From Liberalisation To

From Liberalisation to Sustainable Development a Critique of the OECD Paper:

"Open Markets Matter: the Benefits of Trade & Investment Liberalisation" April 1998

WWF Critique, June 1998 Amended Jan 1999

EXECUTIVE SUMMARY

The politics and practice of liberalisation are in crisis. The last decade has seen an unprecedented lowering of trade barriers and increase in private investment. These have helped stimulate strong economic growth, though this been unevenly distributed both between and inside countries. The impact of financial instability in Mexico, Asia and Russia, coupled with reactions to controversial decisions by the WTO on environmental issues and widespread opposition to the proposed MAI has produced a groundswell of opinion against continued progress towards trade and investment liberalisation.

During this period of liberalisation environmental degradation has accelerated. The review of the Rio agreements held in 1997 concluded that all unsustainable trends were worsening at a faster rate. Most of these problems are driven by increased economic activity which has not been matched by adequate regulatory action at any level. This mismatch between high economic growth and worsening environmental quality is the starting point for environmental critiques of current patterns of liberalisation.

WWF has a mission to preserve biodiversity through sustainable development which recognises the connections between economic, social and environmental goals. We are clear about these goals and our approach to liberalisation is not derived from any ideology, but rather aims to measure liberalisation's impact on these objectives. It is on this basis that we address the issues raised by the OECD paper "Open Markets Matter".

WWF is deeply disappointed with the Open Markets paper considering many of its conclusions on environmental issues to be unproven or false. As such the paper represents a missed opportunity to move the debate on liberalisation and the environment forward.

WWF considers the Open Markets paper to have serious flaws when considering environmental issues. The scope of analysis is inadequate, mainly focusing on pollutants from manufacturing sectors and ignoring impacts in resource using and extracting sectors. The evidence used is partial and methodologically biased towards aggregate and academic economic studies; there is little use of case studies or more direct forms of analysis. The paper also suffers from a narrow theoretical approach, ignoring new theories of growth and sustainable development based on balanced accumulation of human, man-made, technological and social capital - combined with optimal, precautionary use of natural capital inside ecological limits. WWF urges the OECD to engage with all participants in this debate - from both North and South - and produce a new analysis to generate economically and ecologically sound policies for achieving sustainable development.

WWF's Analysis of Liberalisation & the Environment In the body of this paper WWF attempts to rectify these analytical omissions by providing some evidence, ideas and arguments from our own experience and research which were not included in the Open Markets paper. WWF's own research has lead us to five main conclusions:

Increased satisfaction of Northern demands for goods and natural resources from developing countries will result in excessive and irreversible environmental damage under current systems of national and international regulation.

The impact of foreign investment on the environment is ambiguous and differs between sectors. However, in many polluting and natural resource sectors competition for investment is leading to lowering, non-enforcement or chilling of environmental regulations.

The transition effects of liberalisation often result in permanent environmental destruction and increased poverty for marginal communities dependent on natural resources. There is no causal evidence that any increase in aggregate incomes from liberalisation will result in a general rise in environmental quality. The irreversible nature of much environmental destruction means that any such correlations do not guarantee sustainability.

The mismatch in legal power and completeness between international economic regimes (WTO, MAI, NAFTA) and multilateral environmental regimes has resulted in national and international environmental law being repeatedly challenged or weakened.

Further liberalisation will tend to increase both environmental destruction and poverty in marginal communities if these issues are not tackled through: sectoral reservations; enhanced regulation and policy integration; financial support and technology transfer. The OECD must deploy these policy tools more frequently and effectively if it is to support and not undermine sustainable development.

1. INTRODUCTION The politics and practice of liberalisation is in a state of crisis. The last decade has seen an unprecedented period of increasing openness in the global economy with trade barriers being significantly lowered as a result of GATT agreements, the formation of regional trading blocs and the imposition of structural adjustment programmes in developing countries. At the same time global flows of private investment have increased by over five times - particularly portfolio investment - and the volumes of speculative capital and derivative transactions have risen sharply too.

This period has seen strong economic growth despite the recession in developed countries in the early nineties. However, growth has been unevenly distributed, with income disparities both between and inside countries generally increasing, despite some exceptions. Absolute falls in per capita incomes have occurred in many developing countries - principally those in Sub-Saharan Africa. Financial instability seems to have become endemic with Mexico, East Asia and now Russia all experiencing significant macroeconomic difficulties due to the actions of foreign investment and exchange markets. The causes of these difficulties are a complex mix of domestic and international influences but have undoubtedly been exacerbated by overly footloose and liquid capital and current account flows.

Over the same period environmental degradation has accelerated. The five year review of the Rio agreements held in 1997 concluded that all unsustainable trends were worsening at a faster rate; whether it be greenhouse emissions, deforestation, soil depletion, biodiversity loss or over-fishing. Most of these problems are driven by economic activity and it is obvious that the expansion in productive capacity has not been matched by adequate regulatory action at either national or international level. Economic agreements continue to receive higher priority and greater legal status than environmental or social legislation, despite OECD commitments to fully integrate these policy areas stemming from 1991.

WWF has a mission to preserve biodiversity and natural habitats through promoting balanced sustainable development which recognises the importance and inter-connectedness of economic, social and environmental goals. We are clear about these goals and our approach to liberalisation is not derived from any ideology, but rather aims to measure liberalisation's impact on these objectives. To this end WWF has carried out many extensive research projects into liberalisation issues and has an active Trade and Investment programme and a dedicated Programme office researching macroeconomic issues. It is on this basis that we address the OECD paper "Open Markets Matter".

WWF is deeply disappointed with the Open Markets paper, considering its many of its conclusions on environmental issues to be unproven or false. As such the paper represents a missed opportunity to move the debate on liberalisation and the environment forward.

2. OVERVIEW OF WWF'S CRITIQUE OF THE OPEN MARKETS PAPER The following five sections give WWF's detailed comments and counter analysis of vital themes contained in the paper: comparative advantage, trade and environment; pollution havens and investment liberalisation; transition effects and liberalisation; economic growth and sustainability; and the impact of economic agreements on environmental regulation. However, there are also several common issues which are bought out in this section.

The Open Markets paper sets out three main aims which concern WWF: to address genuine concerns with liberalisation; to determine how much "actual experience" and "serious empirical evidence" supports them; and to assess whether reversing liberalisation is likely to resolve these problems. Below we examine each of these against the content of the paper.

Are genuine environmental concerns addressed? The paper only examines a sub-section of environmental issues connected to liberalisation in any detail; mainly those concerned with emissions of pollutants from manufacturing sectors. The paper generally ignores indirect environmental impacts from economic growth, structural and dynamic changes; fails to study many environmentally sensitive sectors including mining, agriculture, forestry, fishing, and tourism; does not address the issue of free- trade zones or sectoral deregulation to attract investment; and provides little analysis on the impact of liberalisation rules on environmental regulation.

Is actual experience and serious empirical evidence used in the analysis? The paper's analysis is mostly based on aggregate studies - often econometric - using national economic statistics and pollution data. There is hardly any reference to case studies, systematic legal or historical analysis or use of independent sources outside the Northern academic sector or multilateral bodies. As mentioned above, evidence on indirect environmental impacts and natural resource-based sectors is hardly mentioned, neither are ecological data or studies. Many statements are unsupported by serious evidence; for example, the extent to which foreign investors actually transfer environmentally sound technologies. Distribution issues and long term impacts from transition to liberalised markets are completely absent from the environmental analysis.

Are solutions adequately addressed? The paper sets up the straw man of whether reversing liberalisation is the best answer to concerns which have been raised, and unsurprisingly decides that it is not. However, this ignores a raft of other well-known policy options including slowing or limiting liberalisation; adopting a precautionary approach in environmentally sensitive sectors; fully integrating environmental objectives within liberalisation agreements; and policies to empower and develop local industries, regulation and communities before liberalisation occurs.

The root of these problems lies in a narrow economic approach to the analysis of liberalisation and its effects, which ignores the latest developments in growth theory based on balanced accumulation of human, man-made, technological and social capital combined with optimal and precautionary use of natural capital within ecological limits. The analysis also overly focuses on static, long-run efficiency without considering the dynamic effects, stability, irreversible environmental impacts, market power and structural advantages.

WWF urges the OECD to move outside its traditional constituencies and engage with other participants in this debate - including non-economic academics, NGOs and citizens groups from both North and South - and produce a new analysis which will inform economically and ecologically sound policies for achieving sustainable development.

3. COMPARATIVE ADVANTAGE, TRADE & THE ENVIRONMENT The a priori assumption that all trade liberalisation is beneficial is based on the 18th century theory of comparative advantage, which was developed in a world far less technically complex, less populous and less environmentally fragile than the one we inhabit today. The trade analysis of the Open Markets paper rests on the 'solid foundations' (p.9) of comparative advantage and its stimulus to improved efficiency of resource allocation, economic growth and rising incomes for all parties involved (p.10, p.41, p.104). However a number of the basic assumptions on which this theory was based are no longer relevant to present day economic realities (WWF, 1996a).

3.1. Trade & Domestic Externalities Firstly the theory ignores social and environmental externalities. If external costs (or benefits) are not internalised then market prices do not reflect true social values, causing allocative inefficiency. This point is raised within the text (p.96), the solution being to correct market distortions through sound environmental policies, with emphasis being placed on environmental pricing. However, the problems of identifying and putting a price to diffuse and diverse environmental goods and services is extremely complex and not always possible. In the presence of irreversible effects - biodiversity loss, soil loss, climate change, long lasting toxic pollution - pricing is virtually impossible. This is because the willingness of future generations to accept environmental factors must be estimated, and economic theory tells us that these values will diverge markedly from today's estimates (Mabey et al, 1997). Even non-price methods to maintain environmental standards are difficult to monitor and enforce because of the complex systemic nature of environmental goods and services and/or the causes of environmental destruction; for example, fisheries, ecosystem services from wetlands and traffic pollution.

Where externalities are not internalised the increased economic growth from liberalised trade and investment will serve only to exacerbate rather than address environmental problems, especially in those countries which are primary producers of environmentally sensitive commodities - e.g. minerals, agricultural products, fish and fish products etc. One of a number of examples is the Philippines where trade liberalisation has caused a shift in crops, increasing both GDP and substantial negative externalities primarily through a 28% increase in mining (Cruz and Repetto 1992).

3.2. Trade & International Externalities The weight of policy recommendations in the paper are on improving domestic environmental controls: the impact of international environmental externalities is not addressed in any depth. Environmental assets - especially biodiversity and unique/irreplaceable ecosystems and habitats - have international value but this is not adequately reflected in international legal regimes. The Global Environment Facility (GEF) is the only dedicated fund which exists to enable rich countries to invest in biodiversity conservation and environmental improvement in the South. The GEF's budget of $666 million per annum approximates to around 75 cents per person per year for each citizen in the contributing countries. Hardly a proper reflection of the global value of the natural environment.

Meanwhile the direct economic demand of the North for commodities continues to fuel environmental destruction in developing countries, and is often stimulated by government subsidies and credits; for example, the third-party access agreements to West African fishing grounds promoted by the European Union and systems of export guarantees in all OECD countries.

In the absence of significant binding international environmental agreements and adequate funding for environmental protection in the South, the growing and disproportionate demand of the North will continue to cause global environmental degradation. Governments in the South - though they could do much more - face severe budgetary restrictions, a general weakness in administrative capacity and fears of competitive disadvantage if they try to unilaterally increase standards. These dilemmas are both exacerbated by, and reflected in, the current WTO rules restricting discrimination between traded products on the basis of process and production methods. The recent Shrimp/Turtle case at the WTO showed that even a common body of binding but less specific international environmental law is not enough to overturn the primacy of these trade rules. Meanwhile demand for luxury products such as tiger prawns continues to cause massive destruction of irreplaceable mangrove and other coastal ecosystems, bringing unsustainable economic development and increasing poverty to already marginal communities.

WWF is attempting to deal with these types of issues through voluntary certification initiatives such as the Forest and Marine Stewardship Councils, but the efforts of NGOs are unlikely to replace a lack of adequate multilateral legal regimes to correct these market and regulatory failures.

3.3. Trade & Structural Inequality The classical theory of comparative advantage does not take account of long- standing differences and inequalities between trading partners in infrastructure, technologies, human and institutional capital. Evidence - particularly from Africa - has shown that countries forced from colonial times to specialise in sectors with little scope for evolution of comparative and absolute advantages - such as primary products and commodities - may become locked into economic stagnation at the lower end of a growing inequality between nations. Richer countries on the other hand retain their wealth since specialisation in advanced products can create positive externalities such as technological innovation (WWF, 1996a). Hence, a vicious circle is created whereby the rents from depleting natural capital in poorer countries go to build up technological, human and managerial capital in the developed world, increasing their absolute advantage in terms of trade.

This argument implies that many economies starting with trade disadvantages will remain permanently below those more advantaged countries. Such a pattern is illustrated by the fact that primary commodities continue to account for 92 percent of export earnings in Sub-Saharan Africa (WWF, 1994). The real price of such commodities has been declining, as reflected in the worsening commodity index of the terms of trade between rich and poor nations. As the terms of trade continue to worsen these countries are forced to export higher volumes simply to maintain foreign exchange earnings, often pushing them towards unsustainable practices. This problem has been exacerbated by demands on indebted countries to specialise in products with the greatest export potential. This has played a considerable role in producing aggregate international overproduction and subsequent price falls in many exported, primary commodities.

The combination of these factors as well as large debt repayments has contributed to declining economic and social conditions in a number of African countries, and an increasing drawdown on these countries' natural capital. Such evidence would seem to contradict the views of the Open Markets paper that international trade allows all countries to achieve greater prosperity (p.41), and that increased trade will play a vital part in fuelling the improvement of environmental quality (p.15). Even where there is greater prosperity all around this tends to be largely appropriated by developed countries. A study cited in Convery (1995) highlights the implications of the Uruguay Round of GATT, showing that the bulk of welfare gains from this liberalisation accrued to industrial economies.

Many of these problems with the theory of comparative advantage assumes that critical factors of production, such as capital and labour, cannot move internationally. However, this assumption is erroneous since they are mobile and can shift to those countries with absolute advantages hence undermining the notion of comparative advantage. The proliferation of foreign direct investment is testimony to this. The use of infant industry protection policies, which has been crucial to the development of a number of East Asian countries, shows how creative and flexible use of protectionist policies can be vital for the development of internationally competitive industries.

Increased satisfaction of Northern demands for goods and natural resources from developing countries will result in excessive and irreversible environmental damage under current systems of national and international regulation. Free trade is also unlikely to automatically lead to increased welfare gains and more efficient resource use in all participating countries.

4. INVESTMENT LIBERALISATION, POLLUTION HAVENS & THE ENVIRONMENT The Open Markets paper cites evidence to support a positive relationship between investment liberalisation and environmental stewardship (pg 108). The evidence also aims to shows that higher environmental regulation does not have negative impacts on a company's or country's competitiveness, and therefore the likelihood of industrial flight to 'pollution havens' or a race to the bottom on environmental standards is small. The studies this conclusion is based upon are generally aggregate econometric analyses based purely on direct - and often dubious - pollution emission indices.

The locational decisions of most industries are predominantly influenced by factors such as market access, the costs of labour and/or other factors of production, and not environmental regulation. However pollution - and resource- intensive industries such as chemicals, metals and natural resources which are susceptible to environmental costs have shown a locational preference for areas of low environmental standards. This has been borne out during the current unprecedented world-wide 'gold rush' by OECD mineral firms. The paper makes little reference to these industries, simply stating that they account for a very small proportion of total FDI (p.106).

The paper also ignores well documented cases of national authorities lowering environmental standards to attract investment. For example, throughout the Asia Pacific standards have been lowered in the mining sector. In Indonesia and Papua New Guinea almost all mining activities operate under special licences which impose minimum or no environmental regulation (MPI 1998). Recent changes in mining laws for foreign investors in the Philippines have liberalised access to concessions and profit repatriation rules at the same time as removing requirements for environmental impact assessments. Free trade zones in countries such as Mexico, Brazil and India have attempted to lure industries through a mix of incentives, including lower environmental standards. In the case of Mexico the NAFTA agreement has proved to be an incentive for US firms to move to Mexico in order to escape better enforced US standards. A study by the Worldwide Institute found that over 25 percent of companies located along the Mexico-US border had been influenced by lower environmental standards in Mexico (Sierra Club 1993)

Companies which have not explicitly relocated for environmental reasons often apply pressure to lower regulations or prevent their enforcement once established. Foreign investment exacerbates this as transnational corporations have stronger leverage than domestic companies because they can use the threat of disinvestment and relocation more credibly and effectively. (High profile examples include Shell's oil drilling in Nigeria, Freeport's mining operations in Indonesia and more recently P&O's proposed port development in India. Such practices which are prevalent across the OECD, highlights the need for investment liberalisation to be complemented with binding environmental regulation which is co-ordinated at the regional or international level; such as exists inside the European Union.

Past experience has shown that countries competing for foreign investment have also tried to lure corporations with low rents, cheap wages, taxes exemptions as well as lax environmental standards. There has been often been accompanied by a lack of national reinvestment of profits from resource use. Wide spread practices such as transfer pricing reduce the revenue captured by the host country. By underestimating the price of commodities, firms can evade taxes in the producer country and raise their profits when they sell them at their true price in the importing country (WWF, 1994). This can only be solved by international rules on multinational corporations.

Econometric studies are also incapable of measuring the chilling effect of liberalisation where environmental standards fail to rise because of perceived competitiveness effects. The fact that each nation is reluctant to introduce environmental legislation unilaterally, since it will undermine their competitiveness in the international market, the overall level of environmental standards will be sub-optimal. These pressures not only reduce action to manage domestic environmental resources but also affects any action pertaining to the global commons, such as climate change or species extinction. This chilling effect has prevented the political implementation of appropriate environmental regulation; for example, the failure of the European Union's proposed carbon/energy tax. It further highlights the urgent need to have the necessary institutional arrangements in place to introduce appropriate regulation at both the national and international levels.

The impact of foreign investment on the environment under current systems of regulation is ambiguous, but in many polluting and natural resource sectors competition for investment is leading to lowering, non-enforcement or chilling of environmental regulations.

5. TRANSITION EFFECTS & LIBERALISATION The above sections show how the Open Markets paper has failed to take account of many important negative structural effects which accompany over-extensive or overly rapid liberalisation. As a result of NAFTA, for example, 2.5-3 million Mexican farmers engaged in white corn production are experiencing the effects of an influx of cheap imported corn from the US (CEC 1998). In Brazil, liberalisation of the agricultural sector has caused a significant change in crop mix, displacing hundreds of thousands of farmers producing to the domestic market. These are pernicious, long-run impacts affecting trends in human, social and environmental capital stocks which are vital for the balanced sustainable development of any country. The paper does mention the transition effects of liberalisation, and the impact on specific social groups and industries of structural economic change. However, this is treated in a some-what cursory manner with the implication that in the long run social welfare will increase and disadvantaged groups will be compensated. However, as Keynes famously said - "in the long run we are all dead" - and this is particularly true for the environment.

Many important environmental assets can not be replaced once destroyed. Sometimes destruction is absolutely irreversible - such as with species extinction and loss of complex ecosystems - and sometimes natural systems will only retain their previous quality due to long-run natural process; for example, soil loss, ozone layer recovery and rainfall changes due to climate change.

The "transition effects" of badly regulated or over hasty liberalisation often cause such irreversible effects as production expands outside adequate government controls, or impoverished groups are forced to draw down on natural assets to survive the "transition" to new livelihoods. Such transitions can also bring about irreversible social and cultural disruption which removes traditional economic support mechanisms without replacing them with adequate substitutes (WWF, 1998). A WWF study of 12 country cases of structural adjustment (WWF, 1996) showed the range and significance of these effects, especially in sectors such as agriculture and forestry. Of course, the relationships are complex, and liberalisation does bring some environmental benefits especially if damaging subsidies were eliminated at the same time, but a significant pattern of liberalisation, marginalisation and environmental destruction was observed over a range of different countries.

The paper also ignores the indirect effects caused by rapid and unplanned industrialisation through migration, urbanisation and associated infrastructure development. For example along the Maquiladora zone on the US-Mexico border, the most serious environmental problems have been as a result of the rapid development in the region without adequate environmental infrastructure (Esty and Genty 1997). The costs of cleaning up the environmental damage have been estimated to be in the order of $21 billion by the year 2003 (Sierra Club 1995)

The transition effects following liberalisation, especially when imposed by outside agencies such as the IMF, often lead to permanent social and environmental damage and a lowering of welfare and assets for the most marginal and impoverished communities.

6. ECONOMIC GROWTH, THE ENVIRONMENT & SUSTAINABILITY The Open Markets paper suggests that 'open trade and investment can play a vital role in helping societies shift resources and patterns of production and consumption in more sustainable directions while still contributing to economic growth' (pg 108). This is one of the few references made to sustainability, which is highly surprising given its prominent position in the current economic debate. However, the assumption that increased growth will necessarily encourage sustainability development is fundamentally flawed.

To achieve more sustainable directions it is advocated that trade and investment is liberalised and policies to correct market distortions introduced (pg 108, pg 96). This will ensure that prices are right and resources are used in the most inter-temporally efficient and sustainable manner. However, it is now generally recognised that efficiency criteria alone will not ensure sustainability, and that some form of intergenerational bequests are needed (Howarth and Noorgaard 1993). The composition of these intertemporal bequests has been the focus of much of the recent academic debate on sustainability. (Thoman et al., 1994)

The paper bypasses a number of key issues in the current environmental debate by conveniently accepting simple neo-classical growth models and the premises upon which they are based. In the first place the assumption of perfect substitution possibilities between man made (goods, factories, machines) and natural capital (renewable, non renewable, system resilience) is clearly erroneous. In some cases natural capital have no man made equivalent, for example life support functions, aesthetic qualities and assimilative properties. Moreover conventional models wrongly assume that all actions are reversible and subject to known probabilities. The fact is that certain ecological processes, for example the reaction of ocean currents to climate change, are so badly understood means that no meaningful probability distribution can be fitted. In such circumstances a more precautionary approach to decision making is required

The neo-classical model takes individual preferences as both fixed and given. Such an assumption may be fine in the short run when individuals preferences are unlikely to change, but over longer time periods - years, decades, generations - where peoples tastes may change, this may no longer be the case. Basing decision on current generations is unlikely to guide the economy towards a sustainable path. This again highlights the needs for sustainability constraints and public policies to incorporate the rights of future generations

There are also a number of difficulties associated with the solution of 'getting the price right'. For environmental goods traded in markets, such as minerals, metals, timber, there are commonly market failures (e.g cartels, monopolies), government failures (price ceiling, tax breaks, low concession fees) as well as external environmental and social costs. As a consequence the market prices of these goods are a lower estimate of their social value. The non rivalry and non exclusionary nature of many environmental goods and services makes the creation of markets an extremely difficult task. To counteract this non market valuation techniques have been designed. These methods are beset with technical and operational problems (see Freeman 1993). Moreover, they are unable to capture a number of more elusive indirect values whilst humans continue to have limited understanding of the complexity of interactions and mutual interdependencies between species, communities and ecosystems..

By failing to recognise the evolution of modern growth theory to include the inter-relation of human, man-made, social and environmental capital the paper misses the opportunity to move the debate on liberalisation forward in a creative and constructive manner. The assumptions underlying simple neo- classical models assume away the main components of modern environmental policy - namely irreversibility, uncertainty, ecological limits, the need for institutional evolution and the rights of future generations. Therefore, it is unsurprising that proponents of naive liberalisation policies based on these models come up against what they see as a wall of irrational opposition from the environmental policy community.

Environmental Kuznets Curves The most glaring example of this outdated approach is the paper's use of the argument that environmental quality rises as societies move up the income ladder (p.98), and therefore liberalised trade and investment will remove environmental degradation by increasing incomes.

The hypothesis that environmental consumption (use of natural resources and pollution) rises then falls after a certain level of income has come to be known as the environmental Kuznets curve. On simple methodological and empirical grounds this work has serious flaws (see WWF 1996a). These include: problems of dynamic comparative advantage and economic stagnation; ample evidence that policy intervention is a necessary prerequisite for environmental improvements; the fact that curves tend to differ over geographical and cultural boundaries; the dependence of the shape of the curves on the econometric models and data used; the existence of non-quadratic relationships with secondary turning points for certain pollutants; the fact that large external environmental effects are excluded which underestimate the true environmental impact of economic growth.

Such analysis also fails to acknowledge the wider direct and indirect environmental impacts of economic growth. For example the greater use of transport and, packaging, and increased air and water pollution. More indirect problems stem from the social impact created by industrial development, migration and urbanisation. It has also been highlighted by recent OECD-DAC reports that it is the poor that are most effected by environmental degradation, that ensuring environmental quality is critical for poverty elimination and sustainable development, and thus appropriate policy actions cannot wait for rising aggregate incomes.

The interpretation of such curves is also fundamentally flawed because they do not account for the long run irreversibility of many environmental effects (for example, US Superfund clean up; CO2 emissions from the 19th and early 20th century; deforestation in Europe and N. America). The linkage of environmental quality with domestic incomes also ignores the fact that environmental degradation through resource use is often driven by international demand. Therefore, the level of economic activity in such sectors will bear no automatic relationship to the aggregate incomes or institutional development of the country in which the activity takes place. For example, much of Ecuador's oil reserves were exploited by US companies in the 1960s leaving vast environmental damage. Attempts to gain compensation for this today have been rebuffed based on that fact that the companies were in legal compliance at the time (though not with US standards). Ecuador gained little from depletion of these resources and certainly does not even now have an average income supposedly commensurate with high environmental standards under the Kuznets model. However, there was no economic reason why these operations could not have been carried out to the US standards in the 1960s, if the companies had behaved responsibly.

The role of culture, democracy and institutional development in promoting environmental quality - coupled with the importance of export-oriented resource intensive sectors in the poorest countries - implies that Kuznet curves do not justify the view that liberalisation is automatically good for the environment. Even if we are to believe that such curves do show some kind of correlation between regulatory evolution and economic growth, then trade and investment liberalisation will not reap environmental improvements for the vast majority of the world's population who remain below the income per capita hump of the curve. Without explicit programmes of institutional development - supported by developed countries - there will be many more years of accelerated environmental degradation driven by Northern demand, with large irreversible and catastrophic effects, before countries reach this threshold - if they ever do (WWF 1996a).

There is no causal evidence that any increase in aggregate incomes through liberalisation will result in general improved environmental quality, and the irreversible nature of much environmental destruction means that such relations provide no guarantee of sustainability.

7. IMPACT OF LIBERALISATION ON COUNTRIES' ABILITY TO REGULATE The Open Markets paper regards trade and liberalisation as an overall strategy to maintain and even strengthen a country's capacity to determine its own future and hence sovereignty; for example, by improving a country's competitiveness and income and thus making it less vulnerable to external shocks (p.115). However, for a number of poorer countries (such as Sudan, Zimbabwe, Zambia) specialisation has meant a less diverse crop or commodity base more prone to economic, climatic and ecological shocks. Furthermore, nations are becoming increasingly dependant on foreign technologies, commodity and capital goods and services. The recent shocks in South East Asia are testimony to the complex problems related to this in the field of macroeconomic management.

It is pointed out (p.15) that under trade agreements such as WTO, governments retain the sovereign right to set their own environmental objectives. Although this is formally the case experience shows that differences in environmental standards and efforts to regulate difficult transboundary issues are generally decided in favour of trade principles rather than environmental protection. The burden of proof seems to be heavily weighted against the domestic right to regulate on environmental issues when there are trade implications.

Although the paper commends the environmental credentials of the WTO it remains more muted with respect to the Multilateral Agreement on Investment (MAI). The MAI would affect signatories' ability to regulate the environment on three accounts. Firstly the MAI only allows environmental legislation to be enacted if it is non-discriminatory against foreign investors. This would allow foreign companies equal access to environmentally sensitive sectors such as energy, mining, agriculture, forestry, fisheries and tourism which are vital attractors of FDI from developed countries. The economic rents arising from these assets have traditionally been procured by the sovereign owner. However, that procurement often requires discriminatory measures or performance requirements that would be banned under the MAI. Although the MAI does allow sector specific exemptions, these must be kept to a minimum and pressure would be put on any joining members to leave such sectors open or to gradually open them up. This could greatly effect the ability of developing countries to gain just and sustainable returns on their natural wealth.

Secondly, the current MAI proposals have conflicts with several prominent Multilateral Environmental Agreements (MEAs), established to deal with global environmental externalities. This conflict stems from discriminatory articles in MEAs which are based on the Rio principle of "common but differentiated responsibilities" between North and South for environmental protection. Examples of where the MAI conflicts with MEAs include; (1) the Convention on Biodiversity (CBD) which mandates 'benefit sharing' of profits from the exploitation of genetic resources between host country and foreign enterprises; (2) The Kyoto Protocol to the UN Framework Convention on Climate Change which may mandate the compulsory split of emission mitigation credits between foreign companies' greenhouse gas mitigation and the host country; (3) the Montreal Protocol which gives different levels of funding and technology transfer to foreign and domestic firms in developing countries (WWF 1997b).

Thirdly, the MAI proposals can undermine national environmental regulation. Existing de jure discrimination includes requirements from foreign investors to provide greater information on environmental performance; levying higher environmental bonds against future environmental liabilities; protection of unique environmental assets and traditional livelihoods, such as artisanal fisheries. Regulations may also be de facto discriminatory where national environmental standards have a greater affect on foreign investors than national industries. For example, evolving pollution restrictions, recycling regulations and new technology standards (WWF 1998b).

The mismatch in legal power and completeness between international economic regimes (WTO, MAI, NAFTA) and multilateral environmental regimes has resulted in national and international environmental laws being repeatedly challenged or restricted.

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ACKNOWLEDGEMENTS This paper was co-authored by Nick Mabey and Richard McNally.

For further information contact: Charles Arden-Clarke WWF International Ave Mt Blanc 1196 Gland Switzerland Tel: 41 22 364 9001 Fax: 41 22 364 8219 Eml: [email protected] or

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