From Liberalisation to
Sustainable Development
a Critique of the OECD Paper:
"Open Markets Matter:
the Benefits of Trade & Investment Liberalisation" April 1998
WWF Critique,
June 1998
Amended Jan 1999
EXECUTIVE SUMMARY
The politics and practice of liberalisation are in crisis. The last decade has
seen an unprecedented lowering of trade barriers and increase in private
investment. These have helped stimulate strong economic growth, though this been
unevenly distributed both between and inside countries. The impact of financial
instability in Mexico, Asia and Russia, coupled with reactions to controversial
decisions by the WTO on environmental issues and widespread opposition to the
proposed MAI has produced a groundswell of opinion against continued progress
towards trade and investment liberalisation.
During this period of liberalisation environmental degradation has accelerated.
The review of the Rio agreements held in 1997 concluded that all unsustainable
trends were worsening at a faster rate. Most of these problems are driven by
increased economic activity which has not been matched by adequate regulatory
action at any level. This mismatch between high economic growth and worsening
environmental quality is the starting point for environmental critiques of
current patterns of liberalisation.
WWF has a mission to preserve biodiversity through sustainable development which
recognises the connections between economic, social and environmental goals. We
are clear about these goals and our approach to liberalisation is not derived
from any ideology, but rather aims to measure liberalisation's impact on these
objectives. It is on this basis that we address the issues raised by the OECD
paper "Open Markets Matter".
WWF is deeply disappointed with the Open Markets paper considering many of its
conclusions on environmental issues to be unproven or false. As such the paper
represents a missed opportunity to move the debate on liberalisation and the
environment forward.
WWF considers the Open Markets paper to have serious flaws when considering
environmental issues. The scope of analysis is inadequate, mainly focusing on
pollutants from manufacturing sectors and ignoring impacts in resource using and
extracting sectors. The evidence used is partial and methodologically biased
towards aggregate and academic economic studies; there is little use of case
studies or more direct forms of analysis. The paper also suffers from a narrow
theoretical approach, ignoring new theories of growth and sustainable
development based on balanced accumulation of human, man-made, technological and
social capital - combined with optimal, precautionary use of natural capital
inside ecological limits.
WWF urges the OECD to engage with all participants in this debate - from both
North and South - and produce a new analysis to generate economically and
ecologically sound policies for achieving sustainable development.
WWF's Analysis of Liberalisation &
the Environment
In the body of this paper WWF attempts to rectify these analytical omissions by
providing some evidence, ideas and arguments from our own experience and
research which were not included in the Open Markets paper. WWF's own research
has lead us to five main conclusions:
Increased satisfaction of Northern demands for goods and natural resources from
developing countries will result in excessive and irreversible environmental
damage under current systems of national and international regulation.
The impact of foreign investment on the environment is ambiguous and differs
between sectors. However, in many polluting and natural resource sectors
competition for investment is leading to lowering, non-enforcement or chilling
of environmental regulations.
The transition effects of liberalisation often result in permanent environmental
destruction and increased poverty for marginal communities dependent on natural
resources. There is no causal evidence that any increase in aggregate incomes
from liberalisation will result in a general rise in environmental quality. The
irreversible nature of much environmental destruction means that any such
correlations do not guarantee sustainability.
The mismatch in legal power and completeness between international economic
regimes (WTO, MAI, NAFTA) and multilateral environmental regimes has resulted in
national and international environmental law being repeatedly challenged or
weakened.
Further liberalisation will tend to increase both environmental destruction and
poverty in marginal communities if these issues are not tackled through:
sectoral reservations; enhanced regulation and policy integration; financial
support and technology transfer. The OECD must deploy these policy tools more
frequently and effectively if it is to support and not undermine sustainable
development.
1.
INTRODUCTION
The politics and practice of liberalisation is in a state of crisis. The last
decade has seen an unprecedented period of increasing openness in the global
economy with trade barriers being significantly lowered as a result of GATT
agreements, the formation of regional trading blocs and the imposition of
structural adjustment programmes in developing countries. At the same time
global flows of private investment have increased by over five times particularly portfolio investment - and the volumes of speculative capital and
derivative transactions have risen sharply too.
This period has seen strong economic growth despite the recession in developed
countries in the early nineties. However, growth has been unevenly distributed,
with income disparities both between and inside countries generally increasing,
despite some exceptions. Absolute falls in per capita incomes have occurred in
many developing countries - principally those in Sub-Saharan Africa. Financial
instability seems to have become endemic with Mexico, East Asia and now Russia
all experiencing significant macroeconomic difficulties due to the actions of
foreign investment and exchange markets. The causes of these difficulties are a
complex mix of domestic and international influences but have undoubtedly been
exacerbated by overly footloose and liquid capital and current account flows.
Over the same period environmental degradation has accelerated. The five year
review of the Rio agreements held in 1997 concluded that all unsustainable
trends were worsening at a faster rate; whether it be greenhouse emissions,
deforestation, soil depletion, biodiversity loss or over-fishing. Most of these
problems are driven by economic activity and it is obvious that the expansion in
productive capacity has not been matched by adequate regulatory action at either
national or international level. Economic agreements continue to receive higher
priority and greater legal status than environmental or social legislation,
despite OECD commitments to fully integrate these policy areas stemming from
1991.
WWF has a mission to preserve biodiversity and natural habitats through
promoting balanced sustainable development which recognises the importance and
inter-connectedness of economic, social and environmental goals. We are clear
about these goals and our approach to liberalisation is not derived from any
ideology, but rather aims to measure liberalisation's impact on these
objectives. To this end WWF has carried out many extensive research projects
into liberalisation issues and has an active Trade and Investment programme and
a dedicated Programme office researching macroeconomic issues. It is on this
basis that we address the OECD paper "Open Markets Matter".
WWF is deeply disappointed with the Open Markets paper, considering its many of
its conclusions on environmental issues to be unproven or false. As such the
paper represents a missed opportunity to move the debate on liberalisation and
the environment forward.
2.
OVERVIEW OF WWF'S CRITIQUE OF
THE OPEN MARKETS PAPER
The following five sections give WWF's detailed comments and counter analysis of
vital themes contained in the paper: comparative advantage, trade and
environment; pollution havens and investment liberalisation; transition effects
and liberalisation; economic growth and sustainability; and the impact of
economic agreements on environmental regulation. However, there are also several
common issues which are bought out in this section.
The Open Markets paper sets out three main aims which concern WWF: to address
genuine concerns with liberalisation; to determine how much "actual experience"
and "serious empirical evidence" supports them; and to assess whether reversing
liberalisation is likely to resolve these problems. Below we examine each of
these against the content of the paper.
Are genuine environmental concerns addressed?
The paper only examines a sub-section of environmental issues connected to
liberalisation in any detail; mainly those concerned with emissions of
pollutants from manufacturing sectors. The paper generally ignores indirect
environmental impacts from economic growth, structural and dynamic changes;
fails to study many environmentally sensitive sectors including mining,
agriculture, forestry, fishing, and tourism; does not address the issue of freetrade zones or sectoral deregulation to attract investment; and provides little
analysis on the impact of liberalisation rules on environmental regulation.
Is actual experience and serious empirical evidence used in the analysis?
The paper's analysis is mostly based on aggregate studies - often econometric using national economic statistics and pollution data. There is hardly any
reference to case studies, systematic legal or historical analysis or use of
independent sources outside the Northern academic sector or multilateral bodies.
As mentioned above, evidence on indirect environmental impacts and natural
resource-based sectors is hardly mentioned, neither are ecological data or
studies. Many statements are unsupported by serious evidence; for example, the
extent to which foreign investors actually transfer environmentally sound
technologies. Distribution issues and long term impacts from transition to
liberalised markets are completely absent from the environmental analysis.
Are solutions adequately addressed?
The paper sets up the straw man of whether reversing liberalisation is the best
answer to concerns which have been raised, and unsurprisingly decides that it is
not. However, this ignores a raft of other well-known policy options including
slowing or limiting liberalisation; adopting a precautionary approach in
environmentally sensitive sectors; fully integrating environmental objectives
within liberalisation agreements; and policies to empower and develop local
industries, regulation and communities before liberalisation occurs.
The root of these problems lies in a narrow economic approach to the analysis of
liberalisation and its effects, which ignores the latest developments in growth
theory based on balanced accumulation of human, man-made, technological and
social capital combined with optimal and precautionary use of natural capital
within ecological limits. The analysis also overly focuses on static, long-run
efficiency without considering the dynamic effects, stability, irreversible
environmental impacts, market power and structural advantages.
WWF urges the OECD to move outside its traditional constituencies and engage
with other participants in this debate - including non-economic academics, NGOs
and citizens groups from both North and South - and produce a new analysis which
will inform economically and ecologically sound policies for achieving
sustainable development.
3.
COMPARATIVE ADVANTAGE, TRADE & THE ENVIRONMENT
The a priori assumption that all trade liberalisation is beneficial is based on
the 18th century theory of comparative advantage, which was developed in a world
far less technically complex, less populous and less environmentally fragile
than the one we inhabit today. The trade analysis of the Open Markets paper
rests on the 'solid foundations' (p.9) of comparative advantage and its stimulus
to improved efficiency of resource allocation, economic growth and rising
incomes for all parties involved (p.10, p.41, p.104). However a number of the
basic assumptions on which this theory was based are no longer relevant to
present day economic realities (WWF, 1996a).
3.1. Trade & Domestic Externalities
Firstly the theory ignores social and environmental externalities. If external
costs (or benefits) are not internalised then market prices do not reflect true
social values, causing allocative inefficiency. This point is raised within the
text (p.96), the solution being to correct market distortions through sound
environmental policies, with emphasis being placed on environmental pricing.
However, the problems of identifying and putting a price to diffuse and diverse
environmental goods and services is extremely complex and not always possible.
In the presence of irreversible effects - biodiversity loss, soil loss, climate
change, long lasting toxic pollution - pricing is virtually impossible. This is
because the willingness of future generations to accept environmental factors
must be estimated, and economic theory tells us that these values will diverge
markedly from today's estimates (Mabey et al, 1997). Even non-price methods to
maintain environmental standards are difficult to monitor and enforce because of
the complex systemic nature of environmental goods and services and/or the
causes of environmental destruction; for example, fisheries, ecosystem services
from wetlands and traffic pollution.
Where externalities are not internalised the increased economic growth from
liberalised trade and investment will serve only to exacerbate rather than
address environmental problems, especially in those countries which are primary
producers of environmentally sensitive commodities - e.g. minerals, agricultural
products, fish and fish products etc. One of a number of examples is the
Philippines where trade liberalisation has caused a shift in crops, increasing
both GDP and substantial negative externalities primarily through a 28%
increase in mining (Cruz and Repetto 1992).
3.2. Trade & International Externalities
The weight of policy recommendations in the paper are on improving domestic
environmental controls: the impact of international environmental externalities
is not addressed in any depth. Environmental assets - especially biodiversity
and unique/irreplaceable ecosystems and habitats - have international value but
this is not adequately reflected in international legal regimes. The Global
Environment Facility (GEF) is the only dedicated fund which exists to enable
rich countries to invest in biodiversity conservation and environmental
improvement in the South. The GEF's budget of $666 million per annum
approximates to around 75 cents per person per year for each citizen in the
contributing countries. Hardly a proper reflection of the global value of the
natural environment.
Meanwhile the direct economic demand of the North for commodities continues to
fuel environmental destruction in developing countries, and is often stimulated
by government subsidies and credits; for example, the third-party access
agreements to West African fishing grounds promoted by the European Union and
systems of export guarantees in all OECD countries.
In the absence of significant binding international environmental agreements and
adequate funding for environmental protection in the South, the growing and
disproportionate demand of the North will continue to cause global environmental
degradation. Governments in the South - though they could do much more - face
severe budgetary restrictions, a general weakness in administrative capacity and
fears of competitive disadvantage if they try to unilaterally increase
standards. These dilemmas are both exacerbated by, and reflected in, the current
WTO rules restricting discrimination between traded products on the basis of
process and production methods.
The recent Shrimp/Turtle case at the WTO showed that even a common body of
binding but less specific international environmental law is not enough to
overturn the primacy of these trade rules. Meanwhile demand for luxury products
such as tiger prawns continues to cause massive destruction of irreplaceable
mangrove and other coastal ecosystems, bringing unsustainable economic
development and increasing poverty to already marginal communities.
WWF is attempting to deal with these types of issues through voluntary
certification initiatives such as the Forest and Marine Stewardship Councils,
but the efforts of NGOs are unlikely to replace a lack of adequate multilateral
legal regimes to correct these market and regulatory failures.
3.3. Trade & Structural Inequality
The classical theory of comparative advantage does not take account of longstanding differences and inequalities between trading partners in
infrastructure, technologies, human and institutional capital. Evidence particularly from Africa - has shown that countries forced from colonial times
to specialise in sectors with little scope for evolution of comparative and
absolute advantages - such as primary products and commodities - may become
locked into economic stagnation at the lower end of a growing inequality between
nations. Richer countries on the other hand retain their wealth since
specialisation in advanced products can create positive externalities such as
technological innovation (WWF, 1996a). Hence, a vicious circle is created
whereby the rents from depleting natural capital in poorer countries go to build
up technological, human and managerial capital in the developed world,
increasing their absolute advantage in terms of trade.
This argument implies that many economies starting with trade disadvantages will
remain permanently below those more advantaged countries. Such a pattern is
illustrated by the fact that primary commodities continue to account for 92
percent of export earnings in Sub-Saharan Africa (WWF, 1994). The real price of
such commodities has been declining, as reflected in the worsening commodity
index of the terms of trade between rich and poor nations. As the terms of trade
continue to worsen these countries are forced to export higher volumes simply to
maintain foreign exchange earnings, often pushing them towards unsustainable
practices. This problem has been exacerbated by demands on indebted countries to
specialise in products with the greatest export potential. This has played a
considerable role in producing aggregate international overproduction and
subsequent price falls in many exported, primary commodities.
The combination of these factors as well as large debt repayments has
contributed to declining economic and social conditions in a number of African
countries, and an increasing drawdown on these countries' natural capital. Such
evidence would seem to contradict the views of the Open Markets paper that
international trade allows all countries to achieve greater prosperity (p.41),
and that increased trade will play a vital part in fuelling the improvement of
environmental quality (p.15). Even where there is greater prosperity all around
this tends to be largely appropriated by developed countries. A study cited in
Convery (1995) highlights the implications of the Uruguay Round of GATT, showing
that the bulk of welfare gains from this liberalisation accrued to industrial
economies.
Many of these problems with the theory of comparative advantage assumes that
critical factors of production, such as capital and labour, cannot move
internationally. However, this assumption is erroneous since they are mobile and
can shift to those countries with absolute advantages hence undermining the
notion of comparative advantage. The proliferation of foreign direct investment
is testimony to this. The use of infant industry protection policies, which has
been crucial to the development of a number of East Asian countries, shows how
creative and flexible use of protectionist policies can be vital for the
development of internationally competitive industries.
Increased satisfaction of Northern demands for goods and natural resources from
developing countries will result in excessive and irreversible environmental
damage under current systems of national and international regulation. Free
trade is also unlikely to automatically lead to increased welfare gains and more
efficient resource use in all participating countries.
4.
INVESTMENT LIBERALISATION, POLLUTION HAVENS &
THE ENVIRONMENT
The Open Markets paper cites evidence to support a positive relationship between
investment liberalisation and environmental stewardship (pg 108). The evidence
also aims to shows that higher environmental regulation does not have negative
impacts on a company's or country's competitiveness, and therefore the
likelihood of industrial flight to 'pollution havens' or a race to the bottom on
environmental standards is small. The studies this conclusion is based upon are
generally aggregate econometric analyses based purely on direct - and often
dubious - pollution emission indices.
The locational decisions of most industries are predominantly influenced by
factors such as market access, the costs of labour and/or other factors of
production, and not environmental regulation. However pollution - and resourceintensive industries such as chemicals, metals and natural resources which are
susceptible to environmental costs have shown a locational preference for areas
of low environmental standards. This has been borne out during the current
unprecedented world-wide 'gold rush' by OECD mineral firms. The paper makes
little reference to these industries, simply stating that they account for a
very small proportion of total FDI (p.106).
The paper also ignores well documented cases of national authorities lowering
environmental standards to attract investment. For example, throughout the Asia
Pacific standards have been lowered in the mining sector. In Indonesia and Papua
New Guinea almost all mining activities operate under special licences which
impose minimum or no environmental regulation (MPI 1998). Recent changes in
mining laws for foreign investors in the Philippines have liberalised access to
concessions and profit repatriation rules at the same time as removing
requirements for environmental impact assessments. Free trade zones in countries
such as Mexico, Brazil and India have attempted to lure industries through a mix
of incentives, including lower environmental standards. In the case of Mexico
the NAFTA agreement has proved to be an incentive for US firms to move to Mexico
in order to escape better enforced US standards. A study by the Worldwide
Institute found that over 25 percent of companies located along the Mexico-US
border had been influenced by lower environmental standards in Mexico (Sierra
Club 1993)
Companies which have not explicitly relocated for environmental reasons often
apply pressure to lower regulations or prevent their enforcement once
established. Foreign investment exacerbates this as transnational corporations
have stronger leverage than domestic companies because they can use the threat
of disinvestment and relocation more credibly and effectively. (High profile
examples include Shell's oil drilling in Nigeria, Freeport's mining operations
in Indonesia and more recently P&O's proposed port development in India. Such
practices which are prevalent across the OECD, highlights the need for
investment liberalisation to be complemented with binding environmental
regulation which is co-ordinated at the regional or international level; such as
exists inside the European Union.
Past experience has shown that countries competing for foreign investment have
also tried to lure corporations with low rents, cheap wages, taxes exemptions as
well as lax environmental standards. There has been often been accompanied by a
lack of national reinvestment of profits from resource use. Wide spread
practices such as transfer pricing reduce the revenue captured by the host
country. By underestimating the price of commodities, firms can evade taxes in
the producer country and raise their profits when they sell them at their true
price in the importing country (WWF, 1994). This can only be solved by
international rules on multinational corporations.
Econometric studies are also incapable of measuring the chilling effect of
liberalisation where environmental standards fail to rise because of perceived
competitiveness effects. The fact that each nation is reluctant to introduce
environmental legislation unilaterally, since it will undermine their
competitiveness in the international market, the overall level of environmental
standards will be sub-optimal. These pressures not only reduce action to manage
domestic environmental resources but also affects any action pertaining to the
global commons, such as climate change or species extinction. This chilling
effect has prevented the political implementation of appropriate environmental
regulation; for example, the failure of the European Union's proposed
carbon/energy tax. It further highlights the urgent need to have the necessary
institutional arrangements in place to introduce appropriate regulation at both
the national and international levels.
The impact of foreign investment on the environment under current systems of
regulation is ambiguous, but in many polluting and natural resource sectors
competition for investment is leading to lowering, non-enforcement or chilling
of environmental regulations.
5.
TRANSITION EFFECTS &
LIBERALISATION
The above sections show how the Open Markets paper has failed to take account of
many important negative structural effects which accompany over-extensive or
overly rapid liberalisation. As a result of NAFTA, for example, 2.5-3 million
Mexican farmers engaged in white corn production are experiencing the effects of
an influx of cheap imported corn from the US (CEC 1998). In Brazil,
liberalisation of the agricultural sector has caused a significant change in
crop mix, displacing hundreds of thousands of farmers producing to the domestic
market. These are pernicious, long-run impacts affecting trends in human, social
and environmental capital stocks which are vital for the balanced sustainable
development of any country. The paper does mention the transition effects of
liberalisation, and the impact on specific social groups and industries of
structural economic change. However, this is treated in a some-what cursory
manner with the implication that in the long run social welfare will increase
and disadvantaged groups will be compensated. However, as Keynes famously said "in the long run we are all dead" - and this is particularly true for the
environment.
Many important environmental assets can not be replaced once destroyed.
Sometimes destruction is absolutely irreversible - such as with species
extinction and loss of complex ecosystems - and sometimes natural systems will
only retain their previous quality due to long-run natural process; for example,
soil loss, ozone layer recovery and rainfall changes due to climate change.
The "transition effects" of badly regulated or over hasty liberalisation often
cause such irreversible effects as production expands outside adequate
government controls, or impoverished groups are forced to draw down on natural
assets to survive the "transition" to new livelihoods. Such transitions can also
bring about irreversible social and cultural disruption which removes
traditional economic support mechanisms without replacing them with adequate
substitutes (WWF, 1998). A WWF study of 12 country cases of structural
adjustment (WWF, 1996) showed the range and significance of these effects,
especially in sectors such as agriculture and forestry. Of course, the
relationships are complex, and liberalisation does bring some environmental
benefits especially if damaging subsidies were eliminated at the same time, but
a significant pattern of liberalisation, marginalisation and environmental
destruction was observed over a range of different countries.
The paper also ignores the indirect effects caused by rapid and unplanned
industrialisation through migration, urbanisation and associated infrastructure
development. For example along the Maquiladora zone on the US-Mexico border, the
most serious environmental problems have been as a result of the rapid
development in the region without adequate environmental infrastructure (Esty
and Genty 1997). The costs of cleaning up the environmental damage have been
estimated to be in the order of $21 billion by the year 2003 (Sierra Club 1995)
The transition effects following liberalisation, especially when imposed by
outside agencies such as the IMF, often lead to permanent social and
environmental damage and a lowering of welfare and assets for the most marginal
and impoverished communities.
6.
ECONOMIC GROWTH, THE ENVIRONMENT & SUSTAINABILITY
The Open Markets paper suggests that 'open trade and investment can play a vital
role in helping societies shift resources and patterns of production and
consumption in more sustainable directions while still contributing to economic
growth' (pg 108). This is one of the few references made to sustainability,
which is highly surprising given its prominent position in the current economic
debate. However, the assumption that increased growth will necessarily encourage
sustainability development is fundamentally flawed.
To achieve more sustainable directions it is advocated that trade and investment
is liberalised and policies to correct market distortions introduced (pg 108,
pg 96). This will ensure that prices are right and resources are used in the
most inter-temporally efficient and sustainable manner. However, it is now
generally recognised that efficiency criteria alone will not ensure
sustainability, and that some form of intergenerational bequests are needed
(Howarth and Noorgaard 1993). The composition of these intertemporal bequests
has been the focus of much of the recent academic debate on sustainability.
(Thoman et al., 1994)
The paper bypasses a number of key issues in the current environmental debate by
conveniently accepting simple neo-classical growth models and the premises upon
which they are based. In the first place the assumption of perfect substitution
possibilities between man made (goods, factories, machines) and natural capital
(renewable, non renewable, system resilience) is clearly erroneous. In some
cases natural capital have no man made equivalent, for example life support
functions, aesthetic qualities and assimilative properties. Moreover
conventional models wrongly assume that all actions are reversible and subject
to known probabilities. The fact is that certain ecological processes, for
example the reaction of ocean currents to climate change, are so badly
understood means that no meaningful probability distribution can be fitted. In
such circumstances a more precautionary approach to decision making is required
The neo-classical model takes individual preferences as both fixed and given.
Such an assumption may be fine in the short run when individuals preferences are
unlikely to change, but over longer time periods - years, decades, generations where peoples tastes may change, this may no longer be the case. Basing decision
on current generations is unlikely to guide the economy towards a sustainable
path. This again highlights the needs for sustainability constraints and public
policies to incorporate the rights of future generations
There are also a number of difficulties associated with the solution of
'getting the price right'. For environmental goods traded in markets, such as
minerals, metals, timber, there are commonly market failures (e.g cartels,
monopolies), government failures (price ceiling, tax breaks, low concession
fees) as well as external environmental and social costs. As a consequence the
market prices of these goods are a lower estimate of their social value. The non
rivalry and non exclusionary nature of many environmental goods and services
makes the creation of markets an extremely difficult task. To counteract this
non market valuation techniques have been designed. These methods are beset with
technical and operational problems (see Freeman 1993). Moreover, they are unable
to capture a number of more elusive indirect values whilst humans continue to
have limited understanding of the complexity of interactions and mutual
interdependencies between species, communities and ecosystems..
By failing to recognise the evolution of modern growth theory to include the
inter-relation of human, man-made, social and environmental capital the paper
misses the opportunity to move the debate on liberalisation forward in a
creative and constructive manner. The assumptions underlying simple neoclassical models assume away the main components of modern environmental policy
- namely irreversibility, uncertainty, ecological limits, the need for
institutional evolution and the rights of future generations. Therefore, it is
unsurprising that proponents of naive liberalisation policies based on these
models come up against what they see as a wall of irrational opposition from the
environmental policy community.
Environmental Kuznets Curves
The most glaring example of this outdated approach is the paper's use of the
argument that environmental quality rises as societies move up the income ladder
(p.98), and therefore liberalised trade and investment will remove environmental
degradation by increasing incomes.
The hypothesis that environmental consumption (use of natural resources and
pollution) rises then falls after a certain level of income has come to be known
as the environmental Kuznets curve. On simple methodological and empirical
grounds this work has serious flaws (see WWF 1996a). These include: problems of
dynamic comparative advantage and economic stagnation; ample evidence that
policy intervention is a necessary prerequisite for environmental improvements;
the fact that curves tend to differ over geographical and cultural boundaries;
the dependence of the shape of the curves on the econometric models and data
used; the existence of non-quadratic relationships with secondary turning points
for certain pollutants; the fact that large external environmental effects are
excluded which underestimate the true environmental impact of economic growth.
Such analysis also fails to acknowledge the wider direct and indirect
environmental impacts of economic growth. For example the greater use of
transport and, packaging, and increased air and water pollution. More indirect
problems stem from the social impact created by industrial development,
migration and urbanisation. It has also been highlighted by recent OECD-DAC
reports that it is the poor that are most effected by environmental degradation,
that ensuring environmental quality is critical for poverty elimination and
sustainable development, and thus appropriate policy actions cannot wait for
rising aggregate incomes.
The interpretation of such curves is also fundamentally flawed because they do
not account for the long run irreversibility of many environmental effects (for
example, US Superfund clean up; CO2 emissions from the 19th and early 20th
century; deforestation in Europe and N. America). The linkage of environmental
quality with domestic incomes also ignores the fact that environmental
degradation through resource use is often driven by international demand.
Therefore, the level of economic activity in such sectors will bear no automatic
relationship to the aggregate incomes or institutional development of the
country in which the activity takes place.
For example, much of Ecuador's oil reserves were exploited by US companies in
the 1960s leaving vast environmental damage. Attempts to gain compensation for
this today have been rebuffed based on that fact that the companies were in
legal compliance at the time (though not with US standards). Ecuador gained
little from depletion of these resources and certainly does not even now have an
average income supposedly commensurate with high environmental standards under
the Kuznets model. However, there was no economic reason why these operations
could not have been carried out to the US standards in the 1960s, if the
companies had behaved responsibly.
The role of culture, democracy and institutional development in promoting
environmental quality - coupled with the importance of export-oriented resource
intensive sectors in the poorest countries - implies that Kuznet curves do not
justify the view that liberalisation is automatically good for the environment.
Even if we are to believe that such curves do show some kind of correlation
between regulatory evolution and economic growth, then trade and investment
liberalisation will not reap environmental improvements for the vast majority of
the world's population who remain below the income per capita hump of the curve.
Without explicit programmes of institutional development - supported by
developed countries - there will be many more years of accelerated environmental
degradation driven by Northern demand, with large irreversible and catastrophic
effects, before countries reach this threshold - if they ever do (WWF 1996a).
There is no causal evidence that any increase in aggregate incomes through
liberalisation will result in general improved environmental quality, and the
irreversible nature of much environmental destruction means that such relations
provide no guarantee of sustainability.
7.
IMPACT OF LIBERALISATION ON
COUNTRIES' ABILITY TO REGULATE
The Open Markets paper regards trade and liberalisation as an overall strategy
to maintain and even strengthen a country's capacity to determine its own future
and hence sovereignty; for example, by improving a country's competitiveness and
income and thus making it less vulnerable to external shocks (p.115). However,
for a number of poorer countries (such as Sudan, Zimbabwe, Zambia)
specialisation has meant a less diverse crop or commodity base more prone to
economic, climatic and ecological shocks. Furthermore, nations are becoming
increasingly dependant on foreign technologies, commodity and capital goods and
services. The recent shocks in South East Asia are testimony to the complex
problems related to this in the field of macroeconomic management.
It is pointed out (p.15) that under trade agreements such as WTO, governments
retain the sovereign right to set their own environmental objectives. Although
this is formally the case experience shows that differences in environmental
standards and efforts to regulate difficult transboundary issues are generally
decided in favour of trade principles rather than environmental protection. The
burden of proof seems to be heavily weighted against the domestic right to
regulate on environmental issues when there are trade implications.
Although the paper commends the environmental credentials of the WTO it remains
more muted with respect to the Multilateral Agreement on Investment (MAI). The
MAI would affect signatories' ability to regulate the environment on three
accounts. Firstly the MAI only allows environmental legislation to be enacted if
it is non-discriminatory against foreign investors. This would allow foreign
companies equal access to environmentally sensitive sectors such as energy,
mining, agriculture, forestry, fisheries and tourism which are vital attractors
of FDI from developed countries. The economic rents arising from these assets
have traditionally been procured by the sovereign owner. However, that
procurement often requires discriminatory measures or performance requirements
that would be banned under the MAI. Although the MAI does allow sector specific
exemptions, these must be kept to a minimum and pressure would be put on any
joining members to leave such sectors open or to gradually open them up. This
could greatly effect the ability of developing countries to gain just and
sustainable returns on their natural wealth.
Secondly, the current MAI proposals have conflicts with several prominent
Multilateral Environmental Agreements (MEAs), established to deal with global
environmental externalities. This conflict stems from discriminatory articles in
MEAs which are based on the Rio principle of "common but differentiated
responsibilities" between North and South for environmental protection. Examples
of where the MAI conflicts with MEAs include; (1) the Convention on Biodiversity
(CBD) which mandates 'benefit sharing' of profits from the exploitation of
genetic resources between host country and foreign enterprises; (2) The Kyoto
Protocol to the UN Framework Convention on Climate Change
which may mandate the compulsory split of emission mitigation credits between
foreign companies' greenhouse gas mitigation and the host country; (3) the
Montreal Protocol which gives different levels of funding and technology
transfer to foreign and domestic firms in developing countries (WWF 1997b).
Thirdly, the MAI proposals can undermine national environmental regulation.
Existing de jure
discrimination includes requirements from foreign investors to provide greater
information on environmental performance; levying higher environmental bonds
against future environmental liabilities; protection of unique environmental
assets and traditional livelihoods, such as artisanal fisheries. Regulations may
also be de facto discriminatory where national environmental standards have a
greater affect on foreign investors than national industries. For example,
evolving pollution restrictions, recycling regulations and new technology
standards (WWF 1998b).
The mismatch in legal power and completeness between international economic
regimes (WTO, MAI, NAFTA) and multilateral environmental regimes has resulted in
national and international environmental laws being repeatedly challenged or
restricted.
WWF International Critique, June 1998, Page #
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ACKNOWLEDGEMENTS
This paper was co-authored by Nick Mabey and Richard McNally.
For further
information contact:
Charles Arden-Clarke
WWF International
Ave Mt Blanc
1196 Gland
Switzerland
Tel: 41 22 364 9001
Fax: 41 22 364 8219
Eml:
caclarke@wwfnet.org
or
Nick Mabey
WWF-UK
Panda House
Weyside Park
Godalming,
Surrey GU7 1XR
United Kingdom
Tel: 441 483 426 444
Fax: 441 483 426 409
Eml:
Nmabey@wwfnet.org