Journal Issue


International Monetary Fund. External Relations Dept.
Published Date:
January 1994
  • ShareShare
Show Summary Details

Getting better measures of environmental degradation

There is much that is thoughtful in the article by Andrew Steer and Ernst Lutz on “Measuring Environmentally Sustainable Development” (Finance & Development, December 1993). However, I find the handling of national income adjustment rather disappointing. The article asserts that if the environmentally adjusted accounts should indicate reduced or negative investment, a “careless interpretation might conclude that … the productive capacity of the economy had actually declined.” The authors appear to think that “human capital formation and technological progress” can automatically be offsetting to environmental disinvestment.

The two issues, I submit, are separate and should not be confused. Environmental capital deterioration is certain to undermine sustain-ability, and a greater investment effort will be needed to counteract its effect on future income. Human capital formation, by convention, is left out of the national accounts for various reasons, one of which is that, if it is truly productive, it will be reflected through enhanced productivity in a higher GDP. By contrast, the loss of environmental capital, if not recorded, may take some time before it will reflect itself in income and product measurements. Anyhow, should not a proper comparison be made of the effect of both on national income, before such a summary judgment is made?

Besides properly measuring investment, there are other policy implications of failure to reflect environmental deterioration (especially natural resource depletion) in the national accounts. Without the adjustment we would not be able to know, for example, if an economy that is dependent on such resources is genuinely growing or merely living unsustainably on asset sales beyond its true income; whether the balance of payments is in surplus or deficit on current account (if exports contain environmental capital elements); and whether the exchange rate needs to be changed. The authors, by effectively saying “not to worry,” are in fact depreciating the utility of adjusting the accounts—contrary to what they are ostensibly advocating.

Salah El Serafy

Andrew Steer and Ernst Lutz respond:

We gratefully agree with Mr. El Serafy’s first sentence but have to disagree thereafter. He claims we think that human capital can automatically substitute for resource depletion. We do not, as our article makes clear. There are many situations where neither human nor fabricated capital can substitute for a loss of natural capital and, as we argue in the article, it is essential to analyze what is happening to each type of capital separately. Nonetheless, it is quite wrong to assert that depleting natural capital will always reduce the productive capacity of the nation. If Indonesia uses its oil wealth to invest in its children’s education (as it has wisely done), with the result that fertility rates fall and productive practices become more efficient, few rational people would believe that the country is either poorer or less sustainable. The point we make is that if calculations on trends in a nation’s aggregate capital stock are to be useful for policymakers, they must include human as well as natural and fabricated capital. The Environmentally Sustainable Development Vice Presidency of the World Bank is currently involved in an effort to make both sets of adjustments.

Mr. El Serafy’s argument is that human capital formation can be ignored because, if productive, its presence will be reflected in future income. Of course! So, too, will changes in natural and fabricated capital. The belief that changes in human capital have a “quicker” impact on income than changes in natural capital is not necessarily true; nor is it relevant. What is relevant is that some human capital formation gets recorded in the current account of the national accounts, and some (knowledge breakthroughs) gets omitted altogether. When we assess trends in a nation’s productive capacity, we need a complete picture.

None of this detracts from the vital importance of getting better measures of the high costs of environmental degradation, which was the main theme of our article and where we and Mr. El Serafy are in full agreement.

Culture and development

William Easterly’s review of my book, Who Prospers? How Cultural Values Shape Economic and Political Success (Finance & Development, March 1994) demonstrates how shackled one can become to a conventional wisdom, even when compelling evidence exists that the conventional wisdom is untenable. He concludes his review with, “… there is a lot to be said for the old-fashioned view that people are the same everywhere and will respond to the right economic opportunities and incentives.” How then would he explain the extraordinary performance of some ethnic groups in multiethnic societies, where everyone operates with the same signals: for example, the Chinese in Thailand, Malaysia, Indonesia, the Philippines, and the United States; the Japanese in Brazil, Peru, and the United States; the Koreans in the United States; the Basques in Spain and Latin America; the Germans in Latin America; and the Jewish people wherever they have migrated?

It is Mr. Easterly’s embrace of economic dogma that leads him to caricature Who Prospers? I explain East Asia’s phenomenal success as an important reflection of the progress-prone values in Confucianism/Taoism: future orientation, work, education, frugality, merit, and community. Mr. Easterly asserts that “such a theory is of little use for predicting who is going to succeed.” On the contrary, it would have predicted, without exception, the performance of Japan, Korea, Taiwan Province of China, Singapore, Hong Kong, post-Mao China, and the overseas Chinese.

Mr. Easterly remarks that “when East Asian nations do well, it is the latent positive forces in their own culture; when Spain does well, it is the influx of foreign culture.” But there are differences, and there are costs to the Spanish model: the Spanish economy has grown about half as fast as those of the East Asian countries; Spain saves substantially less and has depended heavily on foreign investment; about one half of GDP is produced by state-owned firms; and Spain has been plagued by very high unemployment, currently above 20 percent, reflecting in part an indisposition toward entrepreneurship. Spain’s per capita GNP is about one half the Western European average and trails Hong Kong and Singapore.

Cause and effect clearly run in both directions in the relationship between culture and development. Indeed, open economic policies have contributed to progressive cultural change, as well as to economic success in some cases. But, as Mr. Easterly suggests, “the old-fashioned view that people are the same everywhere and will respond to the right economic opportunities and incentives” has been with us throughout the past four decades of disappointing performance in most of the Third World. While the Third World should certainly be pursuing the open policies that have proven successful in a few countries, it should also be pondering the values common to successful societies around the globe.

Lawrence E. Harrison

Do you wish to receive FINANCE & DEVELOPMENT regularly?

New readers must either type or print in capital letters their names and addresses and identify their professional category from the list given at right.

Current readers are requested to send us their latest mailing label or previous address when requesting a change of address.

Finance & Development is normally sent without charge by surface mail, but for faster service, air delivery is now available for US$20 (advance payment required).

American Express, MasterCard, and Visa credit cards accepted.

Publications Services, Finance & Development

International Monetary Fund

Washington, DC 20431 USA

Telephone: (202) 623-7430

Telefax: (202) 623-7201

Professional category (Mark one only)

1 College student

2 Central bank

3 Finance ministry

4 Commercial bank

5 Other financial institution

6 Planning agency

7 International or regional organization

8 Public library

9 Facultycollege or university

10 Other government agency

11 Nongovernmental organization

12 News media

13 Private enterprise

99 Other


Russia and the Challenge of Fiscal Federalism. Edited by Christine I. Wallich. Examines the complex issues of intergovernmental fiscal relations in Russia’s newly emerging federal structure. Proposes a new fiscal system to meet the country’s changing needs. February 1994, 320 pages, Stock#12683, US$18.95.

The Role of Women in Rebuilding the Russian Economy. Monica S. Fong. Recommends changes that would enable women to meet family needs and remain productive members of the work force. September 1993, 60 pages, Stock #12626, US$6.95.

Food and Agricultural Policy Reforms in the Former USSR: An Agenda for the Transition. A comprehensive plan to reform the food and agricultural policies of the former Soviet Union. June 1992, 299 pages, Stock #12261 (English), Stock/12426 (Russian), US$14.95

Statistical Handbook 1993 States of the Former USSR. Economic indicators including public finance, monetary statistics, employment, and labor. September 1993, 792 pages, Stock if 12619 (English), Stock #12643 (Russian), US$25.95.

Trade Issues in the New Independent States. Constantine Michalopoulos. Analyzes the factors that contributed to economic decline and recommends ways that the 15 countries of the former Soviet Union can restore trade relations with each other and integrate their economies with the international economy. July 1993, 39 pages, Stock #12483, US$6.95.

Transport Strategies for the Russian Federation. Jane Holt. Russia’s transport sector is collapsing under massive operating losses and unproductive investments. Recommendations seek to reverse the losses and adapt the sector to a market economy. September 1993, 272 pages, Stock/12625, US$14.95.

For payment in local currency, contact your World Bank Distributor.

In the U.S. return the coupon to:

The World Bank

P.O. Box 7247-8619

Philadelphia, PA 19170-8619

Fax: (202) 676-0581

In France return the coupon to:

The World Bank

66, avenue d’lena

75116 Paris, France

Statement of Ownership, Management, and Circulation required by 39 USC 3685.

1a. Title: Finance & Development, lb. Publication No. 123-250. 2. Date of filing: 10/6/93.

3. Frequency: Quarterly.

4. Complete mailing address of known office of publication: Finance & Development, International Monetary Fund, Washington, DC 20431.

5. Complete mailing address of the headquarters of general business offices of the Publisher: International Monetary Fund and the International Bank for Reconstruction and Development, Washington, DC 20431.

6. Full names and complete mailing address of Publisher and Editor: Publisher: International Monetary Fund and International Bank for Reconstruction and Development, Washington, DC 20431; Editor: Claire Liuksila, same address.

7. Owner: International Monetary Fund and the International Bank for Reconstruction and Development, Washington, DC 20431.

8. Known bondholders, mortgagees, and other security holders owning or holding 1 percent or more of the total amount of bonds, mortgages, or other securities: None.

9. Extent and nature of circulationAverage no. of copies each issue in preceding 12 monthsActual no. of copies of single issue published nearest to filing date
A. Total number of copies51,75050,000
B. Paid and/or requested circulation--
C. Total paid and/or requested circulation37,10033,934
D. Free distribution by mail, carrier, or other means Samples, complimentary, and other free copies13,62515,000
E. Total distribution (sum of C and D)50,72548,934
F. Copies not distributed1,0251,066
G. Total (sum of E and F)51,75050,000
I certify that the statements made by me above are correct and complete.
Claire Liuksila, Editor

New readers who wish to receive Finance & Development regularly should apply in writing to Subscription Services, Finance & Development, International Monetary Fund, Washington, DC 20431, USA, specifying the language edition and briefly stating the reasons for their request. The contents of Finance & Development are indexed in Business Periodicals Index, Public Affairs Information Service (PAIS), and Bibliographie Internationale des Sciences Sociales. An annual index of articles and reviews is carried in the December issue.

Credits: Cover photo: Padraic Hughes-Reid. Cover design: Luisa Watson. Charts on pages 18, 19, 21, and 22: Dale Glasgow. Art on pages 10, 15, 31, 44, and 45: Mark Robinson. Art on pages 24 and 36: Luisa Watson.

The International Monetary Fund announces

1993/94 Economic Reviews

Economic Reviews contain authoritative economic and financial analysis of member countries of the IMF. The reviews are based on regular IMF staff consultations with these countries and contain extensive tables and detailed charts.

Available in English (paper). 1993/94. US$15.00 each, plus shipping charges.

Economic Review Series:

  • Armenia (93)

  • Georgia (93)

  • Lithuania (93)

  • Tajikistan*

  • Azerbaijan (93)

  • Kazakhstan (93)

  • Moldova (93)

  • Turkmenistan (94)

  • Belarus (93)

  • Kyrgyz Republic (93)

  • Russian Federation (93)

  • Ukraine (93)

  • Estonia (93)

  • Latvia (93)

  • Uzbekistan (94)

(*Review forthcoming)

The COMPLETE SET is available for US$225.00 and includes delivery via AIRSPEED or FIRST CLASS MAIL at no additional charge.

Send for your copies of these valuable reference materials. Simply tick the issues you require, complete the coupon below, and return it now.

  • Please send the complete set of Economic Reviews with delivery via Airspeed or First Class Mail for US$225.00.

  • Please send the titles I have ticked above at the cost of US$15.00 per title plus shipping charges.

To order, please write or call:

International Monetary Fund

Publication Services, Box FD-402

700 19th Street, N.W.

Washington, D.C. 20431 U.S.A.

Telephone: (202) 623-7430

Telefax: (202) 623-7201

Cable Address: INTERFUND

American Express, MasterCard,

and VISA credit cards accepted.

Let the wold reach you … subscribe to Finance and Development

Every quarter, Finance & Development provides comprehensive, in-depth, and analytical coverage of the crucial issues in the international economic environment. This one journal can sharpen your knowledge on issues and policy recommen-dations in a wide range of areas-from finance, banking, and trade to environment, poverty, and infrastructure.

So stay ahead and subscribe to F&D.

Other Resources Citing This Publication