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Guest Article: The Business of Sustainable Development

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1992
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It is impossible to predict how historians will judge the Earth Summit in Rio. But among its many products, the United Nations Conference on Environment and Development (UNCED), to give it its official title, generated seven tons of waste per day, most of this consisting of discarded reports, drafts, bulletins, and memos. Given that the Summit’s final documents were disappointing to most observers and participants, containing little that was concrete or innovative, this is an impressive amount of pollution.

Unfortunately, many of the issues that must be discussed in any informed debate on sustainable development—population, trade, security, and debt—were either not on the agenda or received only vague lip service. On the other hand, diplomats of virtually all governments spent months preparing for the conference, which necessitated learning the rudiments of sustainability. Over one hundred national leaders had to decide what the ideal meant to them and their people.

In the end, we may decide that the Summit’s real value was in its long-term psychological impact, not the scant immediate legal or financial contributions. Indeed, we may look back to Rio as, not the beginning, but “the end of the beginning” of a change of course toward economic and political systems compatible with environmental realities. That process of beginning lasted two decades—from Stockholm (with the 1972 UN Conference on the Human Environment, the first time world leaders came together to consider the fate of the planet) to Rio.

As for my own view of the Summit, it is, quite naturally, tempered by a business perspective, and from that perspective, I believe Rio was a key turning point in human affairs. The United Nations and member governments finally summoned up the realism to include business in their deliberations, and business finally summoned up the vision to see that its open participation in such deliberations is in its own and the world’s best interests.

To see what a breakthrough this is, one need only look at past conferences. Stockholm 72 attempted to solve environmental problems with virtually no representation from business—the primary polluter and primary user of resources. And countless conferences on “development” have sought ways to help poor countries progress without any real participation by business, the key creator of wealth, jobs, income, and opportunity. Of course, it must be admitted that business, in its meetings and conferences, has not traditionally shown any desire to get involved in environment and development issues, except defensively.

A conducive environment

Much of the debate at Rio centered on increased flows of development assistance. In a sense, this was understandable, as there is no doubt that sustainable development will require massive financing throughout the world, or that levels of development assistance must increase. But neither is there any doubt that aid flows will never be enough to get the job done.

Thus, the large amounts of money needed to effectively manage environmental resources in the developing world, lift people out of poverty, and provide for rapidly growing populations will have to come from economic growth, domestic savings, and wise investments at the national and international level. Foreign investment capital must be attracted, but today only a few developing countries are managing to do this. Of the 18 percent of foreign investments that flowed to developing countries in the second half of the 1980s, about 75 percent went to only ten countries—mostly in Asia and Latin America. Net capital inflows into Latin America rose from $9.6 billion in 1989 to $18.4 billion in 1990, and then doubled again in 1991 to $36 billion—a sharp upward trend that continued in 1992.

Latin America has benefited from new policy frameworks—in particular, legal and institutional changes—that served to strengthen the private sector. Typical actions included the elimination of most ownership restrictions on properties, other forms of deregulation and privatization, and the removal of trade barriers. Many countries in Latin America and elsewhere are finally beginning to clarify property rights, making them available to small farmers in a straightforward and streamlined manner. Clear property rights were a key ingredient in Zimbabwe’s maize miracle in the early 1980s, and they have helped improve the productivity of small farms in Indonesia and Thailand.

Increasingly, we see that given the right signals and support, industrial and developing country businesses with common interests will seek out long-term partnerships with one another, a process that helps transfer skills and competitiveness across borders. But governments—in both industrial and developing nations—must clearly understand that private industry can be a force for sustainable development only when it is allowed to act as private industry should. That means not being saddled with public sector chores, such as creating jobs, and not being expected to operate on concessional terms, but being encouraged to internalize environmental costs.

The new partnership

When I spoke to the plenary in Rio, I found myself delivering a message that is inherent in Changing Course, but not as boldly stated as it should have been. I called for a bold new partnership between business and governments, noting that “business must move beyond the traditional approach of backdoor lobbying; governments must move beyond traditional over-reliance on command-and-control regulations.”

In recent years, it has become increasingly obvious what sorts of actions are required of governments to move toward more sustainable forms of progress. Moreover, the sorts of steps required of business are ever more self-evident—that is, producing ever more goods and services using fewer resources and creating less pollution. But not enough attention has been focused on trying to work out how government and business can cooperate on the key tasks at hand.

Most of my recommendations here are for governments. This does not imply, however, that business does not need to change radically. Many companies are already becoming more “ecologically efficient” as they respond to a number of pressures: “green” consumerism; media emphasis on the environment; banks’ greater willingness to lend to—and insurance companies’ greater willingness to cover—companies that will not face big clean-up bills or lawsuits; internal pressure from employees; tougher regulations; new environmental taxes and changes; and plain old senses of corporate and personal responsibility. But business as a whole will not change for the better until the market framework in which business operates sends different signals—signals that make economic and environmental excellence inseparable.

Reforming macroeconomic and political systems. One of the first tasks for developing country governments is to create free competitive markets, thereby improving efficiency and the allocation of scarce resources. The goal must be to attract investment from outside and create opportunities inside—particularly opportunities for members of the “informal” sector to both join in and thrive in the formal sector.

But macroeconomic reforms must be accompanied by political changes toward participatory democracy. Effective participation in political decision making and effective participation in market decision making appear to go hand-in-hand, eventually. The new democracies of Eastern Europe are seeking to establish open markets. And the citizens of the newly industrialized economies of Asia, having participated in business prosperity, are clamoring for increased democracy. Certainly effective environmental decision making requires a people free to organize themselves into pressure groups, a free media, and freedom to vote for new leaders. Also, as the real “environmental decision makers” are the people making daily decisions in forests, fields, and factories, then they must feel that they have a say in setting environmental rules.

The rules of doing business will be most efficiently changed if business leaders play a leading role in the process. At Rio, the BCSD released a lengthy report, largely put together by African business leaders, on the need for change in that continent, including many case studies showing how business is helping. BCSD members in Latin America produced their own book on how “the rules of the game” must be changed and how they will participate in that process. We have also encouraged the establishment of national BCSDs in several developing countries and hope many more are set up in the months and years ahead.

Pricing changes. Another urgent task—and this one applies to developed and developing countries alike—is to reform the fiscal systems in such a way that natural resources and pollution have more appropriate (usually higher) prices. Here the evidence increasingly shows that the answer lies in finding an optimal mix of regulations, self-regulation, and economic instruments.

The more forward-thinking governments are trying to develop economic instruments that better blend market realities and environmental realities (for example, pollution taxes and tradable permits). Such instruments are usually more efficient than command-and-control regulations (emission standards and mandated technical standards), although there will always be a role for these, particularly where health is threatened or damage may be severe and permanent. A few of the more forward-thinking companies are attempting to regulate themselves now, so as to avoid the necessity of being regulated by governments later.

But establishing this optimal mix will require public-private cooperation everywhere, particularly in the developing world. How could this work? One example might be in the area of regulation: Most developing countries either have too few or too unrealistic regulations, besides lacking sufficient trained regulators and enforcement capacity. Suppose multinational corporations, skilled in dealing with regulations in industrial countries, made available pro bono their expertise in working with regulators in developing countries. These companies might also help these governments establish regulations and economic instruments that are realistic and enforceable.

“It is now time that business becomes involved… inactively and thoughtfully charting the developmental and environmental paths of humankind.”

This would be advantageous for both the companies and the governments. Indeed, Eastern Europe has shown the tragedy that can result from a combination of rigorous but rarely enforced regulations. Governments, companies, and perhaps a multilateral organization like the UN Development Programme, or the World Bank’s Global Environment Facility, might even develop a set of “model” baseline regulations that would be suitable for countries at different stages of development.

Redesigning national accounts. Another largely government job in which business should play a role is the development of integrated environmental and economic accounts to reflect both damages to and improvements in stocks of natural resources and in ecosystems. This would provide a better statistical data base for economic analysis and indirectly encourage better policymaking.

The task will not be easy, however, as demonstrated in two recent studies carried out by the UN Statistical Division and the World Bank, which highlighted problems of data availability, as well as conceptual and empirical valuation issues. In the case of Papua New Guinea, the researchers found that when depreciation of capital, including natural resources, was included in GDP calculations, economic growth from 1986–90 was reduced by between 1-11 percent, depending on the year chosen and the method used. For Mexico, the GDP reduction ranged from 11-23 percent. Nonetheless, the UN Statistical Commission is expected to give the green light to environmentally adjusted accounting at its February 1993 meeting.

Business could feed into this process by measuring environmental performance, conducting its own regular environmental audits and assessments of compliance, and periodically providing appropriate information to boards of directors, shareholders, employees, national authorities, and the general public. Given that such accounting may change their bottom line (that is, reduce profits and/or result in smaller asset balances), public pressure and the development of environmentally oriented accounting standards may be needed. The same accounting rules must apply to all companies.

Technology cooperation. The requirement for clean, equitable economic growth, especially in the developing world, remains the single greatest problem within the larger challenge of sustainable development. A cost-effective way to achieve this would be through business-to-business “technology cooperation,” which focuses on the development of business, in the process building up the infrastructure, wealth-generating capacity, and competitiveness of a country. It works best through long-term partnerships that ensure that both parties benefit by commitment to the continued success of the project.

One critical way that technology cooperation helps developing countries is through the transfer of “software,” which is just as important as the “hardware.” Software here refers not only to the know-how, operating, and maintenance skills associated with the technology but also adaptations appropriate to the cultural context and experience of the receiving organization and the society that is going to use it.

But business-to-business technology cooperation calls for—indeed, in the poorest countries, demands—a new partnership between business and government. Private sector investment and development assistance, both bilateral and multilateral, should support long-term commercial financing and create projects that are part commercial and part concessional. Government financing and business training schemes should support the necessary capacity building. It is easy to imagine five-way partnerships: a business in the North and a business in the South, a government in the North and a government in the South, and a multilateral, perhaps a UN, body helping to broker the cooperation.

Managing renewable resources. Finally, we come to farming and forestry, two areas where the BCSD is paying a great deal of attention, as they sustain the livelihoods of almost half this planet’s people and have extensive, direct impacts on the environment. Too many farming activities in the industrial world and parts of the developing world are affected by subsidies that encourage damaging patterns of resource use. As a first step, distorting subsidies that encourage the overuse of such inputs as water, fertilizers, and pesticides, should be gradually removed.

In the developing world, farmers rarely have the political power or economic power appropriate to their numbers or their contribution to national economies. Empowerment certainly does not guarantee more efficient natural resource management; but powerless farmers have neither the means nor the motivation to get involved in the hard work of soil or water conservation, for example. On the development side, where farmers have gained access to markets, credit, improved seeds, and other inputs, crop yields have often increased dramatically.

As for forestry, about three quarters of the planet’s forests have been brought under government ownership in the past two decades. Certainly, governments have an appropriate role to play in protecting and conserving important forest ecosystems in the form of national parks and other protected areas. However, governments have rarely proved themselves effective in running forestry enterprises for timber production. This is best left to the private sector. But if business is to replant forests, create plantations, and respect the ecological services of forests and the needs of all human inhabitants, they will need new systems of regulations and economic instruments. For example, the tax systems of many Scandinavian countries encourage the replanting of forests, even though the trees may take 100 years to mature, while the tax systems of many developing nations encourage forest destruction.

How to proceed

I am not in any of the above instances arguing for a “leave it to business” approach. Clearly business, by itself, cannot provide all the answers. But I do believe we have yet to define what business does best and what governments do best. And I do believe that given the present environmental and developmental crisis, we must sort this out urgently and then get on with cooperating in the business of sustainable development.

From my perspective, Rio was a success. It produced an agenda for change, and it focused the attention of leaders worldwide on some critical issues. It also produced the crucial breakthrough of bringing business into the development and environment decisionmaking arena. Business has always fueled development and affected the environment—using natural resources, producing pollution, developing and spreading technology, creating terms and paths of trade, and making possible both survival and progress. It is now time that business becomes involved—with governments and other nongovernmental organizations—in actively and thoughtfully charting the developmental and environmental paths of humankind.

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