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Can economic growth go with environmental sustainability?

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 2003
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In many countries, poverty and environmental problems are mutually reinforcing. The only way to break this vicious cycle is to promote sustainable economic growth, which is one of the IMF’s core objectives. To highlight possibilities for sustainable growth and environmentally friendly policies, the Statistics Department and the IMF Institute hosted a seminar on the environment and its implications for the IMF. The immediate motivation for the seminar was a new handbook on environmental accounting: Integrated Environmental and Economic Accounting 2003 (IEEA, 2003), now in its final draft version. Five international organizations—the United Nations (UN), the European Commission, the IMF, the Organization for Economic Cooperation and Development (OECD), and the World Bank—worked with the London Group on Environmental Accounting (mainly composed of national statisticians with an interest in environmental accounts) to draft and publish the handbook. Adriaan Bloem and Russel Freeman, both from the IMF’s Statistics Department, give an account of the seminar’s main findings.

What should countries do when faced with the competing challenges of reducing poverty and debt levels, and preserving unique habitats? Bob Matthias Traa from the IMF’s Western Hemisphere Department highlighted the case of Ecuador, where oil and gas reserves offer a possible solution to debt and poverty.

In its advice to the government, he said, the IMF team had to consider traditional goals such as fiscal sustainability and reducing debt, and new ones such as dealing with depletion and avoiding environmental degradation. To do this, the staff developed an extended public sector balance sheet, which shows the standard assets and liabilities but also includes all oil and gas reserves, as well as very preliminary proxies for protected forest lands and biodiversity in both plants and animals. The resulting data, which go back to 1970, indicate that Ecuador’s net worth has been declining steadily over the years. Essentially, it has been “selling the silverware” rather than using the money for the kind of investment in the future, such as human capital development, that might enhance growth.

Other case studies presented at the seminar covered Nigeria and Norway. In oil-producing countries, policies should aim to protect the stability of the non-oil economy and fiscal policy from the volatility of oil revenues, while spreading the benefits of oil wealth equitably for both current and future generations. In Norway, the government achieves this mainly through the Government Petroleum Fund, which has been built up from surplus oil revenues. It was noted, however, that while the policy mix can mitigate the effects of so-called Dutch disease (currency appreciation due to high oil export revenues with an adverse impact on the non-oil sector), it is not possible to avoid them fully.

Adopting greener policies

It is issues such as these that the IEEA 2003 aims to deal with. Its chief editor, Anne Harrison of the OECD, outlined the handbook’s main objectives: providing a consistent framework for assembling environmental data, establishing connections between the environment and the economy, identifying economic flows that bear on the environment, and considering what “sustainability” means in accounting terms. The IEEA does this using four approaches:

• combining physical data with the monetary data of national accounts through an input-output design;

• identifying environment-related outlays in economic accounts;

• valuing natural resources in a manner consistent with produced capital; and

• reviewing the possibility of adjusting macroeconomic aggregates such as GDP for environmental considerations.

Kirk Hamilton of the World Bank’s Environment Department explained how his organization allows for environmental factors. The Bank uses an adjusted measure of national saving that accounts for outlays on education, use of produced assets, exhausting oil and mineral reserves, forest depletion, and pollution damage. The resulting adjustments can be large. For example, for Ecuador in 2001, standard gross saving was 22.9 percent of GDP but adjusted saving fell to–4.4 percent after allowing for these factors and removing depreciation.

The IMF, for its part, is looking at different ways of “greening the tax system.” Jim Prust of the IMF’s Fiscal Affairs Department explained that governments can encourage environmentally sound development by taxing both the use of natural resources and the activities that pollute the environment. However, they have to do this with care as each situation is different. For example, natural resource taxation may be difficult to apply, and property rights may be unclear or unenforceable.

The final draft of the handbook Integrated Environmental and Economic Accounting 2003 is being circulated for information prior to official editing. It will be published jointly by the United Nations, the European Commission, the IMF, the OECD, and the World Bank, and is available at unstats.un.org/unsd/environment/seea2003.htm

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