson existingtheory. Neoclassicaleconomics Is surprisinglymalleable. It hasbeen successfullyapplied to everysector of the economy,every factor of production,as wellas to behavioralanalyses from the levelof the householdthrough bureaucratic organization, and on to nationaland international politics. Sincethe marketmodel has also aided our understanding of environmentalmanagement and the useof stockresources, achieving sustainable develop- mentwas perceivedas a mstterof morefully usingand extending thinking along these lines. Thereseemed to havebeen good reason to believethat by givingsustainability appropriate emphasis,an economicsof sustainabilitywould readily unfold.

19. suchintellectual excitoemnt'.an be found ln the InternetLonal Society of ZcologLeal XconomiLo(1533) whlch wa&sformed La 1988to furtherunderstanding betwen oconomoits and ecologLsts and develop patterns of thLnkLngand methods of analysia which go aroundcurrent Lmpasses(Robert costansa ced, P1gLca _g_mLcahg ficiance And Manaamnt of, inabilIt, 1991). ThLs group sponsorstho journal Raolaaloal=0nMLes. The World Bank hooted the first internatLonal conferenceof £5z3 in Kay, 1990 and publishedounmariee of the presentatLonf (Robert Costansa -cod>,, The ScologLeal Uconomics of suotaLnablitys 1990). Susainability as Intergeneaional Equity Page 14

2.4. Efforts to date at combiningeconomic reasoning with sustainabilityreasoning, however, havenot beenvery satisfying. In otherapplications, the conceptof efficiencyhas helped explainhow an objectivecan best be attained. But efficiency,at leastas understoodcurrently in the economicsprofession, rather than indicatingsomething about the best way to achieve sustainability,frequently appears to conflict with the goal of sustainability. There is still a strongsense among economic policy makersthat environmentalobjectives are reachedat the expenseof economicobjectives rather than being includedamong economic objectives. This apparentconflict betweenefficiency and sustainabilityhas thwarted the advancementof an economicsof sustainabledevelopment.

2.5. Tropicalrainforests provide some of the best examplesof this apparentconflict. Of morethan 800 millionhectares of tropicalforests designated for timberproduction, only about I million hectaresare now managedon a sustainablebasis.= Froma narrow economicper- spective,the reasonsare clear. It is more profitableto cut without managingtropical rainforests for sustainableproduction because of a combinationof factors including: 1) the low numberof valuabletree speciesin the natural forest mix of species,2) the difficulties of regeneratinga reasonablynatural mix of speciesor of controllingthe mix at all, 3) slow rates of tree growth, and low prices due to 5) the relatively large global supply of rainforest resourcesand 6) the substitutability of timber and other rainforest wood products with temperateforest wood products. Thus from a conventionaleconomic perspective, it is wiser to depletethe forest and to invest the retumsin moreproductive ventures. Fromthis perspective, it is efficient to exploit forestsin an unsustainablemanner. Sustainabilityand efficiency, as economiststypically understandthem, seemto conflict.

2.6. Environmentaleconomists argue that muchof the contradictionbetween sustainability and efficiencyis due to excessivelynarrow economicquantification. By includingthe goods and servicesprovided by rainforestsbeyond those that are marketed,sustainable management may be the most profitablestrategy. The revenuesthat timber ownersand leaseholders re- ceiveare less than the total benefitsof the forest hencethey do not managethem to their full potential. Sustainablemanagement, they argue,is more likely viable if extemal benefitsare includedin benefit-costanalsyis.

2.7. Thus attemptshave been made to measurethe valuesof productsused by indigenous peoplesoL,of soil and watershedprotection services=u, and of the future options maintained

20. Poor., Duncan at al. (No Timber wLthout Treess Sustainability in the Tropical Forest, 1989, p.196).

21. Charles M. Peters, Alwyn H. Gentry, and Robert 0. Mendelsohn (Valuation of an Amazon Rainforent, 1989).

22. Douglas 0. Southgate and Robert Macke (soil Conservation in Hydroelectric Watersheds, 1989). Sutanbilty as Intgeneaonal Equity Page 15

The sense of a *trade-ofvf between sustainability and economic efficiency is pervasive, from acadme to operating economists a on ihrough to economic reporting to educated laymen. As n aademic, eon- omist WLilliam ordhaus has argued publcly that few of the steps proposed to offsetpoteAtial global cl te chnge havebeneitso greater than their costs (Greenhouse Economics Count Before You Leap, The Economist 31607662Z July 7, 1990 pages 21-24). Within workLag documents of the World Bank, the confliet is expresse in term such as: 'It is possible that -it i both economically and financlally advantageous to harvest the forest as rapidly as possible. A fundamntal question is whether (or under what conditions) 'ustainability' is on the whole economLcally justified, or does it lnvolve a national sacrifice, and if :oo, how much?* (Initiating Memorandum,Malaysia Forestry Sector Review* Oct 23, 1990 draft, p. 17). in an article for oducated laymn on the possibilitiesof an international treaty to cotrol greenhousegao emissions,the 0conomist' argues that The best treaty willaim at the smallest loss in world welfare." (The 2conomist, January 26thb 1991, page 59) . One analysis of the World Bank indicates a synthesis is neededs The development Issue addressed here is whether the concept of leconomic efficiency` should have been defined moreclearly and compre- hensively to include sustainable growth' (Operations Evaluation Departmnt, Renewable Resource Mangment in Agriculture, 1989, page :.iil).

Text Box I by protectingbiological diversity.22 In some cases,expanded benefit-cost analyses indeed seemto show that sustainableforest managementis efficient.01 And yet while intemraliing externalitiescertainly increases efficiency, it need not increasesustainability. In the United States,for example,major petroleum resources in the publicdomain have been left undevelop- ed, not so much becauseAmericans want to save resourcesfor future generations,but be- causeno settlementshave been reached on how to compensatethose amongthe currentgeneration who would most directly bearthe environmentalcosts.

2.8. But evenin the caseswhere more efficient managementleads to sustainability,there is a fundamentalconceptual contradiction. Valuationsof non-marketgoods and servicesare basedon the preferencesof the mUnt generationand benefitsaccruing to future generations are discountedin net presentvalue calculationsto reflect what they are iunrtni1worth. to the extent expandedbenefit-cost analyses "make the case for sustainableforest management, they do so on the basisof the interestsof currentgenerations. Sustainability reasoning, on the other hand, weights currentand future generationsmore or lessequally. It is this key differ- encethat suggestsit will be far moreeffective to think of sustainabilityas a matter of intergenerationalequity.

23. jeffrey A. McNeely (Sconos of Di_logIca Dersity, 1908) and John A. Dixon and Paul 3. sherman(Zconomigs of Protected Areas: A Mew Lok at ROMMA and Costa,1990). 24. Charles M. Peters,Alwyn H. Gentry, and Robert 0. Mendelsohn (ValuatiOn of an Amasonian Rainforest,1989)1 Gregory Hodgson and John A. Dixon (Logging versus ishoeriesand Tourismin PalLwan, 1988). Sustainabilit nt neoio Equity Page16

3. SUSTAINABLITYAS INTERGENERATIONALEQUITY

3.1. Theapparent conflict between sustainability and efficiency is resolvedby thinkingof sustainabilityas a matterof intergenerationalequity. Different intergenerational distributions of rightsresult in newefficient allocations of resourcesand environmental services, different pattemsof consumptionand Investment, and different factor and commodity prices including differentinterest rates. Theappearance of a conflictis anartifact of a longhistory of not Incorporatingequity in economicthink° Ing. Theoverlap between economic and equityreasoning is illustratedin Figure2. y Environmental,forestry, and resource economiststo datehave basically tried to work onlyin thearea that Is diagonally striped, ig- noringthe horizontallystriped area that in- cludesequity considerations. Clearly the overlapbetween economic and environmental reasoningis greater when equity consid- erationsare Included.

3.2. Whileeconomists have concentrat- ed theirefforts on the efficientuse of resources,environmentalistshave consistently arguedthat societies need to considerhow Figure2 muchresources they are leaving for future generations.The dialogue is overthe distribution of rightsto resourcesand environmental ser- vicesbetween generations, not overhow efficientlythis generationexploits its current rights.L Thusthe dialogueappears to juxtaposequestions of efficiencyand questions of equity.But by acknowledgingthat the efficientintertemporal allocation of resourcesdepends uponthe Intergenerational distribution of rightsto resources,this apparent conflict disappears.

3.3. Fornon-economists, the relationship between equity and efficiency can be illustrated as follows.Imagine two developingcountries with identical land resources, produced capital goods,population levels, and educational levels. In countryA, capital,land, and education are distributedrelatively equally among the populace, while In country B theyare distributed very unequally.Imagine that marketswork perfectly in eachcountry so that resourcesare efficiently allocatedto producethe goodsdemanded In eachcountry. But becauseof the differencesin the distributionof resources,levels of Incomevary more in countryB. resulting

25. QuLto a few economists have approached the question of the long term but most havo backod away. Talbot Page is one of the few oconomisto who has aerlouoly contmplatod Geonamics over multiple generations(onsRvat1on and %CQ- ncme Nfgfie9an, 1977). Sustinability as IWteenerationalEquity Page 17

in different goodsdemended. Resources, for example,might be allocatedto the productionof rice, chicken,and bicyles consumedwidely by all in country A while in country B reources are allocatedto beansfor those with few resourcesand to beefand cars,for those with many. Both economiesare efficient, but the officient allocationof resourcesto goodsand services dependson the initial distributionof resourcesamong people.

3.4. Many economistsignore the fact that there are multiple efficient solutionsdepending on how rights are distributedand have re- peatedlyreferred to 'trade-offsw that have to be madebetween efficiency and equity. Thereare certainlytradeoffs betweenwho benefits under one distribution and who benefits under another. Efficiency, however, is a measureof how well a goal is being met. Differentgoals such as growth regardlessof equity or growthwithin certain equity constraintscan each be met efficient- J /\ ly or not. The conflation In the literature \ has occurredbecause economists have im- g plicitly assumedthat maximumgrowth of t /7 GNPnotwithstanding of the Inadequacyof \ the measure,of how it is generated,and of who receivesit is the primarygoal and that *of11 eaa seoefes greaterefficiency allows you to reach that Rgure3 goal. Any other goal is then seenas a con- straint on the primarygoal and hencea limi- tation on efficiency. This Is then referredto as a trade-off betweenefficiency and the other goal. While this conflation has become customary in economic discoure, it Is theoretically incorrect. In political discourseit relegatesall societalgoal besidesraw GNPgrowth to a secondarystatus, as things which conflict with efficiencywhich is alwaysbest.

3.5. Therelation between intertemporal allocative efficiency and the intergenerationaldistribution of resourceand environmentalrights is illustratedin Figure3*ZE The utility possibility frontier U indicatesthe highestutility possiblefor peoplein future generationsfor any given utility of peopleIn the currentgeneration, and vice verfs. Eachpoint on this frontier results from an efficient allocationof resourcesassociated with different distributionsof resource rights of caringbetween generations. Points within the frontierrepresent inefficient allocations of resources.Clearly, there are manypossible efficient allocations.Where a societyIs located

26. Thio diagram is the final stop in Q more complete elaboration developed by Francia Bator (TheSimple Analytice of Wolf are taximization, 1957) graphically illuGtratlng tho ooauoneo of relationships between distribution, production, utility, and welfare. Sustalnabityas Jitugeneona Equity Page 18

on U is determinedby the initialdistribution of rightsto productiveassets, including natural assets.While Figure 3 is limitedto onlythe presentand the future,the relationshipsbetween distributionalequity and allocative efficiency are fully elaboratedin Appendices2 and 3 through mathematicalmodels of overlappinggenerations. These models, of course,are also simplifica- tions,but theyexplicitly document that whileefficiency is importantin that it puts societyon the utility frontier,the sustainabilityof developmentis entirely a matterof whetherit is above the 45 line,i.e. a matterof the distributionof productiveassets or caringacross generations.

3.6. WhileFigure 3 is verysimple, it illustratesan important point. Nearlyall of the economic literatureto date on sustainabilitystresss the importanceof intemalizingextemalities. Developmentis conceived as a processof spurringeconomies to go faster;sustainability is con- ceivedas a processof perfectinghow economies work. Perfectinghow economieswork, however,will movethe economytoward the efficiencyfrontier but maynot makeit anymore sustainable.Thus we havethe unfortunatesituation where economies are still beingstimulated, eventhe alreadydeveloped economies, while sustainability waits for a perfectionof marketper- formancethat hasnever yet beenachieved and is unlikelyto leadto sustainabilityif it is.

3.7. A few economists,realizing that sustainabilityis a matterof intergenerationalequity, advocateconstraints on the use of resourcesand environmentalsystems by the curr,nt generation.ZlThe constrained optimization advocated, however, is analogousto movingto- ward the efficiencyfrontier Illustratedin Figure4 but stoppingat a verticalline, the en- vironmentalconstraint on the currentgeneration. To be effective,the constraintmust be with respectto what is passed on to future generations.The currentgeneration should be constrainedto operateabove the 450 line.

3.8. Thebest point on the U frontierin Figure3 or 4 wouldbe at the tangencywith an intergenerationalwelfare function. Sucha welfarefunction, of course,has never been revealed to economists.When it comesto equitydecisions, economists must work with politics. The tenorof the politicaldiscourse certainly indicates that sustainabilityis at leasta minimuminter- generationalcriterion on whichthere is broadconsensus. While economists cannot determine how resourceand environmental rights should be distributed across generations. they can more effectivelyengago in policydialogue and assist countries make their own decisionsif they understandsustainability as a matterof assuringthat assets are available to futuregenerations.

27. Nerman Daly advocated limiting resource use throughput and impositions on the onvironmont beginning in the early 19709and was roundly criticized for beLng an envLronmntal determinist (Toward a Steady State sconomy, 1973). In the late 19S0s, David Pearce, writing with numerous other authors (see bibliography), beganto arguethat austainability and efficiency were not necessarily compatible and thatefficiency should be constrainedby environmentaland resourcolimits to protect futuregeneratLons. By takingup the argumentlater and not being Gpaeific about what the constraintsmight be, Poarceaeem to haveavolded the attacks absorbed by Daly. Susainabalityas Intergenmtonal Equity Page 19

3.9. Thisdistinction between treating suainabilityas anintergenerational equity objectiverather than as a technicalcon- straintmay appear to beunnecessarily sub- tle. but it is quite importantfor several \/. reasons. Theintergenerational framing ela- \/ boratedthrough general equilibrium models in the next sectiondocuments how the J apparentconflict between economic and en- , vironmentalreasoning is to a largeextent an 1- atifactof theparticular course along which economicthinking evolved. Treatig o sustainabilityas an equityobjective rather I thanas a tachniclconstraint constructively reframes environmental, forestry, and t * a,,... resourceeconomics (elaborated in section 4) aswell as capital theory (sections 6 through FIgre4 8). Economicunderstandings which appear to conflictwith the goalof sustainabilityare eliminated by takingan intertemporalgeneral equilibriumapproach which incorporates intergenerational equity and the natureof resources together.This approach, furthermore, identifies the importanceof bequestand other motives andtheir supporting institutions for maintainingenvironmental systems and conserving natural capital.

4. REFRAMINGENVIRONMENTAL. FORESTRY, AND RESOURCE ECONOMICS

4.1. Economictheory and practice will takesome time to evolvearound the broader, intergenerationalequity framework outlined in Section3. Whilethe particular ways in whichtheory andpractice might evolve are difficult to predict,the equityframework dearly identifies how priorthinking and practice in economicsevolved too narrowly. The most powerful contribution of thebroader framing is theperspective it provides for criticallyasssing theevolution of the subdisciplinesof economics most directly concerned with resource use.

4.2. Whileagricultural, environmental, forestry, and resource economics respond to public concemsfor the long run, they do so without questioning the existing intergenerational distributionof rights.In thecontext of Figure3, thesesubdisciplines have primarily addresd ineffici- enciesin reourceallocation due to marketimperfections which leave the economyoperating withinthe utility frontier. Solving such imperfections will In somecase move the economy to- wordsustainability, in other cases not. Indeed,corrections of market failures and other exercis- esIn gettingthe pricesright' thatare undertaken without redistributing rights to the future, undersome circumstances, actually could reduce social welfare. asEquity InWgumdond wPge20

4.3. SinceL.C. Gray's article in 1913and Harold Hotelling's formulation of 1931,econo- mistshave pondered how exhaustible (stock or depletable)resources should be used over time. Withthe energycrisis of 1973/4,economists renewed their attention to theefficient allocation of exhaustibleresources. Students of resourceeconomics are now well aware of the Hotelling Rule' that the rentfrom a stockresource being exploited "optimally" increases at the rateof Interest. Thelogic behindthis rule issimply that a rationalresource owner will maximize the net presentvalue of the resource.If all ownersdeplete their resourcesrapidly, prices and rentsfall. If all leavethe resourcein the ground,prices and rents rise rapidly.A solutionre- suktsrelative to otherinvestment opportunities. If resourcerents are increasing more slowly thanthe rateof interestover time, resource owners would be better off depletingthe resource festerand putting the rentinto other investments which yield the rateof interest. If rentsare increasingfaster than the rateof interest,than leaving the resourcein the groundis the best investment.Given these incentives, the equilibriumsolution results in rentsincreasing at the rateof interest. As a "thoughtexperiment" and pedantic device for gettingstudents to think aboutresource use overtime, Hotelling'sargument has beenextremely effective. But with modestcomplications in the assumptions,rents no longerrise at the rateof interest. Further- more,efforts to explainhistoric mineral prices on the basisof Hotelling'"sreasoning have been unsuccessful.

4.4. Theliterature repeatedly refers to the pathof extractionfrom such 'thought experi- ments"as the igg'mjlpath. Thepaths explored to date,however, have been merely afficimnt pathsassociated with theexisting intergenerational distribution of rightsto resources.Howarth andNorgaard recently demonstrated with a partialequilibrium, overlapping ge-oerations model howthe efficientpath of resourceexploitation changes under different distributions of resource rightsbetw"en generations.L

4.5. A generalequilibrium, overlapping generations model elaborated in Appendix2 demon- strateshow the efficientpath of depletableresource exploitation relates to transfersof income from onegeneration to the next. Thismodel uses multiple overlapping generations to explore the effect of differentlevels of transfersbetween generations on allocativeefficiency. The modelincludes a depletableresource, produced capital, and labor. TableI presentsnumeric resultswith a simpletwo generation,three time periodmodel with differentlevels of transfers

28. Rents, alsoreferred to as royalties,are revenuesminue costs. 29. Eartwick, emp and Ego (setUp Coatsand the Theoryof Exhaustible Resources, 1986),Robert D. Cairns(GoologLeal influences, Metal Prices,and Rationality, 1990), GabrLelLosada (Irreversible Investment and the Conservation- lot'oDilemma, 1991), and HosseinFarsin (The Time Path of ScarcityRent in the Theoryof ExhauotibleResources, 1991) demonstrate how quicklythe liotelling Rule"breaks down. T. D. Agbeygbe(Interest Rates and MetalPrices movements, 1989 The StochasticDehavior of Mineral-CommodityPrices, 1991) and Halvorsen and SioLth(A Test of the Theoryof ExhaustibleResources, 1991) document how poorlythe NotellingRule fitshistorical data for non-renewableresources. 30. Richard 3. Bowarth and Richard D. Norgaard(Intergenerational Resource Rights,EffLcLency, and Social OptLmality, 1990). as bEM-PI ty Page21 from the first generationto the second.Each solution is efficient,but differentlevels of transfers(T resultIn differentallocations of the stockresource (O), with correspondinglydifferent resourceprice schedules (p) and hence different levels of consumption(Ci for eachgeneration for eachtime periodand utility (M. Whilethe differencesin the pricepaths appear to be modest,with no transferresource prices increase nearly 300% over the threeperiods, while with considerabletransfer they increaseonly about 60%. As modeled,the transferneeds to be at a levelof at least1.5. or approximately65% of the secondgenerations consumption, for utility to be sustained.

TameI~~~~~~~~~~~~~~~~~~~~~~~~~~~ ThreePeriod, Two Ovoetppin Generaton, Stock Resoure Economy Under AlematveIncome Transfe BetweenGenertons TR 0 0.6 I 1.5 2 2.6 3 3.5

U, 1.73 1.53 1.32 1.10 0.89 0.68 0.46 0.24 U, 0.19 0.52 0.83 1.13 1.43 1.72 2.00 2.28 C,, 1.40 1.25 1.09 0.93 0.75 0.58 0.40 0.21 C,i 2.14 1.88 1.59 1.32 1.06 0.79 0.53 0.28 C,, 0.14 0.42 0.70 0.97 1.24 1.51 1.78 2.05 C,, 0.27 0.66 1.00 1.33 1.64 1.95 2.25 2.54 R, 2.26 2.07 1.92 1.79 1.67 1.67 1.48 1.41 Ra 1.02 1.64 1.68 1.89 1.72 1.74 1.77 1.79 Rs 0.12 0.29 0.42 0.53 0.61 0.69 0.75 0.81 Pi 0.20 0.21 0.22 0.23 0.24 0.25 0.26 0.27 PS 0.30 0.31 0.31 0.32 0.33 0.34 0.35 0.35 P, 0.58 0.48 0.45 0.44 0.44 0.44 0." 0.44

4.6. Oneof the most interestingand contentiousissues of naturalasset management over timehas centered on the questionof whenshould trees be cut?" In 1849,Faustmann'deter- minedthe "optimal*rotation period for logginga forest by reasoningthat the landowner "should'maximize the net returnto forestland. Thisresults in the followingformula: ustainabilias t Equity Page22

max% (t) sp.V(t) e (-ft) -Ire (-'*)da 0

where t is time or rotationperiod, p, is the expectedstumpage price, V(t) is the biological productionfunction (or yield) functionfor standingtimber, I is the landownersdiscount rate, r is the annual rental return on the land and s is a variable of lntegrationp The formula has beenexpanded to incorporate,among other things, changing demand for timber,the possi- bilitiesfor shiftingbetween species, technological change, and non-marketfactors. But the ini tial premiseof not presentvalue maximizationfrom which the basic formulaand subsequent elaborationsderive implicitly assumes that the currentgeneration holds the land rights, unen- cumberedby obligationsto or concernfor future generations.The Faustmannformula has the propertythat if the value of the resourcedoes not grow, on average,faster than the rate of interest,then harvestwithout replacementis optimal. This,Indeed, is characteo.sticof tropical rainforests. but if future generationshave rights to particularspecies, to speciesdiversity, or evento the availabilityof timber at all, from the forest,then the currentgeneration would have to maximizeits not presentvalue subject to these constraintsimposed by the rights of future generations.

4.7. A Generalequilibrium model of an economyIs presentedin Appendix3 consistingof a renewableasset that grows like trees (R for the stock, H for the harvest),human produced capital(Al, and labor. Themodel is run for twenty generationsoverlapping through twenty-one periods. Not presentvalue criteria are usedto efficiently plan consumption(C) and savings investedin both trees and producedcapital. Thoughnet presentvalue criteriaare used,concem for future generationsis modelledby includinga fraction of the utility of the youngergen- erationin the utility of the older generation. Someof the results for selectedyears are presentedin Table2. An incometransfer (TR) is madefrom old to youngeach time periodwhich maximizes net ptesent value of utility. While each solution is efficient, capital and trees accu- mulateover time andthe consumptionof subsequentgenerations is higherwhen "relativecon- cem" for the next generationis higher.

4.8. While this is simply a numericexample, the three casesvery nicely illustratethat if peopledo not carevery muchabout the next generation(0.5), assetsget usedup. Whenthey care a little more (0.75), consumptionis sustained. And whenthey care equally(1.0), sub- stantialand sustainablegrowth takesplace. Notehow the path of the priceper unit of harvest resource,p, Is different with different levelsof caringfor the future. The modelalso

31. Thic forula Le elaborated further in a paper sumarizing forest economcscprpared for the World Bank by Willam P. Hyde and DavLd H. Newman (Forest Econeaocsln Brief -- and Nine SummaryObservatLons for Forest Policy nalysts, November1990). SutalnabilityasIntergeneraional Equity Page23

Table2. PRewableResoum Economy with 20 Overlpping GeneratinsOver 21 Periods perio 0 4 [ 8 12 16 20 OlderGeneration's Utility Augmentedby 0.5 of Youner Generation'sUtility C, 0.47 0.19 0.13 0.11 0.09 0.09 Ca 0.94 0.37 0.26 0.21 0.19 0.19 S 0.61 0.20 0.14 0.11 0.10 0.00 K 1.00 0.24 0.15 0.11 0.10 0.07 8 2.00 1.10 0.72 0.53 0.41 0.15 H 1.04 0.58 0.38 0.28 0.22 0.15 pfl . 0.32 0.30 0.34 ).38 0.43 0.48 = _9- _ __ MR 0.67 0.13 0.08 0.06 0.05 -0.01 OlderGeneratlons Utirny Augmented by 0.75 of YounerGeneratin's Utiiy C, 0.41 0.40 0.40 0.4 0.2 0.55 C' 0.54 0.53 0.64 0.54 0.55 0.73 S 0.97 0.93 0.94 0.93 0.86 0.00 K 1.00 0.93 0.94 0.93 0.89 0.49 R 2.00 2.19 2.21 2.21 2.11 1.03 H 0.77 0.87 0.89 0.89 0.92 1.03 p 0.40 0.36 0.35 0.35 0.34 0.26 TR 0.92 0.87 0.87 0.87 0.89 0.15

OlderGeneration's Utility Augmentedby FullAmount of YoungerGeneration's Utility C, 0.20 0.40 0.63 0.90 1.26 2.11 C, 0.20 0.40 0.63 0.90 1.26 2.11 S 1.43 3.82 6.19 7.46 6.40 0.00 K 1.00 3.18 5.67 7.30 6.98 2.62 R 2.00 2.79 2.86 2.84 2.73 1.55 H 0.57 0.95 1.00 1.01 1.06 1.55 p 0.48 0.61 0.61 0.64 0.62 0.34 7TR 1.22 3.50 8.93 7.38 6.69 1.31 Sustanabilityas IntefgeneatonalEquity Page 24 illustratesthat with developmentbased on renewableresources, concern for the nextgeneration canbe sufficientto assuresustainability. Unlike the Faustmannformula which is solved for a singlegrowth period which Is alwaysoptimum, this modelharvests trees of differentage at differenttime periods. The model is furtherexplored in Section5 in the contextof the discountrate controversy and is morefully elaboratedin Appendix3.

4.9. Biologicalresources can be exploited in a non-renewablemanner since extinction is not -eversible.Exploitive patterns of renewableresource use arefrequently associated with the breakdownof institutionsfor commonproperty management. The literature in environmental economics,however, also identifies the conditionsunder which it is *Socially"efficient to exploit a speciesto extinctionAuEnvironmental, forestry, and resource economists have argued that efficiencyrules may err in favorof excessiveuse by the presentgeneration due to the existenceof non-marketfactors. There is nowa welldeveloped literature on methodsfor valu- ing non-marketenvironmental services and numerousapplications have been undertaken. Suchapproaches freqantly do showthat non-marketgoods and serviceshave considerable valueand that whenthese are includedin economicanalyses, the efficientpath of resource usefrequently shifts towardsthe future. Butas a generalmeans for assuringresources for futuregenerations, expanding economic analysis to incorporatehow this generationvalues non- marketgoods and services will not necessarilyresult in theirbeing saved for the future. The coincidencebetween method and policy outcome may be largelydue to the priordecision with respectto whichnon-market goods and services are valued and induded in the expandedanaly- sis. In any case,ultimately, we are concernedwith maintainingnatural assets for future generationsbecause we sensethat 1ba will needthese assets, not because= someiiow valuethem.B

4.10. Manysocieties, however, have already determined, largely by noneconomicreasoning, in othersocial decisionmaking arenas that futuregenerations have rights In particularspecies,

32. PeterBerck (Open Access and Extinction, 1979)t Anthony C. Fisherand W. MichaelManemann (Endangered Species: The Economicsof IrreversibleDamage, 1985),and David W. Pearceand A. Kerry Turner (Economicsof NaturalResources and the gnvirnment, 1990J.pp.268).

33. Maynard M. Hufschmidt,David E. James, Anton D. Meister, Blair T. Bower, and John A. Dixon (EnvLronment.Natural Systems. and Develonment:An ggonomc VAluationGuide, 1983). 34. Thlo raisesthe awkwardquestion as to the extent to which RI value naturalassets is already a reflectionof our concern for the needs of future generations.Perhaps survey techniques could be used to determLn,the willing- ness of poople in thli generationto save naturalassets so that futuregenerations,rather than currentgenerations, could utilizethem. In some sense,the attempts at woptiono valuatLonhave this characteristic.On the other hand,en- vironmentaleconomLits are leastconfident of derivingbenefits for thingswhich peoplethemselvea do not oxperionceand about whlch they are unlikelyto be informed (V. Zorry Smith, Can We Measure the Value of EnvironmentalAmenities, 1990). More importantly,oven if people could exprese such "valueo",are they not better conoLdereda reflectionof the welfare functionthan somethingthat shouldbe includedin an efficiencyanalysis? Sustainbility as Intgeneional Equity Page 25

f...... The difficultiesof interprotLng valuations of non-mrket gods undertaken inthe oontext of the current intergenerationaldistribution of propety rights can be illustrated as follows. ase might propose to assesshow people value bLodiversaity by undertaking an investigation of the willing- :ese of toutLrts to pay the costsof travel to see the wildlife in the game Oeserves of east Africa or the tropLial forest reservesof Costa Rica. But if future generations really had rights to biodiversity, it would be very dlfficult to assure their rlghts without drastically seducing the mission of greenhoues gaseo, hence reduclng international travel. Theways in which a few rich people now enjoy biodivereity may be significantlyretrioted if future generations had biodiversity rights. Such travelcost valuatLons would provideinteresting insights into how .much pople were willing to pay today, but what is there manign a oustainablo world? On tOhing ia clear. it ustainabilty is being chosen,rights ar reassigned,and ecctourismwill not be signLleant in a autaibl future, thencertainly investments should not be mnde in ecotourism today based on the willingnss of people to pay under the current dlitribution of rS.ghts.

Text Box2 leavingthe current generationwithout the right to exploitthese species to extinc'n. Inter- national accords to protect endangeredspecies and other agreements have also been made which linilt the rights of and impose responsibilitieson current generations. Whether it is *optimal"to extinguisha species Is not simplya matter of determiningwhether Its not present value Is positive. Whileeconomic valuations provide insight, such values result from how economiesoperate withinrules whichare constantlychanging through an interplayof decidsions made within social arenas using differentvalue systems, patterns of reasoning,and criteria.

4.11. The valuationof non-marketgoods and services is very Importantfor assessing projects and policiesfrom a publicperspective. If the public's perspective,however, is that future generationsshould have more rights than they do now, then valuationshould be undertaken in the context of how the economywould behave if thoss rights were honored. The models developedin the Appendicesand presented In Tables I and 2 in this section have different prices, and hence values reflected in areas under demandcurves, In accordanceto how much peoplecare about the future. Economicvalues derivefrom how marketswork under aternative institutionalsituations. When societies choose which institutionsthey prefer, values can be assessed. Values determined under inappropriateinstitutions tell us little about what institutionsare appropriate. This is somewhat analogousto the currentpractice In benefit-cost analysisof valuinginputs and outputs at the costs and pricesthat wouldoccur if the economy were not distorted by inappropriategovernment policies. The prices that result under Inappropriategovernmental policies only informus of the need for appropriatepolicies relative SusainbiltyasJntergenmtoioa Equity Page26

to the pricesthat wouldoccur under appropriate policies.

* axpanding benit-cost analysis by incorporating non-mrket values better `::iforms the lnvestment decLilon but does not correct the arket failure, f the wrket failure. are actually corrected or internalized, the eonomy .iii behave Ln such a way that the social benefits will actually be teal- Lsed. intornalLzingexternalities results in all priceschanging somewhat in responseto the now good on the market. Thus expandedbeneft-cost analysisis helpful, but internaliuingexternalitLes is even notebelpful becausethe economyadjusts and becomes more effciLent. The situationis simLlarwith the transferof righta to futuregenerations. Imagininghow the economy would operate if future generations had more. rlghts facilLtates better project analyLsi and helps distinguuih betwn ilnvestments and transfers. Actually trasferring the rlghtand lettLng the economyadjust to the dLstrLbutionof rlghts la evn more ef ictivo. Ultimately, sustainable development reqires the actual transfer and enforcment of rights of future genrationa or equivalent concern for the future that affectscurrent behavior.

Text Box 3

4.12. Efficiencyand caring for the futureare not Incompatible.The use of a generalequili- briummodel incorporating the relationshipbetween intergenerational rig"Is to asss andeffici- encVopens up environmental,forestry, and resource economics to a newframing of thefuture. Thesesubdisciplines have implicitly constrained their analyses historically to the existingdistri- butionof rights. As suggestedin the introduction,this selectiveuse of theorywas compatible withinthe progressiveinstitutional context in whicheconomists found themselves during most of this century. The discourseover sustainability. however, is changingeconomic objectives as wefl as the Institutionalcontexts in whicheconomists work.

5. THE DISCOUNT RATE CONTROVERSY

5.1. Theintemational discourse on sustainable development was initiated by naturalscien- tists, environmentalists,and others concermed with themaintenance of favorableenvironmental conditionsover the longrun. Whilethe longrun might be as little as ten to twenty-fiveyears In most economicanalyses, the longrun for geologistsis millenniaand for biologistsIt is at leastmany generations. The discourse was joined by peopleconcerned with culturalsurvival who alsothink in termsof multiplegenerations. This difference in outlooktoward the future is critical. Participantsin thediscourse over sustainability are intensely aware that the standard economicpractice of discountingbenefits received and costs borne in the futureautomatically closesoff the future. By framingsustainability as intergenerationalequity, economics opens

350 Both the uoo of omuity" prLces and "offiLeLncy cpriceerais analogoua iooueoa wLth reopectto tho use of comparatLve statLcawhen the roal challenge ia to datemino the boot pathof adjustment. Susainabilitas tergeneuonal Equity Page27

up to the future. With this reframing,the discountrate itself can be shownto be a function of how eachgeneration cares about the next.

5.2. No doubt there exists an economistwho has never experiencedthe slightest moral qualmover discountingthe benefitsto be receivedand the coststo be bomeby future generations. Both the academicliterature and discussionswithin developmentagencies, however, reflect considerableunease. With lower discount rates, it appearsmore investmentsin forestry and a largerstock of standingforests would be justified, favoringsustainability. Sim ilarly, it appearson preliminaryanalysis that lower ratesof discountfavor usingstock resources more slowly. Thus many peopleconcerned with the environmentse a strong link between the rate of discount,resource conservation, and the sustainabilityof development. 5.3. Two strong theoreticalarguments have been developedwith respectto why society shoulduse a discountrate that is lower than the interestrates observablein privatemarkets. First, the rate usedmay be too high becausemarket interest rates includeindividual risk factors which are frequentlyonly transfers between individualsfrom the perspectiveof sociuty.L Second,transfers to future generationsmay havea public good quality. Parentswho aswure that their own offspring haveaccess to resourcesin effect assurethe availabilityof these resourcesto their offspring's spousesand childrenand to the economyoverallP Theseand other argumentshave led many economiststo concludethat lower discount rates may be appropriate.

5.4. Withindevelopment agencies there has been particularconcem for forestry projects. Manytrees take a long time to grow. Tropicalforests can regainnearly their naturaldiversity after harvest,but a centurymay be needed. Becausemany speciesof trees reproduceat less than currentrates of interest,it is financiallyunprofitable to grow them. Thus forestersand environmentalistsconcemed with sustainableforestry have advocated using lower rates of interest to evaluateforestry projects.

5.5. The argumentsagainst using lower rates of discountin orderto favor future generations appearequally strong. Resourceuse and environmentaltransformations are undertaken in conjunctionwith producedcapital. Laborused in resourcedevelopment and environnental transformationis also treatedas a capitalcost sincethe developmentor transformationis seen

36. The wide felt concern about discounting distant future benefits and costs was recently documented in Th gnomilt (Anonymou=s What Price Posterity?, 1991). The academic literature on discounting is revLowed in the context of the question of sustainabil.ity in a World Bank working paper by Anil Markandya and DavLd Pearce (Znvironrental Considerations and the Choice of Discount Rate in Developing Countries, 1988), in several of the various recent books coauthored by Pearce, and by Richard S. Norgaard and Richard B. Mowarth (Suotainability and Discounting the Future, 1991).

37. Jenneth Arrow and Robert C. Lind (Uncertalnty and the Evaluation of Public Xnvootment, 1970).

38. Stophon A. Marglin (The Social Rate of Discount and the Optimal Rate of investment, 1963). Sustnabilityas Intrgenertiona Equity Page28

as capital. Thus lowerrates of interestmake resource development and environmental transfor- mation relatively Iess expensiveand hence likely to be accelerated.= Low Interest rates favor the investmentsnecessary to transform diversetropical rainforestsinto single swcies plantations. A low Interestrate policy benefitsfuture generationsabout the sameway that a cheapfood policy benefitsthe poor when most of the poor are farmers.

5.6. By reframing questions of the future in terms of the intergenerationaldistribution of rights to natural and other assets, the case for using lower discount rates to protect future generationsbecomes moot. If societieswant to protect future generations,they shouldassure their rights \ or otherwise care for them more. When \ they do, the Investmentopportunities for and savings of current generations,and * A' hencethe interestrat', changeaccordingly. 5 The interest rate is endogenousIn the economybased on a stock resourceexploitation simulated In Appendix 2 and the economybased on renewableresource presentedin Appendix3. In theory,the rate of interest may increaseor decreasein the Fgr 5 transition to sustainabledevelopment, but this is unimportantfor interestis simply an equilibriatingprice. What Is importantis that the types of investmentsand transfersto future generationschange. For the modelsderived in Appendices2 and 3, Table3 and 4 below shows that interestrates decreasewith the transition to sustainability.

5.7. Transfersof rights to future generationsare equity decisions,movements along the efficiencyfrontier from point B to point C in Figure5, madein accordancewith socialwelfare criteria. For the simulatedeconomies, these would be movementsfrom one level of transfer or caringto another. Thebenefits to futuregenerations from shifting from one levelof concom to anotherare not discounted. Whencomparing projects intended as investments,the returns are discounted.

390 since otock roeources are usually eploited ln conjunctLon with capital, lower lnterest rates can lower the cost of capital and thereby lower the cost of production such that more is consumedin early time periods relative to if latorestrates are hlghor, seesRichard L. Gordon(conservation and the Theory of Xxhaustible Resources, 1966)lY. HosselnFarsin (Tho Effect of the Discount Rate on Depletion of ExhaustLbleResources, 1984); John M. Hartwick, Murray C. Kemp, and EgoVan Long (set-Up Costo and the Theory of Exhaustible Resources, 1986); and GabrLel A. Lozada (Irreversible Investment and the ConservatLonist's Diloema, 1991). Sustainabilityas IntergenerationalEquity Page 29

Table3 EndogenousRates of Interestin StockExploitive Economy

TR 0 0.5 -.1 2 2.2 3 3.5 U, 1.73 1.53 1.32 1.10 0.89 0.68 0.46 0.24

U2 _ 0.19 0.52 0.83 1.13 1.43 1.72 2.00 2.28 0.44 0.43 0.41 0.40 0.40 0.39 0.38 0.37 0.53 0.49 0.45 0.42 0.40 0.37 0.35 0.33 0.96 0.57 0.44 0.37 0.32 0.29 0.26 0.24

Table4 EndogenousRstes of Interestin RenewabloeResoure Economy

period-l 0 4 j 8 12 16 20 OlderGeneration's Utility Augmentedby 0.5 of YoungerGeneration's Utility C, 0.47 0.19 0.13 0.11 0.09 0.09 Cs 0.94 0.37 0.26 0.21 0.19 0.19 r 0.34 0.72 0.87 0.92 0.94 1.09 OlderGoneration's Utility Augmented by 0.75 of YoungerGeneration's Utility 0.41 0.40 0.40 0.41 0.42 0.56 C2 0.54 053 054 0.54 055 0.73 r =L=0.31 033 j 034 0.34 0.35 1 0.54 =mm .I.,.- I I OlderGenerstion's Utility Augmentedby FullAmount of YoungerGeneration's Utility C, 0.20 0.40 0.63 0.90 1.26 2.11

C2 0.20 0.40 0.63 0.90 1.28 2.11 r ~~0.28[ 015 0.11 0.09 0.09 0.20

5.8. Themodels presented irn this andthe previoussection demonstrated that thereis nothing intrinsicabout economiesthat ensuresthat living standardswill continueto improveover time or even remain at current levels. The future will unfold from the choices, including sacrifices,made by our ancestorsand those we makeourselves. The on-goingdiscussion within the professonof economicsand Internationaldevelopment agencies as to whethersustain- abledevelopment and intergenerationalequity can be addressedthrough ad hoc manipulations of the discountrate arerooted in an inappropriatetheoretical framing of the choicesbefore us. Sustainabilityas tefgeneationa Equity Page 30

Mattersof equityshould be treatedas such. If we are concemedabout the distributionof welfareacross generations, then we shouldtransfer wealth, not engagein Inefficientinvest- ments.Transfer mechanisms might include setting aside natural resources and protecting environments,educating the young,and developing technologies for the sustainablemanagement of renewableresources. Some of thesemight be viewedas worthwhileinvestments on the part of this generation,but to the extenttheir intentis to functionas transfers,then they shouldnot be evaluatedas investments.

Theapossibility that publi Lsues with respect to the ue of resources over.tme are Lsuse of the distribution of assets acros: geerations has been contmplated but not pursued. Economisto on approaching the question of,.jintergenerational distribution have typically revrted back to argu- m.ents with respectto the choiceof discountrate. Stiglits (1974s139)# for eampl. -Argues I There is, of course, no presumption that the intertemporal distri- >bution of income which merges from the arket solution wLIl be socially optimal' (although La the absence of market failure, the m:.arket allocation will be Pareto optimal)y just as there insno pro- suapt ion that the distribution of Lncoe aong individuals at any ,momnt is 'cocially optimal'. But this is a blem which is not peculiar to the allocation of natural resources over tLmal indeed, i.fi thore were no other sources of 'market failure' and If th2aoe.- :.minent corret c = gontrolsthe rate of Inteest (emphasis added), -then there would be no objection to the competitive determLnation .-of the rate of utilization of our natural resources. Robert Solow (1974s10) also raised the issue of intergenerational distrlbution and retreated to an argnumet with respect to the discount ratet The intergeneratLonal distribution of incom or welfare depends on the provision that each generation make. for lts. successors. the choice of social discount rate is, in effect, a policy decision about that intergenerational distribution. Stiglitz argues.once again (1979:61): .:..the appropriate instruments to use for obtaining more equitable ::ditribution of welfare (if one believes the present distrLbution *A.o not qpitable) are general instruments, for example, monetary .polLoydirected at changing the mrket rate of interest.

the profsasion's emphasis on the relationship between discounting and future anerations took a new twlst in a recent reanalyaLs of discount rates and public investment by Robert Lind (1990t a-24) .-. if de are to avoid the type of paradox that in some cases can lead to total neglect of the interests of generations In the distant futute, we need to look to new welfare foundationo torwS th.tot. oi dagaountLna (emphasis added),.

Text Box 4 vE *s fin.">.b'. < -4i .d>:.r:3>q.-.> -dSUiZ.X.7'.r..4rG.S26. z . W.z&U' o.@'r.S.P..t ...- YY:'-t:-.- Tex Box4 Sstalnabilityas IntergeneaionalEquity Page31

5.9. Distinguishingbetween investments to meetthis generation'sconsumption time prefer onceand transfers to the nextgeneration will not be easy. To the extentthat the distinction canbe made,there will be new reasonsfor concessionalaid, especially for the verypoor who will not be ableto bothassure the rightsof futuregenerations and provide for theirown basic needs. Theuse of investmentcriteria based on meetingthis generation'sconsumption time preferenceis theoreticallyunjustifiable when It is the future'sneeds that areat aske.

6. INTERGENERATIONALASSET TRANSFERS THROUGH CAPITAL MARKETS

6.1. Economiststhink of developmentas a processof accumulatingproductive capacity. Mathematicalmodels have been derived to explorethe conditionsnecessary betwen svings, investment,and the productivityof capitalto keepan economyon anequilibrium growth path. Institutionally,the developmentagencies were initially established to transferproduced and humancapital. Thusideas about capital and capitalmarkets are thoroughlyembedded in economicunderstanding of the processof development.The discourse on sustainabilityis furtherenriching this understandingof developmentas capitalaccumulation.

6.2. In the modelsdeveloped in the appendicesand presented in the foregoingsections of the paper,all markets,including capital markets, work efficiently. With no marketfailure built intothese models, they nonetheless show how the allocationof resourcesvaries with the level of concemfor future generations.Even with all marketsworking perfectly, unsustainable developmentis possible. Capitalmarkets are workingperfectly on all of the pointson the utility frontierof Figures24, but onlythose above the 45° line fromthe originare sustainable. Evenafter environmental externalities are corrected, the existenceof perfectcapital markets will not assuresustainability.

6.3. Andyet, the effectivenesswith whichassets are transferred to futuregenerations does havesomething to do with the natureof capitalmarkets. In modemsocieties, parents forego consumption,save in capitalmarkets, and pass both real assets and financial caims on to their children.Countries with tropicalrainforests frequently argue that by cuttingthe forestsdown, they caninvest in educationand industry, diversifying their portfolio, and effectively transfer moreto theirchildren. If capitalmarkets are not workingperfectly, or in a mannerthat people presumethey are working, then transfers to futuregenerations will not be madeas effectively as desired. How well capitalmarkets work can affect how intergenerationaltransfers are made.

8.4. Thetheoretical arguments developed in the contextof the discountrate controversy by Arrow and Und with respectto privatevs publicrisk andby Marglinwith respectto the publicgood aspect of privatetransfers (Section 5.4) imply private capital markets may not be as effectiveas they shouldbe for makingintergenerational transfers. The underinvestment in- dicatedby the argumentof Arrowand Und occurs becaus banksconsider private rather than Sustalnabilityas IntergenerationalEquity Page32

socialrisk. Thismeans that the growthof rcapitaland hence the levelof transfersof assets betweengenerations is less thanoptimal. TheArrow and Lindargument suggests that we shouldbe especiallyconcerned with thosetypes of lendingthat are clearlydirected at intergenerationaltransfers. Loans to helpparents educate their children,for example,have higher privatethan social risk andmay deserve special treatment. Marglin's argument that people's concernfor theirown childrenbenefits other people's children also can affect the sustainability of development.For the renewableresource economy simulated in Appendix3, greater concernfor the next generationis criticalto the achievementof sustainability.If peopleonly weightthe benefitsreceived by their own childrenin their utility functionrather than the benefitsto all in the next generation,the likelihoodof sustainabilityis reduced.

6.5. Comparingthe complexityof capitalmarkets today with thoseof simplereconomies indicatesan additional problem. Capital markets may not distributeassets to futuregenerations withoutmechanisms for assuringthat assets,especially natural assets, are not beingdepleted. Imaginea societyof nearsubsistence farmers with rightsto land. Parentscan improvethe qualityof the landthey transfer to their childrenby plantingtress. Someof the retumsfrom investingin treesare enjoyed by the parents,others go to theirchildren. Whether consumption is foregoneand investments are made to increasethe parents'welfare or to meetthe parents' objectivewith respectto a transferto theirchildren would be difficultto distinguish.Wealth, of course,does not simplyaccumulate continuously. Some parents choose to cut treesand transferless to their childrenthan they had themselvesreceived from their own parents. Naturaldisasters and war setthe processback periodically. And the total amountthat canbe accumulatedat any giventime is limitedby the culturalknowledge, technologies, and nature of cooperationin the society.

6.6. A new elementmust be addedto the parable.Parents might save in orderto invest in a biggersaw with whichthey couldeasily harvest all of theirtrees. Notethat the saw as capitalis ratherdifferent than trees. Thesaw providesa returnby reducingnatural tree capital whereastrees provide services while maintaining themselves. The parents might choose to re- ducetheir consumption in earlytime periodsto buy the biggersaw in orderto havemore consumptionin latertime periods, but theywould not investin moresaw-capital if theywere inter- estedin accumulatingassets to transferto their children. Mostimportantly, parents know whetherthey are investingin treeswhich will providea transferto their childrenor in saws whichwill not andcan readily monitor the effectsof theirchoices on theircumulative assets.

6.7. Theparable, of course,is highlystylized. In reality,social relations are always more complexand vary dramatically between societies. The story Is too simple. Butthe pointre- mainsthat peoplein simplersocieties are typically closer to the resourcesthey seek to manage andin a betterposition to monitorthe overallset of assetson whichthey depend.

6.8. Westernstyle development- whethercapitalist, socialist, or mixed-- distancessavers from their Investmentsthrough complex, roundabout chains of marketsand/or planning and Sustainaility as Ingreneational Equity Page 33 controlsystems.AL In modernsocieties, transfers of real assetsin terms of land,housing, andfactories still constitutea significantportion of the total, but individualsare increasingly tryingto meettheir transfer objectives through financial claims to assetsor throughthe state. Dofinancial markets and state-managed transfer mechanisms in modem societies serve the dual roleof poolingand allocating savings to enhancethe utility of currentgenerations given their consumptiontime preferences and of poolingand allocating their savings to meettheir transfer objectivesas well? ParentsInvesting in financialmarkets basically only seeinterest rates, not whetherreal assets actually still existto transferto their children.One might argue that the valueof a corporation'sstock would decline as it cuts Its trees.but corporationscan anddo moveon to otherforests to deplete.No onesees the globalpicture like the stylizedfarmers in the parable.The discourse on sustainabilityis aboutthe globalpicture. Evenif all parents individuallyrealize they are investing in sawswhich are deforesting on net,they maycontinue to do so if theyhave no altemativebut to hopethat the retumsfrom theirinvestment can be reinvestedagain to the benefitof theirchildren even if theycan see that all in the furtherfuture arelosing on net.

6.9. Economistsfrequently argue that as particular resources become relatively scarce, their priceswill rise,signalling consumers to useless and investors to investIn their regeneration or the productionof substitutes.In the caseof naturalresources, whether or not marketsfunc- tion in this mannerefficiently depends on resourceallocators having a gl2Ibl overviewof re- sourceavailability, technology, and future demand.4 As notedin section5, the efficient pricepaths explored theoretically in the literatureto dateassume the currentgeneration holds all of the rightsand does not redistributeto futuregenerations. How investors might foresee futuredemand given that they areboth investing to rneettheir own commoditytime preference andinvesting to transferto futuregenerations, thereby changing future demand, presents an interestingdilemma.

6.10. Nevertheless,one mightstill argue that those who are especiallyconcemed about the welfareof their childrencan invest directlyin andhold natural resources themselves. Those who are more worriedcan take care of their own children,and if their worries arejustified.

40. The theme that modern economies are complex and things get done by "roundabout* processes was an important element of economic thinking between 1880 and 1930. In particular, 18hm-Bawerk and other Austrian capital theorists streosed the concept ln an effort to incorporatetime in their production functions(summarised by R. H. Hennings,Roundabout Methods of Production,1990). Kenneth BouldingwriLting as a broad-thinkingeconomist (The NUgld an a =oa jtstm,1985) and AnthonyGiddens writing as a sociologist(The Ccaoenceg of Mh2drni&U,1990) argue that *distancing in space and time of people from the consequencesof their actionsis a key characteristicof modernity. 41. These criticallyimportant conditions for efficientexhaustible re- sourcemarkets are well stated in the treatise by Partha Dasgupta and Geoffrey Heal EaconomiaTheory and ExhaustibleResour;tm, 1979) and the text by Anthony C. Fisher (jfiource and Environmental Sconomics, 1981). When such an global overviewis not available, the price path is not stable. These conditionsand their consequencesare nMIdiscussed in the importantnew text by DavidW. Pearce and R. Kerry Turner,op cit. Sutainabiity as Intgational Equity Page34 their childrenwill be wealthyindeed. Private markets will still work so longas somepeople areconcemed, and these people wiil demonstratehow others should best behave. In response to this position,however, It is dearthat Individualscannot easily directly own the diversediff- erenttypes of resourcesfrom aroundthe worldon whichmodem life depends,to saynothing of alsohaving sufficient control of the technologiesand organizations necessary to combine theminto products.While we think of capitalismas a systemwhich promotes individualism, in fact ourfates and those of ourchildren are highly interconnected through complex webs over whichwe haveno control. Thisinterconnectedness speaks to the needfor collectivemonitor- ing, andperhaps collective guidance, of the stockof assets.-

6.11. Thereis nothingin thenature of marketeconomiesperse which guarantees that investors seekingto accumulateassets will not depletethe naturalcapital they wouldchoose to transferto their childrenif they couldmonitor and guide the globalsituation. This argument addressosthe sameissues of thoseconcernd that naturalassets and their depletiondo not appearin the systemof nationalaccounts.A Their concem is that plannersand/or the elec- toratewho guide the economyought to knowthrough the accounting system how development decisionsmade in the recentpast actually affect options for the future. If they do not, then the currentgeneration could be livingwell at the expenseof futuregenerations about whose welfarethey are reallyconcemed.A The two argumentscan be thoughtof as marketand planning'duals of eachother. In unguidedeconomies, distributive failure could stem from specializationand trade combined with thedifficulty of achievingtwo objectives,meeting one's own commoditytime preferencesand meetingone's intergenerational distributive objectives througha singlemarket with basicallya singlesignal. In guidedeconomies, planners can just as likelyoverinvest In 'saws' andunderinvest in 'trees if theyonly look at retumson investmentsand fail to monitorthe mix of the stockof assets.

6.12. Existingarguments for not relyingon marketsto protectfuture generations include: 1) environmentallyrelated market failures, 2) the welfareof future generationsas a public

42. Ironically,as centrallyplanned economies switch to markets,general equilibriumtheorists posit that for marketsto work efficientlyover time with exhaustibleresources, allocators must either depend on a centralplanner for correctand coordinatedinformation or sufficientof them must themselveshave a centralplanner's global view of resources, technologies, and demand well into the future. 43. Yusuf Ahmad, Salah31 serafy, and Ernst Lutz (tlLgn.nctal Accountnlg for SustainableDeelol2ent, 1989; see especiallythe chapterby 31 Serafy), Nerman Daly and John Cobb (For the CommonGood: Redirectints the sconomy Toward CommunitX.the Environment, and a Sustainable Future, 1989), and Robert Repetto et al stura e c in the NationalXncom Accounts,1989). The United Nations StatisticalOffice is currently taking the lead on the development of nvironmontal accounting. 44. This problem is not uniqueto naturalassets. A societycould also be Lnvestingin acetylenetorches to "mine"the steel ln highway bridgesor in vestingin bureaucracieswhich employ people with doctorate degrees in ways which result ln their looLng the capabilLties they had acquired. Sustanabilityas InterenetatdonaEquity Page35

good,and 3) the problemsof irreversibilityand the advantagesof maintaininga breadthof options for futuregenerations whose preferences arc unknown. Distributivefailure may exist apartfrom and In additionto any of the the foregoing.The likelihood of distributivefailure impliesthat the full gainsfrom specializationand exchange,whether through capitalist or socialistinstitutions, cannot be obtainedwithout asset monitoring, and probably guidance as well, to assurethat distributiveobjectives are met. It mustbe bomein mind,however, that the informationand management costs of assetmonitoring and guidance necessary for the sort of optimizationtypically envisioned by economistsmay imply that alternativeinstitutions or a mix of institutionsless oriented toward optimization may achieve higher levels of welfare.

6.13. As elaboratedin Appendix4, intemationsldevelopment agencies are already monitoring and guidingthe use of naturalassets. Theconcept of distributivefailure presented in this sectionindicates that moreintensive monitoring may well be justified. Equally importantly, the developmentagencies as participants in theplanning of investmentsin both"saWs* and treesw andthe multinationalbanks as the holdersof financialassets and participants in the investment decisionsof their membercountries should systematically develop and base their decisions on a globalview.

7. THE TRANSFEROF NATURALAND OTHERASSETS TO FUTUREGENERATIONS

7.1. Thesimple diagram of Figure3 can Fig. U be modifiedto that presentedin Figure6 to elaboratehow the transferof assetsbe- tweengenerations may have declined. His- torically,the vast majorityof naturalassets weretransferred from onegeneration to the nextbecause people simply did nothave the n --- r------A technologyto depleteresources. But the transfer also occurred becauseparents . _. - knewtheir children'ssurvival depended on 1 the sameresources as did theirown. Insti- I tutions also helpedassure the sustainable N" AS.# b&Mf managementof resourcesused in common. I

Thus,in additionto the transferof natural - assots,the transfer of culturalassets - . humanproduced capital, knowledge,and Figure6 successfulways of organizing- fromgener- ationto generationalso assured sustainabil- Susainabilityas Integonal Equity Page36

lty.0 Whilenot everyculture was sustainablehistorically, many were for longtime periods. Forthese societies in theseperiods, the combinationof naturaland cultural assts transferred put them to the left of the 450 line.

7.2. Wheneconomists have pondered whether future generations will haveadequate resources,they haveargued, with few exceptions,that eachgeneration thus far hasbecome betteroff materiallyin spiteof resourcedepletion, largely because of nowtechnologies. In the contextof Figure6, the argumenthas been that culturalasset transfers more than outweighed anyloss in naturalasset transfers.As the bestquality resources are used up, new technolo- giesallow people to exploitlower quality resources or substituteto othermaterials. A famous analysisby Bamettand Morse seemed to documentthat the costof obtainingresources had declinedfor nearlya century,indicating that resourceswere becoming more available rather than less, at leastthrough 1957.0 Thoughstudies undertaken during the late 1970sand early 1980s indicatedthat resourcecosts and priceshad begunto Increase,apparently indicatingincreasing scarcity, economistv still frequentlycite the studyby Bamettand Morse to justify technologicaloptimism.t0

7.3. Thoughthe useof argumentsusing economic indicators of resourcescarcity is com- monplacein economics,such arguments are logicallyfallacious. Costs or pricescan only be interpretedas indicatorsof scarcityin the contextsof the resourceextraction models of Ricardo or Hotellingrespectively. These models assume resource allocators are informed of resource scarcity.If theyare Informed, than their allocations and the resultingcosts or priceswill reflect the scarcity.If allocatorsare informed, however, economists could simply ask themwhether resourcesare scarce or not. If allocatorsare not informed,the Indicatorswill reflecttheir ignorance. Thereis no way to determinewhether allocators are informedof resourcescarcity or not unlessthose undertaking the analysesknow themselveswhether resources are scarce, which,is the very answerthey hopeto attainby the analysesin the first place.4

7.4. Thegeneral equilibrium framing developed in this paperindicates another reason why priceor cost pathssay little aboutscarcity. Themultiple efficient solutions described in the modelspresented in section4 havedifferent price and cost pathsIn accordancewith how

45. The illustrationin Figure 6 and the argument in the text suggests that natural and culturalassets are additiveand that one can substitutefor the other. Withinlimits this may be true, but certainlysome of each are ultimately necessary. 46. HaroldBarnett and ChandlerMorse (ScarcityAnd towgglhThe Economic. of NatugalResource AlailabiLItY, 1963). 47. The key later studies includeMargaret B. Slade (Trendsln Natural ResourceCosmodity Pricess An Analysisof the Time Domain,1982); and DarwinC. Hall and Jane V. Hall (Conceptsand Measuresof NaturalResource Scarcity with a Summaryof Recent Trends,1984). 48. Richard B. Norgaard (IconomicIndicators of Resource ScarcitysA criticalBesay, 1990). Sslbility as t o Equity Page37

muchpeople care about the future. Thetransfers made by parents,the forestconservation policiesof nationalgovernments, and other factors affect economic indicators. For this reason, It is inappropriateto look to economicIndicators to seewhether resources arescarce. The indicatorsmay not reflectscarcity, not becauseresources are not scarce,but becausepeople have establishedinstitutions to redistributeresources in light of their scarcity. If those institutionsare weakened because economists interpret their beneficial affect on pricesas the absenceof scarcity,resource use will secelerateand sustainability will suffer.

7.5. Earlyempirical work on the contributionof naturalassets to currentincome in developing anddeveloped countries is suggestiveif not definitivewith respectto the sustainabilityof development. A studyby Repettoet aoof petroleumdepletion, deforestation, and soil loss in Indonesiaindicates that what appearsto be a steadyfour fold increasein grossdomestic incomein Indonesiabetween 1971 and 1984may actually have been a highlyerratic though apparentlydeclining income after resourcedepletion is inluded in the analysis.I Dalyand Cobbargue that sustainableeconomic welfare in theUnited States probably deteriorated slight- ly between1970 and 1980and appears to havedeteriorated by somewhatmore than 1% per yearin the 1980s.l

7.6. Thuswhether societies are transferring more or fewerassets to futuregenerations is still very much an empiricalquestion in searchof an adequateconceptual framing. The evidenceis mixed. Certainlytechnology has advanced. But industrialdevelopment. modem lifestyles,and even modem ways of organizingare closely tied to thenet oxidationof hydrocar- bonsat the heartof the problemof globalclimate change. Thus much of the culturalassets availableto future generationsare likely to be inappropriate.Many resources are not being

49. One of the majordifficulties in envirormentalaccounting is that re- sourcequalities and technologyare closelyinterrelated. One can onlybe de- finedin the contextof the other. As technologychange., qualities which were not appreciatedbefore, and hencenot thoughtof and inventoriedas resources, becomeresourcess see Richard D. Norgaard(Resource Scarcity and New Technology in U.s. PetroleumDevelopment, 1975) and RichardD. Norgaardand owo JiunLeu (PetroleumAssessibility and Drilling Technology: A Case Study of U.S.Petroleum Developmentfrom 1959-1978, 1986). 50. Thisstudy by Repetto,Magrath, Beer and Rossini (op cit) valued assets Ln termsof currentmarket rents,i.e. current market prices loes production costs. Incom afteradjusting for resource dspletion varLed tremendously due to oil pricechanges, so muchso thatthe adjustodincome losses all meaning.The problemiL thatrelatively minor changes in marketprices, when appliedto the full stock of resources,result in very largechanges in calculatedincome. Clearly,when supply and/or demand for a naturalresource product are inelastic, relativelysmall changes in supplyor demandwill havelarge effects on price. suchprice changes are necessaryto equilibratethe marketin thattime period, butyearly price changes should not be usedto valuenatural assets. Indeed, the priceof farmlanddoes not vary as muchas theprice of farmproducts, especially afterdeductlng productlon costs, because investors in farm landrealise most pricechanges are temporary. Thisstudy highlightoone of the complexitiesof valuation. 51. eormanB. Dalyand John3. Cobb (opcit, appendix). Sustainabilityas Intergenrationd EBqWty Page38

transferrednow becausewe have the technologiesand levels of populationto degrade resourceswe couldnever degrade heretofore. New technologies,ways of organizing,and populationlevels have created a needfor transferinstitutions which werenot neededbefore. What little theoreticalwork has beendone on the importanceard nature of intergenerational transfersis probablyinsufficient to supportsignificant empirical forays.A

7.7. Socialscientists are beginning to formallydocument how colonizationfollowed by efforts at Westernstyle development broke down both the traditionalmechanisms of managing resources.Many have argued that the new institutionsand technologies which replacedthe earliercultural capital hastened the ratesof exploitation,assuring that therewould be lessto transfer. Colonial,and later national,governments assumed central control over forest resourcesin particular,both openingthem up to commercialexploitation for international marketsand closing them down to useby localpeoples. The introduction of marketincentives into village life shiftedthe incentivefrom savingsin the form of land maintenanceand improvementto savingsin the formof monetaryassets and Western-style human capitalDt

S. SUSTAINABIUTYAND CAPITALTHEORY: DILEMMAS OF ASSETAGGREGATION

8.1. Thisdiscussion paper, like many other economic treatments of sustainability,argues that the assets- the natural,produced, and human capital - in eachtime period or generation mustbe at leastas productiveas that in the precedingperiod or generation.While this formu- lationhas great intuitive appeal, aggregating capital, even simply produced capital, has proven difficult for numerousreasons. If knowingwhether development is sustainabledepends on

52. RalphC. d'Argeand CliveSpash (EconomicStrategies for Mitigatingthe Impactsof ClimateChange on FutureGenerations, 1991) John Cumberland(Inter- generationalTransfers and EcologicalSustainability, 1991) and TalbotPage (op lte, Sustainabilityand the Problemof Valuation,1991) seemto be the only other economistsbeginning to frame questions in this manner. 53. The numberof socialscientists working in this area is now sufficient- ly large that therear established,though still very much overlapping,schools of thought. The largest focuseson institutions,typically at the community level,which have historicallymanaged commonproperty resources. Economists have worked activelywith sociologistsin this effort,reviewed in a World Bank DiscussionPaper by Daniel Bromleyand MichaelCernea (TheManagement of Common PropertyResources, paper #57, 198x). A secondgroup, under the rubricof poli- ticalecology, concentrates on nationaland internationalinstitutions. Repre- sentatlvework. LncludesPiers Ilaikie (The Political Roan= of Boil Zrosio in Ravelong Qntrim* 1985),Michael Redclift (Sustainable DeveloomentI Ex2loorna the Contradictions,1987) and VandanaShiva (StavinaAlivet Women. Xcoloav.and pvyo1m=nt. 1988). A third group,who have assumedthe name of 'onvironmental history"combine the thinkingof the first two and concentrateon historical documentatLon. The works by RamachandraGuha (The VngUie Woods: ecolcical Changgand PeasantReasitance in the Hmalaya, 1990p MadhavGadgil and Ramachan- dra Guha, An Rniromntal Hiutorvof India* 1991) are excellentoxamples from the developing world of the work underway in the area of environmental history. Donald WortstGr (Thg nds of the Earth: Persoectives on Modern Environmntal Hin- t=, 1988) and Carolyn Merchant, The Death of Natuxes Women. XEoloS. and the sllS GIIE]=Xm%&MIQ # 1980) are leaders in the field in the developed world. S ility as IntergeneratdonalEquity Page 39

actuallydetermining whetheraggregate capital is increasing,a review of the controversiesin capitaltheory Is in order.

8.2. CapitalIs heterogeneous.Some assetshave short lives, some long; some produce evenlyover time and then suddenlyexpire, some produceproportionately less over time and whither away; some, like trees, havelong start up times,produce different productsover their lifetimes,and then can be harvestedduring any of a numberof years. The typical approach to aggregatingacross capital of differentlifespans and productivitytime pathsentails summing the net present values of each of the assets over their lifetimes. This method fits our understandingof how salesprices for corporationswith multiplecapital assets are determined. This approach,however, runs into difficultieswhen appliedto economiesas a whole.

8.3. The Cambridge-Cambridgecontroversy is still unresolved.Though empiricists have yet to find the argumentsignificant, the controversyhas highlightedthe fact that aggregationrules are necessarilybased on assumptionsabeut the natureof economicsystems which may prove contentious.B In particular,the controversyhighlights the complexitiesintroduced by the relationshipsbetween production techniques and capital aggregation,complexities which paralielthe difficultiesof valuingnatural assets independently of technology. How can things be valuedand comparedwhen they are inherentlyinterrelated, i.e. not separatethings? New conventionswill have to evolve to work with the dilemmasof measuringand comparing separatenatural, produced,and humanassets when they, in fact, are inseparable.

8.4. The Cambridge-Cambridgecontroversy stressed how valueschange moving between equilibriapoints. On the presumptionthat the transitionto sustainabilitywill entaila significant shift in the economy,this aspectof the controversyis important. Thinkingback to the utility frontiersbetween current and futuregenerations of earlierdiagrams, the measurementof aggregatecapital at an interiorpoint (suchas A), the closestefficient point (B), andthe welfaremax- imizingpoint (C) will all be different becausethey use different rates of interest and prices.

54. RichardS. Norgaard(Three Dilemmas of EnvironmentalAccounting, 1989) and Vorgaard(Linkages between Environmental and NationalIncome Accounts, 1989). Many of the same issuesappear in Henry M. Peskinwith Ernst Lutz (A Survey of Resourceand gnvironmentalAccounting in IndustrializedCountries, 1990). 55. Joan Robinsonargued that sincethe total quantityof capitalin an economy at a particulartime, how capital is used over time, and how capital servicesare aggregated all dependon the rate of interest,there is a possibility that the relationshipbetween aggregatecapital and the rate of interest is not monotonic. Whenthis phenomena in combined with the posBibilityof back- ward bendingsupply curvesfor labor, the relationshipbetween the capitalin- tensity of differenttechniques used at different interest ratesis not omooth. Thee is, in effect, the possibility of switching and reswitchLngbetween tech- niquesof production as interest ratesdecline or riserelative to wages. And lf this is the case, very different,i.e. incomparable,bundles of capitalare being dLacussedat only somawhatdifferent interest rates. The Cambridge-Cam- bridge Controversyis roviewedfrom at least half a dozen perapectivesln John Zatwell, Murray Milgate, and Peter Newman (ode) (jhe Me_ *P_alar CanitAl %hinEL, 1990). Susanabilityas IntergeneaionalEquity Page40

At pointB, the total assetspassed on to the next generationwill be lessthan those enjoyed by the current,at pointC the total assetspassed on to the next generationsare greater than thoseenjoyed by the current,but onecannot compare the aggregatevalues of assetsat points B andC as theywould be measuredat theirrespective points. Dueto priceeffects associated with the scarcityof naturalassets and the changein the rateof interest,the aggregatevalue passedto the nextgeneration at B couldbe greater than the valueat C andyet Bclearly would still not be sustainable.The net presentvalue of assetscan stay the sameor evenincrease whenboth the flows andthe rate of interestdecrease. Thus environmental and resource accountingrelies on a monotonicrelationship between capital and the rateof interestmuch the sameas doesthe conceptof aggregatecapital for aggregateproduction functions.

8.5. Aggregatingcapital may blur whethersustainabil,ty is possiblefor anotherreason. GenerationOne might pass trees on to GenerationTwo with a net presentvalue equal to the assetsGeneration One received. But if thesetrees need to grow another30 yearsand can only havethe stipulatedvalue if theyin fact arenot useduntil GenerationThree, then the rule doesnot leadto sustainabledevelopment. In short,the timeperiod during which capital can be usedis criticalto our understandingof sustainabilitybut areblurred through aggregation.

8.6. Fromthe perspectiveof sustainability,emphasis must be placedon the continuityof flow, not somemeasure of aggregatevalue. In this sense,each generation is obligatedto pass on to the next a mix of assetswhich provides equal or greaterflows to the next generation without greatereffort on that generation'spart to providethe samefor the next. Givena choicebetween several possible assets, the appropriatequestion is 'how welldoes an asset's flow of servicesmatch with thoseof existingassets to meetthe welfareobjectives for each generation?'

8.7. Followingthe energycrisis of 1973-4,several economists used growth models with both aggregatephysical capital and exhaustibleresources to explorethe conditionsfor sustainability.Out of theseexplorations emerged what has become known as the 'Hartwick' rule whichstates that consumptioncan remain constant in the faceof decliningavailability of exhaustibleresources so longas the rentsfrom the exhaustibleresource are invested in renew- ablecapital.P Whilethese models were touted at the time andhave been since as evidence that the developmentcan be sustainedin the face of naturalresource exhaustion, in fact, closeranalysis reveals that thesemodels only identify the importanceof substitutability.So longas a renewableform of capitalcan substitute for the depletednatural capital for all pro-

56. Bese Robert M. 8010w (Intergenerational Equity and Exhaustible Re- oources,1974), John M. Hartwick (SubstitutionAmong ExhaustibloResources and IntergenerationalEquity, 1978), A. Dixit,P. Hammond,and M. Noel (OnHartwick#s Rule for RegularKaximin Paths of CapitalAccumulation and ResourceDepeletion), and ParthaDaogupta and T. Nltra (IntergenerationalEquity and EfficientAlloca- tlon of ExhaoutibleResources, 1983). SalahEl Serafyarrived at effectivelythe esam rule otartingfrom accountingprinciples (The ProperCalculation of Income from DoplotableNatural Resourcee,1989, and letter of April 19, 1991 to El Berafy from Hartwick). Sustinability as IntergenerationalEquity Page 41

ductivepurposes, development can be sustained.ACommon sense indicates that if some- thingis not essential,its demiseis not critical. Thesegrowth models illustrate why the role of naturalcapital in sustainabilityoften hinge on the extentto whichnatural capital is special.

8.8. Foreconomists, comparison and aggregation are greatly simplified by valuation.Sus- tainabilityrequires, however, that equalattention must be givento the mix of specificassets andthe timingof theirflow of services.Though the aggregatemeasures of economistswill no doubtassist in the overallassessment, the limitationsof capitalaggregation explored in this sectionprovide excellent justification for sustainingdevelopment in partthrough tne protection andtransfer of particulartypes of assetsas determinedby noneconomicreasoning.

9. THE CHALLENGETO ECONOMICPRACTICE

9.1. Thepractice of economicsand the organizationalenvironment in whicheconomists workevolves with socialconcerns and the theoryused to addressthem. Thereis everyr"son to believethat economicpractice will evolveto theextent sustainability is a matterof designing new andbolstering existing institutions to transferassets. And yet the historyof the practice of economicsdocuments that the methodologicalstance of positivismhas clearlyselected againstserious involvement with questionsof equity. Sustainabilitychallenges the profession to betteradapt to work In the politicalarenas In whichmany of the decisionsabout which assetsshould be savedfor futuregenerations and how institutionsshould be augmentedto maintainand transfer assets are being made.

9.2. The intemationaldevelopment agencies were initially conceivedin the progressive visionas mechanisms for transferringknowledge, technology, and capital from industrial nations to the lessdeveloped world. In this formulation,the UnitedNations agencies provided advice on specificissues and the internationalbanks assessed specific development projects proposed for loans. Economistshelped select, on the basisof efficiencycriteria, what slhouldbe pre- sentedto agencygoverning bodies and developing governments for consideration.Unique re- commendationsare obtained, most typically, by implicitlyassuming the currentdistribution of rights,both within and acrossgenerations. Development economists were initially seen as workingapart from politics,independently assessing and advising on separatethings, with the flow of informationclearly going from Northto South. Theevolution of environmental,for-

57. for stock resourceswhich do not have substitutes,economists have built models in which resourceuse asymptoticallygoes to zero and output is maintained, but these rely on a Cobb-Douglasspecification in which the average product of the stock resourcegoes to infinityas use goes to soro. Harold J. Barnettand ChandlerMors (op tit) also argue that oubstitutionhas been a key factorrelieving scarcity. ?ollowingthis argument,some economiatshave argued that reoourceswith high elasticitiesof substitutioncannot by definitionbe scarce. Paul R. Zhrilchtackles economists, reliance on oubstLtutionarguments from the perspectiveof onvironmentalscience (The Limits to SubstitutionsMota- resourceDoplotion and a New Bconomic-BcologicalParadigm, 1989). SusaLn Ablity as Itrgenetational Equity Page 42

estry,and resource economics in NorthAmerica took placein a verysimilar organizational on- vironment.Interpreting sustainability as a matterof correctingmarket failures fits nicelywithin this organizationalrole. Takingthe existingdistribution of assetsas given,of course,nas been an equitystance, but few amongthe publicat largeknew sufficient economics to effectively exposethis position.

9.3. Thepractice and organization of developmenteconomics, however, did evolve. Advice givingagencies have become integrally involved in nationalplanning and institution building as well as in projectformulation and implementation.Advice with respect to separatesecific thingsmade little sense.Yet in spiteof continuingefforts to initiatedevelopment projects and policiescorrectly, it is commonlyacknowledged that internationalefforts to promotedevelop- mentfall shortbecause the institutionsestablished lose direction, knowledge transferred is not retainedand disseminated, educational facilities soon lack teachers. and irrigation projects are not maintained.Efforts to addressthis problemhave led the intemationalagencies In con- tradictorydirections - to try in somecases to devolveresponsibility to localcommunities and nongovemmentalorganizations and in othercases to assumebroader responsibility themselves, centrallydirecting aid in responseto how well nationsare managing projects and maintaining institutions.

9.4. Concemover the sustainabilityof developmenthas accentuated the issueof develop- mentmaintenance. When environmental institutions have high 'decay rates', environmental monitoringand protection will soonbe inadequate.Industrial projects require sustained maintenanceand management to keeppollution levels low. Forestryprojects require a balancebe- tweengrowth and cutting as wellas roadbuilding and erosion control that caneasily tip the wrongway whenmanagement is not sustained.Modem agriculture requires sustained research simplyto maintainlevels of productivitybecause pests overcome the resistancebred into modernvarieties. Sustainable development requires sustained, day to day,appropriate inter- actionwith the complexitiesof ecosystems.Unlike the progressivevision, development is not a processof figuringthings out andsetting them up correctlyonce and for all.m

9.5. Formulatingsustainability as an equity decision also confronts positivism directly since economistscan no longersort between development possibilities using efficiency criteria rooted in the currentdistribution of rightsbetween generations. If the economycould be movedfrom B to C in Figure5 with a few legislativechanges in a matterof years,economists could 'wait out" the transitionand then undertake conventional efficiency analyses after a newregime of rightswas established. In fact,there is no reasonto expectthe transitionto sustainabilitywill be quick.

58. The significance of sustaining develont for the World Bank, for oxamplo, hao been deocrLbed by the Operations Evaluation Department (Renewable Roourco Managment in Agrlculturs, 1989). Ssta bility as Integeneration Equity Page 43

Sconomit work with at least three different prespectives via a via polLtics. f:l~aaaJcL- legislative bodies are necessary for ng decisions with respect to eqity, economic can inform poltical d ionmakers how alternative legislative decisions will affectdifferent groups ad how to improve efficiency given equity decisions. aLconoma interactive with politics. Zronrat PgXAa - economics narrows the political agenda by pro- screeninginefficient options, encouragesgood politL by identifying bestoptions,generates objective information for policy-makers, and Ldi- cateshow to implemnt legislativemandate. efficiently. Iconoicea should replacepolLtics to the extentpossible. NODS&=gAtlvQ - voting and other participation in collectiveactivities is Irrational, most "do-gooders* are rent seekerseploiting the public's nalve faith in collective action. Sconomics shows that politics reduces social welfare. This paper assumes the first stance: that soclties arm politically viable; that political decision-making is a balancing of moral argument about the type of future people want, not simply another method of allocating between individual material wantsa and that thi role of economic analysis is to better inform polities of the econoLic implications of alternative decisions. The second position, however, is the most common position that economists assume and the stance assumed in benfit-cost analysis. in thls view, polities is mostly another way of balancing competingmaterial interests which can be done more effectively by simula- ting how marketswould work. The third positionis that of the "new" aso- classical economists such as James Buchananwho assumethat moral arguments are simply ways of fooling the public into bending the rules bent to favor partlcular economic Interests.

Text Box 5

9.6. Assuringthe rightsof futuregenerations will be an on-going,complicated process. Tosome extentit will bea matterof determiningand protecting the localand national mechan- Isms- cultural,market, and public - that alreadyexist for transferringassets to futuregenerations. Legislativedecisions to protectindividual species, set asideland for nationalparks, es- tablishsoil conservationagencies, and limit pollutioncan be interpretedas effortsto protect the rightsof futuregenerations. Judicial branches of governmentwill reinterpretlegislative law anddevelop rationales for decisionsin new areas.Intemational accords such as the Montreal Protocolto protectthe ozoneshield clearly limit the rightsof currentpeoples In orderto protect the assetsof futurepeoples. An Internationalgreenhouse gas accord of muchgreater signifi- canceIs likely. Theintemational agencies have been mandated to promotesustainable developmenton a projectby projectbasis. And intemational agencies, national govemments, and nongovemmentalorganizations have joined in theTropical Forestry Action Plan to savetropical for- sts for futuregenerations through a complexadministrative process. The principle that future peopleshave rights to humancapital in the formof educationand health are equally Important andassured by a combinationof sharedethics, constitutional clauses, national legislation, and internationalaccords which established United Nations agencies to promotethese ends. In Sustainabiityas IntergeneratonalEquity Page44

short,the rightsof futuregenerations will be protectedby an incoherent,constantly evolving, pasticheof formallegislation and informal agreements. Economists might be ableto helpmake themmore coherent, but it wouldbe naive to presumethat the rightsof futuregenerations will beassured by a few simplerules. Wecan expect the processto berepresented by the zig-zag pathfrom A to C in Figure7.

9.7. Giventhat manydecisions of great economicimportance will be madein non- economic decisionmakingarenas, what shouldbe the role of economists?Econ- c omistsneed not be simplyreactive, tech- J nocraticallyresponding to new rulesaimed at intergenerationalequity madein other arenas. A higher portion of economists 5 might take proactiveroles, closerto the , classicalliberal view of the interdependence \ betweeneconomics and politics. Econo- mists shouldactively propose what they think are the best methods for protecting the interests of future generationsand questionthe effectivenessof proposalsput 7 forth by others. Theyshould openly parti- 7 cipate in the political discoursethrough whichthe strategiesfor achievingsustainability are beingselected. This, however,would requirea significantshift in the stancethese economists take toward political and other social decisonmakingprocesses.

9.8. Thetechnocratic progressive stance, in whicheconomists see their role as keeping politicson trackthrough the useof effiencyarguments, is still dominant.In the last decade, therehas been a significantrise in the numberof neoconservativeeconomists taking the view that any form of collectiveactivity is irrational. Morerecently, however, some economists havejoined with othersocial scientists to reinvigoratethe classicalposition. 32 . In the classical view,markets, politics, administration, and the judiciary are separate social decisionmaking arenas.Decisions within each of the arenasaffect the otherarenas. Progressive technocratic andneoconservative economists see all decisionmakingas simplya matterof weighingaggre-

S9. AmitaLZtalonl (The Moral DimonsLon: Toward a uw RgonmlVA, 1988) from the perspectLveof a socLologistprLmarlly concerned wlth coamunLtyand equity and Mark Sagoff (The2conomv of theZEarth,1988) from the perspectLveof a moral phLlosopherprimarily concerned with the onvLronmentargue persuasively that pol- ltco ia a form of moral dlicourosdirected at creatingthe kind of socLety peopledesLre. AmitaLZtzLonL has spearheadedthe formationof the Societyfor the Advancement of SocLo-Zconomics to foster communication between economists and other oocial scLentistoand to supporta whealthLer"attitude among economLito toward other ooclaldeciLionmaking arenas. Susinability as Intergeneonal Equity Page45 gatebenefits and costs, a processwhich markets do for individualconsumers automatically and arguablyas wellas possible.In contrast,the classicalview stresseshow peopleparticipating as citizensengaged in the politicalprocess use different procedures, languages of discourse, andcriteria than they use as consumersparticipating in markets.In thereviving classical view, peopleare not simplyutility maximizersbut ratherthink and act in differentmodes as members of families,as citizensof cities,states, and nations; as laborers,profesionals, or capitalists; as participantsin judicialprocedures; as religiousbeings; and as consumers.And in eachof thesemodes, rather than thinking of decisionmakingas an informedweighing of givenprefer- ences,the revivingclassical view stressesshared discourse and learning, that contributesto the developmentof understandingand formation of preferences.P

9.9. Classicalinterpretations of the interplaybetween people as consumerssatisfying their individualwants and peopleas citizensstriving to reshapethe world providesconsiderable insight Into the organizationalchallenge that sustainabilityprosents to the practiceof economics.Economists tend to think that decisionsin all arenasshould meet tests of eco- nomicrationality, of a weighingof benefitsand costs. Butwith benefitsand costs a function of how rightsare assigned. decisions to changerights cannot possibly be put to an economic test. And yet economistscan still participateeffectively In theseother decisionarenas. Economistscan still assesshow differentstrategies under consideration would actually work if implemented.Efficiency criteria could not be used,but economistscould explore how much the currentgeneration might have to foregoin orderto assurefuture income. Economics as a patternof thinkingidentifies issues that othersocial and environmental sciences miss. For example,economists might try to predicthow nationaleconomies will respondand interact globallyto alternativerules for greenhousegas reduction. Economicsis critical.not in the sensethat it providescriteria by whichother argumentsare tested, but as one way among manyfor "eking a largerunderstanding.

9.10. At an operationallevel within the existingstructure of economicpractice, thinking of sustainabilityas intergenerational equity suggests that development agencies need to bepaying moreattention to assetmaintenance and transfer. In this light, the practiceof economics

60. This "classical position to also known as "republicanism" in reference to its supportfor a republicanform of governmentconsisting of aetivecitisen- voters. ChristopherLasch (op cit) draws heavilyon this distinctionin his new left critiqueof the old left'spolitics of materialism,wending these concerns deftlywith the current perceptionthat unlimitedmaterialism will also destroy the environmentthat supports us. Also from tho political left, Samuel Bowles and Herbert Gintis (Democracyand CanitallsmtProv2rt. COMMity. and -the C2ntradictionsof o2dernSocLal Shouaht, 1986) argue for an expansion of democratic decioionmakinginto what are now the economic and administrative alms in part to elevate workers/consumersfrom mere preferencesorters to learningbeings. Key republicanrevivalists nearer the centerof politicalviews includesRobert Bellah and diversecohorts (Habits-f the Hoarts Individualism and CommitmentIn AmericanLife, 1985s) William f. sullivan (i2conhtructina Publi_Chilouonhy, 1966), and Alan Wolfe (WhoseLenrm Socialscience and Moral , 1989). The concernsfor communityexpressed by HermanDaly and John Cobb (op cit) fit this philosophyas well. Susthinity as IntergeneradonalEquity Page 46

gconomists would prefer general rules for attaining intergenerational eqity which are consistent with current practice and organisation. Treating ustainability as a problem of internalisng extenalities fLts this oriteria. For this reason, economists have also been attracted to using a lower discount rate (which has the quality of givlng future generations a greater weight) and meeting an aggregate capital objective during each time period. While each of these have soa merit, they are inadeqate for the reasonsdeveloped in sections4-8. Xn reallty, politLcal processes will bolster sustalnabillty through a collageof legislationprotecting specific areas and specie.,probibiting specLfictechnologies, limiting pollution,encouraging certaln types of technologies, changing the broadandates and structuresof organisations, and changing lncentives for individual behavior. Zconomist, should interact in this process and argue for fewer, more general rules. But to the extent that resource. and environmental syste have few substitutes, general rules break down. And to the extent that sustainability is about this generation'sconcern for the qualitativedirection of development, not simply assuring some abstract bundle of wealth, general rules will be ahunned. It this indeed is the reality, economists might still participate constructively in the political process by informang political actors of the implications of alternative proposals individually and ln combination. It will not be possible to rank them by officiencycriteria, but the .politLcal process still deserves the understandingeconomLits have of :economiesas systems.

TextBox 6 needsto shift from concem with efficiency to concemwith both efficiency and transfers. Considerablebackground work is neededwhich might best start within or be fostered by the intemationaldevelopment agencies themselves. Theseinclude:

9.10.1 Analysesof TransferInstitutions. Both historicaland cross culturalanalyses of the effectivenessof altemativeinstitutions affecting how assets have been transferred between generationsare needed. Economists,and more recently anthropologists,his- torians,political scientists, and sociologists,have made very importantcontributions to our understandingof institutionsfor managingenvironmental systems. The linkagesbetween how institutionsaffect environmentalmanagement and how they affect bequets to future generationsneed to be understoodand to becomepart of political discourse. Such analysesneed to be undertakenon a country by country basisand within regionsfor the larger countries. Economistswith other social scientists in intemationaldevelopment agenciescould Initiate such analyses and demonstratetheir Importance.On-going research might then best be undertakenby academicssupported by national govemmentsand nongovernmentalorganizations. Development strategies should then be designedto favor those Institutionswhich are supportingthe transferof assetsand discouragethose which are not.

9.10.2. Analvms of Crent Levelsof AssetTransfE. Whilethere Is now widespreadcon- Sustinability as Intergenetdonal Equity Page 47

cemthat developmentis not sustainable,existing data on servicesfrom naturaland other assetsare inadequate and methods for aggregationare not appropriate.The efforts by the UnitedNations Statistical Office to developenvironmental and resourco accounting data and methodscould be augmentedwith greaterefforts by other developmentagencies. Environmentalaccounting methods and waysof usingthe datawill evolvebest through experimentation.As perthe argumentsdeveloped in Section8, methodsfor asessing yearlyflows from multipleassets rather than the aggregationof assetsgre especially needed.Development strategies should be formulated in lightof whatcan be known about the levelsof assettransfer.

9.16".3.Evolution of Rulesfor Appraisalof Projectswith Transfr Comgnnts. Projects will be seenincreasingly as havingtwo components:an investmentcomponent which shouldprovide a returnto currentsavings and a transfercomponent designed to helpmeet intergenerationalequity objectives. The distinctionbetween these two components. however,will rarelybe clear. Rules,analogous perhaps to the rulesfor the divisionof costs betweenjoint productsin financ.alanalyses, will needto be developedthrough experienceand rational discourse within the agencies.

9.11. Increasingly,intemational development agencies will becomeinvolved in transfersof financialcapital with the primaryaim of promotingintergenerational equity. Theobjective of the new GlobalEnvironmental Facility jointly runby the WorldBank, United Nations Develop- mentProgramme and United Nations Environment Programme is to providefinancial transfers from industrializednations to developingnations to protect biodiversity,limit greenhouse emissions,and protect the ozonelayer. If the capitalendowment of the Facilityis substantially increased,it couldbecome a majorplayer in facilitatingthe transfersneeded for sustainable development.

9.12. Whetherparticipating in politicaland other decision arenas or workingwithin developmentagencies, economists will find themselvesstriving for optimawhich are not consistent with the limiteddata, the unreliabilityof environmentalInstitutions, the vulnerabilityof managers,and the vagariesof nature. Questionsconcerning the interactionsof socialand environmentalsystems over long time periodsare inherently complex, the likelihoodthat optimization reasoningwill err on the unsafeside are high, and the consequencesare likelyto be very costly. To the extentthis characterizesthe searchfor sustainability,there is goodreason to seekminimum regret solutions and safe minimum standards. 13

9.13. In all of theseroles, the internationalagencies can assist by contributingto the global view necessaryfor the efficientdistribution and allocation of exhaustibleresources.

61. S. V. Ciriacy-Wantrup (RgsourceConservation:t conomic. and Policieso 1968) and charlesA. Porrings(Reserved Rationality and the PrecautionaryPrin- ciples TechnologicalChange and Uncertaintyin ZnvironmentalDecision-making, 1991). Suswtainabiityas IntergeneratonalEquity Page 48

9.14. At this stage,relatively little is knownabout how to transfercapital to anothernation and assurethat globalobjectives are met. With sufficientNorth-South transfers or debt cancellation,for example,the tropicalrainforest nations may indeed establish very effective controlson deforestation.Northern economies, however, may choose to accelerateeconomic activityin orderto supportthe transfer.And the transfersmay also stimulate energy intensive developmentin the South.Both effects could contribute even more to globalwarming and ulti- matelyto the loss of blodiversity.Transfers between generations and between North and Southmay have little effectin the mediumto longerrun if thereare few newtechnologies and only a narrowfield of developmentstrategies between which nationscan choose.There is goodreason to believethat transferscan contribute to a solution,but they areprobably not a solutionin themselves.

9.15. Whilesuccessful middle and upper income participants in the modernglobal economy haveless control over the processof assettransfer, the poorincreasingly simply have nothing to transfer.The more than a billionpeople, approximately 20% of the world'spopulation, living on less than one U.S.dollar per day must necessarilyworry abouttheir immediateneeds. Aboutas manypeople have higher standards of livingbut insecuretitle to the resourcesthey manage,reducing their incentiveto managethem well for their children. Drought,floods, hurricanes,and earthquakesdisrupt the managementand accumulationof naturaland other assetsperiodically for manyother peoples. And tribal,civil, and regionalwarfare interrupt resourcemanagement, education, and capital accumulation for millionsof others. To a large extent,enhancing the transfer of naturaland other assets will requiresubstantial improvements for those most vulnerablenow. Intergenerationalequity and infragenerationalequity are complementaryobjectives.

9.16. Duringthe rise of industrialdevelopment, the questionof whetherthis generation's incomewas at the expenseof the next was subsumedby our faith in technologicalprogress. Futuregenerations would be taken care of by a processof 'trickle ahead'much like we once believedthat the poorwould automatically benefit from developmentthrough 'trickle down". With the weakeningin the faith in progress,"trickle ahead"Is openlybeing questioned. Modernsocieties have not developedinstitutions to assurethe needsof future generations. Quitethe contrary,modernity appears to havebroken down previous management and transfer institutions. Thereis a significantpossibility that the growth in incomeassociated with developmenthas come from the useof resourcesthat hadheretofore been protected for future generations.The provision of "FutureNeeds' through natural and other asset management and transfermust become a criterionfor developmenton a parwith the provisionof "BasicNeeds".

9.17. Thepossible arrival of an International"grants economy" suggests a host of new questionsthat will needto be exploredand new typesof practicesin whicheconomists need to becomeinvolved. Sustainabilityas Integeneational Equity Page 49

APPENDIX1

THECHALLENGE OF SUSTAINING TROPICAL RAINFORESTS

Al.1. Tropicalrainforests have ittracted the most attention during the intemationaldiscourse on uswtainabilitybecause they presentthe mostdramatic and Intertwineddifffculties. While It is somewhatunfair to sharpena nowconceptualization of the relationshipbetween economics and sustainabilityon th mostdifficult problem facing development agencies and third world peoples, thinkingabout sustainability In the context of tropicalrainforests quickly Identifies the difficulties of implementingthe concept.

A1.2. Concemis greatestfor the majorforests of the Amazon,the Congo,and Southeast Asia includingthose in Indonesia,Malaysia and in t.aos,Cambodia. and Vietnam. Key contributing factors Include: A1.2.1.Iliodive. Tropicalrainforests are the mostspecies diverse of all terrestrialeco- systems.Our undersanding of the total number of specieson earth and the proportion in tropical rainforestsIs unfoldingin responseto recentconcern over the forests themselves, yet it is widelyaccepted that a verylare proportionof thetotal is in thetropical rainforests. There Is a growingconsensus that sustainable development will beeasier for all witha mulitudeof spe- cieswith whichto experiment.Stog agrumentshave been developed that a smallpercentage of speciesmay prove to haveextrmely valuable propertes which could benefit all, but that we havelittl or no Ideanow which species these will tumout to be. Plantaionforests and agro- forestrywith equivalentor higherproductivities may serve as alemativeassets to the natural forestfor purposesof producingwood and pulp, but It is difficultto Imagineassets that might substitutefor the diversityof speciesItself.9

Al1.2.2.Mansoement intensive. The response of tropicalrainforest ecosystems to human Interventionand to naturalvariations In climateand other factor arevery difficult to predict. Thehigher uncertainty in tropicalrainforest systems, relative to mosttemperate zone systems, Is dueto: 1) the diversityof species,2) the tightercoevolution and hencegreater inter- connectednessbetween species, and 3) the relativeabsence of stocksof nutrientsand water storedIn soil whichbuffer ecosystem dynamics. Ecosystem response uncertainties can be narrowedwith more intensive management such as botter monitoring, deeper understandings of tropicalrainforest dynamics, and engaging in multipleactivities at lowerintensities. Traditional peoplesevolved such management techniques. Tropical rainforests have not espondedpredict- ablyto thetechnologies, management strategies, and social organization associated with modem development.The unpredictability of tropical rainforest ecosystems immensely complicates their managementand utilization and limits their contribution to economicdevelopment as it has conventionallybeen understood. A1.2.3. Deve1gmnnta h. Becausethe characteristics of tropical rainforests are relatively Incompatiblewith modernsocial organization and technology, they have remained on the gao-

62. U. S. Congress, Office of Technology Asoseant (Technologiea to sustain Tropical Rainforest, 1984), U.S. Congress, Office of Technology Assessment(Technologies to Maintain BiologicalDiversity, 1987), and Jeffray A. Mcleely at al (Con2prino the Ngrld's RiolggigalDiver_ity, 1990). Suatai iity as e EquWty Page50

gaphical marginsof economicmarkets and of govemmentinfluence. This has meantthat ansportcosts to andfrom nationaland intemational markets are relatively high which, In tum, mons purchasedInputs to productionare costy while the pricesof fores productsare low. This Wlavesa low marginof profit for a few commercialeconomic activitie andno marginfor most. Thoughmany are Interested in the possibilitiesof intensivemanament for the mutiple potentialproducts of t rainforestby the ver natureof the fact that the rainforestare on the developmentperipherl, Intensive management Is not lkely to be ggmm2uialy fe"sible. Thus commercialdevelopment tends to resultIn the harvestingof a few speciesover extended areas. The resultin highoradingshift t speciesmix, frquently driving some speciesto iocal oxtincions.

Al.2.4. Slmiarly,only a few servicesfrom central govemments can be maintained continuously, othr can be dolived lntemluently,and many cannot be providedat all due to the costsof transporteionand communication over sparsely populated land for from nationalcapitals. This ruts In an asymmetryin the distributionof servicesavailable from centralgoverments, or justd giventhe low returnper unit area. Forsimilar reasons, local govemments find it difficult to Interact effectively wih distnt central govemments. High tansactions costs reduce the effectivenessof both particpatoryand progressive technocratic govenance, greatly complicating topical rainforestdevelomnt and conservaton.

A1.2.5. Tzbal PeoDla. As a result of the incompatiblitiesbetween modem technologies and socil oranization that have left tropical forests on the developmentperiphery, the forests, by default, are hometo a signfcant portion of the remainingpeople sill oranized, economically and socially,along tribal pattems. The rights of tribal peoplesto forest resourcesare rarely well specifd and evenles frequenty onfored by nationalgovermment. How peopleIn developing and developednations think the rights of tribal peoplesshould be specifiedand enforceddiffer drmatically accordingto the extent to which they believetribal peoplesshould be ableto deter- minetheir own courseof development,building on their own culural and oogical base,or be- leve tribal peoples will choose, or must inevitably accept, the cultural premises and environmentaltransformation of modemdevelopmem.

Al .2.B. C6 m . The tropical rainforestscontain a signifant pordon of the global crbon squestered In livingbiomass. Deforesttion is estimatedto contribute14% of the gren- housegse th contributeto globalclimate change.1k At the sametime, reforestationin wet tropical regionsIs undersood to be oneof the most cost-effectiveways of delayinggreenhouse warming. The fact that tropical deforestationis currenty a significant sourceof greenhouse gase while the forest could become a significant sink makes It one of the most Interesting variablesIn the climate models.B There is increasingevidence that large scale deforestation affects regionalclimates as well5 .

A1.3. Thedifficulties of managingtropical rainforests have been elabored In the contextof the inteaionships betweenecological complexity and socio-economic systems. It Isimportant to bear

63. World Resources Institute(World Resources1990-91, p.24. 1990). 64. lntergoverraental Panel on Climate Change (ClimateChanuat Th X=b R2monsstrateoies, 1991) 65. Ineas Salati (The Forest and the Hydrological Cycle, 1987). Sustainabilftas Integenraional Equity PageS1

In mind that there are many more Interelationshipsand tat many of thm ntail positive,or amplifying,feedback loops which make prediction, policy prescription, and managemntextremely difficult.

A1.4. Thefoegoing characterationof the specialfeaturs of tropicalrainfores highlightthe difficultiesof assigningresource tights to currentgenerations, let alonefuture gnerations. There Is an on-goinginteraional debate,for example,as to whet natonsor all peopleshave rights to th bnefts of geneticdiversity of the rainforest.While this debaterages In partbecause of different ethil intions. there ae tremeidouspractical difficultis of auring that the gainsgo to naionsor to al peoplesas a whole ratherthan to the mulintional corpations ta are likelyto pant productsorinating from the biologicalproperties discoverod In th rainforest.0 The importanceof biodiversityraises questions such as whetherfuture generations should have riohts to geneticproperties, Individual species, and specifictypes of ecosytems? Or shouldfuture peoples haverights to somethingmore general and, If so, how shouldthis be definedand measured.The exitnce of tribalpeoples dramatically raises the Issueas to whetherthe rightsof futuregoeneations shouldbe vested in all peopls withina nationor whetherpartcular peoples might be givenparticular rights,challenging the conceptof nationhooditseIf. Andthe globalimportnce of the rainfors to climatehighlights the problemof whetherrights to specieswill be adequa andwhether the rights and responsibilitiesto future nerstionswill not haveto be specifiedIn termsof carbonstored in biomasss wel.

A .5. Thecomplexiies associated with ourinteractions with tropical rainforests challenge the very way In whichWstm thinking,Including neoclassical economic theory, conceive of rights. Many haveargued that the conceptof obligationswhich was historicallylinked to the conceptof rights needsto be relinked.-MObligations or responsibilitiesmay be expressedas retictons on rights whichmerely limit whet one can do in the market. RestrictionsIn femselvesfun countr to the ibertarin evolutionof the Ideaof right in the West. Regardlessof the dominanceof rudimentary conceptionsof fte privilW of property,rights arecomplex and highlyevolved In mostsocieies, developedor not. Obligations,beyond being more highly defined rights, may entail periodic positive benevolentactons in and beyondthe marketplace. Obligatonsas positiveacts may require Institutionsin addfitonto markets.Thus, though this paperpresents its argumentslargely in tms of the rights of futuregenerations, rights should not be interpretedtoo simply. In fact, theconcept of rightsassumes th naturecan be dividedup into partsand assigned as property,a preconception that mayin fact contributeto the problem.0

66. The complexityof the interrelatLonshLpsand a number of amplifying feedbackloops are elaboratedby Norgeard(Sociosystem and EcosystemCoevolution in the Amazon, 1981). Stephen Bunker has also explaLned the failure of developmentin the Amazon ln a systems context (Underdavelo2ingthe Amazon, 1985). 67. The dLfficultiesof aslgning rlghtsto genetieresourcoe are explored from the perepectLveof developingcountries by CaleatousJuma (Tho Gone HHOa:DSxxx, 1989) 68. Zdith Brown Vetso,op c1t, and Brian Norton,op cit& among othersmake thes points. 69. RiLhardS. Worgaard(EnvLronmental EconomLcss An UvolutLonaryCritLque and Plea for Pluralism,1985). Sutainability as JntergUM26mW Eqwty Pge 52

APPENDIX2

AN INTERGENERATIONALCOMPETMVE EQUIULBRIUM MODEL OF A NON-RENEWABLERESOURCE ECONOMY

A2.1. Consideran economy with an arbitrarily large finite number of ovelappinggeneon a 1, 2,... G, eachof which ivesfor two periods.The first generation Is bomin pedWI anda now generationIs bomin eachsuccesive period so that the o th goneratonlives In periodsu and9 + 1. Forsimplicity, asume ta eachgeration consistsof homogeneousIndividuals who can be repre- snt asa singleagent. There Is a singleconsumption good C andthe consumptionlevels of theo th eneationin perods gand g+ I areCR and C,.,. Eachgenertion has a utlitiyfunction Ue U*IC,,C,,1 ) whichis concave,monotonically increaning, and differentable.

A2.2. A singlefirm produces a homogeneous output in periodst - 1,2,...,G+lusing bbor U,), capital(K,), anda nonreproduciblenatural resource (A,) according to a constantreu to scale productionfunction f, - f,(L,,K, ,) that Is monotonicallyIncreasing, dierentiable, and concave. Assumefurhr thatprduction Is zro whenthe levelsof all Inputsare zero so thatf,(0,0,0) - 0. NoteOt thetime subscipt (t) allowsfor exogenoustechnoogial Improvement through changs In the pametes or functonalform of f, overtime.

A2.3. OutputIs distributedbetween consumption and net capialInvestment (K,, - K,). Capitl maybe freely converted Into consumption sothat there may be net consumpton of thecapital stock. Eachgeneration Is edowedwith a singleunit of laborin eachperiod tt It supplineinelly to thefirm. TheNi stocksof resources(S,) and capitl IK,) we ownedby the firstgonerato and takeon stricy posive values.Each successive generation recives an incometranse T,,from its predecessordurin the first periodof it existence.While In realityintergenerational transfer are effectedby bothprivate Individuals and by publicagencies, hare we assumethat the transfersare selectedand enforced by th governmentand are thus taken as exogenousto individualdecision- making. A2.4. Intergenerationalcompetitive equilibrium Is achieved via the temporary equilibria established throughtrading between the generaions alive in eachperiod subject to theirexpectations conceming futureprices and economic conditions. The conditions that describe the competitiveequilibri that ariseunder altemative income transfer regimes may thus be derived by evalutingthe maximization problemsfacd by eachagent. Consider first theprofit maximization problem conftonting the firm. Forthe sakeof simplicity,assume that the firm Is myopicand that there are no fur marketsso ht tradingIs limited to goodsthat are made available during the period In whichthey are purchased. Definingf, as the firm'sprofit in period, w, as the wagerate, r, as the interestrate or priceof capitalsorvices, p, as thoprice of theresource, and taking the firms output as numeraire,the firm's problemis to: Max R g fg(LL, Kg, Rg) - w t - zt Kt - ptt (1) subJectto L,.K,K,, > 0. Sincethe firmbehaves competitively, this problemgenerates the first orderconditons: Susainabilityas Ilntcggnolo Equity Page53

we ifc 9 (2)

.rt. ; (3)

Rftp" ~~~~~~(4) that necessa andsumcint for the attainmentof an Interiorsolution to the profit maximization problemunder the rtctions on f,. Theassumpton that the productin functionexhibts constnt returnsto cae impls a proft are eo In ech period.

A2.5. Now considerthe utlity maximzationproblem confrondng ft th g ationIn period . t mustchoose its periodg conmpon d net nvestme In capitaland rsources basd on the k obw in peod VWdthprit expets hfrpeod o + 1 so as to maximiZeIk expected te udtlityU,(CwC,, 1). For simpliciy, we ssum tha eac genrtion has perfct foresiht so that its expectidons gardig futur pcs ae borneout In reait.

A2.6. Thebudge constnts maybe deived by noting t, snceno two generatonsoverlap for mmoretn ono peod, tee are no opportunitesfor loans,and incomemust mualexpenditure In eachperod. In period1, genraton 1 makesa paymentof C,, + K8 - K, for consump aonand net capitalivment whilekicomts fromsales of labor,caphal servics, and resources Is w, + r,K, + p S4S,21. Notethat: c-I St a SI - RI^(5) is the resowrcestock mnainn at th beginningof periodt. In period2, Its expectedexpenditure Is C12whil ik expected IIncomesw, + (1 + r,)K2+ paS - Ts. Thisholds because, at the gndof it fWeme,each goneraton consumes ft rmainderof Is nonansferredcapial stock. Theperiod I andperiod 2 budgetconstraints faced by generationI thrforo reduceto:

w 1 + (t + z)I' +pj(S 1 - S2) - Cqj - Ka a ° (6)

*+ (1 + 2.). +pS 2 - 4T - C12 a O (7)

A2.7. The budget onsras for generatong> 1 aresomewht differentin form. Generationg must purchase ts stocks of capitaland resourcesfor use In periodu+1 from the preceding neraion and/orthe firm, so It periodg expenditureon consumption,cpital, andresources Is CO + K,, + pS*., while kt incomefrom laborsales and t transferit receivesfrom Its predeceso0r Is w, + To. In periodg + 1, Io expeeMdexpenditure Is Co, , whileIt expectedincome Is w%.,+ Su tainaity"as Intergeneraional Equity Page 54

(1 + i,9J)K9,. + pg*,S+I- T,,. Hence It periodg andperi g + 1 budgetconstraints are: WV- PA+,1 + TV - Cgv - Kg.1 . O (8)

Wg(1 + (. + rgi)K+, + Pg,iSg.i - Tg. - Cm#, * 0 (9)

A2.8. The problemconfronting generaon g is to maximizeUJ(C,. Co,.,) subjectto the budget constraintsand the nonnegativityconstraints C,,, C,O.,, Ks,,, S,, > - 0. In th ca of aninterior solution, this yields te fist order conditions:

auO/ *C... IPf 1 4zgI 1 (10)

for g = 1, 2, ..., G hat e both necessaryand sufficient given the assumptionsimposed on the utility functions.

A2.9. A competitiveequilibrium will exist for this modelif we can find a se of prices and quantitiesthat simultaneouslysatfies the conditionsof utility and profit maximization.Howarth (1989)has shownthe exisnce and Paretoefficiency of equiibriaprovided that the set of Income transfersIs technicallyfeasibl. Thepossibility of comersolutions implies tha theequilibrium conditions derivedabove are not completelygeneral, although this techniality need not concemus here.

A2.10. Theseconditons yield some interesting if familiarinterpre ns. Alongan equilibriumpath, the marginalrate of time preferenceor discountrate of eachsuccessive geration mustequal the interestrate or returnon capital,and the discountrate is always reaterthan zeroprovided that the marginalproductiviy of capita is positive. Moreover,the resourceprice must rise at the rate of Interestover time, confirming the Hotelling(1931) rule.

A2.11. Thecomptiivo equilibriumand hence the discountrat, however,depend on the distribution of Incomeacross generations, a point that is best Ilustrted by a numericalexample. For simplicitywe limitthe exampleto the two generation,three period case. Letthe initialcapital stock equalone and the inital resourcestock equal four. Assumethat the utility and productionfunctions take the familiarCobb-Douglas forms:

UV n (cow Cog+,) t2 (11)

ft - (Lt Kt Rt) 1 / (12)

A2.12. In a numericexample we show that unlessthe transferfrom the presentto the future generationexceeds about 1.5, or 90 percentof period2 capital111 +r,)Ka 1, the hypotheticaleconomy will be unsustainablein the sensethat living standardswill declinefrom generationto generation (Pezzey,1989). Sutainabiity as uteeneational Eqwty Page 55

Table A2 Two Generaton Cobb-DouglasEquilibia Under Atemaive IncomeTransfers

TR 0 0.5 1 1.5 2 2.5 3 3.5 U, 1.73 1.53 1.32 _,0 0.89 0.68 0.46 0.24 U2 0.19 0.52 0.83 1.13 1.43 1.72 2.00 2.28 C,, 1.40 1.25 1.09 0.93 0.75 0.58 0.40 0.21 C,a 2.14 1.86 1.59 1.32 1.05 0.79 0.63 0.28 C,, 0.14 0.42 0.70 0.97 1.24 1.51 1.78 2.05 C23 0.27 0.66 1.00 1.33 1.64 1.95 2.25 2.54 LI 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 La 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 Ls 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 K, 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 K2 0.91 1.03 1.15 1.29 1.43 1.59 1.75 1.91 K, 0.07 0.24 0.43 0.63 0.84 1.05 1.26 1.48 R 0t, 12.28 2.07 1.92 1.79 1.67 1.57 1.48 1.41 R2 !1.62 1.64 1.66 1.69 1.72 1.74 1.77 1.79 RS 0.12 0.29 0.42 0.53 0.61 0.89 0.75 0.81 wI 0.44 0.43 0.41 0.40 0.40 0.39 0.38 0.37 w2 0.24 0.25 0.26 0.27 0.28 0.30 0.31 0.32 w, 0.07 0.14 0.19 0.23 0.27 0.30 0.33 0.35 ft 0.44 0.43 0.41 0.40 0.40 0.39 0.38 0.37 Ira 0.53 0.49 0.45 0.42 0.40 0.37 0.35 0.33 ta_ X 0.96 0.57 0.44 0.37 0.32 0.29 0.26 0.24 Pi 0.20 0.21 0.22 0.23 0.24 0.25 0.26 0.27 P't 0.30 0.31 0.31 0.32 0.33 0.34 0.35 0.35 Ps I 0.58 0.48 0.45 0,.44 0.44 0.44 0.44 0.44

A2.13. The modelhighlights the sonsitivityof equilibriuminterest rates, wages, and resource prices to the disnbution of incomeacross generations determined by the transfersmade between genera- tons. The intet ra variesfrom periodto periodand may either rise or faUover time, but trans- fhr of wealth from prent to future drive down the interest rate in eachperiod. Sincethe interest Sustinabiliyas Intergaional Equity Page56

ra In this modelIs equalto eachoeneration's subjective discount rate, or Its marginalrate of substitution with respectto consumptionin consecutiveperiods, we may concludethat the discountrate Is a function of ft intergenerationalwelfare distribution. The combinedeffects of changesin the Interestrat and resourceprices lead to not conservationof the resourcestock as Incomeis transferred from the presentto the futud. But while this result may sem to confirm the conventional wisdom that low discountrates favor both resourceconservation and the woHelreof future generations, this conclusiondeseves carefulqualification. The intergenerationalIncome distribution deter- minesnot only the efficent allocationof natural resourcesbut also the discount rate and all other pricesand quantties that are relevantto the applicationof conventionalevaluation techniques. Ad hoc manipultions of the discountrate to advancesustainability interest In partialequilibrium analyses may therefore lead to the misallocationof resources. In a numeric example we (Howarth and Norgaard,1 990bWwe show that unlessthe transferfrom the presentto the future generationexceeds about 1.5, or 90 percentof period2 capital, the hypotheticaleconomy will be unsustainableIn the sensethat living standardswill declinefrom generationto generation(Pezzey, 1989).

A2.14. The model andthe numericexample highlight the sensitivityof equilibriuminterest rates to the distributionof incomeacross generations determined by the transfersmade between generations. The interest rate variesfrom periodto period and may either rise or fall over time, but transfersof wealth from presentto future drive down the Interestrate in eachperiod. Sincethe Interestrate in this model is equalto eachgeneration's subjective discount rate, or its marginalrate of substitution with respectto consumptionin consecutiveperiods, we may concludethat the discount rate Is a function of the Intergenerationalwelfare distribution. The combinedeffects of changesin the interest rates andresource prices lead to not conservationof the resourcestock as incomeIs transferredfrom the presentto the future. But while this result may seemto confirmthe conventionalwisdom that low discount ras favor both resourceconservation and the welfare of future generations,this conclusiondeserves careful qualification. The intergenerationalincome distribution detrmines not only the ficient allocaton of natural resourcesbut also the discount rate and all other pricesand quantitiestat a relevantto the applicationof conventionalevaluation techniques. Ad hoc mani- pulationsof the discount rate to advancesustainability interest in partial equilibriumanalyses may thereforelead to the misallocationof resources.

A2.115. The discount rat dilemmaIs effectively resolvedby retuming to the basic frameworkof economics. Each distribution of rssourcesor income between people, in our case generations, defines an efficient allocation of resources between end uses and users. Conservationor sustainability cannot be addressedsimply through efficiency. While efficiency is important, Intergenerationaldistribution Is also Important. Both concemsmust be addressed,and when they are, the discount rate dilemmais resolved.

A2.16. Prices, Includingthe rate of interest or discount, equilibrateresource allocationsat the margin. With differen distributons and efficient allocations,new prices arise. One can no more speakof "the' fate of interest when societiesare giving major consideraionto the sustainabilityof developmentthan one can speakof "the" priceof timber when decidingwhether or not to conserve forests for future generations. Redistributionschange equilibriumprices. The rate of interest is undoubtedlydistorted by market failuresjust as is the price of timber, and adjustmentsare thereby In order. But it Is inefficient to adjust either the rate of interest or the price of timber for the purposesof achievingdistributional goals. Sustainabilityas IntergenerationalEquity Page57

APPENDIX3

AN INTERGENERATIONALCOMPETITIVE EQUILIBRIUM MODEL OF A RENEWABLERESOURCE ECONOMY RichardB. Howarth

A3.1. Policymakers frequently must render decisions regarding the proper intertmporal allocation of naturalresources. While decision-making isan Inherently subjective process, formal anlytcal conceptsand methods are often useful in reducingproblems to theiresntial structureIn a mannertat Illuminatesthe decision-makingproblem. Two sets of normativecrteria are often Invoked in dis- cussionsof naturalresource policy. Some argue that resources should be managed according to*t presentvalue criterion of cost-benefitanalysis. Others assert that the discounting techniques implicit Inthe cost-benefitapproach may lad to theoverexploltation of natural resoutces, so that resources shouldbe managed accoe 4ing to a sustainabilitycriterion that ensures an equitable ditribution of r sourcesbetween the presentand future generations. A3.2. Thisappendix explores the relationship between these two approachesusing a modelof an abstractintertemporal economy with a renewableresource that Is sociallymanagd according to cost- benefitcriteria. Consumption and Investment decisions are made by privaw Individuals under compe- titivemarket conditions. The model illustrates the utilityof cost-benefittechniques In achievingan efficientallocation of resources.As we shallsee, however, the cost-benofit approach will resultIn an equitabledistribution of welfarebetween generations only if appropriatetransfers of assetsare transferredfrom one generation to the next. Inthis sense, cost-benoft techniques and sustainability criteriaare seen to becomplementary rather than contradictory approaches to policy analysis.

A3.3. Considera disrete-time, finite-horizon model of anintertemporal economy. Thee aretwo generationsalive at eachdate t O.1,...,T- one"young" and one old". Eachgoeneration lives for two periods,and goneration t lives at datest andt + 1. It isconvenient to assumethat each genera- tionconsists of a singlerepresentative individual, although the modelis easilymodified to allowfor changesin populationand heterogeneity between individuals. There Is a homogeneousconsumption/- investmentgood, and the consumptionlevels of theyoung and the old at datet aroCb, and C., e spectively.The old own a stockof capitalK, and earn incomes from th saleof capitalservices to theproduction sector. The young hold an endowment of labor L, that they supply inelasffcally to pro- ducers.The young and the old receivethe not (positiveor negative)lump-sum transfers T., and T., froman independentagency, the govemment*.There is no explicitaltruism between gnerations. andindividuals take the Incometransfers they receive as fixed. A3.4. The preferencesof thegeneration bom at datet arerepresented by the utilityfunction U, - U,(Cy,C,,,),which is assumedto be increasing,differentiable, and concave. The consump- tionfinvestmentgood Is takenas the numeraire,and the wage rate and the priceof capitalservices arew, andr, rspectively.Markets are perfectly competitive, and Individuals have perfet foresight regardingfuture prices and economic conditions. Each generation seeks to maximizeis lifetimeutil- ity throughits consumptionand investment decisions subject to thebudget constraints:

C,, + Kt., - w,L, + Tv,

C.,.I (I + t,.,I)Kt.,I+ Tat+.I Sustainabilityas IntagenerationalEquity PageS8

Underthe maintainedasumptions, utility maximizaionyields the first orderconditon:

I6Ut/6CV,1/$U,/0C.,t1)m I + r,.1 that is necessaryand sufficientfor the achievementof an interiorsolution.

A3.5. Productionactivitis arecaried out by a singlerepresentaive firm tha use inputsof capial services,labor, and the harvestof a renewableresource (1,) accordingto the production functionf,(K,,Lj,H,). The firm holdsno asset of Its own, but purchass inputsduring t period they are used. The productionfunction exhibits constant returns to scaleand Is assumedto be increasing,differentiable, and concave. Both its parametersand functional form maychange over time with the evolutionof new technologies.If we takep, Is the priceper unit of the resoure harvest,profit maximizationunder perfect compotiton yiekds the first ord conditions:

-. df,l6K, w, if,16L, p, - Of,I/&, that are necessaryand sufficient for the achievementof an interiorslution. The condiins holdthat, in equilibrium,the marginalproductivity of eachfactor input Is equatedwith its price. Theconstant retums to scaleasumption implies that profitsare zeroIn eachperiod.

A3.6. The pre-harveststock of the renewableresource at date t Is Q,,and the stock grows overtime accordingto the concave,continuous function 0,,, - g(t0Hj,. We shallassume that g, Is IncreaingIn 0, anddecreasing in H,, so that resourceutilization dere futureresource availability.The resource harve maynot exceedthe existingstock, so H, s 0. Thee ae no harvestcosts, and th govemrmentmanags resourceharvest using conventonal cost-benefitcr- teria, maximizingthe presentvalue benefits of resourceutiliztion definedby the formul:

a fPt (z) dz. cu o

Herep,(H,) Is the inversedemand function for the resourceharvest, or the pricethat prevails whenthe harvestis set equalto H,. o, is the discountfactor applied to not benfits accruingt periodsinto the future. We shal aume that the govemment ts the discount rate equalto the marketrate of interestso tht a,. m o,/(l + r,.,) wherea. m 1. This maximizationproblem im- pliesthe first ordercondition:

(6gjM1(l6M,I) Elis,) (Rgs.176U,7. ig, 1 / EQ,1) that is necessaryand sufficientfor the attainmentof an interiorsolution provided that the resourcedemand function Is downwardsloping so that the integraldefining the surplusassociated

58 Sustainabilityas IntergenationalIEquity Page59

wih resourceutilization In eachperiod is concavein H,. Thiscondition stts ha the present-valuebenefit eratedby a marginalshift in resourceconsumption from one periodto the next, whileholding harvests constant in all otherperiods, must be equalto zero. Becausethere is no valueIn preservingth resourcestock at the terminaldate, the resourcestock is fully exhaus- ted In the final periodso that H, - Q,.

A3.7. To completethe model,a set of Incometransfers {T,,,T.: t - 0,1,...,T)must be speci- fied satisfyingthe constraintT,, + T, - pH, so that the goverment'sbudget is balancedIn eachperiod. In general,there are manyincome transfer regimes that will satisfythis propety andthus manypotential competitive equilibria. While one mightexplicitly model the govemment'schoice of the transferregime, we shallfor the momenttake incometransfes as givenIn orderto assessthe weffareimplrations of the potentialalternatives.

A3.8. Onequestion to ask is whetherthe cost-benefitapproach to renwable esoure man- agementresults in to a competitiveequilibrium that is Paretoefficient. In an International context,an allocationis efficientIf It is Impossibleto Improvethe wefare of onegenetion without renderingone or moreother generations worse off. Whilewe shallnot go throughthe details of the derivation,it may be shownthat an allocationis efficientif it satisfiesthe conditions:

(6U,I6C,)j(6U,I6C..,I 1 + 6ft, 116K4,,

Sf,., (Sf,/SIH,) (1+f,ifS6K,.,) (6g9, /6h,*,) (Eg,/6H,) (Mg,,,/EQ,El)

It is straightforwardto showthat theseconditions are satisfiedby competitiveequilibra if and only if the discountrae is equatd with the marketrate of interest. Thecost-benefit approach to resourcemanagement therefore results In an efficientallocation of resourcesprovided that this conditionis met.

A3.9. We shouldalso like to knowIf thereanything in the stucture of th modelthat ensur an equilibriumis sustainableIn the sensethat livingstandards are nondecresing from periodto period. To faclitate the analysisof this issue,we focuson a specificversion of the modeland comparethe equilibriathat resultunder alternative income transfer regimes. Suppose there are 21 periodsIT - 20) andthat the productionand utility functionsare f, - (K,ILH,)"and U, - InIC,,)+ ln(C2,,,)while the resourcegrowth equation is 0,,, - 2(Q - Hj - (O,- HJ)/4. The ini-

70. it is worth pointing out that because the firm'sproduction function exhibitsconstant returns to scale, its demand function for resource inputs is not well-defLned. But although the derivationof a resource planningequation is useful for heuristic purposes, the equation itselfmay be justified on the basis of marginalist argumntsthat do not depend in the fomal maximization problemoutlined above. Thisdifficulty is therefore unimportantto the results developodin tho paper. 59 Sustainabilityas IntergeneatdonalEquity Page 60

tial stocksof capitaland the renewableresource are Ko = I and06 - 2, andthe laborendow- ment is Lt = 1 in each period. Theseassumptions are maintainedsricy for illustrativepurposes; thereIs no presumptionthat they are 'realistic in any sense.

A3.10. At this point we shallfocus our aention on incometransfer regimes that maximizethe socialwelfare function:

W.E p telU for variousvalues of B, a positiveconstant that definesthe weightattached to the welfareof futuregenerations in comparisonwith the present. Whilethis functionalform is frequentlyem- ployedin boththeoretical and applied work, its ethicalfoundations are easilyquestioned, and otherformulations are possible.This function, however, allows us to vy the weightattached to the welfareof futuregenerations, and this is sufficientfor the purposeat hand. Table1 shows the equilibriathat resultfor valuesof B of 0.5, 0.75, and 1.0. Solutionvalues ae givenfor ler- nateyears only to simplifythe prentation of the rsults.

A3.11. Theresults of this exerciseindicate that e modelis verysnstiwv to the choiceof B andthus to the choiceof the Incometransfer regime. Whenltte weightis attachedto the welfareof futuregonertions IS - 0.5), the stocksof capitl and naturalresources ar rpidly diminishedto satisfythe wants of the currentgeneration, and lving standardsdecline precipitouslyover time. Increasesin the valueof I, and hencein the transferof asse ftom the presentto the future,raise the captl and resourcestocks and shift the balancebetween present andfuture consumption. For the ntermediaecase (B = 0.75), a nearlyconsta consumption standardIs maintainedover time, whilethe extremecase of B - 1.0 resul In explosivegrowth In consumption.

A3.12. Thetransfer of assetsfrom presnt to futuretends to lowerequlibrium interest raes and hencethe rat at whichfuture cost and benefitsshould be discountedIn cost-benefit evaluations.While this resultmight seem to supportthe view that low discoumntrts shouldbe usedto favor the intere of futuregenerations, in fact sucha conclusionIs not justied. A sustainabledevelopment path in this modelis achievedthrough the choiceof intergeneational transfersthat ensurefuture geneotions the assetsthey needto liW fruitf an productivelives. Giventhe set of intergenerationaltransfers, cost-benefit analysis is helpfulIn achievingan efficientallocation of resourcesif the discountrate is set equalto the market rate of interest. If, however,the discountrate is not equatedwith the interestrate, the resultwiN be inefficint resourceallocation - not intergenerationalequity.

60 Sustainabilityas Intagenerational Equity Page61

Table A3.1. Competitiveequilibria under alternative Income transfer reimes. t 0 2 4 6 8 10 12 14 16 18 20

13- 0.5 Tit 0.74 0.34 0.21 0.16 0.14 0.12 0.11 0.10 0.10 0.09 0.02 Ta -0.40 -0.11 -0.04 -0.02 -0.01 -0.01 -0.01 0.00 0.00 0.00 0.05 C3, 0.47 0.26 0.19 0.1S 0.13 0.12 0.11 0.10 0.09 0.09 0.09 Ca 0.94 0.52 0.37 0.30 0.26 0.23 0.21 0.20 0.19 0.18 0.19 K, 1.00 0.41 0.24 0.18 0.15 0.13 0.11 0.11 0.10 0.09 0.07 Q4 2.00 1.44 1.10 0.88 0.72 0.62 0.53 0.47 0.41 0.33 O.1S Hi 1.04 0.76 0.58 0.46 0.38 0.32 0.28 0.24 0.22 0.20 0.15 w, 0.34 0.23 0.17 0.14 0.13 0.11 0.11 0.10 0.09 0.09 0.07 x, 0.34 0.55 0.72 0.82 0.87 0.90 0.92 0.93 0.94 0.96 1.09 pt 0.32 0.30 0.30 0.31 0.34 0.36 0.38 0.40 0.43 0.45 0.48

a a 0.75 Ti, 1.07 1.03 1.02 1.02 1.02 1.02 1.02 1.01 0.96 0.83 0.28 T) -0.76 -0.72 -0.71 -0.71 -0.71 -0.71 -0.71 -0.69 -0.65 -0.52 -0.02 C. 0.41 0.40 0.40 0.40 0.40 0.40 0.41 0.41 0.42 0.44 O.SS Ca 0.54 O.S4 0.53 0.54 0.54 O.S4 O.S4 0.54 O.SS O.S9 0.73 1, 1.00 0.9S 0.93 0.93 0.94 0.94 0.93 0.92 0.89 0.80 0.49 Q, 2.00 2.13 2.19 2.21 2.21 2.22 2.21 2.19 2.11 1.88 1.03 H, 0.77 0.84 0.87 0.88 0.89 0.89 0.89 0.90 0.92 0.98 1.03 w, 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.26 ;, 0.31 0.33 0.33 0.33 0.33 0.34 0.34 0.34 0.35 0.38 0.54 pt 0.40 0.37 0.36 0.38 0.35 0.35 0.3 0.35 0.34 0.31 0.26

a = 1.0

T3, 1.35 2.45 3.74 5.05 6.23 7.1S 7.70 7.72 7.02 S.25 1.58 Ts -1.08 -2.05 -3.26 -4.S0 -5.63 -6.53 -7.05 -7.07 -6.37 -4.63 -1.OS Ci, 0.20 0.30 0.40 0.51 0.63 0.7S 0.90 1.06 1.26 1.54 2.11 C) 0.20 0.30 0.40 O.S1 0.63 0.75 0.90 1.06 1.26 1.54 2.11 K, 1.00 1.96 3.18 4.47 5.67 6.65 7.30 7.47 6.98 S.SS 2.62 g 2.00 2.58 2.79 2.85 2.86 2.86 2.84 2.81 2.73 2.50 1.SS H 0.57 0.84 0.95 0.99 1.00 1.00 1.01 1.02 1.06 1.18 1.55 w, 0.28 0.39 0.48 0.55 O.S9 0.63 0.65 0.66 0.65 0.62 0.53 , 0.28 0.20 O.1S 0.12 0.10 0.09 0.09 0.09 0.09 0.11 0.20 p 0.48 0.47 0.51 O.SS 0.60 0.63 0.64 0.64 0.61 O.53 0.34

A3.13. While cost-benefitcriteria may be helpful in achievingan efficient allocationof natural re- sourcesover time, the allocationthat Is judgedto be sociaUlyefficient dependson the transfers of asts that are effected betweenthe presentand future generations. An allocaton tht is judged to be optlmal3 from the standpointof cost-benefitcriteria may be unsustainablein the sensethat it Waves tn impoverishedworld to members of future gonerations. This result underscoresthe

e1 Susinabfity as Intergeradona Equity Page62

needto supplemnntthe cost-benefitapproach with criteriadefining an appropria distributionof welfarebewen presentand future. In this sense,cost-benefit and sustinability criria arepro- perlyviewed as complementaryrastr than contradictory,addressing fundamentally dffrent as- pectsof the tertemporalpilnning problem.

A3.14. Themodel used to Illuste theseresults Is a considerableabstraction and simplification of reality. Manyinteresting Issues - the relationshipbetwen livingstandards and populton growth(Ecksteln et al, 1988),the implicationsof uncertaintyIHowarth, 1991), poti ors In the formationof expecations(Graham-Tomasi et al, 1986),and th ineffkcnces tha may wise In infinie-horizonoveriapping generaions economies, for example- areomitted from consition In orderto simplifyand crify the structureof the problemunder consideraton. One matter of directrelevance concems the Institutionsthat govemthe transferof assetsfrom presentto future. Intergenerationaltransfers are a pervasiveaspect of economicrealiy. Parentscare for their offspringand renderbequests to them upondying. Publkinstiutions provid educationand, In somesocities, healthand welfareservices to the young. Govemmentsinvest In reerch and developmentactivtes that maytake manydecades to generateuseful technologies.

A3.1S. Whileprivat altruismIs onesource of interenerationaltransfers, there ar both thoret- ical andpractial concernsthat suggesta potentialrole for governmentis ensuri th wefHareof future generations.If, for example,Individuals care not only abouttir own childrenbut also aboutother future individuals, the welfareof futuregnerations take on the characteristicsof a publicgood, and a laissezfaWre policy would result In as transfer from presentto futurethat aUindividuals would find to be undesirablysmall (Howarth and Norgard, 1991). Therhetoric of Intergeneraionalequity plays an Importantrole in publicdebats concerninthe environment, education,the economy,and other policy issues. To the extentOt conomistsseek to illumi- now andcontribute to policydiscussions, it is thereforeimportant ta they fully addrss the dimensionsand implicatonsof the susainabilitycriterion.

62 Sustainabilityas Intergentona Equity Page63

Appendix4

CURRENTMONITORNG AND INTERGENERATIONAL DISTRIBUTIVE INSTITUTIONS

A4.1. In the Industrializedcountries, institutions have ben establishdto assur future generationshave aeess to pardands,tt naturalareas are protected, and ta endagredspecies do not go extinct. Forestmanagement agencies wer establishedwth the objecdveof asuri contnuedsupplies of timber.Many energy resources in th publicdomain In the UnitedStates and Canadawere not exploiteduntil lona after their existence became well documented. Compawable resourcemanagement agencies In developingcountries also typicly ar mandae to nmnage resourcesfor fuure gnerations.Concerm for futuregenerations and the design of Institutions,albeit inadequately,for longterm resourcemanagement clearly prdat the curent concer with t susainabilityof developmentand the recentdevelopmens this concem has simulad In economic thinking.Indeed, it canbe arguedthat thegoals of the conservaionmovement at theend of the 19thcentury and beginning of the 20thcentury and the institutionsesblished at thattime have beenundermined by therise of economicargumrents about efficiency which ignored intreneraional quity. A4.2. At the ineional level,numerous Institutions have evolved during the lte half of the twentiethenury in rsponseto the needsof developingcouties andmore recently which collet someof thepertinent informaton and affect the maintenanceof naral capitl. Sincesustainb developmentas an intational issue still evolvingpolitically and concepuay, it is not ye apparenhow existing institutions will fit Intoan ultimate pattern of ins t fulfi theneed for the aesment andguidance of resourcetransfers to futuregnerations. The newy esblshed GlobalEnvironmental Facility could evolve Into a veryeffective instution for this task, but is funding to dateis relativelyInsignificant and its proceduresare only beginning to beesthed. In aneffort to sparkfurther thinking about insutions in the future,dfts stion vey brfly assess th sit- ustionwith rpea to tropicalrainfoests In particular. A4.3. Dataon tropical rainforst timber resources are collected by individual nations and assmbled by the Fores Departmentof the U.N.Food and Agricultural Organiation. Coordination with respectto variablesfor which data are collected has occurred over the yars throughFAO assisnce to Individualnations for foresy Inventories.Such data, however, ar vey limitedin scopeeven for thenarrow goal of asessingtimber resources and are not known for thir qualityor availabiliywith respectto morerecent years. Data on tropical timber resources are especially difficult because only a few speciesof treesmay be of commercialInterest in anygiven year, but the numberand typ of speciesof intes is rapidlychanging. Non-timoor species utilized by Indigenous and local peoples arenot Identfiedin anycoordinated data set. Manystill hopetha remotesensing and elctronic storageand sorting techniques will overcomethoe limitations.Others emphasize that the quality of tropicalfore" area functionof manyinteracting factors. Furhm , it is notthe forssu that ned to becontinuously asssed asmuch as the threats to the forestthat need to becontinuoUSIy asesed. Theiumense fir in the tropicalrainforest of Kallmanfanin 398xaftr severalyears of droughthighlights the Importance of entirely new types of informationwith rspect to theInteractions betweenclima andhuman activites on a globalscale. Such factor wUibe evenmore critical in

63 Sustainabilityas IntergeneationalEquity Page 64

light of climatepredictions.

A4.4. Issuesof complexity,contextuality, and the needfor informationwith respectto threats are even more relevantfor non-timberspecies and forest ecosystemt.nctions where the quality of the availabledata are far worse. The IntemationalUnion for the Conservationof Nature and Natural Resourcesmaintains Information on threatenedspecies. This Information,however, Is biasedtowards particular types of species, and collection largely occurs through the haphazard efforts of uncoordinatedfield researchers.The numberof species,to say nothing of ecosystemcharacteristics and functions, about which informationmight be collectedIs daunting.

A4.5. Giventhe quality of dat and the difficulties of improvingthem, the diversenational and intemationalagencies and disparatenon-governmental organizations which have assumedvarious aspects of the task of assessingthe status and future of tropical rainforestsare understandably contentious. While views on particularsdiffer dramatically,there Is an apparentconsensus, however, that deforestation must be reversed,that a significant portion of the remaining virgin tropical rainforestmust be savedto protect blodiversityand indigenouspeoples, and that Improvedtechnolo- gies and social organizationmust be developed. The TropicalForest Action PlanITFAP) emerged in the mid-i 980s around this consensus, providing a sries of linkages between international agencies,national govemments, and non-govemmentalorganizaions around nationalaclon plans. The linkages, aimed at ataining these objectives, were not backed by sufficient new financial resources or committment from those with existing financial resourcesto make an apparent difference. Most nationalaction plans and decisions continued to favor commercialtimber production while paying "lip service" to other uses of the forests and both lcal and global interests. Since TFAP was inititated, concem for biodiversity has continuedto increasewhile the importanceof foreststo globalclimate maintenance has begunto be realized.The combinationof poorresults and greaterimportance at coordinationhas ledto considerableevaluation and proposalsfor the redesign of TFAP.

A4.6. In 1985 the IntemationalTropical Timber Agreement, an agreementbetween nations which producetropical timber and nationswhich Importtropical timber, cameinto effect. The International TropicalTimber Organization (ITTO) was formedto fulfill the terms of the agreementto: promotethe expansionand diversificaion of intemationaltrade in timber, to Improvethe structuralconditions of the tropical timber market, to promoteand support researchand developmenton improvedforest managmentand wood utilization,Improve market intelligence, encourage timber processingin timber producingcountries, encourage members to support reforestationand forest management,and improve the marketing and distribution of tropical timber exports. What makes this agreement especiallyInteresting is the final objoctive(Article 1 (h)I: 'To encouragethe developmentof national policie aimed at sustainable utilization and conservationof tropical forests and their genetic resources,and at maintainingthe ecologicalbalance in the regionsconcemed'. While the agreement and ITTO are still primarilydirected at timber and wood export productsexclusive of the multitude of oftr forest usesand fors interests,ITTO could play an Important,constructive role in the global monitring and managementof tropical rainforests. The terms of the agreementare broaderand suggesta greer interest in cooperatingto reach globalenvironmental goals than any commodity sgree"nt heretofore. Indeed,one of the first decisionsof ITTOwas to commissiona study of the

64 Sustainbility as I enetaeional Equity Page 65

sustainability of tropical forestryo. Intemationalagencies Including the World Bankhave already reliedon this study for data and assessmentof the prospectsfor sustainabletropicl forety.

A4.7 TheWorld Reources Institute,United Nations Environment Program, and InternatonalUnion for Conservationof Natureand NaturalResources are initiatinga BiodiversityConservation Strategy which is beingjoined by numerousIntenatonal agenciesincluding the World Bank and numerous nongovermental organizations. Sincetropical rainforestshouse a significant portion of the total numberof speies, the efforts of the BiologicalCosnervation Strategy to developbiological dat and assesments of the causes of the loss of biodiversity could affect our understandingof the imporance of tropical forests for fumr peoplesand our understandingof the opto availablefor managingforests.

A4.8. Concemover globalclimate change sustains a globalmodeling and assessmenteffort and diversenetworkin betweenrearchers and policy makerswhich may result in intemationalaccords which could have a major impact on forest maintenanceand perhapsrgeneration.

A4.9. The administrationsof the seven leading Western induwil nations known as fte G-7 periodicallyhold EconomicSummit meings to discusscommon concerns. Among an expanding rangoof isues in the now world disordor,global environmental concems are absorbingan Increasing portion of the EconomicSummit agenda. An extensivestment reflecting considerableanxiet emergedfrom the Parismeing in th summerof 1989. At the Houstonmeing duringJuly 1990, a weakconsensus toward actionemerged wkh respectto globalclimate change and an experimeal step was Initiatedto curb deforestationin the Amazon. The -7 askedBrazil to preparea proposal to stem tropical deforstion with the financial and other cooperationof Industrial neions. A proposalis currenly being drafted with the assistanceof the World Bank.

A4.10. The GlobalEnvironmental Facility (GEF) developed through an agreementamong a goup of countriesto establisha fund administeredby the World Bankto be dispensedas concesonal lns designedand approvedby the Bank, UW4EPand UNDP. The GEFIs a pilot programdesigned to provideconcessional lending to developingcountres for project which alleviateglobal environmental problems. Umiting the emisons of greenhouseases and protectingbiodiversity are two of the four priority areasfor funding. Both of theseobjectives interelate wkh tropicalforestry policies. The GEF is just beginningoperation but could evolve Into an extremelyImportant Institution for facilitating transfers betweennations which will assurethe transfer of rights to tropical rainfors resourcesto future generations.

A4.11. In responseto th belief that cuffent cooperativeefforts to protect tropical rainforestsare ineffective,local and nationalgovemments in Germanyand the Netherlandshave voluntarily stopped buying products madefrom tropical timbers. The EuropeanParliament proposed a ban on imports which was rejectedby the EuropeanCommisson. Tradeagencies in Europeand th UnitedKingdom have adopted voluntary codes of conduct and proposedtrWfs to resain Imports. Numerous Indigenousgroups and non-govermentalorganizations in developedand developingcountries have directly interferredwih lgging, procoeing, and trade in an effort to reduce deforestatin. These

71. Duncan Poore, op cit. 65 Sqas'ainabilityasItreeaoalEquity Page66

Individualat areclarly not optimal,but neitheris the statusquo optimal.z

A4.12. In summary,tee Isa pastiheof evolvinoresource monitoring and assessment bnttutons workngat an Internanal levelwith considerablepotential for affeng the m gnt and trans of tropkalrainforest rurces to futuregenerations. Economis tend to look at the delopmnt of the institutionsas In oppositonto economic sittns, but his perspectiveIs Inappropiate.Economic optization, whetherthrough markets or planning,requires just h srt of lba monioingand st theseenvironmental instiudons strive to provid. Theenviron- nwntalsemnc bsemn whichthe institutionsreason is needed,since if theyto bokedto economicreasoning and the marketthe rasoningwould be too circular.New and old institutionswill evolvemore approprately If the potentialcomplementarities areappropriately understod. The di- vere Impikationsof thinkingof sustainabilityas an equitywill hopefullyhelp in this respect. Consierablework is neededon how the environmentalInstitutions might bs beaugmented, how economicIasts* mightbest utilize the informationthey generate, and what additional accords andperhps new management directives are needed to susin development.

72. Condenoed from Robert J. A. Goodland,lmanuel O.A. ABJbey, Jan C. Post, and ary 3. Dyson (Tropical MoistForest ManagmentsThe Urgencyof the ?raneltion to Sustainability, 1990). as Sutaiability asInegeneadona Equity Page67

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76 ASIMKREGION DISCUSSION PAPER SEJS

fl Aufi Date OniXmtor

IDP74 A Cm. Studyof a Gradu Approch to Ecomi Refom: The Vt Nam Enpeul.of 198S88 Z. Dabxk Septmbe 1990 Z. Drak (80504)

mm on50fmfi81bwoqvq7of lo bnaka: Roved Pood Beohaiorvsus Nutlal Norms B.8. inm Septembe 1990 S. Jayanthl(81419)

IIDP Ao8s ReAgionSeminar on Pdicy Cba1la2FsIn Indi October 1990 C. Chamberlin(81409)

U)P93 Pmetri Popuatio Proje n and its Useles for Pol Analyis W. Sanda_n Apri 1991 Jee-Pag Tan (81408)

IDP96 A Reviewof Korea's Ttade Pattem D.M. lprjge S.Y. song March 1991 D. Lopziger (81388)

ID)P9 _llHyb as -- _- Equity: The Chal,p to Ecoomi Though and Protlc R. B. Notygad June 1991 F. Johanus (81410)

Not.: Biba pes qmybe obtnd fromthe Asia &nfo i Savic C_t.