Why Mcicroeconomists and Environmentalists Need Each Other RONALD MCMORRAN and LAURA WALLACE
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Why Mcicroeconomists and Environmentalists Need Each Other RONALD MCMORRAN AND LAURA WALLACE At the moment, Ecotopia is threatened with one, it would have more resources to spend on O SUSTAIN and im- imminent macroeconomic instability and environmental problems. Moreover, developed severe environmental degradation if it does countries generally have relatively well-func- prove living standards, not immediately undertake dramatic environ- tioning markets, adequate environmental countries must simul- mental and economic policy reforms. How will infrastructure and institutions, well-defined Ecotopia fare when its policymakers simulta- and secure property rights regarding commu- D taneously pursue sound neously tackle environmental and macroeco- nal resources, and well-structured and macroeconomic and environ- nomic problems? Much will depend upon the enforced environmental standards and regula- willingness of both groups not only to talk but tions. Some even have environmental taxes mental policies. This will also to implement sound macroeconomic and (though these are not always adequate) for require macroeconomists environmental policies. Inaction by one internalizing environmental costs, and public and environmentalists to group—or lack of coordination—is bound to utility prices normally reflect long-term pri- have effects on the ability of each group to vate (if not social) costs. work together. achieve its primary objectives. Exactly what By contrast, many developing countries, these effects will be, however, still remains like Ecotopia, must grapple with nonexistent, uncertain, largely because the links between thin, or uncompetitive markets, inadequate Imagine a developing country—let us call it macroeconomics and the environment are environmental infrastructure and institutions, "Ecotopia"—where macroeconomic policy- complex and, as yet, not fully understood. In poorly defined and insecure property rights, makers care deeply about the environment an effort to explore those links, the IMF held a poorly designed or enforced environmental and environmental policymakers care deeply seminar on May 10-11, 1995, that was standards, few (if any) environmental taxes, about the macroeconomy. Of course, the pri- attended by about 80 individuals from the and public utility prices that do not reflect mary job of each group is different: IMF, the World Bank, academic institutions, even the long-term private costs. Thus, prices environmentalists must address the coun and nongovernmental organizations (NGOs). for environment-intensive goods and services try's environmental problems, and macro- This article draws heavily on the studies pre- tend to be too low to reflect environmental economists are responsible for achieving price sented and the discussions that ensued, in the costs in Ecotopia. Moreover, high rates of pop- stability and balance of payments sustainabil- hopes of sharing the insights gained with ulation growth, acute rural and urban poverty, ity, to lay the foundation upon which Ecotopia's policymakers. and the dependence of total output and Ecotopia's economy can grow. But they recog- exports on depletable natural resources typi- nize that they have a great deal to gain, in Economic effects of degradation cally exacerbate the root causes of environ- terms of sustaining and improving domestic Ecotopia's environmental policymakers mental problems—market, policy, and living standards, by working together. know that if their country were a developed institutional failures. The most serious conse- Ronald McMorran, Laura Wallace, a Canadian national, is an Economist in the IMF's Fiscal Affairs Department. a US national, is a Senior Public Affairs Officer in the IMF's External Relations Department. 46 Finance & Development / December 1995 ©International Monetary Fund. Not for Redistribution Economists and environmentalists in one room: the Norwegian experiment Getting macroeconoraists and environmentalists The simulation was accomplished by feed- What did the Norwegians learn from this experi- to talk to each other about policy options—prefer- ing the environmentalists' top 26 demands—such ment about enhancing communication between ably in the same language—is no easy task. But as restraints on carbon dioxide and sulfur dioxide macroeconomists and environmentalists? Norway seems to have found a way to do so, as emissions, as well as on oil and gas into the long- • A model that integrates the environment and Stein Hansen, Director, Project for a Sustainable run computable general equilibrium model used the macroeconomy offers an excellent way of Economy, Norway, and Knut Alfsen, Director by Norway's Ministry of Finance for its own long- focusing the debate between macro- of Research, Statistics Norway, reported at run macroeconomic policy analysis. economists and environmentalists because it the seminar. This rather unusual approach to a dialogue was offers a common framework for analysis—forcing Two years ago, the Ministry of Finance, the made possible by several features perhaps unique both sides to see the linkages and, when neces- Ministry of Environment, and the National to the political economy of Norway. First, sary, face the trade-offs. This occurs because the Research Council launched an innovative study Norway's wealth is, to a larger extent than any technical analysis gives rough estimates of the based on initiatives taken by Friends of the Earth other OECD country (except Iceland), based on magnitude of the changes in the level and struc- and Project Alternative Futures of Norway at the how it manages its natural resources (fish.tim- ture of output associated with alternative environ- time of the 1992 Earth Summit in Rio de Janeiro. ber, petroleum, and sources of hydropower). mental control policies. The idea was to simulate the long-term environ- Second, Norway has a long tradition of making • It is preferable to integrate resource and envi- mental and economic impacts of imposing envi- use of operational models in policymaking—a ronmental issues directly into existing macroeco- ronmental demands on a small, open economy, collaborative effort that brings together aca- nomic policymaking tools—rather than dealing thereby providing a basis for a dialogue among demics, the Ministry of Finance, and Statistics with these issues in a separate exercise—as this today's decision makers on policy options that Norway. Third, Norway's political tradition approach gives environmental issues more promi- would affect future generations. The results would involves including different constituencies, nence and forces policymakers to recognize the be used to see how different Norway would look especially NGOs, in environmental links between macroeconomic and environmental by 2030 if the environmentalists were calling the discussions—part of a political process aimed at objectives. shots, rather than the macroeconomists. generating a consensus. quences of these failures are likely to be out- Director of the Center for Social and Economic dialogue, looked at this issue by asking put and human capital losses. Research on the Global Environment, whether Norway's economy would survive Macroeconomy. Environmental prob- University College, London, indicate that "pol- very strict environmental policies, such as a lems may directly affect the macroeconomic lution control is not a 'luxury good' to be carbon-emissions tax (see box above). The balances—particularly external and fiscal afforded after the development process has answer: yes, given sufficient time to ones—sometimes to the point of threatening 'taken off', but a prior requirement for sustain- adjust—say 40 years—albeit with lower, but their viability and sustainability. On the exter- able development." still significant, economic growth relative to a nal side, exports that lead to exhaustion of world without a carbon tax. nonrenewable natural resources (e.g., from Tackling degradation The Norwegian study, which was presented mines) and of renewable natural resources Faced with these potential costs, how will at the seminar, also highlighted the need for (e.g., from forests and fisheries) without ade- Ecotopia's environmental policymakers tackle adequate environmental data compatible with quate replacement and renewal may seriously the nation's environmental problems? It is existing national accounts. Another seminar erode a country's future export base, forcing it imperative that they introduce policies that paper, by IMF national accounts experts to import primary products. On the fiscal side, address the root causes of the problems. Adriaan Bloem and Ethan Weisman, has revenues may be greatly reduced if output of Environmental policy tools—designed with noted that the idea of placing statistical cover- primary exports declines because of soil ero- the assistance of microeconomists with envi- age of environmental concerns in a national sion or other environmental degradation. ronmental expertise—could include establish- accounts framework now commands Over time, environmental degradation and ing property rights for open-access resources, widespread support. The United Nations natural resource depletion can also affect the eliminating subsidies for environmentally recently completed a major revision of the macroeconomy by leading to reduced output, damaging goods or activities, introducing System of National Accounts. Although coun- which, in turn, can seriously reduce the rate environmental user charges or pollution taxes, tries will not be required to fully integrate of economic