gNvoo'f

THEWORLD BA,NK SECTORPOLICY AND RESEARCH STAFF Public Disclosure Authorized

EnvironmentDepartment

"EnvironmentallySustainable

Public Disclosure Authorized EconomicDevelopment Buildingon Brundtland"

Compiledand Edited by

Public Disclosure Authorized Robert Goodland,Herman Daly and Salah El Serafy

July 1991

EnvironmentWorking Paper No. 46 Public Disclosure Authorized

This pape has been preparedfor internaluse. The views and itetpretations herei are those of the authot(s) and shouldnot be atributed to the World Bank, to its afiliated organizationsOr to any individualcting on their behalf. PREFACE

We are delightedto be invitedto prefacethis bookfor four reasons. First,because it sets a realistic and fair stage for the importantUNCED 1992 conference. Second, because it acknowledgesmuch more developmentis needc4 in the South. Third, because that needed developmentand growth must be accommodatedby the North. Fourth,burdensharing or reparation for the North's historicoveruse of globalenvironmental functions - both as source of natural resourcesand sinkfor wastes -- is firmlyaccepted by the almostentirely Northern authors. Ths is refreshing. We havenot been too encouragedby the North'sreaction to the Brundtlandreport overthe four yearssince its publication. Therefore,we warmly endorse the clearthinkdng expressed in this book The fact that two Nobel laureate economistsare amongthe auttors (Haavelmoand Thbergen)raise our hopesthat economistswill raise sustainability higher on their agendasfor serious work in the 1990X We ullyshare the authors'view that the transitionis urgentand we find their suggestionson howto achieveit to be senusble.Now the difficultpart, mustering the politcal will, is up to us and our UNCED'92 colleagues.

Emil Salm Jose Lutenberger

ILE The Ministerof State for Environmentand Population,The HonorableEmil Salim, Jakarta, Indonesia,and L.E.lThe Secretary of State for Environment,The HonorableJose Lutzenberger, BrasiliaDF, Brazil

DepartmentalWorking Papes amenot formalpublications of the World Bank They represent prelminaiyand unpolished tests of counttyanalsil or rsearch that are cirulated to encouragedisuon and comment;dtation and the useof sucha papershould take acwountof its provisionalchamecter. The fings interpretations,and condusionsexpressed in this paper are entirelythose of the authors' and should not be attributedin any manner to the WorldBankl Its affliated orgnizations or to membersof its Board of 13ecutlv Direct or the the countriesthe represent. CONTEN1

Emi Salimand Jose Lutzeberger bmUm 1

Chas 1. The casethat the worldhas reachedlmits S RobertGoodland 2. Fromempty-world to full-worldeconmis: Recogning an historical trnig point in ecomomicdevelopment. 18 HeamanDaly 3. On the strategyof hig to reduceeconomic inequality by pfang the sale of humanacthit. 27 rge Haave}moand SteinHanen 4. GNP and marketprices: wrong signals for sustainableeconomic succes that maskeinn desucon. 36 Jan Tibergen and RoefleHucting 5. Sustainability,income meaurement and growth 43 SalahElSerat 6. ProjectEvaluadon and SustainableDevelopment 54 RaymondMikesell 7. Sustainabledevelopment: the role of investment 61 Berndvon Drste and Peter Dogse & The ecologicaleffects of sustainabilit!r.Investing in naturalcapital 72 Robert Costanza 9. Promgrowth to sustainabledevelopment 80 Lester Brown,Sandra Postel and ChristopherFlavin About tbh Authr

Lest R. Bro, Sanda Pstl and ChrisopherFlavin are Presidentand Vice Presidentsfor Research,respectively, of the WorldwatchInstitute, 1776 Massachusetts Avenue NW, Washington DC 20036,USA; Parx 202J7365. Foundedin 1974,Worldwatch, a public policyresearch organztion, is devotedto anabzingglobal trends with the aim of promotinga sustainableworld aconomy. Robcat Ecological Economics,Editor in Chiefof the journalEcological Economics, and editorof the 1991Columbia Universitytext of the samename. PO Box38, SolomonsMD 20688,USA; Fa3011326-342 H~ermai *. Authorof manyworks on ecologicaleconomics including "Steady State Economics' (Freman ;974;second edition 1991); Senior Economist, Environment Department, The WorldBank, WashingtonDC 20433,USA. The mostrecent amplification of his ideasis "Forthe CommonGood" withJohn Cobb,Beacon Press 1989; Fax: 202V477-0565. Slah El Serfy EconomicAdviser, Economic Advisory Staff, The WorldBank, Washington DC 20433,USA; awardedan Oxforddoctorate under EconomicsNobellist the late ProfessorSir John Hicks;led the Bankinto EnvironmentalAccounting and published the bookof the sametitle in 1989; Fax 202/477-1569. Robet Goodamd:Environmental Advisor, Environment Department, World Bank, Washington DC 20433,USA; published 14 books mainly on tropicalecology, the mostrecent being "Race to Savethe Tropics"(Island Press, DC 1990);Fax: 2021477-0565. TtygveHaaelmo andStein Hme Respectively,the 1989Economics Nobellist, partly for founding econometrics,Institute of Economics,University of Oslo;and Director, Nordic Consulting Group A.S. Oslo,Omev 46A, N-1340 Bekkestua, Norway, Fx: 472-247-856,Consultant to NORAD,The World Bank, Asian DevelopmentBank, UNESCO and others, latest amplificationof ideas:"Economic policiesfor sustainabledevelopment." ADB, Manila, 1990. RaymondMleV: Professorof Economicsat the Universityof Oregon,Dr Mikesellassisted Harry DexterWhite from 1942to 1946during the furmaiiknuJf 'lle 'WouiddBanu and IM1paricpated in the 1944Bretton WoodsConference. He has publishedextensively on trade and development economicsand on the economicsof natural resources. He has publishedtwenty-fours books, includingfour publishedby Resourcesfor the Future,Inc., and one by the NationalBureau of EconomicResearch. Jan Thbrge and RoefieHueting Jan Tinbergenwas awardedthe firstNobel Memorial Prize in economicsin 1969,and was electedthe first Chairmanof the UN Committeeon Development Planning,of hismany works,especiafly relevant here are his 1968"Development Planningn, and his 1968"Income Distnbution". Roefie Hueting, Head, Environmental Statistics, Netherlands Bureau of Statistics,hasbeen publishingon ecologicaleconomics since the 1060s;main work "New Scarcity and EconomicGrowth" 1980, North-Holland Publishing Co. Fax:31170/3877-42.

in BRen4v Dr1te and Pet Dop: Respectvely,Director of UNESCO'sDision of Eoological Siences and Seetary of the UN Manand BiosphereProgramme, Associate Eport UNESCOs Divisionof E3cologcalSciences. Among their moxt recnt publicationsI the 1991"Debt-for-Natwe Exchangesand BiospheroResr . 7 Placede Fontenoy,75700 Pars, Fax:331/4065-9897. Fax 331/4065-9897.

hv INThODUCIION

This book is our contributionto the United NationsConference on Environmentand Developmentto be heldin Rio de Janeiroin June 1992,and which builds on the trailblazingwork of the Brndtlani Commission.Right at the outset,we want to acknowledgeour majordebt to the BrundtlandCommission's 1987 report, "Our Common Future". In particular,we greatly admire the Commission'sachievement in garneringpolitical consensus on the needfor sustainabledevelopment. We use this report as our springboard,although we are far less comprehensive.Of the four elemeatsof environmentalsustainability -- poverty,population, technology, and lifestyle-- we focus on only lifestyle,technology and population,with that order of emphasisreflecting our skills. Povertyis onlydealt with via our suggestionsfor a moreequitable intemational income distribution. We acknowledge,however, that povertyand alrs debt are for somecountries more pressingthan environment. Our aim is to followBrundtland's lead on the need for a rapid transitionto sustainability. We bolsterBrundtland's case for the transition,because we feel that the need for this transitionis not yet adequatelyrecognized. We thengo on to suggestspecifics of whatis neededto achievethe transition. We eaveto othtersthe more importanttask, namely how to implementthe transition; how to muster the politicalwill for changeswhich will be painful,but essential. We feel that understandingthe necessityand general direction of the transitionis a preconditionfor musteringthe politicalwilL All authorshave read and discussedeach other's chapters and havereached consensus that the contributionsincluded in thisvolume are not onlycompatible with each other, but alsomutually reinforcing. We collaboratedfist becausewe felt that we wereall alreadythinking along similar lines,judging from our previouswriting Andsecond, because we all feel stronglythat the nextstep for the transitionto sustainabilityis agreementon the implicationsof what Brundtlandadvocated. We have deliberatelyretained a certainoverlap between some chapters in an effort to stressthe notion that, irrespectiveof the directionfrom which the subjectis approached,the sameconclusion is reached. The conclusionis that economicactivity cannot proceed any longerunder the banner of "businessas usual." Specificallyit is no longertenable to makeeconomic growth, as conventionally nerceivedand measured,the unquestionedobjective of economicdevelopment policy. The old conceptof growth,which we designate"throughput growth", with it- relianceon an everincreasing throughputof energy and other natural materals cannot be sustained,and must yield to an imaginativepursuit of economicends that are lessresource intensive. The waywe undervaluenatural capital servicesand fail to account for natural asset degradation often means that we are impoverishingourselves while imagining that our economiesare growing. The new approach requiresa concertedeffort at remoldingconsumer's preferences, and steeringwants in the direction of environmentallybenign activities, while simultaneov,sly reducing throughput per unit of final product,including services. Earlierstudies of environmentallimits to growthemphasized the sourcelimits (depletion of petroleum,copper, etc.). Experiencehas shown,however, that the sinkconstraints (greenhouse,

1 ozonedepletion, local air andwater pollution, etc.) are the morestringent. Since sink functionsare commonproperty to a greaterextent than sourcefunctions, this overuseis less correctibleby the automaticmarket adjustment. Accelerationof technologicaldevelopment is thereforerequired to reduce the natural resourcecontent of giveneconomic activities. We feel thisimportant acceleration can be achieved in a way that will satisfyboth the optimistsas well as the pessimists. We suggestsubstantially increasedtaxes on throughput(such as carbonemission or mineralseverance taxes). MTisshould pleasethe optimistsbecause it willaccelerate new technologies. It willplease the pessimintsbecause it willreduce environmentally stressful throughput. Sincewe musttax something in order to raise needed publicrevenue, why not tax the thingswe wantto reduce(pollution and depletion)rather thanthe thingswe wantto increase(employment and income)?Because pollution and depledion can neverbe reducedto zero there is no dangerof taxingour sourceof revenueout of existence,no matterhow high the tax rate. As we gainrevenue from these environmentaltaxes we can ease up on incometaxes, especially on low incomes,even to the extentof usingsome of the new revenues to financea negativeincome tax on verylow incomes. Weurgently call for fmdamental changes in our economicobjectives, as wellas in our modesof behavior.Towards this end, the cooperation of all manind is necessary. Brundtland'scall for sustainabledevelopment has elicitedtwo opposingreactions. One is to revert to a definitionof sustainabledevelopment as "growthas usual",although at a slowerrate. The other reaction is to define sustainabledevelopment as "developmentwithout growth in throughputbeyond environmental carrying capacity. WCEDleaders (Brundtland 1989, McNeill 1990)seem themselvesto be torn betweenthese two directionsfor operationalizingtheir concept.

Tvworealisms confict. On the one hand,political realism rules out incomeredis. -outionand populationstability as politicallydifficult, if not impossible;therefore the world economyhas to expand"... by a factor of five or ten ...." in order to cure poverty. On the other hand, ecological realismaccepts that the globaleconomy has klreadyexceeded the sustainablelimits of the global ecosystemand that a fiveto tenfoldexpansion of anythingremotely resembling the presenteconomy wouldsimply speed us fromtoday's long run unsustainablityto imminentcollapse. We believethat in conflictsbetween biophysical realities and political reaIi,ies, the lattermust eventually give ground. The planet will transit to sustainability:the choice is betweensociety planning for an orderly transition,or lettingphysical limits and environmelAtal damage dictate the timingand course of the transition. Whilewe agree with Brundtlandthat we shouldseek to limit,arrest or even reduce the throughputassociated with economicactivity, we are far less sanguineabout our abilityto achieve this quickly. The vast expansionin economicactivity projected b Brundtlandis thereforebound to be associatedwith majorrises in throughput. This does not involveany differencein theory betweenBrundtland and ourselves, but merelyreflects the observablefact that successfulsubstitution of manmadecapital for natural resourcesis slowand limited,and that the necessarytechnology cannotbe organizedon cue as the optimistswould wish. Followingthe dictionarydistinction between growth and development:to grow meansto increasein size by the assiniilationor accretionof materials;to developmeans to expandor realize the potentialitiesof; to bringto a fuller,greater or better state. Whensomething grows it gets quantitativelybigger; when it developsit getsqualitatively better, or at leastdifferent. Quantitative

2 growth and qualitativeimprovement follow different laws. Our planet developsover time without growing. Our economy,a subsystemof the finite and non-growingearth, must eventuallyadapt to a similat pattem of developmentwithout throughputgrowth. The time for such adaptation is now.

An alternative formulationwould be to say that physicalinputs must cease growing,but that value of output can continue to increase as long as technologicaldevelopment permits. Of course if physicalinput is Umited,then by the law of conservationof matter-energy,so is physicaloutput. This is equivalentto sayingthat quantitativegrowth in throughputis not permitted, but qualitative improvementin servicesrendered can developwith new technology.In other wordswe are back to the formulationof development(increasing value of output) without growth (physicalthroughput constant). Throughput is treated as an aggregate,and clearlysome componentsare more important than others environmentally.For many purposes,energy is the dominantand criticalcomponent.

Unfortunately, current GNP accounting conventions conflate growth and development, counting both as "economicgrowth". We sharplydistinguish between throughput growth (growth proper) and efficiencyimprovement (development in the dictionarysense).

Once these distinctions are accepted it is reasonable to ask: Can development without throughput growth (sustainabledevelopment) cure exsting poverty? Our belief is that it cannot. Qualitativeimprovement in the efficiencywith which resources are used willgreatly help, but willnot be sufficientto cure poverty. The reductionof throughputintensity per dollarof GNP in some rich countries is all to the good,but meanslittle to poor countriesstill strivingfor adequate food,clothing and shelter. Basicnecessities have a large and irreduciblephysical dimension, unlike say information processing.

The Brundtlandproposal to alleviatepoverty by an annual 3% globalrise in per capita income translatesinitially into annual per capitaincome increments of $633 for USA; $3.6 for Ethiopia; $5.4 for Bangladesh;$7.5 for Nigeria;$10.8 for Chinaand $10.5for India. By the end of ten years, such growth willhave raisedEthiopia's per capitaincome by $41 - hardlysufficient to dent poverty there - - while that of the USA will have risen by $7257. The greater disparityof international income levels that would result calls into question the desirabilityof Brundtland'sprojections.

It is neither ethical nor helpful to the environmentto expect poor countries to cut or arrest their development,which tends to be highlyassociated with throughputgrowth. Therefore the rich countries, which after all are responsiblefor most of today's environmentaldamage, and whose atc.fa. =ll ing can sustainhalting or even reversingthroughput growth, must take the lead in this respect. Poverty reductionwill require considerablegrowth, as well as development,in developing countries. But ecologicalconstraints are real and more growth for the poor must be balanced by negativethroughput growth for the rich.

Developmentby the rich must be used to free resources(source and sink functionsof the environment)for growth and developmentso urgentlyneeded by the poor. Large scale transfers to the poorer countries also will be required, especiallyas the impact of economicstability in rich countries may depress terms of trade and lower economicactivity in developingcountries. Higher prices for the exportsof poorer countries therefore willbe required.

Most importantly,population stability is essentialto reduce the need for growtheverywhere,

3 but especiallywhere population growth is highest,i.e in the poor countries. Politically,it is verydifficult to faceup to the need for incomeredistribution and population stability.If the conceptof sustainabledevelopment becomes a verbalformula for glossingover these hash realities,then it willhave been a big step backwards.It is in thissense that we, the authors of this volume,are seeling to build on Brundtlandbefore the tempestof conventionalpolitical *realismserodes the foundationsthat WCEDconstructed with such care and foresight. Such an agendawil be exceptionallydifficult to implement,and many other issuesare involvedwhich are not addressedin thisvolume, but of whichwe are acutelyaware. Markets,for example,wil have to learn to functionwithout expansion, withcut wars,without wastes and without advertisingthat encourageswaste. Economicpolicy will have to suppresscertain activities in order to allowothers to expand,so that the sum total remainswithin the biophysicalbudget constraint of a nongrwing throughput.T addsup to a formidablepolitical agenda. That iswhy exceptional political wisdom and leadershipare so urgentlyrequired.

We acknowledgethe constructivereviews of VinodDubey and HermanG. Van der Talk

Brundtland,G.IL 1989.Global change and our commonfuture. Washington DC., Benjamin Franlin Lecture(2 May).Environment (US) 31: 16-20,40-43. McNeill,J. 1990.On the economicsof susuainabledevelopment. Washington DC, US AID,January 23-26workshop. WCED,1987. Our commonfuture.The BrundtlandReport]. Oxford, Oxford University Press (for) UN WorldCommission of Environmentand Development393 p.

4 Chapter1: THE CASETHAT THE WORLDHAS REACHED LIMIMh - Mae pece thatcurrent througput th in O gW moomy canotbe suaa - RobertGoodiland

MahatwmGandh [whenasked if, afterindepenaence, India would attain Briih standardsof llvbui' ".... it tookBDtain half the resowiaSof theplanet to achkweu prspe*y; howmany pJaet wil a coltuy Ake Indiarequire .n

The aimof thisthapter is to presentthe case that limitsto growthhave already been reached, that furtherinput growthvwill take the planetfurther away from sustainability, and that weare rapidly foreclosingoptions for the future,possibly by overshootinglimits (Catton 1982). T* scaapter seeks to convincethe reader of the urgent need to convertto a sustainableeconomy, rather than the relatedand equallyor more importantneed of povertyalleviation. The politicalwil to transitto sustainabilitwill be musteredonly when the need for the trnsition is percei 'e crucal next step - howto musterthat politicalwill -- is deferredto a subsequentbook. Rightat the start, plauditsfor Brundtland'sheroic achievement: elevating "austainability" as a planetarygoal now espoused by practicallyall nations,the UN family,and the WorldBank In July 1989,leaders of the Group of Sevenmajor industrialized nations called fbr the early adption, worldwide,of policiesbased on sustainabledevelopment." The wholeworld owes Brundtlandan enormousdebt for thistremendous feat andwe admireher politicalwisdom. This chapterbuikd on Brundtland'slead and exploresthe implicationsof sustainability.We assumeas giventhat the world is beingrun unsustainablynow - beingfuelled by inheritedfossil fuels is the best singleexample. Nonrenewableoil and gas provide60% of globalenergy with barely 50 yearsof provenreserves.

Brundt!andsaid that meetingessential needs requires " a newera of economicgrowt for nationsin whichthe majontyare poor. The report(WCED, 1987) anticipates ".... a five-to tenfold increasein worldindustrial output...." Twoyears later, this"sustainable growth" conclusion was re-emphasizedby the SecretaryGeneral of the BrundtlandCommission: n A fvefold to tenfold increa in economicactivity would be requiredover the next50 years...."to achievesustainability (MacNeill,1989).

2. TheGlobal Eoystem and the EconomicSubsystem

A singlemeasure -- populationtimes per capitaresource consumption -- encapsulateswhat is neededto achievesustainabiity. Tis is the scaleof the humaneconomic subsstem with respect to that of the globalecosystem on whichit depends,and of whichit is a part. The globalecoystem is the sourceof all materialinputs feeding the economicsubsystem, and is the sinkfor all its wastes. Populationtimes per capitaresource consumption is the total flow-- throughput- of resourcesfrom the ecosystemto the economicsubsystem, then backto the ecosystemas waste,as dramatizedin

S Figue 1. The upper diagramillustrates the bygoneera when the economicsubsytem was small elat 'e to the sizeof the globalecosystem The lowerdiagram depicts a situationmuch near to todayin whichthe economicsubsystem is vety largerelative to the globalecosystem Population timesper capitaresource use is refinedby Tinbergenand Hueting (1991), and by Ehrlichand Bhrlich (1990). The global ecosystem'ssource and sink functionshave limitedcapacity to support the economicsubsytem. The imperative,therefore, is to maintainthe size of the globaleconomy to withinthe capacityof the ecosystemto sustainit. Speth(1989) calculates that it took all of human historyto grow to the $60-billionswale economy of 1900. Today,the worldeconomy grows by this amountevery two year. Unchecked,today's $20 trillion global economy may be fivetimes bigger only one generationor so hence. It seemsunlikely that the worldcan sustain a doublingof the economny.let aloneBrundtland's "fie- to ten-foldincrease". We feel throughputgrowth is not the wayto reachsustainabilitr, we cannot "grVW"our way into sustainability.The globalecosystem, which is the source of all the resourcesneeded for the economicsubsystem, is finiteand has limted regenerativeand asimilative capacities. It looksine!itable that the nextcentury will be occupiedby double the numberof people in the humaneconomy consuiming sources and burdeningsinks with their wastes.

The globalecosystem is the sink for all he wastescreated by the economicsubsystem, and thissink has hlited assimativecapacity. WheLthe economicsubsytem was small relative to the globalecosystem (Figure 1; upper),then the sourcesand sinks were large and limits were irrelevant. Leadingtbinkers, such as Ehrlichani Ehrlich(1990), Hardin (1991), Boulding (1991), Daly (1989, 1990,1991),as wellas the Clubof Rome(Meadows et al. 1974),have shown for yearsthat the world is no longer"empty", the economicsubsystem is largerelative to the biosphere,and the capacitiesof the biosphere'ssources and sinksare beingstressed (Fgure 1, lowerdiagram).

3. LocalizedI mits to GlobalLmits This chapter presents the case that the economicsubsystem has reached or eceeded mportantsource and sink limits. We takeas agreedthat we havealready fouled our nest:practically nowherein this earth are signsof the humaneconomy absent. Fromthe center of Antarcticato MountEverest human wastes are obviousand increasing. it is not possibleto findasample of ocean waterwith no sip of the 20 billiontons of humanwastes added annualy. PCBsand other persistent toxicchemicals like DDT and heavymetal compounds, have alreadyaccumulated throughout the marine ecosvstem. One fifthof the world'spopulation breathes air more poisonousthan WHO standardsrecommend, and an entire generationof MexcoCity children may be intellectuallystunted by leadpoisoning (Brown et al. 1991). Sincethe Clubof Rome's1972 "Limits to Growth",the constraintshave shifted from source limitsto sinklimits. Source limits are moreopen to substitutionand are morelocalized. Since then, the cmsehas substantiallystrengthened for limitsto throughputgrowth. There is a widevariety of limits. Someare tractableand are beingtackled, such as the CFCphase out under the Montreeal Convention. Other limitsare less tractable,such as the massivehuman appropriation of biomass (see below). The key limitis the smk constraintof fossilenergy use. Therefore,the rate of transitionto renewablesincluding solar energy, parallels the rate of the transitionto sustainability. Here the optimistsadd the possibilityof cheapfusion energy by the year2050. We are agnosticon

6 technoloy, andwant to encourageIt byenergy taxes (Daly, this volume). Htherto, technolog has onlysrted to focuson input reductionand evenless on sinkmanagement, which suggests there is SCopefor improvements Land fill sites are becomingharder to find; garbageis shpped thousandsof milesfrom industral to deloping countriesin searchof unfilledsinks. It has so far provedimpossible for the US NuclearRegulatory Commission to findanywhere to rent a nuclearwaste site for US$100million pa Germany'sKraft-Werk Union signed an agreementwith China in July1987 to butynulear waste in Mongolia'sGobi desert. Thesefacts prove that landfillsites and toic dumps- aspoct of sinb - - are increasinglyhard to fnd, that limitsare near.

4. Flist Evidae Hman Blons Appropriation The best evdence that there are other imminentlimits is the calulationby Vitouseket aL (1986)that the humaneconomy uses - directlyor indimectly- about 40% of the net primaryproduct of terrestrialphotosynthesis today. (This figuredrops to 25% if the oceansand other aquatic ecosystemsare included). And desertification,urban encroachmentonto agriculturalland, blacktopping,soil erosion and pollutionare increasing-- asis the populationssearch for food This meansthat in onlya singledoubling of the world'spopulation (say 35 yeas) we willuse 80%,and 100%shortly therafter. As Daly(1991a,b) points out 100%appropriation is ecologically impossible and sociallyhighly undesirable. The worldwill go fromhalf emptyto full in one doublingperiod, rrpeti of the sink beingflled or the sourcebeing consumed. Readersrefuinig to recognze overfullnessthat has appropriated40% for humansaleady shoulddecide when between now and 100%they would be wilingto say"enough'. Theyshould state in advancewhat evidence they wil requireto be convinced. Althoughthis evidence has not been refutedover the last fiveyears, this singlestudy is so starkthat we urge promptcorroboration and analysisof the implications. 5. SOowndEvidnc of lAimts:Global Warming The evidenceof atmosphericcarbon dioxide accumulation are pervasive,as geographical atensive as possible,and unimaginablyexpensive to cureif allowedto worsen.In addition,they are unambiguouslynegative and stronglyso. There maybe a few exceptions,such as plantsgrowing fasterin C02-enrichedlaboratories where water and nutrients are not lImiting.However in the real world,it seemsmore likelythat crop belts willnot shiftwith changingclimate, nor will they grow fasterbecause some other factor(eg: suitablesoils, water) willbecome limiting. Tne prodigious NorthAmerican breadbasket's climate may indeed shift north. but thisdoes not meanthe breadbasket willfollow because the richprairie soils will stay put, andCanadian boreal soils and muskeg are very infertle. The secondevidence that limitshave been exceeded is global warming. 1990 was the wamest yearin more than a centuryof recordkeeping. Sevenof the hottestyears on record all occurred in the last.11 years. The l980swere 1 oF warmerthan the 1880s;while 1990 was 1.25°F warmer. Thi contrastsalarmingly with the pre-industrialconstancy in whichthe earth's temperaturedid not vary more than 2-4o F in the last ten thousandyears Humanity'sentire social and cultural infastructureover the last7000 years has evolvedentirely within a globalclimate that neverdeviated as muchas 2 °F fromtoday's climate (Arrhenius and Waltz1990).

7 Figue1: lSo Fite GlobalEsystem Relatveto the GWlng EconomcSubste Mw D*Mamo NWD* NM fIN I T E e~~ coS

,r,, MROV~~~~~~~~~~~~~~~~~~NA... GROWING :

ULAII: U

.7- ECOOMCSUBSST

aFt N I T E1 .,bta C °S w

a -- ECONOMIC SVBSYSTEM

\ ENERtY

POPULOM t i¢~~Go K - .

)1---'VCU'. n _ RICYCMAO It is too soon to be absolutelycertain that global"Greenhouse" warming has begun:normal climaticvariability i too great for absolutecertainty. There is even greateruncertainty about the possibleeffects. But all the evidencesuggests that globalwarming may well have started, that C02 accumulationstarted years ago, as postulatedby SvanteArrhenius in 1896,and that it is worsening fast. Scientistsnow practically universally agree that suchwarming will occur, although differences remainon the rates. The US NationalAcademy of Sciencewarned President Bush that global warmingmay well be the mostpressing international issue of the nextcentury. A dwindlingminority of scientistsremain agnostic. The disputeconcerns policy responses much more than the predictions. The scale of todaysfossil-fuel-based human economy seems to be the dominantcause of greenhousegas accumulation. The biggestcontribution to greenhousewarming, carbon dicoide releasedfrom burning coal, oil andnatural gas, is accumulatingfast in the atmosphere.Today's 53 billionpeople annually burn the equivalentof morethan one ton of coaleach. Nextin importancecontnbuting to Greenhousewarming are all other pollutantsreleased by the economythat exceedthe biosphere'sabsorptive capacity methane, CFCs and nitrousoodde. Relativeto carbondioxide these three pollutantsare ordersof magnitudemore damaging, although thek amountis muchless. Today'sprice to pollutersfor usingatmospheric sink capacity for carbon dioide disposalis ztro, althoughthe real opportunitycost may turn out to be astronomical The costsof rejectingthe greenhousehypothesis, if true, are vastlygreater than the costsof acceptingthe hypothesis,if it provesto be false. Bythe time the evidenceis irrefutable,it is sure to be too late to avert unacceptablecosts, such as the influxof millionsof refugeesfrom low-lying coatal areas(55% of theworld's population lives on coastsor estuaries),damage to portsand coastal cities,increase in stormintensity, and worst of all, damageto agriculture. Andbest of all, abating globalwarming may save money, not cost it, accordingto Lins (1990)when the benefitfrom lower fuel billsis factoredin. The greenhousethreat is more than sufficientto justifyaction now, even ff onlyin an insurancesense. The questionnow to be resolvedis howmuch insurance to buy? Admittedly,great uncertaintyprevails. But uncertaintycuts both ways. 'Businessas usual or 'wait and see' are thus imprudent,if not foolhardy. Underestimationof greenhouseor ozone shieldrisks is just as likelyas overestimation.Recent studies suggest we are underestimatingrisks, rather than the converse. In May 1991,US EPA uppedby 20-foldtheir estimateof UV-cancer deaths;and the earth's abilityto absorbmethane was estimated downwards by 25%in June 1991. In the face of uncertaintyabout global environmental health, prudence should be paramount. The relevantcomponent here is the tightrelationship between carbon released and the scale of theeconomy. Global carbon emissions have increased annually since the industrialrevolution; now at nearly4% pa. To the extentenergy use parallelseconomic activity, carbon emissions are an index of the scale of the economy. Fossilfuels accountfor 78% of US energy. Of course there is tremendousscope for reducingthe energyintensity of industiyand of the economyin general,that is whyreductions in carbonemissions are possiblewithout reducing standards of living. A significant degreeof decouplingeconomic growth from energy throughput appears substantially achievable. Witnessthe 81% increasein Japan'soutput since 1973 using the sameamount of energy. Similarly, the Uaited States'snear 39% increasein US GNP since 1973,but with only modestincrease in energyuse. This means energyefficiency increased almost 26%. Sweden- cold, gloomy, industrializedand veryenergy efficient - is the best exampleof howprofitable it is to reduceC02.

9 The SwedishState PowerBoard found that doubledelectric efficiency, 34% decrease in C02, phase out of the nuclearpower which supplies 50% of the country'selectricity, actually lowers consumers electricitybills by US$1bn per year(Lovins, 1990). Other,less efficient nations should be able to do even better. Reducingenergy intensity is possiblein all industrialeconomies and in the largerdeveloping economies,such as China,Brazil and India. The scopeof increasingenergy use withoutincreasing C02 meansprimarily the overduetransition to reneawbles:biomass, solar, hydro. The other major source of carbon emissions-- deforestation- also parallelsthe scale of the economy. More people needingmore land pushback the frontier. But there are vanishinglyfew geopoliticalfrontiers left today. Greenhousewarming is a compellingargument that limitshave been exceededbecause it is globallypervasive, rather than disrupting the atmospherein the regionwhere the C02 wasproduced. In comparison,acid rain damagingparts of the United States and Canada,and those parts of Scandinaviadownwind from UK, and the "Waldesterben"or US$30billion loss of muchof Europe's forest are more regionalevidence for lmits. The nearly7 billiontons of carbonreleased to the atmosphereeach yearby humanactivity (from fossil fuels and deforestation)accumulate in the atmosphere,which suggeststhat the ecosystem'ssinks capable of absorbingcarbon have been exceeded, and carbon accumulation appears for all practicalpurposes irreversible on any relevanttime frame,hence it is of majorconcern for sustainabilityfor future generations. Removalof carbondioxide by liquefyingit or chemically scrubbingit from the stacksmight double the cost of electricity.Optimistically, technology may reducethis cost,but stillat a majorpenalty. 6. Third Evidence:Ozone Shield Ruptue

The third evidencethat globalUmits have been reachedis the ruptureof the ozone shield. It is difficultto imaginemore compelling evidence that humanactivity has ahreadydamaged our life support systemsthan the cosmicholes in the ozoneshield. That CECswould damage the ozone L"yr wvaspredicted as far back as 1974by SherwoodRowland and MarioMolina. But when the damage was first detected -- in 1985 in Antarctica - disbeliefwas so great that the data were rejectedas comingfrom faulty sensors. Retestingand a searchof hithertoundigested computer printoutsconfirmed that not only did the hole existin 1985,but that it had appearedeach spring since 1979. The world had failed to detect a vast hole that threatenedhuman life and food productionand that wasmore extensive than the UnitedStates and taller than MountEverest (Shea 1989). Allsubsequent tests have proved global ozone layer thinning far fasterthan models predicted. The relationshipbetween the increasedultraviolet b radiationlet throughthe impaired ozoneshield and skincancers and cataracts is relativelywell known - every1% decrease in the ozone layer results in 5% more of certain slkn cancers - and alarmingin neighboringregions (eg. Queensland).The worldseems set for 1 billionadditional skin cancers, many of them fatal,among peoplealive today. The possiblymore serioushuman health effect is depressionof our immune systems,increasing our vulnerabilityto an arrayof tumors,parasites and infectiousdiseases. In addition,as the shieldweakens, crop yields and marine fisheries decline. But the gravesteffect may be the uncertainty,such as upsettingnormal balances in naturalvegetation. Keystone species - those on whichmany others depend for survival-- maydecrease leading to widespreaddisruption in

10 enironmental servicesand acceleratingextinctions The one millionor so tonsof CFCsannually dumped into the biospheretake about 10years to waft up to the ozonelayer, where they destrW it witha halflife of 100to 150years. The tonnage of CFCsand other ozone-depletinggases released into the atmosphereis increasingdamage to the ozone shield. Todaysdamage, although senous, only reflectsthe relativelylow levelsof CFCs releasedin the early 1980s. If CFC emissionscease today,the worldstill wil be grippedin an unavoidablecommittment to ten yearsof increaseddamage. Thiswould then graduallyreturn to pre-damagelevels over the next 100- 150years.

Tbis seemsto be evidencethat the globalecosystem's sink capacity to absorbCFC pollution has been vastly xceeded. The limitshave been reachedand emeeded,manlind is in for damage to environmentalservices, human health and foodproduction. This is a goodexample because 85% of CFCsare releasedin the industrialnorth, but the mainhole appeared in Antarcticain the ozone layer20 kilometersup in the sky,showing the damageto be widespreadand trulyglobal in nature.

7. Fourt Evkdne Lad Derdation

Landdegradation, decreased productivity such as causedby accelerated soil erosion, salination and desertification,is onlyone of the manytopics that couldbe includedhere. It is not new;land degradedthousands of yearsago (eg: Tgris-Euphrates)remains unproductive tod. But the scale has mushroomedand is importantbecause practically all (97%)food comes from landrather than fromaquatic or oceansystems. As35% of the earth'sland already is degraded,and since this figure is increasingand largelyirreversible in anytimescale of interestto swciety,such degradation is a sig that we have eceeded the regenerativecapacity of the earth'ssoil source. Pimentelet al. (1987)found soil erosionto be seriousin mostof the world'sagriculturd areas,and that thisproblem is worseningas moremarginal land is brought into production. Soilloss rates, generallyrangimg from 10 to 100 t/ha/yr,exceed soil formationrates by at least tenfold. Agricultureis leadingto erosion,salination or waterloggingof possibly6 millionhectares per year: "a crisisseriously affecting the worldfood economy". Exceedingthe limitsof thisparticular environmental source function raises food pnces, and exacerbatesincome inequality, at a time that one billionpeople are alreadymalnourished. As one third of developingcountry populations now faces fuelwooddeficits, crop residuesand dung are diverted from agricultureto fuel Fuelwoodoverharvesting and this diversionintensify land degradation,hunger and poverty.

& Fifth Evldewe:Blodiversty The scale of the humaneconomy has grownso large that there is no longer room for all speciesin the ark. The ratesof takeoverof wildlifehabitat and of speciesextinctions are the fastest theyhave ever been in recordedhistory and are accelerating.The world'srichest species habitat, tropicalforest, has alreadybeen 55%destroyed, the currentrate exceeds168,000 square kIlometers per year. As the total numberof speciesextant is not yet knownto the nearestorder of magnitude (5 millionor 30 millionor more),it is impossibleto determineprecise extinction rates. Howei-r,

11 conservativeestimates put the rate at more than 5000 species of our inherited genetic hbrary irrevestbly extinguishedeach year. This is about 10,000times as fast as pre-humanextinction rates. Less conservativeestimates put the rate at 150,000species per year (Goodland 1991). Many find sucb anthropocentrismto be arrogant and immoral. It also increasesrisks of overshoot. Built-in redundancyis a part of manybiological systems, but we do not knowhow near thresholdsare. Most extinctionsfrom tropical deforestation (eg: colonization)today increase poverty - tropical moist forest soilsare fragile-- so we do not even have much of a beneficialtradeoff with developmenthere.

9. PopulatIon

Brundtland is sensible on population: enough food is too zxpensivefor one-fourth of the earth's population today. Birthweightis decliningin places. Povertystimulates population growth Direct poverty alleviationis essential;business as usualon povertyalleviation is immoraL MacNeill (1989)states it plainly:".... reducingrates of populationgrowth .... " is an essentialcondition to achieve sustainability. This is as important, if not more so, in industrialcountries as it is in developing countries. Industrial countriesoverconsume per capita,hence overpoliute,so are responsiblefor by far the largest share of limitsbeing reached. The richest 20%oof the world consumesover 70% of the world's commercialenergy. Thirteen nationsalready have achievedzero population growth,so it is not utopian to expect others to follow.

Developingcountries contribute to exceedinglimits because they are so populous today (77% of the world's total), and increasingfar faster than their economiescan provide for them (90%oof world population growth). Real incomesare dechlningin some areas. If left unchecked,it maybe half way through the 21st century before the number of births will fall back even to current high levels. Developingcountries' population growth alone would account for a 75% increase in their commercial energy consumption by 2025, even if per capita consumption remained at cufrent inadequate levels (OTA 1991). These countries need so much scale growth that this can only be freed up by the transitionto sustainabilityin industrialcountries.

The poor must be given the chance, mustbe assisted,and wil justifiablydemand to reach at least minimallyacceptable living standards by accessto the remainingnatural resource basew.When industrial nations switch from input growth to qualitative deve.lopment,more resources and environmentalfunctions will be availablefor the South's needed growth. This is a major role of the World Bank. It is in the interests of developingcountries and the worldcommons not to followthe fossilfuel model. It ISin the interest of industrialcountries to subsidizealternatives, and this is an increasingrole for the World Bank. This viewis repeated by Dr. Qu Wenhu of AcademicaSinica who says: ".... if 'needs' includes one automobile for each of a billion Chinese, then sustainable developmentis impossible.... " Developingpopulations account for only 17% of total commercial energy now, but unchecked this will almostdouble by 2020 (OTA 1991).

Merely meeting unmet demandfor familyplanning would help enormously. Educatinggirls and providingthem with credit for productivepurposes and employmentopportunities are probably the next most effectivemeasures. A full25% of US births, and a much larger number of developing country births, are to unmarriedmothers, hence providingless child care. Most of these bths are unwanted, which also tends to result in less care. Certainly,international development agencies should assist high population growth countries reduce to world averages as an urgent first step, instead of tryingonly to increase infrastructurewithout population measures.

12 10. Growthversus Delopment To the extent the economicsubsystem has indeedbecome large relative to the global ecosystemon whichit depends,and the regenerativeand assimilativecapacities of its sourcesand sink are beingexceeded, then the growthcalled for by Brundtlandwill dangerouslyexacerbate surpasingthe limitsoutlined above. Opinionsdiffer. MacNeil(1989) claimns Wa minimum of 3% annualper capitaincome growth is neededto reachsustainability during the first part of the next century',and this wouldneed highergrowth in nationalincome, given population trends. Hueting (1990) dagrees, concludingthat for sustainability",,,, what we need let is an increase in national income". Sustainabilitywill be achievedonly to the extentquantitative throughput growth stabilizes and i3 replacedby qualitativedevelopment, holding inputs constant. Revrting to the scaleof the economy- population timesper capita resourceuse - per capita resource use must decline, as well as population. Brundtlandis excellent on three of the fournecessary conditions. Firt, producingmore with less (eg: conservation,efficiency, technological improvements and recycling). Japan excelsin this regard,producing 81% more real output than it did in 1973using the same amount of energy. Second,reducing the populationexplosion. Third, redistribution from overconsumersto the poor. Brundtlandwas probablybeing politically astute in leavingfuzzy the the fourthnecessary condition to make all four sufficientto reach sustainability.This is the transiton from input growthand growthin the scaleof the economyover to qualitativedevelopment, holding the scaleof the economy consistentwith the regenerativeand assimilativecapacities of globallife support systems. In several piac the BrundtlandReport hints at this. In qualitative,sustainable development production replacesdepreciated assets, and births replacedeaths, so that stocksof wealth and people are continuallyrenewed and even improved(Daly 1990). A developingeconomy is getting better: wellbeingof the (stable)population improves. An economy growing in throughputis gettingbigger, e wxc limits,damaging the self-reparingcapacity of the planet. To the extentour leadersrecognize the fact that the globehas reachedlimits and decideto reducefurther expansion in the scaleof the economy,we mustprevent hardship in thistremendous transitionfor poor countries.Brundtland commendably advocates growth for poor countries. But onlyraising the bottomwithout lowering the top willnot permitsustainability (Haavelmo, 1990).

The poor need an irreducibleminimum of basics- food,clothing and shelter. Thesebasics requirethroughput growth for poor countries,with compensating reductions in suchgrowth in rich countries. Apart from colonialresource drawdowns, industrial country growth historically has increased markets for developingcountries' raw materials,hence presumablybenefiting poor countries,but it is industrialcountry growth that has to contractto free up ecologicalroom for the minimumgrowth needed in poorcountry economies. Tmbergen and Hueting (1991) put it plainest: ". no further production growth in rich countries ..." All approaches to sustainabilitymust internalizethis constraint if the crucialgoals of povertyalleviation and haltingdamage to globallife supportsystems ate to be approached.

11. ConclusIon When economieschange from agrarianthrough industrial to more serviceoriented, then smokestackthroughput growth may improve to growthless damaging of sourcesand sinks:coal and steel to fiber optics and electronicsfor example. We must speed to productionwhich is less

13 thoughput-intensive. We must acceleratetechnical improvementsin resource productivity, Brudtlad's "producingmore with le". Presumablythis is what the Bndtland commissionand subsequentfolow up authors(eg. MacNefil1989) label "growth, but of a differentkund." Vigomous promotionof this trend will indeedhelp the transitionto sustainability,and is probablyessential. It is alsolargely true that conservationand efficiency improvements and recyclingare profitable,and willbecome much more so the instantenvironmental externalities (eg: carbon dioxide emissions) are internalized. Butit willbe insufficientfor four reasons. First,all growtb consumes resources and produces wastes,even Brundtland'sunspecified new type of growth. To the extentwe have eched limitsto the ecosystem'sregenerative and assimilative capacities, throughput growth exceeding such limits will not herdadsustainability. Second, the size of the servicesector relative to the productionof goods has lmits. Tid, evenmany servces are farly throughput-intenive,such as tourim, universitiesand hospitals.Fourth, and highlysignificant, is that lessthroughput-intensive growth is "hi-tech",hence the one place where there has to be more growth- tiny, impoverished,developing-countty economies - are less likelyto be able to afford Brundtland's"new" growth. Pamof the answerwil be massivetechnology transfer from industrial countries to developing countries to offer them whateverthroughput-neutral or throughput-minimaltechnologies are available. This transferis presagedby the US$1.5bn "GlobalEnviromnment Facility" of UNEP, UNDPand the WorldBank which wfll start in 1991to financeimprovements not yetfully "economic," but whichbenefit the globalcommons. his chapteris not primarilyabout how to approachsustainability: that is welldocumented elsewhere(Adams 1990, Agarwal and Narain 1990, Chambers et aL1990,Conroy and Litvinoff1988, Goldsmith,Hildyard and Bunyard1990). Nor is it about the economicand politicaldifficulties of reachingsustainability, such as the pricingof the infnite (eg:ozone shield), endlessly debatable (eg: biodiversity),or pricingfor posteritywhat we cannotprice today. Ihat is admirablyargued by Daly and Cobb(1989), Daly (1989,1990, 1991), El Serafy(1991), and by Costanza(1991). It is aboutthe need to recognizethe imminenceof himtsto throughputgowth, whilealleviating poverty in the world. Manvlocal thresholdshave been broachedbecause of populationpressures and poverty; globaltursholdb atu beingburoached by ind i&..awuuu;c' uvviKusumpiiou. To concludeon an optimisticnote: OECDfound in 1984that environmentalexpenditures are good for the economyand goodfor employment.The 1988Worldwatch study (Brown, 1988) speculatedthat most sustainabilitycould be achievedby the year 2000 with additionalannual exnditures increasinggradually to $150 bn in 2000. Most measuresneeded to approach sustainabilityare beneficialalso for other reasons(eg: fuel efficiency).The world'snations have annuallyfunded UNEP with about$30 million, although they propose now "to consider"increasing this sum to $100 million. Moneyis available;it is not financialcapital shortage that limitsthe economyanymore. It is shortagesof both natural capital, as well as of politicalwill in the industrializedworld. Yet we failto followeconomic logic and investin the limitingfactor.

Manynations spend less on environment,health, education and welfare than they do on arms, whichnow annually total $1 trillion. Globalsecurity is increasinglyprejudiced by sourceand sink constraintsas recentnatural resourco wars have shown, such as the 1974"Cod" war between UK and Iceland,the 1969"Football" war between overpopulated El Salvadorand under-populated Honduras, and the 1991Gulf war. As soonas damageto globallife-support systems is perceivedas far riskier

14 than mitay threats,more prudentreallocation wDll promptly follow.

Ackwwdpmats I acknowledgethe usefulcomments of Paul Ehrlich,Stein Hansen,Roefie Hueting, Frederik van BolusiS,Sandra Postel, Jane Pratt and RichardNorgaard

BlioPphy

Adams,W.M 1990.Gen development:environment and sustainabilityin the ThirdWorld. London, Routledge2SSp. Agarwa A. andNarain, S. 1990.Towards green villages. Delhi, Center for Scienceand Enwonment 52p. ArrheniusE. andWaltz, T.W. 1990. The Greenhouseeffect: implications for economic development WashingtonDC., Ihe WoddBank, Discussion Paper 78. 18p. Brown,L R. 198&State of the World.Washington DC, Worldwatchinstitute 237p. [see also: State of the Worldfor 1989,1990 and 1991J. Catton,W. R. 1982.Overshoot: the ecologicalbasis of revolutionarychange. Cbicap, Unhesity of fllinoisPress 298p.

Chambers,R., Saxena,N.C. and Shah,T. 1990.To the handsof the poor. London,Intermediate Technology273p. Conroy,C. and Utvinoff MAL1988. The greeningof aid: sustainablelivelihoods in practice.London, Earthscan302 p. Costanza,R. (ed.) 1991.Ecological economics: the scienceand managementof sustainability.New York, ColumbiaPress 5 35p. Court,T. de la, 1990.Beyond Brundtland: green development in the 1990s.London, Zed Books1 39p. Daily,G.C. and Ehrlicb,P.R. 1990.An exploratorymodel of the impactof rapidclimate change on the worldfood situation.Proceedings Royal Soc. 241: 232-244.

Daly,H.E. 1991.Ecological economics and sustainabledevelopment in Rossi C. and Tiezzi,E (eds.)Ecological Physical Chemistry. Amsterdam, Elsevier (in press). Daly, H.LF 1991.Towards an environmentalmacroeconomics. in CostanzaR. (ed.) Ecological Economics.New York, Columbia Press 535p. Daly, H. . 1990.Toward some operationalprinciples of sustainabledevelopment. Ecological Economics2:1-6.

15 Daly,H.E. 1990.Boundless bull GannettCenter Joumal 4(3): 113-118.

Daly,EL. 1991.Sustainable development: from conceptual theory twards operationalprinciplet Popubdon and DevelopmentRevew (forthcoming). Daly,H.E. and Cobb, . 1989.For the commongood: redirecting the economytowards community, the environment,and a sustainablefuture. Boston,Beacon Pres 482p. Ehrlich,P. 1989.lTe limitsto substitution:meta-resource depletion and a new economi-ecolgic paradigm.Ecological Economics 1(1): 9-16. Ehrlich,P. and Ehrlich,A. 1990.The popWulationexplodon. New York, Simon and Schuster320p. El Serafy,S 1991.The environmentas capital in Costanza,R. (ed.) Ecologicaleconomies: the scienceand managementof sustainability.New York, Columbia Press 535p. Foy,0. 1990.Economic sustainability and the preservationof environmentalassets Environmental Management14(6): 771-778. Goldsmith,E., Hildyard,N. and Bunyard,P. 1990.5000 days to save the planet.London, Hamlyn 320p. Goodland,R. 1991.Tropical deforestation: solutions, ethics and religion. Washton DC., Ihe WorldBank, Enviroment DepartmentWorking Paper 43: 62p. Goodland,R., Asibey,E, Post, J. and Dyson,K 1991.Tropical moist forest mana ent the urgencyof transitionto sustainability.Envion mental Coevation (Spnng). Goodland,R. and Ledec,G. 1987.Neoclassical economies and sustaable develpment Ecologcl Modelling38: 19-46. Goodland,R. and Daly,IL 1990.The misingtools (for sustainability)(269-282) in Mungail,C and McLaren,DJ. (eds.)Planet under stress: the challengeof globalchange. Toronto, Oxford University Pres 344p. Haavelmo,T. 1990.The bigdilemma, international trade andthe North-Southcooperation (Box 1-1; p 7) ia Economicpolicies for sustainabledevelopment. Manila, Asian Development Bank 253p. Hardin,G. 1991.Paramount positions in ecologicaleconomics. in CostanzaR. (ed.) Ecobgial Economics.New York, Columbia Press S3Sp. Hueting R. 1990.The Brundtlandreport a matterof conflictinggoals. Ecological Economics 2(2): 109-118. Lovns, A.B 1990.Does abatingglobal warring cost or savemoney? Old Snowmus,CO., Rocky Mountai Inst. 6(3):1-3.

McNeill, J. 1989.Strategies for sustainabledevelopment. Scientific American 261(3): 154-165.

16 Meadows,D. H. et ai 1974.Ihe limitsto growth:a reportfor the Clubof Rome'sproject on the predicment of mankind(2nd.ed.) New York, Universe Books 205p. OTA, 1991.Energy in developingcountries. Washington DC., US Congress,Office of Technology Assessment13 7p. Pimentel,D. et al 1987.World agriculture and soilerosion. BioScience 37(4): 277-283. Shea, C P. 1988.Protecting life on earth: steps to save the ozone layer. WashingtonDC, WorldwatchInstitute, paper 87: 46p. Speth, J.G. 1989.A Ludditerecants: technological innovation and the environment.The Amicus Journl (Spring):3-5. Inbergen, . andHueting, R. 1991.GNP and marketprices: wrong signals for sustainableeconomic developmentthat disguiseenvironmental destruction. (this volume). Vitousek,P. M et aL 1986.Human appropriation of the productsof photosynthesis.BioScience 34(6):368-373, WCED, 1987.Our commonfuture. WorldCommission on Environmentand Development(The BrundtlandReport). Oxford, Oxford Univ. Press 383p.

17? Ciapter2:FROM EMFIY-WORLD ECONOMICS TO FULLWORLD ECONOMICS: RECOGNIZINGAN HISTORICAL TURNING POINT IN ECONOMICDEVELOPMENT

Herman . Daly'

1. Inr The thesishere arguedis that the evolutionof the humanecohomy has pased froman era in whichmanmade capital was the limitingfactor in economicdevelopment to an era in which remainingnatural capitalhas becomethe limitingfactor. Economic logic tells us that we should maximizethe productivityof the scarcest(limiting) factor, as wellas try to increaseits supply.Tbis meansthat economicpolicy should be designedto inrease the productivityof naturalcapital and its total amount,rather than to increasethe productivityof manmadecapital and its accumulation,as wasappropriate in the pastwhen it wasthe limitingfactor. The remainderof thispaper aimsto give some reasonsfor believingthis 'new era thesis,and to considersome of the far-reachingpolicy changesthat it wouldentail, both for developmentin generaland for the multilateraldevelopment bank in particular.

2 Raon the Twring Point Has Not Ben Notled Whyhas this transformationfrom a worldrelatively empty of humanbeings and manmade capitalto a worldrelatively full of these not been noticedby economists?If such a fundamental change in the pattern of scarcityis real, as I think it is, thenhow could it be overlookedby economistswhose job is to py attentionto the patternof scarcity?Some economists, eg. Boulding 2 an 3corg -Roegen,3 have indeedsigpalled the change,but their vices have been largely unheedeA One reasonis the deceptiveacceleraton of exponentiagowth. With a constantrate of growththe worldwill go fromhalf full to totaly fullin one doublingperiod-the same amount of time that it took to go from 1% full to 2% full Of coursethe doublingtime itself has shortened, compoundingthe deceptiveacceleration. If we take the percentappropriation by humanbeings of the net productof land-baedphotosynthesis as an indexof howfidl the worldis of humansand their funiture, then we can say that it is 40% fullbecause we use,directly and indirecty,about 40% of the net primaryproduct of land-basedphotosynthesis (Vitousek, et aLQ)Tading 35 years as the doublingtime of the humanscale (ie., populationtimes per capita resourceuse) and calculating backwards,we go fromthe present40A to only 10%full in just two doublingtimes or 70 years, whichis aboutan averagelifetime. Also "full" here is takenas 100%human appropriation of the net productof photosynthesiswhich on the face of it wouldseem to be ecologcay quite unlikelyand sociallyundesirable (only the most recalcitrantspecies would remainwild-all others would be managedfor humanbenefit). In other words,effective fuHllness occurs at kss than 100%human preemptionof net photosyntheticproduct, and thereis muchevidence that long run humancarying capacityis reachedat lessthan the existing40% (See Goodland,this volume). The worldhas rapidly gonefrom relatively empty (10% full) to relativelyfull (40% full). Although 40% b less than halfit makessense to thinkit as indicatingrelative fullness because it is onlyone doublingtime awayfrom 80o , a figurewhl-h represents excessive fullness. This change has beenfaster than the speedwith

18 whichfundamental economic paradigms shift. According to physicistMax Planck a new scientific paradigmtriumphs not by convincingthe majorityof its opponents,but becauseits opponents eventuallydie. There has not yet been time for the empty-worldeconomists to die, and meanwhile theyhave been cloningthemselves faster than they are dyingby maintainingtight control over their guild.The disciplinarystructure of knowledgein modemeconomics is far tighter than that of the turn-of-the-centuryphysics that was Planck'smodel. Full-world economics is not yet acceptedas academicallylegitimate; indeed it is nolteven recognp;ed as a challenge.5 Anotherreason for failingto note the watershedchange in the pattern of scarcityis that in order to speak of a lmiting factor,the factorsmust be thoughtof as complementary.If factorsare good substitutesthen a shortageof one doesnot significantlylimit the productivityof the other.A standard assumptionof neoclassicaleconomics has been that factorsof productionare highly substitutable.Although other modelsof productionhave considered factors as not at all substitutable (e.g.,the totalcomplementarity of theLeontief model), the substitutability assumption has dominated. Consequentlythe very idea of a limitingfactor was pushedinto the background.If factorsare substitutesrather than complementsthen there canbe no limitingfactor and hence no newera based on a changeof the limitingrole fromone factorto another.It is thereforeimportant to be veryclear on the issueof complementarityversus substitutability. The productivityof manmadecapital is moreand morelimited by the decreasingsupply of complementarynatural capital Of coursein the past whenthe scale of the humanpresence in the biospherewas low manmadecapital played the limitingrole. The switchfrom manmade to natural capitalas the limitingfactor is thus a functionof the increasingscale and impactof the human presence.Natural capital is the stockthat yieldsthe flowof naturalresources--the forest that yields the flowof cut timber;the petroleumdeposits that yieldthe flowof pumpedcrude oil, the fish populationsin the sea that yield the Howcaught fish. The complementarynature of natural and manmadecapital is madeobvious by askingwhat good is a saw millwithout a forest?; a refinery withoutpetroleum deposits?; a fishingboat withoutpopulations of fish?Beyond some point in the accumulationof manmadecapital it is clearthat the limitingfactor on productionwill be remaining naturalcapitaL For example,the limitingfactor determining the fishcatcb is the reproductivecapacity of fish populations,not the numberof fishingboats; for gasolinethe limitingfactor is petroleum &dpods, not rcfln.y capact;- d for nr=i Wp=of tood it is remainingforests, not saw mill capacity.Costa Rica and PeninsularMalaysia, for example,now must import logs to keep their saw millsemployed. One countrycan accumulate manmadecapital and deplete natural capitalto a greaterextent only if anothercountry does it to a lesserextent-e, CostaRica must import logs from somewhere.The demandsof complementaritybetween manmade and natural capital can be evaded withina nationonly if theyare respectedbetween nations. Of coursemultiplying specific examples of complementaritybetween natural and manmade capitalwil neversuffice to provethe generalcase. But the examplesgien aboveat least serveto addconcreteness to the moregeneral arguments for the complementarityhypothesis given in the next section. Becauseof the complementaryrelation between manmade and natural capital the very accumulationof manmadecapital puts pressure on naturalcapital stocks to supplyan increasingflow of naturalresources. When that flowreaches a sizethat canno longerbe maintainedthere is a big temptationto supplythe annualflow unsustainablyby liquidationof natural capitalstocks, thus postponingthe collapsein the valueof the complementarymanmade capital Indeedin the era of

19 empty-worldeconomics natural resources and naturalcapital were considered free goods(except for extractionor harvestcosts). Consequently the valueof manmadecapital was under no threat from scarcityof a complementaryfactor. In the era of full-worldeconomics this threat is real and is met by Uquidatingstocks of natural capitalto temporarilykeep up the flowsof natural resourcesthat supportthe valueof manmadecapital. Hence the problemof sustainability. 3. Moreo Complemoentat VersusSubstitutability

The mainissue is the relationbetween naturaI capital which yields a flowof naturalresources and servicesthat enter the processof production,&ad the manmadecapital that servesas an agent in the proctss for transformingthe resourceinflow into a productoutflow. Is the flowof natural resources(and the stockof naturalcapital that yieldsthat flow)substitutable by manmadecapital? Clearlyone resourcecan substitutefor another--wecan tranform aluminuminstead of copperinto electricwire. We can also substitutelabor for capital,or capitalfor labor,to a significantdegree eventhough the characteristicof complementarityis also important. For example, we can havefewer carpentersand inore powersaws, or fewerpower saws and more carpenters and stillbuild the same house. Butmore pilotscannot substitute for fewerairplanes, once the airplanesare fullyemployed. In otherwords one resource can substitute for another, albeit imperfectly, because both play the same qualitativerole in production--bothare raw materialsundergoing transformation into a product. Likewisecapital and labor are substitutableto a significantdegree because both playthe role of agent of transformationof resourceinputs into productoutputs. However,when we cometo substitution acrossthe rolesof transformingagent and materia undergoingtransformation (efficient cause and materialcause), the possibilitiesof substitutionbecome very limited and the characteristicof complementarityis dominant.For example,we cannotmake the samehouse with half the lumber no matter how manyextra powersaws or carpenterswe try to substitute. Of coursewe mnight substitutebrick for lumber,but then we facethe analogouslimitation--we cannot substitute masons and trowelsfor brcks. 4. The Complementaityof Naturaland ManmadeCapital

The upshotof these considerationsis that naturalcapital (natural resources) and manmade *pitsdare complementsrather than substitutes. The neoclassicalassumption of near perfect substitutabilitybetween natural resources and manmadecapital is a serous distortionof reality,the excuseof "analyticalconvenience" notwithstanding. To see howserious just imaginethat in fact manmadecapital were indeed a perfectsubstitute for naturalresources. Then it wouldalso be the case that naturalresources would be a perfectsubstitute for manmadecapitaL Yet if that wereso then wewould have had no reasonwhatsoever to accumulatemanmade capital since we werealready endowedby nature with a perfect substitutelHistorically ot coursewe did accumulatemanmade capitallong before naturalcapital was depleted, precisely because we needed manmadecapital to make effective use of the natural capital (complementarityl).It is quite amazingthat the substutabilitydogma should be held with such tenacity in the face of such an easy reduaioad absurdum.Add to that the fact that capitalitself requiresnatural resourcesfor its production-ie.,the substituteitself requires the very input being substituted for- andit is quiteclear that manmadecapital and natural resourcesare fundamentallycomplements, not substitutes. Substitutabilityof capital for resourcesis limitedto reducingwaste of materialsin process,e.g., collectingsawdust and usinga press(capital) to makeparticle board. Andno amountof substitution of capitalfor resourcescan ever reducethe massof materialresource inputs below the massof the outputs,given the lawof conservationof matter-energy.

20 Substitutabilityof capitalfor resourcesIn aggregateproduction functions reflects largely a changeIn the total productmix from resource-intensive to differentcapital-intensive products. It is an artifactof productaggation, not factorsubsdtudon (ie., alonga givenproduct isoquant). It is importantto emphasizethat t ,4 thi Itter meRningnf substitutionthat Is under attackhere-i.e., producinga givenphysical product with less natural resources and morecapital. No one deniesthat it is possibleto producea differentproduct or a differentproduct mix with less resources Indeed newproducts may be designedto providethe sameor better servicewhile using less resources,and sometimesless labor and less capitalas well. This is technicalimprovement, not subsdtutionof capitalfor resources. Lightbubs that givemore lumensper watt representtechnical progre, qualitativeimprovement in the state of the arts, not the substitutionof a quantityof capitalfor a quantityof naturalresource in the productionof a givenquantity of a product It may be that economistsare speakingloosely and metaphoricllywhen they claimthat capitalis a near perfectsubstitute for naturalresources. Perhaps they are countingas "capitalall improvementsin knowledge,technology, managerial skill, etc.-in short anythingthat wouldincrease the efficiencywith which resources are used. If thisis the usagethen 'capital' and resourceswould by definitionbe substitutesin the samesense that moreefficient use of a resourceis a substitutefor using more of the resource. But to define capitalas efficiencywould make a mocketyof the neoclassicaltheory of production,where efficiency is a ratio of output to input, and capitalis a quantityof input. The productivityof manmadecapital is moreand more limitedby the decreasingsupply of complementarynatural capital. Of coursein the pastwhen the scaleof the humanpresence in the biospherewas low, manmade capital played the limitingrole. The smtch frommanmade to natural capitalas the limitingfactor is thus a functionof the increasingscale of the humanpresence. 5. Moreon Natural Capital

Thinkingof the naturalenvironment as "naturalcapital" is in someways unsatisfactoty, but usefulwithin limits. We maydefine capital broadly as a stockof somethingthat yieldsa flowof usful goodsor servcn Traditionallycapital was defined as producedmeans of production,which we are here callingmanmade capital in distinctionto naturalcapital which, though not madeby man, is neverthelessfunctionalUy a stock that yieldsa flowof usefulgoods and services. We can distinguish renewablefrom nonrenewable,and marketedfrom nonmarketed natural capital, gimvng four cross categories.Pricing natural capital, especially nonmarketable natural capital, is so far an intrctable problem,but one that need not be facedhere. Allthat needbe recognizedfor the argumentat hand > that na^turtal ialconsists of physicalstocks that ar mpemta tn manmadecapital. We havelearned to use the conceptof humancapital which departs even morefundamentally from the standarddefinition of capital. Humancapital cannot be boughtand sold, although it can be rented. Althoughit can be accumulatedit cannotbe inheritedwithout effort by bequestas can ordinary manmadecapital, but mustbe re-learnedanew by eachgeneration. Natutal capital, however, is more like traditionalmanmade capital in that it canbe bequeathed.Overall the conceptof naturalcapital is less a departurefrom the traditionaldef1nition of capitalis the commonlyused notion of human capitaL There is a troublesomesubcategory of marketednatural capital that is intermediatebetween naturaland manmade,which we might refer to as "cultivatednatural capital", consisting of suchthings as plantationforests, herds of livestock,agricultural crops, fish bred in ponds,etc. Cultivatednatural

21 capitalsupplies the rawmaterial Input complementary to mamade capital,but doesnot providethe wide ange of naturalecological services characteristic of natural capitalproper (e.g, eucalptus plantationssupply timber to the sawmill, and may even retduce erosion, but do not providea wildlffe habitatnr preservebodiverity). Investmentin the cultivatednatural capital of a plantationforests, howevr, isuseful not only for the lumber,but as a wayof easingthe pressureof lumberinterests on the remainingtrue naturalcapital of real forests. Marketednatural capital can, subject to the importantsocial corrections for common p and myopicdiscountig. be left to the markcL Nonmarketednatural capital, both renewableand nonrenewable,wil be the mosttroublesome category. Remainingnatural forestsshould in many casesbe treatedas nonmarketednatural capital, and only replanted areas treated as marketednatural capital. In neoclassicalterms the extemalbenefits of rmaining naturalforests might be considered "infinte"thus removingthem from market competition with other (inferior)uses. Mostneoclassical economists,however, have a strongaversion to anyimputation of an "infiniteor prohibitiveprice to anything.

In this neWfull-world era investmentmust shift from manmade capital accumulation towards natural capital preservation and restoration. Also technologyshould be aimed at increasing the producivityof naturalcapital more than manmadecapital If these two thingsdo not happenthen wewil be behaving i - in the mostorthodox sense of the word. That is, the emphasis shouldshift fromtechnologies that increse the productivityof laborand nmade capitalto those that increasethe productivityof naturalcapitaL Thiswould occur by marketforces if the price of naturalcapital were to rise as it becamemore scarce. Whatkeeps the prie fromrnsg? In most casesnatural capital is unownedand consequentlynonmarketed. Therefore it has no explicitprice andis exploitedas if its pricewere zero. Evenwhere pnces exist on naturalcapital the markettends to be myopicand excssivelydicounts the costs of future scarcity,especia when under the influenceof economistswho teach that accumulatingcapital is a near perfectsubstitute for depleting natur resmarcesl Naturalcapital productivity is increasedby: (1) increasingthe flow(net growth)of natural resourcesper unit of naturalstock (limited by biologicalgrowth rates); (2) increasingproduct output per unit of resourceinput (limitedby massbalance); and especiallyby (3) increasingthe end-use efficiencywith whichthe resultingproduct yields services to the finaluser (lmited by technology). We havealready argued that complementarityseverely Umitswhat we shouldexpect from (2), and complexecological interrelations and the lawof conservationof matter-energywill limit the increase from(1). Thereforethe focusshould be mainlyon (3). The abovefactors lmit productivityfrom the supplyside. Fromthe demandside tastesmay providea limitto the economicproductivity of naturalcapital that is more stringentthan the limit of biologicalproductiviy. For example,game ranching and fruit and nut gatheringin a natural tropicalforest may,in termsof biomassbe moreproductive than cattle ranching. But undeveloped tastesfor gamemeat and tropicalfruit maymake this use lessprofitable than the biologicallyless productiveuse of cattle ranching. In this case a changein tastes can increase the biological productivitywith whichthe landis used. Sincemanmade capital is ownedby the capitalistwe can expectthat it willbe maintained

22 with an Intet to increasingits productity. Laborpower, which X a stock that yieldsthe usefl secros of laborcan be tmatedi thesmeway as manmadecapitaL Labor power is mamade and owned by the laboer who has an interestin maintainingit and enhancingits productivity.But nonmarketednatul capital(the watercycle, the ozonelayer, the atmosphere,etc.) are not subject to ownevhp, andno selfinterestedsocial class can be reliedupon to protectit fromoverexploltation. If the thesis arguedabove wer acceptedby developmenteconomists and the multilateral dovelopmentbanks, what polic implicationswould follow? The roleof the multilateraldevelopment bks in the newera wouldbe wcreainglyto makeinvestments that replenishthe stock and that increasethe productivityof naturalcapitaL In the pastdevelopment investments have largelyaimed at icasing the stockand productivityof manmadecapitaL Instead of investingmainly in sawmills, fishingboats and refineries,development ban shouldnow invest more in reforestation,restocking of fishpopulations, and renewable substitutes for dwindlingreseres of petrolum Tne latter should includeinvestment in energ efficiency,since it is impossibleto restockpetroleum depositL Since naturalcapacity to absorbwastes b alsoa vitalresource investments that preservethat capacity(eg, pollutionreduction) also incease in priority.For marketednatural capital this will not representa reoluoar change. For nonmarketednatural capital it will be more difficult,but even here economicdevelopment agencies have ecperience in inmestingin complementarypublic goods such as educatbio,legal systems, public infratructure, and populationcontroL Ivtments in Hiting the rate of growthof the humanpopulation are of greatestimportance in managinga worldthat bas becomerelatively fulL Uikemanmade capital, manmade labor power is also complementarywith natural resours and its growthcan increasedemand for naturalresources beyond the capacityof naturalcapital to sustinabtysupply. Perhapsthe clearestpolicy implication of the full-worldthesis is that the levelof per capita resourceuse of the rich countriescannot be generaizedto the poor, gvn the current world population.Present total resourceuse levelsare alreadyunsustainabl, and multiplyingthem by a factor of S to 10 as evisaged in the Brundtlandreport, albeitwith considerablequalication, is ecologicallyimpossible. As a policyof growtbbecomes less possible the importanceof redistribution andpopulation control as measum to combatpoverty increase correspondingly. In a ful worldboth humannumbers and per capitaresource use mustbe constrained.Poor countriescannot cut per capitaresource use, indeed ticy mustincwaa ii to ma.ha buTfie4eay, so theirfocus must be mainly on populationcontroL Rich countriescan cut both, and for those that have alreadyreached demographicequilbrium the fccus wouldbe more on limitingper capitaconsumption to make resoure availablefor transfertcG help bring the poor up to sufficiency.Investments in the areasof populationcontrol and redistributiontherefore increase in priorityfor developmentagencies. Investingin naturalcapital (nonmarketed) is essentiallyan infrastructureimvestment on a grandscale and in the mostfundamental sense of infrastructure-Le.,the biophysicalinfrastructure of the entire humanniche, not justthe within-nichepublic investments that supportthe productivity of the privateinvestments. Rather we are nowtalking about investments in biophysicalinfrastructure ("9nfra-infastructure")to maintain the producthityof all preious economicimvestments in manmade capital,be theypublic or private,by invesig in rebuildingthe remainingnatural capital stocks which havecome to be limitative.Indeed, in thenew era the WorldBank's official name, The International Bankfor Reconstrucdonand Development,should emphasize the wordreconstruction and redefine it to refer to reconstructionof naturalcapital devastated by rapacious"development", as opposedto the historicalmeaning of reconstructionof manmadecapital in Europedevastated by WWIL Since our abilityactually to re-ate naturalcapital is very limited,such investmentswil have to be

23 indiret.ie, conservethe remainingnatural capital and encourage its naturalgrowth by reducing our levelof cunrentexploitation. This includes investing in projectsthat relievethe pressureon these naturalcapital stocks by expandingcultivated natural capital (plantation forests to relievepressure on natural forests),and by increasingend-use efficiency of products. The difficultywith infrastructureinvestments is that their productivityshows up in the enhancedreturn to other investments,and is thereforedifficult both to calculateand to collectfor loanrepayment. Also in the presentcontext these ecological infrastructure investments are defensive and restorativein nature-that is theywill protect existing rates of return fromfalling more rapidly than otherwise,rather than raisingtheir rate of return to a higherlevel. This circumstancewill dampenthe politicalenthusiasm for suchinvestments, but willnot alter the economiclogic favoring them. Past high ratesof return to manmadecapital were possibleonly with unsustainablerates of use of natural resourcesand consequent(uncounted) liquidation of naturalcapital We are now learningto deductnatural capital liquidation from our measureof nationalincome (See Ahmad,El Serafy,and Lutz ). The new era of sustainabledevelopment will not permit natural capital liquidationto countas an income,and wifm requiemthat webecome to lcoer ts of retn on a ecapital-rates,on the ord of of the biolc grwth rates of natwalcapital, since that wi be the limitatingfctor. Onceinvestments in naturalcapital have resulted in equilibriumstocks that are maintainedbut not expanded,(yielding a constant total resourceflow) then all furtherincrease in economicwelfare would have to comefrom increases in pure efficiencyresulting from improvements in technologyand clarification of priorities. Certainly investmentsare being made in increasingbiological growth rates, and the advent of genetic engineeringwill add greatlyto thisthrust. However,experience to date (e.g.,the green revolution) indicatesthat higherbiological yield rates usuaflyrequire the sacrificeof someother usefulquality (diseaseresistance, flavor, strength of stalk). In any casethe lawof conservationof matter-energy cannotbe evadedby genetics:i.e., more foodfrom a plant or animalimplies either more inputsor less matter-energygoing to the non-foodstructures and functionsof the organism. To avoid ecologicalbacklashes wfll require leadership and clarityof purposeon the part of the development agencies. To carry the arguments for infrastructure investments into the area of biophysical/environmentalinfrastructure or naturalcapital replenishment will require new thinking by developmenteconomists. Since much natural capitalis not only publicbut globallypublic in nature, the UnitedNations seems indicated to tike a leadershp rl. Considersome specific cases of biosphericinfrastructure investments and the difficultiesthey present. (1) A largelydeforested country will need reforestationto keep the complementary manmadecapital of sawmills (carpentry, cabinetry skills, etc.) fromlosing their value. Of coursethe deforestedcountry could for a time resort to importinglogs. To protectthe manmadecapital of damsfrom the siltingup the lakesbehind them, the watercatchment areas feedingthe lakes must be reforestedor originalforests protected to preventerosion and siltation. Agricultural investments dependingon irrigationcan become worthless without forested water catchment areas that recharge aquifers.(2) At a globallevel enormous stocks of manmadecapital and natural capital are threatened by depletionof the ozonelayer, although the exactconsequences are too uncertainto be predicted. The greenhouseeffect is a threat to the valueof all coastallylocated and climaticallydependant capital,be it manmade(port cities, wharves,beach resorts) or natural(estuarine breeding grounds for fishand shrimp).And if the naturalcapital of fishpopulations diminishes due to lossof breeding grounds,then the valueof the manmadecapital of fishingboats and cannerieswill also be diminished in value,as will the labor power(specialized human capital) devoted to fishing,canning, etc. We have begun to adjust nationalaccounts for the liquidationof natural capital,but have not yet

24 recognized that the value of complementarymanmade capital must also be written down as the natural capital that it was designedto exploitdisappears. Eventuallythe market will automatically lowerthe valuationof fishingboats as fishdisappear, so perhapsno accountingadjustments are called for. But ex ante policyadjustments aimed at avoidingthe ex post writing down of complementary manmadecapital, whether by market or accountant,is certainlycalled for.

7. Initial PolicyRespone to the Historic Tuning Point

Althoughthere is as yet no indicationof the degree to which developmenteconomists would agree with the fundamental thesis here argued, three U.N. agencies (World Bank, UNEP, and UNDP) have neverthelessembarked on a project, however exploratoryand modest, of biospheric infrastructureinvestment known as the GlobalEnvironmental Facility. The Facilitywould provide concessionalfunding for programsinvesting in the preservationor enhancement of four classesof biosphericinfrastructure or nonmarketednatural capital.These are: protection of the ozone layer; reduction of greenhousegas emissions;protection of internationalwater resources; and protection of biodiversity. If the thesis argued here is correct, then investmentsof this type should eventually become very inportant in the lending portfoliosof developmentbanks. Likewisethe thesis would provide theoreticaljustification and guidancefor present efforts to found the Global Environmental Facilityand its likelyextensions. It wouldseem that the "new era" thesis merits serious discussion, both inside and outside the multilateraldevelopment banks, especiallysince it appears that our practical policy response to the reality of the new era has already outrun our theoretical understandingof it.

NOTES

1. I am grateful to P. Ehrlich, B. Hannon, G. Lozada,R. Overby,S. Postel, B. von Droste and P. Dogse for helpful comments.

2. Kenneth Boulding,The Meaningof the Twentieth Century.New York: Harper and Row, 1964.

3. NicholasGeorgescu-Roegen, The Entro=y Law and the EconomicProcess. Cambridge: Harvard UniversityPress, 1971.

4. Peter Vitousek,et al.,HIumanAppropriation of the Productsof Photosynthesis",ioScience1986 (34 No.6 pp[.368-73).

±). tFor an analysisof economicsas an academicdiscipiine see Part i of For the Common Con' by H. E. Daly and J.B. Cobb, Boston: Beacon Press, 1989.

6. The usual Hicks-Allendefinition of complementarityand substitutibilityis: "if a rise in the j th factor price,which reduces the use of the j th factor, increases(resp. reduces)the use of the i th factor for each fixed [levelof output), i is a substitute (resp. complement)for j .n {From Akira Takayama,Mathematical Economics, second edition, New York: CambridgeUniversity Press, 1985, p. 1441 In a model with only two factors it followsfrom this definition that the factors must be substitutes.If they were complementsthen a rise in the price of one of them would reduce the use of both factorswhile output remainedconstant, which is impossible.The customarydigrammatic use of two-factor models thus reinforces the focus on substitutibility by effectively defining

25 complementarityout of existencein the two-factorcase. In the Leontiefmodel of L-shapedisoquants (Roedcoefficients) the abovedefinition simply breaks down because the reductionin use of one factorinevitably causes a reductionin output,which the defnitionrequires must remainconstant. For the argumentof this paperone need appealonly to "complementarity"in the senseof a limiting factor. A factorbecomes limiting when an increasein the other factor(s)will not increaseoutput, but an inees in the factor in question(the limitingfactor) will increase output. For a limiting factorall that i8 neededis that the isoquantbecome parallel to oneof the axoes.And for the practical argumentof thispaper "nearlyparaller wouldalso be quitesufficient. 7. YusufAhmad, Salah El Serafy,and Emst Lutz,eds., EnvirnmentalAcmunting f tiia. Devloment. WorldBank, Washington, 1989.

26 Chapter3: ON THE STRATEGYOF TRYINGTO REDUCEECONOMIC INEQUALITY BY EXPANDINGTHE SCALEOF HUMANACTIVITY TrygveHaavelmo and SteinHansen

1. The BgD&== Sustainabledevelopment as advocatedin the BrundtlandCommission (WCED) 2 Report requiresa rate of globaleconomic growth and a distributionof assetsand incomethat wouldallow developingcountries to achievea significantper capitaincrease in disposableincome as a basisfor achievingalleviation of poverty.Imariably, policy statements to thiseffect mean a stategy whereby the standardsof the poor shall be lifted towardsthe levelof the well-to-doand to the formsof consumptionand investmentsseen in the industrializedcountries today. Such policystatements appear to be foundedon a beliefthat there are and will be in the futureof concernto society,no seriouslimits to materialgrowth. The variousfactors of production, e.g.natural resources, man-made capital, and labor, are assumedto be substitutableso that a shortage of one does not significantlylimit the productivityof another. At the same time the WCEDexpresses serious concern about the globalconsequences of humanactivity in the way of pollution,exhaustion of resources,and generallythe danger of deterioratingthe environmentfor futuregenerations to livein. Suchconcerns appear to reflectthe beliefthat there are - and willincreasingly be - seriouslimits to growth,ie. someof the keyfactors of productionare complementaryrather thansubstitutable. Morespecifically, as HermanDaly has put it2, the concernexpresses a suspJon that an ever increasingflow of input of natural resourcesin the productionprocesses to sustainthe required growth,inevitably results in liquidatingof the naturalcapital stock that suppliesthis flow. Man-made capitalis madefrom inputs of labor andnatural capital, and serves as an agent alongwith labor in the processof transformingthe resourceflow into an utility-yieldingoutput flow. If thisvery resource Slowis ieduced or disappears,the productivityof thetransformation agents, ie. man-madecapital and labor, is reduced. Forexample, what is the valueof a sawmillwithout a forest to supplylogs, or fishingboats without a fish populationto catch?Thus complementarity rather than substitutability betweenthe flowof naturalresources on the one hand,and man-madecapital on the other,must be recognizedas a clear possibility,and consideredfor inclusionas a fundamentalassumption for economicplanning. Thisimplies that the very accumulationof man-madecapital puts increasing pressureon naturalcapital stocks to supplyan increasingflow of natural resourcesto sustainthe productivityof man-madecapitaL The case of natural resourcecultivation such as farmingillustrates this. Agriculturalists establishedlong ago that the basicprinciple of farmingis to changethe localnatural system into one whichproduces more of the goodsdesired by man. Thisman-made system is an artificialconstruction that requirescontinuous economic inputs obtained from the natural environmentto maintainits output leveL Muchof the farminginput is thus nothingbut an effort to preventthe establsed artificialstate of the land from decliningtowards an unproductive(from a human perspective) low-levelstate; mostlikely lower than the naturalstate priorto farmingof the land3.

27 Fundamentally,rearrangement of matter is the central physicalfact about the economic process.Matter cannot be destroyedin the economicsystem, it can merelybe convertedor dissipated. These transformationprocesses generate wastes some of whichcan be economicallyrecycled, whereas others cannot. To the extent that nature's capacity to assimilate such wastes is or becomes inadequate,wastes will accumulate. Energy is degraded in these transformations. This means that little by little the capacityto rearrangematter is irrevocablyused up. Energyflows also drive the basic physical,chemical, and biologicallife-support systems, e.g. air, water, and soils. It is eventuallythe capacityof these systemsthat wfll limit the scale of human activity,i.e. long term global economic growth4.

Sustainabledevelopment implies a perspectiveof several generationsor centuries. Clearly, a development where population and per capita use of the planet's finite resources both grow significantly,cannot go on indefinitely.Even if populationand the ievel of economicactivity were kept stationary,accumulation of pollutantswould grow very rapidly because of the growthof entropy beyond nature's capacity of self repair. Entropy is a concept borrowed,somewhat freely, from physics. The concept as used here can be defined as an index measuringthe total accumulatedpile of uselss or harmfulwastes producedby human activitiesover a relevant span of recent economic history. .

The politicallywidely acclaimedWCED-definition of Sustainable Development invariably implieslifting the bottom rather than loweringthe top. Successfulachievement of global equitygoals via growth and economicefficiency as conventionallymeasured in the national incomaaccounts, will contradict the environmentaldimensions of sustainabledevelopment'. Even the most turdyship will eventuallysink if the load is too big. There is little comfortin the fact that the load wasoptimally allocated and fairlydistnbuted at the time of sinking!7

To make political difficultiesworse, even with wide acceptance that loweringthe top is required, continued accumulativestrain on the natural resourcebase wouldbe the likelyoutcome, albeit at a reduced rate. The developmentprocess has a tremendousmomentum. It can be likened to a journey: You start out from Manilaand your destinationis Bali Instead you head north towards Tokyo. You realize that the directionof travel willnot bringyou to Bali. Therefore, you reduce the travellingspeed, ie. you slowdown, but you do not changethe directionof the traveLWhile this will postpone your time of arrival in Tokyo,it willnot bring you any closer to Bali8!

2. The Technologial OptimisticView

iistory is full of technologicalpessimists. The economistsof the 19ithiniury saw thr;natural resource base as a limitingfactor that wouldeventually drive the productivityof the transformative agents - labor and capital - down to a level correspondingto a subsistencestandard of living9. Some of them predictedthe industrialrevolution would end as coal mineswere exhausted.Most doomsayers did not foresee the abilityof society,through human capital formationand organizationof societies, to improveman-made capital so as to facilitatean unprecedentedrate of natural resourceextraction to meet rapidly increasingand diversifyingconsumer demands, thus yieldingvery attractive returns on man-madecapital and labor in many societies.

Manypeople today look upon those who warn againstpollution and exhaustionof resources as technologicalpessimists. On the other hand, technologicaloptimism is based on a faith in scientific

28 developmentand technologicalprogress. Tboughtsfrom the fieldof decisionsunder uncertaintyalso enter the picture.There is the questionof whohas the burdenof proof;the optimistor the pessimist?Here we findtwo extme views.One is sincewe do not knowfor certainthat the futurewill be difficult,why worry? The other viewis that we shouldbe concernedabout the future becausewe cannotbe sure that the futurewill not be difficult.Both views risk making wrong predictions. Even if we couldestimate the chancesof rightor wrongpredictions, there is the questionof whichmistake is the more serious? Here there is a strongdegree of asymmetry.The irreversibleeffects of an 'optimistsrecldess policy is likelyto be vastlymore difficultto copewith than the outcomeof a more cautious"pessimists policy.

Technologicaldevelopment - whichis qualitativeprogress and thusfundamentally different fromquantitative substitution of man-madecapital for naturalresources1 - couldtake placealong two linesrelevant to the issuesat stake here. The one line is improvementin the abilityto utilize availableresources at any tme to producemore and more goods. The other line reducesthe negativeeffects of growingentropy. Possiblytechnological ability in the methodsof producing wantedgoods and servicescould develop faster than the negativeeffects of growingentropy. Even if the negativeeffects of entropykept increasing, conceivably people in the futurewould prefer twice as manygoods as we havetoday, even if theyhad to wear gasmasks. It is eve possiblethat human tastesand preferenceswould gradually develop in thisdirecdon. But there is a fundamentalflaw in this "optimisticeline of reasoning.

If the developmentof the productionof goodsand serviceshas reacheda certainlevel at whichentropy grows in spiteof cleaningefforts, the furtherdevelopment of the abilityto produce goodsand serviceshas to g on increasing.If the abilityto producegoods and servicesshould level off at a higherlevel, it isjust a questionof timefor the negativeeffects of entropyto catchup with development.In other words,one wouldhave to producegoods and services at a steadilyincreasing rate in order to staveoff the growingeffects of entropythat wouldcreep up as timegoes one2. Even worse;lowering entropy of the economicsubsystem requires increasing the entropyof the restof the system(environment). Since 'rest of the system"includes the sun,the inevitableentropy increase can be chargedto the solaraccount, but onlyfor a solarbased economy, not a fossilfuel based economy'. If we couldbe sure that thiseternal chase is accordingto the informedpreferences of society, there is of coursenot muchto be added. The sacredstatus of consumersovereignty is the keyin this connection.But to what extentdo peopleknow what they are doing in the long run? Or, more PrWL ,tJf,t whatextent it possibleat all Fp 4 A oiidivid the lf t. hf their futurepath of development"4?

3. Mh Princple of the Free MarketWill Not Providethe Anwer As is wellknown, the free market mechanismwith equilibriumprices has certainoptimal properties. But there are manyassumptions that have to be fulfilledin order to ensure these properties. A fundamentalassumption is that there be no collective(or external)side-effects of productionor consumption,in additionto what individualsconsider as the immediateproduct of interestto them. If collecve sideeff (externas) are subatial and important,the ical docti of the blesi of free tradesimply becomes irrelevant as a guidelinefor economicpolcy.

29 Thi Isa conclusionthat anyserious student of economicscan verify by meansof standardeconomic textbooktheory.

Thee are thre kindsof side-effectsof a collectivenature that are importantin the present context:

a) lbe production of immediatepollution in the process of production,or production pollution. b) The indirecteffets of the pollutionproduced by consumersas a by-productof their enjoyingk goodsand servicesthey buy, or consumptionpollution. c) Tle negativeeffects of entropyand its impacton environmentaldeterioration, or environmental pollution. Everyday we hear complaints from producers that theirbusiness would not be profitablewere they to payfor the pollutionand environmental deterioration that theycause. Weobserve a rapidly gowing market for shippingtoxic, carcinogenic and other waste materialsfrom productionand consumptionin industrializedcountries to developingcountries for dumpingor recycling.Tbere the lawsand regulationson handling,recyling, dumping,and storage, are often more lenient than those in indutralied economics,where the negativehazards and crwding effectsof the accumulating undesirablewaste are becomingtoo costlyfor comfort. Consumersare led to overestimatethe value of the goodsand services they buy because they takethe "surroundingsor naturalenvionment as somethinggiven free in anycase. Tis wasalready well knownfrom the writingsof Pigoul. In additionto all this comesthe humanweakness of preerring presentgoods to futuregoods, as was pointedout longago by Boehm-Bawerk.

Thesethings illustrate the difficultyof relyingon individualaction to makea wisechoice from the point of viewof the distantfutur It is extremelydifficult to modifya free marketsystem by ns of taxesand subsidies in orderto take careof all thoseside-effects not includedin the simple free market frameworLRecent economichistory is fullof illustrationsof how it has been found necesary to restrict the private market forces by publiclyinvoked constraints.

The core messagefrom these considerations can be furtherstrengthened by addressingthe veryimportant currentproblem in manycountries of providingemployment for their labor force. Here the real economicproblem has been turned almostupside down. The idea of regular and "respectable"employment among employees is one of workingand getting income from an employer that can paythe wagesbecause what they produce can be soldprofitably in the market Individual employeescannot make it their businessto decidewhether or not what theyproduce is desirable froma globalpoint of view.According to the principleof consumersovereignty, if there is a market for whatthe employeehelps to produce,then somebody must prefer the product.Hence it is a good thing. Whateverside-effcts employees simultaneously help to produce(e.g. environmental damage) they camot be blamedfor, becausetheir partialinfluence on such side-effectsis infinitesimalas comparedto their immediategain from their work and income.

4. WillTechnological Advances Benefit the Sto or the Weak?

Two conflictingdevelopments can be conceivedof in responseto such a question. First,

30 dthaadvances in tochnologc skilland know-howwill benefit the strong relativelyrmore than the weak. If then the strong(like other people)are primarilyselfish, the outcomemay be a widening ofthe inequalityin the world.This tendenqys furtherexacerbated if those whodevelop technical advancesfocus on consumergoods and servicesfor a high levelof living,rather than focusingon more elementaryimprvements of usingthe world'sresources to benefitthe poor. Second,however, is the possibilitythat increasingability to utilizeresources more effectively and reducepollution could be used to help thosewho are less fortunateand less able to take care of themseles It is beyondeconomic theory to speculateon the finalconclusion as to what might be the outcomeof such conflictingtendencies. The disputed *trickledoweu theory couldperhaps lead to suchan outcomeeven with the strongbeing pnmarily selfish.

5. What Mad of North-SouthTrade and Aid COpertion? Governmentsand indwidualshave for decadesassumed natural resource inputs to be abundant,where man-madecapital and skilled labor needed to transformthe naturalresources into usefulconsumption and investmentgoods have been consideredthe scarcefactors A consequence of such perceptionsand their penetrationinto commoditymarket formation has been the falling relativeraw materials prices in worldmarkets. This has contributed to a wideningof the gapbetween industrializedand manynatural resource-dependent developing countries. Suchdeterioradon has been furtherintensified as a consequenceof the globaltrend-setting prodwui and consumptionpatterns of rich countries.Poor countries are then temptedto exhaust their own valuablenatural resourcestocks at low pricesin return for importedmachinery and consumergoods Exportis not an end in itself. Exportonly serves a purposeif it can financeuseful imports. Developingcountries should realize they must stringently avoid exports they cannot afford. Strategiesto enhanceexports of manystaple agricultural products should be cr' icallyrevisited. Such goods face low demandelasticities in worldmarkets. Indnivdually,each exportertakes the world marketprce as given.In the aggregate,however, the simultaneousimplementation of suchstrategies by manydrives the pricedown dramatically as theyall reachtheir productiontargets. In the end, the exportrevenue might fall short of payingfor the importedmachinery, implements, pesticides etc., requiredto producefor export The outcomeis financialcrisis and reducedcapability to service increaseddebt burdens. Suchtrade includesnot onlysale of non-renewableminerals and harvests fromsoils, forests, and oceans,but an increasinguse of poor countries'soils as dumpsand recychng sites for undesirablewaste fromindustrial production and consumption. Whflemany nice things can be saidabout liberalizing and thusincreasing trade, the structure of trade, as we knowit at present is a cursefrom the perspectiveof sustainabledevelopment 11. A drive for efficientresource use in the presenceof significantenvironmental externalities and other marketimperfections, requires full-cost pricing of resourcesin all applications.This in turn implies a need for substantialintervention at nationaland supra-national levels into otherwisefree market forcesof domesticand international trade. Otherwisecountries that practicefull-cost internalization would,in the short-run,lose out to countriesthat did not, in a regimeof free trade. Poor countnes shouldbegin to realizethe approachingscarcity of some of their natural resources,and plan the exploitationof theseaccordingly. International and national policies pursued in a complexworld of conflictingindividual and groupdemands must come to gripswith approaching

31 natural resource constraints.The globalproduction structure is rapidlyapproaching a situation wherethe relativescarcity of input factorsis aboutto be turnedupside down. Increasingly,it is the sustainableflows from natural resource stocks that are becomingthe limitingproduction factors, not man-madecapital and skilledlabor".

Thisis clearlyindicated by the rapidemergence of the technologicalyadvanced "intemediate" input categorythat couldbe labelledcultivated natural capital, i.e. "GreenRevolution" agriculture, hybridplantation forests, fish farming, etc. However,such high efficiency artificial natural resources may lack the robust biodiversitydimensions of indigenousnatural resources. While being intermediatebetween natural and man-madeinputs, they are thereforefar from perfect long-run substitutes for indigenousnatural resources,and are in fact subjectto the growthof entropy constraintson economicdevelopment identified as a keygrowth dilemma earlier in this chapter. This emergingnew bargaining position is whatthe poor countriesneed to prepare for while they still have somethingto bargainwith. This requirespreparation of developmentplans and programsfor whatthe countries'economic activities should look like in the longrun. Structuraland sectoraladjustments, including changes in domesticprice policies, and international debt management Wi be importantcomponents of plansfor sustainabledeveloment" 9. Aid cooperationwith the purposeof assistingpoor countriesin a developmenttowards the same pattern of pollutingconsumerism as the West has broughtabout is no contnbutiontowards sustainabledevelopment. It will resultin continuedrent transferfrom natural resource-endowed developingcountries to rich countriessupplying the Southwith machinery for speedierresource exraction,which will result in keepingdown their pricesof naturalresources. On the other hand, aid cooperationwith the purposeof assistingin the developmentof lcation specifictechnologies and patternsof consumptionadapted to local,cultural, and habitual patternsin order to enhancehuman development and qualityof life in a sustainableway should be stronglyendorsed. Suchassistance could serve as an eye-openerto the richdonors, thus help themin the process towardsa sustainableworld as welL One possibleway to operationalizethe conceptof sustainable developmentin economicplanning and aid cooperationis by means of so-calledcompensatory investmentsr. Already,some power companies in industrializedcountries have decided that their long-term prospect will benefit from undertakingmeasures to counter the environmentalimpact from increasedcarbon dioxide emission. Tree plantingat homeor in anothercountry, or installationof moreenergy-efficient devices in poorcountries where the costsof reducingemissions are wellbelow those at home,are real worldexamples. One could foresee virgin tropical forests take on increased financialvalue to the ownersif leased out to preservebiodiversity, to provide a natural and sustainablehabitat for indigenouspeople, or preventinga reductionin the global carbon sink capacity.This maximum sustainable income would be higherthan the presentworth of the combined financialreturns to the ownersfrom first cutting and exportingthe logs,and then raisingcattle for a fewyears, before the soilsbecome exhausted. With self-imposed national emission barriers in rich countries,such opportunities could soon providefor newfinancially and economicallysound trade and aid flows. The requiredinstitutional changes may be moderate.

32 6 TheOutook: Tere a Solution? No matter how peoplego about managingthis earth and the life on it, there is alwaysa "solution".Imagine some recording entity outside our planetthat keepssome sort of recordof what mankinddoes on Earth, and the consequencesof it, and there willalways be somethingto record. The developmentmight be somethinglike whatone wouldconclude from reading Charles Darwin. That is, developmentmight lead into some ecologicalbalance as far as mankindis conceened, includingthe catastrophe(from mankind's perspective) that mankindbecomes extinct. Whatpeople metn by askingfor a solutionis presumablysomething else. Thissomething else is then presumablythe following.Certain developments are, fromthe humanperspective, more desirablethan others. The humanmind being rational is supposedto be able to make a senslble choicebetween various feasible altematives when it comesto development.So the questionboils downto this:is there a 'good' solution,or a solutionwhich is acceptable? At least three formidableassumptions have to be fullfilledin order to get a positiveanswer to thisquestion. The firstis that we havea fairlygood knowledge of the consequencesof alternative pathsof humanactivities in the future.Knowledge in thisrespect has probablymade quite a bit of progressin recentyears. The secondcondition is that there is an addresseeto receivethis knowledge anduse it. The thirdcondition is that thisbody or someother internationally accepted body be given the authorityand powerto choosethe futurepath of developmentand enforceit. Aboutthe lasttwo conditions to be fuLllfedone should have no illusion.Perhaps one should settle for the somewhatcynical answer suggested by somepeople, namely that the situationon earth as far as crowding,polution, and deterioratedenvironments are concerned,will not be recognized until the actualsituatioa becomes much more precariousthan is the casetoday. This leadsto whatmany might find paradoxicaLRapid growth and successfuldevelopment as conventionallymeasured, combined with crowding and highpopulation densities, could result in a menuof veryfew and very costly options for futuredevelopment. In contrast,hitherto poor growth performance,low levelsof infrastructureinvestments, slow utilization of the natural resourcebase, and a relativelysparse population (even if it isgrowing rapidlv at present)could leave relatively more doorsopen for the choicebetween future developments. Perhaps this is the flavorof optimismone couldpresent for the peoplesof Africaat thistime of hardship. The opportunitiesregarding possible actions for futuresustainable development are limitedand diminishing.It wouldnot at all contributetowards sustainable development if nationscontinue to do as the bewflderedtourist who in the treelesssandy desert encountered a hungrylion: 'But whatdid you do?' asked his friend afterward.'I climbeda tree."said the tourist."But there were no trees around,"said his friend."Well, what else should I havedone?' saidthe tourist"2' 7. Conchuion Policiesfor moreequality invariably start off that the standardof the poor be liftedtowards the levelof the rich. In other words,lifting the bottomrather than loweringthe top. However, rapidgrowth and successfuldevelopment as conventionallymeasured, combined with crowdingand high populationdensities, could result in a menu of very few and costlyoptions for future development. The opportunitiesregarding possible actions for futuresustainable development are

33 limitedand diminishing.A "good"or acceptabledevelopment solution requires the fLtfillmentof at least three formidableassumptions. The first is that we have a fairlygood knowledgeof the consequencesof alternativepaths of humanactivities in the future. The secondis that there is an addrsee to receive this knowledgeand use it. The third is that this body or some other intemationallyaccepted body be given the authorityand power to choose the future path of developmentand enforceit. If thesesimple facts are not recognizedthere is no more to be said about the sustainabilityissue, or anyother developmentpolicy.

mNlOS

1. WorldCommission on Environmentand Development (WCED). (The BrundtlandReport) 1987. Our CommonFuture. Oxford, Oxford University Press 383p. 2. Daly,H. 1991.An HistoricalTurning Point in EconomicDevelopment: From Empty-World to Full-WorldEconomics. This volume. 3. Ruthenberg,H. 1980.Farming Systems in the Tropics.Third Edition, Oxford, Clarendon Press 424p.

4. TrygveHaavelmo, 1971. Forrensningrsproblemet fra et SamfunnsokonomiskSynspunkt (lTe PollutionProblem from a GlobalPerspective) 11, Sosialokonomen(The NorwegianEconomic Journal),No 4. (in Norwegian);Georgescu-Roegen, N. 1971.The EntropyLaw and the Economic Process.Cambridge, Mass., Harvard University Press 457p.

5. TrygveHaavelmo, 1971, op.cit. 6. AsianDevelopment Bank, 1990. Economic Policies for Sustrinable Development. Manila, ADB, 253 p. 7. Daly,ILE. and Cobb, J. 1989.For the CommonGood: Redirectingthe EconomyToward Community,Environment, and a sustainableFuture. Boston, Beacon Press 482p. 8. Haavelmo,T. 1980. On the Dynamicsof GlobalEconomic Inequality. Mumorandum, Institute of Economics,University of Oslo,7 May 1980;Asian Development Bank, 1990, op. cit.

9. Blaug,M. 1962.Economic Theory in Retrospect.London, Heineman 756p. 10. Haavelmo,T. 1954.A Studyin the Tbeoryof EconomicEvolution. Amsterdam, North Holland PublishingCo.1 14p; Hansen,S. 1969. Naturverneller Naturressurser(Natural Resourcesfor Conservationor EconomicGrowth, in Sosialokonomen(Norwegian Journal of Economics,No. 2: Vol 23. (in Norwegianonly); Haavelmo,T. 1970.Some Observations on Welfareand Economic Growth. u Induction,Growth and Trade:Essays in Honourof Sir RoyHarrod." WA Eltis,M.F.G. Scott, and J.N. Wolfe(eds.) Oxford, Clarendon Press 376p. 11. Daly,H. 1991.op. cit.

34 12. Haavelmo,T. 1971.op. cit. 13. Personalcommunication from Herman E Daly,1991. 14. Haavelmo,T. 1954,1970, and 1971.op.cit. 15. Pigou,A. 1920. The Economicsof Welfare.London, Macmillan 83 0p. 16. von Boehm-Bawerk,F. 1891. The PositiveTheory of Capital 428p 17. AsianDevelopment Bank, 1990. op.cit., p. 7. 18 Daly,H. 1991.op. cit. 19. Hansen,S. 1989.Debt for NatureSwaps: O"erview and Discussionof KeyIssues. Ecological Economics1(1): 77-93; Hansen, S. 1990.Macroecoaomic Policies and SustainableDevelopment in the ThirdWorld. Journalof IntermationalDevelopment 2(4): 533-557. 20. Pearce, D., Markandya,A. and Barbier,E. 1989.Blueprint for a Green Economy.London, EarthscanPublications 192p. 21. Bohm, P. 1990.Efficiency issues and the MontrealProtocol on CFCs WashingtonDC, EnvironmentWorking Paper 40. 22. Haavelmo,T. 1954.op.cit. 23. AsianDevelopment Bank, 1990. op. cit., p.7.

35 Chapter4: GNP AND MARKETPRICES WRONG SIGNALSFOR SUSTAINABLE ECONOMICSUCCESS THAT MASK ENVIRONMETAL DEmUCnION Jan Tinbergenand RoefieHueting

1. Soct is Steig by tde WrongCMP ITe markt is rightlyconsidered a mechanismthat generatesman-made goods and seri accordingto consumerprefrence. Thismech&mism allows culture and technolog to put into practie inventionsenricng humanlife. It worksefficiently and stimulates productivity increase which is the motor raisingthe quantity,quality and diverstyof man-madegoods thus becomingavailable to consumes An effectivemeasure of the levelof productionand its changesfrom year to year - the nationalincome - wasdevised in the thirties(Inbergen, quotedin Hueting1980). People working on this researchwere well awar that nationalincome would not form a completeindicator of economicsuccess (welfre). But givena fair distnbutionof incomeand perfectcompetition it no longermatters what is produced,only how much of it is producad.Consequently at that timegreat valuews attachedto the compilationof a seriesof figureson the total productionof goodsand serviceL In the 1930s*external effects, like environmentaldeterioration, did not yet play an importantrole. hi situationhas changeddrastically. Over the last forty-fiveyears, the perod in which, based on the above reasoning,growth of nationalincome has been giventhe highestpriority in economicpolicy, the followingpicture emerges Ihe productionof man-madegoods and services has increased unpredentedly, but hasbeen accompaniedby an unprecedenteddestruction of the mostfundamental, scarce, and consequently eownomicgood at humandisposal namely the environmen Thi processhas aleady causedmuch human suffering Much of what are called natural diters, such as erosion, floodingand deserfication, is causedby mismanagementof the environment.This process threatens the liWng conditionsof generationsto come. Furthermore,part of the growthof nationalincome consists of productionincreases in arms,alcohol, tobacco and drugs Fewpeople consider this progress.Part of t3NPgrowth is doublecounting. Thus, in the Systemof NationalAccounts environmental losses are not writtenoff as costs,but expendituresfor their partial recuperation or compensationis written up as final consumption.The sameholds true for expenditureson victimsof trafficaccidents and diseasescaused by consumption,such as smoking, Increasein productionis distnbutedvery unequally. In rich countries,people are led to consumemore becuse of seductivebillion dollar adverstiing. But twenty percent of the population in poor countriesare deprived of basicneeds, such as adequatefood, shelter, potable water, taps and toilets Economicresearch has shownthat once basicneeds have been met, relativeincome has a greater impacton welfarethan absoluteincome. Finallyproduction increase has not prevented persistenceof high unemploymentworld-wide and considerablechild labor. The marketworks well, but not aflfactors contibuting to humanwelfare are capturedby it.

36 CoDnsequently,market prices and economicindicators bse on them,such as nationalincome and costbnefit analyses,misleadingly signal to societyand thereforemust be corrected.The factorfor whichcorrection is mosturgently needed is the environment.

2. The Rlado'p BetweenGrwth and B tal D ab

Environmentaldegradation ir a consequenceof productionand its growth. The burdenon the environmentis determinedby the numberof people,the amountof activityper person, andthe natureof that activity.These three factorsare all reflectedin the levelof nationalincome, albeit the numberof peoM with a time lag (to be incorporatedinto the labor force). The increaseand decreaseof the firsttwo burdening factors -- populadonand per capitaactivity -- parallelthe increase anddecrease of productionlevels. For the thirdfactor (the natureof our actvities)it roughlyholds that the more burdensomefor the environmentour activitiesare, the highertheir contributionis to nationalincome, and viceversa. Thus drivinga car contributesmore to GNP than ridinga bicycle. his emergesfrom an analysisof the DutchNational Accounts. The sectorial composition of the Dutchaccounts does not differappreciably from that of the UnitedKingdom, nor probablyfrom that of most other Northemcountries. WhatfoHows is thereforeby and largevald for industrialized counties Prodi.ctiongrowth results largely from increase in productivity,in whichthe lss of scarce environmentalgoods has not beentaken into account.Increase in laborvolume plays a minorrole. anequarter to one thirdof the activitiesmaking up nationalincome (notably state consumption) do not contributeto its growth,because increase in productivityis difficultto measure.Other activities resultonly in slightimprovements in productvity.Average annual growth must therefore be achieved by muchhigher growth among the remainingactivites. Thirtypercent of activitiesgenerate about 70 percentof growth. Unfortunately,these are preciselythe actvitieswhich, by their use of space, soiland resourcesor by their pollution,in productionor consumption,harm the envronmentmost. These are notablythe oil, petrochemicaland metalindustries, agriculture, public utilities, road building,traport and mining. Measuresto save the environmentwfll have the followingeffects on gowth rates and on productionlevels. To maintaincurrent lifestyles as muchas possille,all availabletechnical measures shouldbe appliedto the fullestextent affordable. Suchmeasures include end-of-pipe treatment, process-integratedchanges, recycling, increasing energy efficiency, terracing agricultural slopes, and sustainablymanaging forests. Because they require extra input of labor,these measures reduce labor productivityand thereforeraise productprices, which in turn checksgrowth of nationalincome (correctedfor doublecounting). ( The check of growthcan be alleviatedby the absorptionof unemployedworkers, up to the pointwhere full employment has been attained). Savingthe environmentwithout causing a risein pricesand subsequentcheck of production growthis only possibleif a technologyis inventedthat is sufficientlyclean, reduces the use of space sufficiently,leaves the soilintact, does not depleteenergy and resources (i.e. energy derived from the sun and recyling).A is cheaper(or at leastnot moreexpensive) than currenttechnology. This is hardlyimaginable for our wholerange of currentactivities. But whensuch technologiesbecome available,the abovementioned effects will be avoided. Applymgtechnical measures cannot completely avoid a changein our consumptionpattem,

37 becauseprice rises resulting from the measuresinevitably cause a shifttoward more environmentally benip activities,such as bicyclingand usingpublic transport. Technicalmeasures often do not reallysolve the problem,either becausethe growthof the activityoverrides the effectof the measure,or becauseof the persistentand cumulativecharacter of the burden. In this case, the measureonly retardsthe rate of deterioration.Thus, to stop the Netherlands'contribution to acidificationof forestsand lakes,apart from applyingali available technicalmeans, the Dutchmust reduce the numberof car-milesand farmlivestock by about50% (Fransen1987). For some problemsno technicalmeasures are available:for instancethe lossof habitatof plant and animalspecies as a resultof the use of spaceand the formationof cirrusclouds that contnbuteto tlhegreenhouse effect. (CO2 accumulationmay be partlysolvable). In these cases, in additionto the technicalmeasures, a directshift in behaviorpatterns must ensue, forced by do's and don'ts,rules, incentives and taxes. A directshift in productionand consumption patterns will also check GNP growth as follows fromthe analysisof NationalAccounts (the environmentallymost burdensome activities contribute mostto GNP growth). Moreoverin termsof NationalAccounts, environmentally benign activities represent a smallervolume. Thus a bicycle-kilometerrepresents a smallervolume than a car- kilometer,a sweatera smallervolume than a hot room;an extra blanketa smallervolume than heatingthe wholehouse; beans a smallervolume than meat; and a holidayby train,a smallervolume than holidaytlights. This is mainlybecause the exhaustionof environmentand resourcesis not chargedto nationalincome as costs. If it were,the differenceswould become much smaller or nil. Fromthe above,it followsthat savingthe environmentwill certainly check production growth andprobably lead to lowerlevels of nationalincome. This outcome can hardlysurprise. Many have knownfor a longtime that populationgrowth and risingproduction and consumption levels cannot be sustainedforever in a finiteworld. The outcomeof the aboveanalysis should arouse optimism rather than pessimism.Because environmentally benign activities are remarkablycheap. Thus, a bicycleis muchcheaper than a car,a blanketis cheaper than central heating, and rearing two children is cheaperthan bringingup ten. This meansthat savingour planetis indeedpossible. Our fervent goal - to arriveat environmentalsustainability, as advocatedby the Brundtlandreport (WCED, Wi7),and by politiciansand institutionsacross the world-- can indeed be fulfilled,albeit onlyunder limitingconditions. In particular,population growth shouldbe avoidedas soon as possible. Moreover,activities with little or no materialthroughput can increase practically forever. As we have seen, this willnot resultin great increasein nationalincome. Decision-makersshould not become upsetby this. Changesin nationalincome levels by no meansindicate the economicsuccess of their policiesbecause they conceal the destructionof our life suvport -ystems,as long as the figuresare not correctedfor environmentallosses.

3. Conrtion of NationalIncome Based on SustainableUse of the Environment Attemptsto correctnational income for environmentallosses started in the earlyseventies with the followingtrain of thought(Hueting 1980). The environmentis interpretedas the physical surroundingsof humanity,on whichit iscompletely dependent (from breathing to producing).Within the vironment,a numberof possibleuses can be distinguished.These are calledenvironmental functions.When the use of a functionby an activityis at the expenseof the use of another (or the same) functionby another activity,or threatensto be so in the future, loss of functionoccurs.

38 Environmentalfunctions then have becomescarce goods, because the use of a functionimplies, whoDlyor partly,the sacrificeof another. Thisfully meets the definitionof scarcitythat demarcates the economicdiscipline. This approachlinks ecology and economics,and places environment centrallyin economictheory. Becausenational income is recordedin marketprices, shadow prices have to be estimatedfor functions(and their losses)that are directlycomparable with pricesof man-mademarketed goods. For this purpose,supply and demandcurves for functionshave to be constructed. It appeared possibleto constructsupply curves, consisting of the costsof measureseliminating the burdenon the environment,arranged by increasingcosts per unit burdenavoided. But in most casesno complete demandcurves can be found. This is becausethe possibilitiesfor preferencesfor environmental functionsto be manifestedvia market behavior are verylimited. Other methods,such as willingness to payor to accept,do not yieldcomplete demand curves, certainly for functionson whichcurrent and futurelife depends. Standardssettings was also considered, but the questions"What standards are to be set and by whom?"could not be answeredat that time. Thissituation has nowchanged. Especially after the 1987Brundtland Report politicians and organizationsacross the worlddeclared themselves in favorof sustainableuse of the environment. Tis preference,voiced by society,opens up the possibilityof basinga calculationon standardsfor the sustainableuse of environmentalfunctions, instead of on (unknown)individual preferences. Therefore,the followingprocedure is proposedfor correctingGNP for environmentallosses. (Hueting1986, 1989). First define physicalstandards for environmentalfunctions, based on their sustainableuse. Thesestandards replace the (unknown)demand curves. Then formulatemeasures to meetthese standards.Finally, estimate the moneyinvoled in implementingthe measures.The reductionof nationalincome (Y) by the amountsfound gives a first approximationof the activity levelwhich, in linewith the standardsapplied, is sustainable.Needless to saya correctionfor double counting,mentioned in Section1, mustalso be made. If the sustainablelevel is Y, the difference betweenY and Y' indicates,in moneytenns, how far societyhas driftedaway from its desiredgoal of sustainableuse of the environment. The standardscan be relatedto environmentalfunctions. Thus it is possibleto formulatethe way in whicha forest shouldbe managedin order to attain a sustainableuse of its functions. Sustainabilitythen meansthat all presentand futureuses remain available. For renewableresources such as forests,water, soil and air, as long as their regenerativecapacity remains intact, then the functionsremain intact (e.g. the function"supplier of wood"of forests,the function"drinking water" nfwater, the finctcion"soil for raisingcrops"of soil and the funrctinx fhr physiologicalfunctioning" of air). Thismeans that emissionsof substanceswhich accumulate in the environment,such as PCBs, heavymetals, nitrates and carbondioxide may not exceedthe natural assimilativecapacity of the environment,and that erosionrates may not exceednatural soil regeneration. As for non-renewable resources,such as oil andcopper, "regeneration" takes the formof researchand bringing into practice flow resourcessuch as energyderived from the sun (wind,tidal, collectors, photo-voltaic cells), recyclingof materialsand developingtheir substitutes. The measuresto meet standardsinclude: reforestation, building terraces, draining roads, maintaininglandscape buffers, selective use of pesticidesand fertilizers,building treatment plants, materialrecycling, introducing flow energy, altering industrial processes, using more public transport andbicycles, and useof spacethat leavessufficient room for the survivalof plant and animalspecies.

39 The methodis applicablefor cost-benefitanalyses of projectswith longterm environmental effects. The method seems to be the only wayto confrontnational income with the lossesof environmentalfunctions in monetaryterms. The physicaldata required for comparisonwith standards comedown to basic environmentalstatistics which have to be collectedin any caseif a government is to get a grip on the state of the environmentThe formulationof measuresto meetstandards and estimatesof the expendituresinvolved are indispensablefor policydecisions. In other words,the workfor supplementingnational income figures might be laborious,but it has to be done in any case if one wants to practisea deliberatepolicy with respect to the environment.We thereforestrongly urge decision-makers to stimulatethis Idndof researchin their countries. The Philippinesand Swedenalready are interestedin followingthe Dutchlead.

4. Our Debt to Future Generation A rough order of magnitudeof the debt to future generationsthe world has been accumulatingduring the last few decades,and howit is to be paidoff; is estimatedbelow. We base this on the tue of energy and correspondingCO 2 emissions. One aspectof sustainabilitycould be that the annualconsumption of fuelssuch as coal,oil and naturalgas, expressed as a percentageof knownreserves, is equalto the rate of efficiencygrowth in the use of energy,while keeping the levelof productionconstant (Timbergen 1990). Tinbergen (1990)found that a figurefor thisefficiency growth dose to realityis 1.67percent. Bythis behavior, it wouldbe theoreticaUypossible to use a finitestock for an infiniteperiod of time. Eowever,it is not certai whethertub willbe feasible,because it wouldmean that the productionand consumption of today'spackage of goodshas to be generatedwith an eversmaller amount of energy. Thus after 315 years,today's package must be generatedwith 0.5 percentof today'senergy use. 315 yearsis a short period in relation to the speed of natural processesin questionwhen addressingenvironmental sustainability.Therefore, if we alsowant to avoidthe hazardsof nuclearenergy, development of new technologiessuch as fow energy(derived from the sun) is less risky.

To avoid g recnhouse'risks, global CO 2 emissionsare estimatedto haveto be reducedby 75 to 80 percent. In the period 1950-1988,CO 2 emissions,energy use and GDP ran parallel. Around 1950both worldGDP and energyuse amountedto 25 percentof the 1988leveL This meansthat, other thingsbeing equal, the GDP levelmust be reducedby 75 percent. Assumingthat a CO2 reductionof 25 percent is possibleat low cost, and consideringthat a numberof environmental effecztare not eliminatedby reducedenergy use, we concludethat to payoff globalenvironmental debt we would have to halve the level of globalactivities. Tbis demonstratesthe urgencyof allocatingall availableresources, such as know-howand capital,towards the developmentof new technologies(such as flow energyand recycling),instead of towardsincreasing production, while haltingthen reversingpopulation growth. The last thingthe worldcan affordis to wagewar, such as that todayin the Gulf. The outlook of such changesin technologyseems to be promising.For example,Potma (1990)shows that techniqueslike splitting water molecules by solar energy in desertsand transporting the resultinghydrogen fuels, can providethe worldwith sufficientclean energyat twicecurrent energyprices. Deserticdeveloping countries thus have a majorexport potential. This would allow a sustainableuse of the environmentwhile regaining current production levels in 50 to 100years.

40 Tbis is because sufficientclean energywould becomeavailable for both eliminatingpart of environmentalefflcts other thanthe greenhouseeffect and compensating for the necessazydecrease in productionwhere no solutionsare availablewith additional production of anotherkind. Moreover roomwould be createdfor raisingper capitaproduction levels in the Southby a factorof 2.5. This wouldreduce the incomegap between rich and poorcountries from 10:1to 4:1,with the condition of no furtherthroughput growth in rich countries. The uncertaintiesare, of course,far too big to attach great value to the outcomeof this scenario.But the aboveclearly demonstrates that continuingprevailing growth paths is blockingour chancesof survival,for whichpossibilities still remain.

5. Cnlusion In order to achievesustainable use of the environment,we conclude that the highestpriority shouldbe accordedto devisingand implementingeconomic policies which: 1. Acceleratedevelopment of newtechnologies, such as flowenergy and recycling. 2. Permitno furtherproduction growth in rich countries. 3. Stabilizethe globalpopulation as soon as possible. 4. Improveinternational income distribution.

Reerenm Fransen,J.T.P. 1987.Zure regen:cen nieuwbeleid. Utrecht, Natuur en MilieuFoundation 2 7p. Hueting,R 1980.New scarcity and economicgrowth. Oxford, New York 269p. Hueting,R. 1986.A note on the constructionof an environmentalindicator in monetaryterms as a supplementto nationalincome with the aie.of basicenvironmental statistis. Jakarta,Ministry of Populationand Environment(stencil): 10r. [availablefrom the author]. Hueting,R 1989.Correcting national income for environmentallosses: towards a practicalsolution (32-39)in Ahmad,Y., El Serafy,S. and Lutz,E (eds.)Environmental Accounting for Sustainable Development. Washington,DC., World Bank 100p. Potma,T.G. 1990.Interrelationships between environment, energy and economy. (A paperfor the Dutch NationalEnergy Authority). Delft, Center for EnergyConservation and CleanTechnology (ms): 17p. Tnbergen,3. 1990.Le incognitedel terzo millenio.Rome, Dimensione Energia 38 (Jan-Feb):36 - 41. Tinbergen,J. 1990.How to leave enoughnatural resourcesfor future generations?(ms.):7 p. Publishedin Dutchin: NRC Handelsblad,22 June,p. 8.

41 Tibergeu, J. 1991.Personal communication, and quotedin Hueting,R. 1980(qv) p. 153& p. 157. WCS, 1987.Our commonfuture. [The Bundtland Commission). London, Oxford Univ. Press (for The WorldCommission on Environmentand Development):383 p.

42 Chapter5: SUSTAINABIT, INCOMEMAASUREMEN AND GROWIH

Salah l Ser*

1. b Sustanabilityis a conceptthat has figuredprominently in the BrundtlandRepont, though it has proveddifficult to definewithout amiguity. Withinthe BnmdtlandReport itself we findmore than one defintion,but the one that has sincebeen mostquoted is the foiowine 'SustairAbe developmentis developmentthat meetsthe needsof the presentwithout compromisig the abilty of future generationsto meet their own needs" The Report goes on to clarifysutainable developmentviz: 'It containswithin it two keyconcepts:

D the conceptof 'need', in paricular the esential needs of the world'spoor, to which overridingprionity should be given;and * the idea of limitationsimpoed by the state of technologyand socialorganization on the environment'sability to meet presentand futureneeds.' The referenceto limitationsof technologyand social oation, andto meetingessential needs offthe world'spoor' in the abovequotation, and a later statementthat 'concern for social equitybetween generations ... mustlogically be extendedto equitywithn each generaon,' whle appealingto many readers emphasies the complexityof Brunddan's sustinabit, both as a conceptand as a pragmaticguide to policyaction. As disced later in thischapter, the 'aueness of definitionof Brundtland'ssustanability should not detractfrom its validconcern over addreing distnrbutionalissues which are viewednghtly as an integralpart of the emental problem.This ambiguityis by no means confinedto Brundtland. A more recent attempt to carify what sustainabilitymeant to differentauthors yielded a bewilderingarray of definitions. Tbe searchfor a Mm meaningof sustainabflityhas remainedelusive, with now a growing awarenessthat for practicalpurpose sustainabflityshould be perceivedin approimate tems only? It is certainlyevident that the use of the expression"sustainable growth has becomemore frequent in recentdevelopment literature, replacing the older unqualified 'growth," in an apparentattempt to i6part the notion that growthshould be keptwithin environmental limts. The BrundtlandRepor representsone of the earlyattempts at thisusage. It is true, however,that suchen ental limts remainundefined in a mannerconducive to practicablepolicy guidelnes, but I return to this point - later. 2.nac B[s In retrospectit seemsthat whilethe BrundtlandReport made a great impacton worldleaders ad environmentalistsalike, its impacton economistshas been rather modest. Thisis not to deny, however,some influenceit has hadon economicpolicy, indirectly through the politicalforces it has motivatd4 The attentionthat hassince the publicationof QOuCommo Future been given to global eavironmentalissues may be a productof its politicalimpact.' There is alsothe growingcoverage

43 of enonmental isues in economicwork practicaly everywhere, which may be gracedback, at leat in par to Bn8dtland'spublicadon.

3. E 1 frDS D While Brundtand was in gestation,an initiativewas developing,spurred by the United NationsEnin t Pr me andthe WorldBank, to revisenational income calculations in order to refect in them enonmental conerns The coincidencein timingis remarkablebetween the 'WorldCommission on En t andDevelopment which began its work in December1983 and reachedIs o ons in mid-1987,and the UNEP-WoridBank workshops which sought improvd nationalincome me ementa is paralkl effort also bga in 1983,rahed a ccial stage in 198 and is sil progressingin a numberof directions Over the past two dOcadesmost countruieshave been calculatingtheir nationalincome acoding to guines, isued in 1968by the UnitedNations Statistical Office, generaly known as the Systemof NadonalAccounts (SNA). Theseguidelines paid practically no attentionto the fact that, in order to reckonincome properly, the Systemmust account for naturalresource eroson and onmental degradation.The old systemtreated much of the anti-pollutionexpenditures as final expendIturesthat wouldrtae income,instead of regardig themas necesaryintermediate costs that shouldbe caged aginst the finalproducts It alo filed to tak accountof envonmental disasters whenthey ocurred It treatednatural resources, partcularly those emanating from the publicsector, as a ree gift ftom nature,reflecting in the accountsmainly their direct exraction costs and any valation, over and aboveextrtion cost,that the unevenand heterogeneousfree marketdeigned to atach to them. Worstof all the SNAfaied to distnguishbtween valueadded by factorsof productionand sale of naural assetssuch as forestiyproducts and petroleum. Throughincome meurements patened on the SNA,many naural resource-baseddeveloping countries were made out to have higherincome thaD they actualy had, and to be rowingat rates that obscuredtheir true economic performance.Besides, the accountsfailed to reflectthe fact that the currentlevel of prosperitythey wereenjoying would not lastsince the basisfor such prosperity wprogressIvely being eroded. False accountWresulted from mixng in the flowaccounts elements of naturalcapital that shouldhave been keptsepmate from current income. Such income measurements, where they occurred, oved up economicweaknesses that neededurgent attention, thus mirecting economicpolicy. Countdes where natural resourcescontnbuted significantly to fical and externalbalance failed to make asential adjustmentsand ended up with alloating to consumptiontoo muchof the receiptsthey obtainedfrom selling their naturwalassets. May of them assumedtoo muchexteal debt for their own good. Domestically,relative prices moved against tradeable goods, resulting in a lamentable shrinage of non-naturalresource-based acdvties. Uittle wonder that so many resource-rich developingcountaies that shouldhave benefited from the exceptionalimprvement of their termsof trade in the 1970sfound themselves in the 1980shardly better off than theyhad been before.' At the UNEP-WorldBank workshop held in Paris in November1988 experts from various nadonalstatistical offices met witheconomists and otherswho had been investigatingthe topic of envionmentalnational accounting, and for the first time a consensuswas reached that natural resourcesand the environmentwere indeed important and likelyto becomemore so in future;that nadonalaccounts should reflect the stresson the envron ent that hadbecome Increasingly evident;

44 and that a set of environmentalsatellite accounts needed to be elaboratedand attachedto the new SNAcore accounts, with the viewof reflectingenvinmental considerations.That 1988meeting was a watershedfrom which signficant developments were to flow. Furtherwork since then, conducted in cooperationwith the UnitedNations Statistical Office, has ledto the acceptanceof the notionthat when the revisedSNA, expected in 1993,came out it wouldrecommend compiling a set of satellite environmentalaccounts showing to the extentpossible the changesthat occurfrom year to year in the state of the envimonment,and attemptinga recalculationof nationalincome to reflect such changes. Thisnational accounting adjustment inidative, which still continues, has provideda bridge betweensome of the objectivesof the environmentalistsand the workof the economists.

4. 9 b and Income If properlymeasured, income is sustainableby defnition. From an environmentalangle errors in measuringincome can be viewedas cominglargely from wrongly mixwng in incomecertain elements of naturalcapital, and fromconfusion of inventoryliquidation with depreciationof fixedassets. A pesn or a nationcannot continue to lhveat the samematerial leWel if presentenjoyment is obtained at the cost of liquidatingcapital. As capitalis eroded,the abilityto maintainthe same level of consumptioninto the futureis undermined.That is why, from its inception, the accountingprofession has insistedthat for profitand losscalculations, whether for individualsor corporations,capital must be "kept intact." To the accountant,keeping capital intact never meant that capitalshould be preseved in its originalstate (the prsrtionist argument),but onlythat allowancebe madeout Of crent income in order to restore capital to the extent it has eroded. Unlesscapital is "maintainedafuture income would inevitably decline Byextension of the sameargument to the area of accounting,keeping capital, includingemironmental capital, intact for accounting purposes,requires adjusting income to reflectcapital deterioration. Again this does not meanthat the accountantis advocatingthat capitalshould be kept undisturbed,or in the languageof some environmentalists,that it should be "preserved'in its existingstate, since the very essence of sustainingeconomic acivity relies on utilizingcapital to generatefuture profits or income. Thereis little disagrgementnow on exending the same principlesthat apply to manmadecapital to environmentalcapital, save on the applicationof thoseprinciples to the specialcase of depletable resourceswhich cannot be renewedor recycled,but whosestock steadily dwindles as it is usedup in the productiveprocess. That the "environment"can be viewedas naturalcapital is easyto perceive,both as a sinkfor wastesand a sourceof materialsand energy.' Wasteshave been dumped in riversand seas,buried ^n la-n anddispersed in the atmosphere,in the beliefthat sucbnatural receptors had an unlimited capacityto receivethem. As productionhas grown, this capacity has clearlybeen seen to be Umited, and has also becomelimiting. There is thus growingacceptance of the notion that the polluting activitiesshould bear the fullcosts to societyof their pollution.If standardsare set for acceptable levelsof pollution,the costof achievingsuch standards, even if not actuallyincurred, can be usedas a measureof environmentaldeterioration on accountof pollution,and be chargedagainst income as depreciation. As a sourceof materials,the environmentshould alo be broughtinto incomecaculation. A distinctionis clearlyneeded between resources that can be regeneratedand others that cannot. Nature,and societyin cooperationwith nature, can amend, restore or regeneratefish stocks, forests, soilsand the like. Wheresuch regeneration falls short of theoreticalor practicalrates that would

45 lt maintainsuch capitalintact (Ie. at its originallevel at the beginningof each accountingperiod) shortfaslshould be deducted,as depreciation,from gr incomecalculations. Some problemsof valuationwould present themselves, but the guidingprinciple throughout should be pragmatismand approximationsince precise measurementis still, and likely to remai an unattainablegoaL Ecologists,likewise, should attempt measurements of sustainableyield in the samespirit of providing pragmaticand prudentialestimates, instead of lettingtheir quest for precisionbecome an obstacle that wouldrender their measurementsirrelevant for policy. In respectof depletableminerals such as fossilfuels, which cannot be meaningfullyrestored once theyare used, applying the sameapproach of depreciationas in the caseof renewableresources would be inappropriate. Such resourcesrepresent mnownwealth that can be liquidatedover a variableime span depending on theirowners' needs, their expectations of futureprices and the state of the market. While productivecapacity is depreiated, existinginventories are used up or liquidated,and it wouldbe wrongconceptually to includethe proceedsfrom selling inventories in gro income.And it is equallywrong to believethat, in orderto correctfor their inclusionin gross incme, all that is needed is to deductthe declineof the stockfrom the wronglycalculated gross incometo arriveat a correctlymeasured net income. If suchan approachis adopted,neither the gros not the net incom willbe correctlymeasured. The gros willbe inflatedby assetsales that do not representvalue added, and the net willbe underestimatedsince the wholecontribution of the exploitationactivity to incomeis removadas capitalconsumption or depreciation.If, on the top of sucherroneous accounting we addwmndfills from upward re-estimation of reserves,and deduct from incomedownward adjustments of these reserves,we arriveat verydubious and gyratingestimates of incomethat are as meaninglesas they are useless,either for gaugingeconomic performance or for uidingeconomic policy. A depletableresource's contribution to incomerequires special handling.

5. Accontingr Dpleabl Reoces In as muchas the reservesof depletableresources are ascertained,they should be treatedas wnentories,not as fixedcapital Inventoriescan be drawndown to exhaustionif that is perceived by their ownersas economicallydesirable. The proceedsfrom their exploitationin any one accountingperod shou4d,as a firststep, be viewedas proceedsfrom asset sales not as valueadded. If the ownersdraw down all their knownreserves in one yearbecause they believe this to be best in the lightof their assessmentof futureprices, it wouldobviously be wrongto includeall suchproceeds in theirgross income for that year,and to deductthe diminutionof the asset,equivalent to the same amountthat had been includedin grossincome, so that net incomefrom this activityis shownas ZO. Nowthat the ownershave substituted for the subsoilasset, say, a bankaccount, true income is the interest that can be earned on the new account. Alternativelythe ownersmay sink the proceedsfrom selling the mineralassets in newmaterial investments whose retuMn would represent true income. In thisway capital liquidation would be kept,as it should,outside the flowaccounts. Followinga propositionby the late ProfessorSir John Hicks,which he put forwardhalf a centuryago," it waspossible for me to calculatethat partof the proceedsfrom a wastingasset which mustbe reinvestedin altemativeassets so that the yieldsobtained from such re-investmentswould compensatefor the declinein receiptsfrom the wastingasset. Usinga discountrate and the amount extractedfrom the reservesin any one year relativeto total reserves,I was able to indicatethe proportionof the proceedsthat can be reckonedas true income,the remainder-- a Idnd of a Keynesianuser-cost - havingto be set aside and reinvestedto producean aggregatestream of

46 constantfuture income. The user-costpart is a capitalelement that shouldbe expungedfrom gross income(GDP), and thereforewould not appearin net incomeeither. If freshdeposits are located, thesewould affect the flowaccounts only indirectly through the changeof the reserves-to-extraction ratio i.e. providinga longerlifetime of the assetso that the incomepart risesand the usercost part falsi.11

Tis proposal,which is slowly gaining ground among economists, is stillby no meansgenerally accepted,either by them or by the nationalincome statisticians.n Many of the latter, even if convinced,would still prefer to preserveold time series of erroneouslycalculated GDP on the argumentthat all that is requiredis to deductnatural resource "depreciation", equivalent to the entire diminutionof stock,from the grossproduct to showa moresustainable net productwhich would amountto niL The conceptualconfusion implied by suchprocedures has alreadybeen mentioned. If one mustpersist with this confusionfor the sake of preservingold time series,the user cost,as explainedabove, would be the appropriateestimate of "depreciation".

6. Mminited Functionof Accounting Accountingby its nature has a limitedfunction. It is essentiallya backward-lookingactivity attemptingto sort out fromthe behaviorof economicunits during a pastperiod elements from which an arithmeticalhistory is compiled.This usually takes the formof a snapshotat a point of time (a balamcesheet of assetsand liabilities),and a flow,during a certainperiod (most commonly a year), of net resultsof the economicactivity concerned: profits and loss for an individualor corporation, andvalue added for a nation. Economistshave often misunderstood the functionsof the accountant, andhis concern - perhapsobsession - withkeeping capital intact, often challengingthe accountant's meaningof keepingcapital intact, and the accuracyof his neasurements,since such a conceptof capitalmaintenance inevitably refers to the future. The Hicksiandefiniton of incomeitselt whose authorinsisted that it wasmerely a roughguide for prudentbehavior, has wrongly been criticizedon the economist'susual ground of concemwith precision,and his (the economist's)forward - rather thanthe accountant'sbackward - orientation.Hicks's income has been saidto be incapableof being 'directlymeasured" and even that it is "notsuited to an accountingof what happenedin the past" eith-er.1 Whe!e,sHick ttreued the accountant'squest for approxmatelydefining a levelof income that canbe devotedto consumptionwith concern for a sustainabilitybuilt around the re-useof capital in future, other economistshave tendedto hankerafter a preciselevel of sustainabilitywhich the Hicksianapproach, with its emphasison futureincome sustainability, obviously cannot meet, pardy becausethe future willahws remainunknown.

Economistsand accountantshave different, but perfectiyreconcu"bic, ubjcxuiv . In their measurementsthe accountantsseek approximations,assume constant technology, and positthat the futurewill be a continuationof the past. In practicetechnology does change, and the futureis a little diffrent fromthe past. But thisdoes not mattermuch, however, since the accountants'accounting periodis seldommore than one year,and everynew year bringswith it new factsand somefresh technologywhich the accountantshave to, andcertainly do, take in their stride.

7. B _sneeand Govenet The approachI haveproposed for estimating income from depletable natural resources, which

47 relies on settingaside part of the proceedsfrom sale of naturalcapital to be sunk in alternative investmentsso that they mayyield a constantstream of futureincome, begs the questionas to what kind of altenative investmentsare available,and whetherfor the sake of sustainabilitysuch investmentswill always be available.Here we leavethe ex Mt worldof the accountantand enter the realmof ex ante analysis. Individualowners of depletableresources usually see to it that part of theirreceipts, whether in the formof depletableallowances or set-asides,are re-investedso that the ownerscan continue in business.Whether or not their newinvestments should be in the sameline of businessthey are alreadyin, or divertedtowards other lines,depends on manyfactorm If the price of the natural resourcethey own rises in reflectionof its growingscarcity, thus indicatingthe opportunityfor investmentto producesubstitutes based on renewableresources, and if sucha courseis economically feasible,the ownersmay well continue in thesame line of business.But frequently the marketwould fail to reflectthe resource'sgrowing scarcity, and its pricewould fail to rise. Besides,technologies for producingsubstitutes may not be available,and if availablemay not be economicat the prevailing set of prices.Thus we often observea tendencyfor diversificationaway from one-product business on the part of large corporationsexploiting natural resources. Someenvironmentalists would prefer that the 'user cost"entailed in the exploitatdonof a depletablenatural asset be investedin a 'twin"project that wouldsupply a renewablesubstitute for the samedepletable source. 14 But in the lightof the considerationsjust mentioned,such 'twinning' or "pairing'may not be attractiveto the privateownets. On the other hand there is nothingagainst societyas a wholeindicating its desireto raise the overalllevel of savingsand inmtment so that these become consistentwith the objectiveof future incomesustainability and also subsidize pioneeringand experimentalventures in pursuit of findingrenewable sources to replace the diminishingones. This can be done by insisting,through appropriate monetary and fiscalpolicies, that the usercost of depletableresource exploitation should be addedto currentinvestments. The extrainvestments would be guidedto sociallydesirable ventures, such as naturalresource restoration and maintenance,through a carefullydesigned system of taxationand subsidies.

& User Cst and hnome Identitie Considerwhat happens to the wualidentity that income(Y) is the sumtotal of consumption (C) and investment(I). Denotinguser cost by the letter U, we can write: Y C+I (1) Adjustingfor user cost,equation (1) becomes: Yr U = (CmV)+ I (2) If the usercost is nowdevoted to fesh invesutments,income rises and we get: Y (C-U) + (I+U) (3) Equation3 is thusseen to be identicalto equation(1) exceptthat consumptionis lowerand imvestmentis higher.

48 Equation(2), however,depicts the correctlevel of incomeif the usercost is not reinvested. But if C remainsunchanged, then the true levelof investmentthat hasbeen attsined is onlyI-U since U representsa disinvestment.In this latter casewe have:

Y- U = C+ (I-U) (4)

9. Policyand the Pobilm of Scale Whilethe approachof sinkingpart of the proceedsinto new investments seems perfec* valid for individuals,businesses and even smallcountries which also havethe optionof acquiringforeig iwestmentsif profitabledomestic opportunities are not available,can it be workableif it is done on a largescale so that significantportions of globalnatural capital might be liquidatedto be substituted for by manmadecapital formation? Once the problemis posed in this way, the realizationof the objectiveof creatinga permanentincome stream from wasting assets becomes questionable. Individuals, corporations and evennations can run out of a naturalresource - evenif their livelihooddepended materially on it - -in the knowledgethat futureincome may be generatedthrough carefully selected new investments Whenconsidering better accountingfor depletableresources my focuswas on the ingomeof their ownes It did not matterwhat form the newinvestments would take providedthey guaranteedfor the ownersa constantstream of futureincome. The formof the newinvestments would be guided by the market,and if the marketindicated that the newinvestments should be in the sameline of buiness,so be it. However,if the problemis considered,not just as one of better accountingfor the resourceowners, but in a forwardcontext as a guideto economicpolicy on a globalscale, we have to fice the issuesraised byBrundtlanui, and the variousconstraints and propositionswe findthere for future environmentalduections. We alsoencounter the problemsof scale and of ultimate substitutabilitybetween natural resourcesand manmadecapital to whichHerman Daly has been drawingour attention. If we perceivethe problemglobally, then it is clearlynecessary to replacesay, dwindling natural energy sources,not just by other sources of i but by other sources of that ar renewable,and the issueof "twinningebecomes relevant. If the marketfails to signalrising energy pricesto justifyinvesting in renewableenergy sources, then societymay wish to givethe marketa helpinghand throughappropriate policy. Viewed globally, society should have a broad interestin the creation and applicationof new technologiesthat would substituterenewable sources for diminishingnon-renewable ones. But what shouldbe done about the searchfor an equilibriumbetw,*n the state of the environmentand globaleconomic activity? The worldeconomic organization has been functioning on the basisof economicagents seeking perpetual economic growth, a pursuitwhich has traditionally been seen not only as desirablefor raisingmaterial welfare all around,but also as essentialfor energizingthe developmentof the less developedcountries, and thus assistingin the alleviationof poverty.If technologycould be organizedso that it gaveus substitutesfor naturalresources through the instrumentof manmadecapital formation, we wouldbe able to continue'business as usual,' hoping that the marketwould reflect scarcities into higherprices, and thus guidethis processof substitution.This certainlyappears to be one of Brundtland'sfundamental assumptions. However, we havereached a stagewhere the stateof the environmenthas become so stressed,and technolog

49 and social orgtion have clearlylagged, at leat so fa, that somedrastic altemative solution des to be explored. Brundtandoffered one solution,which leans in favorof maintainingthe currentemphasis on Vowthwhile using the fruitsof growthto lessenthe materialthroughput in economicactvity, repair the envionent, andalso for incomereditrbution, both intra-nationallyand from the richerto the poorer nations,with the objectiveof allviating povet. I join with the other contributor8in this volumecontending that this strategyis questionable,partly because much of the damae to the envirormentcaused by indiciminate growth is irreversible; partly because the processof substitution of manmadecapital for natural resourcesis slowand erratic;and also in viewof the enormous increas projectedfor global economic activity as comparedwith the advancedstate of envionmental stess alreadyreached. If we are seriousabout savng our planet,we mustseek a steadystate for the ewnomiesof the rich,whfle the poor growand developso that povertyis eradicatedand income disparity,which is the sourceof so muchenvironmental damage, reduced. Meanwhile technology develcuient and disseminationshould be acceleratedand populationgrowth urgently halted. If the Bmndtlandpath is rejectedas impractical,can the proposalto arrestgrowth in much of the wold economybe viewedas anythingshort of utopian?It is difficultspecifically to perceive the sociolog and politicaleconomy of maintaininga steadylevel of incomein the richercounties Such countriesrely primarilyon fr marketforces to guidethe allocationof economicresources. In these countries,the essentialprofit motive is gearedunavoidably to businessexpansion in search of oppounlty. The impactof the richercountry economic expansion on developingcountries bas alo often be seen as benig in an 'emptyworld contextof non-bindingenvironmental constraints. In fact evezytime growth slows down in the richercountries, the poorerones appearto sufferfrom depressedIncomes and adver tems of trade. Andyet, the richercountries use the bulk of the word resourc to supporta minorityof the woddpopulation. If the richare to growricher merely to providemarkets for the poor, not only are there more economicalways to achievethe same objective,but such a coure wouldaccelerate intemational income inequality. Clarly somethingdrastic has to take placein socialand industrialorganization and in the modaitie of internationalrelations if a steadystate of economicactivity, involving a constantlevel of throughput,is to p in the developedcountriae Draftinga blueprintfor thisvision of the futureis needed. Its economiccontent will have to addressthe problemof obtaininggrowth and/or developmentin the poorercountries simultaneously as the economiesof the richercountries are kept on an ee keel. In addition,the richercountries would be askedto transferto the less developed countriesthe resourcesnecesasy to redressthe negativeeffect of the richer countries'arrested growthand to alleviatepoverty. Furthermore, it is necessayto planfor the kindof economicpolicy that wouldhave to applyin the richercountries to producethe target of a steadystate: as some actvities will have to expand,othes must contracL What criteriawould be used to modulate aggregateactivity in a free marketeconomy which also has to be managedin pursuitof manyother policyo ? The issuesthis scenarioraises wfll have to be facedby the advocatesof sucha strategy. The Brndtand Report avoidedall these complexissues and opted insteadfor a non- rewhvotry, rather optimistic,but seeminglyuntenable course.

50 la10.'t 8 Finay a word about the importanceof proper incomeaccounting since it is income measurementsthat wil indicatewhat kind of gowth or expanion of economicactviy is being xperiencedand projected. Todays incomechanges, which probaby lie behind Bnand's projectionsof growth,relate to the grossdomestic product as conventionaymeasured and as valued at factor cost.' But if we shift the focusfrom the gross productto an envronmentallymore sustainableM product(from wbich the user-costof depletableresources has been eliminated),put a valueon naturaldisasters and deduct this from inoome, and developthe habit of valuingactivities at their full envinmental cost when pricesrelect true scarcities,we are bound to get a very differentreding of incomeand Its growth.In whichcae it mightwell tun out that the five-to-ten timesexpasion in economicactvity, as enviagedby Brundtlandad stressedby McNeill,wil be less." A hint of this is to be foundin the contributionby Tinbergen and Hueting in thisvolume, but clearlymuch work is neededto clarifythis issue.

NOBI 1. WorldCommission on Environmentand Development, Our Common OxfordUniversty Pres, Oxfordand NewYork, 1987, p. 43. 2. Defntions of sustalnabilityare surveyedby Pezzey,J. 1989."Economic Analsi of Sustainable Growthand Sustainabl Development".Washington DC., World Bank, Environment Dqetment WorkingPaper 15:Appendix 1: "Definitionsof Sustainabflityin the Literature." 3. As the reader will note presentlythe search for a precisemeaning of sustainabilityis akin to defiing incomein exactterms. Nounimity is possbleas bothconcepts rely on one'svision of the future. For practicalpurposes, however, and as a guidefor prudentbehavior, we mustbe content with some usefuldegree of appraodmation. 4. Whetherit was the BrundtlandReport itseWor the polidcalforces that have been gatheing momeswuitu iudpeadently in vaious part of the richernations, it is remarkablehow the impactof the "GreenMovement" has been reflectedin the declarationsof recent economicsummits of the Group of the Sevenleadig industrialnations and throughthe latter'sinfluence has givenvent to a numberof envonmental initiadves.The July 1989Economic Declaration of the G-7 Economic Summit(Section 37) contained the statements:'In orderto achievesustnable development,we shall ensure the compatibilityof economicgrowth and developmentwith the protection of the nirnment." 'We encouragethe World Bank and regionaldevelopment banks to integrate environmentalconsideratons into their activities.' 5. 'Me July 1990G-7 Declarationof the EconomicSummit referred to globalenvironmental stress (Ozonedepletion, climate change, marine pollution, and loss of biologicaldiversity) and stated that "oneof our mostimportant responsibilities is to passon to futuregenerations an environmentwhose health,beauty and economicpotential are not threatened."

& It is interestingthat in their initialstages the UNEP-WorldBank Workshops were seeking after settingup nationalphysical indicators of environmentalstress, to be combinedeventually into one nationalindex, that wouldreflect the state of the environment,but participantsvery quickly realied

51 that a systemof 'weighting'(or valuation)was necessary to producesuch a singleindex Thi moved the concern of the Workshopsquite earlyinto the directionof refonmingnational income neasurement Cf.Salah El Seray'sRapporteur's Report of the October1985 Paris Meetin& World Bank,Washington D.C., 1986,mimeographed. 7. C£ Aan Geb and Associates,Oil Windfalls:Blessing or Curse? (a World Bank Research Publication),Oxford University Press, 198&

& I am abstractinghere froma numberof activitieswhich have traditionallybeen excluded from nationalincome reckoning such as householdservices by familymembes That the environmentcan be vwed as capital,contnbuting to the productveprocess, is a notionwhich is entirelyin harmony with neo-classicaleconomic thinking. See SalahEl Serafy,"The Environmentas Capital' in R. Costanza(ed.), logical Economics:The Scienceand Managementof Sustainabift Columbia Prs, NewYork, 1991. 9. See SalahEl Serafy,"The Environment as Capital"in Costanza(1991) p cis 10 J.R. Hicks,Value and Ci (1939),Oxford at the ClarendonPress, Second Edition 1946, p. 187. 11. Hicks'sall too briefcoverage of thistopic in Valueand Cptal showsthat he regardedsuch a use-ost as an allowancefor depreciation.In a personalcommunication in 1987,howver, he indicatedapproval of my lineof thinkng,and that I had "madegood use of the incomechapter in e_L and Apial. 12.A qualfied acceptanceof thisapproach is to be foundin MA Adelman,Harindar De Silvaand MichaelF. Koehn,User Costin Oi ProductionMIT Center for EnergyPolicy Research, October 1990. Thi work uses the calculationsof El Serafyto adjust nationalincome for a numberof countriesin supportof argumentsmade in the text,but statesthat "... El Serafy...err[sJ in supposing that productioncan proceedat a constantrate then abruptlycease. The declinerate standsat the center of everyreservoir engineering calculation. Moreover the rate of extractionis limitedby fbha*flyt6itg uaiginal ts... However,this correction would not basicaUlychange the problem."It shouldbe mentioned,however, that Adelmanbelongs to the campthat sees no scarcitydeveloping in the supplyof mineralswhich he viewscorrectly as inventories,but believesthat "onlya fraction of the mineralsin the earth's crust,or in anygiven field, willever be used. (,. i., p. 1). The approachI havebeen advocatingis one that relieson a standardaccountant's rule of thumbthat estimatesinventory use out of a givenstock in an attemDtto anoroxmnaterealitv. T stated in ny 1981 articlethat factorssuch as the ones mentionedby Adelmanet al couldbe accommodatedunder the approachI proposed. The so-calledreservoir engineering rule of alwayskeeping a constantratio betweenreserv and extractionis of dubiousreliability and not essentialfor the calculationsin any cas See Salah El Serafy,"Absorptive Capacity, the Demandfor Revenueand the Supplyof Petroleum,"Journal of Energy and Development.Vol. 7, No. 1 (Autumn1981), pp. 73-88. 13.See David F. Bradford,"Comment on Scottand Eisner," Journal of EconomicLiserature. Volume XXVm, Number3, September1990, p. 1184. Thiswas a commenton MauriceScott's "Extended Accountsfor NationalIncome and Product: A Comment;and Robert Eisner's "Reply" to Scottin the sameissue.

52 14.Ewoogist tend to definesubstitues more narrowly than economists who appear to favora broad defintion that allowsthe market freedomto define what a substituteiL David Pearce, Anfl Markndya and Edward arbier,in their BlueNit for a Green nomy. EartIScan ubIPcatioms, London,1989, advocated 'pairinge or "twing", but withina programof manyprjects, rather than for each projectat a tm 15. A visionof a possiblecouse is offeredin HermanE Dalyand John B. Cubb, Jr., For th VnmorOso0 BeaconPress, Boston, 1989. Many aspects of such a course,however, need to be muchmore careuly eamined as the authorsurge. 16. The conventionof valuingGDP at factor costs and not at market pric derive from the presumptionthat tac and subsidiesrepresent deviations from genuine values producedby the market and whichshould provie weights for the variousacvities that make up the domestic producL But if a newset of environmentallyinspired tauos and subsidiesis viewedas nesay to correctthe market'sfailure to put propervalues on the servicesof naturalresources, then we should regardsuch "marketprces" as better weightsthan factorcosts for the purposeof estimatinginoome in the prent context.

17.Jim McNeill, Sustainable Development, Economics and the GrowthImperative", paper presnted to the Workshopon the Economicsof SustainableDevelopment United States Environmental Protecton Agecy, Washington,D. C., January1990.

53 Canter 6: PROJBCr EVALUAnONAND SUSrAJNABLE DEVELOPMENT RaymondF. Mikesll

Some developmenteconomists and most environmentalistsadvocate the adoption of sustinable developmentin placeof economicgrowth as the primatyobjective for both industrialand developingcountries. Sustainable development has also been endorsed by the WorldBank and other multilateraldevelopment banb (MDBs),and by bilateralasistance agencies such as the USAD. An esential ingredientin sustainabledevelopment is the conservationof the naturalresource base for use by futuregenerations. However, there are a numberof difficultiesin specifyingand applying sustainabilityas a criterionfor evaluatingindividual projects. The purposeof thispaper is to presenta methodof projectevaluatonm that is consistentwith the principlesof sustainabledevelopment. Tne projectswith which this paper is concernedare those that requiresignificant amounts of naturalresources in theirproduction or havea signifcat impact on natural resourcesin their constructionor operation. Most of the projectssupported by the multilateraldevelopment banks are resourceintensive and many of themhave adverse environmental impacts. The traditionalmethod of determiningthe financialfeasibility of projectsused by the World Bankand other developmentasistance agencies has been to calculatethe internalrate of returnon imvestedcapitaL If the internal rmteof return eoceedsa specifiedlevel (usuallyequal to the internationallong-term rate of interestplus an allowancefor risk),the projectis acceptable. For xample,the WorldBank ustaly uses an int-mal rate of return of 12 pect as the um aceptable rate.' Tbh approachto project evaluationimplies that we should max_im the productivityof capitalas the limitingfactor. Sustainable development on the other handimples that natura resourcesrather than capitalare the scarct or limitingfactors in production.2 Hence, governmentsand MDBsshould favor those projects that mmize the productiity of the natural resource usedin the project. Tbis requiresthat projectproponents evaluate projects by calculating their net presentvalue, assuming infinitely elastic supplies of labor and capitalin combinationwith a fixedamount of naturalresources. hi approachhas longbeen usedin resourceeconomics for evaluatingresource projects. Anothercharacteristic of sustainabledevelopment is itsconcem with social benefits and costs, and not simplywith the net returns to the ownersof the factors of production. Sustainable developmentrequires that we evaluateprojects by calculatingtheir net presentsocial value (NPSV) rather thantheir net presentvalue to privateowners of fuIVe pij. Sciss cwfits andcosts include a host of externalitieswhich may benefit or harmsociety. Moreover,social costs involve the non-monetaryimpacts of projects,such as illnessand loss of environmentalamenities, the monetaryvalues of whichrequire special methodologies to estimate. To an increasingdegree, the WorldBank and other developmentassistance agences are concerned with socialbenefits and costswhen evaluating projects, but they rarelyinclude nonmonetary social costsin calculatingfinancial feasibility.

54 lhe most distinguishingcharacterstic of sustainable development is the goal of intergenerationalequity - that the presentgeneration does not impairthe resourcebase required byfuture generations to maintainor increasetheir well-being. Thi goalis variouslydefined, but the moat widelyaccepted definitionis conditionof nondereaing per capita well-beingacross generations.eHowever, the conditionsfor achievingthis goal imnolve the rate of populationgowth, technologicaldevelopments for substituting more abundant for scarce resources, income distnbution, and governmentpolicies that induceconservation of naturalresources. AU of these factorscannot be taken into accountin evaluatingindividual projects. Hence, it is recesaly to formulatesome simplerules that would make individual projects at leastnot incompatiblewith the goalof sustainable devlopment.

Sustainabilityrequires that producivityof the resourcebase be matained overtime, either by renewingthe resourceor by investingin other capitalassets an amountequal to the capitalvalue of the resourcedepletion. Failure to deduct resourcedepletion overstates the net revenueof projectsand consequently overstates their rate of return,leading to misallocation,ie., overimtestment in non-renewabletypes of exploitationrelative to other investments.I would satisfy the sustainabilit criterionin projectevauation by includingin socialcosts any reduction in the valueof the rewurce basecaused by the constuctionand operation of the project.The resourcebase includesall natural andenvironmental resources that oDntributeto the productionof bothmarketable and nonmarketable goodsand servicesthat provideutilities for humanbein Thus a projectthat significantlyreduces the productivityof the landor the qualityof the atmosphere,or of rives and lakes,or of biodiversity, givesrise to socialcosts Thi impliesthat the socialcosts are potentiallymeasurable. Treati-g of Reoure Depleion as a SocialCot

In the approachI here advocate,project evaluation iB based on the NPSV of a project ivohlg the use of naturalresources, with any resource depletion arising directly or indectw from the projecttreated as a soial cost. Failureto deductresource depletion overstates the net revenue of projects and consequentlyoverstates their rate of return, leading to misalocation,ie. .mennvstmeiQtin n.eriewahle tes of exploitatinnrelative to otherinvestments The value of a resourcedepletion is the capitalized(discounted) value of thestream of utilitiesthat couldhave been producedby usingthe lostresource in eitherthe sametype of projector in an altemativeuse of the rource, such as preservationof an old growthforest as an alternativeto harvestingthe timber. It is thiscapitaid v lue that wewant to preservefor future generations; hence, the capitalizedvalue of the resourceloss must be preservedby an equivalentalternative imestment that willbenefit future generations.

In treadngnatural resource depletion as a socialcost in projectevaluation, a two-foldproblem arbes Howdo you measurethe valueof the depletionand howmuch do you need to save and reimvestout of project revenueto maintainthe sameincome (after allowancefor depletion)for futuregenerations? The revenuefrom a resourceproject that is attributedto the naturalresource is the total receiptsfrom the sale of the productsless the capitaland laborcosts associated with the project. We maydivide this revenue,R, into twocomponents: the incomecomponent, X, and a capitalcomponent, R-X representingthe naturalresource depletion. 4 We need to defineR-X in a waythat it can be used as a socialcost in the calculationof NPSV. Assumewe havea minewift annualreceipts, R, whichfuly depletesin n yearsand that eachyear a portionof the revenue,R-X

55 the minethat wouldenable the ownersto receivean infiniteseries of X, assuminga rate of interest of r. Sincethe mine depletesin n years,the annualvalue of the depletionis R, but if R i sved each year, X would be zero and none of the revenuewould be availablefor consumption.The amountneeded to be savedeach year,R-X, is the presentvalue of the annualresource depleion, whichwe mayexpress as - RL- (1+r)y so that X = R - JL Usingthe standardformula for compoundingI per

annumatr R (1+r)"l = R - = x (1+r)0 r l(1+rX0 r r If L is savedand compoundedeach yearfor n yearsat an interestrate of r, the accumulated (l+ry) willequal x , whichwill provide a perpetualincome of X5 r The aboveanalysis can be madeclear with a numericalexample. Assume R is S250,000per year and that the life of the mineis 20 yearsand the rate of interest10 percent Usingthe above formula,the presentvalue of R per yearfor 20 yearsis $2,130,000andannual income, X, is $213,000. Annualdepletion, or R-X, equals$37,000, which when saved and compoundedat 10 percentover 20 yea also equals$2130,000. Ihe longerthe life of the mineand the higherthe rate of interest, the smallerthe proportionof R that needsto be savedfor depletion.For a minethat depletesin 10 Yars and assumingan interestrate of 5 percent,7 percent of R would need to be savedfor depletion.Thi compareswith 15 percentin the frSt example.

Cdcubyg 1theNPSV The NPSVof the mine is the presentvalue of an annualstream, R - _L or R minusthe presentvalue of annualdepletion. Th annual (1+r) 0

streamis also X per year and the presentvalue of X per year for n year is x (1 - 1 ) whichequals the NPSVof themine. r The proofis as follows:Using the standardformula for compoundingI per annum

RL (I+r)d" = R- R X r In the numericalexample given above, the NPSVfor a minewith a lifeof 20 yearsand a rate of interestof 10 percentis about$1.8 million. With higher annual depletion, NPSV is muchsmaler.

56 hus, for a minewith a lifeof only10 years,depletion is 35 percentof R and X is 65 percnt of R- as against15 percent of R for depletionand 85 percentfor X, or income,in the examplegiven above. We may generale the examplegiven above by statingthat the NPSVof a project with alowance for resourcedepletion is the preent value of an annual stream:

R - RD), where RD is the averageannual resource depletion during the (1+r)0 the life ofthe project. The actualrmource depletion might take placeat anytime duringthe lifeof the projectrather than in equalamounts over the life of the project. However,in order to satisfy the sustalnabilitycriterion, it makeslittle difference to futuregenerations when the actualdepletion taes placeduring the life of the project,say, 25 yeas Resourcedepletion need not be confinedto the depletionof reservesin a miningproject. It maytake the formof environmentaldamage caused by a mineor anyother project,which reducesthe productivityof naturalresources. For example,a miningoperation might poflute a rier, therebyreducing the valueof the fish catch. The presentvalue of the lossof fish catchwould be a part of the socialcost of the mine,thereby lowering the NPSVof the miningproject. Alternatively, a hydroelectricdam might cause environmental damage to the recreationalvalues of a river. If the damagewas vet large,R - RD mightbe negative,as wouldalso the MPSVof the projet (1+r) In calculatingNPSV, there should be an allowancefor riskby applying probability coefficients t each of the relevantvariables to estimatethe expectedNPS of the project. 5 the presentvalue of R per yearfor n yearsalo equals X r:

Rtl- (r) = R- (I+rV=X r r r

Rithe R m Depletio

In the approachto projectevaluation outlined above it makesno differencewhether the accumulateddepreciation is reinvestedin renewingthe depletedresource or used for someother capitalimprovement, so long as the investmentyields a net socialoutput equal to that lost by the depletionof the resource. Tbe paradigmis the reinvestmentof depreciationof a buildingor a machine. If a projectdestroys an old growthforest or an area of a scenicriver, the reducedvalue of the resourceas a producerof utilitiesshould be compensatedby an invtment that willyield a streamof utilitiesequal to that whih waslost. The investmentmay take the formof restoringthe depletednatural resource,creating man-made physical capital, or improvinghuman knowledge and skillsfor increasingthe productivityof the resourcebase. Three problemsarise in renderingthe above modelconsistent with sustainability.First, changingthe sqstemof accountingto includeresource depletion as a socialcost will not necessarily induceprivate entities to saveand reinvest social capital. Private firms and individuals may still treat naturalresource depletion as incomeavailable for consumptionand, except for depletionallowances for some types of natural resourceexploitation, the tax systemwill count resourcedepletion as

57 taable income. Therefore,sustinability would require resource depledon to be taaedby the state and nvestedin a mannerthat wil sustainoutput for futuregeneration. The taxwill, of course, be passedon to consumers The pricesfor productswhose productioninvolv heavyresource depleton wouldbe relatiely higherthan pricesof productsthat contributeless to depletion. Ihe state couldeither investthe revenuesdiectly) or use the revenuesto induceprivate investment for ncreasingthe social producL

The secondproblem is whatsocial inestments madeor inducedby the state wil insurethat futuregenerations receive the capitaizedvalue of the resourcesdepleted by the presentgeneration. Supposethat most of the tax revenueis Investedin roadsand building,rather than in restoing depletedrenewable natural resources or in increasingthe productiityof naturalresources. How far can we go in substitutingman-made physical capital for natural esourcecapital and stillmaintain a risingnational or worldoutput? I do not thinkwe can assumethat the agegate nationalor world productionfmction is a Cobb-Douglasproduction functon in whichthe productve fictors are completelysubsttutable. HermanDay arges in Chapter2 that substitutionof man-madecapital for naturalresources i quite limited.In other words,unless the raw mateial base is maintained,long-run st I impossible.This position is highlycontroversial and some resource economists believe that we can offset considerableresource depletion by increasingthe producdvityof natunl resoure capitaL Withoutfuther dbcussionof thisissue, I believethat sustainabiityrequires that a substantialamount of the resourcedepletion be investedin replenishingrenewable resources, in inreasing product output per unit of resourceinput, or in increasingthe end-useefficienc of resourceintenive products A thirdproblem concerms substitutability on the demandside. Howfar can wego in satsfying the demandfor wfldernessamenites, clean air, and lhiingspace with man-madegoods? Tbere is sUrelYa point beyond which furither degradation of theenvironment cannot be compenatedby higher per capitareal incomesin the formof producedgoods and servicea Whati the utilitytrdeoff in dring a Cadillacor Mercedesin a perpetualtraffic jam surroundedby foul air againstwaing througha groveof ancientredwoods? There are alsolimits on the eotentto whichwe can allowthe natural eni ent to deteriorateand still survive as a species. Technologicalprogress can offsetdepletion of the resourcebase by ineasing the productivity of the remaig resources. It can also facilitatethe substitutionof man-madecapital assets for naturalresources and the substitutionof moreabundamt for scarcenatural resources in production. Iio@-@, chb-nologicalprogrs is necesa to maintainor increaseper capitautilities of future generationswith a risingpopulation. I havenot includedtechnological progress in the calculation of the socialcosts represented by the depletionof the resourcebase for two reasons. First,we do not knowenough about future technology to assss its impacton the productvity of the resourcesused in particularprojects. Second, we shouldallow technological progress to have its fuhlleffect on improvingthe well-beingof futuregenerations; Le., we shouldnot borrowagainst future uncertain technologicalprogress to financepresent consumpstlonin excess of what is uswtainablewith presenttechnology. Thus, I believethe socialcost of the depletionof the natural resourcesattributable to a projectshould be basedon the currentstate of technology.

s8 Cdela for 1DB Suppoxtof rojes For a projectto qualfyfor MDBsupport, the expectedNPSV adjusted for resourcedepltion should be positive he expectedNPSV of a proposedproject wihout allwanc for resource is frequentlyregrded as reouce et (Mikesell1989). If resourcerent Is zero the resourcecontributes nothing to socialoutput sincethe labor,capital, and managementincluded in the soci cost couldproduce the samevalue output in anotherproject without natural resoures

However,for the projectto satisfythe conditionof sustaability, the resourcerent mustbe at lest equal to the resourcedepletion caused directly or indirectlyby constructionand operation of the projeL If the expecd NPSVadjusted for resourcedepletion were zero, the resourcewould contributenothing to net revenueby usingit in the project,and it couldprobably do better than that by simplykavng it undeeloped. Thi wouldbe true of a wildernessarea that couldbe uied by fbsermenand hikersas an alternativeto harvestingthe timberwith a zero or negativeNPSV. Also, the ateative of leavingthe resourceundisturbed would have the additionalvalue of reveiiy. Whenresources are not disturbedthey can awaysbe developedat sometime in the futurewhen the need for the productsof the projectis greater. Thisvalue is in additionto the possibleamenities yieldedby resourcesleft in their natural state. Ideally,the use of resourcesthat provide the madmumexected NPSVshould be supported.Frequently, that use is simplyleaving the resource in an undevelopedstate. t i sometime arguedthat accountingfor reource depletionas a socWiacost is impractical becausethere are no reliabledata. I reject this argumentfor two reasons. Frst, environmental economistshave formulatedmethods for estimatinga wide range of nonmarketcosts, including damageto health,rivers and lakes,forest ecosytems, wilderess amenities,and wildife. Estimates of the valueof resourcedepletion have mn madeby Repetto(1988) and others,and researchstaffs of the MDBsare in a good positionto providedata for naturalresource accounting. Second, it is better to havesomeone acquainted with the environmentalaspects of a projectto estimatethe socal coststhan to ignorethem. If somehingis worthdoing, it is worthdoing inadeuately! Note:This paperwas be presentedat the WestemEconomic Association International meeting in Seattle,June 30, 1991.

NOTES 1. The WorldBank usually uses an internalrate of returnof 12 percentas the minimumacceptable rate 2 his point is developedbsy Herman Daly in a chapterof a forthcomingbook. 3. This conditionis consistentwith the conceptof sustainabilityput forwardby the Brundtland Commission(1987). For alternativeapproaches to the sustainabilitycriterion, see Toman and Croson, 1991. 4. Thi analysisis adaptedfrom El-Serafy (1989) and (1991).

59 Brundtand Commission,1987. Our CommonFuture. Report of the World Commissionon onment and Development,Oxford: Oxford University Press, Chapter 2. Daly, B B. 1991. From Empty-WorldEconomics to Full-WorldEconomica: R ng an HistoricalTurning Point in EconomicDevelopment, in R. Go udland,Daly and S. El Serafy(eds.) EnvironmentallySustainable Economic Development: Building on Brundtland,Washington, DC WorldBanL El Seraf, S. 1989.The ProperCalculation of Incomefrom Depletable Natural Resources,' in Y. 3. Ahmad,S. El Serafy,and E. Lutz (eds.),Evironmental Accounting for SustainableDevelopment, Washigton,DC: WorldBank. ... -1991. DepletableResources: Fxed Capitalor Inventories?'Paper ivenat the Conferenceof temationalAssociations of Researchin Incomeand Wealthon EnvironmentalAccounting, Badeji, Austria: May27-31. Miesell, R. F. 1989. DepletableResources, Discounting and IntergeneradonalEquity, Resources Policy,December, 292-296. Rcpetto,R. and W. B. Magrath1988 NaturalResources Accounting, Washington, DC: World Resources Institute. Toman,M. A. and P. Crosson 1991. Economicsand "Sustainability":Balancing Tradeoffs and Imperatives(mimeo), Washigton, DC: Resourcesfor the Future,January.

60 Chapter7: SUSAINAE DEVELOPMET:E ROLEOF INVFSI

Bemdvon Droste and PeterDogs

1. Introdution lnvestent, in all its differentforms, shapes our livesas wellas that of generationsto come. Investmets in education,science, technology, culture and communications,for example,continue to have crucialimpacts on welfare.In manycases, today's resource degradation is a functionof earlier investmentdecisions about the scale and qualityof consumptionand production.This callsfor increasedunderstanding of investmentprocesses for improvedmanagement of manmadeand natural

RapidlyIncreasing environmental costs prompt scientists and economiststo warnthat limits are beingreached (Goodland, Chapter 1), and challengesthe maximthat continuedeconomic growth leadsto increasedglobal welfare (Tinbergen and Hueting, Chapter 4). To manyobservers a discussion about limits,for eample to economicgtor.t, migbtbe seen as an academicexercise in a world whereso manybasic needs still are unmet.Taking these warningsseriously, however, we believe that the questionhas importantimplications, which have to be consideredby developmentplanners in all partsof the world. That being said, this chapter is primarilydirected towards the North, whichis not only prmarilyresponsible for the presentsituation, but whichhas manyof the resourcesneeded to invest in developmentthat 'meetsthe need of the present withoutcompromising the abilityof future generaions to meet their own needs' (WCED, 1987).Based on the relationshipbetween environmentalquality, economic performance and socialwelfare, it is nowevident that sustainable developmentdemands that larger investmentsbe directedtowards the environmentalsector for protectionand restorationof the productiveand assimilativecapacity of naturalcapital.

Increasedinvestments will,however, not onlybe madefor adaptingto environmentallimits, but also for shiftingthem. Investmentsin modernbiotechnology research and productionare an importantexample of the latter, whichpose challengeswith far reachingenvironmental and socio- economicconsequences, not the least in the South.It is by influencingtoday's long-term investment decisions,in areassuch as biotechnologyand renewableenergy, that the policyand decisionmaking communitywill have the largestimpact on the internationalcommunity's sustainable development efforts. 2. WhyDo lnvestmentsGo Wrong? Policymakers tend to underestimatethe valueof environmentalinvestments, becase of: time-lags(environmental costs and benefitsoften take time to developbut politicalmandates are usuallyshort); practicaldifficulties in the evaluationof environmentalbenefits and costs; the transboundarynature of several environmentalexternalities making identificationof national

61 responsbilitesand domestic solutions ambiguous without coordinated intrnational efforts;and high discountrates (short-temtime preferences).Furthermore, private investors are often discouraged to makelong-term investments in naturalcapital due to the public-goodcharacters of suchasus, the lackof propertyrights afrangements, making the benefitsfrom such investments difficult to secure. Intead, theyfavor investments in actividesgenerating income more quickly. Sustainabledevelopment implies, however, that investmentprocesses are not onlyunderstood andmanaged for monetaryreurns, but that non-monetayfactors (e.g. social, cultural and ecological realities)also be considered(Young and Ishwaran, 1989). This means that the valueof environmenta servicesand goodsmust be estimatedand incorporatedin the decision-makingprocess. The failure of traditionalsystems of nationalaccounts in this respectis becomingrecognized, and considerable work is beingundertaken to developaccounting methods that includedepreciation (as well as increases)of environmenalcapital assets and that subtractdefensive expenditures' from national income(Ahmad, El Serafyand Lutz, 1989;El Serafy,Chapter 5). In the sameway as policyand decision-makersconsult macroeconomic indicators (inflation, "growth,exchangerates and unemployment flgures) they should also be providedwith environmenl indicatorsand modelsillustrating the stateof the environmentand its impacton the economy,as well as the relationshipbetween economicactivity and resource degradation.As it stands now, developmentmodels frequently ignore the dire and indirectvalue of naturalcapital, both in the economicgrowth proce8s and in susining humanwelfare. Of course,the availabiltyof suchmodels mightbe limited,but enoughdata existon whichdecisions could and shouldbe made (Costanza, 1990).

Due to the abovefactors and the increasedscale of humanactivity, there is nowa longlist of environent prioritiesrequiring large-scale investment, ranging from the atmosphere(to reduce emissionsof greenhousegases and ozone-layer-depletingchemicals), to local conservationof biologicaland geneticdiversity. The listis so impressivethat authorslike HermanE. Dalyconclude that since the productivityof manmadecapital is becomingmore and more constrainedby the decreasingsupply and qualityof complimentarynatural capital, we are now in an era where "...investmentmustshift from mamade capitalaccumulation towards natural capital preservation and restoration.'(Daly, Chapter, 2).

3. lIvesment Necessaryin the Short Term

Theeconomic rationality behind increased natural capital investments becomes apparent when we look at somecosts and benefitsinvolved. The worldwidelack of investmentin soilprotection is one practicalexample. Due to variousshort-term, income-generating activities (e.g. deforestation, intensiveagriculture and irrigation) 25 billion tons of soilare lost worldwide each year. It is calculated that over a twentyyear period, US $4.5billion/year investment in soilprotection would reduce the annualcos of lost agriculturalproduction by US $26billion (Lazarus, 1990). In addition,increased soil investmentswould also produce benefits outside the agrlculturalsector (e.g. reducing sedinion in manyhydro-electric dams, improving water quality and increasingfish catches). 2 Another exampleis current damageto European forests from air pollution,which is conservativelyestimated at US $30billion per year.Although the Europeancountries have agreed to spendsome US $9 billionper yearto reduceair pollution,additional investments are calculated to be cost-effective(IIASA, 1990).

62 In spite of the fact that today's investmentsare often smallerthan what is necesary, the amountsspent on mitigatingenvironmental costs willlikely fund a new Indusrialsectr for pollution control and was managementin the near future. In the OECD countriessome 9 billion tomnesof wasteswere produced in 1990.Including nearly 1500tonnes of industrialwastes (of which300 milon tonnes wer hardous), and 420 milliontonnes of municipalwastes (OECD, 1991).Eitimat are that by 1992 the pollution control industryin Western Europe alone will be a US $120 billion per year business.By 1994more than US $200 billion mighthave to be spent annuallyon clean-upand pollution contol in the United States. Increased knowledgeand industrialefficiency in these fields a welcomed,but it is unforunate that so manycompanies and employeeswill depend on continued enironment degradaion for their income. The urgent need for a massivelyexpanded waste treatment and pollution control sector reflects historicallack of infrastructureinvestments and calls for substantiallyincreased efforts towardsfinding environmentally sound pr-oductionprocess and products.

With the increasing scarcity of natural capital goods and services, investments in the rehabitation of degradedecosystems have becomeall the mote important.Not onlycan rehabilitated nfaturalcapital assetsproduce significantincomes, they often also constitutethe best way to protect remainingnatral areas from degradation.Since the time and investmentnecessary to undertake restoration activitiesincrease significantlywith the increasinglevel of ecosystemdegradation, rapid action is essential.

Approximately80% of the potentially productive arid and semi-arid lands world-wide (representing 35% of the earth's land surface) sufferedfrom moderate to severe desertificationin the early 1980s,due primarilyto poor land management(Dregne, 1983).In many arid and semi-arid areas, the naural resourcebase is, therefore, no longer able to sustaine'isting human populations. Due to high population growth rates this willworsen in the near fiture. dite year 2000 there will be a rural population of at least 40 million in the Sahelian and Sudanian zones of West Africa (calculatedfrom a conservative2% annual populationincrease). This is 3.7 millionpeople more than what the current crop and livestockproduction systems of this region can support, or 19.1 million more than what can be sustainedby fiuelwood,the energysource on whichthese societiesrely (World Bank, 1985).Unless these areas are successfullyrehabilitated, continued world-widedesertiflcation iiy lave hundreds of millionsof people as envimental refuges (Grgersen, Draper and Elz, 1989;Simon, 1991).

4. FinanclngInvestments in the South and in Eastern Europe

Although increasinglyaware of environmentalvalues but constrained by severe budget constraints,many developingcountries find it difficultto make long-terminvestments in their natural capital assets, in particular since increased consumptionis also seen as a major priority (African Centre for TechnologyStudies, 1990).Their need for additional investmentresources can only be evaluated as alarming.' Developing countries often argue, for example, that tlNy cannot afford environmentalysound techniques, if less expensive,but pollutingalternatives exist, and that it is now their turn to benefit from the technologiesthe industrialworld has been using for a long time.

However,as so much of today'stechnology is not environmentallysustainable, it is therefore not economicallysustainable. As the developedworld already has producedsuch large concentrations of environmentaltoxins, the value of the negative externalities that additional emissionswould produce, is no longer marginaland in many cases no longer external.Developing nations therefore

63 cannotinvest in on ly unund techiques withoutfacing rising domestic environmental cosa, thus reducingthe turn on te invement andjeopardizing the successof futuresustainable developmentSeverJ counies in Eastern Europe are strikingexamples. By pursuingeconomic gowth at the ex of the environmentthey now fac tremendousecological damage. The German Insu or EconomicResearch has estimatedthat industriesin Poland, the former German Democati Republic,Czechoslovakia and the Europeanpart of the USSRwill need US $200billion to rverso prior environmentalneglect (Cave, 1990). One couldargue that the developedworld, by usingtechnologies that have accumulated globaltoxins to some extent have reducedthe option for developingcountries to use the same tehnologies(or anyother techniqueswith the sameimpacts), because of the riskof potentWfuture ctatophes. Industrialcountries should, therefore, be preparedto compensat the developedworld for these closedoptions. Tlis could be done partly by financingsustainable technologyinvestments in developingcountries, and partlyby dramaticallycutting back on its own emissionsto givespace for increaseduse of environmentallyunsound technologies in developing coutries witiout inceasingthe total globalenvironmental abuse. Indeed, the North has to reduce inputgrowth and waste, using both economicand legal instruments, while at the sametime providing the Southwith capital and sound technologies through various arrangemens, such as green-fundsand debt-for-sustainabledevelopment swaps (Hansen, 1989; Dogs6 and von Droste, 1990). The Multilaterl Fund agreedupon by the ContractingParties to the MontrealProtocol to providedeveloping countries with additionalfunds for obtainingozone-friendly technologies and replacementsof CFC's,is an inportantachievement in thisdirection. The US $160million fimd, will epand to US $240million if Chinaand India - both planningmajor CFC production increases - eventuallyratify the MontrealProtocol. This fund is nowpart of the US $1.4billion pilot Global Enionment Facility(GEF) which is administered by the WorldBank, United Nations Environment Pogmme (UNEP)and UnitedNations Development Programme. GEF, howevermodest in size comparedwith Identified needs (WRM, 1990), are to be usedfor investmentsin three additionalareas: greenhousegas emission reductions; conservation of biologicaland geneticdiversity; and protection of itrnational waterresources. Alsothe EuropeanBank for Reconstructionand Development (EBRD) has the potentialto becomean importantfinancier of investmentswith positive environmental impact. EBRD's first loan ever, whichwas given to Poland for a heatingproject, is promising.The US $50 millionloan (togetherwith a US $20million World Bank credit) aims at reducingair pollutionby switchingfrom coalto gas-firedheat generationand by promotingenergy efficiency (International Herald Tribune, 1991). Developingnations cannot, however, always rely on industrialnations to developand transfer appropriatetechnologies to them. They shouldbe prepared to make part of that investment themselvesso as to ensurethat technologiesfit their economic,cultural and naturalenvironments. In somecases this willmean that local,small-scale, production units are stimulated,which may require that innovativefinance approaches first have to be developed.Initiatives such as the GrameenBank in Bangladesh,which in 1988operated with 413,000participants, has shownthat It is possibleto providefinancial support to the rural poor and landless(World Bank, 1990). These groups, heavily dependenton the naturalenvironment, frequently have verylimited means for makinglong-term investmentin naturalcapital, therefore often have to sacrificeinvestment for consumption,may then becomevigorous promotors for sustainableresource management. 64 S. Lg4erm Inv nts

By undesIing dte valueof our natural capital,we are now in a siuaton whe more and moreresources wflbave to be spenton restoration,waste disposal, and protecdonof the natural capitalthat is lef, often withoutproducing any extra gain in welfar. Althoughthe newproblems producedby moderneconomic growth might be soluble,the costsfor doingso are unnecessarilyhigh as manyof today'senvironmental problems should never have been producedin the firstplace and their costsand the abiltyto solvethem are very far fromequally distributed. Sustnable development must, therefore,ensure th scatco resourcesare investedIn rerch and in the productionof proeses and systemsthat not onlyavoid known problems, but alsoanticipate unknown costs and benefits.This requires realism and vision. Although we are generallyoptimisic, the energy sector, central in all discussionson sustainabledevelopment, provides several examples of exces investmentin researchand development of unsustainableprocesse andlack of investmentin renewables.One of the mostglaing is the fact that in p989the 21 membercountries of the IntenationalEnergy Agency (IEA) spent75% of their US $7.3billion energy reseach budgeton fossilfuels and nuclear energy, but only7% on rmewables and 5% on energyconservation (see Table 1). Table1. EnergyR&D Spending by IEAgovernments, 1989. Tedhnology AmowntUS $ 1Share% mUllon NuclearFission 3,466 47 FossilFuel 1,098 15 NuclearFusion 883 12 Renewables 498 7 Conservation 367 5 Other 1,039 14 Total 7,351 | 100

mlorepEPlavin and Lensen(1990).

T'hefact that investmentsare directedinefficiently might often dependon the institutions responsiblefor their administration.Institutions, which once were efficient in their field of competenceand mandate,may not adapt rapidlyenough to new or evolvingdemands. Why, for example,i8 there no UnitedNations body workingon the promotionof energyconservation and renewableswhen there isone dedicatedto the promotionof nuclearpower (the InternationalAtomic EnergyAgency, IAEA)? 1AEA, which in 1991has a budgetof US $179million, with US $70million expectedin additionalvoluntary contributions, has as its majorrole to monitornuclear proliferation, but it is alsosaid to activelypromote export of nuclearpower technology to developingnations. At presentdeveloping countries get 40%of theirenergy from renewables and less than 1%from nuclear plants(Rlavin and Lenssen,1990). The creationof an UnitedNations agency for renewableenergy

65 sourcesand conservationwould clearly be justified ad sbould,therefore, be consideredby UNCED.4

Ext instdtutionsmay reflect historicalpferences rather than modem nceds and the intet of 'old' organion in modern susnabilty Ismesmight be larger than their abilityto cope wi them. Ihis bringsup the whole lssue of either esablihing new ilitutions or up-datg exist ones - a long-em investmentin Itself.

6. Limits, Rmesarchand Development

The increasedvisibility of environmentaldegdation cost has resulted in more sientit waing that variousliit are being reached, or bave alreadybeen exceeded,and more economi challenge the traditional wisdom that continued economic growth leads to increased welfare (Goodland, Chapter 1). On the question of lims, although tr is scienific consensusregarding cetain physicalconstraints and bazardsto economicgrowth, we do not have consensusregarding our possiblitiesto meet these challengesor on the economicconsequences of crossingthese limits- No irreversibleevent Is, from an nropocentric point of view,worse than our subjective,and dynamic, evaluadon of It.

Doubtess humaity willalso try to control fiutu limitsas has happened throughout history. Tbiswillceraly includeincreasingly sophiscated mandpulationof biologicaland physicalpress, ranging from micro-cosmosto the atmosphere,if not beyond.Efforts willbe made to increase the photosyntheticcapacities in plants by cell engineering,the rice, maize and pulse genomesmight be completelymapped and genetic diseasescured, agriculturalsoils and oceans turned into carbon sinks (to midgate the greehouse effect) etc. But we must recognize that these are still unknown technologiesthat willprobably bring unknownside effects (uat as did leaded gasoline,asbestos and CFCs etc.).

7. Shifting Bioloial Lmits

The economicforces boostingbiological productivity are alreadyimmense (see Table 2), and it would be naive to tiink that major (public and private) investmentswill not be made for such purposa. Allocationand managementof Investmentcapital going into modernbiotechnology research and production is, because of its promises,risks and socio-ecowmic consequences,a key area of concern in sustainabilitydiscussions.!

Table 2. Examples of CommercialEconomic Benefits from ConventionalCrop Breeding. PotendalBenefts Commercial "Improvementk US$1year Beneflda,y

4.4billion World-wide crossin of a peial Mexicancom abl to grw in maul soils at high altitudesand which is eitnt to sevennmjor oom disae wih modem annual com vanieties 3.5 billion Asia Inwmvedproducton by incorpoing dwaWfsminto whoat and no

160 million USA A singl gene froman Ethiopianbaleo pln inoducd to commecialbarley crops prtect themfrmn yelow dwarfvins

66 Source:UNEP (1990) Advancedknowledge about how gone expressionworks is nowused in incraed food and aneg production,now mcdlclnc, raw matcials and In Improvedenvironmental management. There is alsogroat nerest fromthe defs industry.Incra knowledgeabout manipulation of biological prcesses is,as withknowVedge in general, a doublededged sword:the key to controlis alsothe key tO destuction.Bec of the hugestakes and the vastnumbers of actorsinvolved in biotechnology, the wholequeston of moraldiscipline poses mjor concern. Biotechnologyapplications can speed up or slow down nropy increases, in both unsustainabland sustinale processes,in a moreequitable or lessequitable iterional order.The particu responsiblitiesnow facing national and International policy and decisionmar8 in the field of biotehology are amongthe mosturgent and difficulton their agenda. Biotechnologyis seen as a majorchance for developingtropical countries to gainfrom their rich biologicaland geneticdiverst. Unlessdeveloping countries become much better preparedto influenceand contoI present and future investmentsin biotechnologyresearch and production, however,they are in serious difficultywith far-reachingconsequences for their economicand enronmental sustanabslity.The risk (from a South pespective) is that additionalcomparative advantageswill be given to the North makingIt impossiblefor the South to competein the productio of variousagricultural goods for whichthere is,or willbe,a largedemand and high value- addedpotential. Byusing subsidies, trade barriersand environmentally unsustainable production tehologies, the North alreadytoday produceagricultural surpluses which suppress world market pricesand productionin the South.Given that the North is not preparedto foregosome of itspresent market control,which serioudy inhibits development effort in the South,it maynot hesitateto strengthen its positionfurther. Although perhaps not primarilyas a consequenceof North-Southbut North- North competition,the Northwill most likely take the leadin investingin naturalcapital using low- cost genetic'raw materials' from the South.This wouldbe analogousto manmadecapital competition wherethe South in manycases was unable to developcompetitive value-added processes (e.g. saw- mills,paper facories, metal industries etc.) and fell back on sellingnatural resources at fallingprices. Smallfarmers in developingcountries may be the largestlosers in sucha scenariosince they are least ableto undertakeand influenceinvestments needed for themto staycompedtive, even on domesti markets.The socio-economicconsequences of decreasingeconomic sustainability by the rural poor which may force large populationsto search for their livelihoodin Increemingly unsustainablecities, should not be underestimated.This leaves the Southwith the questionto what extentthey actually benefit from so-called 'free-trade' and technology transfers. And to considerwhat measuresthey eventually can take to improvetheir own development potential in a situationwhere rntional economiccompetition is so unbalancedin favourof the North. 8. lime for Action It willtake some ten years for today'sinvestments in researchand developmentof new biotechnologyto reapeconomically significant results. It willthenin manycases be too lateto correct for unwantedside effectsand costs.The internationalcommunity should therefore assessrisks, benefits and costs as well as their distribution,and seek to control the developmentof such

67 technologyat h earliest possiblestage.

Much of the discussionabove points to the responsibilitiesof public sectors as a large-scale investor. Sincemany largs biotechnology,and energyresearch, investmentsare made by the private secoor,however, the public sector also has the responsibilityof influencingprivate lnvetment. MauriceStrong's statement on the importanceof incorporatng the private sector into development planning is particlarly relevant: 'Businessis the major engine of developmentIn our society.And, threfore if we can't influencebusiness, we reallycan't influencedevelopment" (Dampier, 1982).In particular this willmean taking the needs of the South into consideration,including elaboration and assessmentof how, though lega, economicand policyarangements, developingcountries can best be strengthened in their research and investmentcapacities.

9. Coldon

Compared with the costs, 0.8-1.5% of GDP, industrialcountries have received signiflcant benefitsfrom their eanvironmentalprogrammes during the lasttwenty years (OECD, 1991).Although natural capital investmentsmade are too low, for those countries who have invested even less, or hope to avoid such investmentsin the future, the bill willget much higher.

It is,therefore, encouragingto note that the publicopinion in the United States,Japan and 14 European countriesnow indicatesa strong support for the environment,even in situationswhere protection of the environmentwould reduce economicgrowth (OECD, 1991).Such attitudes are a good basis for building the necessary institutionalchanges in the industrial world for improved understandingand managementof investmentcapital in relation to exiting (and possiblyshifted) ecologicalconstaints to economicgrowth. Its also the best guarantee for that innovativefincial bodies, such as GUE, will get increased resources and mandate to help promote susinable investmentpractices in the South. UNCED-92is, of course,an opportunityof utmost importanceto bring about such changes.

However, throughout history, although being fully aware of environmental constras, societiesfaied to securea sustainablebalance between immediate consumption and long-tem naur capitalmvestment and, therefore, eventuallycollapsed (Ponting, 1990). Furthennore, althoughthese societies were constrained by only local or regional environmentallimits, today's global limits will require a level of international coordinationand cooperationnever before necessaryin the history of humankind.

Acknowledgement

Tne authors are indebted to Robert Goodland,Ignacy Sachs and Dana Silk for valuablecomments on an earlier version of this chapter.

Notes

1. Cost necesary to maintain(defend) a certain levelof welfarewhich, due to unwantedside-

68 ffects of consumptionand production,such as pollution,threatens to fail.

2. I has been esdmated that siltation of dams feeding hydropowerturbines involvesa loss of some 148,000gigawatt hours which at US $15 per barrel wouldcost some US $4 billion per year to replae using oil fired thermal generation (Pearce, 1987).

3. Ibe World Resources Institute (WRI) has estimatedthat the Third World's unmet financial needs for maintainingtheir natual resourcesas "thebasis for meeting the needs for current and future generations' amountsto US $ 20-50billion per year over the next decade (WRI, 19).

4. The UNEP CollaboratingCentre on Energy and Environmentlinked to the Risoe National Laboratoryin Denmark, whichwas opened on 1 October 1990,may be a good startingpoint towardsthis end.

5. Biotechnologyhas been defined as "The applicationof biologicalsystems and organismsto scientific,industrial, agricultural, health and environmentprocesses and uses.' "Organisms" includesanimals, plants and microbes."New'biotechnology refers to the use of cell fusion, cell and tissue culture, recombinantDNA and novel bioprocessingmethods. While "Old"or classicalbiotechnology means the use of microbesfor baking,brewing, or other fermentation processes,or selectivebreeding in agricultureand animalhusbandry (Giddings and Persley, 1990).

6. In 1987, total research and development investment on agricultural biotechnologywas estimatedat US $900 million,of whichmore than 60% was in the private sector (Giddings and Persley, 1990).

Rderencs

Affican Centre for TechnologyStudies. 1990. The NairobiDeclaration on aMwic Change. Internaional Co.ference on Global Wannng and Climate Change:African Perspectives. Nairobi:African Centre for TechnologyStudies. May 2-4, 1990.

Ahmad, Y. J., S. El Serafy, and E. Lutz, eds. 1989. Environment Accountingfor Sustainable Development.The World Bank, Washington,D.C., 100p.

Cave, S. 1990. "Cleaningup Eastern Europe". Our Planet 2(2):4-7. United Nations Environment Programme.

Costanza, R. 1990. "EcologicalEconomics as a Framework for Developing SustainableNational Policies".In Aniansson,B., and U. Svedineds. Towardsan EcologicalSustainble Econony. Report from a Policy Seminar, in Stockholm,Sweden, January 3-4 1990,arranged by the Swedish Council for Planning and Coordination of Research (FRN) on behalf of the EnvironmentalAdvisory Council of the SwedishGovernment. Stockholm: FRN Rapport 90:6. 144p.

69 Dampier,W. 1982."Strong Assesses the DecadeSince Stockholm". In 'Synopsls:TenYears After Stockholm:A Decadeof EnvironmentalDebate'. Amblo 11(4):229-231. Dogsd,P., and B. von Droste. 1990. "Debt-for-NatureExchanges and BiosphereReserves: Experiencesand Potential".MAD Digest No. 6, UNESCO,Paris. 8 8p. Dree, H. E. 1983.'Desertification of AridLands.In AdvancesIn Desertand Arid Land Technology and DevelopmentVol. 3. NewYork: Harwood Academic Publishers. 2 42pp. Flavin,C., and N. Lensen.1990. "Beyond the PetroleumAge: Designing a SolarEconomy". World WatchPaper No. 100.World Watch Institute. Giddings,L. V., and G. Persley.1990. "Biotechnology and Biodiversity".Study prepared for United NationsEnvironment Programme, UNEPlBio.Div./SWGB. 113.12 October, 1990. Gregersen,H., S. Draper,and D. Elz eds. 1989.People and lSees. The Role of SocialForeshy in SusainableDewlopment. World Bank. Washington, D.C. 273p. Hansen,S. 1989."Debt for NatureSwaps - Overviewand Discussionof Key Issues'.Ecological EcomIcs 1(1):77-93. Intnational HeraldTribune. 1991. "European Development Bank Makes First Loan'. Intwaional Heral ld bune22 June 1991.p.13.

IIASA.1990. "Comprehensive Study of EuropeanForests Assesses Damage and EconomicLosses from Air Pollution".News Release 5 December1990. IIASA, InternationalInstitute for Applied Sysms Anysis. Lazus, D. S. 1990."Save our Soils".Our Plnet. 2(4).United Nations Environment Programme. OECD. 1991. The State of the EnvironmentOrganization for EconomicCooperation and Development(OECD). Paris. Pearce, D. 1987. "EconomicValues and the Natural Environment".University College London DiscussionPapers In Economics.87(8): 1-20. Ponting,C. 1990."Historical Perspectives on SustainableDevelopment". Environment 32(9). Simon,B. 1991.'Report PredictsFlood of 'EnvironmentalRefugees'". Fincia 7lnes 25 June 1991 p.6. UNEP.1990. "Note by UNEPon BasicIskoues With Respect to Biotechnologyand Conservationof BiologicalDiversity".Ad hoc Working Group of Expertson BiologicalDiversity, Subworking Groupon biotechnology,Nairobi: United Nations Environment Programme, 14-16 November, 1990.In UNEP/Bio.Div./SWGB.1/2,15 October, 1990, Annex 2.

70 World Bak. 198S.Devfcalon In Sahlelanand SudanlanZones In West4fica. The WorldBank, Wahiton, D.C.60p. WorldBank, 1990. World Development Report 1990. The WorldBank, Washington, D.C. p.67.

WRI. 1990.Naural Endownents: Fnanng ResourceConservaton for Development.Washington: WorldResources Institute, WRY. 33p. Young,M., and N. Ishwan els. 1989.'Human Investment and ResourceUse: A NewResearch Orienion at the EnvitonmentlEconomicInterflce.' MAB DigestNo. 2. UNESCO,Paris S4p.

71 Chapter 8: THE ECOLOGICALECONOMICS OF SUSTAINABILBTY: INVESG IN NATURALCAPITAL Robert Cotanza

1. An EcologicalEoonomic World View To achieveglobal sustainlity, we need to stopthnking of eologicaland economicgoals as beingin cwnflict Economicsystems are dependenton their ecologicallife supportsytm and we mustrealize that fWctand incorport it into our thinkingand actionsat a verybasic level if we are to sustainour globalhousehold. A housedivided against itself cannot long stand. To achievesuainability we mustdevelop an ecologicaleconomicsthat goeswell beyond the conventionaldisciplines of ecologyand economicsto a trly integrativesynthesis (Costn 1991). Figure 1 illustratesone aspect of the relatoship betwoeeecological economics and the conventionalapproaches; the domainsof the differe subdisclplines.The upper left boxreprents the domain of mconentional"economics, the in ctions of economicsectors (like mining, manufacturing,or households)with each other.The domainof "conventional"ecology is the lower rightbox, the interactionsof ecosystmsand their componentswith each other.The lowerleft box represens the inputsfrom ecological sectors to economicsectors. This isthe usualdomain of resource economicsand environmentaimpact analysis: the use of renewableand nonenewablenatural resourcesby the economy.The upper rightbox represensthe "use"byecological sectors of economic "products."The productsof interestin thisbox are usuallyunwanted by-products of productionand the ultimatewastes from consumption.This is the usual domainof encronmea economicsand environmentalimpact analysis: pollution and its mitigation,prevention and mediation.Ecological economiaencompasses and trancends these disciplinaryboundaries. Elogial economicssees the human economyas part of a larger whole.Its domai is the entire web of interactionsbetween economicand ecologicalsectors. Table I presentssome of the other majordifferences between ecologicaleconomics (OE) and conventionaleconomics (CEcon) and conventional ecology (CEcol). Tbe basicworld view of CEcon is one in whichindividual human consumers are the cental figures.Their tastes and preferences are tkenas egiven and are the dominant,determining force. The resource base is viewedas esentally limitlessdue to technicalprogress and infinitesubstitutability. EE takes a more holisticview with humansas one component(albeit a veryimportant one) in the overallsystem. Human preferences, undersmtanding,tecnology and cultural organizational co-evolveto reflect broad ecological opportunitiesand constraints. Humans have a specialplace in the systembecause they are responsible for understandingtheir ownrole in the largersystem and managingit for sustainability.This basic worldview is similarto that of CEcol,in whichthe resourcebase is limitedand humansare just another (albeit seldomstudied) species. But EE differsfom CEcol in the importanceit givesto humansas a species,and its emphasison the mutualimportance of culturaland biological evolution.

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74 We must acknowledgethat the human systemis a subsystemwithin the larger ecological system. Ibis implies not only a relationship of interdependence,but ultimately a relation of de- pendence of the subsystemon the larger parent system.The fiastquestions to ask about a subsystem are: how big is it relative to the total sytem, how big can it be, and how big should it be? These questions of scale are only now beginningto be asked (Daly and Cobb 1989).

The presumedgoals of the systemsunder studyare also quite distinct,especially at the macro level. The macro goal of EE is sustainabilityof the combinedecological economic system.CEcol's macro goal of species survivalis similarto sustainability,but is generallyconfined to singlespecies and not the whole system.CEcon emphasizes growth rather than sustainabilityat the macroleveL At the microlevel, EE is urique in acknowledgingthe two-waylinkages between scales,rather than the one-wayview of the conventionalsciences in which all macro behavior is the simple aggregationof microbehavior. In EE, socialorganization and culturalinstitutions at higher levelsof the space/time hierarchyameliorate conflictsproduced by myopic pursuit of micro goals at lower levels, and vise versa.

Perhaps the key distinctionsbetween EE and the conventionalsciences lie in their academic stances, and their assumptionsabout technical progress.As already noted, EE is transdisciplinary, pluralistic,integrative, and more focusedon problemsthan on tools.

CEcon is very optimisticabout the abilityof technologyultimately to remove all resource constraints to continued economic growth. CEcol really has very little to say directly about technology,since it tends to ignore humans altogether. But to the extent that it has an opinion, it would be pessimisticabout technology'sability to remove resource constraints because all other existingnatural ecosystemsthat don't include humans are observed to be resource limited. EE is prudentlyskeptical in this regard. Given our high levelof uncertaintyabout this issue,it is irrational to bank on technology'sability to remove resource constraints.If we guess wrong then the result is disastrous,irreversible destruction of our resourcebase and civilizationitself. We should at least for the time being assumethat technologywill not be able to remove resourceconstraints. If it does we can be pleasantlysurprised. If it does not we are still left with a sustainablesystem. EE assumesthis prudentlyskeptical stance on technical progress.

2. Sustainability:Maintaining Our Global LifeSupport System

While acknowledgingthat the sustainabilityconcept requires much additional research,we can offer the followingworking definition: Sustainability is a relationship betweendynamic human economic systems and larger dynamic, but normally slower-changingecological systems, in whicb: (a) human llfe can continue indeflnitelry(b) human indivndualscan flourish, (c) human cultures can develop;but In which (d) effectsof human activites remain within bounds,so as not to destroy the diversity, complexity,and function of the ecologicallife support system.

"Sustainability"does not implya static, muchless a stagnant,eco amy, but we mustbe careful to distinguishbetween "growth' and "development",as specified in the introduction. Economic growth, which is an increase in quantity, cannot be sustainable indefinitelyon a finite planet. Economic development,which is an improvementin the qualityof life without necessarilycausing an increase in quantity of resources consumed, may be sustainable. Sustainable growth is an impossibility.Sustainable development must becomeour primatylong-term policy goaL

7S The mostobvious danger of ignoringthe role of nature in economicsis that nature is the economy'slife support system, and by ignoringit we mayinadvertently damage it beyondit's ability to repair itself. Indeed,there is muchevidence that we have alreadydone so (Goodland,1991). Currenteconomic systems do not inherentlyincorporate any concern about the sustainabilityof our naturallife supportsystem and the economieswhich depend on it (Costanzaand Daly1987). In an importantsense, sustainability is merelyjustice with respectto future generations.This includes future generationsof other species,even thoughour main interestmay be in our ownspecies. Sustainabilityhas been variouslyconstrued (cf. Pezzey1989, WCED, 1987) but a useful definitionis the amountof consumptionthat canbe continuedindefinitely without degrading capital stocks- including"natural capital" stocks. In a business,capital stock incluces long-term assets such as buildingsand machinerythat serve as the meansof production.Natural capital is the soil and atmosphericstructure, plant and animalbiomass, etc. that, taken together,forms the basisof all ecosystems.This natural capitalstock uses primaryinputs (sunlight)to producethe range of ecosystemservces and physicalnatural resource flows. Examples of naturalcapital include forests, fishpopulations and petroleumdeposits. The naturalresource flows yielded by these naturalcapital stocksare, respectively,cut timber,caught fish, and pumpedcrude oiL We havenow entered a new era in whichthe limitingfactor in developmentis no longermanmade capital but remainingnatural capitaLTumber is limitedby remainingforests, not sawmillcapacity; fish catch is limitedby fish populations,not by fishingboats; crude oil is limitedby remainingpetroleum deposits, rot by pumpingand drillingcapacity. Most economistsview natural and manmadecapital as substitutes rather than complements.Consequently neither factor can be Umiting.Only if factors are complementarycan one be limiting.Ecological economists see manmadeand naturalcapital as fundamentallycomplementary and therefore emphasizethe importanceof limitingfactors and changesin the pattern of scarcity.This is a fundamentaldifference that needs to be reconciled throughdebate such as thisbook. To implementsustainability, all projectsshould meet the followingcriteria: For renewable resources,the rate of harvestshould not exceedthe rate of regeneration(sustainable yield) and the rates of waste generationfrom projectsshould not exceed the assimilativecapacity of the cjwir.vnmnt(sutainabl wvstedisposal). Foor nonrenemable resources the ratesof wastegeneration fromprojects shall not exceedthe assimilativecapacity of the environmentand the depletionof the nonrenewableresources should require comparable development of renewablesubstitutes for that resource.These are safe, minimumsustainability standards; and once met, projectsshould be selectedthat havethe highestrates of return basedon other, more traditionaleconomic criteria.

3. Maintaning and Ilmstingin Natural Capitalto Ensure Sustainablilty A minimumnecessary condition for sustainabiityis the maintenanceof the totalnat- ural capitalstock at or above the current level.While a lower stock of natural capitalmay be sustainable,given our uncertaintyand the direconsequences of guessingwrong, it is best to at least provisionallyassume that we are at or belowthe range of sustainablestock levelsand allowno furtherdecline in naturalcapital. This 'constancyof total naturalcapital" rule can thus be seen as a prudentminimum condition for ensuringsustainability, to be abandonedonly when solid evidence to the contrarycan be offered.In factwe shouldbegin the processof reinvestingin naturalcapital stocksto bringthem backto safe minimumstandards. There is disagreementbetween technological

76 optimists(who see technicalprogress eliminating all resourceconstraints to growthand development) and technologicalskeptics (who do not see as muchscope for thisapproach and fear irteversibleuse of tesourcesand damage to naturalcapital). By limiting total systemnatural capital at currentlevels (preferablyby usinghigher severance and consum,,tion taxes) we can satisfyboth the skeptics(since resourceswill be conservedfor futuregenerations) and the optimists(since this will raise the price of naturalcapital resources and more rapidlyinduce the technicalchange they predict). By limiting physicalgrowth, only developmentis allowedand this may proceed without endangering sustainability.

4. PolUyInstuments: EnAronmentalAssurance lkadlng We need to explore promisingalternatives to our current commandand control envi- ronmentalmanagement systems, and to modifyexisting government agencies and other institutioins accordingly.The enormousuncertainty about local and transnationaletnironmental impacts needs to be incorporatedinto decision-making. We alsoneed to better understandthe sociological, cultural, and politicalcriteria for acceptanceor rejectionof policyinstrumentL One exampleof an innovativepolicy instrumentcurrently being studied is a flexible environmentalassurance bonding systemdesigned to incorporateenvironmental criteria and uncertaintyinto the marketsystem, and to inducepositive environmental technological innovation (Perring, 1989;Costanza and Perrings,1990).

In additionto direct chargesfor knownenvironmental damages, a companywouldbe required to post an assurancebond equal to the current best estimate of the largest potential future environmentaldamages; the moneywould be kept in interest-bearingescrow accounts. After the project,the bond (plusa portionof the interest)would be returnedif the fim couldshow that the suspecteddamages had not occurredor wouldnot occur.If they did, the bond wouldbe used to rehabilitateor repairthe environmentand to compensateinjured parties. Thus, the burdenof proof wouldbe shiftedfrom the publicto the resource-userand a strong economicincentive would be providedto researchthe true costs of enironmentaLlydamaging activities and to developcost- cffccuvc pollu'u'n coi)tfoltechnologies. This is an xtensionof the 'polluter payst principlcto 'the polluterpays for tuncertaintyas well."Other innovative policy instruments include tradeable pollution and depletionquotas at both nationaland internationallevels. Also worthy of mentionis the newly emergingGlobal Environmental Facility of the WorldBank which will provide concessionary funds for investmentsthat reduceglobal externalities.

S. Econoilc Inetlves Lnking Revenuesand Uses We shouldimplement fees on the destructiveuse of naturalcapital to promotemore efficient use, and ease up on incometaxes, especially on lowincomes in the interestof equity. Fees, taxes and subsidiesshould be used to changethe pricesof activitiesthat interferewith sustainability relativeto thosethat are compatiblewith it. Thiscan be accomplishedby usingthe fundsgenerated to support an alternativeto undesirableactivities that are being taxed.For examplea tax on all greenhousegases, with the size of the tax linked to the impactof each gas could be linked to developmentof alternativesto fossilfuel. Gasolinetax revenuescould be used to support mass transit and bike lane. Currentpolicies that subsidizeenvironmentally harmful activities should be

77 stopped. For eammple,subsidies on virginmaterial extractionshould be stopped. ITis willalso allow reccling options to effectivelycompete. Crop subsidiesthat dramaticallyincrease pesticide and frtilizer use should be eliminated,and formsof positiveincentives should also be used For example, debt for nature swaps should be supported and should receive much more funding.We should also offer prestigiousprizes for work that increasesawareness of or contributes to sustainabilityissues, such as changes in behavior that develop a culture of maintenance (ie. cars that last for SOyears) or promotes capital and resourcesaving improvements(i.e. affordable,efficient housingand water supplies).

6. EcologIcalEconomic Research

Whileeconomics has developedmany useful tools of analysis,it has not directed these tools toward the thorny questions that arise when considering the concept and implementation of sustainability.In particular,we need to better understandpreference formation,and especiallytime preference formation. We also need to understandhow individualtime preferences and group time preferences maydiffer, and how the preferencesof institutionsthat willbe criticalto the successor failure of sustainabilityare established.We have heretofore paid too little attention to ecological feedbacks.An understandingof these will be criticalto the implementationof sustainabilitygoals. We need to concentrate on the valuationof important non-market goods and services providedby ecoytems (Costanzaet al 1989).

7. EcologIcal Economks Education

We need to develop an ecologicaleconomics core curriculumand degree grantingprograms that embodythe skillsof both economicsand ecology.This impliesa curriculumwith some blending of physical,chemical and biologicalsciences and economics.Within this curriculumquantitative methods are essential but they should be problem directed rather than just mathematicaltools for their own sake. Experimentation capacityis needed to provide ecologicaleconomics with a solid empiricalbase which is built upon creativeand comprehensivetheory. We need to developextension programsthat can effectivelytransfer informationamong both disciplinesand nations.

8L I"ttutional Changes

Institutionswith the fleiabilitynecessary to deal with ecologicallysustainable development are lacking.Indeed many financialinstitutions are built on the assumptionof continuousexponential growth and will face major restructuringin a sustainableeconomy. Many existinginstitutions have fragmentedmandates and policies,and often have not optimaly utilized market and non-market force to resolveenvironmental problems. They have also conductedinadequate benefit/cost analyses by not incorporatingecological costs; used short-term planning horizons;inappropriately assigned property rights (public and private) to resources;and not made appropriate use of incentives.

There is a lack of awarenessand educationabout sustainability,the environment,and causes of environmentaldegradation. In addition, much environmentalknowledge held by indigenous peoples is being lost, as is knowledgeof species, particularlyin the tropics. Institutionshave been slowto respond to new informationand shiftsin values,for examplethreats to biodiversityor rapid

78 changesin eommunicationtechnologies. Finally, many institutions do not freelyshare or disseminate ln, matkon do not prtoide publc acces to decision-makini,and do not devoteserious attention to detmining and representingthe wishesof their constituencies. Minyof theseproblems are a resultof the inflexiblebureaucratic structure of manymodern istitutions.Experience (i.e. Japanese industry) has shown that lessbureaucratic, more flexible, more poer-to-peerinstitutional structures can be muchmore efficientand effective.We need to de- bureaucratizeinstitutions so that theycan effectively respond to the comingchallenges of achieving sustainabilitY.

Costanza,R (ed) 1991.Ecological economics: The sciecmceand managementof sustainability.New York,Columbia Univerity Press 43Sp. Costanza,R. and Daly,t . E. 1987.Toward an ecologicaleconomics. Ecoloal Modeling38: 1-7. Castanza,R., Farber, S. C. and Maxwell,3. 1989.lThe valuation and managementof wetland ecosystems.Ecgical Ecoomi 1: 335-361.

Costanza,R. and Peaings, C R 1990.A flexibleassurance bonding sytem for improveden- vironmentalmanaement. Ecolical Ecmics 2: 57-76. Daly, HE and Cobb,J.B. Jr. 1989.For the commongood: redirectingthe economytoward community,the environment,and a sustainablefuture. Boston,MA., Beacon Pms 482p. Perrig C. 1989.Environmental bonds and the incentie to researchin activitiesimvolving uncertain futureefects Eical Ecoomics 1: 95-110. Pezzey,J. 1989.Economic anaysis of sustainablegrowth and sustainabledevelopment. Washington DC.,Mm World Bank EnvironmentDepartment, working paper 15: p. WCED, 1987. Our commonfuture: report of the world commissionon environmentand development.(The BrundtlandReport). Oxford, Oxford University Press 387 p.

79 Chaptr O* FROMGROWTH TO SUSTAINABLEDEVELPMENT Lester R. Brown,Sandr Postel,and ChristopherFlain

Fbr muchof thiscentuty, econoic debateshave focused on whethercapitalim or socilsm is the best wayto orgeniz a modemindustral economy. Tat argumentnow seems to be over,as the nato of easternEuope moveswiftly toward market mechanisms, and as the Sovieteconomy teeter on the brink of collapse. Yet even before the political dust settles from these transormations,a new,more fundamental question has arisn Howcan we design a vibranteconomy that does not destoy the naturalresources and environmentalsystem on whichit depends? The vast scale and rapid gowth of the $20trillionglobal economy are haietd as great achievementsof our time. But as the pace of envionmentaldeterioration quickens, the consequencesof fallingto bridgethe gap betweenthe worings of economicsystems and natural ones ae becomingal too clear.' Redrcting the globaleconomy toward eonntal sutainabilityrequires fundamental reformsat both the intemationaland nationallevels In an agewhen topical deforestationin one countryreduces the entire earth'sbiological richness, when chemicals relased on one continentcan lead to slin cancer on another, and when CO2 emisios anywherehasten climate change eveywbee, economicpolic ng i no lc"ger exclusivelya national concem Greatlylessening the developingworld's debt burden is a prerequisitefor an enironmentaly sustainableworld economy. By 1989,the Third World'sexemal debt stood at $12 trilion, 44 percentof itscollective gross national product (GNP). In somecountris, the figurewas far higher- 140percent in Egyptand Zaire and a staggering400 percent in Mozambique.Developing nations paid$77 bilion in intereston their debtsthat year,and repaid $85 billion worth of principaLSince about 1984,the traditionalfbow of capitalfrom developedto the developingcountries has been increasInglyoffset by a flowof interestand dividendsin the oppodtedirction. Preiminay data for al Ow, includinggrants, show a negativeflw to the developingcountries of $2.7biSlion in 1989, whichcompares with a positiveflow of $51 billionin 1981.2 Lackof capitalhas madeit nearlyimpossible for developingcountries to investadequately in forest protection,soil conseantion, irigation improvements,more energy-efficient technologie, or pollutioncontrol deviceL Even wore, growingdebts havecompelled them to sell off natural resources,often their onlysource of foreigncurrency. Like a consumerforced to hock the family heirloomsto pay creditcard bills, developing counties are plunderingforests, decimating fisheries, anddepleting water supplies - regardlessof the long-termconsequences. Unfortunatey, no global pawnbrokeris holdingon to this inheritanceuntil the worldcan affordto buy it baclk Reformingforeign aistance is also criticaL Very little of the aid moneydisbursed to developingcountries by goernments and internationallending institutions supports ecologically sound development. The Wodd Bank, the largestsingle funder, lacks a coherentvision of a sustainableeconomy, and thus its lendingpriorities often run counterto the goalof creatingone.

s0 Bilateral aid agencies,with a few importantexceptions, do little better. Moreover, the scale of total lending fails far short of that needed to help the Third Worldescape from the overlappingtraps of poverty, ovepopulation, and ecologicaldecline.

2 Itrments of EconomicReform

At the heart of the dilemmaat the national level is the failure of economiesto incorporate envimnmentalcosts into private decisions,which results in society at large bearing them, often in unanticipatedways. Automobiledriven do not pay the full costs of local air pollution or long-term climatechange wben they fll their gas tanks, nor do farmers pick up the whole tab for the health and ecologicalrisks of usingpesticides.

Many industrialnations now spend 1-2 percent of their total economicoutput on pollution control, and these figureswill increase in the years ahead. Such large sums spent on capturing pollutants at the end of the pipe, while necessaty,are to some extent a measure of the economy's failureto foster practicesthat curb pollutionat its source. Governmentsmandate catalytic converters for cams,but neglect energy-efficienttransport systemsthat would lessen automobile dependence. They require expensive methods of treating hazardous waste, while doing little to encourage industriesto reduce their generation of waste.?

Of the many tools governmentscan use to reorient economicbehavior, fsal policiesoffer some of the most powerfuL In particular,partially replacing income taxes with environmentaltaxes could greatly speed the transition to an environmentallysustainable economy without necessarily increasingthe total tax burden. Designedto make pricesbetter reflect true costs, a comprehensive set of environmentaltaxes would include, for example,levies on carbon emissionsfrom fossilfuels, hazardous waste, paper produced from virgin pulp, pesticide sales, and groundwater depletion. Shifting the tax base in this waywould help ensure that those causing environmentalharm pay the price, rather than societyas a whole, and thereby encouragemore environmentallysound practices.

i. A VUustiOD oi 51ie

Even if debt is relieved,development aid is restructured, and an array of green taxes are instituted, there remains the vexingproblem of the economy'sscale. Listeningto most economists and politicians,unlimited expansion of the economyseems not onlypossible but desirable. Political 1A&mn tnut growth as the answer to unemployment,poverty, ailing industries, fiscal crises, and myriadother societal iDls.To question the wisdomof growthseems almost blasphemous, so ingrained is it in popular thinkingabout how the worldworks.

Yet to agree that creating an environmentallysustainable economy is necessary is to acknowledgethat limits on some forms of growth are inevitable--inparticular the consumptionof physicalresources. Textbook models often portray the economyas a self-containedsystem, with moneyflowing between consumers and businessesin a closedloop. In reality,however, the economy is not isolated. It operates within the boundariesof a global ecosystemwith finite capacitiesto produce fresh water, form new topsoil, and absorb pollution. As a subset of the biosphere, the economycannot outgrowits physicallimits and still remain intact."

$1 With an annualoutput of $20 trilon, the globaleconomy now produces in 17 dayswhat it took an entireyear to generatein 1900. Already,economic activity has breachednumerous local, regional,and globalthresholds, resulting in the spreadof deserts,acidification of lakesand forests, and the buildupof greenhousegases. If growthproceeds along the linesof recentdecades, it is only a matterof time before globalsystems collapse under the pressure.5 One usefldmeasure of the economy'ssize relativeto the earth's life-supportingcapacity is the share of the planet's photosyntheticproduct now devotedto humanactivity. 'Net prinaiy production'is the amountof solarenerag fixed by greenplants through photosynthesis minus the energyused by those plants themselves.It is, in essence,the planet'stotal food resource,the biochemicalenergy that supportsall turmsof animallife, from earthworms to humans. Vitousekand his colleaguesestimate that 40 percent of the earth's annual net prmay productionon land nowgoes directlyto meet humanneeds or b indirectlyused or destroyedby humanactivity-leaving 60 percentfor the millionsof other land-basedspecies with whichhumans share the planet. Whileit took all of humanhistory to reachthis point,the share coulddouble to 80 percentby 2030if currentrates of populationgrowth and consumption continue; ring per capita consumptioncould shorten the doublingtime considerably. Along the way,with peopleusurping an ever largershare of the eartb's life-sustainingenergy, natural systems wfll unravel faster. Eactly when vital thresholdswill be crossedirreversibly is impossibleto say. But as Vitousekand his colleaguesstate, those'who believethat limitsto growtha.e so distantas to be of no consequence for today'sdecision makers appear unaware of these biologicalrealities.

4. TowardGreater Effleecy and Equity For humanityto avoidthe wholesalebreakdown of naturalsystems requires not justa slowing in the expansionof our numbersbut a shiftfrom the pursuitof growthto that of sustainableprogress - humanbetterment that does not comeat the expenseof futuregenerations. The firstand easiest phasein the transitionis to increasegreatly the efficiencywith whichwater, energ, and materials are used,which will allow people's needs to be satisfiedwith fewer resources and less environmental harm Thisshift is alreadyunder way,but is proceding at a glacialpace comparedwith whatis needed. One exampleof the necessaryapproach is in California.Pioneenng energy policies there havefostered utility investments in efficiency,causing electricity use per personto decline03 percent between 1978and 1988,compared witb an 11-percentincrease in the rest of the UnitedStates. Califonis sufferedno drop in livingstandards as a result;indeed, their overallwelfare improved sincetheir electricitybills were reduced and their cooking,lighting, and other electricalneeds were met withless sacrificeof air quality.7 Producinggoods and servicesas efficientlyas possibleand with the mostenvironmentally benigntechnologies available will move societies a longway toward sustainability, but it willnot allow them to achieveit. Continuinggrowth in materialconsumption - the number of cars and air conditionets,the amount of paper used, and the like - will eventuallyoverwhelm gains from efficiency,causing total resourceuse (and all the correspondingenvironmental damage) to rise. A halvingof pollutionemissions from individual cars, for example,will not iesultin muchimprovement in air qualityif the total distancedriven doubles, as it has in the UnitedStates since 1965.'

82 Ibis aspet of the transitionfrom growth to sustainabilityis thusfar moredifficult, as it goes to the her of people'sconsumption patter In poorercountries, simply meeting the basicneeds of growinghuman numbers will requirethat consumptionof water. energy,and forest products ineases, even if these resourcesare usedwith the utmostefficiency. But the wealthierindustdal countes - especally the dozen that have stabilizedtheir populationsize, includingAustra, Gemany,Italy, Norway, Sweden, and Switzerland - are in the best positionto beginsatifying their needs with no net degradationof the naturalresource base. Thes counties couldbe the fist to benefitfrom realiing that somegrowth costs more than it is worth,and that an economy'soptimum size is not its maximumsize.

5. Qualityover Qutty GNP becomesan obsoletemeasure of progres in a socety strving to meetpeople's needs as efficientlyas possibleand withthe leastdamage to the environment Whatcounts i not growth in output,but the qualityof sevicesrendered. Bicyes andlight rail, for instance,ate lessresource, intensiveforms of transportationthan automobilesare, and contributeless to GNP. Buta shift to masstranit andcycling for mostpassenger trips would enhance urban lIfe by eliminatingtraffic jams, reducingsnlog, and makingcities safer for pedestrians GNPwould go down,but oval well-being wouldincrease.' Likwe, investingin water-efficientappliances and irrigationsystems instead of biding more damsand diversioncanals would meet water needs with less harmto the eno t. Since massivewater projects consume more resources than efficiency investments do, GNPwould tend to decE. But qualityof life wouldimprove. It becomesclear that strivingto boost GNP is often inappropriateand counterproductie. As ecologistand phflosopherGarrett Hardinputs it, 'For a statesmanto try to maximizethe GNP is about a sensibleas for a composerof musicto tty to maxmize the numberof notesin a symphony.""

Abandoninggrowth as an overridinggoal does not and mustnot meanfoaidng the poor. Risingincomes and materialconsumption are essentialto imprvingwell-being in muchof the IhW World. But contraryto whatpolitical leaders imply, global economic growth as currentlymeasured is not the solutionto poverty. Despitethe fivefoldrise in worldeconomic output since1950, 1.2 billionpeople - more than everbefore - live in absolutepoverty today. More growthof the sort engineeredin recent decadeswill not s.ivethe poor, onlystrategies to more equitablydistribute inenmePnd wealth can.' 2

6 A HigherSocial Order Formidablebarriers stand in the wayof shiftingfrom growth to real progressas the central goal of economicpolicy. The visionthat growthconjue up of an expandingpie of richesis a powerfuland convenientpolitical tool becauseit allowsthe tough issuesof incomeinequality and skewedwealth distrbution to be avoided.As longas there is growth,there is hopethat the livesof the poorcan be betteredwithout sacrifices from the rich. The reality,however, is that achievingan environmentallysustainable global economy is not possiblewithout the fortunatelimiting their consumptionin order to leaveroom for the poor to increasetheirs.

83 With the endingof the coldwar and the fadingof ideologicalbarriers, an opportunityhas openedto buiWa new worldupon the foundationsof peace. A sustainableeconomy represents nothinglea than a highersocial order - one as concernedwith futuregenerations as withour own, andmore fcwed on the healthof the pt2netand the poorthan on materialacquisitions and military might. Whileit is a fundamentallynew endeavor, with manyuncertaindes, it is far lessrisky than continuingwith businessas usuaL

Note This is basedon State of the Wo_ld1991 New York, W.W. Norton & Company.

NOTES

1. The $20-tilliondolar worldeconomy is a WorldWatch Institute estimate based on 1988 gro worldproduct from Central Intelligence Agency (CIA), Handbook of EconomicStatistics. 1989 (Washington,D.C.: 1989), with Soviet and Eastern Europe gross national products extrapolated from Paul Marer,Dollar GNPs of the USSRand EastemEurone (Baltimore: Johns Hopkins University Press,1985), with adjustmentto 1990based on growthrates fromInternational Monetary Fund (IMF), World Eonomic Outlook (Washington,D.C.: 1990),and CIA Handbookof Economic Tables Budygetof te United States Govrnl Fisca Year 1990 (WashingtonD.C.: U.S. Goverment PrintingOffice, 1989) 2 WorldBank, World Debt Tables1989-1990: External Debt of DevelogingCountries Voks I nd11(Washington, D.C.: 1989); and OECD,DEvelpmrnLn1j (Tn4able 3-1,p. 123),Paris, December1990. 3. OECD, OECD in Figures (Pars: 1990);Kit D. Farber, Gary L Rutlege, 'Pollution Abatementand ControlExpenditures, 198487,' Su of Current Business.US. Departmentof Commerce,June 1990. 4. See Herman Daly, "Towardsan EnvironmentalMacroeconomics," presented at MThe EcologicalEconomics of Sustainability.Making Local and Short Term Goals Consistent with Global andLong Term Goals, -he InternationalSociety for EcologicalEconomics, Washington, D. C, May 1990,see alsoPaul R. Ehrlich,'he limits of Substitution:Meta-Resource Depletion and an New Economic-EcooicalParadigm," Ecological Economics. No.1. 1989. 5. 1900Global World Output from Lester R. Brownand Sandra Postel, Mresholdsof Change,' in Lester Brownet. al., State of the World.1987. (Washington, D.C.; W.W.Norton & company, 1987)

6. Peter 1* Vitouseket. al., 'Human Appropriationof the Productsof Photosynthesis," Bimi~.uaJune 1986;PRB, 1990World Population Data Sheet 7. US. Departmentof Energy(DOE), Energy Information Agency (EIA), State Energy Date Report. QCnsumptionEstimates. 1960-19. (Washington,D.C. 1990);DOE, ELA, Annual EneF=L

& Total VebicleKilometers for 1965-1970from U.S. Departmentof Commerce,Historical

84 Statstics of the UnitedStates. ColonialTimes to 1970.Bicentennial Edition (Washington, D.C., 1975);197048 from DOE, EIA, AnnualEnergy Review. 198? 9. PRB, 1990World Population Data Sheet. 10. See HazelAnderson, 'Moving Beyond Economism: New Indicators for CulturallySpecific, .SustainableDevelopment, " in the Caracas Report on AltemativeDevelopment Indicators, RedefiningWealth and Prog: New ways to MeasureEconomic. Social and Environmental Change(New Yorl The bootstrapPress, 1989); Daly and Cobb,For the CommonFuture. 11. GarrettHardin, "Paramount Positions in EcologicalEconomics," presented at MheEcological Economicmof sustainability."

12. AlanDurning, Povegr and The EnvironmentReversing the DownwardSpiral Washington D.C.:World Watch Institute, 1989)

Ss