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Macroeconotnics and the Environtnent ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution Macroeconon1ics and the Environn1ent Proceedings of a Seminar May 1995 editor Ved P. Gandhi International Monetary Fund ©International Monetary Fund. Not for Redistribution © 1996 International Monetary Fund Design and production: IMF Graphics Section Library of Congress Cataloging-in Publication Data Macroeconomics and the enviroment I edited by Ved P. Gandhi p. em. Includes bibiographical references. ISBN 1-55775-536-1 I. Enviromental economics-Congresses. 2. Macroeconomics-Congresses. 3. Economic policy-Congresses. I. Gandhi, Ved P. (Ved Parkash) II. International Monetary Fund. HC79.E5M323 1996 333.7-dc20 96-8789 CIP Price: $22.50 Address orders to: External Relations Depm1ment, Publication Services International Monetary Fund, Washington D.C. 20431 Telephone: (202) 623-7430: Telefax: (202) 623-720 I Internet: [email protected] ©International Monetary Fund. Not for Redistribution Contents Page Preface v 1. Macroeconomics and the Environment: Summary and Conclusions . 1 Ved P. Gandhi 2. Welcoming Remarks . 23 Margaret Kellj' Session 1. Analytics 3. How Macroeconomic Policies Affect the Environment: What Do We Know? . 29 Ved P. Gandhi and Ronald T. McMorran 4. Macroeconomic Policies and the Environment . 44 Stein Hansen Discussion Discussant's Comments . 65 A ndnrw Steer Other Discussion . 68 5. How the Environment Affects the Macroeconomy . 76 David Pearce and Kirh H arnilton Discussion Discussant's Comments ........ ................... 95 Kirit Parihh Other Discussion ................................ 100 Session 2. Integration of Economic and Environmental Accounts 6. Environmental Accounting: A Framework for Assessment and Policy Integration .... ..... .... ........... ... ..107 Peter Bartelmus I' ©International Monetary Fund. Not for Redistribution vi :>,)- Contents 7. National Accounts and the Environment ... ..............136 Adriaan M. Bloem and Ethan Weisman Discussion Discussant's Comments ...........................150 Michael Ward Other Discussion ............................ .... 156 Session 3. Experience 8. Macroeconomics and the Environment: Norwegian Experience ................... ..... ..... 165 Knut H. Alfsen Discussion Discussam's Comments . .. .. ... ......... 187 Peter Clark Other Discussion ......... .. .. ... ..... 190 9. Economy-Wide Policies and the Environment: Developing Countries .. ... ..... ..... ....... ......195 Mohan Munasinghe and Wiljrido Cruz Discussion Discussant's Comments .. ... .. .. ... ... ... ...233 CiPlito Habito 0Lher Discussion ... .. ... ... ..... ... ... 237 Session 4. Looking Ahead 10. What Is Reasonable to Expect of the IMF on the Environment? ...................................24 7 Stanley Fischer 11. Panel Discussion ............. ......................252 Davicl Pearce Cielito H abito Anclnm; Steer Ved P. Gandhi Other Discussion .. ..... ............ .......... ... 265 12. Concluding Remarks . ... ..... ... ... .... ......269 Vito Tanzi Participants .......................................273 ©International Monetary Fund. Not for Redistribution Preface The lmernational Monetary Fund (hencefonh, the Fund) staffs of ftcial interest in the environment, and the issues relating to it, began in early 1991. At that time, the Executive Board asked the staff to study the interactions between macroeconomics and the environment and, wher ever importam, keep them in mind when conducting policy dialogues with Fund member countries. An early search of the available literature revealed that, while environmental economics was a reasonably well developed discipline, little work had been done on the impact of macro economic policies on the environment and the impact of environmen tal policies on the macroeconomy. In order to improve its understanding of the interrelationships be tween macroeconomics and the environment, the Fund held its first seminar in May 1993, inviting many nongovernmental organizations (NGOs) dealing with the environment to share with it their views and concerns. At a second seminar, held in May 1995, recognized experts shared with Fund staff the results of their thinking and research on the interrelationships between macroeconomics and the environment. This volume contains the papers and proceedings of this second seminar. The seminar was held with four specific objectives in mind: (1) to make the Fund staff aware of the current research on macroeconomics and the environment; (2) to present work being done on the environ ment by Fund staff in support of the mandate and primary functions of the organization; (3) to a�sess the feasibility of integrating macroeco nomic and environmental policy formulation in the Fund's member countries at different stages of development; and (4) to identify the ma.in elements of work that the Fund staff should undertake in the fu ture, including finding ways of incorporating environmental concerns into the staffs policy dialogue with national authorities whenever war ranted and desired by the authorities. The seminar was held over a two-day period (May 10-ll, 1995), and participants included experts from academic and research institutions, NGOs, the World Bank, and the Fund (including representatives from Executive Directors' offices, as well as staff economists working on op erations, policy development, and research). The participants were wel comed by the Deputy Director of the External Relations Department, Margaret Kelly, who provided the welcoming r-emarks, and the seminar vii ©International Monetary Fund. Not for Redistribution viii >Jr Preface was closed by the Director of the Fiscal Affairs Department, Vito Tanzi, who offered the concluding remarks. In between, participants had open, frank, and intensive discussions on the interplay between macro economics and the environment. These discussions were enriched by many constructive and provocative comments from the floor. The First Deputy Managing Director of the Fund, Stanley Fischer, gave a lun cheon speech entitled "What Is Reasonable to Expect of the IMF on the Environment?" In preparing this volume, much gratitude is owed to outside experts, including paper writers (Knut Alfsen, Peter Bartelmus, Wilfrido Cruz, Kirk Hamilton, Stein Hansen, Mohan Munasinghe, and David Pearce), discussants (Cielito Habito, Kit-il Parikh, Andrew Steer, and Michael Ward), and others who participated actively from the floor (Phil Bag noli, Herman Daly, Salah El Serafy, Ian Johnson, Jim MacNeill, and David Reed). From the Fund, active participation was provided by the paper writers (Adriaan Bloem, Ved Gandhi, Ronald McMorran, and Ethan Weisman), session chairs, moderators, and discussants (Peter Clark, Mohammed El-Erian, Margaret Kelly, Naheed Kirmani, Malcolm Knight, and Vito Tanzi), and others who made useful contributions from Lhe Ooor (Benecliclc Christensen, Paul Cotterell, Nuri Erbas, David Nellor, Ganga Ramdas, and Emilio Saccrdoli). Many Fund staff members helped in organizing the seminar (here Laura Wallace, David Nellor, and Ronald McMorran need special men tion) while others (including Dale Chua) assisted during the seminar. The recorded proceedings were ably transcribed by Audrey Gross, Tam mie Leedham, and Meike Gretemann. Ms. Gretemann also typed the first draft of the manuscript while Ms. Nezha Karkas helped with all later drafts and David Driscoll provided expert editorial assistance. The editor is particularly thankful to all the people named above who have contributed significantly to the successful conduct of the seminar and producing this volume in record time. ©International Monetary Fund. Not for Redistribution 1 Macroeconomics and the Environment: Swnmary and Conclusions Ved P Gandhi wo themes dominated the discussions at the seminar. How do T macroeconomic policies and the environment interact? How im portant is it that the Fund staff become aware of this interaction and take it into account in dealing with member countries? Sessions 1, 2, and 3 of the seminar were devoted mainly to the ftrst theme, while Session 4 fo cused primarily on the second theme. The seminar opened with welcoming remarks, which provided to the partic ipants the background of Fund work on the environment, and dosed with concluding remarks, which, among other things, looked forward to establishing priorities for Fund work on the environment. In her welcoming remarks, Margaret Kelly reminded participants that the primary mandate of the Fund is to promote international monetary cooperation and exchange rate stability and to help member countries solve their balance of payments problems. Nevertheless, should resource depletion or environmental damage in a country be so severe as to affect seriously the longer-term viability of its balance of payments, the IMF st.:""lff cannot but be involved. Kelly described how Fund staff work on the environment has so far focused on monitoring the research of other spe cialized institutions and developing an understanding of the links be tween macroeconomic policies and conditions and the environment thereby enabling the staff to design sound macroeconomic policies. Interrelationships Between Macroeconomics and the Environment In dealing with links between macroeconomics and the environment, the first three sessions of the seminar reviewed the conclusions of read- ©International Monetary Fund. Not for Redistribution 2 >Jr. Macroeconomics and the Environment ily available