I12 NEW ECONOMY

Inhnation and Natural resources are over-used Resoutrs.

when property rights are absent

n the four years since the June 1992 United Nations Earth Summit in Rio de Janeiro, I the 150countries that attended have taken

little action on the environment. The main difficulty appears to be that industrialised and developing countries take different views of global environmental problems. Progress at the Berlin meetings, a pilot pro- gramme for joint implemen- tation of the Rio agreements, was restricted to industrial countries’ policies; the meet- ing failed to produce any agreement for action involv- ing North and South. Re- gional differences are at the root of the environmental problem, and raise questions about fundamentals such as economic development, in- ternational trade, and prop- erty rights.

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per cent of the world’s carbon dioxide is emit- ted by the industrialised countries (World Resources Institute - WRI, 1995). This is be- cause the more energy is used, the more carb- on is emitted, and the North consumes most of the world’s energy, even though it houses less than one-fifth of the planet’s population.

By contrast, most of the biodiversity and

“Resource intensive products are exported

a t prices which are below social costs. They

are overconsumed by the countries with well defined property rights and overproduced by those with ill defined

property rights.“

North-South perspectives Developing countries view global environ- mental issues from a historical perspective. As they see it, most of the damage to the global environment originates in the indus- trial countries: most of the world’s green- house gas emissions originate in the industrial countries of the North. Indeed, 70

forests on the planet are in the South, which is also home to four-fifths of the world’s population (WRI 1995). Per capita emissions of carbon are 10 times higher in industrial countries than in developing countries.

It is often said that there should be a reduction of about 50 per cent in greenhouse gas emissions. This target cannot be reached without decreas-

ing industrial countries’ emissions, since de- veloping countries contribute only about 30 per cent (WRI 1995). The problem is that re- stricting emissions may well require restrict- ing energy use and output. Nothing short of changing the North’s pattern of development and voracious exploitation of the environ- ment can make a dent in the problem.

Industrial countries’ view of the global en- vironmental problem focuses on the distant

1070-3535/96/020112 + 06 !512.00/0 0 1996 THE DRYDEN PRESS

UNDER-VALUING THE EARTH 113

future. They fear the rapid population growth in developing countries and the damage this could do to the environment in the future. China and India, for example, countries with large populations and fast growth rates, have big coal deposits and are expected to bum coal and emit carbon into the atmosphere in substantial quantities as their industrial growth proceeds.

In the case of China, projections indicate that it could approach US levels of carbon emissions in about 50 years. At present, the United States produces about 27 per cent of total carbon emissions and consumes about 25 per cent of the petroleum produced in the world, although its population is less than 5 per cent of the world’s population. Replicat- ing such a pattern in other countries would spell disaster.

But global environmental damage is not obviously related to population growth. It is the regions with the lowest population growth - the industrial countries - that actu- ally account for most of the damage to the environment (Chichilnisky 1995). This is not to say that in the future this trend might not be reversed, and that regions with rapid popula- tion growth could not produce the largest damage 50 years hence.

in excess: the role of the interna- tional market

The world’s use of energy, and of the atmos- phere to absorb carbon emissions, is sympto- matic of the exploitation of natural resources as a whole. At present, the North overcon- sumes resources which are, to a large extent, overproduced in the South. The contrast in consumption is striking. The average inhabi-

from the burning of fossil fuels, most of which are exported by developing counties, and are imported by industrial countries.

The most prominent of the fossil fuels is petroleum, and its overproduction and over- consumption clearly indicate that at the root of the problem lies the international market. Nearly threequarters of southern exports of mineral fuels are sent to the North, and 60 per cent of the North’s imports of mineral fuels come from the South (WRI 1995).

This North-South pattern of resource use is well known, but has not been considered a problem until recently; many economists used to see the pattern as a manifestation of markets functioning efficiently.

What is less clear is how this situation evolved. Few consider this question, because it does not fit easily with traditional economic views of the world, and in particular with the standard vision of economic development and international trade based on resource- intensive exports by developing countries.

Other works by the author refmed to in this article

Terms of Trade and Domestic Dish’brr tion, Journal of Development Ewnornics, Vol8.1981

A General Equilibrium Theoy of North- South Trade, in General Equilibrium Analysis: Essays in H m r of Kennetk Atrow, eds W Heller, D Starrett ond R Stan, 1986

North-South Trade and the Global Enm’ron- ment 1; American Economic Review, October, Vo184.4, 2994

Property Rights on Renewable Resources and the Dynamics of North-South Trade, Structural Change and Economic Dynamics, Vo14.2, 1993

tant of an industrial country consumes nine times more fossil fuels, 20 times more alumi-

,The Eco,lomic Va,ue of sources‘, invited Perspectives article,

Earth,s Re-

num, 16 times more copper, and two and a half times more wood than the average in- habitant of a developing country (WRI 1995). Overconsumption and overproduction of fossil fuels is a good example of the North- South process: most carbon emissions come

Trends In Ecolugyand Evolution,March 2996

114 NEW ECONOMY

The past 50 years Most scientists agree that most of the damage to the planet’s biodiversity and the change in atmospheric concentration of greenhouse gases has occurred in the past half century.

Following the Allied victory in the Second World War, the United States came to domi- nate the world economy, producing almost 40 per cent of world gross domestic product (GDP). This followed from the war’s destruc- tion of the economies of Europe and Japan. Also in the past 50 years international trade has grown three times faster than the world economy as a whole: the period has seen the advent of ’globalisation’.

The new international order that emerged after the war was enhanced by the creation of international organisations which have had a tremendous impact in implementing a new vision of trade and development: the Intema- tional Monetary Fund (IMF), the World Bank, and the General Agreement on Tariffs and Trade (GATT). And the United Nations sys- tems of national accounts is used the world over to measure economic progress. These in- stitutions implemented the US vision of eco- nomic growth: a resource-intensive growth corresponding to a rapidly expanding fron- tier economy and the domination of nature through rapid technological change.

At the same time that the multilateral insti- tutions were created, two major theories of trade and growth were developed and imple- mented.

One was the neoclassical theory of optimal economic growth. Originating in the United States, this views as a long-run steady state a path of development with exponential rates of population growth and with the attendant exponential increase in the use of resources. This view of the economy and resource use as ever-expanding corresponded to the US pat- tern of development.

The second theory is of comparative ad- vantages in international trade. This theory recommends that developing countries em-

phasise exports of resources such as timber and minerals and labour-intensive products such as garments, and that they should trade these against capital and technology-inten- sive products machinery, for example pro- duced by the industrialised countries. The vi- sion of development that these theories ad- vanced was one based on the idea that there are unlimited and inexpensive resources (Nordhaus 1993).

These theories were implemented by the World Bank and the IMF, both of which gave developing countries strong incentives to fol- low resource-intensive patterns of develop- ment. They recommended exporting more and more resource-intensive products as a precondition for loans and other economic in- centives. Economists and civil servants from developing countries influenced by the United States were imbued with a sense of inevitability about the ‘way things are’: devel- oping countries are only good for resources, cash crops, and cheap labour products. This proposition is largely uncontested today in Latin America and Africa, the two areas which have fallen behind economically in the past two decades. The theories have never, however, taken hold in the successful East Asian ‘tiger’ economies such as Taiwan, Ko- rea, Japan, and Singapore.

Unless we shift away from this form of economic thinking towards other trade and development strategies, it will be difficult to find a solution to the global environmental problem.

Comparative advantage and North-South trade

Why do developing countries overproduce and overexport resource-intensive products such as cash crops which require extensive land clearing, and minerals such as petro- leum, which also affect the health of many forested areas? Why do developing countries export environment-intensive products at prices below social costs, that is, at prices which do not reflect the social impact of the

UNOER-VALUING THE EARTH 115

damage done to society and the environment by utilising the resource. The theory of com- parative advantage says that countries should export things they are relatively more efficient at producing (even if in an absolute sense they are not as efficient as those they export to). Do developing countries have a comparative advantage in environment- intensive products, such as cash crops, &- erals and dirty industry, which uses clean air intensively? If so, efficiency would dictate that this comparative advantage should be exploited, and this would be to everyone’s benefit. Is there then a fundamental contra- diction between economic development and environmental preservation?

The answer to the last question is no. Ex- port patterns in developing countries do not follow the law of comparative advantage, nor any other law of economic efficiency. Coun- tries with abundant labour and sharply differ- ent patterns in the use of labour and capital in traditional and modem sectors may not bene- fit from increasing their traditional exports. Indeed, export-led growth based on resources and cheap labour can be a hindrance to eco- nomic development (Chichilnisky 1981, 1986). The South is not becoming better off by overproducing and exporting resource inten- sive products. Nor is the world better off eco- nomically when the South specialises in the export of resource-intensive products which damage the environment. The whole thing is a tragic misunderstanding of growth and trade.

Property rights The solution is to be found in the behaviour of competitive international markets. Indus- trialised and developing countries have to take a different approach to issues such as property rights for environmental resources that belong to everyone. It certainly appears that the mechanisms that work to defend such rights in traditional societies break down in the modem world (see box).

Why do property rights matter? When a pool from which a resource is taken is treated as open access, it is usually only the cost of extraction that is counted; the cost of manag- ing the resource - which is often substantial - is not taken into account. For example, when trees are cut down in an open access forest, the only cost counted is that of the felling; the cost of managing the forest is forgotten. In such cases, non-cooperative systems of exploita- tion emerge: at any price that the market de- termines, more is extracted under open access regimes than under traditional managed sys- tems or under private property regimes. The resource is overextracted and can dwindle and even disappear.

If a traditional economy treats a pool from which a natural resource is extracted as open access, then at any market price it will offer more of the resource than it would do were property rights in place. Therefore apparent comparative advantages in resource intensive products emerge where in fact there are none (Chichilnisky 1994, 1993). More resource-

PROPERTY RlGHTS A N D INTERNATIONAL TRADE

Many traditional societies have for a long time managed their common property resources using traditional fonns of local governance. An example is Valencia’s Tribunal & Ins A p a s , a local court in Spain which is 1,000 years old, and zohich still meets weekly to administer costs and al- locate the use of the region‘s water network (Chichilnisky 19%). Other examples are the lriaichi system of managing common lands in japan, and the system of sea tenure in Bahia, Brazil (Chichilnisky 1994), These traditional systems require a population that is stable in the sense that successive generations remain in the same area, and which is not too large. Then penalties for anti-social use of resources can be administered effectively and, if necessa y, across genera- tions. 77iese systems of resource management break down in the period of industrialisation in which outsiders move into the common property area and outsiders can easily move out and avoid penalties.

I 16 NEW ECONOMY

intensive products will be produced and more will be available for export than is so- cially optimal. (Chichilnisky 1994,1993). This is one way in which systems of over-exploita- tion emerge.

Apparent advantage So in societies where resources are unregu- lated national property they are treated as open access. We observe an upparent com- parative advantage in the pro- duction of environment-inten- sive products and apparent gains from trade, even in cases where they are losses. For ex- ample, Honduras exports ma- hogany to the United States even though it has no com- parative advantage in wood products, and Mexico exports petroleum to the United States even though it has small re-

terns of North-South trade that we observe, which are at the core of the environmental dilemma today. The international market transmits and enlarges the externalities of the global commons. No policy which ignores this connection can work.

Green accounting A proposal being considered by the United Nations is to modify the system of national

“Knowledge-intensive growth is not

only more successfirl in pure economic terms, i t clearly

has fewer negative implications

for the global environment. “

serves, while the United States has 50 per cent of the recoverable fossil fuels resources known in the planet (Nordhaus 1993).

What is happening is that the exporting countries are not calculating the costs of re- placing the stock in the case of trees or the cost of the depleted resource in the case of oil. This is how they can compete on price. Developing countries, which tend to have less well-de- fined property rights will export resource-in- tensive products even if they have no real comparative advantage in such products.

Resource-intensive products are exported at prices which are below social costs. They are overconsumed by the countries with well defined property rights and overproduced by those with ill defined property rights.

All this happens within perfectly competi- tive markets without any market distortions. Overuse of resources does not derive from market imperfections but from a defective system of property rights as the world econ- omy moves away from traditional forms of resource management into industrial socie- ties. Modem industrialisation leads to the pat-

accounts that all countries follow so as to incorporate environmental costs - so- called green accounting. Under such a system, from the value of wood exports, one deducts the cost of the forfeited forest; and from the value of oil exports one deducts the depreciation of the national oil stock. This practice is already standard

for private property; most individuals and corporations depreciate their assets when calculating their income. Green accounting treats all environmental assets as i f they had well assigned property rights.

Green accounting can help reduce overuse of resources and excessive extraction and trade because it corrects for the lack of prop- erty rights covering environmental resources, and for the failure of traditional management practices which leads to illusory comparative advantages and gains from trade.

Green accounting also helps indirectly, by deducting from gross domestic product (GDP) the depreciation of the stock of ex- haustible resources, or the cost of replacing the stock of renewable resources. And if a politician’s re-election depends on the meas- ure of national economic growth -and it often does - green accounting could be helpful in reorienting economic policy.

Is international trade compatible with the environment?

Patterns of trade and development can be

UNDER-VALUING THE EARTH 117

reoriented without hindering or interfering with international trade. Positive examples of such strategies are the rapid-growth economies of East Asia; negative examples are the countries of Latin America and Africa. The former have been very export-oriented, but are moving away swiftly from traditional comparative advantages such as labour- and resource-intensive products, into knowl- edge-intensive products - microprocessors, consumer electronics, financial products.

There is an important implication of this trend where knowledge is an important input in the production of goods there tend to be 'external economies of scale' - a term used to characterise any production processes where there are efficiency gains at larger scales which are not restricted to a firm but are dis- tributed throughout the industry or economy. In other words, the more is produced, the more productivedl producers are. The reason aLI firms are more efficient at larger scales of production is that a better trained workforce benefits all firms, not just one of them. Knowl- edge diffuses across the whole industry. And knowledge-intensive growth is not only more successful in pure economic terms, it clearly

has fewer negative implications for the global environment.

Conclusion Developing countries' export of resource in- tensive products is often based on differences in property rights between trading regions. Countries with less well-defined property rights for environmental resources will ex- port these products, even if they have no real comparative advantage. But more sensible accounting and pricing systems alongside better defined property rights can help alle- viate the problem. In addition a move from trade based on traditional comparative ad- vantages - real or illusory - to trade based on external economies of scale that are found in knowledge intensive industries will be good for the global environment.

The time has come to adopt knowledge-in- tensive patterns of development and trade and change our international organisations (IMF, WB, GATT) to regard this as a major goal of development. If such patterns are adopted, we no longer need fear a contradic- tion between competitive international trade and the environment 0