From Liberalisation To

From Liberalisation to

Sustainable Development

a Critique of the OECD Paper:

"Open Markets Matter:

the Benefits of Trade & Investment Liberalisation" April 1998

WWF Critique,

June 1998

Amended Jan 1999

EXECUTIVE SUMMARY

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

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

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

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

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

WWF urges the OECD to engage with all participants in this debate - from both North and South - and produce a new analysis to generate economically and ecologically sound policies for achieving sustainable development.

WWF's Analysis of Liberalisation &

the Environment

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

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

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

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

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

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

1. INTRODUCTION

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

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

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

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

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

2. OVERVIEW OF WWF'S CRITIQUE OF THE OPEN MARKETS PAPER

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

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

Are genuine environmental concerns addressed?

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

Is actual experience and serious empirical evidence used in the analysis?

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

Are solutions adequately addressed?

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

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

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

3. COMPARATIVE ADVANTAGE, TRADE & THE ENVIRONMENT

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

3.1. Trade & Domestic Externalities

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

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

3.2. Trade & International Externalities

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

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

In the absence of significant binding international environmental agreements and adequate funding for environmental protection in the South, the growing and disproportionate demand of the North will continue to cause global environmental degradation. Governments in the South - though they could do much more - face severe budgetary restrictions, a general weakness in administrative capacity and fears of competitive disadvantage if they try to unilaterally increase standards. These dilemmas are both exacerbated by, and reflected in, the current WTO rules restricting discrimination between traded products on the basis of process and production methods.