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For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.

THE 1992 “Earth Summit” succeeded in alerting the conscience of the world to the urgency of achieving environmentally sustainable development. We know enough to act today, but we must also find answers to the many tough conceptual and technical questions that remain.

As last year’s “Earth Summit” in Rio de Janeiro drew to a close, its message to the world became clear: without better environmental stewardship, development will lx- undermined, and without accelerated development in poor countries, environmental policies will fail. The evidence is all around us In sub-Saharan Africa, “slash and burn” approaches to agriculture—in the face of rising population growth—are creating vicious cycles of soil degradation and impaired productivity. In cities like Sao Paulo, Mexico City, and Bangkok, the polluted air and water are posing a serious health threat. Industrial country emissions of greenhouse gases—threatening a 2—4° centigrade rise in global temperatures over the next century—show little sign of abatement.

Rio was a signal to the world that after decades of pitting environmental quality against economic growth, policymakers are finally becoming aware of the crucial and potentially positive link between the two. Humanity must learn to live within the limitations of the physical environment as both a provider of inputs and a “sink” for waste. We must recognize that even if environmental degradation does not reach life-threatening levels, it can result in a significant decline in the quality of the world we live in. We must face our responsibilities to other species and the need to protect biodiversity. We must find a way to enable all people, now and in the future, to enjoy clean water, clean air, and fertile soils.

But basic as these concerns may seem, the world today faces a tremendous backlog in providing these basic amenities to the poor and disadvantaged. One billion people—mostly in developing countries—do not have access to clean water, 1.7 billion people do not have access to sanitation, and 2–3 million children die annually because of diseases associated with this lack of water and sanitation. To this situation, we are adding about 90 million people to the global population every year—again, mostly in developing countries. This raises huge challenges for policymakers as they seek to reconcile the needs and aspirations of the growing population with the limitations of the natural world. Three particular challenges stand out:

Food production. As the world’s population expands to 9 billion over the next 40 years, food consumption will double. Even though the required rate of growth of food production—1.6 percent per year—will be less than the 2 percent achieved for the past three decades, agronomists agree that the task is likely to be much more difficult, since many of the sources of earlier growth are no longer available. Two options now exist: intensifying production on land already in use, and expanding into new areas. In the past three decades, intensification has dominated, accounting for over 90 percent of agricultural growth. Whether a new “green revolution” will be able to repeat the remarkable gains in yields is highly uncertain. The challenge will be not only to raise yields but to do so in a less damaging way than in the past. Already, the environmental problems of intensification (chemical and biological runoff, water logging, salinization, and the like) are serious in some areas and, without better policies, will get much worse.

Urbanization and pollution. Ninety percent of the world’s increased population will be located in urban areas, posing formidable problems of social and institutional change, infrastructure investment, and pollution control. Already many municipal authorities are overwhelmed by their current responsibilities’—yet the task ahead will only increase. Making clean water available to everybody in the next 40 years will require extending service to 3.7 billion more urban residents. And preventing pollution from worsening in some fast-growing countries will require that pollution per unit of industrial output fall by 90 percent between now and 2030.

Human encroachment. As human numbers and the scale of their activities increase, so does the pressure on fragile ecosystems. In the past decade, 7–10 percent of tropical forests and wetlands have been destroyed, important aquifers have been depleted, and coastal zones have been polluted at an unprecedented rate. We now know that income growth need not cause these problems and can help reduce them. But without better policies, the coming decades will witness even worse damage.

“Sustainable development”

The term “sustainable development” was brought into common use by the World Commission on Environment and Development (The Brundtland Commission) in 1987. Calling for development that “meets the needs of the present generation without compromising the needs of future generations,” the Brundtland Commission report highlighted the need to simultaneously address developmental and environmental imperatives.

Since then, substantial work lias been undertaken in an effort to draw out the operational implications of the concept of sustainable development. This, for example, was the main theme of the World Bank’s World Development Report 1992. The Bank’s current work in this area is designed not to generate a general theory of sustainability, but rather to focus on key conceptual issues with potentially important operational implications. One thing is sure: we will fail in our efforts unless better progress is made to integrate the viewpoints of three disciplines:

  • That of the economists, whose methods seek to maximize human welfare within the constraints of existing capital stock and technologies. Economists are currently relearning the importance of natural capital.

  • That of the ecologists, who stress preserving the integrity of ecological subsystems viewed as critical for the overall stability of the global ecosystem. Some argue for the preservation of all ecosystems, although a less extreme view aims at maintaining the resilience and dynamic adaptability of natural life-support systems. The units of account are physical, not monetary, and the prevailing disciplines are biology, geology, chemistry, and the natural sciences generally.

  • That of the sociologists, who emphasize that that key actors are human beings, whose pattern of social organization is crucial for devising viable solutions to achieving sustainable development. Indeed, evidence is mounting that failure to pay sufficient attention to social factors in the development process is seriously jeopardizing the effectiveness of various development programs and projects.

While economists, ecologists, and sociologists would all agree that the others’ concerns (illustrated in chart 1) matter, they do not see these concerns through each other’s eyes. An economist, for example, would readily acknowledge the importance of social and environmental factors but. as chart 2 shows, would interpret these concerns through an economists lens. Social concerns tend to be reduced to questions of inequality and poverty reduction, and environmental concerns to questions of natural resource management. Absent are important concerns such as social cohesion, cultural identity, and ecosystem integrity.

Chart 1.
Chart 1.

Objectives of environmentally sustainable development

Citation: Finance & Development 0030, 004; 10.5089/9781451951813.022.A002

Chart 2.
Chart 2.

How an economist sees it

Citation: Finance & Development 0030, 004; 10.5089/9781451951813.022.A002

As policymakers seek to bring together experts from each of these disciplines—as equal partners—a number of conceptual and methodological questions need to be addressed. The key unresolved questions fall into four broad categories: questions of valuation; questions of decision making in the presence of thresholds and uncertainty; questions of policy and institutional design; and questions of social sustainability.

Questions of valuation

How should we value the environment? The starting point of good environmental management is to recognize the costs of environmental damage and inject them into the decisionmaking process. But this is easier said than done. As chart 3 shows, it requires the estimation not only of the direct benefits to humans (e.g., productivity benefits of good soils and health benefits of clean water), but also of the indirect benefits (e.g., watershed protection from woodlands). Further, some natural assets, such as biological diversity, have “option” values that we are not even aware of (e.g., providing new medicines in the future) and that are particularly difficult to estimate. Finally, most of us believe that the natural world has an “intrinsic” worth, above and beyond its value to humans; here the best we can do is estimate human perceptions of that value.

Chart 3.
Chart 3.

Economic values attributed to environmental assets

Citation: Finance & Development 0030, 004; 10.5089/9781451951813.022.A002

A number of techniques—including contingent valuation, replacement cost estimation, and the use of “surrogate” markets—have been developed for estimating the value of nonmarketed environmental services, and the Bank has recently strengthened significantly its capacity to assist developing country policymakers in using these techniques (see “The Economist’s Approach to Sustainable Development”). But much remains to be learned both in terms of the methodologies and their empirical application.

How should we build sustainability into national accounts? Valuation techniques have usually been employed to inform decisions at the project and sectoral level, but they also need to influence decisions—and how we measure progress—at the national level. Conventional national accounts may serve macroeconomists and central bankers well, but they do a poor job of measuring sustainable income or changes in a nation’s productive capacity. They include estimates of depreciation of manmade capital, but not that of natural capital—which in some countries is more important. For example, when oil is extracted and consumed, no adjustment is made for the use of petroleum energy stocks. When a tropical forest is logged, no estimate is made for the loss of an irreplaceable asset. When land cultivation increases the loss of topsoil, which subsequently accumulates in a reservoir, there is no allowance made for the harmful effects on soil and water storage.

To help address some of these deficiencies, the Bank has been collaborating with the UN Statistical Office and others to develop a new system of environmentally adjusted national accounts. There are difficult technical issues yet to be resolved, but good progress has been made in the development of a System of Integrated Environmental and Economic Accounts (see “Measuring Environmentally Sustainable Development”).

How should we value the future?

Emitting carbon dioxide into the air costs us nothing today but may cost our great-grandchildren dearly. How should long-term impacts be valued? Economists have conventionally applied discount rates to future costs and benefits, but ecologists, ethicists, and ordinary citizens often argue that it is surely wrong to value the well-being of unborn people less than we value our own welfare. Economists reply that it is not the well-being of future generations that is being discounted; it is simply that one dollar today can be invested at a positive real rate of return to yield several dollars in the future—and thus is worth more than one dollar in the future. This is why they usually choose to discount the future at the opportunity cost (the real rate of return) of capital.

For near-term decision making, this argument is persuasive, although still subject to well-known empirical problems of how to estimate the appropriate discount rate. For the long term, however, it is right to consider whether the discount rate should be so high, since we cannot be sure that positive rates of return on investment will continue, especially if the natural resource base continues to deteriorate. Most economists would agree that discount rates over very long time periods should be lower than the 9–12 percent range usually used for medium-term investments in developing countries, but how much lower is a subject of debate, even among economists. (See the debate on “Discounting Our Descendants?” in Finance & Development, March 1993.)

We should reject the suggestion of some that discount rates should be set at zero; this would encourage a more capital-intensive form of development and would probably have an adverse impact on the environment. We should also reject the argument that environmental impacts should have a separate, lower discount rate than other impacts; there is no reason to give more priority to environmental protection than to health, education, or family planning projects. But we do need to explore various ways of supplementing cost- benefit analysis—such as the imposition of a “sustainability condition” requiring that the overall capital stock not be depleted.

Thresholds and uncertainty

How should uncertainty and thresholds be handled? Our knowledge about the relationship between human activity and ecological processes is still fragmentary (see “The Ecologist’s Approach to Sustainable Development”). In addition, such relationships may be “discontinuous”; that is, when under stress, an ecosystem may “crash” irreversibly in a manner and at a time that could not have been predicted. This seriously complicates decision making and makes conventional approaches to risk management—assigning probabilities to possible outcomes and adding an insurance premium onto project costs—difficult to implement.

There are many examples of how well-intentioned human behavior has led to totally unexpected ecological damage. When chlo- rofluorocarbons were first used, no one anticipated the damaging loss to the ozone layer. When Nile Perch were introduced into Lake Victoria some 30 years ago to improve game fishing, few would even have guessed that it might cause the elimination of whole species and the degradation of the area surrounding the lake.

This high degree of uncertainty, however, is no reason for inaction. The dynamics of poverty, demography, and economics often make the costs of inaction even higher than those of action. But uncertainty does demand rigorous environmental assessments, drawing upon the best scientific knowledge available and including careful sensitivity analysis. A key challenge will be to narrow the range of uncertainty and make the “precautionary principle” operationally useful.

How should we prioritize biodiversity? The loss of species is an extreme example of irreversibility, and the uncertainty surrounding the impact of lost biological diversity is an extreme example of our lack of knowledge. Some species are seen to be repositories of key genetic material; others are seen as of marginal genetic significance. But our knowledge in this area is quite limited.

How much priority, then, should we assign to protecting biodiversity? At one extreme, some biologists would like to save everything. The imminent extinction of the white rhino, along with threatened whales and elephants, has galvanized conservation efforts for highly visible causes. But public willingness to pay to save a myriad of lesser species (minor insects and plants) is much less evident, and the cost of saving all species may be prohibitive. Our present posture is a precautionary one—a rough-and-ready set of disorganized and disconnected initiatives, without any sure knowledge of what might be enough to preserve the world’s unique genetic heritage. The challenge now is to bring greater analytical rigor in this area.

Policy and institutional design

How should we set priorities? Faced with a complex array of environmental dangers and limited resources, where should a government start? The problems that seem at first glance to be the most urgent may not in practice offer the best value for money. In Eastern Europe, for example, despite the obvious need to clean up badly polluted rivers, calculations make clear that for each dollar spent, higher benefits could be secured by reducing air pollution.

One interesting approach to priority setting is found in the work of a team at Harvard University that has developed a framework for ranking various abatement options. The core of the method, which follows on the US Environmental Protection Agency’s pioneering work, consists of deriving a common set of indicators based on impacts on human health, productive assets, and ecological functions. From this matrix of hazards, sorted according to various criteria such as their pervasiveness (spatially and over time) and their total consequences (current and future), it is possible to clarify the basis for establishing priorities for addressing different environmental hazards. This methodology is still in its infancy; the next step is to apply it in a number of countries on a pilot basis.

Such analyses may be useful to countries as they draw up national environmental action plans that would enable decisionmakers to view their country’s environmental problems as a whole. Moreover, to the extent that the process is broadly participatory, the public can be made aware of the options and dangers facing the nation.

What policies work best? Policies for environmentally sustainable development fall into two categories. First, there are those that clearly promote economic growth and improved environmental stewardship. These so-called “win-win” policies include removing general subsidies on resource use, clarifying property rights, and accelerating education and population programs. Such policies should be relatively uncontroversial, needing political will and funding for their implementation. Second, there are policies that seek to stop environmentally damaging behavior through regulations and incentives. These are more controversial in that, implemented poorly, they can distort the economy and fail to improve the environment. Textbooks and empirical studies tell us that market-based instruments—those that charge polluters for the damage they do—are generally better than quantitative restrictions, yet the latter have generally dominated policymaking. A major task is to assess the extent to which developing countries can avoid the expensive “command and control” approaches common to industrial countries and thus minimize any trade-offs between income growth and environmental protection.

How should we build capacity for the task? Many well-meaning environmental policies have failed due to the lack of institutional capacity to get the job done. As a result, countries around the world are now actively seeking to strengthen their institutional capacity; the Bank is currently assisting over 50 of them. Experience suggests that the organizational structure of institutions is less important than clarity of mandate, adequate resources and technical skills, authority to operate across disciplinary and jurisdictional lines, and accountability for results. Much remains to be learned in this important area, however, both in terms of appropriate institutional design in various sociocultural contexts and in how to enhance the human resource base for effective management.

People-centered development

People are the instruments and beneficiaries, as well as the victims, of all development activities. Their active involvement in the development process is the key to success (see “The Sociologist’s Approach to Sustainable Development”). Furthermore, unless we keep foremost in our minds the need to continue to improve the welfare of the people, environmental programs will certainly fail. The poor, in particular, tend to be the hardest hit by environmental degradation and the least well- equipped to protect themselves, yet, at the same time, they cause much of the damage out of short-term necessity, ignorance, and lack of resources (see box).

The challenge is to make participation more than an empty catchword. Practical progress is required at three levels. First, those potentially affected by development projects need to be more involved at the design stage. Second, local knowledge needs to be better utilized in the design and implementation of programs. Third, we need to build our capacity to assess social impacts of policies and investments—a particularly important, but difficult, task, requiring a different skill mix and a different way of doing business. Indeed, doing business differently will be required in many areas if development is to be truly sustainable.


Finance & Development, December 1993
Author: International Monetary Fund. External Relations Dept.