Environmental Assessments: Why they matter; the Bank’s role
Author: John Cleave

Contributor Notes

Why the Bank is concerned about the environment, and the objectives and approaches to a new initiative

This paper examines the policy implications of structural changes in financial markets. Domestic financial markets have become less segmented, and the major financial centers more integrated. At the same time, the structural changes in financial markets have improved efficiency by lowering intermediation costs, increasing the ability to hedge financial risks associated with currency, interest rate, and price volatility and opening up access to new sources of savings. The widespread application of computer and telecommunications technology to financial markets has permitted markets to process a significantly larger volume of transactions.


This paper examines the policy implications of structural changes in financial markets. Domestic financial markets have become less segmented, and the major financial centers more integrated. At the same time, the structural changes in financial markets have improved efficiency by lowering intermediation costs, increasing the ability to hedge financial risks associated with currency, interest rate, and price volatility and opening up access to new sources of savings. The widespread application of computer and telecommunications technology to financial markets has permitted markets to process a significantly larger volume of transactions.

John Cleave

In an address to the World Resources Institute on May 5, 1987, World Bank president Barber B. Conable made public a series of initiatives designed to “match [the Bank’s] fight against global poverty with [its] commitment to environmental protection.” He announced the creation of a new Environmental Department to help set the direction of Bank policy, planning, and research on the environment and to take the lead in developing strategies to integrate environmental considerations into the Bank’s other activities. At the same time he announced the creation of units in the four regional technical departments with the dual mandate of scrutinizing the environmental impact of Bank-supported projects and seeking new ways to improve resource management in member countries.

Besides these organizational changes, designed, in response to criticisms, to make the Bank’s handling of environmental concerns more effective, Mr. Conable proposed the allocation of Bank resources to four operational initiatives. These are: a collaborative program to help governments assess environmental threats in environmentally vulnerable developing nations; a special effort to stem the southward advance of the desert in Sub-Saharan Africa; priority attention to the environmental and development problems resulting from the deforestation of the tropics, and support for a global program to encourage tropical forest conservation; and participation in an international effort to improve the environment of the Mediterranean.

While the last three of these initiatives present formidable challenges, in each case crossing, as they must, international boundaries, they are fairly straightforward in concept. The issues involved in the assessment of environmental threats, on the other hand, are less well understood, and are the subject of this article.

An important background paper on the Bank’s role in addressing environmental issues is “Environment, Growth and Development,” Development Committee Report No. 14, obtainable from the Publication Sales Unit, World Bank, Washington, DC 20433.

Though there are environmental problems associated with the extraction of exhaustible resources, and issues also embrace pollution from industry, agricultural chemicals, and domestic waste, of particular concern is the management of resources that are potentially renewable—forests, soils, and water—but which are increasingly being used at a rate in excess of their regenerative capacity. These provide the habitats essential for maintaining the diversity of life and are of special importance to the welfare of the poorest groups, frequently tribal minorities.

What is meant here by environmental assessment goes far beyond the scrutiny of the impact on the environment of specific development projects. It requires:

• an examination of all the forces that influence how natural resources are used by millions of individuals in the course of their domestic and economic activities;

• an identification of how such use affects the sustainability of the resource and how its management or mismanagement affects resources and other people; and, because the importance of these problems is only appreciated if the cost to society is clearly demonstrated;

• the quantification of these impacts. It therefore requires an understanding of how physical phenomena work and interact, how underlying economic forces and institutional arrangements influence resource management, and how the costs and benefits of such influences can be assessed. Clearly, action calls for multidisciplinary cooperation.

The Bank’s role

Why should the World Bank be concerned with such matters? Cannot they be left to local official and nongovernmental organizations on the one hand, or to specialized agencies such as the United Nations Environment Programme (UNEP) on the other? There are several responses to such questions. First, and at the most parochial level, the Bank is vitally concerned with the sustainability of the investments it supports in member countries. For example, the development impact of a dam or an irrigation system may be seriously reduced if deforestation and inappropriate agricultural practices in the catchment area above it either adversely affect the water regime or lead to heavy siltation of the canals. Moreover, the Bank has long set as a major objective the alleviation of the plight of the poor. And it is precisely the poorest groups, extremely dependent as they are on the natural resources of their country, who suffer most when land is eroded, vegetation stripped, and water polluted.

Second, the Bank’s efforts are not to replace the work of others but rather to complement and support them. The Bank needs to draw on the expertise of organized environmental groups wherever they are operating. Much of the task of increasing the awareness of the public and decision makers can best be done at the local level. Where the Bank can help is to coordinate such efforts, add rigor to the analysis which must support them, and, on a unique scale, provide funding to support policy changes and specific investments to improve natural resource management. It is working in conjunction with UNEP on this task, and will be the executing agency for an interregional project funded by the UN Development Programme and designed to help recipient countries integrate natural resource management into their overall economic planning. Countries participating in the project are Bolivia, Burkina Faso, Lesotho, and the Philippines.

Third, concern with the environmental impact of development is not new to the Bank. The assessment of externalities has been part of Bank project appraisal for decades, and the Bank has long had explicit policies to limit any harmful environmental effects of the development projects it supports (see article by Lee and Goodland, Finance and Development, December 1986). The organizational changes and new initiatives are to make their implementation more effective.

Current studies. Studies of natural resource management and the environment help to provide the knowledge and insights needed to make the Bank’s influence effective. In such studies a holistic view is essential, for what happens in industry can affect fisheries or agriculture, while growth and patterns of urban development influence pressures in the rural sector, farming systems in the lowlands condition the future of forest in the uplands, and macroeconomic policies influence the whole. Thus, an ongoing study in the Philippines (see box) is attempting to cover the entire country, reviewing resource use from the watersheds to the reefs, and examining the full range of technical, human, policy, and institutional factors that determine how resources are managed. Sometimes, however, for the very reason that the interrelationships are so complex, it may be necessary to limit the investigation to major problems or key geographic areas. This is being done in a current Bank study in Indonesia which, although still attempting a broad policy analysis, has been designed more narrowly to deal with problems in two contrasting areas, Java and the Outer Islands. On Java, where over 60 percent of Indonesia’s 177 million population are living on only 7 percent of the land, the major problem is water resource management in the face of encroachment on the catchment forest for fuelwood and agricultural use and increasing demands for water for agricultural, domestic, and industrial use. These together have led to erosion and downstream problems of siltation, pollution from human waste and agricultural chemical runoff, and flooding. On the generally sparsely populated Outer Islands the problem is one of promoting appropriate land use in an area of fragile tropical forest and variable soils, under pressure, in particular, from the expansion of extensive agriculture by indigenous groups, and from logging operations and planned resettlement programs.

Population growth is a major factor in man’s degradation of natural resources. Any meaningful assessment must anticipate future pressures on resources and future vulnerability to pollution, under feasible scenarios of population growth and economic transformation. This theme underlies a third current initiative: a project in Burkina Faso, the first land management project in the Sahel to be supported by the Bank. This project, now in the pilot phase, emphasizes the need for improvements in the direction of internal migration and intensification of the farming systems to support growing numbers of people. Its suggestions for intensified but sustainable agricultural production systems include giving high priority to water harvesting and soil conservation; integration of livestock into farming, based on intensive fodder production, which will, inter alia, provide manure to improve soil structure and fertility; and alternative tree planting systems for fuel, fodder, and soil conservation. The pilot project focuses on enhancing security of access to land, increasing local participation in, and responsibility for, land management activities, improving land use planning, financing appropriate conservation techniques, and involving peripheral villages in the management of protected areas.

Approach, methods

Environmental assessments should:

• take stock of the natural resource base, determine the immediate causes of misuse and degradation, and assess current trends;

• identify from within the national system of incentives, regulations, and institutional arrangements those elements which inhibit sustainable use of natural resources;

• determine the cost to society of retaining these systems;

• evaluate changes in policies, laws, procedures, pricing mechanisms, and identify investments which would encourage more rational natural resource management.

Stock-taking. In any natural resource and environmental study a stock-taking may be an important starting point—an inventory of the status of a country’s natural resources, the present condition of land and water, soil, forest, and wildlife, and the identification of present and vulnerable areas of degradation and pollution. This provides a baseline for monitoring future changes in stocks and a basis for gauging the importance of rates of depletion. Data are often defective and have to be culled from many sources; priorities in data collection should be derived from local knowledge of critical problems and the most appropriate, readily available methods used ad hoc.

Philippines: forestry, fisheries, and agriculture resource management (ffARM) study

The objective of this study is to identify the set and sequence of policy actions, investment, and institutional changes that, consistent with the new government’s development policy and strategy, will encourage the sustainable utilization of the country’s natural resources in a way which will maximize their long-term product, and return to productive use areas already cut-over, degraded, or overfished. It is expected to provide a foundation for Bank lending operations and to be a catalyst for support by other agencies in watershed protection, upland farming systems, and coastal fisheries. An important objective will be to identify the scope for extensive reforestation and the conditions under which this can be expected to take place.

The study is being carried out under the auspices of the National Economic Development Agency (NEDA), government’s planning body, and in close cooperation with key line departments, in particular the Department of Environment, Energy, and Natural Resources, with support from the Bank and other international agencies.

Being a tropical archipelago, the Philippines is particularly vulnerable to degradation. Nearly 60 percent of the land is mountainous. Critical water catchments are small and if not carefully managed are susceptible to degradation when heavy rains follow prolonged dry seasons. These catchments have been under tremendous pressure from rapid population growth. One third of all provinces are reported to have over 40 percent of their surface severely eroded. Naturally, siltation has increased. Coastal ecosystems have been similarly degraded, to the cost of both coastal and deep-water fisheries: perhaps 80 percent of mangroves have been cut for charcoal or cleared for fish ponds, and it is estimated that over half the Philippines’ coral reefs have been destroyed or extensively damaged by destructive fishing methods.

The ffARM study is attempting to assess the present state of the natural resources of the Philippines, using, as one tool, satellite imagery; identifying the linkages between economic activities and their effects on resource use; starting to quantify these effects; assembling information on technologically optimal means of using the resources, including species for reforestation, stable farming systems for upland areas, and criteria for selecting critical habitats of endemic species; and determining what measures should and could be taken to ensure the adoption of environmentally sound practices in the future. The final report will provide a basis for dialogue with government, NGOs, and the donor community on actions to be taken and support to be offered.

Separately or in conjunction, ground survey, aerial photography or satellite imagery may all be used. As the quality and availability of the last improves, it offers particularly exciting prospects not only for detailed analysis of the present position but also an economical means of monitoring change over time. The value of ground data collection on broad resource situations may be limited by the time needed to compile results and by the accuracy of official statistics. However, supplemented by case study information from government environmental agencies, interested nongovernmental organizations, academic work or consultant studies, it is usually possible at least to identify areas critical for further study.

Identifying linkages. Environmental assessments call for an understanding of the proximate and underlying physical and economic linkages between different levels and manners of resource use, and their environmental consequences. The proximate causes of degradation are usually well known and documented. For example, chemical runoff or waste discharges are readily apparent reasons why waters become unfit for human use or incapable of supporting fish.

Identifying the underlying causes is more difficult, and is perhaps the most important part of any environmental assessment. Clearly, the problems occur in the course of the use of resources for the legitimate purpose of economic growth. In a market economy the signals that determine how resources are used derive from the structure of society and the economic policies pursued by government. The signals may fail for several reasons. First, that the market economy is less than complete, so that resource allocation is not based on economic considerations. Second, that although a market system is working the signals are distorted because interventions elsewhere in the economy spill over to affect resource management. Third, that the market fails because of externalities, where the personal cost to a user of a resource is less than the market price he pays. Such pervasive factors underlie most environmental deterioration.

This is evident, for example, in the case of tropical forest where mistaken policies have been a prime cause of over-rapid and wasteful exploitation over the past two or three decades. (Similar factors influence how exhaustible resources are used.) As Robert Repetto has noted, governments have typically set the price to concession holders of natural forest well below the proceeds from cutting down the trees. Rates of deforestation are affected not just by the level of user charges but by the form the charges take. For example, basing charges on the volume of timber removed rather than the size of the tract encourages removal of only high-grade timber and results in extensive damage to the remaining trees. It has been estimated that in Sabah and Indonesia half to three quarters of the trees remaining after logging are severely damaged or destroyed, but in Sarawak, where specific charges which vary by species are imposed, the damage of residual trees is only half as great.

Perverse policies are found very widely. For example, it is probable that policies pursued by the Philippines in the 1970s to keep farm prices artificially low intensified rural poverty and reduced the incentives for farmers to invest in the longer-term productivity of their land. This was aggravated by insecure tenure and share tenancy arrangements. Subsidies on fertilizer and pesticides in Indonesia have led to overuse, have proved a heavy fiscal drain, and have resulted in polluted drinking water and fisheries. Encouragement to cattle-ranching through free veterinary services or water supplies has contributed to overgrazing in many parts of Africa, and threatened the habitats of other species. Undercharging for irrigation water, either through low service fees or failure to enforce collection, has resulted in excessive use in Indonesia and the Philippines, depriving other users, making heavy demands on the development budget, and risking salinization. On the other hand, support to irrigation or inputs may be the most effective way of encouraging intensive agriculture which, by absorbing more labor per land unit, relieves pressure on marginal lands or forest elsewhere and encourages stable farming systems.

Externalities reflect the difference between financial and economic net returns. They can lead to actions which damage others, as for example where industries pass on their waste disposal problems by polluting the air or rivers. Private investment will be discouraged where the returns cannot be largely captured by the investor. Reforestation, for example, tends not to attract private investors because of its long gestation period and consequent high interest cost, even though it may have a high payoff to an economy through the protection it offers to downstream investment. This may justify government transfer payments to tree planters; provided the transfers only fill the gap between social and private net returns no subsidy is involved.

Externalities do not apply only to present generations. One of the most difficult questions for analysts is the extent to which the scale or manner of use of resources today deprives future generations of their patrimony and at what cost this should be preserved. Perhaps the most critical case is where resource exploitation destroys the habitat of endemic species and deprives a country of biological diversity—that pool of unique plants, insects, or vertebrates which have an unknown but potentially enormous value as the source of new foods, raw materials, drugs, or chemicals. Tropical forest ecosystems and marine systems are particularly rich in species diversity and their preservation on a sufficient scale to prevent the loss of species of potential value to man is a major concern of environmentalists.

Determining the costs of environmental damage. If an environmental assessment is to provide guidelines for public policy it must be able to quantify the costs of environmental damage and the benefits that will follow from positive action. The theoretical concepts for doing this exist. Essentially they are extensions of applied welfare economics. Measurement presents difficult problems, however. First, the physical and biological effects of economic activities are only partially understood, and experience is limited in measuring, for example, erosion rates or the reductions in fertility from soil loss. Some argue that the onsite effects of erosion are generally small, that it is only the downstream impact of sedimentation that has a significant cost and, therefore, that it would be fruitless to expect farmers to adopt conservation practices. Meanwhile, there is only sparse evidence to quantify the effects of terracing or its economic alternatives and relatively little is known of the soil-holding properties of different crops or rotations, particularly those suited to the tropical uplands where the need to stop erosion is so great.

Second, problems arise from the need to value nonmarket goods. It is difficult to value the cost of pollution-induced damage to human health; even more so to value human life. Nonetheless, there is considerable literature on the subject and a growing body of case studies which indicate a willingness on the part of economists, whose task it is to complete the analysis, to tackle these problems. It should also be emphasized that precision in quantification is rarely worth pursuing very far. Broad magnitudes and directions of costs and benefits are likely to be a sufficient basis for dialogue on policy directions and setting of priorities for action. Refinements can come later.

Policy recommendations. The ultimate objective of an environmental assessment should be to identify priorities for action concerning social and economic policy interventions, appropriate investments, and institutional changes. Policy measures may include the removal of taxes and subsidies that lead to degradation or overexploitation of the natural resource base, or the introduction of new interventions to encourage desirable action by the private sector where market signals have failed. Investments would include local projects to prevent, halt, or reverse degradation, where the cost/benefit calculus shows this to be worthwhile, or broader investments in, for example, land classification and improved allocation mechanisms, research into new farming systems for sloping lands, and irrigation operations and maintenance and drainage programs. Recommendations may also embrace institutional changes including improved planning and resource allocation mechanisms, strengthening of natural resource agencies to provide technical support to environmental programs and to undertake environmental monitoring, and education in natural resource management, and the inclusion of appropriate programs in school curricula. Changes may also be necessary to increase the involvement of local authorities and local peoples, and to identify appropriate administrative units for handling environmental matters. Flexible arrangements that increase local accountability and responsibility for stewardship of resources within the public commons are highly desirable.

The Bank, economic development, and the environment

In 1970 the Bank became the first multilateral institution of its kind to formulate an environmental policy and appoint a high-level advisor to assure its implementation. But until very recently the policy largely amounted to a developmental injunction, similar to that of the Hippocratic oath: do no harm.

We have learned, however, that prevention is not just difficult to ensure but often inadequate to the goal of resource preservation. Thus we have created an Environment Department within the Bank and begun to develop a positive program both for reversing environmental degradation and for assuring that nature’s wealth is used for sustainable development—in short, to make sure that the bank unfailingly implements what it has long embraced in principle.

Sustainable development, as the Bank’s President has noted, “depends on managing resources, not exhausting them. Economic growth based on any other premise is a costly illusion.” That principle is the foundation of a genuinely new and exciting development discipline: the endeavor both to analyze the environmental consequences of economic policy and to harmonize long-term profitability and long-lasting protection.

Where short-term economic progress conflicts with natural resource preservation, and where conservation values are of paramount significance, we must endeavor to ensure that development defers to preservation. This is a monumental challenge where development is, as in much of the Third World, synonymous with simple survival. The World Bank has long understood that poverty and overpopulation can do more environmental harm than industrial progress. That Malthusian reality is all too evident, for example, wherever too many poor farmers use too many poor farming practices. Slash and burn cultivation, overgrazing, and overplanting destroy the land and its capacity for renewal.

Bank-supported programs that help reduce poverty by improving agricultural techniques, introducing new skills, promoting energy conservation, and controlling population growth are therefore not just development measures. They are also effective means of environmental protection.

We would be pursuing these anti-poverty strategies even if they were not also investments in environmental protection. But in asking that they be recognized for their dual merit, I am not suggesting that the Bank’s role in defending natural resources ends with its offensive against Third World poverty and overpopulation. Our commitment to sustainable development—to controlled, enduring economic growth—requires not just a sensitivity to limited natural resources but an emphasis on renewable resources and on renewing them. That priority defines the juncture between environmental and developmental concerns.

Increasingly, in its policy-based adjustment lending and in the policy dialogue that goes with its financial support, the Bank is in a strong position to help developing nations join economic and environmental reform under a common policy umbrella. Our analysts understand the problems involved. No one fully understands the technical solutions. Thus it is here that I would urge environmental activists to turn some of their attention and energy. I would ask you to examine development not just for its attendant evils but for the opportunities that reformed growth policies are opening for redemptive, preservative treatment of natural resources. I would ask you to look at poverty, especially the rural poor and the population pressures they represent, as a danger to the environment every bit as grave as the waste products of the rich, the exploitative practices of the greedy, or the indifference of industrial polluters. And I would ask you to regard the World Bank as your ally in a common cause, a common sense of economics and ecology as companion disciplines.

D. Jane Pratt

Chief, Environmental

Operations and Strategy

This text is based on a speech to the Fourth World Wilderness Congress, Denver, Colorado, September 13, 1987. A detailed explanation of the Bank’s new approach on environmental issues will be forthcoming in a future issue of Finance & Development.

Finance & Development, March 1988
Author: International Monetary Fund. External Relations Dept.