Chapter

6 Ensuring Environmental Sustainability at the National Level

Author(s):
International Monetary Fund
Published Date:
April 2008
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Achieving environmental sustainability underpins progress on many of the Millenium Development Goals (MDGs). If forests are lost, soils degraded, fisheries depleted, waters polluted, or the air unbreathable, then achievements in poverty reduction may not be sustainable. The evidence in this chapter suggests that developing countries are highly dependent on natural resources and that the mineral and oil-based economies are, in many cases, consuming their national wealth. Deforestation is a fact in many low-income countries, while middle-income countries, and several low-income economies, face high levels of pollution. Water scarcity is a growing problem in countries that are already water-stressed. These trends place a premium on the ability of developing countries to manage their environment and natural resources.

MDG 7—to ensure environmental sustainability—includes four targets (table 6.1). The overarching target, 7.A, presents major challenges for global monitoring. In fact, unlike most of the other MDG targets, its goal is neither quantitative nor time-bound. This chapter takes up the challenge of monitoring progress toward target 7.A, to reverse the loss of environmental resources, by looking at specific indicators of pressure on the environment, at the broader question of assessing progress toward sustainable development, and at the adequacy of policies and institutions for environmental sustainability in developing countries. Given its global nature, the biodiversity target, 7.B, is dealt with in chapter 7. Water and sanitation targets are addressed in chapter 2.

Table 6.1The targets under MDG 7
Sustainability outcomesSustainability policies
Environment

Target 7.A: [… ] Reverse the loss of environmental resources

Target 7.B: Reduce biodiversity loss, achieving, by 2010, a significant reduction in the rate of loss
Target 7.A: Integrate the principles of sustainable development into country policies and programmes […]
Infrastructure

Target 7.C: Halve, by 2015, the proportion of people without sustainable access to safe drinking water and basic sanitation

Target 7.D: By 2020, to have achieved a significant improvement in the lives of at least 100 million slum dwellers

Achieving environmental sustainability has both a national and a global character. Some actions, such as reducing particulate matter in urban areas, will have largely local effects. Other actions, such as mitigating greenhouse gas emissions, will affect global sustainability. Other activities, such as reducing deforestation, can have impacts that are both local and global. This chapter focuses primarily on local, national-level actions, but there are inevitable overlaps with chapter 7, which focuses on global environmental sustainability.

Sustainable Development and the MDGs

Table 6.2 highlights the potential links between actions on MDG 7 and other selected MDGs.

Table 6.2Environmental links to the MDGs
MDGEnvironmental actionPolicy input
Eradicate extreme poverty and hungerImprove natural resource management where natural resources contribute a high share of household incomeLand titling

Market creation
Achieve universal primary educationReduce education costs of malnutrition by improving environmental conditionsAccess to water and sanitation
Promote gender equality and empower womenReduce time spent collecting water and biomass for cooking and heating

Reduce female exposure to pollutants

Involve women in environmental and natural resource management
Access to water and sanitation

Electrification
Reduce child mortality and improve maternal health

Combat HIV/AIDS, malaria, and other infectious diseases
Reduce environmental risk factorsAccess to water and sanitation

Access to electricity

Reduce exposure to indoor air pollution

Water resource management in mosquitoinfested areas
Foster global partnershipsAgree on a global plan of action to combat climate changeTargets for greenhouse gas emission reduction

Development and diffusion of new technologies

Development of carbon markets

Income and poverty reduction.

The environment and natural resources constitute a major source of income, especially in the poorest countries: water resources sustain agriculture and industry; forests provide construction materials and energy; mineral exports can generate foreign exchange. In low-income countries natural resources can be an important driver of growth, which in turn can provide the scope for poverty reduction. To make this possible, there is a need for institutions that allow efficient use of public goods and that manage rents equitably. The environmental contribution to income and poverty reduction can be assessed both at the macro and the micro level. The wealth estimates presented in chapter 1 are an example of the former. Microlevel indicators include measures of household dependence on natural resources (the contribution of natural resource income to overall household income; see box 6.1). Natural resources can also serve as a buffer, or insurance, during times of need.

BOX 6.1The importance of environmental income to the poor

Wild or uncultivated natural resources contribute to the welfare of the poor, in some cases significantly. While this finding cannot be generalized to all rural households (note the wide ranges in the table below) resource income can contribute over 40 percent of overall household income in some rural areas. This is particularly true for households living on the fringes of forests. Some case studies show that poor households are dependent on natural resources even in areas where those resources are more scarce or less accessible.

Environmental income in resource-poor and resource-rich rural areaspercentage of total incomes
Resource-rich areasResource-poor/low-access areasAverage
StudyPoorRichPoorRichPoorRich
Jodha 19869–261–4
Cavendish 20004430
Vedeld and others 20043217
Narain, vant Veld, and41231818
Gupta 2005
Chettri-Khattri 2007201421

This high dependence on natural resources can exacerbate vulnerability to climate variability. For example, the Intergovernmental Panel on Climate Change estimates that climate change will increase the number of undernourished people in the world by between 40 million and 170 million by 2050. Climate change is likely to exacerbate food insecurity especially in the most malnourished world regions, such as Sub-Saharan Africa.

Source: World Bank 2008b; IPCC 2007.

Education.

Educational attainment is lower where lack of water, sanitation, and hygiene is a major cause of malnutrition, as seen in chapter 2. Many studies have documented the effect of early childhood malnutrition on cognitive function, school enrollment, grade repetition, school dropout rates, grade attainment, and test scores among school-age children.1 A study for the World Bank goes one step further and assesses the effect of lack of water, sanitation, and hygiene on malnutrition and education performance.2 In Ghana and Pakistan, the study finds that water-related infections cause an annual loss in education performance equivalent to 4.9 and 4.2 percent of GDP, respectively.

Gender equality.

The cost of obtaining clean water and energy in developing countries is borne mostly by women and young children. The many hours devoted to these tasks mean less opportunity for women to participate in market-based activities (and thus to earn income independently) and less time for children to go to school. Women performing household tasks are also more exposed to indoor smoke.

Health.

Environmental health risks (e.g., lack of water and sanitation and indoor air pollution) are the main cause of child mortality and a major risk factor for maternal health. The World Health Organization (WHO) shows that an estimated 24 percent of the 2004 global burden of disease and 23 percent of all deaths can be attributed to environmental factors; among children 0-14 years of age, the proportion of deaths attributable to environmental risk factors is 36 percent.3 The environmental link to infectious diseases is also an important one. HIV-infected people are particularly at risk from unsanitary environments. Malaria and other vector-borne diseases can be prevented by controlling potential breeding grounds such as irrigation systems, poor drainage, and stagnant water.

Global partnerships.

Global action for development cannot succeed without coordinated support for provision of global public goods, including environmental goods. Climate change threatens to reverse many achievements in the fight against poverty. Increases in extreme climatic events such as droughts and floods in the poorest countries may also exacerbate conflicts and cross-country migration. Controlling greenhouse gas emissions constitutes a major challenge for international action and cooperation going forward, as highlighted in chapter 7.

Measuring Progress on Outcomes

The complete set of MDG 7 indicators is shown in box 6.2. The indicators are diverse, aiming to cover a range of pressures on the environment. Environmental issues differ across countries, and their rank as policy priorities may vary depending on specific country circumstances. When it comes to monitoring environmental sustainability, one size does not fit all.

BOX 6.2MDG 7 indicators

Target 7.A: Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources

  • 7.1 Proportion of land area covered by forest

  • 7.2 CO2 emissions, total, per capita and per $1 GDP (PPP), and consumption of ozone-depleting substances

  • 7.3 Proportion of fish stocks within safe biological limits

  • 7.4 Proportion of total water resources used

Target 7.B: Reduce biodiversity loss, achieving, by 2010, a significant reduction in the rate of loss

  • 7.5 Proportion of terrestrial and marine areas protected

  • 7.6 Proportion of species threatened with extinction

Target 7.C: Halve, by 2015, the proportion of people without sustainable access to safe drinking water and basic sanitation

  • 7.7 Proportion of population using an improved drinking water source

  • 7.8 Proportion of population using an improved sanitation facility

Target 7.D: By 2020, to have achieved a significant improvement in the lives of at least 100 million slum dwellers

  • 7.9 Proportion of urban population living in slums

Note: GDP (PPP) stands for purchasing power parity–adjusted GDP.

Measuring Progress in Natural Resources Management

Forests.

Forests are particularly important natural assets, because they harbor biodiversity, provide environmental services, and sequester carbon dioxide (CO2). According to the Food and Agriculture Organization (FAO), in 2005 the world average forest endowment was 0.61 hectares of forest per capita, equivalent to the size of five Olympic-size swimming pools. Forest assets are not distributed evenly, however; two-thirds of the global forest area is concentrated in 10 countries, while nearly 140 countries together have less than 5 percent of the world’s forests. On average, South Asia has less than 0.06 hectares of forest per capita while the Europe and Central Asia region has 1.94 hectares per capita. Forests are relatively more abundant per capita in richer countries: forest endowments in high-income countries (0.93 hectares per capita) were three times greater than in low-income countries (0.29 hectares per capita) in 2005. High deforestation rates and population growth in the poorest countries have widened this gap over time.

The net loss of forest area in the period 2000–05 is estimated at 73,000 square kilometers a year (an area about the size of Sierra Leone or Panama). Deforestation, mainly from conversion into agricultural land, was very high in low- and middle-income countries, especially in Latin America and the Caribbean and Sub-Saharan Africa (figure 6.1).4 At the other end of the spectrum is East Asia and the Pacific, where forest area grew between 2000 and 2005 as the result of a major afforestation program in China; this growth masks the situation in Indonesia, which continues to have one of the highest deforestation rates in the world (1.6 percent a year between 2000 and 2005).5

figure 6.1Annual deforestation by region and for top 10 countries, 2000–05

Water resources.

Monitoring water resources presents major challenges, particularly in the case of groundwater. Information sources are numerous but seldom complete, and access to information on water resources is still sometimes restricted for reasons related to political sensitivities at the local or regional level. Data are available from FAO’s AQUASTAT and several World Resources Institute (WRI) compilations.6 Cross-country comparisons of water resource data should be made with caution, owing to differing measurement methods and base years.

Water resources are abundant in Latin America and the Caribbean, Europe and Central Asia, and in certain areas of East Asia and the Pacific and Sub-Saharan Africa. The Middle East and North Africa and South Asia regions experience water stress and have a level of internal freshwater resources below 2,000 cubic meters per capita (figure 6.2). The situation is particularly critical in the Middle East and North Africa. Under current projected population growth, water resources per capita are expected to fall below 500 cubic meters per capita in the Middle East by 2050 (figure 6.3).

figure 6.2Internal freshwater resources per capita, by region and income group, 2005

figure 6.3Trends and projections in freshwater availability, West Asia

Source: UNESCWA 2003, UNDP 2005 (as reported in UNEP 2007).

Worldwide, total annual freshwater withdrawals amount to about 9 percent of freshwater resources available. Agriculture is the largest user of water, accounting worldwide for 70 percent of total withdrawals. This figure rises to 78 percent in low- and middle-income countries and falls to 43 percent in high-income countries (figure 6.4). While most regions have high levels of freshwater surplus, in the Middle East and North Africa region freshwater withdrawals are estimated to be above the level of resources available. Underground abstraction in some countries substantially exceeds the recharge level, particularly in the Arabian Peninsula, which relies heavily on underground water. Figure 6.5 shows that countries such as Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates, as well as Libya in North Africa, consume more than five times the level of annual available resources.7 The United Nations Environment Programme predicts that the problem of allocating scarce water resources among competing uses will worsen, despite progress in reforming agricultural policies in some countries.8 Climate change is likely to contribute to water stress around the world (e.g., through impacts on snowmelt in the Himalayas and the Andean region, which may alter water availability patterns significantly). Chapter 7 provides more details on the projected impacts of global warming.

figure 6.4Annual freshwater withdrawals, by region and income group, 2002

figure 6.5Total water withdrawal relative to renewable water resources, selected countries

Energy and mineral resources.

Oil, gas, and coal constitute the dominant source of primary energy, and they are expected to continue to dominate energy supply for the foreseeable future. The U.S. Energy Information Administration projects world primary energy demand to grow at an annual rate of 1.8 percent a year over the next two decades.9 Most of the new demand will come from China and India, where consumption is expected to grow by 3.2 percent and 3.6 percent a year, respectively. These rising energy needs will be increasingly met by coal. Coal demand is expected to increase by 73 percent between 2005 and 2030, while oil is expected to increase by 37 percent and gas by 17–22 percent.

From the point of view of the resource-exporting country, depleting an exhaustible resource like crude petroleum is, in effect, liquidating an asset, which means that the sustainability of mineral- and energy-based economies is potentially at risk. Oil companies and governments will aim to maximize the stream of rents from resource extraction over time. What matters most from a sustainability point of view is whether these resource rents are invested, rather than consumed, to sustain the income-generating capacity of the economy as nonrenewable resources are depleted.

The question of the sustainability of mineral- and energy-based economies is highlighted in figure 6.6, which combines data on mineral and energy depletion with figures on adjusted net savings (the measure of sustainability introduced in chapter 1). As seen at the top of the figure, the general tendency is for the big resource-extracting economies to have negative adjusted net saving rates (and therefore to be on an unsustainable path). This is true in low-income countries in Sub-Saharan Africa such as Angola and Nigeria, as well as in middle-income countries such as the Syrian Arab Republic, the Islamic Republic of Iran, and the Russian Federation. On the other hand, Malaysia and Vietnam provide excellent examples of extractive economies that are on a sustainable path (that is, their net savings and investments in education more than offset the value of natural resource depletion and environmental degradation).

figure 6.6Sustainability in energy- and mineral-rich economies

Measuring Progress in Pollution Management

Pollution emissions are a by-product of economic activity, belonging to the class of problems that economists term externalities to reflect the disconnect between the interests of the emitter of the pollution, who wishes to avoid costly pollution abatement expenditures, and the interests of the external parties, who are affected by the pollution through damage to their health or other assets.

Current scientific evidence indicates that urban air pollution causes a wide array of health effects ranging from minor inconvenience to death.10 Major sources of urban air pollution are emissions from traffic and industrial sources. Nonanthropogenic sources such as dusty winds may also contribute significantly to air pollution in certain cities.

The urban air pollutant with the greatest impact on human health is particulate matter. Typically, this is measured as concentrations of fine, suspended particulates less than 10 microns (PM10) or 2.5 microns (PM2.5) in diameter (the latter are more damaging to health, but are not always monitored in developing countries). These particles are capable of penetrating the respiratory system deep enough to cause health damages. A World Bank study publishes time series of particulate matter concentrations that span the period 1990–2005.11 The estimates measure the mean annual exposure level of the average urban resident to particulate matter outdoors. Concentrations have been declining across the board since 1990, with the steepest declines taking place in low-income countries, where concentration dropped from 130 micrograms per cubic meter (μg/m3) to 77 μg/m3 (a 40 percent decline). This decline shows how countries have, to varying degrees, internalized the cost of urban air pollution through policy changes (such as emission standards and pollution taxes). However, concentrations of PM10 in low-income countries continue to be nearly three times higher than those in high-income countries (figure 6.7).

figure 6.7Annual particulate matter (PM10) concentrations, 1990–2004

Source: World Bank 2008c.

Note: The dashed line denotes the former (pre-September 2006) EPA standard for annual PM10 concentrations.

Turning to water pollution, table 6.3 shows the world’s top 10 emitters of industrial water pollution (measured in terms of biochemical oxygen demand, or BOD12). The data come from an international study of industrial emissions.13 China heads the list by a wide margin, with 6 million kilograms of emissions a day, followed by the United States, with less than 2 million kilograms of daily emissions. India has a high emission intensity, with 20 grams of emissions per day per worker, similar to that of Russia (21 grams per day per worker).

Table 6.3Top 10 emitters of industrial water pollution, 2001
Organic water pollutant (BOD) emissions
RankCountryKilograms per dayGrams per day per worker
1China6,088,66314
2United States1,897,48013
3India1,515,68320
4Russian Federation1,398,49621
5Japan1,279,50315
6Germany982,31313
7Indonesia753,65718
8France616,09216
9United Kingdom599,08816
10Italy493,55112

Energy Access, Health, and the Environment

The environment-development trade-off is nowhere more evident than in the case of energy. Without reliable energy, hospitals and health care infrastructure cannot provide dependable services, schools cannot run, and households are forced to use more expensive and inefficient ways of lighting, cooking, and heating. But the generation, transmission, and use of modern energy can have heavy environmental costs. For example, thermal generation plants are major sources of air pollution and CO2 emissions, and hydropower can change entire ecosystems and facilitate the spread of vector-borne disease.

Chapter 2 has shown that indoor air pollution is a major cause of mortality in developing countries. This is linked in particular to the lack of energy access. About a quarter of the world population (1.6 billion people) has no access to electricity (table 6.4).14 The majority of these people live in South Asia, Sub-Saharan Africa, and East Asia and the Pacific. Data at the national level highlight some extreme cases: Afghanistan, Burkina Faso, the Democratic Republic of Congo, and Mozambique have the highest percentage of population without access to electricity, at over 93 percent each.

Table 6.4Access to electricity, by region, 2005
Population (millions)Population without electricity (millions)Electrification rate (%)Urban electrification rate (%)Rural electrification rate (%)
Africa89155437.867.919.0
North Africa153795.498.791.8
Sub-Saharan Africa73854725.958.38.0
Developing Asia341893072.886.465.1
China and East Asia195122488.594.984.0
South Asia146770651.969.744.7
Latin America4494590.098.065.6
Middle East1864178.086.761.8
Developing Countries4,9441,57068.285.256.4
Transition economies and OECD1,510899.5100.098.1
World6,4541,57875.690.461.7
Source: IEA 2006.

Lack of access to modern sources of energy is not only a health risk factor, it is a major cause of deforestation as well. Most of the people without access to electricity (1.3 billion, or 81 percent of the total) live in rural areas.15 Urban-rural differences can be striking. In Malawi 35 percent of urban households are connected compared with only 2 percent of rural households. In Lao People’s Democratic Republic access is 44 percent in urban areas and 20 percent in rural areas. Livelihoods of the rural poor depend heavily on the capacity of the ecosystem to provide a sustained source of fuel, and in some regions fuel wood crises loom in the next decade. The loss of forest resources has consequent impacts on biodiversity and the ability of ecosystems to provide key services to the economy, such as regulating water flow.

Progress in improving electricity access in the last 15 years has been slow, with some exceptions. The fastest increase in access rates has taken place in China, which reached almost universal access (99 percent) in 2005. Excluding China, the share of the developing world population without access to electricity has actually increased since 1990. Population growth in particular has offset the modest increases in energy investments. The International Energy Agency estimates that if no new policies are put in place, in 2030 there will still be 1.4 billion people without access to electricity.16

In addition to population growth, a major bottleneck in the poorest countries is the infrastructure gap. Sub-Saharan Africa (excluding South Africa) has an installed capacity of 28 gigawatts (GW).17 About 25 GW of new generation capacity will be needed in the region over the next decade to make up the present shortfall in supply and to meet future demand growth.

The data on the use of traditional biomass products for energy (wood, dung, crop waste, and biogas) show very little progress in the past 10 years. In low-income countries, the use of biomass products and waste as a percent of total energy use has dropped from 55 percent in 1990 to 48 percent in 2004 (figure 6.8). Dependence on biomass products for energy is especially high in Sub-Saharan Africa. Nine of the top 10 biomass-dependent countries are in this region (table 6.5).

figure 6.8Use of biomass products and waste, by income, 1990–2004

Table 6.5Top 10 users of biomass products and waste, 1990–2004percentage of total energy use
19902004
Congo, Dem. Rep. of84.092.5
Tanzania91.091.6
Ethiopia92.890.4
Nepal93.486.8
Mozambique94.484.1
Nigeria79.880.2
Sudan81.779.2
Zambia73.479.1
Cameroon75.977.8
Kenya78.474.1

Toward a Comprehensive Measure of Sustainability

The sector-specific indicators presented above are crucial for policy making. However, none of them is able to measure environmental sustainability in a comprehensive way. Building upon the green national accounting literature, this section describes sustainability indicators that are based on a key principle of sustainable development: to sustain well-being it is necessary to ensure that the total value of assets does not decline in real terms.

The notion that wealth (including natural wealth) is directly related to social welfare is not new. In a seminal paper published in 1961, Samuelson pointed out the inadequacy of income and consumption measures as a proxy for social welfare. The paper argued that the choice of a welfare measure has to be made “in the space of all present and future consumption…. [T]he only valid approximation to a measure of welfare comes from computing wealth-like magnitudes, not income magnitudes.”18

A key sustainability indicator, adjusted net savings, was introduced in chapter 1 and will be presented briefly below. The second indicator pertains to a particular component of wealth, the total value of natural resources.

Measuring Changes in Comprehensive Wealth: Adjusted Net Savings

The concept of adjusted net savings is built around the notion that depletion of natural resources, damages to human health caused by pollution, and the resources invested in human capital are all components of national savings. To illustrate this concept, figure 6.9 decomposes saving for Bolivia at two different points in time. In 2002 the policy mix was broadly sustainable, with net savings and investments in human capital roughly equaling the depletion of natural resources (mostly natural gas); pollution damages turn the adjusted net saving rate slightly negative. In 2005 high natural gas prices provided a windfall for the economy, but gross savings did not adjust fully. The result was that net wealth creation in 2005 turned sharply negative—Bolivia was, in effect, consuming its natural wealth. Maintaining this policy mix would place the economy on an unsustainable development path.

figure 6.9Adjustments to the saving rate: The case of Bolivia in 2002 and 2005

Figures 6.6 and 6.9 show that unsustainable development paths are more than a theoretical possibility. As emphasized previously, a negative saving rate in a country with abundant natural resources is an indication of an opportunity not taken: natural resource rents represent a type of free development finance, and consuming these rents is a process of consuming an inheritance.19

Adjusted net savings provides a useful indicator of sustainable development because it measures changes in the economy’s total wealth. If population is growing, however, then the relevant sustainability indicator is the change in wealth per capita. In fact, even if total wealth is increasing, population growth may outstrip the growth in total asset value. A World Bank study shows that many developing countries, particularly in Sub-Saharan Africa, have positive adjusted net savings in total but declining wealth per person.20

Measuring Natural Capital

While adjusted net savings measures the change in total wealth in real terms, there are good reasons to concentrate on the evolution of natural wealth over time as well, particularly if there are limits on the substitutability of produced capital for natural capital. This distinction is especially useful in light of the formulation of MDG target 7.A: “reversing the loss of environmental resources.”

A recent study by the World Bank disaggregates natural assets into agricultural land (crops and pastures), forests (timber and nontimber forest resources), protected areas, and subsoil assets (oil, natural gas, coal, and minerals).21 Natural capital constitutes a major component of wealth in developing countries, with the average citizen in low-income countries deriving 42 percent of his or her total wealth from some form of natural capital (see chapter 1 and figure 6.10a). This pattern is common to most developing regions, where, with the exception of Latin America and the Caribbean, natural capital accounts for more than a third of total wealth. The share of natural capital is particularly high in the Middle East and North Africa, where subsoil assets play a much larger role than in other regions. As seen in chapter 1, the value of natural capital per capita rises with income level. This is partly a consequence of higher productivity of land in more developed countries (where technologically advanced production methods allow higher yields per unit of land), partly a consequence of abundant subsoil assets in these countries, and partly a result of relative population sizes.

figure 6.10Relative importance and composition of natural capital, 2005

Source: World Bank staff.

While high-income countries have more natural capital per person, less wealthy countries are more dependent on their endowments of natural resources, particularly agricultural land (figure 6.10b), as a share of total wealth. So, for example, a person from Sub-Saharan Africa has a total wealth of nearly US$10,000, of which US$2,000 is in the form of agricultural land. On average in low-income countries, the sum of cropland and pastureland accounts for nearly 25 percent of total wealth and 60 percent of natural wealth. This heavy reliance on agricultural land falls as income rises, a natural resource analogue to Engel’s Law. Subsoil assets play a major role in natural wealth, particularly in Europe and Central Asia, the Middle East and North Africa, and Latin America and the Caribbean.

The region with the largest value of natural resources per capita is Latin America and the Caribbean (figure 6.11), with US$17,000 per capita. Natural wealth in the region consists mostly of subsoil assets (50 percent) and agricultural land (30 percent). In the Middle East and North Africa, natural resources account for US$12,000 per capita, mostly in the form of oil. Subsoil assets are also very important in Europe and Central Asia, where they account for 68 percent of natural wealth. In East Asia and the Pacific, natural wealth per capita is US$5,600 with a distribution similar to the one in Latin America and the Caribbean. Agricultural land is particularly important in Sub-Saharan Africa (62 percent of the total natural wealth of US$3,900 per capita). In South Asia, natural wealth is US$2,600 per capita, with most wealth in the form of agricultural land (51 percent), subsoil assets (26 percent), and forests (20 percent).

figure 6.11Natural capital per capita across regions of the world, 2005

Source: World Bank staff.

Note: The size of each “pie” is proportional to the value of natural wealth per capita.

As seen in figure 6.12, the value of the world’s natural capital per capita (measured in 2000 U.S. dollars and deflated using a GDP deflator) increased from 1995 to 2000, largely because of the increase in real energy prices, followed by a slight decline to 2005 (energy prices continued to rise over this period but were more than offset by declines in food prices). In low-income countries, the value of natural capital fell from US$3,400 per capita in 1995 to US$3,100 per capita in 2005 (a 10 percent drop). The decline in value resulted partly from population growth and partly from falling agricultural yields and declining real crop prices. The per capita value of agricultural land in low-income countries fell 31 percent in real terms over the same period. Agricultural land values in these countries are also particularly vulnerable to the potential impact of climate change.22

figure 6.12Evolution of the value of natural capital

Source: World Bank staff.

Measuring Progress on Policies and Institutions

Public policy is important for protecting the environment and natural resources in most countries. This is because of the public good nature of some assets (such as parks and protected areas) and the market failures inherent in pollution emissions (no one owns the atmosphere, and so everyone is free to pollute it). For open access resources, such as forests and fisheries, governments need to define property rights regimes that will prevent the “tragedy of the commons.”

But are good environmental policies something developing countries can afford? It has been often argued that developing countries should “grow first and clean up later.” This is the so-called Environmental Kuznets Curve (EKC), where pollution emissions rise with income until a tipping point is reached, where countries are wealthy enough to wish to invest in environmental quality. A major assumption of the EKC literature is that strong environmental governance is simply not possible for poor countries.

It turns out that a good institutional framework for the environment is not only possible but may improve the quality of growth. In empirical studies, the EKC disappears after controlling for the quality of environmental institutions and the inherent sensitivity of local environments to pollution: poor countries can have good policies and are not fated to be heavily polluted.23 This is why indicators of environmental governance and institutions are becoming a very important item in the monitoring agenda.

A number of measures of policy and institutional quality have been attempted in the recent years. These include:

  • Policy outcome indexes (such as the Environmental Performance Index, or EPI), which measure the results of government policy by looking at the distance of any given indicator from a target or appropriately defined benchmark; and

  • Policy input indexes (such as the World Bank Country Policy and Institutional Assessment, or CPIA), which track policies for environmental management and assess the quality of institutions intended to enforce them.24

The Environmental Performance Index

The EPI is a measure of performance that identifies broadly accepted targets for a set of 25 indicators and measures how close each country comes to meeting these goals. By means of this distance-to-target approach, the EPI provides policy-relevant benchmarks for pollution control and natural resource management. The issue-by-issue rankings facilitate cross-country comparisons both globally and within relevant peer groups. The EPI ranks 149 countries on these indicators tracked across six policy categories: environmental health, air pollution, water resources, biodiversity and habitat, productive natural resources, and climate change.25

The EPI is divided into two major subcomponents: environmental health and ecosystem vitality, mirroring the priorities expressed by policy makers. Figure 6.13 shows the results of the 2008 EPI. With some notable exceptions, countries in Sub-Saharan Africa, South Asia, and parts of East Asia and the Pacific have the lowest performance. Higher-income countries on average have higher environmental performance scores than lower-income countries. However, within each income group, including the high-income group, individual country environmental performance varies widely. An important factor underlying the low environmental performance of poor countries is these countries’ limited capacity to invest in environmental infrastructure (such as water and sanitation systems), pollution control, and systematic natural resource management.

figure 6.13Environmental Performance Index, by income group and region, 2008

Source: Environmental Performance Index (http://epi.yale.edu/Home).

Country Policy and Institutional Assessments

The annual CPIA exercise at the World Bank measures the quality of a country’s policy and institutional framework against a set of 16 criteria, including “Policies and Institutions for Environmental Sustainability.” Country policies are rated on a scale from 1 to 6 (higher is better); 3.5 is therefore a neutral score representing policies and institutions that are neither particularly strong nor weak. Figure 6.14 shows the evolution of the CPIA environment score since 1999. Excluding South Asia, all regional averages were below the 3.5 midpoint in 1999. In 2006 Europe and Central Asia, Latin America and the Caribbean, and the Middle East and North Africa had exceeded this threshold. The largest increment has taken place in Europe and Central Asia, which moved from an average score of 3.1 in 1999 to a score of 3.8 in 2006.

figure 6.14Evolution of the CPIA environment score, 1999–2006

Source: World Bank data.

The methodology for calculating the environment CPIA score was updated in 2003. The score is obtained by averaging performance in 2 major categories and 10 sub-categories:

  • Assessment of the national institutional context

    • Adequacy of prioritization

    • Quality of environmental assessment

    • Cross-sectoral coordination

    • Public information and participation

  • Assessment of specific sectors

    • Air pollution

    • Solid and hazardous waste management

    • Freshwater resources

    • Marine and coastal resources

    • Ecosystems and biodiversity

    • Commercial natural resources

Each of the sectors in the second part of the CPIA questionnaire is assessed for the appropriateness of the policy mix and the quality of policy implementation. Figure 6.15a presents Environment CPIA scores for regions for 2006. Sub-Saharan Africa scores lowest (3.1), while Europe and Central Asia has the highest regional average (3.8). As might be expected, scores vary widely within regions. In Sub-Saharan Africa, scores range from a minimum of 1.1 to a maximum of 4.5. There is also a wide disparity in the environment score between low-income countries (3.0) and upper-middle-income countries (4.1). As shown in Environment Matters, resource-poor countries tend to perform better than their resource-rich peers; oil-rich countries, in particular, tend to have lower performance on political stability and rule of law.26 Overall, there is a high correlation between the CPIA environment score and the CPIA score for property rights and rule-based governance.

figure 6.15CPIA environment score and its subcomponents, 2006

Source: World Bank dataset.

Note: NRM = natural resource management.

Results on the overall institutional context CPIA subscores show that on average countries perform poorly in terms of public information and participation, particularly in East Asia and the Pacific, and on cross-sectoral coordination, particularly in East Asia and the Pacific and the Middle East and North Africa (figure 6.15b). In contrast, countries are better at identifying priorities, with Europe and Central Asia being a top performer in this area.

Looking at sector-specific policies and institutions, it is evident that upper-middle-income countries have a much stronger performance than low- and lower-middleincome countries (figure 6.15c). The difference is particularly marked in the waste management and water resources management sectors. Low-income countries show a particularly weak performance in air quality management and marine and coastal resources management.

An important distinction should be made between the policies that a country has and its capacity to implement these policies. Figure 6.15d makes this distinction clear, plotting the scores on quality of the policy mix against implementation capacity. Countries score better on establishing standards, regulations, and incentives than on their capacity to actually implement and enforce the policy framework.

Government “policy failure” can be a threat to environmental sustainability, and subsidies are often the source of the problem. Utility subsidies (for water or energy services, for example, where prices may be held artificially low) are often an important element of social programs in developing countries. The result, however, is that water and electricity tariffs in developing countries rarely cover the operational and maintenance costs of utilities. Low tariffs also promote inefficient use of resources. Equally important, utility subsidies have also performed poorly in assisting the needy (box 6.3).

BOX 6.3Assessing the performance of subsidies

From a monitoring point of view, it is important to know whether subsidies actually achieve their poverty targeting goals. The “benefit targeting performance indicator” tries to measure the extent to which energy subsidies effectively target the poor. It does so by measuring the ratio between the share of total subsidies that benefit the poor and the share of poor in total population

Komives and others show that on a set of quantity-targeted utility subsidies (including water and electricity), the performance indicator is regularly less than 1. What this means is that the poor capture a smaller portion of the subsidy than they would capture if the government decided to distribute the subsidy randomly. That is because those without access to electricity (and hence to the subsidy) belong to the poorest sectors of society. In Sub-Saharan Africa, for example, electricity increasing block tariffs exclude more than 70 percent of the poor.

The performance of subsidies tends to increase with the connection rate. But even in situations where there is universal coverage, subsidies reach at most the neutrality target (Ω = 1). This failure occurs because wealthier households consume considerably more electricity than poorer households, thus capturing a larger share of the subsidy. This is true for all utility subsidies, but it is particularly important in the case of electricity. All this is relevant for analyzing the trade-offs between environment and development. Subsidies place important burdens on the environment since they favor overconsumption, inefficient use of scarce resources, and increased pollution.

Benefit-targeting performance of electricity subsidies in selected developing countries
CountryType of subsidyBenefit-targeting performance indicator (Ω)Error of exclusion (%)
GuatemalaVDT0.2055.4
HondurasVDT0.4956.0
PeruIBT0.8259.9
Cape VerdeIBT0.4875.6
São Tomé and PrincipeIBT0.4176.8
HungaryIBT0.981.7
RwandaIBT0.3587.2
India (average)IBT0.7021.0
Source: Komives and others 2005.Note: VDT = volume-differentiated tariffs; IBT = increasing block tariffs. Increasing block tariffs are a price structure in which a commodity is priced at a low initial rate up to a specified volume of use (block), then at a higher or several increasingly higher rates for additional blocks used.

Although increasingly recognized as a development issue for low-income countries, mainstreaming environmental management into Poverty Reduction Strategy Papers and Poverty Reduction Support Credits is evolving slowly. The most recent review for 11 Sub-Saharan African countries shows that attention to environmental priorities ranks low compared with fiscal reforms, macroeconomic stability, and sectoral investments in education and health.27

Making Progress on Monitoring

A good indicator should have the following characteristics: policy relevance, analytical soundness, and measurability.28 Policy relevance is key in the MDG 7 context. Recall that figure 6.3 showed the trends in water availability per capita in the Middle East. While this is an important indicator of an impending problem, it is not particularly policy relevant because it is primarily driven by an endowment, the quantity of water available annually. An indicator that is relevant for decisions about water policy would be some measure of the efficiency with which water is used. Such an indicator would be sensitive to policy actions such as allocating water rights or establishing pricing for water abstraction. In general a policy-relevant indicator should be easy to interpret, show a trend over time, be measurable against a target level, and be responsive to policy changes.

In addition to these characteristics, a good sustainability indicator, or set of indicators, should combine different aspects of sustainable development, such as environmental quality, economic progress, and human and social development. The sustainability indicators currently available in the literature meet this goal to varying degrees. They can be mapped into the following categories:

  • Indexes and indicator sets

    • Weighted indexes, which combine indicators with an explicit recognition of the relationships between them and their relative importance, such as summing emissions of different greenhouse gases weighted by their individual global warming potentials

    • Unweighted indexes, which combine indicators without making explicit assumptions on their relative importance, such as the Living Planet Index (see chapter 7) and the Environmental Performance Index

    • Indicator sets, which present indicators separately or group them into logical categories, such as the UN Commission for Sustainable Development indicator set

  • Indicators based on biophysical relationships, such as the Ecological Footprint (which accounts for energy use in terms of the land area that would be required to produce the equivalent amount of energy from biofuels)

  • Indicators based on economic accounts, which employ the national accounting framework to measure changes in wellbeing and the resources underpinning it over time (for example, the UN System of Environmental and Economic Accounts, adjusted net savings, the Genuine Progress Index, and the Index of Sustainable Economic Welfare).

Aggregate indicators have advantages and disadvantages for monitoring progress. When it comes to measuring environmental sustainability, the core of MDG 7, some degree of aggregation is essential because collections of indicators, usually highly disparate, cannot answer the question of whether social welfare (itself an aggregate concept) is likely to be increasing or decreasing in the future. However, users of indicators are rightly uneasy about aggregate indicators that are effectively a “black box”—that is, if the weights on subaggregates are arbitrary, it is impossible to meaningfully compare aggregates across countries or changes in aggregates across time. National accounts–based indicators have the advantage of using money as a numeraire, having weights (in the form of prices) that relate to social welfare, and using a conceptual framework that provides a rigorous basis for aggregation.29 Adjusted net savings, introduced in chapter 1 and used in this chapter to measure the sustainability of mineral-based economies, is discussed in more detail in box 6.4.

Indicator sets such as the MDG 7 indicators shown in box 6.2 play an important role in the MDG process. These indicators attempt to span a range of issues—deforestation, extent of protected areas, energy use, and carbon intensity—that are germane to the question of achieving environmental sustainability. It is tempting to propose additional indicators for the set; urban air pollution seems to be a particular gap. But when the issue is measuring sustainability, these indicator sets have inherent limitations: each is measuring only a piece of the puzzle, and there is no aggregate measure of progress toward sustainability.

BOX 6.4Adjusted net savings as a sustainability indicator

Concerns about sustainable development are fundamentally concerns about the assets that underpin economic development.a The overall sustainability of any economy is tied to the management of the portfolio of assets on which the economy depends. Adjusted net (or “genuine”) savings is simply the measure of the change in the real value of this portfolio from one year to the next, and economic theory tells us that this change is precisely equal to the change in social welfare.b The link between net savings and social welfare is strongest if the accounting of assets is comprehensive, embracing produced capital, natural capital, human capital, and other less tangible forms of wealth such as knowledge, social capital, and quality of institutions.

A unique aspect of adjusted net savings is that it has been tested empirically using the 30+ year time series of estimates published by the World Bank. Ferreira and Vincent show that adjusted net savings is correlated with changes in social welfare for developing countries, but not for developed ones. This makes sense: accumulation of physical assets is an important part of the development process for poorer countries, whereas knowledge creation and innovation (not measured directly in adjusted net savings) are clearly the drivers of growth in rich countries.c Ferreira, Hamilton, and Vincent show that this result for developing countries is robust when population growth is taken into account.d

Adjusted net savings also has clear links to policy. The policy levers to achieve positive net savings can be applied at the level of the different assets that constitute total national wealth—either the macro policies that influence saving effort, or individual sectoral policies on natural resource management, human resource development, and environmental protection.

Because any measure of saving is likely to be incomplete, a positive adjusted net saving rate needs to be interpreted with caution. Some important assets are omitted from adjusted net savings for methodological and empirical reasons, which may mean that saving rates are only apparently positive. Challenges include lack of data (on subsoil water, land degradation, fish stocks, and diamonds, for example), methodological weaknesses (valuing biodiversity, for example), and measurement errors.

Questions about the degree of substitutability of produced and natural assets can also limit confidence in the link between positive saving and sustainability. There is no technological substitute for the ozone layer as a whole, for example, although in this case it is possible to value marginal losses of ozone according to their incremental impacts on health.

Finally, the step from saving to investment is an important one in the development process. If savings are not channeled to productive investments, then they will not be effective in promoting development. This is an important factor in many developing countries, where public sector investments have often been wasteful and where absorptive capacity may be a real constraint.

a.See, for example, Pearce and Atkinson 1993.b.Hamilton and Clemens 1999.c.Ferreira and Vincent 2005.d.Ferreira, Hamilton, and Vincent forthcoming.

This limitation of indicator sets is one of the primary reasons for emphasizing adjusted net savings in this report. As box 6.4 has suggested, adjusted net savings is by no means a perfect indicator. But it is derived from what is arguably the only sound framework for measuring sustainability, an asset-accounting framework. Investments in better data and methodology can make it a stronger indicator of sustainable development.

The question of potential limits in the substitutability of produced capital for natural capital deserves to be taken seriously. This is an argument, first, for continuing to track changes in the value of total natural capital country by country and, second, for measuring a range of biophysical indicators pertaining to the quality or quantity of critical natural capital.

Conclusions

MDG 7 is arguably the most cross-cutting of the MDGs. Given the high resource dependence of most developing countries, being able to manage the environment and natural resources is fundamental for the sustainability of MDG outcomes—boosting consumption by mining soil nutrients is not a sustainable enterprise, to give just one example. Moreover, sound environmental management can have positive impacts on such key MDG goals as poverty reduction, education, gender equality, and health.

The analysis in this chapter leads to the following findings:

  • Natural capital constitutes a major component of wealth in developing countries. The average citizens in low-income countries derive over 40 percent of their wealth from some form of natural capital.

  • Owing to falling relative prices, the value of natural capital—including agricultural land, forests, and subsoil assets—has declined over the recent past in those countries that most heavily rely on nature for their well-being. Climate change is likely to exacerbate this situation in the future.

  • An area of forest equivalent to the size of Sierra Leone is lost every year to land use changes, particularly in Latin America and the Caribbean and in Sub-Saharan Africa. Most of the world’s forest loss takes place in Brazil and Indonesia.

  • Population growth will cause per capita water resources to fall below critical levels in the very near future in the Middle East and North Africa and in South Asia. Underground water abstraction is already unsustainable in many Middle Eastern countries, in parts of South Asia, and in Mexico.

  • Countries rich in subsoil assets risk being on an unsustainable development path if they primarily consume the rents from natural resource extraction rather than investing them in other forms of capital. This represents lost opportunities for development.

  • Low- and lower-middle-income countries are characterized by high levels of urban air pollution (as measured by particulate matter concentrations), despite the progress made in recent years. Owing to growing rates of urbanization in developing countries, this situation could worsen.

  • Progress in improving electricity access in the last 15 years has been slow. In most developing countries, population growth has offset the gains in energy investment. As a consequence of low levels of access, the consumption of biomass fuels is still very high in developing countries, with continuing adverse conequences for forests and human health.

  • Progress in institutional and policy performance has been uneven across world regions. The Europe and Central Asia region has been characterized by the sharpest improvements, while South Asia and Sub-Saharan Africa have lagged behind. Good performance in establishing environment and natural resource policies does not necessarily mean good performance in enforcing them, as shown by the disaggregated CPIA scores.

The policy challenges raised by the environment are as diverse as the endowments of natural resources enjoyed by developing countries. Strengthening private or communal property rights to local natural resources has been shown to be an effective tool for many resource management problems. Improving governance is key for many resources that are effectively subject to open access, such as forests and fish. Explicit resource rent policies are often needed; the chain from rent capture to the management and use of resource rents can determine whether rich resource stocks are a source of development finance or a contributor to the “resource curse.” Water rights and more explicit treatment of water as an economic good can help to manage water scarcity. Managing pollution starts from the recognition that the marginal damages from pollution emissions far exceed the marginal costs of abatement in many industrializing countries; finding efficient solutions to pollution problems is clearly a priority, given competing demands for finance in developing countries. Policies such as energy subsidies, which encourage inefficient use, can exacerbate pollution problems while simultaneously straining fiscal resources.

This chapter has emphasized one of the principal difficulties in meeting MDG 7, the challenge of building stronger institutions. The problem is not unique to the environment and natural resource sectors, of course, but policies and institutions in these sectors are particularly weak. The Global Monitoring Report 2007 analyzed CPIA data for 2005 to show that environment CPIA scores significantly lag overall CPIA scores.30

A key ingredient in resolving institutional weakness is better and more comprehensive data. Public access to environmental data is essential to the process of building public demand for environmental quality. And better data are needed to support policy decisions concerning environment and natural resource management, as well as policy implementation. One of the strengths of the MDG process is this emphasis on data and indicators. This chapter highlights some of the strengths as well as the deficiencies in environment and natural resource data.

Notes

See World Bank 2008a for a review.

Deforestation in LAC and SSA is highest also as a percent of total forest resources. Between 1990 and 2005, the annual deforestation rate has been 0.4 and 0.6 percent respectively.

The forest cover indicator is not perfect. A major problem with this indicator is that it does not distinguish between natural forests and plantations. This is particularly relevant for biodiversity as well as other natural functions of forests.

World Bank 2007b. While the Middle East and North African region features a critical situation with respect to water, the problem is not unique to the region. In China, for example, parts of the North China Plain and the North East are highly water stressed.

Biochemical oxygen demand refers to the amount of oxygen that bacteria in water will consume in breaking down waste. This indicator measures pollution from organic matter and fertilizers (in general referred to as nutrients) thus excluding other important sources of pollution such as sediment, acids and salts, heavy metals, toxic chemicals and other pathogens.

The International Energy Agency (IEA) defines access to electricity as the number of people (in households) who have some form of electricity at home, either commercially purchased or self-generated (when data is available through surveys by national administrators). It excludes unauthorized connections.

Samuelson 1961, pp. 50–57.

In extreme circumstances, of course, consuming resource rents may the only alternative to starvation.

See chapter 7 for an analysis of climate change impacts.

A caveat about these measures is in order: because these are indexes consisting of arbitrarily weighted (and highly disparate) subcomponents, the interpretation of the aggregate indexes can be problematic. There is no numeraire to weight the contributions of different aspects of environmental management to social welfare. These indicators are therefore best used to compare close peers at the level of individual subcomponents of environmental management.

The EPI has been developed by the Center for Environmental Law and Policy at Yale University and the Center for International Earth Science Information Network (CIESIN) at Columbia University, in collaboration with the World Economic Forum and the Joint Research Centre of the European Commission.

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