gNvoo'f

Public Disclosure Authorized

THEWORLDBA,NK
SECTORPOLICYANDRESEARCHSTAFF

EnvironmentDepartment
Public Disclosure Authorized

"EnvironmentallySustainable
EconomicDevelopment
Buildingon Brundtland"
Public Disclosure Authorized

Compiledand Edited by
RobertGoodland,HermanDaly and
SalahEl Serafy
Public Disclosure Authorized

July 1991

Environment
WorkingPaperNo.46

This pape has beenpreparedfor internaluse. Theviewsand itetpretations herei are those of
the authot(s)and shouldnot be atributed to the WorldBank, to its afiliated organizationsOr to
any individualcting on their behalf.
 PREFACE

We are delightedto be invitedto prefacethis bookfor four reasons. First,becauseit sets

a realistic and fair stage for the importantUNCED 1992conference. Second,because it
acknowledgesmuch more developmentis needc4 in the South. Third,because that needed
developmentandgrowthmustbe accommodated bythe North. Fourth,burdensharing or reparation
for the North's historicoveruseof globalenvironmentalfunctions- both as source of natural
resourcesand sinkfor wastes -- is firmlyacceptedbythe almostentirelyNorthernauthors. Ths is
refreshing.
We havenot been tooencouragedbythe North'sreactionto the Brundtlandreport overthe
four yearssinceits publication. Therefore,wewarmlyendorsethe clearthinkdng expressedin this
book The fact that two Nobel laureate economistsare amongthe auttors (Haavelmoand
Thbergen)raiseourhopesthat economists willraisesustainability
higheron theiragendasforserious
workin the 1990X We ullyshare the authors'viewthat the transitionis urgentand we find their
suggestions on howto achieveit to be senusble.Nowthe difficultpart,musteringthe politcalwill,
is up to us and our UNCED'92 colleagues.

Emil Salm Jose Lutenberger

ILE The Ministerof State for Environmentand Population,The HonorableEmilSalim,Jakarta,

Indonesia,and L.E.lTheSecretaryof State for Environment,
The HonorableJose Lutzenberger,
BrasiliaDF, Brazil

DepartmentalWorkingPapes amenot formalpublicationsof the World Bank They represent prelminaiyand unpolished
tests of counttyanalsil or rsearch that are cirulated to encouragedisuon and comment;dtation and the useof sucha papershould
take acwountof its provisionalchamecter.The fings interpretations,and condusionsexpressedin this paper are entirelythoseof the
authors' and should not be attributedin any mannerto the WorldBanklIts affliated orgnizations or to membersof its Board of
13ecutlv Direct or the the countriesthe represent.
 CONTEN1

Emi Salimand Jose Lutzeberger

bmUm 1

Chas
1. The casethat the worldhas reachedlmits S
RobertGoodland
2. Fromempty-world to full-world
econmis: Recogning an historical
trnig pointin ecomomic development. 18
HeamanDaly
3. On the strategyof hig to reduceeconomicinequalityby
pfang the sale of humanacthit. 27
rge Haave}mo and SteinHanen
4. GNP and marketprices:wrongsignalsfor sustainableeconomic
succes that maskeinn desucon. 36
Jan Tibergen and RoefleHucting
5. Sustainability,
incomemeaurementand growth 43
SalahElSerat
6. ProjectEvaluadonand SustainableDevelopment 54
RaymondMikesell
7. the roleof investment
Sustainabledevelopment: 61
Berndvon Drste and PeterDogse
& The ecologicaleffectsof sustainabilit!r.
Investingin
naturalcapital 72
Robert Costanza
9. Promgrowthto sustainabledevelopment 80
LesterBrown,SandraPosteland ChristopherFlavin
Abouttbh Authr
Lest R. Bro, Sanda Pstl and ChrisopherFlavin are Presidentand Vice Presidentsfor
Research,respectively,
of the Worldwatch
Institute,1776Massachusetts
AvenueNW,Washington
DC 20036,USA; Parx 202J7365. Foundedin 1974,Worldwatch,a publicpolicyresearch
organztion, is devotedto anabzingglobaltrendswiththe aimof promotinga sustainableworld
aconomy.
Robcat <t_ Presidentand founder (in 1987)of the InternationalSocietyfor Ecological
Economics,Editorin Chiefof the journalEcologicalEconomics, and editorof the 1991Columbia
Universitytext of the samename. PO Box38, SolomonsMD 20688,USA;Fa3011326-342
H~ermai *. Authorof manyworkson ecologicaleconomicsincluding"SteadyState Economics'
(Freman ;974;secondedition1991);SeniorEconomist,
Environment Department,TheWorldBank,
WashingtonDC 20433,USA. The mostrecentamplification
of his ideasis "Forthe CommonGood"
withJohn Cobb,BeaconPress1989;Fax:202V477-0565.
Slah El Serfy EconomicAdviser,EconomicAdvisoryStaff,The WorldBank,WashingtonDC
20433,USA;awardedan OxforddoctorateunderEconomics Nobellistthe late ProfessorSir John
Hicks;ledthe BankintoEnvironmental
Accounting
andpublishedthe bookof the sametitlein 1989;
Fax 202/477-1569.
Robet Goodamd:Environmental Advisor,Environment
Department,WorldBank,Washington DC
20433,USA;published14booksmainlyon tropicalecology,the mostrecentbeing"Raceto Savethe
Tropics"(IslandPress,DC 1990);Fax:2021477-0565.
TtygveHaaelmo andSteinHme Respectively, the 1989EconomicsNobellist,partlyfor founding
econometrics, InstituteofEconomics,
University
ofOslo;andDirector,NordicConsulting GroupA.S.
Oslo,Omev46A,N-1340Bekkestua,Norway,Fx: 472-247-856, Consultantto NORAD,TheWorld
Bank, AsianDevelopmentBank,UNESCOand others,latest amplification of ideas:"Economic
policiesfor sustainabledevelopment."
ADB,Manila,1990.
RaymondMleV: Professorof Economics at the University
of Oregon,Dr MikesellassistedHarry
DexterWhitefrom 1942to 1946duringthe furmaiiknuJf'lle 'Wouidd Banu and IM1paricpated in
the 1944BrettonWoodsConference.He has publishedextensively on trade and development
economicsand on the economicsof naturalresources. He has publishedtwenty-foursbooks,
includingfour publishedby Resourcesfor the Future,Inc., and one by the NationalBureauof
EconomicResearch.
Jan Thbrge and RoefieHueting Jan Tinbergenwasawardedthe firstNobelMemorialPrizein
economicsin 1969,and was electedthe first Chairmanof the UN Committeeon Development
Planning,of hismany works,especiaflyrelevanthere are his 1968"Development Planningn,and his
1968"IncomeDistnbution".RoefieHueting,Head,Environmental Statistics,NetherlandsBureau
of Statistics,has
been publishing
on ecologicaleconomicssincethe 1060s;mainwork"NewScarcity
and EconomicGrowth"1980,North-Holland PublishingCo.Fax:31170/3877-42.
in
BRen4v Dr1te and Pet Dop: Respectvely,Directorof UNESCO'sDision of Eoological
Siences and Seetary of the UN Manand BiosphereProgramme,AssociateEport UNESCOs
Divisionof E3cologcal
Sciences.Amongtheirmoxtrecnt publicationsI the 1991"Debt-for-Natwe
Exchangesand BiospheroResr . 7 Placede Fontenoy,75700Pars, Fax:331/4065-9897.
Fax 331/4065-9897.

hv
INThODUCIION

This book is our contributionto the United NationsConferenceon Environmentand

Developmentto be heldin Rio de Janeiroin June 1992,andwhichbuildson the trailblazing work
of the Brndtlani Commission.Rightat the outset,wewantto acknowledge our majordebtto the
BrundtlandCommission's 1987report,"OurCommonFuture". In particular,wegreatlyadmirethe
Commission's achievementin garneringpoliticalconsensuson the needfor sustainabledevelopment.
We use this report as our springboard,althoughwe are far less comprehensive.Of the four
elemeatsof environmental sustainability
-- poverty,population,technology,and lifestyle
-- we focus
on only lifestyle,technologyand population,with that order of emphasisreflectingour skills.
Povertyis onlydealtwithviaoursuggestions for a moreequitableintemationalincomedistribution.
We acknowledge, however,that povertyand alrs debt are for somecountriesmorepressingthan
environment.
Our aim is to followBrundtland'slead on the need for a rapidtransitionto sustainability.
We bolsterBrundtland'scasefor the transition,becausewe feel that the need for this transitionis
not yet adequatelyrecognized.We thengo on to suggestspecificsof whatis neededto achievethe
transition. We eaveto othtersthe moreimportanttask,namelyhowto implementthe transition;
how to muster the politicalwill for changeswhichwillbe painful,but essential. We feel that
understanding the necessityandgeneraldirectionofthe transitionis a preconditionfor musteringthe
politicalwilL
All authorshavereadand discussedeachother'schaptersand havereachedconsensusthat
the contributionsincludedin thisvolumeare notonlycompatible witheachother, but alsomutually
reinforcing. We collaboratedfist becausewe felt that we wereall alreadythinkingalongsimilar
lines,judgingfromour previouswriting Andsecond,becausewe allfeelstronglythat the nextstep
of what Brundtlandadvocated.
is agreementon the implications
for the transitionto sustainability
We have deliberatelyretaineda certainoverlapbetweensomechaptersin an effort to stressthe
notionthat, irrespectiveof the directionfromwhichthe subjectis approached,the sameconclusion
is reached.
The conclusionis that economicactivitycannotproceedany longerunder the banner of
"businessas usual."Specificallyit is no longertenableto makeeconomicgrowth,as conventionally
nerceivedand measured,the unquestionedobjectiveof economicdevelopmentpolicy. The old
conceptof growth,whichwe designate"throughput growth",withit- relianceon an everincreasing
throughputof energy and other natural materals cannot be sustained,and must yield to an
imaginative pursuitof economicendsthatare lessresourceintensive.Thewaywe undervaluenatural
capital servicesand fail to account for natural asset degradation often means that we are
impoverishing ourselveswhileimaginingthat our economiesare growing. The new approach
requiresa concertedeffortat remoldingconsumer'spreferences,and steeringwantsin the direction
of environmentally benignactivities,whilesimultaneov,slyreducingthroughputper unit of final
product,includingservices.
Earlierstudiesof environmental
limitsto growthemphasizedthe sourcelimits(depletionof
petroleum,copper,etc.). Experiencehasshown,however,that the sinkconstraints(greenhouse,

1
 ozonedepletion,localair andwaterpollution,etc.) are the morestringent.Sincesink functionsare
commonpropertyto a greaterextentthan sourcefunctions,this overuseis less correctibleby the
automaticmarketadjustment.
Accelerationof technologicaldevelopmentis thereforerequiredto reduce the natural
resourcecontentof giveneconomicactivities.We feelthisimportantaccelerationcan be achieved
in a way that willsatisfyboth the optimistsas well as the pessimists. We suggestsubstantially
increasedtaxeson throughput(suchas carbonemissionor mineralseverancetaxes). MTisshould
pleasethe optimistsbecauseit willacceleratenewtechnologies.It willpleasethe pessimintsbecause
it willreduceenvironmentally stressfulthroughput. Sincewe musttaxsomethingin order to raise
neededpublicrevenue,whynot tax the thingswe wantto reduce(pollutionand depletion)rather
thanthe thingswe wantto increase(employment and income)?Becausepollutionanddepledioncan
neverbe reducedto zero there is no dangerof taxingour sourceof revenueout of existence,no
matterhowhighthe tax rate. As we gainrevenuefromtheseenvironmental taxeswe can ease up
on incometaxes,especiallyon lowincomes,even to the extentof usingsomeof the new revenues
to financea negativeincometaxon verylowincomes. Weurgentlycallforfmdamentalchanges
in our economicobjectives,aswellas in our modesof behavior.Towardsthis end,the cooperation
of all manind is necessary.
Brundtland'scallfor sustainabledevelopmenthaselicitedtwoopposingreactions. One is
to revertto a definitionof sustainabledevelopment
as "growthas usual",althoughat a slowerrate.
The other reaction is to define sustainabledevelopmentas "developmentwithout growthin
throughputbeyondenvironmentalcarryingcapacity. WCEDleaders(Brundtland1989,McNeill
1990)seemthemselvesto be torn betweenthesetwodirectionsfor operationalizing theirconcept.
Tvworealismsconfict. On the one hand,politicalrealismrules out incomeredis. -outionand
populationstabilityas politicallydifficult,if not impossible; thereforethe worldeconomyhas to
expand"... by a factor of five or ten ...." in order to cure poverty. On the other hand, ecological
realismacceptsthat the globaleconomyhas klready exceededthe sustainablelimitsof the global
ecosystemand that a fiveto tenfoldexpansionof anythingremotelyresembling the presenteconomy
wouldsimplyspeedus fromtoday'slongrununsustainablity to imminentcollapse. We believethat
inconflictsbetweenbiophysical realitiesandpoliticalreaIi,ies,the lattermusteventuallygiveground.
The planet will transit to sustainability: the choice is betweensocietyplanningfor an orderly
transition,or lettingphysicallimitsandenvironmelAtal damagedictatethe timingandcourseof the
transition.
Whilewe agree withBrundtlandthat we shouldseek to limit,arrest or even reduce the
throughputassociatedwitheconomicactivity,we are far lesssanguineaboutour abilityto achieve
this quickly. The vast expansionin economicactivityprojectedb Brundtlandis thereforebound
to be associatedwith majorrisesin throughput. Thisdoes not involveany differencein theory
betweenBrundtlandandourselves, but merelyreflectsthe observable
factthatsuccessful
substitution
of manmadecapitalfor naturalresourcesis slowand limited,and that the necessarytechnology
cannotbe organizedon cue as the optimistswouldwish.
Followingthe dictionarydistinctionbetweengrowthand development:to growmeansto
increasein sizeby the assiniilation
or accretionof materials;to developmeansto expandor realize
the potentialitiesof; to bringto a fuller,greateror better state. Whensomethinggrowsit gets
quantitativelybigger;whenit developsit getsqualitativelybetter,or at leastdifferent. Quantitative

2
growthand qualitativeimprovementfollowdifferentlaws. Our planet developsover time without
growing. Our economy,a subsystemof the finite and non-growingearth, must eventuallyadapt to
a similat pattem of developmentwithout throughputgrowth.The time for such adaptation is now.

An alternativeformulationwouldbe to say that physicalinputsmust cease growing,but that

value of output can continue to increase as long as technologicaldevelopmentpermits. Of course
if physicalinput is Umited,then by the law of conservationof matter-energy,so is physicaloutput.
This is equivalentto sayingthat quantitativegrowthin throughputis not permitted, but qualitative
improvementin servicesrendered can developwith new technology.In other wordswe are back to
the formulationof development(increasingvalue of output) without growth (physicalthroughput
constant). Throughput is treated as an aggregate,and clearlysome componentsare more important
than others environmentally.For manypurposes,energy is the dominantand criticalcomponent.

Unfortunately, current GNP accounting conventionsconflate growth and development,

counting both as "economicgrowth". We sharplydistinguishbetween throughput growth(growth
proper) and efficiencyimprovement(developmentin the dictionarysense).

Once these distinctionsare accepted it is reasonable to ask: Can development without

throughput growth (sustainabledevelopment)cure exsting poverty? Our belief is that it cannot.
Qualitativeimprovementin the efficiencywithwhichresourcesare usedwillgreatlyhelp,but willnot
be sufficientto cure poverty. The reductionof throughputintensityper dollarof GNP in some rich
countriesis all to the good,but meanslittleto poor countriesstill strivingfor adequate food,clothing
and shelter. Basicnecessitieshave a largeand irreduciblephysicaldimension,unlikesay information
processing.

The Brundtlandproposalto alleviatepovertybyan annual3% globalrisein per capita income

translatesinitiallyinto annualper capitaincomeincrementsof $633for USA;$3.6for Ethiopia;$5.4
for Bangladesh;$7.5 for Nigeria;$10.8for Chinaand $10.5for India. By the end of ten years,such
growthwillhave raisedEthiopia'sper capitaincomeby $41 - hardlysufficientto dent povertythere -
- while that of the USA will have risen by $7257. The greater disparityof international income
levels that would result calls into question the desirabilityof Brundtland'sprojections.

It is neither ethical nor helpfulto the environmentto expect poor countriesto cut or arrest
their development,whichtends to be highlyassociatedwith throughputgrowth. Therefore the rich
countries, which after all are responsiblefor most of today's environmentaldamage, and whose
atc.fa
. =ll ing can sustainhaltingor even reversingthroughputgrowth,must take the lead in this
respect. Poverty reductionwillrequire considerablegrowth,as well as development,in developing
countries. But ecologicalconstraintsare real and more growthfor the poor must be balanced by
negativethroughput growthfor the rich.

Developmentby the rich must be used to free resources(source and sink functionsof the
environment)for growthand developmentso urgentlyneeded by the poor. Large scale transfersto
the poorer countries also will be required, especiallyas the impact of economicstability in rich
countriesmay depress terms of trade and lower economicactivityin developingcountries. Higher
prices for the exportsof poorer countriestherefore willbe required.

Most importantly,populationstabilityis essentialto reducethe need for growtheverywhere,

3
but especiallywherepopulationgrowthis highest,i.e in the poorcountries.
Politically,
it is verydifficultto faceup to the need for incomeredistribution
and population
stability.If the conceptof sustainable development becomesa verbalformulafor glossingoverthese
hash realities,then it willhavebeen a bigstep backwards.It is in thissense that we, the authors
of this volume,are seeling to buildon Brundtlandbeforethe tempestof conventionalpolitical
*realismserodes the foundationsthat WCEDconstructedwithsuchcare and foresight. Suchan
agendawil be exceptionally difficultto implement, andmanyotherissuesare involvedwhichare not
addressedin thisvolume,but of whichwe are acutelyaware. Markets,for example,wil have to
learn to functionwithoutexpansion,withcutwars,withoutwastesand withoutadvertisingthat
encourageswaste. Economicpolicywillhaveto suppresscertainactivitiesin order to allowothers
to expand,so that the sum total remainswithinthe biophysical budgetconstraintof a nongrwing
throughput.T addsup to a formidable politicalagenda. Thatiswhyexceptionalpoliticalwisdom
and leadershipare so urgentlyrequired.

We acknowledge
the constructivereviewsof VinodDubeyand HermanG. Van der Talk

Brundtland,G.IL 1989.Globalchangeandourcommonfuture.Washington
DC.,BenjaminFranlin
Lecture(2 May).Environment(US) 31:16-20,40-43.
McNeill,J. 1990.On the economicsof susuainable
development.
WashingtonDC,US AID,January
23-26workshop.
WCED,1987.Our commonfuture.TheBrundtlandReport].Oxford,OxfordUniversity
Press (for)
UN WorldCommission
of Environment
and Development393p.

4
 Chapter1: THE CASETHATTHE WORLDHASREACHEDLIMIMh
- Mae pece thatcurrentthrougput th in O gW moomy canotbesuaa -

RobertGoodiland

MahatwmGandh [whenaskedif, afterindepenaence, IndiawouldattainBriih standardsof

llvbui' ".... it tookBDtainhalfthe resowiaSof theplanetto achkweu prspe*y; howmanypJaet
wil a coltuy Ake Indiarequire.n

The aimof thisthapteris to presentthecasethat limitsto growthhavealreadybeen reached,

that furtherinputgrowthvwilltake the planetfurtherawayfromsustainability,
andthat weare rapidly
foreclosingoptionsfor the future,possiblyby overshootinglimits(Catton1982). T* scaapter seeks
to convincethe reader of the urgentneed to convertto a sustainableeconomy,rather than the
relatedand equallyor moreimportantneed of povertyalleviation.The politicalwil to transitto
sustainabilitwillbe musteredonlywhenthe need for the trnsition is percei 'e crucal next
step - howto musterthat politicalwill-- is deferredto a subsequentbook.
Rightat the start,plauditsfor Brundtland'sheroicachievement:elevating"austainability"
as
a planetarygoalnowespousedbypractically allnations,the UN family,and the WorldBank In July
1989,leadersof the Group of Sevenmajorindustrialized nationscalledfbr the early adption,
worldwide,of policiesbasedon sustainabledevelopment."The wholeworldowesBrundtlandan
enormousdebtfor thistremendousfeatandwe admireher politicalwisdom.Thischapterbuikdon
Brundtland'sleadand exploresthe implicationsofsustainability.
We assumeasgiventhat the world
is beingrun unsustainablynow - beingfuelledby inheritedfossilfuelsis the best singleexample.
Nonrenewableoil and gasprovide60%of globalenergywithbarely50yearsof provenreserves.

Brundt!andsaid that meetingessentialneedsrequires" a newera of economicgrowt for

nationsin whichthe majontyare poor. The report(WCED,1987)anticipates"....a five-to tenfold
increasein worldindustrialoutput...." Twoyearslater, this"sustainable
growth"conclusionwas
re-emphasizedby the SecretaryGeneralof the BrundtlandCommission: n A fvefold to tenfold
increa in economicactivitywouldbe requiredoverthe next50 years...."to achievesustainability
(MacNeill,1989).

2. TheGlobalEoystem and the EconomicSubsystem

A singlemeasure-- populationtimesper capitaresourceconsumption-- encapsulateswhat
is neededto achievesustainabiity.Tis is the scaleof the humaneconomicsubsstemwithrespect
to that of the globalecosystem on whichit depends,andof whichit is a part. The globalecoystem
is the sourceof all materialinputsfeedingthe economicsubsystem, andis the sinkfor all its wastes.
Populationtimesper capitaresourceconsumption is the totalflow-- throughput- of resourcesfrom
the ecosystemto the economicsubsystem,then backto the ecosystemas waste,as dramatizedin

S
Figue 1. The upper diagramillustratesthe bygoneera when the economicsubsytemwassmall
elat 'e to the sizeof the globalecosystem The lowerdiagramdepictsa situationmuchnear to
todayin whichthe economicsubsystemis vety largerelativeto the globalecosystem Population
timesper capitaresourceuseis refinedbyTinbergenandHueting(1991),andbyEhrlichandBhrlich
(1990).
The global ecosystem'ssource and sink functionshave limitedcapacityto support the
economicsubsytem. The imperative,therefore,is to maintainthe sizeof the globaleconomyto
withinthe capacityof the ecosystemto sustainit. Speth(1989)calculatesthat it took allof human
swaleeconomyof 1900. Today,the worldeconomygrowsby this
historyto growto the $60-billion
amounteverytwoyear. Unchecked,today's$20trillionglobaleconomymaybe fivetimesbiggeronly
one generationor so hence.
It seemsunlikelythat the worldcansustaina doublingofthe economny.
let aloneBrundtland's
"fie- to ten-foldincrease". We feel throughputgrowthis not the wayto reachsustainabilitr,we
cannot "grVW" our way into sustainability.The globalecosystem,whichis the source of all the
resourcesneededfor the economicsubsystem, is finiteand haslimtedregenerativeand asimilative
capacities.It looksine!itablethat the nextcenturywillbe occupiedbydoublethe numberof people
in the humaneconomyconsuiming sourcesand burdeningsinkswiththeirwastes.

The globalecosystemis the sink for all he wastescreatedby the economicsubsystem,and

thissink hashlited assimativecapacity. WheLthe economicsubsytemwassmallrelativeto the
globalecosystem(Figure1; upper),then the sourcesandsinkswerelargeandlimitswereirrelevant.
Leadingtbinkers,suchas Ehrlichani Ehrlich(1990),Hardin(1991),Boulding(1991),Daly(1989,
1990,1991),aswellas the Clubof Rome(Meadows et al.1974),haveshownfor yearsthat the world
is no longer"empty",the economicsubsystem is largerelativeto the biosphere,and the capacitiesof
the biosphere'ssourcesand sinksare beingstressed(Fgure 1, lowerdiagram).
3. LocalizedI mits to GlobalLmits
This chapter presentsthe case that the economicsubsystemhas reached or eceeded
mportantsourceandsinklimits.We takeasagreedthatwe havealreadyfouledour nest:practically
nowherein this earth are signsof the humaneconomyabsent. Fromthe center of Antarcticato
MountEveresthumanwastesare obviousandincreasing.it is not possibleto findasampleof ocean
waterwithno sip of the 20billiontonsof humanwastesaddedannualy. PCBsandotherpersistent
toxicchemicalslike DDT and heavymetalcompounds, have alreadyaccumulatedthroughoutthe
marine ecosvstem. One fifthof the world'spopulationbreathesair morepoisonousthan WHO
standardsrecommend,andan entiregenerationof MexcoCitychildrenmaybe intellectuallystunted
by leadpoisoning(Brownet al. 1991).
Sincethe Clubof Rome's1972"Limitsto Growth",the constraintshaveshiftedfromsource
limitsto sinklimits.Sourcelimitsare moreopento substitutionandare morelocalized.Sincethen,
the cmsehassubstantiallystrengthenedfor limitsto throughputgrowth. Thereis a widevarietyof
limits. Someare tractableandare beingtackled,suchas the CFCphaseout underthe Montreeal
Convention. Other limitsare lesstractable,suchas the massivehumanappropriationof biomass
(see below). The key limitis the smk constraintof fossilenergyuse. Therefore,the rate of
transitionto renewablesincludingsolarenergy,parallelsthe rate of the transitionto sustainability.
Here the optimistsaddthe possibilityof cheapfusionenergybythe year2050. We are agnosticon

6
technoloy, andwantto encourageIt byenergytaxes(Daly,thisvolume). Htherto, technolog has
onlysrted to focuson inputreductionand evenlesson sinkmanagement, whichsuggeststhere is
SCopefor improvements
Land fill sites are becomingharder to find; garbageis shpped thousandsof milesfrom
industralto deloping countriesin searchof unfilledsinks. It hasso far provedimpossiblefor the
USNuclearRegulatoryCommission to findanywhereto renta nuclearwastesite for US$100million
pa Germany'sKraft-WerkUnionsignedan agreementwithChinain July1987to butynulear waste
in Mongolia'sGobidesert. Thesefactsprovethat landfillsitesand toic dumps- aspoct of sinb -
- are increasinglyhard to fnd, that limitsare near.

4. Flist Evidae Hman Blons Appropriation

The best evdencethat there are other imminentlimitsis the calulationby Vitouseket aL
(1986)that the humaneconomyuses- directlyor indimectly - about40%of the net primaryproduct
of terrestrialphotosynthesistoday. (This figuredrops to 25% if the oceansand other aquatic
ecosystemsare included). And desertification,urban encroachmentonto agriculturalland,
blacktopping, soilerosionand pollutionare increasing-- asisthe populationssearchfor food This
meansthat in onlya singledoublingof the world'spopulation(say35 yeas) we willuse 80%,and
100%shortlytherafter. As Daly(1991a,b)pointsout 100%appropriationisecologically impossible
and sociallyhighlyundesirable. Theworldwillgo fromhalfemptyto full in one doublingperiod,
rrpeti of the sink beingflled or the sourcebeingconsumed. Readersrefuinigto recognze
overfullnessthat has appropriated40%for humansaleady shoulddecidewhenbetweennowand
100%theywouldbe wilingto say"enough'. Theyshouldstatein advancewhatevidencetheywil
requireto be convinced. Althoughthisevidencehasnot been refutedoverthe last fiveyears,this
singlestudyis so starkthat we urgepromptcorroborationand analysisof the implications.
5. Evidnc of lAimts:
SOownd GlobalWarming
The evidenceof atmosphericcarbondioxideaccumulation are pervasive,as geographical
atensive as possible,and unimaginablyexpensiveto cureif allowedto worsen.In addition,theyare
unambiguously negativeand stronglyso. There maybe a fewexceptions,suchas plantsgrowing
fasterin C02-enrichedlaboratorieswherewaterandnutrientsare not lImiting.Howeverin the real
world,it seemsmore likelythat cropbelts willnot shiftwithchangingclimate,nor willthey grow
fasterbecausesome other factor(eg: suitablesoils,water)willbecomelimiting. Tne prodigious
NorthAmericanbreadbasket's climatemayindeedshiftnorth.butthisdoesnotmeanthe breadbasket
willfollowbecausethe richprairiesoilswillstayput, andCanadianborealsoilsandmuskegare very
infertle.
Thesecondevidencethat limitshavebeenexceededisglobalwarming.1990wasthe wamest
yearin more than a centuryof recordkeeping. Sevenof the hottestyearson recordall occurred
in the last.11years. The l980swere 1 oFwarmerthan the 1880s;while1990was1.25°F warmer.
Thi contrastsalarmingly withthe pre-industrial
constancyin whichthe earth'stemperaturedid not
vary more than 2-4o F in the last ten thousandyears Humanity'sentire socialand cultural
infastructureoverthe last7000yearshasevolvedentirelywithina globalclimatethat neverdeviated
as muchas 2 °F fromtoday'sclimate(Arrheniusand Waltz1990).

7
Figue1:lSo Fite GlobalEsystem Relatveto the GWlng EconomcSubste
Mw D*Mamo NWD* NM

fIN ITE
e~~ coS

,r,, ... GROWING

MROV~~~~~~~~~~~~~~~~~~NA :

ULAII
: U

.7- ECOOMCSUBSST

aFt N I T E1
.,bta C °S w

a -- ECONOMIC SVBSYSTEM

\
ENERtY

POPULOM t
i¢~~Go K - .

)'VCU
1---
'.
n _ RICYCMAO
 It is too soon to be absolutelycertainthat global"Greenhouse" warminghas begun:normal
climaticvariabilityi too great for absolutecertainty. There is even greateruncertaintyaboutthe
possibleeffects. But allthe evidencesuggeststhat globalwarmingmaywellhavestarted,that C02
accumulation startedyearsago,as postulatedbySvanteArrheniusin 1896,and that it is worsening
fast. Scientistsnowpractically universallyagreethat suchwarmingwilloccur,althoughdifferences
remainon the rates. The US NationalAcademyof SciencewarnedPresidentBushthat global
warmingmaywellbe the mostpressinginternationalissueof the nextcentury.A dwindlingminority
of scientistsremainagnostic.Thedisputeconcernspolicyresponsesmuchmorethan the predictions.
The scaleof todaysfossil-fuel-based
humaneconomyseemsto be the dominantcause of
greenhousegas accumulation. The biggestcontributionto greenhousewarming,carbondicoide
releasedfromburningcoal,oil andnaturalgas,is accumulating
fast in the atmosphere.Today's53
billionpeopleannuallyburnthe equivalentof morethan one ton of coaleach.
Nextin importancecontnbutingto Greenhousewarmingare allotherpollutantsreleasedby
the economythat exceedthe biosphere'sabsorptivecapacitymethane,CFCsand nitrousoodde.
Relativeto carbondioxidethesethreepollutantsare ordersof magnitudemoredamaging,although
thek amountis muchless. Today'spriceto pollutersfor usingatmosphericsinkcapacityfor carbon
dioide disposalis ztro, althoughthe realopportunitycostmayturn out to be astronomical
The costsof rejectingthe greenhousehypothesis, if true, are vastlygreaterthan the costsof
acceptingthe hypothesis,if it provesto be false. Bythe timethe evidenceis irrefutable,it is sure
to be too late to avert unacceptablecosts,suchas the influxof millionsof refugeesfromlow-lying
coatal areas(55%of theworld'spopulationliveson coastsor estuaries),damageto portsandcoastal
cities,increasein stormintensity,andworstof all, damageto agriculture. Andbest of all, abating
globalwarmingmaysavemoney,notcost it, according to Lins (1990)whenthe benefitfromlower
fuel billsis factoredin. The greenhousethreatis morethan sufficientto justifyactionnow,even
ff onlyin an insurancesense. The questionnowto be resolvedis howmuchinsuranceto buy?
Admittedly, greatuncertaintyprevails.But uncertaintycutsbothways. 'Businessas usual
or 'wait and see' are thus imprudent,if not foolhardy. Underestimationof greenhouseor ozone
shieldrisksis just as likelyas overestimation.Recentstudiessuggestwe are underestimating
risks,
rather than the converse. In May1991,US EPA uppedby 20-foldtheirestimateof UV-cancer
deaths;and the earth's abilityto absorbmethanewasestimateddownwardsby 25%in June 1991.
In the face of uncertaintyaboutglobalenvironmental health,prudenceshouldbe paramount.
The relevantcomponenthereis the tightrelationship betweencarbonreleasedand the scale
of theeconomy.Globalcarbonemissions haveincreasedannuallysincethe industrialrevolution;now
at nearly4% pa. To the extentenergyuseparallelseconomicactivity,carbonemissions are an index
of the scaleof the economy. Fossilfuels accountfor 78%of US energy. Of course there is
tremendousscopefor reducingthe energyintensityof industiyand of the economyin general,that
is whyreductionsin carbonemissionsare possiblewithoutreducingstandardsof living. A significant
degreeof decouplingeconomicgrowthfromenergythroughputappearssubstantially achievable.
Witnessthe 81%increaseinJapan'soutputsince1973usingthe sameamountof energy. Similarly,
the Uaited States'snear 39% increasein US GNP since1973,but withonlymodestincreasein
energyuse. This means energyefficiencyincreasedalmost26%. Sweden- cold,gloomy,
industrialized
and veryenergyefficient- is the best exampleof howprofitableit is to reduceC02.

9
 The SwedishStatePowerBoardfoundthat doubledelectricefficiency, 34%decreasein C02, phase
out of the nuclearpowerwhichsupplies50%of the country'selectricity,actuallylowers consumers
electricitybillsby US$1bn per year(Lovins,1990). Other,lessefficientnationsshouldbe able to
do even better.
Reducingenergyintensityis possiblein allindustrialeconomiesand in the largerdeveloping
economies,suchas China,Braziland India. The scopeof increasingenergyusewithoutincreasing
C02 meansprimarilythe overduetransitionto reneawbles: biomass,solar,hydro. The othermajor
source of carbon emissions-- deforestation- also parallelsthe scaleof the economy. More people
needingmoreland pushbackthe frontier. But there are vanishingly
fewgeopoliticalfrontiersleft
today.
Greenhousewarmingis a compellingargumentthat limitshavebeen exceededbecauseit is
globallypervasive,ratherthandisruptingthe atmospherein the regionwherethe C02 wasproduced.
In comparison,acid rain damagingparts of the United States and Canada,and those parts of
Scandinaviadownwind fromUK,and the "Waldesterben" or US$30billionlossof muchof Europe's
forestare moreregionalevidencefor lmits.
The nearly7 billiontons of carbonreleasedto the atmosphereeachyearby humanactivity
(from fossil fuels and deforestation)accumulatein the atmosphere,which suggeststhat the
ecosystem's sinkscapableofabsorbingcarbonhavebeenexceeded,andcarbonaccumulation appears
for all practicalpurposesirreversibleon any relevanttimeframe,henceit is of majorconcernfor
sustainabilityfor future generations. Removalof carbondioxideby liquefyingit or chemically
scrubbingit from the stacksmightdoublethe cost of electricity.Optimistically,technologymay
reducethis cost,but stillat a majorpenalty.
6. Third Evidence:OzoneShieldRuptue

The third evidencethat globalUmitshavebeen reachedis the ruptureof the ozone shield.
It is difficultto imaginemorecompellingevidencethat humanactivityhas ahready damagedour life
supportsystemsthan the cosmicholesin the ozoneshield. That CECswoulddamagethe ozone
L"yr wvaspredictedas far back as 1974by SherwoodRowlandand MarioMolina. But when the
damage was first detected -- in 1985 in Antarctica - disbeliefwas so great that the data were
rejectedas comingfromfaultysensors. Retestingand a searchof hithertoundigestedcomputer
printoutsconfirmedthat not onlydid the hole existin 1985,but that it had appearedeachspring
since 1979. The worldhad failedto detect a vast hole that threatenedhuman life and food
productionand thatwasmoreextensivethanthe UnitedStatesandtallerthan MountEverest(Shea
1989). Allsubsequenttestshaveprovedglobalozonelayerthinningfar fasterthanmodelspredicted.
The relationshipbetweenthe increasedultravioletb radiationlet throughthe impaired
ozoneshieldand skincancersandcataractsis relativelywellknown- every1%decreasein the ozone
layer results in 5% more of certain slkn cancers- and alarmingin neighboringregions(eg.
Queensland).The worldseemsset for 1 billionadditionalskincancers,manyof themfatal,among
peoplealivetoday. The possiblymoreserioushumanhealtheffectis depressionof our immune
systems,increasingour vulnerability to an arrayof tumors,parasitesand infectiousdiseases. In
addition,as the shieldweakens,cropyieldsandmarinefisheriesdecline.But the gravesteffectmay
be the uncertainty,suchas upsettingnormalbalancesin naturalvegetation.Keystonespecies- those
on whichmanyothers depend for survival-- maydecreaseleadingto widespreaddisruptionin

10
enironmentalservicesand acceleratingextinctions
The one millionor so tonsof CFCsannuallydumpedintothe biospheretake about 10years
to waftup to the ozonelayer,wheretheydestrWit witha halflifeof 100to 150years. The tonnage
of CFCsand other ozone-depleting gasesreleasedinto the atmosphereis increasingdamageto the
ozone shield. Todaysdamage,althoughsenous,onlyreflectsthe relativelylow levelsof CFCs
releasedin the early 1980s. If CFC emissionscease today,the worldstillwil be grippedin an
unavoidablecommittmentto ten yearsof increaseddamage. Thiswouldthen graduallyreturn to
pre-damagelevelsover the next 100- 150years.
Tbis seemsto be evidencethat the globalecosystem's
sinkcapacityto absorbCFCpollution
hasbeen vastly xceeded. The limitshavebeen reachedand emeeded,manlindis in for damage
to environmentalservices,humanhealthand foodproduction.Thisis a goodexamplebecause85%
of CFCsare releasedin the industrialnorth,but the mainholeappearedin Antarcticain the ozone
layer20 kilometersup in the sky,showingthe damageto be widespreadand trulyglobalin nature.

7. Fourt Evkdne Lad Derdation

Landdegradation, decreasedproductivitysuchascausedbyacceleratedsoilerosion,salination
and desertification,is onlyone of the manytopicsthatcouldbe includedhere. It is not new;land
degradedthousandsof yearsago(eg:Tgris-Euphrates) remainsunproductivetod. But the scale
has mushroomedand is importantbecausepractically all (97%)foodcomesfrom landrather than
fromaquaticor oceansystems.As35%of the earth'slandalreadyis degraded,andsincethisfigure
is increasingand largelyirreversiblein anytimescaleof interestto swciety,
suchdegradationis a sig
that we have eceeded the regenerativecapacityof the earth'ssoilsource.
Pimentelet al. (1987)foundsoil erosionto be seriousin mostof the world'sagriculturd
areas,andthat thisproblemis worseningasmoremarginallandisbroughtintoproduction. Soilloss
rates, generallyrangimgfrom 10 to 100t/ha/yr,exceedsoil formationrates by at least tenfold.
Agricultureis leadingto erosion,salinationor waterlogging
of possibly6 millionhectaresper year:
"a crisisseriouslyaffectingthe worldfoodeconomy".
Exceedingthe limitsof thisparticularenvironmental
sourcefunctionraisesfoodpnces, and
exacerbatesincomeinequality,at a timethat one billionpeopleare alreadymalnourished.As one
third of developingcountrypopulationsnowfacesfuelwooddeficits,crop residuesand dungare
diverted from agricultureto fuel Fuelwoodoverharvesting and this diversionintensifyland
degradation,hungerand poverty.

& Fifth Evldewe:Blodiversty

The scaleof the humaneconomyhas grownso largethat there is no longerroom for all
speciesin the ark. Theratesof takeoverof wildlifehabitatandof speciesextinctionsare the fastest
theyhave ever been in recordedhistoryand are accelerating.The world'srichestspecieshabitat,
tropicalforest,hasalreadybeen 55%destroyed,the currentrate exceeds168,000squarekIlometers
per year. As the totalnumberof speciesextantis notyet knownto the nearestorder of magnitude
(5 millionor 30 millionor more),it is impossibleto determinepreciseextinctionrates. Howei-r,

11
conservativeestimates put the rate at more than 5000 species of our inherited genetic hbrary
irrevestbly extinguishedeach year. This is about 10,000timesas fast as pre-humanextinctionrates.
Less conservativeestimatesput the rate at 150,000speciesper year (Goodland 1991). Many find
sucb anthropocentrismto be arrogant and immoral. It also increasesrisks of overshoot. Built-in
redundancyis a part of manybiologicalsystems,but we do not knowhow near thresholdsare. Most
extinctionsfrom tropical deforestation(eg: colonization)today increase poverty - tropical moist
forest soilsare fragile-- so we do not even have muchof a beneficialtradeoffwith developmenthere.

9. PopulatIon

Brundtland is sensible on population: enough food is too zxpensivefor one-fourth of the

earth's populationtoday. Birthweightis decliningin places. Povertystimulatespopulationgrowth
Direct povertyalleviationis essential;businessas usualon povertyalleviationis immoraL MacNeill
(1989)states it plainly:".... reducingrates of populationgrowth...." is an essentialconditionto achieve
sustainability. This is as important, if not more so, in industrialcountries as it is in developing
countries. Industrialcountriesoverconsumeper capita,hence overpoliute,so are responsiblefor by
far the largestshare of limitsbeing reached. The richest20%oof the world consumesover 70% of
the world'scommercialenergy. Thirteen nationsalreadyhave achievedzero populationgrowth,so
it is not utopian to expect others to follow.

Developingcountriescontributeto exceedinglimitsbecausethey are so populoustoday(77%

of the world's total), and increasingfar faster than their economiescan providefor them (90%oof
world populationgrowth). Real incomesare dechlningin some areas. If left unchecked,it maybe
half way through the 21st century before the number of births will fall back even to current high
levels. Developingcountries' populationgrowthalone would account for a 75% increase in their
commercial energy consumption by 2025, even if per capita consumption remained at cufrent
inadequate levels (OTA 1991). These countriesneed so muchscale growththat this can only be
freed up by the transitionto sustainabilityin industrialcountries.

The poor must be giventhe chance, mustbe assisted,and wil justifiablydemand to reach at
least minimallyacceptablelivingstandardsby accessto the remainingnatural resource basew.When
industrial nations switch from input growth to qualitative deve.lopment,more resources and
environmentalfunctionswillbe availablefor the South's neededgrowth. This is a major role of the
World Bank. It is in the interests of developingcountriesand the worldcommonsnot to followthe
fossilfuel model. It ISin the interest of industrialcountriesto subsidizealternatives,and this is an
increasingrole for the World Bank. This viewis repeated by Dr. Qu Wenhu of AcademicaSinica
who says: ".... if 'needs' includes one automobile for each of a billion Chinese, then sustainable
developmentis impossible.... " Developingpopulationsaccount for only 17% of total commercial
energy now,but unchecked this will almostdouble by 2020(OTA 1991).

Merely meetingunmet demandfor familyplanningwould help enormously. Educatinggirls

and providingthem with credit for productivepurposesand employmentopportunitiesare probably
the next most effectivemeasures. A full25% of US births,and a muchlarger numberof developing
countrybirths, are to unmarriedmothers,hence providingless child care. Most of these bths are
unwanted,which also tends to result in less care. Certainly,internationaldevelopment agencies
should assist high population growth countries reduce to world averages as an urgent first step,
instead of tryingonly to increase infrastructurewithoutpopulationmeasures.

12
10. GrowthversusDelopment
To the extent the economicsubsystemhas indeedbecomelarge relative to the global
ecosystemon whichit depends,and the regenerativeand assimilative capacitiesof its sourcesand
sink are beingexceeded,then the growthcalledfor by Brundtlandwilldangerouslyexacerbate
surpasingthe limitsoutlinedabove. Opinionsdiffer. MacNeil(1989)claimns Waminimumof 3%
annualper capitaincomegrowthis neededto reachsustainability duringthe first part of the next
century',and this wouldneed highergrowthin nationalincome,givenpopulationtrends. Hueting
(1990)dagrees, concludingthat for sustainability",,,, what we need let is an increase in national
income". Sustainabilitywillbe achievedonlyto the extentquantitativethroughputgrowthstabilizes
and i3 replacedby qualitativedevelopment,holdinginputsconstant. Revrting to the scaleof the
economy- populationtimesper capita resourceuse - per capita resource use must decline,as well
as population.
Brundtlandisexcellenton threeof the fournecessaryconditions.Firt, producingmorewith
less (eg:conservation,efficiency,technological
improvements and recycling). Japanexcelsin this
regard,producing81% more real output than it did in 1973usingthe same amountof energy.
Second,reducingthe populationexplosion.Third,redistribution from overconsumers to the poor.
Brundtlandwasprobablybeingpolitically astutein leavingfuzzythe the fourthnecessarycondition
to make all four sufficientto reach sustainability.Thisis the transiton from input growthand
growthin the scaleof the economyoverto qualitative development, holdingthe scaleof the economy
consistentwiththe regenerativeand assimilativecapacitiesof globallifesupportsystems.In several
piac the BrundtlandReport hints at this. In qualitative,sustainabledevelopmentproduction
replacesdepreciatedassets,and births replacedeaths,so that stocksof wealth and people are
continuallyrenewedand even improved(Daly 1990). A developingeconomyis gettingbetter:
wellbeingof the (stable)populationimproves.Aneconomygrowingin throughputis gettingbigger,
e wxc limits,damagingthe self-reparingcapacityof the planet.
To the extentour leadersrecognizethe fact that the globehasreachedlimitsand decideto
reducefurtherexpansionin the scaleof the economy,we mustpreventhardshipin thistremendous
transitionfor poorcountries.Brundtlandcommendably advocatesgrowthfor poorcountries. But
onlyraisingthe bottomwithoutloweringthe top willnot permitsustainability (Haavelmo,1990).
The poorneed an irreducibleminimum of basics- food,clothingandshelter. Thesebasics
requirethroughputgrowthfor poor countries,withcompensating reductionsin suchgrowthin rich
countries. Apart from colonialresourcedrawdowns, industrialcountrygrowthhistoricallyhas
increasedmarkets for developingcountries'raw materials,hence presumablybenefitingpoor
countries,but it is industrialcountrygrowththat has to contractto free up ecologicalroom for the
minimumgrowthneededin poorcountryeconomies.TmbergenandHueting(1991)put it plainest:
". no further production growth in rich countries ..." All approaches to sustainabilitymust
internalizethisconstraintif the crucialgoalsof povertyalleviationand haltingdamageto globallife
supportsystemsate to be approached.
11. ConclusIon

When economieschangefrom agrarianthroughindustrialto more serviceoriented,then

smokestackthroughputgrowthmayimproveto growthlessdamagingof sourcesand sinks:coaland
steel to fiber optics and electronicsfor example. We must speed to productionwhich is less

13
thoughput-intensive. We must acceleratetechnical improvementsin resource productivity,
Brudtlad's "producingmorewithle". Presumablythis is what the Bndtland commission
and
subsequentfolow up authors(eg. MacNefil1989)label"growth,but of a differentkund."Vigomous
promotionof this trendwillindeedhelp the transitionto sustainability, and is probablyessential.
It is alsolargelytrue that conservation
andefficiencyimprovements and recyclingare profitable,and
willbecomemuchmoreso the instantenvironmental externalities(eg:carbondioxideemissions)are
internalized.
Butit willbe insufficientforfourreasons. First,allgrowtbconsumesresourcesand produces
wastes,even Brundtland'sunspecifiednewtypeof growth. To the extentwe have eched limitsto
the ecosystem's
regenerativeandassimilative capacities,throughputgrowthexceedingsuchlimitswill
not herdadsustainability.Second,the sizeof the servicesectorrelativeto the productionof goods
haslmits. Tid, evenmanyservcesarefarly throughput-intenive, suchastourim, universitiesand
hospitals.Fourth,and highlysignificant, is that lessthroughput-intensive
growthis "hi-tech",hence
the one place where there has to be more growth- tiny, impoverished,developing-countty
economies - are less likelyto be able to afford Brundtland's"new"growth.

Pamof the answerwil be massivetechnologytransferfromindustrialcountriesto developing

countries to offer them whateverthroughput-neutralor throughput-minimal technologiesare
available. This transferis presagedby the US$1.5bn "GlobalEnviromnment Facility"of UNEP,
UNDPand the WorldBankwhichwfllstartin 1991to financeimprovements not yetfully"economic,"
but whichbenefitthe globalcommons.
his chapteris not primarilyabouthowto approachsustainability: that is welldocumented
elsewhere(Adams1990,AgarwalandNarain1990,Chamberset aL1990,Conroy and Litvinoff1988,
Goldsmith,Hildyardand Bunyard1990).Nor is it about the economicand politicaldifficultiesof
suchas the pricingof the infnite (eg:ozoneshield),endlesslydebatable(eg:
reachingsustainability,
biodiversity),
or pricingfor posteritywhatwe cannotpricetoday. Ihat is admirablyarguedbyDaly
and Cobb(1989),Daly(1989,1990,1991),El Serafy(1991),andbyCostanza(1991).It is aboutthe
need to recognizethe imminenceof himtsto throughputgowth, whilealleviatingpovertyin the
world. Manvlocal thresholdshavebeen broachedbecauseof populationpressuresand poverty;
globaltursholdbatu beingburoached byind i&..awuuu;c' uvviKusumpiiou.
To concludeon an optimisticnote: OECDfoundin 1984that environmental expenditures
are goodfor the economyand goodfor employment.The 1988Worldwatch study(Brown,1988)
speculatedthat most sustainabilitycouldbe achievedby the year 2000 with additionalannual
exnditures increasinggraduallyto $150 bn in 2000. Most measuresneeded to approach
sustainability
are beneficialalso for other reasons(eg: fuelefficiency).The world'snationshave
annuallyfundedUNEPwithabout$30million,althoughtheyproposenow"toconsider"increasing
this sum to $100million. Moneyis available;it is not financialcapitalshortagethat limitsthe
economyanymore. It is shortagesof both naturalcapital,as well as of politicalwill in the
industrialized
world. Yet we failto followeconomiclogicand investin the limitingfactor.

Manynationsspendlessonenvironment, health,educationandwelfarethantheydo on arms,

whichnowannuallytotal $1 trillion. Globalsecurityis increasingly
prejudicedby sourceand sink
constraintsasrecentnaturalresourcowarshaveshown,suchasthe 1974"Cod"warbetweenUK and
Iceland,the 1969"Football"
warbetweenoverpopulated El Salvadorandunder-populated Honduras,
and the 1991Gulfwar. As soonas damageto globallife-support systemsis perceivedas far riskier

14
than mitay threats,moreprudentreallocationwDll
promptlyfollow.

Ackwwdpmats

I acknowledgethe usefulcommentsof PaulEhrlich,SteinHansen,RoefieHueting,Frederikvan

BolusiS,SandraPostel,Jane Pratt and RichardNorgaard
BlioPphy

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Routledge2SSp.
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DC, Worldwatch
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of the Worldfor 1989,1990and 1991J.
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fllinoisPress298p.

Chambers,R., Saxena,N.C. and Shah,T. 1990.To the handsof the poor. London,Intermediate
Technology273p.
Conroy,C. and Utvinoff MAL
1988.Thegreeningof aid:sustainablelivelihoods
in practice.London,
Earthscan302p.
Costanza,R. (ed.) 1991.Ecologicaleconomics:
the scienceand managementof sustainability.New
York, ColumbiaPress5 35p.
Court,T. de la,1990.BeyondBrundtland: in the 1990s.London,Zed Books139 p.
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(eds.)EcologicalPhysicalChemistry.Amsterdam,
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Economics.NewYork,ColumbiaPress535p.
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Daly,EL. 1991.Sustainabledevelopment:
fromconceptualtheorytwards operationalprinciplet
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2(2):
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Meadows,D. H. et ai 1974.Ihe limitsto growth:a reportfor the Clubof Rome'sprojecton the
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17?
Ciapter2:FROMEMFIY-WORLD TO FULLWORLDECONOMICS:
ECONOMICS
RECOGNIZINGANHISTORICAL POINTIN ECONOMICDEVELOPMENT
TURNING

Herman . Daly'

1. Inr

Thethesishere arguedis that the evolutionof the humanecohomyhas pased froman era
in whichmanmadecapitalwas the limitingfactorin economicdevelopmentto an era in which
remainingnaturalcapitalhas becomethe limitingfactor.Economiclogictells us that we should
maximizethe productivity of the scarcest(limiting)factor,aswellas try to increaseits supply.Tbis
meansthat economicpolicyshouldbe designedto inrease the productivity of naturalcapitaland its
total amount,rather than to increasethe productivity of manmadecapitaland its accumulation, as
wasappropriatein the pastwhenit wasthe limitingfactor.The remainderof thispaper aimsto give
some reasonsfor believingthis 'new era thesis,and to considersomeof the far-reachingpolicy
changesthat it wouldentail,both for developmentin generaland for the multilateraldevelopment
bank in particular.

2 Raon the Twring Point Has Not Ben Notled

Whyhas this transformation froma worldrelativelyemptyof humanbeingsand manmade

capitalto a worldrelativelyfull of these not been noticedby economists?If sucha fundamental
changein the pattern of scarcityis real, as I think it is, thenhow could it be overlookedby
economistswhosejob is to py attentionto the patternof scarcity?Someeconomists,eg. Boulding
2 an 3corg -Roegen, 3 have indeedsigpalledthe change,but their vices have been largely
unheedeA

One reasonis the deceptiveacceleratonof exponentiagowth. With a constantrate of

growththe worldwillgofromhalffullto totalyfullin one doublingperiod-thesameamountof time
that it took to go from 1% full to 2% full Of coursethe doublingtime itself has shortened,
compoundingthe deceptiveacceleration.If we take the percentappropriationby humanbeingsof
the net productof land-baedphotosynthesis asan indexof howfidlthe worldis of humansand their
funiture, then we can saythat it is 40%fullbecausewe use,directlyand indirecty,about40%of
the net primaryproductof land-basedphotosynthesis (Vitousek,et aLQ)Tading35 years as the
doublingtimeof the humanscale(ie., populationtimesper capita resourceuse) and calculating
backwards,we go fromthe present40A to only10%full in just two doublingtimesor 70 years,
whichis aboutan averagelifetime.Also"full"here is takenas 100%humanappropriationof the net
productof photosynthesis whichon the face of it wouldseemto be ecologcay quite unlikelyand
sociallyundesirable(only the most recalcitrantspecieswouldremainwild-all others wouldbe
managedfor humanbenefit).In other words,effectivefuHllness occursat kss than 100%human
preemptionof net photosynthetic product,and thereis muchevidencethatlongrun humancarying
capacityis reachedat lessthan the existing40%(SeeGoodland,thisvolume).Theworldhasrapidly
gonefromrelativelyempty(10%full)to relativelyfull(40%full).Although40%b lessthan halfit
makessenseto thinkit as indicatingrelativefullnessbecauseit is onlyone doublingtimeawayfrom
80o , a figurewhl-hrepresentsexcessive fullness.Thischangehas beenfasterthan the speedwith

18
whichfundamentaleconomicparadigmsshift.Accordingto physicistMaxPlancka new scientific
paradigmtriumphsnot by convincingthe majorityof its opponents,but becauseits opponents
eventuallydie. Therehas not yet been timefor the empty-worldeconomiststo die, and meanwhile
theyhavebeen cloningthemselvesfasterthantheyare dyingbymaintainingtightcontrolovertheir
guild.The disciplinary
structureof knowledgein modemeconomicsis far tighter than that of the
turn-of-the-century
physicsthat was Planck'smodel.Full-worldeconomicsis not yet acceptedas
academicallylegitimate;indeedit is noltevenrecognp;ed 5
as a challenge.
Anotherreasonfor failingto note the watershedchangein the patternof scarcityis that in
order to speakof a lmiting factor,the factorsmustbe thoughtof as complementary. If factorsare
goodsubstitutesthen a shortageof one doesnot significantly limitthe productivity
of the other.A
standard assumptionof neoclassicaleconomicshas been that factorsof productionare highly
substitutable.Althoughothermodelsof productionhaveconsideredfactorsas not at allsubstitutable
(e.g.,the totalcomplementarityof theLeontiefmodel),thesubstitutability
assumptionhasdominated.
Consequentlythe very idea of a limitingfactorwas pushedinto the background.If factorsare
substitutesratherthan complements thentherecanbe no limitingfactorandhenceno newera based
on a changeof the limitingrolefromone factorto another.It is thereforeimportantto be veryclear
on the issueof complementarity versussubstitutability.
The productivity of manmadecapitalis moreand morelimitedby the decreasingsupplyof
complementary naturalcapital Of coursein the past whenthe scaleof the humanpresencein the
biospherewaslowmanmadecapitalplayedthe limitingrole.The switchfrommanmadeto natural
capitalas the limitingfactoris thus a functionof the increasingscaleand impactof the human
presence.Naturalcapitalis the stockthat yieldsthe flowof naturalresources--the forestthat yields
the flowof cut timber;the petroleumdepositsthat yieldthe flowof pumpedcrude oil, the fish
populationsin the sea that yieldthe Howcaughtfish.The complementary nature of naturaland
manmadecapitalis madeobviousby askingwhatgoodis a sawmillwithouta forest?; a refinery
withoutpetroleumdeposits?;a fishingboat withoutpopulationsof fish?Beyondsomepoint in the
accumulation of manmadecapitalit is clearthat the limitingfactoron productionwillbe remaining
naturalcapitaLFor example,the limitingfactordetermining the fishcatcbisthe reproductivecapacity
of fish populations,not the numberof fishingboats;for gasolinethe limitingfactoris petroleum
&dpods,not rcfln.y capact;- d for nr=i Wp=of tood it is remainingforests,not saw mill
capacity.Costa Rica and PeninsularMalaysia,for example,now must import logsto keep theirsaw
millsemployed.One countrycan accumulate manmadecapitaland deplete naturalcapitalto a
greaterextentonlyif anothercountrydoesit to a lesserextent-e, CostaRicamustimportlogsfrom
somewhere.The demandsof complementarity betweenmanmadeandnaturalcapitalcan be evaded
withina nationonlyif theyare respectedbetweennations.
Of coursemultiplyingspecificexamplesof complementarity
betweennaturaland manmade
capitalwil neversufficeto provethe generalcase.But the examplesgien aboveat leastserveto
addconcretenessto the moregeneralargumentsforthe complementarity hypothesisgivenin the next
section.
Becauseof the complementary relationbetweenmanmadeand natural capital the very
accumulation of manmadecapitalputspressureon naturalcapitalstocksto supplyan increasingflow
of naturalresources.Whenthat flowreachesa sizethat canno longerbe maintainedthere is a big
temptationto supplythe annualflowunsustainably by liquidationof naturalcapitalstocks,thus
postponingthe collapsein the valueof the complementary manmadecapital Indeedin the era of

19
 empty-world economicsnaturalresourcesand naturalcapitalwereconsideredfreegoods(exceptfor
extractionor harvestcosts).Consequently the valueof manmadecapitalwasunderno threat from
scarcityof a complementary factor.In the era of full-world
economicsthis threat is real and is met
by Uquidating stocksof naturalcapitalto temporarily keep up the flowsof naturalresourcesthat
supportthe valueof manmadecapital.Hencethe problemof sustainability.
3. Moreo Complemoentat VersusSubstitutability

The mainissueis the relationbetweennaturaIcapitalwhichyieldsa flowof naturalresources

and servicesthat enter the processof production,&adthe manmadecapitalthat servesas an agent
in the proctssfor transformingthe resourceinflowinto a productoutflow. Is the flowof natural
resources(and the stockof naturalcapitalthat yieldsthat flow)substitutableby manmadecapital?
Clearlyone resourcecan substitutefor another--wecan tranform aluminuminsteadof copperinto
electricwire. We can also substitutelaborfor capital,or capitalfor labor,to a significantdegree
eventhoughthe characteristic of complementarity is alsoimportant.Forexample,we can havefewer
carpentersand inorepowersaws,or fewerpowersawsandmorecarpentersand stillbuildthe same
house. Butmorepilotscannotsubstitutefor fewerairplanes,once the airplanesare fullyemployed.
In otherwordsoneresourcecansubstituteforanother,albeitimperfectly, becausebothplaythe same
qualitativerole in production--both are raw materialsundergoingtransformationinto a product.
Likewisecapitalandlaborare substitutable to a significantdegreebecausebothplaythe roleof agent
of transformation of resourceinputsintoproductoutputs. However,whenwe cometo substitution
acrossthe rolesof transforming agentand materiaundergoingtransformation (efficientcauseand
materialcause), the possibilitiesof substitutionbecomevery limitedand the characteristicof
complementarity is dominant.For example,we cannotmakethe samehousewithhalfthe lumber
no matter how manyextra powersawsor carpenterswe try to substitute. Of coursewe mnight
substitutebrickfor lumber,but then we facethe analogouslimitation--we cannotsubstitutemasons
and trowelsfor brcks.
4. The Complementaityof Naturaland ManmadeCapital

The upshotof theseconsiderations is that naturalcapital(naturalresources)and manmade

*pitsdare complementsrather than substitutes. The neoclassicalassumptionof near perfect
substitutability
betweennaturalresourcesand manmadecapitalis a serous distortionof reality,the
excuseof "analyticalconvenience" notwithstanding.To see howseriousjust imaginethat in fact
manmadecapitalwereindeeda perfectsubstitutefor naturalresources.Then it wouldalsobe the
case that naturalresourceswouldbe a perfectsubstitutefor manmadecapitaLYet if that wereso
then wewouldhavehad noreasonwhatsoever to accumulate manmadecapitalsincewe werealready
endowedby nature witha perfectsubstitutelHistorically ot coursewe did accumulatemanmade
capitallongbeforenaturalcapitalwasdepleted,preciselybecausewe neededmanmadecapitalto
make effectiveuse of the natural capital (complementarityl).It is quite amazingthat the
substutabilitydogma should be held with such tenacity in the face of such an easy
reduaioad absurdum.Add to that the fact that capitalitself requiresnaturalresourcesfor its
production-ie.,the substituteitselfrequirestheveryinputbeingsubstitutedfor- andit is quiteclear
that manmadecapital and natural resourcesare fundamentallycomplements,not substitutes.
Substitutabilityof capital for resourcesis limitedto reducingwaste of materialsin process,e.g.,
collectingsawdustand usinga press(capital)to makeparticleboard. Andno amountof substitution
of capitalfor resourcescan ever reducethe massof materialresourceinputsbelowthe massof the
outputs,giventhe lawof conservation of matter-energy.

20
 Substitutability
of capitalfor resourcesIn aggregateproductionfunctionsreflectslargelya
changeIn the total productmixfromresource-intensive to differentcapital-intensive products.It is
an artifactof productaggation, not factorsubsdtudon(ie., alonga givenproductisoquant).It
is importantto emphasizethat t ,4thi Itter meRning nf substitutionthat Is underattackhere-i.e.,
producinga givenphysicalproductwithlessnaturalresourcesand morecapital.No one deniesthat
it is possibleto producea differentproductor a differentproductmixwithlessresources Indeed
newproductsmaybe designedto providethe sameor better servicewhileusingless resources,and
sometimesless labor and less capitalas well. Thisis technicalimprovement, not subsdtutionof
capitalfor resources. Lightbubs that givemore lumens per watt represent technicalprogre,
qualitativeimprovementin the state of the arts,not the substitutionof a quantityof capitalfor a
quantityof naturalresourcein the productionof a givenquantityof a product
It may be that economistsare speakinglooselyand metaphoricllywhen they claimthat
capitalis a near perfectsubstitutefor naturalresources.Perhapstheyare countingas "capitalall
improvements in knowledge,technology, managerialskill,etc.-in shortanythingthat wouldincrease
the efficiencywithwhichresourcesare used. If thisis the usagethen 'capital' and resourceswould
by definitionbe substitutesin the samesensethat moreefficientuse of a resourceis a substitutefor
using more of the resource. But to definecapitalas efficiencywouldmake a mocketyof the
neoclassicaltheoryof production,whereefficiencyis a ratio of output to input, and capitalis a
quantityof input.
The productivity of manmadecapitalis moreand morelimitedby the decreasingsupplyof
complementary naturalcapital. Ofcoursein the pastwhenthe scaleof the humanpresencein the
biospherewaslow,manmadecapitalplayedthe limitingrole. Thesmtch frommanmadeto natural
capitalas the limitingfactoris thus a functionof the increasingscaleof the humanpresence.
5. Moreon Natural Capital

Thinkingof the naturalenvironmentas "naturalcapital"is in somewaysunsatisfactoty, but

usefulwithinlimits. We maydefinecapitalbroadlyas a stockof somethingthat yieldsa flowof
usful goodsor servcn Traditionally capitalwasdefinedas producedmeansof production,which
we are here callingmanmadecapitalin distinctionto naturalcapitalwhich,thoughnot madeby man,
is neverthelessfunctionalUy
a stockthatyieldsa flowofusefulgoodsandservices.Wecandistinguish
renewablefrom nonrenewable, and marketedfromnonmarketednaturalcapital,gimvng four cross
categories.Pricingnaturalcapital,especiallynonmarketable naturalcapital,is so far an intrctable
problem,but one that need notbe facedhere. Allthat needbe recognizedfor the argumentat hand
> that na^turtal ialconsistsof physicalstocksthat ar mpemta tn manmade capital. We
havelearnedto use the conceptof humancapitalwhichdepartseven morefundamentally fromthe
standarddefinitionof capital.Humancapitalcannotbe boughtandsold,althoughit can be rented.
Althoughit can be accumulatedit cannotbe inheritedwithouteffort by bequestas can ordinary
manmadecapital,but mustbe re-learnedanewbyeachgeneration.Natutalcapital,however,ismore
liketraditionalmanmadecapitalin that it canbe bequeathed.Overallthe conceptof naturalcapital
is lessa departurefromthe traditionaldef1nitionof capitalis the commonlyusednotionof human
capitaL
Thereis a troublesome subcategory
of marketednaturalcapitalthatis intermediatebetween
naturaland manmade,whichwemightreferto as"cultivated naturalcapital",consistingof suchthings
as plantationforests,herdsof livestock,
agricultural
crops,fishbredin ponds,etc. Cultivatednatural

21
capitalsuppliesthe rawmaterialInputcomplementary to mamade capital,but doesnot providethe
wide ange of naturalecologicalservicescharacteristicof naturalcapitalproper (e.g, eucalptus
plantationssupplytimberto the sawmill,andmayevenretduceerosion,butdo not providea wildlffe
habitatnr preservebodiverity). Investmentinthe cultivatednaturalcapitalof a plantationforests,
howevr, isusefulnot onlyfor the lumber,but as a wayof easingthe pressureof lumberinterests
on the remainingtrue naturalcapitalof real forests.
Marketednaturalcapitalcan,subjectto the importantsocialcorrectionsforcommonp
and myopicdiscountig. be left to the markcL Nonmarketednaturalcapital,both renewableand
nonrenewable,wil be the mosttroublesomecategory.Remainingnaturalforestsshouldin many
casesbe treatedasnonmarketednaturalcapital,andonlyreplantedareastreatedasmarketednatural
capital. In neoclassical
termsthe extemalbenefitsof rmaining naturalforestsmightbe considered
"infinte"thus removingthemfrommarketcompetitionwithother(inferior)uses. Mostneoclassical
economists,however,have a strongaversionto anyimputationof an "infiniteor prohibitiveprice
to anything.

In this neWfull-world
era investmentmustshiftfrommanmadecapitalaccumulation
towards
natural capital preservation and restoration. Also technologyshould be aimed at increasing the
producivityof naturalcapitalmorethan manmadecapital If these twothingsdo not happenthen
wewil be behaving i - in the mostorthodoxsenseof the word. Thatis,the emphasis
shouldshiftfromtechnologiesthat increse the productivity of laborand nmade capitalto those
that increasethe productivity of naturalcapitaLThiswouldoccurby marketforcesif the priceof
naturalcapitalwere to rise as it becamemorescarce. Whatkeepsthe prie fromrnsg? In most
casesnaturalcapitalis unownedand consequently nonmarketed.Thereforeit has no explicitprice
andis exploitedas if its pricewerezero. Evenwherepncesexiston naturalcapitalthe markettends
to be myopicand excssivelydicounts the costs of future scarcity,especia when under the
influenceof economistswhoteachthat accumulating capitalis a near perfectsubstitutefor depleting
natur resmarcesl
Naturalcapitalproductivity is increasedby:(1) increasingthe flow(net growth)of natural
resourcesper unitof naturalstock(limitedbybiologicalgrowthrates);(2) increasingproductoutput
per unit of resourceinput (limitedby massbalance);and especiallyby (3) increasingthe end-use
efficiencywithwhichthe resultingproductyieldsservicesto the finaluser (lmited by technology).
We havealreadyarguedthat complementarity severely Umits
whatwe shouldexpectfrom(2), and
complexecologicalinterrelationsand the lawof conservationof matter-energywilllimitthe increase
from(1).Thereforethe focusshouldbe mainlyon (3).
The abovefactorslmit productivityfromthe supplyside. Fromthe demandside tastesmay
providea limitto the economicproductivityof naturalcapitalthat is morestringentthan the limit
of biologicalproductiviy. For example,gameranchingand fruit and nut gatheringin a natural
tropicalforestmay,in termsof biomassbe moreproductivethancattleranching.But undeveloped
tastesfor gamemeat and tropicalfruit maymakethis use lessprofitablethan the biologically less
productiveuse of cattle ranching. In this case a changein tastes can increasethe biological
productivitywithwhichthe landis used.
Sincemanmadecapitalis ownedby the capitalistwe can expectthat it willbe maintained
22
with an Intet to increasingits productity. Laborpower,whichX a stock that yieldsthe usefl
secros of laborcan be tmatedi thesmeway as manmadecapitaLLaborpoweris mamade and
owned by the laboer who has an interestin maintainingit and enhancingits productivity.But
nonmarketednatul capital(the watercycle,the ozonelayer,the atmosphere,etc.) are not subject
to ownevhp, andno selfinterestedsocialclasscanbe relieduponto protectit fromoverexploltation.
If the thesisarguedabovewer acceptedby developmenteconomistsand the multilateral
dovelopment banks,whatpolic implicationswouldfollow?The roleof the multilateraldevelopment
bks in the newera wouldbe wcreainglyto makeinvestmentsthat replenishthe stock and that
increasethe productivityof naturalcapitaLIn the pastdevelopmentinvestments have largelyaimed
at icasing the stockand productivity ofmanmadecapitaLInsteadof investingmainlyin sawmills,
fishingboatsand refineries,development ban shouldnowinvestmorein reforestation,restocking
of fishpopulations,andrenewablesubstitutesfor dwindlingreseres of petrolum Tnelattershould
includeinvestmentin energ efficiency, sinceit is impossibleto restockpetroleumdepositL Since
naturalcapacityto absorbwastesb alsoa vitalresourceinvestments that preservethat capacity(eg,
pollutionreduction)alsoincease in priority.For marketednaturalcapitalthiswillnot representa
reoluoar change. For nonmarketednaturalcapitalit willbe more difficult,but even here
economicdevelopmentagencieshaveecperiencein inmesting in complementary publicgoodssuchas
educatbio,legalsystems,publicinfratructure,and populationcontroL Ivtments in Hiting the
rate of growthof the humanpopulationare of greatestimportancein managinga worldthat bas
becomerelativelyfulL Uikemanmadecapital,manmadelaborpoweris also complementary with
naturalresours and its growthcan increasedemandfor naturalresourcesbeyondthe capacityof
naturalcapitalto sustinabtysupply.
Perhapsthe clearestpolicyimplicationof the full-worldthesisis that the levelof per capita
resourceuse of the rich countriescannot be generaizedto the poor, gvn the current world
population.Presenttotal resourceuselevelsare alreadyunsustainabl, and multiplying themby a
factorof S to 10 as evisaged in the Brundtlandreport,albeitwithconsiderablequalication, is
ecologically
impossible.As a policyof growtbbecomeslesspossiblethe importanceof redistribution
andpopulationcontrolasmeasumto combatpovertyincreasecorrespondingly. In a ful worldboth
humannumbersand per capitaresourceuse mustbe constrained.Poor countriescannotcut per
capitaresourceuse,indeedticy mustincwaa ii to ma.h a buTfie4eay,so theirfocusmustbe mainly
on populationcontroL Rich countriescan cut both, and for those that have alreadyreached
demographicequilbriumthe fccus wouldbe more on limitingper capitaconsumptionto make
resoure availablefor transfertcG
helpbringthe poorup to sufficiency.Investmentsin the areasof
populationcontroland redistributionthereforeincreasein priorityfor developmentagencies.
Investingin naturalcapital(nonmarketed) is essentiallyan infrastructureimvestmenton a
grandscaleand in the mostfundamentalsenseof infrastructure-Le., the biophysicalinfrastructure
of the entirehumanniche,not justthe within-niche publicinvestmentsthatsupportthe productivity
ofthe privateinvestments.Ratherweare nowtalkingaboutinvestments inbiophysicalinfrastructure
("9nfra-infastructure")to maintainthe producthityof allpreious economicimvestments in manmade
capital,be theypublicor private,byinvesig in rebuilding the remainingnaturalcapitalstockswhich
havecometo be limitative.Indeed,in thenewera the WorldBank'sofficialname,The International
Bankfor Reconstrucdonand Development, shouldemphasizethe wordreconstruction and redefine
it to refer to reconstruction
of naturalcapitaldevastatedbyrapacious"development", as opposedto
the historicalmeaningof reconstruction of manmadecapitalin EuropedevastatedbyWWIL Since
our abilityactuallyto re-ate naturalcapitalis verylimited,suchinvestmentswil have to be

23
indiret.ie, conservethe remainingnaturalcapitalandencourageits naturalgrowthbyreducingour
levelof cunrentexploitation.Thisincludesinvestingin projectsthat relievethe pressureon these
naturalcapitalstocksby expandingcultivatednaturalcapital(plantationforeststo relievepressure
on naturalforests),and byincreasingend-useefficiencyof products.
The difficultywith infrastructureinvestmentsis that their productivityshowsup in the
enhancedreturn to other investments, and is thereforedifficultbothto calculateand to collectfor
loanrepayment.Alsoin the presentcontexttheseecological infrastructure investments are defensive
and restorativein nature-that is theywillprotectexistingrates of return fromfallingmorerapidly
than otherwise,rather than raisingtheir rate of return to a higherlevel. This circumstancewill
dampenthe politicalenthusiasmfor suchinvestments, but willnot alter the economiclogicfavoring
them. Past high ratesof return to manmadecapitalwere possibleonlywithunsustainableratesof
use of naturalresourcesand consequent(uncounted)liquidationof naturalcapital We are now
learningto deductnaturalcapitalliquidationfromour measureof nationalincome(SeeAhmad,El
Serafy,and Lutz ). The new era of sustainabledevelopmentwill not permit natural capital
liquidationto countas an income,andwifm requiemthatwebecome to lcoer
ts of retn on a ecapital-rates,on the ord of of the biolc grwth rates
of natwalcapital,sincethat wi be the limitating fctor. Onceinvestmentsin naturalcapitalhave
resulted in equilibriumstocksthat are maintainedbut not expanded,(yieldinga constanttotal
resourceflow)then all furtherincreasein economicwelfarewouldhaveto comefromincreasesin
pure efficiencyresultingfromimprovements in technologyandclarificationof priorities. Certainly
investmentsare being made in increasingbiologicalgrowthrates, and the advent of genetic
engineeringwilladd greatlyto thisthrust. However,experienceto date (e.g.,the green revolution)
indicatesthat higherbiologicalyieldrates usuaflyrequirethe sacrificeof someother usefulquality
(diseaseresistance,flavor,strengthof stalk). In any casethe lawof conservation of matter-energy
cannotbe evadedby genetics:i.e.,morefoodfroma plantor animalimplieseither moreinputsor
less matter-energygoingto the non-foodstructuresand functionsof the organism. To avoid
ecologicalbacklasheswfllrequireleadershipand clarityof purposeon the part of the development
agencies. To carry the arguments for infrastructure investmentsinto the area of
biophysical/environmental infrastructure
or naturalcapitalreplenishment willrequirenew thinking
by developmenteconomists.Sincemuchnaturalcapitalis not onlypublicbut globallypublicin
nature, the UnitedNationsseemsindicatedto tike a leadershp rl.
Considersomespecificcasesof biosphericinfrastructureinvestmentsandthe difficultiesthey
present. (1) A largelydeforestedcountrywill need reforestationto keep the complementary
manmadecapitalof sawmills(carpentry,cabinetryskills,etc.) fromlosingtheirvalue. Ofcoursethe
deforestedcountrycouldfor a time resortto importinglogs. To protectthe manmadecapitalof
damsfromthe siltingup the lakesbehindthem,the watercatchmentareasfeedingthe lakesmust
be reforestedor originalforestsprotectedto preventerosionandsiltation.Agriculturalinvestments
dependingon irrigationcanbecomeworthlesswithoutforestedwatercatchmentareasthat recharge
aquifers.(2) At a globallevelenormousstocksof manmadecapitalandnaturalcapitalare threatened
by depletionof the ozonelayer,althoughthe exactconsequences are too uncertainto be predicted.
The greenhouseeffectis a threat to the valueof all coastallylocatedand climaticallydependant
capital,be it manmade(port cities, wharves,beachresorts)or natural(estuarinebreedinggrounds
for fishand shrimp).Andif the naturalcapitalof fishpopulationsdiminishes
due to lossof breeding
grounds,then the valueof the manmadecapitalof fishingboatsand cannerieswillalsobe diminished
in value,as willthe laborpower(specialized humancapital)devotedto fishing,canning,etc. We
have begun to adjust nationalaccountsfor the liquidationof naturalcapital,but have not yet

24
 recognized that the value of complementarymanmade capital must also be written down as the
natural capital that it was designedto exploitdisappears. Eventuallythe market will automatically
lowerthe valuationof fishingboats as fishdisappear,so perhapsno accountingadjustmentsare called
for. But ex ante policyadjustmentsaimedat avoidingthe ex post writing down of complementary
manmadecapital,whether by market or accountant,is certainlycalledfor.

7. Initial PolicyRespone to the Historic Tuning Point

Althoughthere is as yet no indicationof the degreeto whichdevelopmenteconomistswould

agree with the fundamentalthesis here argued, three U.N. agencies(World Bank, UNEP, and
UNDP) have neverthelessembarked on a project, howeverexploratoryand modest,of biospheric
infrastructureinvestmentknown as the GlobalEnvironmentalFacility. The Facilitywould provide
concessionalfundingfor programsinvestingin the preservationor enhancement of four classesof
biosphericinfrastructureor nonmarketednatural capital.These are: protectionof the ozone layer;
reduction of greenhousegas emissions;protection of internationalwater resources;and protection
of biodiversity. If the thesisargued here is correct, then investmentsof this type shouldeventually
become very inportant in the lendingportfoliosof developmentbanks. Likewisethe thesis would
provide theoreticaljustificationand guidancefor present effortsto found the Global Environmental
Facilityand its likelyextensions. It wouldseem that the "newera" thesismerits serious discussion,
both inside and outside the multilateraldevelopmentbanks, especiallysince it appears that our
practical policy response to the reality of the new era has already outrun our theoretical
understandingof it.

NOTES

1. I am grateful to P. Ehrlich, B. Hannon, G. Lozada,R. Overby,S. Postel, B. von Droste and P.

Dogse for helpfulcomments.

2. Kenneth Boulding,The Meaningof the TwentiethCentury.New York: Harper and Row, 1964.

3. NicholasGeorgescu-Roegen,The Entro=yLaw and the EconomicProcess.Cambridge:Harvard

UniversityPress, 1971.

4. Peter Vitousek,et al.,HIumanAppropriationof the Productsof Photosynthesis",ioScience1986

(34 No.6 pp[.368-73).

±).tForan analysisof economicsas an academicdiscipiinesee Part i of For the Common Con' by

H. E. Daly and J.B. Cobb, Boston: BeaconPress, 1989.

6. The usual Hicks-Allendefinitionof complementarityand substitutibilityis: "if a rise in the j th

factor price,whichreducesthe use of the j th factor, increases(resp. reduces)the use of the i th
factor for each fixed[levelof output), i is a substitute(resp. complement)for j .n {From Akira
Takayama,MathematicalEconomics,secondedition, New York: CambridgeUniversityPress, 1985,
p. 1441 In a model with only two factors it followsfrom this definition that the factors must be
substitutes.If they were complementsthen a rise in the price of one of them would reduce the use
of both factorswhile output remainedconstant,whichis impossible.The customarydigrammaticuse
of two-factor models thus reinforces the focus on substitutibility by effectively defining

25
complementarity out of existencein the two-factorcase.In the Leontiefmodelof L-shaped isoquants
(Roedcoefficients)the abovedefinitionsimplybreaksdownbecausethe reductionin use of one
factorinevitablycausesa reductionin output,whichthe defnitionrequiresmust remainconstant.
For the argumentof this paperone need appealonlyto "complementarity" in the senseof a limiting
factor. A factorbecomeslimitingwhenan increasein the other factor(s)willnot increaseoutput,
but an inees in the factorin question(the limitingfactor)willincreaseoutput. For a limiting
factorallthat i8 neededis that the isoquantbecomeparallelto oneof the axoes.Andfor the practical
argumentof thispaper "nearly parallerwouldalsobe quitesufficient.
7. YusufAhmad,SalahEl Serafy,and Emst Lutz,eds.,EnvirnmentalAcmuntingf tiia.
Devloment. WorldBank,Washington, 1989.

26
 Chapter3: ON THE STRATEGY
OF TRYINGTOREDUCEECONOMICINEQUALITY
BY EXPANDINGTHE SCALEOF HUMANACTIVITY
TrygveHaavelmoand SteinHansen

1. The BgD&==

Sustainabledevelopmentas advocatedin the BrundtlandCommission(WCED) 2 Report

requiresa rate of globaleconomicgrowthand a distributionof assetsand incomethat wouldallow
developingcountriesto achievea significant per capitaincreasein disposableincomeas a basisfor
achievingalleviationof poverty.Imariably, policystatementsto thiseffectmeana stategywhereby
the standardsof the poor shall be lifted towardsthe levelof the well-to-doand to the formsof
consumptionand investmentsseenin the industrialized countriestoday.
Suchpolicystatementsappear to be foundedon a beliefthat there are and will be in the
futureof concernto society,no seriouslimitsto materialgrowth.Thevariousfactorsof production,
e.g.naturalresources,man-made capital,andlabor,are assumedto be substitutableso that a shortage
of one doesnot significantly of another.
limitthe productivity
At the same timethe WCEDexpressesseriousconcernabout the globalconsequencesof
humanactivityin the way of pollution,exhaustionof resources,and generallythe danger of
deterioratingthe environmentfor futuregenerationsto livein. Suchconcernsappearto reflectthe
be- seriouslimitsto growth,ie. someof the keyfactors
beliefthat there are - and willincreasingly
of productionare complementary ratherthansubstitutable.
Morespecifically,as HermanDalyhasput it2, the concernexpressesa suspJon that an ever
increasing flowof input of naturalresourcesin the productionprocessesto sustainthe required
growth,inevitablyresultsin liquidating
of the naturalcapitalstockthatsuppliesthisflow.Man-made
capitalis madefrominputsof laborandnaturalcapital,andservesas an agent alongwithlaborin
the processof transforming the resourceflowintoan utility-yielding
outputflow.If thisveryresource
Slowisieducedor disappears,the productivity of thetransformation agents,ie. man-madecapitaland
labor, is reduced. Forexample,whatis the valueof a sawmillwithouta forestto supplylogs,or
fishingboatswithouta fishpopulationto catch?Thuscomplementarity rather than substitutability
betweenthe flowof naturalresourceson the one hand,and man-made capitalon the other,mustbe
recognizedas a clear possibility,and consideredfor inclusionas a fundamentalassumptionfor
economicplanning. Thisimpliesthat the veryaccumulation of man-madecapitalputs increasing
pressureon naturalcapitalstocksto supplyan increasingflowof naturalresources to sustainthe
productivityof man-madecapitaL
The case of natural resourcecultivationsuch as farmingillustratesthis. Agriculturalists
establishedlongagothat the basicprincipleof farmingis to changethe localnaturalsystemintoone
whichproducesmoreof the goodsdesiredbyman. Thisman-made systemis an artificialconstruction
that requirescontinuouseconomicinputsobtainedfromthe naturalenvironmentto maintainits
output leveL Muchof the farminginput is thus nothingbut an effort to preventthe establsed
artificialstate of the land from decliningtowardsan unproductive(from a human perspective)
low-levelstate; mostlikelylowerthan the naturalstatepriorto farmingof the land3.

27
 Fundamentally,rearrangement of matter is the central physicalfact about the economic
process.Mattercannot be destroyedin the economicsystem,it can merelybe convertedor dissipated.
These transformationprocessesgeneratewastessomeof whichcan be economicallyrecycled,whereas
others cannot. To the extent that nature's capacity to assimilatesuch wastes is or becomes
inadequate,wastes will accumulate. Energy is degradedin these transformations.This means that
little bylittle the capacityto rearrangematter is irrevocablyusedup. Energyflowsalso drivethe basic
physical,chemical,and biologicallife-supportsystems,e.g. air, water, and soils. It is eventuallythe
capacityof these systemsthat wflllimit the scale of human activity,i.e. long term global economic
growth4.

Sustainabledevelopmentimpliesa perspectiveof severalgenerationsor centuries. Clearly,

a development where population and per capita use of the planet's finite resources both grow
significantly,cannot go on indefinitely.Even if populationand the ievel of economicactivitywere
kept stationary,accumulationof pollutantswouldgrowveryrapidlybecauseof the growthof entropy
beyond nature's capacity of self repair. Entropy is a concept borrowed,somewhatfreely, from
physics. The concept as used here can be definedas an indexmeasuringthe total accumulatedpile
of uselss or harmfulwastesproducedby human activitiesover a relevantspan of recent economic
history. .

The politicallywidely acclaimedWCED-definitionof SustainableDevelopment invariably

impliesliftingthe bottom rather than loweringthe top. Successfulachievementof global equitygoals
via growth and economicefficiencyas conventionallymeasuredin the nationalincomaaccounts,will
contradict the environmentaldimensionsof sustainabledevelopment'.Even the most turdyshipwill
eventuallysink if the load is too big.There is little comfortin the fact that the load wasoptimally
allocated and fairlydistnbuted at the time of sinking! 7

To make politicaldifficultiesworse, even with wide acceptance that loweringthe top is

required, continued accumulativestrain on the natural resourcebase wouldbe the likelyoutcome,
albeit at a reduced rate. The developmentprocesshas a tremendousmomentum. It can be likened
to a journey: You start out from Manilaand yourdestinationis Bali Instead you head north towards
Tokyo. You realize that the directionof travel willnot bringyou to Bali.Therefore, you reduce the
travellingspeed, ie. you slowdown,but you do not changethe directionof the traveLWhilethis will
postpone your time of arrivalin Tokyo,it willnot bring you any closer to Bali8!

2. The Technologial OptimisticView

iistory is full of technologicalpessimists.The economistsof the 19ithiniury saw thr;natural

resource base as a limitingfactor that wouldeventuallydrive the productivityof the transformative
agents - labor and capital - downto a level correspondingto a subsistencestandard of living 9 . Some
of them predictedthe industrialrevolutionwouldend as coalmineswere exhausted.Mostdoomsayers
did not foresee the abilityof society,throughhuman capitalformationand organizationof societies,
to improveman-madecapitalso as to facilitatean unprecedentedrate of natural resourceextraction
to meet rapidlyincreasingand diversifyingconsumerdemands,thus yieldingvery attractive returns
on man-madecapital and labor in manysocieties.

Manypeople todaylook upon those who warn againstpollutionand exhaustionof resources

as technologicalpessimists.On the other hand, technologicaloptimismis based on a faith in scientific

28
developmentand technological
progress.
Tboughtsfrom the fieldof decisionsunderuncertaintyalsoenter the picture.There is the
questionof whohas the burdenof proof;the optimistor the pessimist?Here we findtwoextme
views.One is sincewe do not knowfor certainthat the futurewillbe difficult,whyworry? The
other viewis that we shouldbe concernedaboutthe future becausewe cannotbe sure that the
futurewillnot be difficult.Bothviewsriskmakingwrongpredictions.Evenif we couldestimatethe
chancesof rightor wrongpredictions,there is the questionof whichmistakeis the moreserious?
Here there is a strongdegreeof asymmetry.Theirreversibleeffectsof an 'optimistsrecldesspolicy
is likelyto be vastlymoredifficultto copewith than the outcomeof a morecautious"pessimists
policy.
Technological development- whichis qualitativeprogressand thusfundamentally different
fromquantitativesubstitutionof man-madecapitalfor naturalresources1- couldtake placealong
two linesrelevantto the issuesat stakehere.The one line is improvementin the abilityto utilize
availableresourcesat any tme to producemore and more goods. The other line reducesthe
negativeeffectsof growingentropy. Possiblytechnologicalabilityin the methodsof producing
wantedgoodsand servicescoulddevelopfasterthan the negativeeffectsof growingentropy. Even
if the negativeeffectsof entropykeptincreasing,
conceivablypeoplein the futurewouldprefertwice
as manygoodsaswe havetoday,evenif theyhadto wear gasmasks.It is eve possiblethat human
tastesand preferenceswouldgraduallydevelopin thisdirecdon.But thereis a fundamentalflawin
this "optimistice
lineof reasoning.

If the developmentof the productionof goodsand serviceshas reacheda certainlevelat

whichentropygrowsin spiteof cleaningefforts,the furtherdevelopmentof the abilityto produce
goodsand serviceshasto g on increasing.If the abilityto producegoodsand servicesshouldlevel
off at a higherlevel,it isjust a questionof timefor the negativeeffectsof entropyto catchup with
development.In otherwords,one wouldhaveto producegoodsandservicesat a steadilyincreasing
rate in order to staveoff the growingeffectsof entropythatwouldcreepup as timegoesone2.Even
worse;loweringentropyof the economicsubsystem requiresincreasingthe entropyof the restof the
system(environment).Since'restof the system" includesthe sun,the inevitableentropyincreasecan
be chargedto the solaraccount,butonlyfora solarbasedeconomy,not a fossilfuelbasedeconomy'.
If we couldbe sure thatthiseternalchaseis accordingto the informedpreferencesof society,
there is of coursenot muchto be added.Thesacredstatusof consumersovereignty is the keyin this
connection.But to what extentdo peopleknowwhatthey are doingin the longrun? Or, more
PrWL ,t whatextent it possibleat all F
,tJf p 4 A the lf t.
oiidivid hf their
futurepath of development" 4?

3. Mh Princpleof the Free MarketWillNot Providethe Anwer

As is wellknown,the free marketmechanism withequilibriumpriceshas certainoptimal
properties. But there are manyassumptionsthat have to be fulfilledin order to ensure these
properties. A fundamentalassumptionis that there be no collective(or external)side-effectsof
productionor consumption,in additionto what individualsconsideras the immediateproductof
interestto them. If collecve sideeff (externas) are subatial and important,the ical
docti of the blesi of free tradesimplybecomesirrelevantas a guidelinefor economicpolcy.

29
Thi Isa conclusionthat anyseriousstudentof economicscanverifyby meansof standardeconomic
textbooktheory.

Thee are thre kindsof side-effects

of a collectivenaturethat are importantin the present
context:

a) lbe production of immediatepollutionin the processof production,or production pollution.

b) The indirecteffets of the pollutionproducedbyconsumersas a by-productof their enjoyingk
goodsand servicestheybuy,or consumptionpollution.
c) Tle negativeeffectsof entropyandits impacton environmentaldeterioration,or environmental
pollution.
Everydaywehearcomplaintsfromproducersthattheirbusinesswouldnotbe profitablewere
they to payfor the pollutionandenvironmental deteriorationthat theycause. Weobservea rapidly
gowing market for shippingtoxic,carcinogenicand other wastematerialsfrom productionand
consumptionin industrialized countriesto developing
countriesfor dumpingor recycling. Tbere the
lawsand regulationson handling,recyling, dumping,and storage,are often more lenient than those
in indutralied economics,wherethe negativehazardsand crwding effectsof the accumulating
undesirablewasteare becomingtoo costlyfor comfort.
Consumersare led to overestimate
thevalueof the goodsandservicestheybuybecausethey
takethe "surroundingsor naturalenvionmentassomethinggivenfreein anycase. Tis wasalready
well knownfrom the writingsof Pigoul. In additionto all this comesthe humanweaknessof
preerring presentgoodsto futuregoods,as waspointedout longago by Boehm-Bawerk.

Thesethingsillustratethe difficulty
of relyingon individual
actionto makea wisechoicefrom
the point of viewof the distantfutur It is extremelydifficultto modifya free marketsystemby
ns of taxesandsubsidiesin orderto take careof allthoseside-effects not includedin the simple
free marketframeworLRecenteconomichistoryis fullof illustrationsof how it has been found
necesary to restrict the private market forcesby publiclyinvokedconstraints.

The core messagefromtheseconsiderationscan be furtherstrengthenedbyaddressingthe

veryimportant currentproblemin manycountriesof providingemploymentfor their laborforce.
Here the real economicproblemhas been turnedalmostupsidedown.The idea of regularand
"respectable"employmentamongemployeesis one ofworkingandgettingincomefroman employer
that can paythe wagesbecausewhattheyproducecan be soldprofitablyin the market Individual
employeescannotmakeit their businessto decidewhetheror not what theyproduceis desirable
froma globalpointof view.Accordingto the principleof consumersovereignty,
if thereis a market
for whatthe employeehelpsto produce,thensomebodymustpreferthe product.Henceit is a good
thing. Whateverside-effctsemployeessimultaneouslyhelpto produce(e.g.environmental damage)
they camot be blamedfor, becausetheir partialinfluenceon suchside-effectsis infinitesimalas
comparedto their immediategainfromtheirworkand income.

4. WillTechnological
AdvancesBenefitthe Sto or the Weak?
Twoconflictingdevelopments
can be conceivedof in responseto sucha question. First,

30
dthaadvancesin tochnologc skilland know-howwillbenefitthe strongrelativelyr more than the
weak. If then the strong(likeother people)are primarilyselfish,the outcomemaybe a widening
ofthe inequalityin the world.Thistendenqys furtherexacerbatedif those whodeveloptechnical
advancesfocuson consumergoodsand servicesfor a highlevelof living,rather than focusingon
moreelementaryimprvementsof usingthe world'sresourcesto benefitthe poor.
Second,however,is the possibility
thatincreasingabilityto utilizeresourcesmoreeffectively
and reducepollutioncouldbe usedto help thosewhoare lessfortunateand lessable to take care
of themseles It is beyondeconomictheoryto speculateon the finalconclusionas to what might
be the outcomeof suchconflictingtendencies.The disputed *trickledoweutheorycouldperhaps
lead to suchan outcomeevenwiththe strongbeingpnmarilyselfish.

5. What Mad of North-SouthTradeand AidCOpertion?

Governmentsand indwidualshave for decadesassumednatural resource inputs to be
abundant,where man-made capitalandskilledlaborneededto transformthe naturalresourcesinto
usefulconsumptionand investmentgoodshavebeen consideredthe scarcefactors A consequence
of suchperceptionsand their penetrationinto commoditymarketformationhas been the falling
relativerawmaterialspricesin worldmarkets.Thishascontributedto a wideningof the gapbetween
industrialized
and manynaturalresource-dependent developingcountries.
Suchdeterioradonhasbeen furtherintensifiedas a consequenceof the globaltrend-setting
prodwui and consumption patternsof richcountries.Poorcountriesare then temptedto exhaust
their own valuablenaturalresourcestocksat low pricesin return for importedmachineryand
consumergoods Exportis not an end in itself. Exportonlyservesa purposeif it can financeuseful
imports. Developingcountriesshouldrealizetheymuststringently avoidexportstheycannotafford.
Strategiesto enhanceexportsof manystapleagricultural productsshouldbe cr' icallyrevisited.Such
goods face lowdemandelasticitiesin worldmarkets. Indnivdually, eachexportertakes the world
marketprce asgiven.In the aggregate,however,the simultaneous implementation of suchstrategies
by manydrivesthe pricedowndramatically as theyall reachtheirproductiontargets. In the end,
the exportrevenuemightfallshortof payingfor the importedmachinery, implements, pesticidesetc.,
requiredto producefor export The outcomeis financialcrisisand reducedcapabilityto service
increaseddebt burdens. Suchtradeincludesnot onlysaleof non-renewable mineralsand harvests
fromsoils,forests,and oceans,but an increasinguseof poorcountries'soilsas dumpsand recychng
sitesfor undesirablewastefromindustrialproductionandconsumption.
Whflemanynicethingscanbe saidaboutliberalizing and thusincreasingtrade,the structure
of trade, as we knowit at present is a cursefromthe perspectiveof sustainabledevelopment 11. A
drivefor efficientresourceuse in the presenceof significantenvironmental externalitiesand other
marketimperfections, requiresfull-costpricingof resourcesin allapplications.Thisin turn implies
a need for substantialinterventionat nationalandsupra-national levelsinto otherwisefree market
forcesof domesticandinternationaltrade. Otherwisecountriesthatpracticefull-costinternalization
would,in the short-run,lose out to countriesthat didnot, in a regimeof free trade.
Poor countnesshouldbegin to realizethe approachingscarcityof some of their natural
resources,andplanthe exploitationof theseaccordingly.
Internationalandnationalpoliciespursued
in a complexworldof conflicting
individualand groupdemandsmustcometo gripswithapproaching

31
naturalresource constraints.The globalproductionstructureis rapidlyapproachinga situation
wherethe relativescarcityof inputfactorsis aboutto be turnedupsidedown. Increasingly,
it is the
sustainableflowsfromnaturalresourcestocksthat are becomingthe limitingproductionfactors,not
man-madecapitaland skilledlabor".
Thisis clearlyindicatedby the rapidemergenceof the technologicalyadvanced"intemediate"
inputcategorythat couldbe labelledcultivatednaturalcapital,i.e. "GreenRevolution"agriculture,
hybridplantationforests,fishfarming,etc. However,suchhighefficiencyartificialnaturalresources
may lack the robust biodiversitydimensionsof indigenousnatural resources. While being
intermediatebetweennaturaland man-madeinputs,theyare thereforefar from perfectlong-run
substitutes for indigenousnatural resources,and are in fact subjectto the growthof entropy
constraintson economicdevelopmentidentifiedas a keygrowthdilemmaearlierin this chapter.
Thisemergingnewbargainingpositionis whatthe poorcountriesneed to preparefor while
they still have somethingto bargainwith. This requirespreparationof developmentplans and
programsfor whatthe countries'economicactivitiesshouldlooklikein the longrun. Structuraland
sectoraladjustments,including
changesindomesticpricepolicies,andinternationaldebtmanagement
Wi be importantcomponentsof plansfor sustainable 9.
develoment"
Aidcooperationwiththe purposeof assistingpoorcountriesin a developmenttowardsthe
samepattern of pollutingconsumerism as the Westhasbroughtabout is no contnbutiontowards
sustainabledevelopment.It willresultin continuedrent transferfromnaturalresource-endowed
developingcountriesto richcountriessupplyingthe Southwithmachineryfor speedierresource
exraction,whichwillresultin keepingdowntheirpricesof naturalresources.
On the other hand,aid cooperationwith the purposeof assistingin the developmentof
lcation specifictechnologiesand patternsof consumption
adaptedto local,cultural,and habitual
patternsin order to enhancehumandevelopmentand qualityof lifein a sustainablewayshouldbe
stronglyendorsed.
Suchassistancecouldserveasan eye-openerto the richdonors,thushelp themin the process
towardsa sustainableworldas welLOne possiblewayto operationalize the conceptof sustainable
developmentin economicplanningand aid cooperationis by meansof so-calledcompensatory
investmentsr.
Already,somepowercompaniesin industrialized countrieshavedecidedthat theirlong-term
prospect will benefit from undertakingmeasuresto counter the environmentalimpact from
increasedcarbondioxideemission.Tree plantingat homeor in anothercountry,or installationof
moreenergy-efficient devicesin poorcountrieswherethe costsof reducingemissionsare wellbelow
those at home,are realworldexamples.Onecouldforeseevirgintropicalforeststake on increased
financialvalue to the ownersif leasedout to preservebiodiversity, to providea natural and
sustainablehabitat for indigenouspeople,or preventinga reductionin the globalcarbon sink
capacity.Thismaximum sustainable
incomewouldbe higherthanthe presentworthof the combined
financialreturnsto the ownersfromfirstcuttingand exportingthe logs,and then raisingcattlefor
a fewyears,beforethe soilsbecomeexhausted.Withself-imposed nationalemissionbarriersin rich
countries,suchopportunitiescouldsoon providefor newfinancially and economicallysoundtrade
and aid flows.The requiredinstitutionalchangesmaybe moderate.

32
 6 TheOutook: Tere a Solution?
No matterhow peoplego about managingthis earth and the life on it, there is alwaysa
"solution".Imaginesomerecordingentityoutsideourplanetthat keepssomesortof recordof what
mankinddoeson Earth,and the consequences of it, and there willalwaysbe somethingto record.
The developmentmightbe somethinglikewhatone wouldconcludefromreadingCharlesDarwin.
That is, developmentmightlead into some ecologicalbalanceas far as mankindis conceened,
includingthe catastrophe(frommankind'sperspective)that mankindbecomesextinct.
Whatpeoplemetn byaskingfor a solutionis presumably somethingelse. Thissomethingelse
is then presumablythe following.Certaindevelopments are, fromthe humanperspective,more
desirablethan others. The humanmindbeingrationalis supposedto be able to make a senslble
choicebetweenvariousfeasiblealtemativeswhenit comesto development.So the questionboils
downto this:is there a 'good' solution,or a solutionwhichis acceptable?
At leastthree formidableassumptions haveto be fullfilledin order to get a positiveanswer
to thisquestion.The firstis thatwe havea fairlygoodknowledge of the consequences of alternative
pathsof humanactivitiesin the future.Knowledge in thisrespecthasprobablymadequite a bit of
progressin recentyears.The secondconditionis thatthereis an addresseeto receivethisknowledge
anduseit. The thirdconditionis that thisbodyor someotherinternationally acceptedbodybe given
the authorityand powerto choosethe futurepathof development and enforceit.
Aboutthe lasttwoconditionsto be fuLllfedoneshouldhaveno illusion.Perhapsone should
settle for the somewhatcynicalanswersuggestedbysomepeople,namelythat the situationon earth
as far as crowding,polution,and deterioratedenvironments
are concerned,willnot be recognized
until the actualsituatioabecomesmuchmoreprecariousthan is the casetoday.
Thisleadsto whatmanymightfind paradoxicaLRapidgrowthand successfuldevelopment
as conventionally measured,combinedwithcrowdingand highpopulationdensities,couldresultin
a menuofveryfewandverycostlyoptionsfor futuredevelopment. In contrast,hithertopoorgrowth
performance,lowlevelsof infrastructureinvestments, slowutilizationof the naturalresourcebase,
and a relativelysparsepopulation(evenif it isgrowingrapidlvat present)couldleaverelativelymore
doorsopen for the choicebetweenfuturedevelopments.Perhapsthisis the flavorof optimismone
couldpresentfor the peoplesof Africaat thistimeof hardship.
The opportunitiesregardingpossibleactionsfor futuresustainable
developmentare limitedand
diminishing.
It wouldnot at allcontributetowardssustainabledevelopment if nationscontinueto do
as the bewflderedtouristwhoin the treelesssandydesertencountereda hungrylion:'But whatdid
youdo?' askedhis friend afterward.'I climbeda tree."said the tourist."Butthere were no trees
around,"said his friend."Well,whatelseshouldI havedone?' saidthe tourist"2 '
7. Conchuion
Policiesfor moreequalityinvariably startoff that the standardof the poorbe liftedtowards
the levelof the rich. In other words,liftingthe bottomrather than loweringthe top. However,
rapidgrowthand successfuldevelopmentas conventionally measured,combinedwithcrowdingand
high populationdensities,could result in a menu of very few and costlyoptions for future
development.The opportunitiesregardingpossibleactionsfor futuresustainabledevelopmentare

33
limitedand diminishing.A "good"or acceptabledevelopment solutionrequiresthe fLtfillment
of at
least three formidableassumptions. The first is that we have a fairlygood knowledgeof the
consequencesof alternativepathsof humanactivitiesin the future. The secondis that there is an
addrsee to receive this knowledgeand use it. The third is that this body or some other
intemationallyacceptedbody be given the authorityand power to choosethe future path of
developmentand enforceit. If thesesimplefactsare not recognizedthere is no moreto be said
about the sustainability
issue,or anyotherdevelopmentpolicy.

mNlOS

1. WorldCommission
on Environment
andDevelopment (WCED).(The BrundtlandReport)1987.
Our CommonFuture.Oxford,OxfordUniversity
Press383p.
2. Daly,H. 1991.An HistoricalTurningPointin EconomicDevelopment:
FromEmpty-World
to
Full-WorldEconomics.Thisvolume.
3. Ruthenberg,H. 1980.FarmingSystemsin the Tropics.ThirdEdition,Oxford,ClarendonPress
424p.
4. TrygveHaavelmo,1971.Forrensningrsproblemet
fra et Samfunnsokonomisk
Synspunkt(lTe
PollutionProblemfrom a GlobalPerspective)11, Sosialokonomen(The NorwegianEconomic
Journal),No 4. (in Norwegian);Georgescu-Roegen,
N. 1971.TheEntropyLawand the Economic
Process.Cambridge,Mass.,HarvardUniversity
Press457p.
5. TrygveHaavelmo,1971,op.cit.

6. AsianDevelopmentBank,1990.EconomicPoliciesforSustrinableDevelopment.Manila,ADB,
253p.
7. Daly,ILE. and Cobb,J. 1989.For the CommonGood:Redirectingthe EconomyToward
Community,
Environment,and a sustainableFuture.Boston,BeaconPress482p.
8. Haavelmo,T. 1980. On the Dynamicsof GlobalEconomicInequality.Mumorandum, Institute
of Economics,Universityof Oslo,7 May1980;AsianDevelopmentBank,1990,op. cit.

9. Blaug,M. 1962.EconomicTheoryin Retrospect.London,Heineman756p.

10. Haavelmo,T. 1954.A Studyin the Tbeoryof EconomicEvolution.Amsterdam,NorthHolland
PublishingCo.114p; Hansen,S. 1969. Naturverneller Naturressurser(NaturalResourcesfor
Conservationor EconomicGrowth,inSosialokonomen (NorwegianJournalof Economics,
No.2: Vol
23. (in Norwegianonly); Haavelmo,
T. 1970.SomeObservations
on WelfareandEconomicGrowth.
u Induction,Growthand Trade:Essaysin Honourof Sir RoyHarrod."WA Eltis,M.F.G.Scott,
and J.N. Wolfe(eds.)Oxford,ClarendonPress376p.
11. Daly,H. 1991.op. cit.

34
12. Haavelmo,T. 1971.op. cit.
13. Personalcommunication
fromHermanE Daly,1991.
14. Haavelmo,T. 1954,1970,and 1971.op.cit.
of Welfare.London,Macmillan830p.
15. Pigou,A. 1920. The Economics
16. von Boehm-Bawerk,
F. 1891. The PositiveTheoryof Capital 428p
17. AsianDevelopmentBank,1990.op.cit.,p. 7.
18 Daly,H. 1991.op. cit.
19. Hansen,S. 1989.Debt for NatureSwaps:O"erviewand Discussionof KeyIssues. Ecological
Economics1(1):77-93;Hansen,S. 1990.Macroecoaomic Policiesand SustainableDevelopmentin
the ThirdWorld. Journalof Intermational
Development 2(4):533-557.
20. Pearce,D., Markandya,A. and Barbier,E. 1989.Blueprintfor a Green Economy.London,
EarthscanPublications192p.
21. Bohm,P. 1990.Efficiencyissuesand the MontrealProtocolon CFCs WashingtonDC,
EnvironmentWorkingPaper40.
22. Haavelmo,T. 1954.op.cit.
23. AsianDevelopmentBank,1990.op. cit.,p.7.

35
Chapter4: GNP AND MARKETPRICES WRONG SIGNALSFOR SUSTAINABLE
ECONOMICSUCCESSTHATMASKENVIRONMETALDEmUCnION
Jan Tinbergenand RoefieHueting

1. Soct is Steig by tdeWrongCMP

ITe markt is rightlyconsidereda mechanismthat generatesman-madegoodsand seri
accordingto consumerprefrence. Thismech&mism allowscultureandtechnologto putintopractie
inventionsenricng humanlife. It worksefficiently
andstimulatesproductivity
increasewhichis the
motor raisingthe quantity,qualityand diverstyof man-madegoods thus becomingavailableto
consumes
An effectivemeasureof the levelof productionand its changesfrom year to year - the
nationalincome- wasdevisedin the thirties(Inbergen, quotedin Hueting1980).Peopleworking
on this researchwere well awar that nationalincomewouldnot form a completeindicatorof
economicsuccess(welfre). But givena fair distnbutionof incomeand perfectcompetitionit no
longermatterswhatis produced,onlyhowmuchof it is producad.Consequently at that timegreat
valuews attachedto the compilationof a seriesof figureson the total productionof goodsand
serviceL In the 1930s*externaleffects,like environmentaldeterioration,did not yet play an
importantrole.
hi situationhas changeddrastically.Overthe last forty-fiveyears,the perod in which,
basedon the above reasoning,growthof nationalincomehas been giventhe highestpriorityin
economicpolicy,the followingpictureemerges
Ihe productionof man-made goodsandserviceshasincreasedunpredentedly, but hasbeen
accompaniedby an unprecedenteddestructionof the mostfundamental, scarce,and consequently
eownomic goodat humandisposalnamelythe environmen Thi processhas aleady causedmuch
human suffering Much of what are called natural diters, such as erosion,floodingand
deserfication,is causedby mismanagement of the environment.Thisprocessthreatensthe liWng
conditionsof generationsto come. Furthermore,part of the growthof nationalincomeconsistsof
productionincreasesin arms,alcohol,tobaccoand drugs Fewpeopleconsiderthis progress.Part
of t3NPgrowthis doublecounting.Thus,in the Systemof NationalAccountsenvironmental losses
are not writtenoff ascosts,but expenditures
fortheirpartialrecuperationor compensationiswritten
up as finalconsumption.The sameholdstrue for expenditureson victimsof trafficaccidentsand
diseasescausedby consumption, suchas smoking,
Increasein productionis distnbutedveryunequally.In rich countries,peopleare led to
consumemorebecuse of seductivebilliondollaradverstiing.Buttwentypercentof the population
in poorcountriesaredeprivedof basicneeds,suchasadequatefood,shelter,potablewater,tapsand
toilets Economicresearchhas shownthat once basicneedshavebeen met, relativeincomehas a
greater impacton welfarethan absoluteincome. Finallyproductionincreasehas not prevented
persistenceof highunemployment world-wideand considerable
childlabor.
The marketworkswell,but not aflfactorscontibutingto humanwelfareare capturedbyit.

36
CoDnsequently,
marketpricesand economicindicatorsbse on them,suchas nationalincomeand
costbnefit analyses,misleadingly
signalto societyand thereforemustbe corrected.The factorfor
whichcorrectionis mosturgentlyneededis the environment.

2. The Rlado'p BetweenGrwthand B tal D ab

Environmental degradationir a consequenceof productionand its growth. The burdenon

the environmentis determinedbythe numberof people,the amountof activityper person, andthe
natureof that activity.Thesethreefactorsare allreflectedin the levelof nationalincome,albeitthe
numberof peoM with a time lag (to be incorporatedinto the labor force). The increaseand
decreaseof the firsttwoburdeningfactors-- populadonandper capitaactivity-- parallelthe increase
anddecreaseof productionlevels.For the thirdfactor(the natureof our actvities)it roughlyholds
that the moreburdensomefor the environment our activitiesare,the highertheircontributionis to
nationalincome,and viceversa. Thusdrivinga car contributesmoreto GNPthan ridinga bicycle.
his emergesfroman analysisof the DutchNationalAccounts.Thesectorialcompositionof the
Dutchaccountsdoesnotdifferappreciably fromthat of the UnitedKingdom, nor probablyfromthat
of most other Northemcountries. WhatfoHowsis thereforeby and largevald for industrialized
counties
Prodi.ctiongrowthresultslargelyfromincreasein productivity, in whichthe lss of scarce
environmentalgoodshasnot beentaken intoaccount.Increasein laborvolumeplaysa minorrole.
anequarterto one thirdof the activitiesmakingup nationalincome(notablystateconsumption)do
not contributeto its growth,becauseincreasein productivityis difficultto measure.Otheractivities
resultonlyinslightimprovements in productvity.Averageannualgrowthmustthereforebe achieved
by muchhighergrowthamongthe remainingactivites. Thirtypercentof activitiesgenerateabout
70 percentof growth. Unfortunately, theseare preciselythe actvitieswhich,by theiruse of space,
soiland resourcesor bytheirpollution,in productionor consumption, harmthe envronmentmost.
These are notablythe oil, petrochemicaland metalindustries,agriculture,publicutilities,road
building,traport and mining.
Measuresto savethe environmentwfllhave the followingeffectson gowth rates and on
productionlevels.To maintaincurrentlifestylesasmuchaspossille,all availabletechnicalmeasures
shouldbe appliedto the fullestextentaffordable. Suchmeasuresincludeend-of-pipetreatment,
process-integrated
changes,recycling,increasingenergyefficiency,
terracingagriculturalslopes,and
sustainablymanagingforests.Becausetheyrequireextrainputof labor,thesemeasuresreducelabor
productivityand thereforeraise productprices,whichin turn checksgrowthof nationalincome
(correctedfor doublecounting). ( The checkof growthcan be alleviatedby the absorptionof
unemployedworkers,up to the pointwherefullemployment has been attained).
Savingthe environmentwithoutcausinga risein pricesand subsequentcheckof production
growthis onlypossibleif a technology is inventedthat is sufficiently
clean,reducesthe useof space
sufficiently,
leavesthe soilintact,doesnotdepleteenergyandresources(i.e.energyderivedfromthe
sun and recyling).A is cheaper(or at leastnot moreexpensive)than currenttechnology.Thisis
hardlyimaginablefor our wholerangeof currentactivities.But whensuch technologiesbecome
available,the abovementionedeffectswillbe avoided.
Applymgtechnicalmeasurescannotcompletely
avoida changein our consumption
pattem,

37
becausepricerisesresultingfromthe measuresinevitably
causea shifttowardmoreenvironmentally
benip activities,
suchas bicyclingand usingpublictransport.
Technicalmeasuresoftendo not reallysolvethe problem,eitherbecausethe growthof the
activityoverridesthe effectof the measure,or becauseof the persistentand cumulative
characterof
the burden. In this case,the measureonlyretardsthe rate of deterioration.Thus,to stop the
Netherlands'contributionto acidificationof forestsand lakes,apart from applyingali available
technicalmeans,the Dutchmustreducethe numberof car-milesand farmlivestockby about50%
(Fransen1987). For some problemsno technicalmeasuresare available:for instancethe lossof
habitatof plantand animalspeciesas a resultof the useof spaceandthe formationof cirrusclouds
that contnbuteto tlhegreenhouseeffect. (CO2 accumulation maybe partlysolvable).In thesecases,
in additionto the technicalmeasures,a directshiftin behaviorpatternsmustensue,forcedby do's
and don'ts,rules,incentivesand taxes.
A directshiftin productionandconsumption patternswillalsocheckGNPgrowthas follows
fromthe analysisof NationalAccounts(the environmentally mostburdensomeactivitiescontribute
mostto GNP growth).Moreoverin termsof NationalAccounts,environmentally benignactivities
represent a smallervolume. Thus a bicycle-kilometer representsa smallervolumethan a car-
kilometer,a sweatera smallervolumethan a hot room;an extrablanketa smallervolumethan
heatingthe wholehouse;beansa smallervolumethanmeat;and a holidaybytrain,a smallervolume
than holidaytlights. Thisis mainlybecausethe exhaustionof environmentand resourcesis not
chargedto nationalincomeas costs. If it were,the differenceswouldbecomemuchsmalleror nil.
Fromthe above,it followsthatsavingthe environmentwillcertainlycheckproductiongrowth
andprobablyleadto lowerlevelsof nationalincome.Thisoutcomecan hardlysurprise.Manyhave
knownfor a longtimethat populationgrowthand risingproductionandconsumptionlevelscannot
be sustainedforeverin a finiteworld. The outcomeof the aboveanalysisshouldarouseoptimism
rather than pessimism.Becauseenvironmentally benignactivitiesare remarkablycheap. Thus, a
bicycleis muchcheaperthana car,a blanketischeaperthancentralheating,andrearingtwochildren
is cheaperthan bringingup ten. Thismeansthat savingour planetis indeedpossible.Our fervent
goal - to arriveat environmentalsustainability,as advocatedby the Brundtlandreport (WCED,
and by politiciansand institutionsacrossthe world-- can indeedbe fulfilled,albeit onlyunder
Wi7),
limitingconditions. In particular,populationgrowthshouldbe avoidedas soon as possible.
Moreover,activitieswithlittleor no materialthroughputcanincreasepractically
forever.Aswe have
seen, this willnot resultin greatincreasein nationalincome.Decision-makers shouldnot become
upsetby this. Changesin nationalincomelevelsbyno meansindicatethe economicsuccessof their
policiesbecausetheyconcealthe destructionof our lifesuvport-ystems, as longas the figuresare
not correctedfor environmental losses.

3. Use of the Environment

Conrtion of NationalIncomeBasedon Sustainable
Attemptsto correctnationalincomefor environmental lossesstartedin the earlyseventies
withthe followingtrainof thought(Hueting1980).The environmentis interpretedas the physical
surroundingsof humanity,
on whichit iscompletelydependent(frombreathingto producing).Within
the vironment,a numberof possibleusescan be distinguished.Theseare calledenvironmental
functions.Whenthe useof a functionbyan activityis at the expenseof the useof another(or the
same) functionby another activity,or threatensto be so in the future,loss of functionoccurs.

38
Environmentalfunctionsthen have becomescarcegoods,becausethe use of a functionimplies,
whoDlyor partly,the sacrificeof another. Thisfullymeetsthe definitionof scarcitythat demarcates
the economicdiscipline. This approachlinksecologyand economics,and places environment
centrallyin economictheory.
Becausenationalincomeis recordedin marketprices,shadowpriceshaveto be estimatedfor
functions(and their losses)that are directlycomparablewithpricesof man-mademarketedgoods.
For this purpose,supplyand demandcurvesfor functionshave to be constructed. It appeared
possibleto constructsupplycurves,consisting of the costsof measureseliminatingthe burdenon the
environment,arrangedby increasingcostsper unit burdenavoided.But in most casesno complete
demandcurvescan be found. This is becausethe possibilities for preferencesfor environmental
functionsto be manifestedviamarketbehaviorare verylimited.Othermethods,suchas willingness
to payor to accept,do not yieldcompletedemandcurves,certainlyfor functionson whichcurrent
and futurelifedepends. Standardssettingswasalsoconsidered,but the questions"Whatstandards
are to be set and bywhom?"couldnot be answeredat that time.
Thissituationhasnowchanged.Especially afterthe 1987BrundtlandReportpoliticiansand
organizationsacrossthe worlddeclaredthemselvesin favorof sustainableuse of the environment.
Tis preference,voicedby society,opensup the possibilityof basinga calculationon standardsfor
functions,insteadof on (unknown)individualpreferences.
the sustainableuse of environmental
Therefore,the following procedureis proposedfor correctingGNPfor environmental losses.
(Hueting1986,1989). Firstdefinephysical standards for environmental based
functions, on their
sustainableuse. Thesestandardsreplacethe (unknown)demandcurves.Thenformulatemeasures
to meetthesestandards.Finally,estimatethe moneyinvoled in implementing the measures.The
reductionof nationalincome(Y) by the amountsfoundgivesa first approximation of the activity
levelwhich,in linewiththe standardsapplied,is sustainable.Needlessto saya correctionfor double
counting,mentionedin Section1, mustalsobe made. If the sustainablelevelis Y, the difference
betweenY and Y' indicates,in moneytenns,howfar societyhasdriftedawayfromits desiredgoal
of sustainableuse of the environment.
Thestandardscan be relatedto environmental functions.Thusit is possibleto formulatethe
way in whicha forest shouldbe managedin order to attain a sustainableuse of its functions.
then meansthat allpresentand futureusesremainavailable.For renewableresources
Sustainability
such as forests,water,soil and air, as longas their regenerativecapacityremainsintact,then the
functionsremainintact(e.g.the function"supplierof wood"of forests,the function"drinkingwater"
nfwater, the finctcion"soilfor raisingcrops"ofsoiland the funrctinx fhr physiologicalfunctioning"
ofsubstanceswhichaccumulatein the environment,
of air). Thismeansthat emissions suchas PCBs,
heavymetals,nitratesand carbondioxidemaynot exceedthe naturalassimilative capacityof the
environment,andthat erosionratesmaynot exceednaturalsoilregeneration.As for non-renewable
resources,suchasoilandcopper,"regeneration" takesthe formof researchandbringingintopractice
flowresourcessuch as energyderivedfrom the sun (wind,tidal,collectors,photo-voltaiccells),
recyclingof materialsand developingtheirsubstitutes.
The measuresto meet standardsinclude:reforestation,buildingterraces,drainingroads,
maintaininglandscapebuffers,selectiveuse of pesticidesand fertilizers,buildingtreatmentplants,
introducingflowenergy,alteringindustrialprocesses,usingmorepublictransport
materialrecycling,
andbicycles,and useof spacethat leavessufficientroomfor the survivalof plantand animalspecies.

39
 The methodis applicablefor cost-benefitanalysesof projectswithlongtermenvironmental
effects. The methodseems to be the only wayto confrontnationalincomewith the lossesof
environmentalfunctionsinmonetaryterms.Thephysical datarequiredfor comparison withstandards
comedownto basicenvironmental statisticswhichhaveto be collectedin any caseif a government
is to get a grip on the stateof the environmentTheformulation of measuresto meetstandardsand
estimatesof the expendituresinvolvedare indispensable for policydecisions.
In other words,the workfor supplementing
nationalincomefiguresmightbe laborious,but
it has to be done in any case if one wantsto practisea deliberatepolicywith respect to the
environment.We thereforestronglyurgedecision-makers to stimulatethis Idndof researchin their
countries.The Philippinesand Swedenalreadyare interestedin followingthe Dutchlead.

4. Our Debt to Future Generation

A rough order of magnitudeof the debt to future generationsthe world has been
accumulating
duringthe last fewdecades,and howit is to be paidoff;is estimatedbelow. We base
this on the tue of energy and correspondingCO2 emissions.

One aspectof sustainability

couldbe that the annualconsumptionof fuelssuchas coal,oil
and naturalgas,expressedasa percentageof knownreserves,is equalto the rateof efficiencygrowth
in the use of energy,whilekeepingthe levelof productionconstant(Timbergen 1990). Tinbergen
(1990)foundthat a figurefor thisefficiencygrowthdose to realityis 1.67percent. Bythisbehavior,
it wouldbe theoreticaUypossibleto use a finitestockfor an infiniteperiodof time. Eowever,it is
not certai whethertub willbe feasible,becauseit wouldmeanthat the productionand consumption
of today'spackageof goodshas to be generatedwithan eversmalleramountof energy.Thusafter
315years,today'spackagemustbe generatedwith0.5 percentof today'senergyuse. 315yearsis a
short period in relation to the speed of natural processesin questionwhen addressingenvironmental
sustainability.Therefore,if we alsowantto avoidthe hazardsof nuclearenergy,development
of new
technologiessuch as fow energy(derivedfromthe sun) is lessrisky.
To avoid grecnhouse'risks,globalCO2 emissionsare estimatedto haveto be reducedby75
to 80 percent. In the period1950-1988,CO2 emissions,
energyuse and GDP ran parallel. Around
1950both worldGDP and energyuse amountedto 25 percentof the 1988leveLThismeansthat,
other thingsbeing equal,the GDP levelmust be reducedby 75 percent. Assumingthat a CO2
reductionof 25 percent is possibleat lowcost, and consideringthat a numberof environmental
effecztare not eliminatedby reducedenergyuse,we concludethat to payoff globalenvironmental
debt we would have to halve the level of globalactivities. Tbis demonstratesthe urgencyof
allocatingall availableresources,such as know-howand capital,towardsthe developmentof new
technologies(such as flowenergyand recycling),insteadof towardsincreasingproduction,while
haltingthen reversingpopulationgrowth. The last thingthe worldcan affordis to wagewar,such
as that todayin the Gulf.
The outlookof such changesin technologyseemsto be promising.For example,Potma
(1990)showsthat techniqueslikesplittingwatermoleculesbysolarenergyindesertsand transporting
the resultinghydrogenfuels,can providethe worldwithsufficientclean energyat twicecurrent
energyprices. Deserticdevelopingcountriesthushavea majorexportpotential.Thiswouldallow
a sustainableuse of the environmentwhileregainingcurrentproductionlevelsin 50 to 100years.
40
Tbis is because sufficientclean energywould becomeavailablefor both eliminatingpart of
environmental efflctsotherthanthe greenhouseeffectandcompensating for the necessazydecrease
in productionwhereno solutionsare availablewithadditionalproductionof anotherkind. Moreover
roomwouldbe createdfor raisingper capitaproductionlevelsin the Southby a factorof 2.5. This
wouldreducethe incomegapbetweenrichand poorcountriesfrom 10:1to 4:1,withthe condition
of no furtherthroughputgrowthin richcountries.
The uncertaintiesare, of course,far too big to attach greatvalue to the outcomeof this
scenario.Butthe aboveclearlydemonstrates that continuingprevailinggrowthpaths is blockingour
chancesof survival,for whichpossibilities
stillremain.

5. Cnlusion

In order to achievesustainableuseof the environment,

weconcludethat the highestpriority
shouldbe accordedto devisingand implementing economicpolicieswhich:
1. Acceleratedevelopmentof newtechnologies, suchas flowenergyand recycling.
2. Permitno furtherproductiongrowthin richcountries.
3. Stabilizethe globalpopulationas soon as possible.
4. Improveinternationalincomedistribution.

Reerenm

Fransen,J.T.P. 1987.Zure regen:cen nieuwbeleid.Utrecht,Natuuren MilieuFoundation27 p.

Hueting,R 1980.Newscarcityand economicgrowth.Oxford,NewYork269p.
indicatorin monetarytermsas a
Hueting,R. 1986.A note on the constructionof an environmental
supplementto nationalincomewiththe aie.of basicenvironmental statistis. Jakarta,Ministryof
Populationand Environment(stencil):10r. [availablefromthe author].
Hueting,R 1989.Correctingnationalincomefor environmentallosses:towardsa practicalsolution
(32-39)in Ahmad,Y., El Serafy,S. and Lutz,E (eds.)Environmental
Accountingfor Sustainable
Development.Washington,DC.,WorldBank100p.
Potma,T.G.1990.Interrelationships
betweenenvironment, energyandeconomy. (A paperfor the
Dutch NationalEnergyAuthority).Delft,Centerfor EnergyConservationand CleanTechnology
(ms): 17p.

Tnbergen,3.1990.Le incognitedel terzomillenio.Rome,DimensioneEnergia38 (Jan-Feb):36 -

41.
Tinbergen,J. 1990.How to leave enoughnaturalresourcesfor future generations?(ms.):7p.
22 June,p.8 .
Publishedin Dutchin: NRCHandelsblad,

41
Tibergeu, J. 1991.Personalcommunication,
and quotedin Hueting,R. 1980(qv)p. 153& p. 157.
WCS, 1987.Our commonfuture.[TheBundtlandCommission).
London,OxfordUniv.Press(for
The WorldCommission
on Environment
and Development):
383p.

42
Chapter5: SUSTAINABIT, INCOMEMAASUREMENANDGROWIH

Salah l Ser*

1. b
in the BrundtlandRepont,thoughit
Sustanabilityis a conceptthat hasfiguredprominently
hasproveddifficultto definewithoutamiguity. Withinthe BnmdtlandReportitselfwe findmore
thanone defintion,but the one that has sincebeen mostquoted is the foiowine 'SustairAbe
developmentis developmentthat meetsthe needsof the presentwithoutcompromisigthe abilty
of future generationsto meet their own needs" The Report goes on to clarifysutainable
developmentviz: 'It containswithinit twokeyconcepts:
D the conceptof 'need', in paricular the esential needsof the world'spoor, to which
overridingprionityshouldbe given;and
* the idea of limitationsimpoed by the stateof technologyand socialorganizationon the
environment's
abilityto meet presentand futureneeds.'
The referenceto limitationsof technologyandsocialoation, andto meetingessential
needsoffthe world'spoor' in the abovequotation,and a later statementthat 'concernfor social
equitybetweengenerations... mustlogicallybe extendedto equitywithn each generaon,' whle
appealingto many readers emphasies the complexityof Brunddan's sustinabit, both as a
conceptand as a pragmaticguideto policyaction.As disced laterin thischapter,the 'aueness
of definitionof Brundtland'ssustanabilityshouldnot detractfromits validconcernoveraddreing
distnrbutionalissueswhichare viewednghtlyasan integralpart of the emental problem.This
ambiguityis by no means confinedto Brundtland. A more recent attempt to carify what
meantto differentauthorsyieldeda bewildering
sustainability arrayof definitions.
Tbe searchfor a Mm meaningof sustainabflity hasremainedelusive,withnowa growing
awarenessthat for practicalpurpose sustainabflity shouldbe perceivedin approimatetems only?
It is certainlyevidentthat the useof the expression"sustainable
growthhasbecomemorefrequent
in recentdevelopmentliterature,replacingtheolderunqualified'growth,"in an apparentattemptto
i6part the notionthat growthshouldbe keptwithinenvironmental limts. The BrundtlandRepor
representsone of the earlyattemptsat thisusage.It is true, however,that suchen ental limts
remainundefinedin a mannerconduciveto practicablepolicyguidelnes,but I return to this point-
later.
2.nac B[s
In retrospectit seemsthatwhilethe BrundtlandReportmadea greatimpacton worldleaders
ad environmentalists alike,its impacton economists
has been rathermodest. Thisis not to deny,
however,some influenceit hashadon economicpolicy,indirectlythroughthe politicalforcesit has
motivatd4 The attentionthathassincethe publication of QOu
CommoFuturebeengivento global
eavironmentalissuesmaybe a productof its politicalimpact.' There is alsothe growingcoverage

43
 whichmaybe gracedback,at leat
of enonmental isues in economicworkpracticalyeverywhere,
in par to Bn8dtland'spublicadon.

3. E 1 frDS D

While Brundtand wasin gestation,an initiativewas developing,spurred by the United

NationsEnin t Pr me andthe WorldBank,to revisenationalincomecalculationsinorder
to refect in themenonmental conerns The coincidencein timingis remarkablebetweenthe
'WorldCommission on En t andDevelopmentwhichbeganitsworkin December1983and
reachedIs o ons in mid-1987, and the UNEP-Worid Bankworkshopswhichsoughtimprovd
nationalincomeme ementa is paralkl effort also bga in 1983,rahed a ccial stagein
in a numberof directions
198 and is sil progressing
Over the past two dOcadesmost countruieshave been calculatingtheir nationalincome
acoding to guines, isued in 1968bythe UnitedNationsStatisticalOffice,generalyknownas
the Systemof NadonalAccounts(SNA).Theseguidelinespaidpracticallyno attentionto the fact
that, in order to reckonincomeproperly,the Systemmustaccountfor naturalresourceeroson and
onmental degradation.The oldsystemtreatedmuchof the anti-pollution expendituresas final
expendItures thatwouldrtae income,insteadof regardig themas necesaryintermediatecoststhat
shouldbe caged aginst the finalproducts It alo filed to tak accountofenvonmental disasters
whentheyocurred It treatednaturalresources,partcularlythoseemanatingfromthe publicsector,
as a ree gift ftom nature,reflectingin the accountsmainlytheir directexraction costs and any
valation, over and aboveextrtion cost,that the unevenand heterogeneousfree marketdeigned
to atach to them.
Worstof allthe SNAfaied to distnguishbtween valueaddedbyfactorsof productionand
sale of naural assetssuch as forestiyproductsand petroleum. Throughincomemeurements
patened on the SNA,manynaural resource-based developingcountriesweremade out to have
higherincomethaDtheyactualyhad,and to be rowingat rates that obscuredtheirtrue economic
performance.Besides,the accountsfailedto reflectthe factthatthe currentlevel of prosperitythey
wereenjoyingwouldnot lastsincethe basisforsuchprosperitywprogressIvely beingeroded.False
accountW resultedfrommixng in the flowaccountselements of natural that shouldhave
capital
been keptsepmatefromcurrentincome.Suchincomemeasurements, wheretheyoccurred,oved
up economicweaknessesthatneededurgentattention,thusmirecting economicpolicy.Countdes
where natural resourcescontnbutedsignificantly to fical and externalbalancefailed to make
asential adjustmentsand ended up withalloating to consumptiontoo muchof the receiptsthey
obtainedfromsellingtheirnaturwal assets. May of themassumedtoo muchexteal debt for their
own good. Domestically, relativepricesmovedagainsttradeablegoods,resultingin a lamentable
shrinage of non-naturalresource-basedacdvties. Uittle wonderthat so many resource-rich
developingcountaiesthat shouldhavebenefitedfromthe exceptional imprvementof theirtermsof
trade in the 1970sfoundthemselves in the 1980shardlybetter off than theyhad been before.'
At the UNEP-WorldBankworkshopheldin Parisin November1988expertsfromvarious
the topicof
nadonalstatisticalofficesmet witheconomistsand otherswhohad been investigating
envionmentalnationalaccounting,and for the first time a consensuswasreached that natural
resourcesand the environmentwereindeedimportantand likelyto becomemoreso in future;that
evident;
nadonalaccountsshouldreflectthe stresson the envron ent that hadbecomeIncreasingly

44
and that a set of environmental
satelliteaccountsneededto be elaboratedand attachedto the new
SNAcoreaccounts,withthe viewof reflectingenvinmental considerations. That1988meetingwas
a watershedfromwhichsignficantdevelopments wereto flow. Furtherworksincethen,conducted
in cooperationwiththe UnitedNationsStatisticalOffice,hasledto the acceptanceof the notionthat
when the revisedSNA,expectedin 1993,cameout it wouldrecommendcompilinga set of satellite
environmentalaccountsshowingto the extentpossiblethe changesthat occurfromyearto year in
the state of the envimonment,and attemptinga recalculationof nationalincometo reflectsuch
changes. Thisnationalaccounting adjustmentinidative,whichstillcontinues,hasprovideda bridge
betweensomeof the objectivesof the environmentalists and the workof the economists.

4. 9 b and Income
If properlymeasured,incomeis sustainable bydefnition.Froman environmental angleerrors
in measuringincomecanbe viewedascominglargelyfromwronglymixwng inincomecertainelements
of naturalcapital,and fromconfusionof inventoryliquidationwithdepreciationof fixedassets. A
pesn or a nationcannotcontinueto lhveat the samematerialleWel if presentenjoymentis obtained
at the cost of liquidatingcapital. As capitalis eroded,the abilityto maintainthe samelevel of
consumption intothe futureis undermined.Thatiswhy,fromitsinception,the accountingprofession
hasinsistedthat for profitand losscalculations,
whetherfor individuals or corporations,capitalmust
be "kept intact." To the accountant,keepingcapitalintact never meant that capitalshouldbe
preseved in its originalstate (the prsrtionist argument),but onlythat allowancebe madeout
Of crent income in order to restore capital to the extent it has eroded. Unlesscapital is
"maintaineda futureincomewouldinevitably decline Byextensionof the sameargumentto the area
of accounting,keepingcapital,includingemironmentalcapital,intact for accounting
purposes,requiresadjustingincometo reflectcapitaldeterioration.Againthis doesnot meanthat
the accountantis advocatingthat capitalshouldbe kept undisturbed,or in the languageof some
environmentalists, that it should be "preserved'in its existingstate, since the very essenceof
sustainingeconomicacivityrelieson utilizingcapitalto generatefutureprofitsor income. Thereis
little disagrgementnow on exending the same principlesthat apply to manmadecapital to
environmental capital,saveon the applicationof thoseprinciplesto the specialcaseof depletable
resourceswhichcannotbe renewedor recycled,but whosestocksteadilydwindlesas it is usedup in
the productiveprocess.
Thatthe "environment" canbe viewedasnaturalcapitalis easyto perceive,both asa sinkfor
wastesand a sourceof materialsand energy.' Wasteshavebeendumpedin riversand seas,buried
^n la-n anddispersedin the atmosphere,in the beliefthat sucbnaturalreceptorshad an unlimited
capacityto receivethem. As productionhasgrown,thiscapacityhas clearlybeen seento be Umited,
and has also becomelimiting.There is thus growingacceptanceof the notionthat the polluting
activitiesshouldbear the fullcoststo societyof theirpollution.If standardsare set for acceptable
levelsof pollution,the costof achievingsuchstandards,evenif not actuallyincurred,can be usedas
a measureof environmentaldeteriorationon accountof pollution,and be chargedagainstincome
as depreciation.
As a sourceof materials,the environmentshouldalo be broughtinto incomecaculation.
A distinctionis clearlyneededbetweenresourcesthat can be regeneratedand others that cannot.
Nature,and societyin cooperationwithnature,canamend,restoreor regeneratefishstocks,forests,
soilsand the like. Wheresuchregenerationfallsshortof theoreticalor practicalrates that would

45
 lt

maintainsuchcapitalintact (Ie. at its originallevelat the beginningof each accountingperiod)

shortfaslshouldbe deducted,as depreciation,fromgr incomecalculations.Someproblemsof
valuationwouldpresentthemselves, but the guidingprinciplethroughoutshouldbe pragmatism and
approximationsince precisemeasurementis still, and likelyto remai an unattainablegoaL
Ecologists,likewise,shouldattemptmeasurements of sustainable
yieldinthe samespiritof providing
pragmaticand prudentialestimates,insteadof lettingtheirquest for precisionbecomean obstacle
that wouldrendertheirmeasurements irrelevantfor policy.
In respectof depletablemineralssuchas fossilfuels,whichcannotbe meaningfully restored
once theyareused,applyingthe sameapproachof depreciation asin the caseof renewableresources
wouldbe inappropriate. Such resourcesrepresent mnown wealththat can be liquidatedover a
variableimespandependingon theirowners'needs,theirexpectations of futurepricesandthe state
of the market. While productivecapacityis depreiated, existinginventoriesare used up or
liquidated,and it wouldbe wrongconceptually to includethe proceedsfromsellinginventoriesin
gro income.And it is equallywrongto believethat, in orderto correctfor theirinclusionin gross
incme, all that is neededis to deductthe declineof the stockfromthe wronglycalculatedgross
incometo arriveat a correctlymeasurednet income.If suchan approachis adopted,neitherthe
gros not the net incom willbe correctlymeasured.Thegros willbe inflatedbyassetsalesthat do
not representvalueadded,and the net willbe underestimated sincethe wholecontributionof the
exploitationactivityto incomeis removadas capitalconsumption or depreciation.If, on the top of
sucherroneousaccountingwe addwmndfills fromupwardre-estimation ofreserves,anddeductfrom
incomedownwardadjustmentsof thesereserves,we arriveat verydubiousand gyratingestimatesof
incomethat are as meaninglesasthey are useless,eitherfor gaugingeconomicperformanceor for
uidingeconomicpolicy.A depletableresource'scontributionto incomerequiresspecialhandling.

5. Accontingr Dpleabl Reoces

In as muchas the reservesof depletableresourcesare ascertained,theyshouldbe treatedas

wnentories,not as fixedcapital Inventoriescan be drawndownto exhaustionif that is perceived
by their ownersas economically desirable. The proceedsfrom their exploitationin any one
accountingperod shou4d,as a firststep,be viewedas proceedsfromassetsalesnot as valueadded.
If the ownersdrawdownalltheirknownreservesin one yearbecausetheybelievethis to be best in
the lightof theirassessment of futureprices,itwouldobviously
be wrongto includeallsuchproceeds
in theirgrossincomefor thatyear,andto deductthe diminution of the asset,equivalentto the same
amountthat had been includedin grossincome,so that net incomefromthis activityis shownas
ZO. Nowthat the ownershavesubstitutedfor the subsoilasset,say,a bankaccount,true income
is the interest that can be earned on the new account. Alternativelythe ownersmaysink the
proceedsfromsellingthe mineralassetsin newmaterialinvestments whoseretuMnwouldrepresent
true income.In thiswaycapitalliquidationwouldbe kept,as it should,outsidethe flowaccounts.
Followinga propositionby the late ProfessorSir John Hicks,whichhe put forwardhalf a
centuryago," it waspossiblefor me to calculatethat partof the proceedsfroma wastingassetwhich
mustbe reinvestedin altemativeassetsso that the yieldsobtainedfromsuchre-investments would
compensatefor the declinein receiptsfromthe wastingasset. Usinga discountrate and the amount
extractedfromthe reservesin any one year relativeto total reserves,I was able to indicatethe
proportionof the proceedsthat can be reckonedas true income,the remainder-- a Idndof a
Keynesianuser-cost- havingto be set asideand reinvestedto producean aggregatestreamof

46
constantfutureincome.The user-costpart is a capitalelementthat shouldbe expungedfromgross
income(GDP),and thereforewouldnot appearin net incomeeither. If freshdepositsare located,
thesewouldaffectthe flowaccountsonlyindirectly throughthe changeof the reserves-to-extraction
ratioi.e. providinga longerlifetimeof the assetso that the incomepart risesand the usercost part
11
falsi.

Tis proposal,whichisslowlygaininggroundamongeconomists,
is stillbyno meansgenerally
accepted,either by them or by the nationalincomestatisticians.nManyof the latter, even if
convinced,wouldstill prefer to preserveold time seriesof erroneouslycalculatedGDP on the
argumentthat all thatis requiredis to deductnaturalresource"depreciation",
equivalentto the entire
diminutionof stock,from the grossproductto showa moresustainablenet productwhichwould
amountto niL The conceptualconfusionimpliedby suchprocedureshasalreadybeen mentioned.
If one mustpersistwiththis confusionfor the sakeof preservingold timeseries,the user cost,as
explainedabove,wouldbe the appropriateestimateof "depreciation".

6. Mminited Functionof Accounting

Accountingbyits naturehasa limitedfunction.It is essentiallya backward-looking activity
attemptingto sortout fromthe behaviorofeconomicunitsduringa pastperiodelementsfromwhich
an arithmeticalhistoryis compiled.Thisusuallytakesthe formof a snapshotat a pointof time(a
balamcesheetof assetsand liabilities),and a flow,duringa certainperiod(mostcommonlya year),
of net resultsof the economicactivityconcerned:profitsand lossfor an individualor corporation,
andvalueaddedfor a nation. Economists haveoftenmisunderstood the functionsof the accountant,
andhisconcern- perhapsobsession- withkeepingcapitalintact,oftenchallenging the accountant's
meaningof keepingcapitalintact,and the accuracyof his neasurements,sincesucha conceptof
capitalmaintenanceinevitablyrefersto the future. The Hicksiandefinitonof incomeitselt whose
authorinsistedthat it wasmerelya roughguidefor prudentbehavior,haswronglybeen criticizedon
the economist'susualgroundof concemwithprecision,and his (the economist's)forward- rather
thanthe accountant'sbackward- orientation.Hicks'sincomehasbeen saidto be incapableofbeing
'directlymeasured"and even that it is "notsuitedto an accountingof what happenedin the past"
1 Whe!e,sHick ttreued the accountant's
eith-er. questfor approxmatelydefininga levelof income
that canbe devotedto consumption withconcernfor a sustainabilitybuiltaroundthe re-useofcapital
in future,other economistshave tendedto hankerafter a preciselevelof sustainability whichthe
Hicksianapproach,withits emphasison futureincomesustainability, obviouslycannotmeet,pardy
becausethe future willahws remainunknown.
Economistsand accountantshavedifferent,but perfectiyreconcu"bic,ubjcxuiv. In their
measurements the accountantsseekapproximations, assumeconstanttechnology,and positthat the
futurewillbe a continuationof the past. In practicetechnology
doeschange,andthe futureis a little
diffrent fromthe past. But thisdoesnot mattermuch,however,sincethe accountants'accounting
periodis seldommore than one year,and everynewyear bringswithit new factsand somefresh
technologywhichthe accountantshaveto, andcertainlydo, take in theirstride.

7. B _snee
and Govenet
TheapproachI haveproposedforestimating
incomefromdepletablenaturalresources,which

47
 relies on settingasidepart of the proceedsfromsaleof naturalcapitalto be sunk in alternative
investmentsso that they mayyielda constantstreamof futureincome,begsthe questionas to what
kind of altenative investmentsare available,and whetherfor the sake of sustainabilitysuch
investmentswillalwaysbe available.Here we leavethe ex Mt worldof the accountantand enter
the realmof ex ante analysis.
Individualownersofdepletableresourcesusuallysee to it that partof theirreceipts,whether
in the formof depletableallowances or set-asides,are re-investedso that the ownerscan continue
in business.Whetheror not their newinvestments shouldbe in the sameline of businessthey are
alreadyin, or divertedtowardsother lines,dependson manyfactormIf the price of the natural
resourcethey own risesin reflectionof its growingscarcity,thus indicatingthe opportunityfor
investmentto producesubstitutesbasedon renewableresources,andif sucha courseis economically
feasible,the ownersmaywellcontinuein thesamelineof business.Butfrequentlythe marketwould
failto reflectthe resource'sgrowingscarcity,and its pricewouldfailto rise. Besides,technologies
for producingsubstitutesmaynotbe available, andif availablemaynot be economicat the prevailing
set of prices.Thuswe oftenobservea tendencyfor diversification awayfromone-productbusiness
on the part of largecorporationsexploitingnaturalresources.
Someenvironmentalists wouldprefer that the 'user cost"entailedin the exploitatdon
of a
depletablenaturalassetbe investedin a 'twin"projectthatwouldsupplya renewablesubstitutefor
the samedepletablesource. 14 But in the lightof the considerations
just mentioned,such'twinning'
or "pairing'maynot be attractiveto the privateownets.On the otherhand thereis nothingagainst
societyas a wholeindicatingits desireto raise the overalllevelof savingsand inmtment so that
these become consistentwith the objectiveof future incomesustainabilityand also subsidize
pioneeringand experimentalventures in pursuit of findingrenewablesourcesto replace the
diminishingones. Thiscan be done by insisting,throughappropriatemonetaryand fiscalpolicies,
that the usercost of depletableresourceexploitationshouldbe addedto currentinvestments.The
extrainvestmentswouldbe guidedto sociallydesirableventures,suchas naturalresourcerestoration
and maintenance,througha carefullydesignedsystemof taxationand subsidies.

& User Cst and hnome Identitie

Considerwhathappensto the wualidentitythat income(Y) is the sumtotalof consumption
(C) and investment(I). Denotingusercostby the letter U,we can write:
Y C+I (1)
Adjustingfor user cost,equation(1) becomes:
Yr U = (CmV)+ I (2)
If the usercost is nowdevotedto fesh invesutments,
incomerisesand we get:
Y (C-U) + (I+U) (3)
Equation3 is thusseen to be identicalto equation(1) exceptthat consumption
is lowerand
imvestment
is higher.

48
 Equation(2),however,depictsthe correctlevelof incomeif the usercost is not reinvested.
But if C remainsunchanged,then the truelevelof investment
that hasbeenattsinedis onlyI-U since
U representsa disinvestment.In this lattercasewe have:
Y- U = C+ (I-U) (4)

9. Policyand the Pobilm of Scale

Whilethe approachof sinkingpartofthe proceedsintonewinvestments seemsperfec* valid
for individuals,
businessesandeven smallcountrieswhichalso havethe optionof acquiringforeig
iwestmentsif profitabledomesticopportunitiesare not available,can it be workableif it is done on
a largescaleso thatsignificant
portionsof globalnaturalcapitalmightbe liquidatedto be substituted
for by manmadecapitalformation?
Once the problemis posed in this way,the realizationof the objectiveof creatinga
permanentincomestreamfromwastingassetsbecomesquestionable.Individuals, corporationsand
evennationscan run out of a naturalresource- evenif theirlivelihooddependedmateriallyon it -
-in the knowledgethat futureincomemaybe generatedthroughcarefullyselectednew investments
Whenconsideringbetter accountingfor depletableresourcesmyfocuswason the ingomeof their
ownes It did not matterwhatformthe newinvestments wouldtake providedthey guaranteedfor
the ownersa constantstreamof futureincome.Theformof the newinvestments wouldbe guided
by the market,and if the marketindicatedthat the newinvestmentsshouldbe in the sameline of
buiness,so be it. However,if the problemis considered,
notjust asone of betteraccountingfor the
resourceowners,but in a forwardcontextas a guideto economicpolicyon a globalscale,we have
to fice the issuesraised byBrundtlanui,
and the variousconstraintsand propositionswe findthere
for future environmentalduections. We alsoencounterthe problemsof scale and of ultimate
substitutability
betweennaturalresourcesand manmadecapitalto whichHermanDalyhas been
drawingour attention.
If we perceivethe problemglobally,then it is clearlynecessaryto replacesay, dwindling
natural energy sources,not just by other sourcesof i but by other sourcesof that ar
renewable,and the issueof "twinningebecomesrelevant.If the marketfailsto signalrisingenergy
pricesto justifyinvestingin renewableenergysources,then societymaywishto givethe marketa
helpinghand throughappropriatepolicy.Viewedglobally,societyshouldhave a broad interestin
the creation and applicationof new technologiesthat wouldsubstituterenewablesourcesfor
diminishingnon-renewable ones.
But what shouldbe done about the searchfor an equilibriumbetw,*n the state of the
environmentand globaleconomicactivity?Theworldeconomicorganizationhasbeen functioning
on the basisof economicagentsseekingperpetualeconomicgrowth,a pursuitwhichhastraditionally
been seen not only as desirablefor raisingmaterialwelfareall around,but also as essentialfor
energizingthe developmentof the lessdevelopedcountries,and thus assistingin the alleviationof
poverty.If technologycouldbe organizedso that it gaveus substitutesfor naturalresourcesthrough
the instrumentof manmadecapitalformation,we wouldbe able to continue'businessas usual,'
hopingthat the marketwouldreflectscarcitiesinto higherprices,and thus guidethis processof
substitution.Thiscertainlyappearsto be one of Brundtland'sfundamentalassumptions.However,
we havereacheda stagewherethe stateof the environmenthasbecomeso stressed,and technolog

49
and socialorgtion have clearlylagged,at leat so fa, that somedrasticaltemativesolution
des to be explored.
Brundtandofferedone solution,whichleansin favorof maintaining the currentemphasison
Vowthwhileusingthe fruitsofgrowthto lessenthe material throughput in economic actvity,repair
the envionent, andalsofor incomereditrbution,bothintra-nationally andfromthe richerto the
poorer nations,withthe objectiveof allviatingpovet. I join withthe other contributor8in this
volumecontendingthat this strategyis questionable,partlybecausemuchof the damae to the
envirormentcausedbyindiciminategrowthisirreversible; partlybecausethe processofsubstitution
of manmadecapitalfor naturalresourcesis slowand erratic;and also in viewof the enormous
increas projectedforglobaleconomicactivityascomparedwiththe advancedstateof envionmental
stess alreadyreached. If we are seriousaboutsavngour planet,we mustseeka steadystatefor the
ewnomiesof the rich,whflethe poorgrowand developso that povertyis eradicatedand income
disparity,whichis the sourceof so muchenvironmental damage,reduced.Meanwhiletechnology
develcuient and dissemination shouldbe acceleratedand populationgrowthurgentlyhalted.
If the Bmndtlandpath is rejectedas impractical,
can the proposalto arrestgrowthin much
of the wold economybe viewedas anythingshortof utopian?It is difficultspecifically
to perceive
the sociolog and politicaleconomyof maintaining a steadylevelof incomein the richercounties
Suchcountriesrelyprimarilyon fr marketforcesto guidethe allocationof economicresources.
In thesecountries,the essentialprofitmotiveis gearedunavoidablyto businessexpansionin search
of oppounlty. The impactof the richercountryeconomicexpansionon developingcountriesbas
alo oftenbe seenas benig inan 'emptyworldcontextofnon-binding environmentalconstraints.
In factevezytimegrowthslowsdownin the richercountries,the pooreronesappearto sufferfrom
depressedIncomesand adver tems of trade. Andyet, the richercountriesuse the bulk of the
word resourc to supporta minorityof the woddpopulation.If the richare to growrichermerely
to providemarketsfor the poor, not onlyare there moreeconomicalwaysto achievethe same
objective,but sucha coure wouldaccelerateintemationalincomeinequality.
Clarly somethingdrastichasto take placein socialand industrialorganizationand in the
modaitie of internationalrelationsif a steadystateof economicactivity,involvinga constantlevel
of throughput,is to p in the developedcountriae Draftinga blueprintfor thisvisionof the
futureis needed. Its economiccontentwillhaveto addressthe problemof obtaininggrowthand/or
development in the poorercountriessimultaneouslyasthe economiesofthe richercountriesare kept
on an ee keel. In addition,the richercountrieswouldbe askedto transferto the lessdeveloped
countriesthe resourcesnecesasyto redressthe negativeeffectof the richercountries'arrested
growthand to alleviatepoverty.Furthermore,it is necessayto planfor the kindof economicpolicy
that wouldhave to applyin the richercountriesto producethe targetof a steadystate: as some
actvitieswill have to expand,othes must contracL What criteriawouldbe used to modulate
aggregateactivityin a free marketeconomywhichalsohasto be managedin pursuitof manyother
policyo ? The issuesthis scenarioraiseswfllhave to be facedby the advocatesof sucha
strategy. The Brndtand Report avoidedall these complexissuesand opted insteadfor a non-
rewhvotry, ratheroptimistic,but seeminglyuntenablecourse.

50
la10.'t 8

Finay a word about the importanceof proper incomeaccountingsinceit is income

measurementsthat wil indicatewhat kind of gowth or expanion of economicactviy is being
xperiencedand projected. Todays incomechanges,whichprobaby lie behind Bnand's
projectionsof growth,relateto the grossdomesticproductasconventionaymeasuredandas valued
at factor cost.' But if we shift the focusfrom the gross productto an envronmentallymore
sustainableM product(fromwbichthe user-costof depletableresourceshasbeen eliminated),put
a valueon naturaldisastersanddeductthisfrominoome, and developthe habitof valuingactivities
at their full envinmental cost when pricesrelect true scarcities,we are bound to get a very
differentreding of incomeand Itsgrowth.In whichcae it mightwelltun out that the five-to-ten
timesexpasion in economicactvity,as enviagedby Brundtlandad stressedby McNeill,wil be
less." A hint of this is to be foundin the contributionbyTinbergen
andHuetingin thisvolume,but
clearlymuchworkis neededto clarifythis issue.

NOBI
1. WorldCommissionon EnvironmentandDevelopment,Our Common OxfordUniversty
Pres, Oxfordand NewYork,1987,p. 43.
are surveyedby Pezzey,J. 1989."EconomicAnalsi of Sustainable
2. Defntions of sustalnability
Growthand Sustainabl Development".WashingtonDC.,WorldBank,EnvironmentDqetment
WorkingPaper 15:Appendix1: "Definitions in the Literature."
of Sustainabflity

3. As the reader willnote presentlythe searchfor a precisemeaningof sustainabilityis akin to

defiing incomein exactterms. Nounimity is possbleas bothconceptsrelyon one'svisionof the
future. For practicalpurposes,however,and as a guidefor prudentbehavior,we mustbe content
withsome usefuldegreeof appraodmation.
4. Whetherit was the BrundtlandReport itseWor the polidcalforcesthat have been gatheing
momeswuitu iudpeadentlyin vaious part of the richernations,it is remarkablehowthe impactof
the "GreenMovement"has been reflectedin the declarationsof recent economicsummitsof the
Groupof the Sevenleadig industrialnationsand throughthe latter'sinfluencehasgivenvent to a
numberof envonmental initiadves.The July 1989EconomicDeclarationof the G-7Economic
Summit(Section37)containedthe statements: 'In orderto achievesustnable development,we shall
ensure the compatibilityof economicgrowth and developmentwith the protectionof the
nirnment." 'We encouragethe WorldBank and regionaldevelopmentbanks to integrate
environmentalconsideratonsinto theiractivities.'
5. 'Me July 1990G-7 Declarationof the EconomicSummitreferredto globalenvironmentalstress
(Ozonedepletion,climatechange,marinepollution,andlossof biologicaldiversity)and statedthat
is to passon to futuregenerationsan environmentwhose
"oneof our mostimportantresponsibilities
health,beautyand economicpotentialare not threatened."
& It is interestingthat in theirinitialstagesthe UNEP-World
BankWorkshopswereseekingafter
settingup nationalphysicalindicatorsof environmental stress,to be combinedeventuallyinto one
nationalindex,that wouldreflectthe stateof the environment,but participants
veryquicklyrealied

51
 that a systemof 'weighting'(or valuation)wasnecessaryto producesucha singleindex Thi moved
the concern of the Workshopsquite earlyinto the directionof refonmingnational income
neasurement Cf.SalahEl Seray'sRapporteur'sReportof the October1985ParisMeetin&World
Bank,WashingtonD.C.,1986,mimeographed.
7. C£ Aan Geb and Associates,Oil Windfalls:Blessingor Curse? (a World Bank Research
Publication),OxfordUniversityPress,198&
& I am abstractinghere froma numberof activitieswhichhave traditionallybeen excluded from
nationalincomereckoningsuchashouseholdservicesbyfamilymembes Thatthe environmentcan
be vwed as capital,contnbutingto the productveprocess,is a notionwhichis entirelyin harmony
with neo-classical
economicthinking. See SalahEl Serafy,"The Environmentas Capital'in R.
Costanza(ed.), logical Economics: The Scienceand Managementof Sustainabift Columbia
Prs, NewYork, 1991.
9. See SalahEl Serafy,"TheEnvironmentas Capital"in Costanza(1991) p cis
10 J.R. Hicks,Valueand Ci (1939),Oxfordat the ClarendonPress,SecondEdition1946,p.
187.
11. Hicks'sall too briefcoverageof thistopicin Valueand Cptal showsthat he regardedsucha
use-ost as an allowancefor depreciation.In a personalcommunication in 1987,howver, he
indicatedapprovalof mylineof thinkng,and that I had "madegooduse of the incomechapterin
e_L and Apial.
12.A qualfiedacceptanceof thisapproachis to be foundin MA Adelman,HarindarDe Silvaand
MichaelF. Koehn,User Costin Oi ProductionMITCenterfor EnergyPolicyResearch,October
1990. Thi work uses the calculationsof El Serafyto adjust nationalincomefor a numberof
countriesin supportof argumentsmadein the text,butstatesthat "... El Serafy...err[sJin supposing
that productioncan proceedat a constantrate then abruptlycease. The declinerate standsat the
center of everyreservoirengineeringcalculation.Moreoverthe rate of extractionis limitedby
fbha*flyt6itg uaiginal ts...However,thiscorrectionwouldnot basicaUly changethe problem."It
shouldbe mentioned,however,that Adelmanbelongsto the campthat sees no scarcitydeveloping
in the supplyof mineralswhichhe viewscorrectlyas inventories,but believesthat "onlya fraction
of the mineralsin the earth'scrust,or in anygivenfield, willeverbe used. (,. i., p. 1). The
approachI havebeen advocatingis one that relieson a standardaccountant'srule of thumbthat
estimatesinventoryuseoutof a givenstockin an attemDtto anoroxmnate realitv.Tstatedin ny 1981
articlethat factorssuchas the onesmentionedbyAdelmanet al couldbe accommodated underthe
approachI proposed. The so-calledreservoirengineeringrule of alwayskeepinga constantratio
betweenreserv and extractionis of dubiousreliabilityand not essentialfor the calculationsin any
cas See Salah El Serafy,"AbsorptiveCapacity,the Demandfor Revenueand the Supplyof
Petroleum,"Journalof Energy and Development. Vol.7, No. 1 (Autumn1981),pp. 73-88.
13.SeeDavidF. Bradford,"Commenton ScottandEisner,"Journalof EconomicLiserature.Volume
XXVm, Number3, September1990,p. 1184. Thiswasa commenton MauriceScott's"Extended
Accountsfor NationalIncomeandProduct:A Comment;andRobertEisner's"Reply"to Scottin the
sameissue.

52
14.Ewoogisttend to definesubstituesmorenarrowlythaneconomists whoappearto favora broad
defintion that allowsthe market freedomto define what a substituteiL David Pearce,Anfl
Markndya and Edward arbier,in theirBlueNit for a Green nomy. EartIScan ubIP catioms,
London,1989,advocated'pairingeor "twing", but withina program of many prjects, rather than
for each projectat a tm
15. A visionof a possiblecouse is offeredin HermanE Dalyand John B. Cubb,Jr., For th
VnmorOso0 BeaconPress,Boston,1989.Manyaspectsof sucha course,however,need to be
muchmorecareuly eamined as the authorsurge.
16. The conventionof valuingGDP at factor costsand not at marketpric derive from the
presumptionthat tac and subsidiesrepresentdeviationsfromgenuinevaluesproducedby the
market and whichshouldprovie weights for the variousacvities that make up the domestic
producL But if a newset of environmentallyinspiredtauosand subsidiesis viewedas nesay to
correctthe market'sfailureto putpropervalueson the servicesof naturalresources,thenwe should
regardsuch"marketprces"as betterweightsthan factorcostsfor the purposeof estimatinginoome
in the prent context.

17.JimMcNeill,SustainableDevelopment,Economics paperpresnted
andthe GrowthImperative",
to the Workshopon the Economicsof Development
Sustainable United States Environmental
D. C., January1990.
Protecton Agecy, Washington,

53
Canter 6: PROJBCr EVALUAnONANDSUSrAJNABLE
DEVELOPMENT
RaymondF. Mikesll

Some developmenteconomistsand most environmentalists advocatethe adoption of

sustinabledevelopmentinplaceofeconomicgrowthas the primatyobjectivefor bothindustrialand
developingcountries.Sustainabledevelopment hasalsobeenendorsedbythe WorldBankandother
multilateraldevelopmentbanb (MDBs),and by bilateralasistanceagenciessuchas the USAD.
An esential ingredientin sustainabledevelopment is the conservation
of the naturalresourcebase
for usebyfuturegenerations.However,there are a numberof difficulties in specifying
and applying
sustainability
as a criterionfor evaluatingindividual
projects.
Thepurposeof thispaperis to presenta methodof projectevaluatonm that is consistentwith
the principlesof sustainabledevelopment.Tneprojectswithwhichthispaperis concernedare those
that requiresignificantamountsof naturalresourcesin theirproductionor havea signifcat impact
on natural resourcesin their constructionor operation. Mostof the projectssupportedby the
multilateraldevelopment banksare resourceintensiveandmanyofthemhaveadverseenvironmental
impacts.
The traditionalmethodof determiningthe financialfeasibilityof projectsusedby the World
Bankandother developmentasistanceagencieshasbeen to calculatethe internalrate of returnon
imvestedcapitaL If the internalrmteof return eoceedsa specifiedlevel (usuallyequal to the
internationallong-termrate of interestplus an allowancefor risk),the projectis acceptable.For
xample,the WorldBank ustaly uses an int-mal rate of return of 12 pect as the um
aceptable rate.' Tbh approachto project evaluationimpliesthat we should max_im the
productivity of capitalasthe limitingfactor.Sustainable
development on the otherhandimplesthat
natura resourcesrather than capitalare the scarct or limitingfactorsin production. 2 Hence,
governmentsand MDBsshouldfavorthoseprojectsthat mmize the productiity of the natural
resource usedin the project. Tbis requiresthat projectproponentsevaluateprojectsbycalculating
their net presentvalue,assuminginfinitelyelasticsuppliesof laborand capitalin combinationwith
a fixedamountof naturalresources. hi approachhaslongbeen usedin resourceeconomicsfor
evaluatingresourceprojects.
Anothercharacteristicofsustainabledevelopmentis itsconcemwithsocialbenefitsandcosts,
and not simplywith the net returnsto the ownersof the factors of production. Sustainable
developmentrequiresthat we evaluateprojectsbycalculating theirnet presentsocialvalue(NPSV)
ratherthantheirnet presentvalueto privateownersoffuIVe
pij. Sciss cwf its andcostsinclude
a host of externalitieswhichmaybenefitor harmsociety.
Moreover,socialcostsinvolvethe non-monetary impactsof projects,suchas illnessand loss
of environmental amenities,the monetaryvaluesofwhichrequirespecialmethodologies to estimate.
To an increasingdegree,the WorldBankandotherdevelopment assistanceagences are concerned
withsocialbenefitsand costswhenevaluatingprojects,but they rarelyincludenonmonetarysocial
costsin calculatingfinancialfeasibility.

54
 lhe most distinguishingcharacterstic of sustainable development is the goal of
intergenerationalequity- that the presentgenerationdoesnot impairthe resourcebase required
byfuturegenerationsto maintainor increasetheirwell-being.Thi goalis variouslydefined,but the
moat widelyaccepted definitionis conditionof nondereaing per capita well-beingacross
generations.eHowever,the conditionsfor achievingthisgoalimnolve the rate of populationgowth,
technological
developmentsforsubstituting moreabundantforscarceresources,incomedistnbution,
and governmentpoliciesthat induceconservation of naturalresources.AUof thesefactorscannot
be taken into accountin evaluatingindividualprojects.Hence,it is recesaly to formulatesome
simplerulesthatwouldmakeindividual projectsat leastnotincompatiblewiththe goalof sustainable
devlopment.

Sustainabilityrequiresthat producivityof the resourcebasebe matained overtime,either

byrenewingthe resourceor by investingin othercapitalassetsan amountequalto the capitalvalue
of the resourcedepletion. Failureto deduct resourcedepletionoverstatesthe net revenueof
projectsandconsequently overstatestheirrateofreturn,leadingto misallocation,ie., overimtestment
in non-renewable typesofexploitationrelativeto otherinvestments. I wouldsatisfythe sustainabilit
criterionin projectevauationby includingin socialcostsanyreductionin the valueof the rewurce
basecausedbythe constuctionandoperationof the project.The resourcebaseincludesallnatural
andenvironmental resourcesthatoDntribute to the production
of bothmarketableandnonmarketable
goodsand servicesthat provideutilitiesfor humanbein Thus a projectthat significantly reduces
the productivityof the landor the qualityof the atmosphere,or of rives and lakes,or of biodiversity,
givesrise to socialcosts Thi impliesthat the socialcostsare potentiallymeasurable.
Treati-g of Reoure Depleion as a SocialCot
In the approachI here advocate,projectevaluationiB based on the NPSVof a project
ivohlg the use of naturalresources,withanyresourcedepletionarisingdirectlyor indectw from
the projecttreatedas a soial cost. Failureto deductresourcedepletionoverstatesthe net revenue
of projects and consequentlyoverstatestheir rate of return, leading to misalocation,ie.
.mennvstmeiQt in n.eriewahle tes of exploitatinn relativeto otherinvestmentsThevalueof a
resourcedepletionis the capitalized(discounted)valueof thestreamof utilitiesthat couldhavebeen
producedby usingthe lostresourcein eitherthe sametypeof projector in an altemativeuseof the
rource, suchas preservationof an old growthforestas an alternativeto harvestingthe timber. It
is thiscapitaid v lue that wewantto preserveforfuturegenerations;hence,the capitalizedvalue
of the resourcelossmustbe preservedbyan equivalentalternativeimestmentthat willbenefitfuture
generations.

In treadngnaturalresourcedepletionas a socialcostin projectevaluation,a two-foldproblem

arbes Howdo you measurethe valueof the depletionand howmuchdo you need to saveand
reimvestout of project revenueto maintainthe sameincome(after allowancefor depletion)for
futuregenerations?The revenuefroma resourceprojectthat is attributedto the naturalresource
is the total receiptsfromthe saleof the productslessthe capitaland laborcostsassociatedwiththe
project. We maydividethis revenue,R, into twocomponents:the incomecomponent,X, and a
capitalcomponent,R-X representingthe naturalresourcedepletion. 4 We need to defineR-Xin a
waythat it can be usedas a socialcost in the calculationof NPSV. Assumewe havea minewift
annualreceipts,R, whichfuly depletesin n yearsand thateachyeara portionof the revenue,R-X

55
 the minethat wouldenablethe ownersto receivean infiniteseriesof X, assuminga rate of interest
of r. Sincethe minedepletesin n years,the annualvalueof the depletionis R, but if R i sved
each year, X wouldbe zero and none of the revenuewouldbe availablefor consumption.The
amountneededto be savedeachyear,R-X,is the presentvalueof the annualresourcedepleion,
whichwe mayexpressas - RL-
(1+r)y
so that X = R - JL Usingthe standardformulafor compoundingI per
annumatr R (1+r)"l = R - = x
(1+r)0 r 0 r
l(1+rX
r
If L is savedand compoundedeachyearfor n yearsat an interestrate of r, the accumulated
(l+ry)
willequal x , whichwillprovidea perpetualincomeof X5
r
The aboveanalysiscan be madeclearwitha numericalexample.AssumeR is S250,000per
year and that the lifeof the mineis 20yearsand the rate of interest10 percent Usingthe above
formula,the presentvalueof R peryearfor 20yearsis $2,130,000 andannualincome,X,is $213,000.
Annualdepletion,or R-X,equals$37,000,whichwhensavedand compoundedat 10 percentover
20 yea also equals$2130,000.Ihe longerthe lifeof the mineand the higherthe rate of interest,
the smallerthe proportionof R that needsto be savedfor depletion.For a minethat depletesin 10
Yars and assumingan interestrate of 5 percent,7 percent of R would need to be savedfor
depletion.Thi compareswith15percentin the frSt example.

Cdcubyg 1theNPSV
The NPSVof the mineis the presentvalueof an annualstream,
R - _L or R minusthe presentvalueof annualdepletion.Th annual
(1+r) 0

streamis also X per year and the presentvalueof X per year for n year is
x (1 - 1 ) whichequalsthe NPSVof themine.
r
The proofis as follows:Usingthe standardformulafor compoundingI per annum
RL (I+r)d" = R- R X

r
In the numericalexamplegivenabove,the NPSVfor a minewitha lifeof 20yearsand a rate
of interestof 10percentis about$1.8million.Withhigherannualdepletion,NPSVis muchsmaler.

56
 hus, for a minewitha lifeof only10years,depletionis35 percentof R and X is 65 percnt of R-
asagainst15percentof R for depletionand85 percentforX,or income,in the examplegivenabove.
We may generale the examplegivenaboveby statingthat the NPSVof a projectwith
alowance for resourcedepletion is the preent value of an annual stream:

R - RD), where RD is the averageannualresourcedepletion during the

(1+r)0
the lifeoftheproject. The actualrmourcedepletionmighttake placeat anytimeduringthe lifeof
the projectrather than in equalamountsoverthe lifeof the project. However,in order to satisfy
the sustalnability
criterion,it makeslittledifferenceto futuregenerationswhenthe actualdepletion
taes placeduringthe lifeof the project,say,25yeas Resourcedepletionneed not be confinedto
the depletionof reservesin a miningproject.
It maytake the formof environmental damagecausedbya mineor anyother project,which
reducesthe productivity of naturalresources.For example,a miningoperationmightpoflutea rier,
therebyreducingthe valueof the fishcatch. The presentvalueof the lossof fishcatchwouldbe a
part of the socialcostof the mine,therebyloweringthe NPSVof the miningproject. Alternatively,
a hydroelectricdammightcauseenvironmental damageto the recreationalvaluesof a river. If the
damagewasvet large, R - RD mightbe negative,as wouldalso the MPSVof the projet
(1+r)

In calculating
NPSV,thereshouldbe an allowance for riskbyapplyingprobability
coefficients
t eachof the relevantvariablesto estimatethe expectedNPSof the project.
5 the presentvalueof R per yearfor n yearsalo equals X
r:

Rtl- (r) = R- (I+rV=X

r r r
Rithe R m Depletio

In the approachto projectevaluationoutlinedabove it makesno differencewhetherthe

accumulateddepreciationis reinvestedin renewingthe depletedresourceor used for someother
capitalimprovement, so longas the investmentyieldsa net socialoutputequal to that lost by the
depletionof the resource. Tbe paradigmis the reinvestmentof depreciationof a buildingor a
machine. If a projectdestroysan old growthforestor an area of a scenicriver,the reducedvalue
of the resourceas a producerof utilitiesshouldbe compensated by an invtment that willyielda
streamof utilitiesequalto that whih waslost. Theinvestmentmaytake the formof restoringthe
depletednaturalresource,creatingman-madephysicalcapital,or improvinghumanknowledgeand
skillsfor increasingthe productivity
of the resourcebase.
Three problemsarise in renderingthe above modelconsistentwith sustainability.First,
changingthe sqstemof accountingto includeresourcedepletionas a socialcostwillnot necessarily
induceprivateentitiesto saveandreinvestsocialcapital.Privatefirmsandindividuals
maystilltreat
naturalresourcedepletionas incomeavailablefor consumption and,exceptfor depletionallowances
for some types of naturalresourceexploitation,the tax systemwillcount resourcedepletionas

57
taable income.Therefore,sustinabilitywouldrequireresourcedepledonto be taaedby the state
and nvestedin a mannerthat wil sustainoutputfor futuregeneration. The taxwill,of course,
be passedon to consumers The pricesfor productswhoseproductioninvolv heavyresource
depleton wouldbe relatiely higherthan pricesof productsthat contributelessto depletion. Ihe
statecouldeitherinvestthe revenuesdiectly)or usethe revenuesto induceprivateinvestmentfor
ncreasingthe social producL
The secondproblemis whatsocialinestmentsmadeor inducedby the statewil insurethat
futuregenerationsreceivethe capitaizedvalueof the resourcesdepletedbythe presentgeneration.
Supposethat most of the tax revenueis Investedin roadsand building,rather than in restoing
depletedrenewablenaturalresourcesor in increasingthe productiityof naturalresources.Howfar
can we go in substitutingman-madephysicalcapitalfor natural esourcecapitaland stillmaintaina
risingnationalor worldoutput?I do not thinkwe can assumethat the agegate nationalor world
productionfmction is a Cobb-Douglas productionfuncton in whichthe productvefictors are
completelysubsttutable.
HermanDay arges in Chapter2 that substitution of man-made capitalfor naturalresources
i quite limited.In otherwords,unlessthe rawmateial baseis maintained,long-runst
I impossible.Thispositionis highlycontroversial
andsomeresourceeconomists believethatwe can
offset considerableresourcedepletionby increasingthe producdvityof natunl resoure capitaL
Withoutfuther dbcussionofthisissue,I believethat sustainabiityrequiresthat a substantialamount
of the resourcedepletionbe investedin replenishingrenewableresources,in inreasing product
output per unit of resourceinput,or in increasingthe end-useefficienc of resourceintenive
products
A thirdproblemconcerms substitutability
on the demandside. Howfar can wego in satsfying
the demandfor wfldernessamenites,clean air, and lhiingspacewithman-madegoods? Tbere is
sUrelYa pointbeyondwhichfuritherdegradation of theenvironment cannotbe compenatedbyhigher
per capitareal incomesin the formof producedgoodsand servicea Whati the utilitytrdeoff in
dring a Cadillacor Mercedesin a perpetualtrafficjam surroundedby foul air againstwaing
througha groveof ancientredwoods?Thereare alsolimitson the eotentto whichwe can allowthe
naturaleni ent to deteriorateandstillsurviveas a species.
Technological progresscan offsetdepletionof the resourcebasebyineasing the productivity
of the remaig resources. It can also facilitatethe substitutionof man-madecapitalassetsfor
naturalresourcesand the substitutionof moreabundamt for scarcenaturalresourcesin production.
Iio@-@, chb-nological progrs is necesa to maintainor increaseper capitautilitiesof future
generationswitha risingpopulation.I havenot includedtechnological progressin the calculation
of the socialcostsrepresentedbythe depletionof the resourcebasefor two reasons.
First,we do not knowenoughaboutfuturetechnology to assss its impacton the productvity
of the resourcesusedin particularprojects.Second,we shouldallowtechnological progressto have
its fuhlleffecton improvingthe well-beingof futuregenerations;Le.,we shouldnot borrowagainst
future uncertain technologicalprogressto financepresent consumpstlonin excess of what is
uswtainable with presenttechnology.Thus,I believethe socialcost of the depletionof the natural
resourcesattributableto a projectshouldbe basedon the currentstateof technology.

s8
 Cdela for 1DB Suppoxtof rojes
For a projectto qualfyfor MDBsupport,the expectedNPSVadjustedfor resourcedepltion
should be positive he expectedNPSVof a proposedprojectwihout allwanc for resource
is frequentlyregrded as reouce et (Mikesell1989). If resourcerent Is zero the
resourcecontributesnothingto socialoutputsincethe labor,capital,and managementincludedin
the soci cost couldproducethe samevalueoutputin anotherprojectwithoutnaturalresoures

However,for the projectto satisfythe conditionof sustaability, the resourcerent mustbe

at lest equal to the resourcedepletioncauseddirectlyor indirectlyby constructionand operation
of the projeL If the expecd NPSVadjustedfor resourcedepletionwerezero,the resourcewould
contributenothingto net revenuebyusingit in the project,andit couldprobablydo betterthan that
by simplykavng it undeeloped. Thi wouldbe true of a wildernessarea that couldbe uied by
fbsermenand hikersasan alternativeto harvestingthe timberwitha zero or negativeNPSV.Also,
the ateative of leavingthe resourceundisturbedwouldhavethe additionalvalueof reveiiy.
Whenresourcesare not disturbedtheycan awaysbe developedat sometimein the futurewhenthe
need for the productsof the projectis greater. Thisvalueis in additionto the possibleamenities
yieldedby resourcesleft in their naturalstate. Ideally,the use of resourcesthat providethe
madmumexected NPSVshouldbe supported.Frequently,that useis simplyleavingthe resource
in an undevelopedstate.
t i sometime arguedthat accountingfor reource depletionas a socWia cost is impractical
becausethere are no reliabledata. I reject this argumentfor two reasons. Frst, environmental
economistshave formulatedmethodsfor estimatinga wide range of nonmarketcosts,including
damageto health,riversand lakes,forestecosytems,wilderess amenities,and wildife. Estimates
of the valueof resourcedepletionhavemnmadebyRepetto(1988)and others,and researchstaffs
of the MDBsare in a goodpositionto providedata for naturalresourceaccounting.Second,it is
betterto havesomeoneacquaintedwiththe environmental aspectsof a projectto estimatethe socal
coststhan to ignorethem. If somehingis worthdoing,it is worthdoinginadeuately!
Note:Thispaperwasbe presentedat the WestemEconomicAssociation
Internationalmeetingin
Seattle,June 30, 1991.

NOTES
1. TheWorldBankusuallyusesan internalrateof returnof 12percentas the minimumacceptable
rate
2 his point is developedbsyHermanDalyin a chapterof a forthcoming
book.
3. This conditionis consistentwiththe conceptof sustainability
put forwardby the Brundtland
Commission(1987). For alternativeapproachesto the sustainability criterion,see Tomanand
Croson, 1991.
4. Thi analysisis adaptedfromEl-Serafy(1989)and (1991).

59
Brundtand Commission,1987. Our CommonFuture. Report of the WorldCommissionon
Press,Chapter2.
onment and Development,Oxford:OxfordUniversity
Daly, B B. 1991. From Empty-WorldEconomicsto Full-WorldEconomica:R ng an
in R. Go udland,DalyandS. El Serafy(eds.)
HistoricalTurningPointin EconomicDevelopment,
Environmentally SustainableEconomicDevelopment:Buildingon Brundtland,Washington,DC
WorldBanL
El Seraf, S. 1989.The ProperCalculationof IncomefromDepletableNaturalResources,'in Y. 3.
Ahmad,S. El Serafy,and E. Lutz (eds.),EvironmentalAccountingfor SustainableDevelopment,
Washigton,DC: WorldBank.
... -1991. DepletableResources:Fxed Capitalor Inventories?'Paper ivenat the Conferenceof
temationalAssociations
of Researchin Incomeand Wealthon EnvironmentalAccounting,Badeji,
Austria: May27-31.
Equity,Resources
and Intergeneradonal
Miesell, R. F. 1989. DepletableResources,Discounting
Policy,December,292-296.

Rcpetto,R. and W. B. Magrath1988 NaturalResourcesAccounting,Washington,DC: World

Resources Institute.

Toman,M. A. and P. Crosson1991. Economicsand "Sustainability":BalancingTradeoffsand

Imperatives
(mimeo),Washigton,DC: Resourcesfor the Future,January.

60
Chapter7: SUSAINAE DEVELOPMET:E ROLEOF INVFSI

BemdvonDrosteand PeterDogs

1. Introdution

lnvestent, in all its differentforms,shapesour livesas wellasthat of generationsto come.

Investmetsin education,science,technology,cultureand communications, for example,continueto
have crucialimpactson welfare.In manycases,today'sresourcedegradationis a functionof earlier
investmentdecisionsabout the scaleand qualityof consumptionand production.This callsfor
increasedunderstanding of investmentprocessesfor improvedmanagement of manmadeandnatural

RapidlyIncreasingenvironmental to warnthat limits

costspromptscientistsand economists
are beingreached(Goodland,Chapter1),and challengesthe maximthat continuedeconomicgrowth
leadsto increasedglobalwelfare(TinbergenandHueting,Chapter4).To manyobserversa discussion
about limits,for eample to economicgtor.t, migbtbe seen as an academicexercisein a world
whereso manybasicneedsstillare unmet.Takingthesewarningsseriously, however,webelievethat
which
the questionhasimportantimplications, haveto be consideredby developmentplannersin all
partsof the world.
That being said, this chapter is primarilydirectedtowardsthe North, whichis not only
prmarilyresponsiblefor the presentsituation,but whichhasmanyof the resourcesneededto invest
in developmentthat 'meetsthe need of the present withoutcompromising the abilityof future
generaions to meet their own needs' (WCED, 1987).Based on the relationshipbetween
environmentalquality,economicperformanceand socialwelfare,it is nowevidentthat sustainable
developmentdemandsthat largerinvestmentsbe directedtowardsthe environmentalsector for
protectionand restorationof the productiveand assimilativecapacityof naturalcapital.
Increasedinvestmentswill,however,not onlybe madefor adaptingto environmental limits,
but also for shiftingthem. Investmentsin modernbiotechnology researchand productionare an
importantexampleof the latter, whichpose challengeswithfar reachingenvironmentaland socio-
economicconsequences, today'slong-terminvestment
not the leastin the South.It is by influencing
decisions,in areassuchas biotechnology and renewableenergy,that the policyand decisionmaking
communitywillhave the largestimpacton the internationalcommunity's sustainabledevelopment
efforts.
2. WhyDo lnvestmentsGo Wrong?
Policymakerstend to underestimatethe valueof environmentalinvestments,becase of:
time-lags(environmentalcostsand benefitsoften take timeto developbut politicalmandatesare
usuallyshort); practicaldifficultiesin the evaluationof environmentalbenefits and costs;the
transboundarynature of several environmentalexternalitiesmakingidentificationof national

61
responsbilitesanddomesticsolutionsambiguous withoutcoordinatedintrnational efforts;andhigh
discountrates (short-temtime preferences).Furthermore,privateinvestorsare oftendiscouraged
to makelong-terminvestmentsinnaturalcapitaldue to the public-good
charactersof suchasus, the
lackof propertyrightsafrangements,makingthe benefitsfromsuchinvestmentsdifficultto secure.
Intead, theyfavorinvestmentsin actividesgeneratingincomemorequickly.
Sustainable
developmentimplies,however,that investment
processesarenot onlyunderstood
andmanagedfor monetaryreurns, butthat non-monetayfactors(e.g.social,culturalandecological
realities)alsobe considered(YoungandIshwaran,1989).Thismeansthatthe valueofenvironmenta
servicesand goodsmustbe estimatedand incorporatedin the decision-making process.The failure
of traditionalsystemsof nationalaccountsin this respectis becomingrecognized,and considerable
workis beingundertakento developaccountingmethodsthat includedepreciation(as well as
increases)of environmenalcapitalassetsand that subtractdefensiveexpenditures'fromnational
income(Ahmad,El Serafyand Lutz, 1989;El Serafy,Chapter5).
In the samewayas policyand decision-makers consultmacroeconomic indicators(inflation,
"growth,exchange ratesandunemployment flgures)theyshouldalsobe providedwithenvironmenl
indicatorsand modelsillustrating
the stateof the environmentandits impacton the economy,aswell
as the relationshipbetween economicactivityand resource degradation.As it stands now,
developmentmodelsfrequentlyignorethe dire and indirectvalueof naturalcapital,both in the
economicgrowthproce8sand in susining humanwelfare.Ofcourse,the availabiltyof suchmodels
mightbe limited,but enoughdata existon whichdecisionscouldand shouldbe made (Costanza,
1990).

Due to the abovefactorsand the increasedscaleof humanactivity,there is nowa longlist

of environent prioritiesrequiringlarge-scale investment,rangingfromthe atmosphere(to reduce
emissionsof greenhousegases and ozone-layer-depleting chemicals),to local conservationof
biologicaland geneticdiversity.The listis so impressive
that authorslikeHermanE. Dalyconclude
that sincethe productivityof manmadecapitalis becomingmore and moreconstrainedby the
decreasingsupply and qualityof complimentary natural capital,we are now in an era where
"...investmentmustshiftfrommamade capitalaccumulation towardsnaturalcapitalpreservationand
restoration.'(Daly,Chapter,2).
3. lIvesment Necessaryin the Short Term

Theeconomicrationality behindincreasednaturalcapitalinvestmentsbecomesapparentwhen
we lookat somecosts and benefitsinvolved.The worldwide lackof investmentin soilprotectionis
one practicalexample.Due to variousshort-term,income-generating activities(e.g.deforestation,
intensiveagricultureandirrigation)25billiontonsof soilarelostworldwideeachyear.It is calculated
that overa twentyyearperiod,US $4.5billion/year investmentin soilprotectionwouldreducethe
annualcos of lost agriculturalproductionby US $26billion(Lazarus,1990).In addition,increased
soil investmentswould also produce benefits outside the agrlculturalsector (e.g. reducing
sedinion in manyhydro-electric dams,improving 2
waterqualityand increasingfishcatches).
Another exampleis current damageto European forests from air pollution,whichis
conservativelyestimatedat US $30billionper year.Althoughthe Europeancountrieshaveagreed
to spendsomeUS $9 billionper yearto reduceair pollution,additionalinvestmentsare calculated
to be cost-effective
(IIASA,1990).

62
 In spite of the fact that today's investmentsare often smallerthan what is necesary, the
amountsspent on mitigatingenvironmentalcostswilllikelyfund a new Indusrialsectr for pollution
control and was managementin the near future. In the OECD countriessome 9 billiontomnesof
wasteswere produced in 1990.Includingnearly 1500tonnes of industrialwastes(of which300milon
tonnes wer hardous), and 420 milliontonnes of municipalwastes(OECD, 1991).Eitimat are
that by 1992the pollution control industryin Western Europe alone will be a US $120billionper
year business.By 1994more than US $200billionmighthave to be spent annuallyon clean-upand
pollution contol in the United States. Increasedknowledgeand industrialefficiencyin these fields
a welcomed,but it isunforunate that so manycompaniesand employeeswilldepend on continued
enironment degradaion for their income. The urgent need for a massivelyexpanded waste
treatment and pollutioncontrol sector reflects historicallackof infrastructureinvestmentsand calls
for substantiallyincreasedefforts towardsfindingenvironmentallysound pr-oductionprocess and
products.

With the increasing scarcity of natural capital goods and services, investments in the
rehabitation of degradedecosystemshave becomeallthe mote important.Not onlycan rehabilitated
nfaturalcapital assetsproduce significantincomes,they often also constitutethe best wayto protect
remainingnatral areas from degradation.Since the time and investmentnecessaryto undertake
restoration activitiesincrease significantlywith the increasinglevel of ecosystemdegradation,rapid
action is essential.

Approximately80% of the potentially productive arid and semi-arid lands world-wide

(representing 35% of the earth's land surface) sufferedfrom moderate to severe desertificationin
the early 1980s,due primarilyto poor land management(Dregne, 1983).In manyarid and semi-arid
areas, the naural resourcebase is, therefore, no longer able to sustaine'isting human populations.
Due to high populationgrowthrates this willworsen in the near fiture. dite year 2000there will
be a rural population of at least 40 million in the Sahelian and Sudanian zones of West Africa
(calculatedfrom a conservative2% annualpopulationincrease).Thisis 3.7 millionpeoplemore than
what the current crop and livestockproductionsystemsof this region can support, or 19.1million
morethan what can be sustainedby fiuelwood,the energysourceon whichthese societiesrely (World
Bank, 1985).Unless these areas are successfullyrehabilitated,continued world-widedesertiflcation
iiy lave hundreds of millionsof people as envimental refuges (Grgersen, Draper and Elz,
1989;Simon, 1991).

4. FinanclngInvestmentsin the South and in Eastern Europe

Although increasinglyaware of environmentalvalues but constrained by severe budget

constraints,manydevelopingcountriesfind it difficultto make long-terminvestmentsin their natural
capital assets, in particular since increased consumptionis also seen as a major priority (African
Centre for TechnologyStudies, 1990).Their need for additionalinvestmentresourcescan only be
evaluated as alarming.' Developingcountries often argue, for example, that tlNy cannot afford
environmentalysoundtechniques,if less expensive,but pollutingalternativesexist,and that it is now
their turn to benefit from the technologiesthe industrialworldhas been using for a long time.

However,as so muchof today'stechnologyis not environmentallysustainable,it is therefore

not economicallysustainable.As the developedworldalreadyhas producedsuchlarge concentrations
of environmentaltoxins, the value of the negative externalities that additional emissionswould
produce, is no longer marginaland in manycases no longer external.Developingnations therefore

63
cannotinvestin on ly unund techiques withoutfacingrisingdomesticenvironmental
cosa, thus reducingthe turn on te invement andjeopardizingthe successof futuresustainable
developmentSeverJ counies in Eastern Europe are strikingexamples.By pursuingeconomic
gowth at the ex damage.The German
ofthe environmenttheynowfac tremendousecological
Insu or EconomicResearchhas estimatedthat industriesin Poland, the former German
Democati Republic,Czechoslovakia andthe Europeanpartofthe USSRwillneedUS$200billion
to rverso prior environmentalneglect(Cave,1990).
One couldargue that the developedworld,by usingtechnologiesthat have accumulated
globaltoxinsto some extent have reducedthe optionfor developingcountriesto use the same
tehnologies(or anyother techniqueswiththe sameimpacts),becauseof the riskof potentWfuture
ctatophes. Industrialcountriesshould,therefore,be preparedto compensat the
developedworld for these closedoptions.Tlis could be done partly by financingsustainable
technologyinvestmentsin developingcountries,and partlyby dramaticallycuttingbackon its own
emissionsto givespacefor increaseduse of environmentally unsoundtechnologiesin developing
coutries witiout inceasingthe total globalenvironmental
abuse.Indeed,the Northhasto reduce
inputgrowthandwaste,usingbotheconomicandlegalinstruments,whileat the sametimeproviding
the Southwithcapitalandsoundtechnologies throughvariousarrangemens,suchasgreen-fundsand
debt-for-sustainable
developmentswaps(Hansen,1989;Dogs6and vonDroste,1990).
The Multilaterl Fundagreeduponbythe ContractingPartiesto the MontrealProtocolto
providedevelopingcountrieswithadditionalfundsfor obtainingozone-friendly technologiesand
replacementsof CFC's,is an inportantachievementin thisdirection.TheUS $160millionfimd,will
epand to US $240millionif Chinaand India- both planningmajorCFCproductionincreases-
eventuallyratifythe MontrealProtocol.This fundis nowpart of the US $1.4billionpilotGlobal
Enionment Facility(GEF)whichisadministered bythe WorldBank,UnitedNationsEnvironment
Pogmme (UNEP)and UnitedNationsDevelopmentProgramme.GEF,howevermodestin size
comparedwithIdentifiedneeds(WRM, 1990),are to be usedfor investmentsin threeadditionalareas:
greenhousegasemissionreductions;conservation of biologicaland geneticdiversity;andprotection
of itrnational waterresources.
Alsothe EuropeanBankfor Reconstruction andDevelopment (EBRD)hasthe potentialto
becomean importantfinancierof investmentswithpositiveenvironmental impact.EBRD'sfirstloan
ever, whichwasgiven to Poland for a heatingproject, is promising.The US $50 millionloan
(togetherwitha US $20millionWorldBankcredit)aimsat reducingairpollutionbyswitching from
coalto gas-firedheat generationand bypromotingenergyefficiency(InternationalHeraldTribune,
1991).
Developingnationscannot,however,alwaysrelyon industrialnationsto developandtransfer
appropriatetechnologiesto them. They shouldbe preparedto make part of that investment
themselvesso as to ensurethat technologiesfit their economic,culturaland naturalenvironments.
In somecasesthiswillmeanthatlocal,small-scale, productionunitsare stimulated,whichmayrequire
that innovative
financeapproachesfirsthaveto be developed.Initiativessuchasthe GrameenBank
in Bangladesh,whichin 1988operatedwith413,000participants,has shownthat It is possibleto
providefinancialsupportto the rural poorand landless(WorldBank,1990).Thesegroups,heavily
dependenton the naturalenvironment,frequentlyhave verylimitedmeansfor makinglong-term
investmentin naturalcapital,thereforeoftenhaveto sacrificeinvestmentfor consumption,maythen
becomevigorouspromotorsfor sustainableresourcemanagement.

64
S. Lg4erm Inv nts

By undesIing dte valueof our naturalcapital,we are now in a siuaton whe more
and moreresourceswflbaveto be spenton restoration,wastedisposal,and protecdonofthe natural
capitalthat is lef, often withoutproducinganyextragain in welfar. Althoughthe newproblems
producedbymoderneconomicgrowthmightbe soluble,the costsfor doingso are unnecessarily high
as manyof today'senvironmental problemsshouldneverhavebeen producedin the firstplaceand
theircostsandthe abiltyto solvethemareveryfar fromequallydistributed.Sustnable development
must,therefore,ensure th scatcoresourcesare investedIn rerch and in the productionof
proeses and systemsthat not onlyavoidknownproblems,but alsoanticipateunknowncostsand
benefits.Thisrequiresrealismand vision.
Althoughwe are generallyoptimisic,the energy sector, central in all discussionson
sustainabledevelopment,providesseveralexamplesofexces investmentinresearchanddevelopment
of unsustainableprocesse andlackof investmentin renewables.One of the mostglaing is the fact
that in p989the 21 membercountriesofthe IntenationalEnergyAgency(IEA)spent75%of their
US$7.3billionenergyreseach budgeton fossilfuelsandnuclearenergy,but only7%on rmewables
and 5% on energyconservation (see Table1).
Table1. EnergyR&DSpendingbyIEAgovernments,
1989.
Tedhnology AmowntUS$
mUllon
1Share
%

NuclearFission 3,466 47
FossilFuel 1,098 15
NuclearFusion 883 12
Renewables 498 7
Conservation 367 5
Other 1,039 14
Total 7,351 | 100

Plavin and Lensen(1990).

mlorepE

T'hefact that investmentsare directedinefficiently

mightoftendependon the institutions
responsiblefor their administration.Institutions,which once were efficientin their field of
competenceand mandate,maynot adapt rapidlyenoughto new or evolvingdemands.Why,for
example,i8 there no UnitedNationsbodyworkingon the promotionof energyconservationand
renewableswhenthereisone dedicatedto the promotionofnuclearpower(theInternationalAtomic
EnergyAgency,IAEA)?1AEA,whichin 1991hasa budgetof US $179million,withUS $70million
expectedin additionalvoluntarycontributions, hasas its majorroleto monitornuclearproliferation,
but it is alsosaidto activelypromoteexportof nuclearpowertechnologyto developingnations.At
presentdevelopingcountriesget 40%of theirenergyfromrenewablesandlessthan 1%fromnuclear
plants(Rlavinand Lenssen,1990).The creationof an UnitedNationsagencyfor renewableenergy

65
 4
sourcesand conservationwouldclearlybe justifiedad sbould,therefore, be consideredby UNCED.

Ext instdtutionsmay reflect historicalpferences rather than modem nceds and the
intet of 'old' organion in modernsusnabilty Ismesmight be larger than their abilityto cope
wi them. Ihis bringsup the wholelssueof either esablihing new ilitutions or up-datg exist
ones - a long-em investmentin Itself.

6. Limits, Rmesarchand Development

The increasedvisibilityof environmentaldegdation cost has resulted in more sientit

waing that variousliit are being reached,or bave alreadybeen exceeded,and more economi
challenge the traditional wisdom that continued economic growth leads to increased welfare
(Goodland, Chapter 1). On the question of lims, although tr is scienific consensusregarding
cetain physicalconstraintsand bazardsto economicgrowth,we do not have consensusregardingour
possiblitiesto meet these challengesor on the economicconsequencesof crossingthese limits- No
irreversibleevent Is,from an nropocentric point of view,worsethan our subjective,and dynamic,
evaluadon of It.

Doubtess humaity willalso try to controlfiutu limitsas has happened throughout history.
Tbiswillceraly includeincreasinglysophiscated mandpulationof biologicaland physicalpress,
rangingfrom micro-cosmosto the atmosphere,if not beyond.Efforts willbe made to increase the
photosyntheticcapacitiesin plants by cell engineering,the rice, maize and pulse genomesmight be
completelymapped and genetic diseasescured, agriculturalsoilsand oceans turned into carbon sinks
(to midgate the greehouse effect) etc. But we must recognize that these are still unknown
technologiesthat willprobablybring unknownside effects(uat as did leaded gasoline,asbestosand
CFCs etc.).

7. Shifting Bioloial Lmits

The economicforcesboostingbiologicalproductivityare alreadyimmense(see Table 2), and

it would be naive to tiink that major (publicand private) investmentswill not be made for such
purposa. Allocationand managementof Investmentcapitalgoinginto modernbiotechnologyresearch
and production is, because of its promises,risks and socio-ecowmicconsequences,a key area of
concern in sustainabilitydiscussions.!

Table 2. Examples of CommercialEconomicBenefits from ConventionalCrop Breeding.

PotendalBenefts Commercial "Improvementk
US$1year Beneflda,y
4.4billion World-wide crossin of a peial Mexicancomabl to grw in maul soils
at high altitudesandwhichis eitnt to sevennmjoroom disae
wih modemannual com vanieties

3.5 billion Asia intowhoatand no

Inwmvedproductonby incorpoing dwaWfsm

160 million USA A singl genefroman Ethiopianbaleo pln inoducd to

commecialbarleycropsprtect themfrmnyelowdwarfvins

66
Source:UNEP(1990)
Advancedknowledgeabouthowgone expressionworksis nowused in incraed foodand
aneg production,nowmcdlclnc,rawmatcialsandInImprovedenvironmental management. There
is alsogroat nerest fromthe defs industry. Incra knowledgeaboutmanipulationofbiological
prcesses is,as withknowVedge in general,a doublededgedsword:thekeyto controlis alsothe key
tO destuction.Bec of the hugestakesandthe vastnumbersof actorsinvolvedin biotechnology,
the wholequeston of moraldisciplineposesmjor concern.
Biotechnologyapplicationscan speed up or slow down nropy increases,in both
unsustainablandsustinale processes,in a moreequitableor lessequitableiterional order.The
particu responsiblitiesnowfacingnationalandInternationalpolicyand decisionmar8 in the field
of biotehology are amongthe mosturgentand difficulton their agenda.
Biotechnology is seenas a majorchancefor developing tropicalcountriesto gainfromtheir
richbiologicaland geneticdiverst. Unlessdevelopingcountriesbecomemuchbetter preparedto
influenceand contoI present and future investmentsin biotechnology researchand production,
however,they are in seriousdifficultywith far-reachingconsequencesfor their economicand
enronmental sustanabslity.The risk (from a Southpespective)is that additionalcomparative
advantageswill be given to the North makingIt impossiblefor the South to competein the
productio ofvariousagricultural goodsfor whichthere is,or willbe,a largedemandandhighvalue-
addedpotential.
Byusingsubsidies,tradebarriersandenvironmentallyunsustainable productiontehologies,
the North alreadytoday produceagriculturalsurpluseswhichsuppressworldmarketpricesand
productionin the South.Giventhat the Northis not preparedto foregosomeof itspresentmarket
control,whichserioudyinhibitsdevelopmenteffort in the South,it maynot hesitateto strengthen
its positionfurther.Althoughperhapsnot primarilyas a consequenceof North-Southbut North-
Northcompetition, the Northwillmostlikelytake the leadin investingin naturalcapitalusinglow-
cost genetic'rawmaterials'fromthe South.This wouldbe analogousto manmadecapitalcompetition
wherethe Southin manycaseswasunableto developcompetitive value-addedprocesses(e.g.saw-
mills,paperfacories,metalindustriesetc.)andfellbackon sellingnaturalresourcesat fallingprices.
Smallfarmersin developing countriesmaybe the largestlosersin sucha scenariosincethey
are leastableto undertakeand influenceinvestments neededfor themto staycompedtive,evenon
domesti markets.The socio-economic consequencesof decreasingeconomicsustainability by the
rural poor which may force large populationsto search for their livelihoodin Increemingly
unsustainablecities,shouldnot be underestimated.
Thisleavesthe Southwiththe questionto what
extenttheyactuallybenefitfromso-called'free-trade'andtechnology transfers.Andto considerwhat
measurestheyeventuallycantake to improvetheirowndevelopment potentialin a situationwhere
rntional economiccompetitionis so unbalancedin favourof the North.

8. lime for Action

It willtake some ten years for today'sinvestmentsin researchand developmentof new
biotechnologyto reapeconomically significantresults.It willthenin manycasesbe too lateto correct
for unwantedside effectsand costs.The internationalcommunityshouldtherefore assessrisks,
benefits and costs as well as their distribution,and seek to controlthe developmentof such

67
technologyat h earliest possiblestage.

Much of the discussionabovepoints to the responsibilitiesof public sectors as a large-scale

investor. Sincemanylargs biotechnology,and energyresearch, investmentsare made by the private
secoor,however, the public sector also has the responsibilityof influencingprivate lnvetment.
MauriceStrong'sstatement on the importanceof incorporatng the private sector into development
planning is particlarly relevant: 'Businessis the major engine of developmentIn our society.And,
threfore if we can't influencebusiness,we reallycan't influencedevelopment"(Dampier, 1982).In
particularthis willmean taking the needs of the South into consideration,includingelaboration and
assessmentof how,though lega, economicand policyarangements, developingcountriescan best
be strengthened in their research and investmentcapacities.

9. Coldon

Compared with the costs, 0.8-1.5%of GDP, industrialcountries have received signiflcant
programmesduringthe lasttwentyyears (OECD, 1991).Although
benefitsfrom their eanvironmental
natural capital investmentsmade are too low, for those countrieswho have invested even less,or
hope to avoid such investmentsin the future, the bill willget muchhigher.

It is,therefore, encouragingto note that the publicopinionin the United States,Japan and
14 European countriesnow indicatesa strong support for the environment,even in situationswhere
protectionof the environmentwould reduce economicgrowth (OECD, 1991).Such attitudes are a
good basis for building the necessary institutionalchanges in the industrial world for improved
understandingand managementof investmentcapital in relation to exiting (and possiblyshifted)
ecologicalconstaints to economicgrowth.Its also the best guarantee for that innovativefincial
bodies, such as GUE, will get increased resources and mandate to help promote susinable
investmentpracticesin the South. UNCED-92is, of course,an opportunityof utmost importanceto
bring about such changes.

However, throughout history, although being fully aware of environmental constras,

societiesfaied to securea sustainablebalancebetweenimmediateconsumptionand long-tem naur
capitalmvestmentand, therefore, eventuallycollapsed(Ponting,1990).Furthennore, althoughthese
societieswere constrainedby only local or regional environmentallimits,today's global limitswill
require a level of internationalcoordinationand cooperationnever before necessaryin the history
of humankind.

Acknowledgement

Tne authors are indebted to Robert Goodland,IgnacySachs and Dana Silkfor valuablecomments
on an earlier version of this chapter.

Notes

1. Cost necesary to maintain(defend) a certain levelof welfarewhich,due to unwantedside-

68
 ffects of consumptionand production,such as pollution,threatens to fail.

2. I has been esdmated that siltationof dams feedinghydropowerturbines involvesa loss of

some 148,000gigawatthours whichat US $15 per barrel wouldcost some US $4 billionper
year to replae using oil fired thermalgeneration (Pearce, 1987).

3. Ibe World Resources Institute (WRI) has estimatedthat the Third World'sunmet financial
needs for maintainingtheir natual resourcesas "thebasis for meetingthe needs for current
and future generations' amountsto US $ 20-50billionper year over the next decade (WRI,
19).

4. The UNEP CollaboratingCentre on Energy and Environmentlinked to the Risoe National

Laboratoryin Denmark,whichwas opened on 1 October 1990,may be a good startingpoint
towardsthis end.

5. Biotechnologyhas been defined as "The applicationof biologicalsystemsand organismsto

scientific,industrial,agricultural,health and environmentprocesses and uses.' "Organisms"
includesanimals,plants and microbes."New'biotechnologyrefers to the use of cell fusion,
celland tissue culture, recombinantDNA and novelbioprocessingmethods.While "Old"or
classicalbiotechnologymeansthe use of microbesfor baking,brewing,or other fermentation
processes,or selectivebreeding in agricultureand animalhusbandry(Giddingsand Persley,
1990).
6. In 1987, total research and development investment on agricultural biotechnologywas
estimatedat US $900 million,of whichmore than 60% was in the private sector (Giddings
and Persley, 1990).

Rderencs

AfficanCentre for TechnologyStudies. 1990. The NairobiDeclarationon aMwic Change.

Internaional Co.ference on Global Wannng and Climate Change:African Perspectives.
Nairobi:AfricanCentre for TechnologyStudies.May 2-4, 1990.

Ahmad, Y. J., S. El Serafy, and E. Lutz, eds. 1989. Environment Accountingfor Sustainable
Development.The World Bank, Washington,D.C., 100p.

Cave, S. 1990. "Cleaningup Eastern Europe". Our Planet2(2):4-7.United Nations Environment

Programme.

Costanza,R. 1990. "EcologicalEconomicsas a Frameworkfor Developing SustainableNational

Policies".In Aniansson,B., and U. Svedineds. Towardsan EcologicalSustainble Econony.
Report from a Policy Seminar, in Stockholm,Sweden,January 3-4 1990,arranged by the
Swedish Council for Planning and Coordinationof Research (FRN) on behalf of the
EnvironmentalAdvisoryCouncilof the SwedishGovernment.Stockholm:FRN Rapport 90:6.
14 4p.

69
Dampier,W. 1982."StrongAssessesthe DecadeSinceStockholm".
In 'Synopsls:TenYearsAfter
Stockholm:A Decadeof Environmental Debate'.Amblo 11(4):229-231.
Dogsd,P., and B. von Droste. 1990. "Debt-for-Nature
Exchangesand BiosphereReserves:
Experiencesand Potential".MADDigestNo.6, UNESCO,Paris.88 p.
Dree, H. E. 1983.'Desertification
of AridLands.In AdvancesInDesertandAridLand Technology
andDevelopmentVol.3. NewYork:HarwoodAcademicPublishers.242pp.
Flavin,C., and N. Lensen.1990."Beyondthe PetroleumAge:Designinga SolarEconomy".World
WatchPaperNo. 100.WorldWatchInstitute.
Giddings,L. V., and G. Persley.1990."Biotechnology
and Biodiversity".
Studypreparedfor United
NationsEnvironmentProgramme,UNEPlBio.Div./SWGB. 113.12October,1990.
Gregersen,H., S. Draper,and D. Elz eds. 1989.Peopleand lSees. TheRole of SocialForeshyin
SusainableDewlopment.WorldBank.Washington, D.C. 273p.
Hansen,S. 1989."Debtfor NatureSwaps- Overviewand Discussionof Key Issues'.Ecological
EcomIcs 1(1):77-93.
Intnational HeraldTribune.1991."EuropeanDevelopment
BankMakesFirstLoan'.Intwaional
Heral ld bune22 June 1991.p.13.

IIASA.1990."Comprehensive Studyof EuropeanForestsAssessesDamageand EconomicLosses

from Air Pollution".NewsRelease5 December1990.IIASA,InternationalInstitutefor
Applied Sysms Anysis.

Lazus, D. S. 1990."Saveour Soils".OurPlnet. 2(4).UnitedNationsEnvironmentProgramme.

OECD. 1991. The State of the EnvironmentOrganizationfor EconomicCooperationand
Development(OECD).Paris.
Pearce,D. 1987. "EconomicValuesand the NaturalEnvironment".UniversityCollegeLondon
DiscussionPapersIn Economics.87(8):1-20.
Ponting,C. 1990."Historical
Perspectiveson SustainableDevelopment".
Environment
32(9).
Simon,B. 1991.'ReportPredictsFloodof 'Environmental
Refugees'".Fincia 7lnes 25June 1991
p.6.
UNEP.1990."Noteby UNEPon BasicIskoues WithRespectto Biotechnology
and Conservation
of
Biological
Diversity".Ad
hocWorkingGroupof Expertson BiologicalDiversity,Subworking
Grouponbiotechnology,Nairobi:UnitedNationsEnvironmentProgramme,14-16November,
1990.In UNEP/Bio.Div./SWGB.1/2,15October,1990,Annex2.

70
World Bak. 198S.Devfcalon In Sahlelanand SudanlanZones In West4fica. The WorldBank,
Wahiton, D.C.60p.
WorldBank,1990.WorldDevelopment
Report1990.The WorldBank,Washington,
D.C. p.67.
WRI. 1990.Naural Endownents:Fnanng ResourceConservatonfor Development.Washington:
WorldResourcesInstitute,WRY.33p.
Young,M., and N. Ishwan els. 1989.'HumanInvestmentand ResourceUse: A NewResearch
Orienion at the EnvitonmentlEconomicInterflce.' MABDigestNo. 2. UNESCO,Paris
S4p.

71
Chapter 8: THE ECOLOGICALECONOMICSOF SUSTAINABILB
TY: INVESG IN
NATURALCAPITAL
Robert Cotanza

1. An EcologicalEoonomicWorldView
To achieveglobalsustainlity, we need to stopthnking of eologicaland economicgoals
as beingin cwnflictEconomicsystemsare dependenton theirecologicallife supportsytm and
we mustrealizethat fWctand incorport it into our thinkingand actionsat a verybasiclevelif we
are to sustainour globalhousehold.A housedividedagainstitselfcannotlongstand.
To achievesuainabilitywe mustdevelopan ecologicaleconomics that goeswellbeyondthe
conventionaldisciplinesof ecologyand economicsto a trly integrativesynthesis(Costn 1991).
Figure 1 illustratesone aspectof the relatoship betwoeeecologicaleconomics and the
conventionalapproaches;the domainsof the differe subdisclplines. The upperleft boxreprents
the domain of mconentional"
economics,the in ctions of economicsectors (like mining,
manufacturing, or households)witheach other.The domainof "conventional" ecologyis the lower
rightbox,the interactionsof ecosystmsand theircomponentswitheachother.The lowerleft box
represensthe inputsfromecological sectorsto economicsectors.Thisisthe usualdomainof resource
economicsand environmentaimpactanalysis:the use of renewableand nonenewablenatural
resourcesbythe economy.Theupperrightboxrepresensthe "use"byecological sectorsof economic
"products."The productsof interestin thisboxare usuallyunwantedby-products of productionand
the ultimatewastesfrom consumption. This is the usual domainof encronmea economicsand
environmentalimpactanalysis:pollutionand its mitigation,preventionand mediation.Ecological
economiaencompasses and trancendsthesedisciplinaryboundaries.Elogial economics sees the
human economyas part of a largerwhole.Its domai is the entire web of interactionsbetween
economicand ecologicalsectors.
betweenecologicaleconomics
TableI presentssomeof the othermajordifferences (OE)and
conventional economics(CEcon)andconventional ecology(CEcol).Tbebasicworldviewof CEcon
is one in whichindividual
humanconsumersare the cental figures.Theirtastesandpreferencesare
tkenas egiven and are the dominant,determiningforce. The resource base is viewedas esentally
limitlessdue to technicalprogressand infinitesubstitutability.
EE takes a moreholisticviewwith
humansas one component(albeita veryimportantone) in the overallsystem.Humanpreferences,
undersmtanding, tecnology and culturalorganizational co-evolveto reflect broad ecological
opportunitiesandconstraints.Humanshavea specialplaceinthe systembecausetheyare responsible
for understanding their ownrole in the largersystemand managingit for sustainability.
This basic
worldviewis similarto that of CEcol,in whichthe resourcebase is limitedand humansare just
another(albeitseldomstudied)species.But EE differsfom CEcolin the importanceit givesto
humansas a species,andits emphasison the mutualimportanceof culturalandbiologicalevolution.

72
FiueiTpndomansof
ho cn entonlomonues
convetIonaleologyenvlrmnntland resource
acolga Ieonom

From Economic
Sucw Ecdoloical
soct

"Convendonal" En otd I

Economicaw honveEconoics
and
jfI EonvimicsU
Impam
Analy imsc
Resuc
Envfonony
nay
wa+Economics
and "Conventional"_ _ w.i.

SolwEnug
Ecological
Economics

73
Tal, It Compio economicsand ecolo withecologcaleconomcs
of convenionear

COw.Ueoinal "C.eqg81Wl9gSl ogea .ome

ZeaomIis Keelepa
hssle Mteehuls"es Sudl., 99oUolUelur Atomlile Dpomle. Symms,
Worm Aeomlasle 3,.l.tt torl
VI.,
psfmssmba "- f-u and IowAiove a bs
dinoin adsndo. as and
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tborndet
bs"dS aeb nM*adcnl _ as i

f ai ad

Time Short %fulel-scale htoillSeaie

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mxoreao" femn oneel
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Goal
as ag fdtwiu misso Oaegslt mis S_dal
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Academic Dlecpilenar Dlecipllaary TrandsT norleciiry

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74nug"

74
 We must acknowledgethat the human systemis a subsystemwithin the larger ecological
system. Ibis implies not only a relationship of interdependence,but ultimatelya relation of de-
pendence of the subsystemon the larger parent system.The fiastquestionsto ask about a subsystem
are: how big is it relative to the total sytem, how big can it be, and how big should it be? These
questions of scale are only now beginningto be asked (Daly and Cobb 1989).

The presumedgoalsof the systemsunder studyare also quite distinct,especiallyat the macro
level. The macro goal of EE is sustainabilityof the combinedecologicaleconomic system.CEcol's
macro goal of species survivalis similarto sustainability,but is generallyconfined to singlespecies
and not the whole system.CEconemphasizesgrowthrather than sustainabilityat the macroleveLAt
the microlevel, EE is urique in acknowledgingthe two-waylinkagesbetween scales,rather than the
one-wayview of the conventionalsciencesin whichall macro behavior is the simpleaggregationof
microbehavior.In EE, socialorganizationand culturalinstitutionsat higher levelsof the space/time
hierarchyameliorate conflictsproduced by myopicpursuit of micro goals at lower levels, and vise
versa.

Perhaps the key distinctionsbetween EE and the conventionalscienceslie in their academic

stances, and their assumptionsabout technicalprogress.As already noted, EE is transdisciplinary,
pluralistic,integrative,and more focusedon problemsthan on tools.

CEcon is very optimisticabout the abilityof technologyultimatelyto remove all resource

constraints to continued economic growth. CEcol really has very little to say directly about
technology,since it tends to ignore humans altogether. But to the extent that it has an opinion,it
would be pessimisticabout technology'sability to remove resource constraints because all other
existingnatural ecosystemsthat don't include humans are observedto be resource limited. EE is
prudentlyskepticalin this regard. Givenour high levelof uncertaintyabout this issue,it is irrational
to bank on technology'sabilityto removeresource constraints.If we guess wrong then the result is
disastrous,irreversibledestructionof our resourcebase and civilizationitself. We should at least for
the time being assumethat technologywillnot be able to removeresourceconstraints.If it does we
can be pleasantlysurprised.If it does not we are still left with a sustainablesystem.EE assumesthis
prudentlyskepticalstance on technicalprogress.

2. Sustainability:Maintaining Our Global LifeSupport System

While acknowledgingthat the sustainabilityconcept requires much additional research,we

can offer the followingworkingdefinition:Sustainability is a relationship betweendynamichuman
economic systems and larger dynamic, but normally slower-changingecological systems, in
whicb: (a) human llfe can continue indeflnitelry(b) human indivndualscan flourish, (c) human
cultures can develop;but In which(d) effectsof human activites remain within bounds,so as not
to destroy the diversity,complexity,and function of the ecologicallife support system.

does not implya static,muchless a stagnant,eco amy,but we mustbe careful

"Sustainability"
to distinguishbetween "growth' and "development",as specifiedin the introduction. Economic
growth, which is an increase in quantity, cannot be sustainable indefinitelyon a finite planet.
Economicdevelopment,whichis an improvementin the qualityof life without necessarilycausing
an increase in quantity of resources consumed, may be sustainable. Sustainable growth is an
impossibility.Sustainabledevelopmentmust becomeour primatylong-termpolicygoaL

7S
 The mostobviousdangerof ignoringthe role of nature in economicsis that nature is the
economy'slifesupportsystem,and by ignoringit we mayinadvertently damageit beyondit's ability
to repairitself. Indeed,there is muchevidencethat we have alreadydone so (Goodland,1991).
Currenteconomicsystemsdo not inherently incorporateanyconcernaboutthe sustainabilityof our
naturallifesupportsystemand the economieswhichdependon it (Costanzaand Daly1987).In an
importantsense,sustainabilityis merelyjusticewith respectto future generations.This includes
future generationsof other species,even thoughour maininterestmaybe in our ownspecies.
Sustainabilityhas been variouslyconstrued(cf. Pezzey1989,WCED,1987)but a useful
definitionis the amountof consumption that canbe continuedindefinitelywithoutdegradingcapital
stocks- including"naturalcapital"stocks.In a business,capitalstockincluceslong-termassetssuch
as buildingsand machinerythat serve as the meansof production.Naturalcapitalis the soil and
atmosphericstructure,plant and animalbiomass,etc. that, taken together,formsthe basisof all
ecosystems.This natural capitalstock uses primaryinputs (sunlight)to producethe range of
ecosystemservcesand physicalnaturalresourceflows.Examplesof naturalcapitalincludeforests,
fishpopulationsand petroleumdeposits.Thenaturalresourceflowsyieldedbythesenaturalcapital
cut timber,caughtfish,and pumpedcrudeoiLWe havenowentereda new
stocksare, respectively,
era in whichthe limitingfactorin development is no longermanmadecapitalbut remainingnatural
capitaLTumberis limitedby remainingforests,not sawmillcapacity;fish catch is limitedby fish
populations,not by fishingboats; crude oil is limitedby remainingpetroleumdeposits,rot by
pumpingand drillingcapacity.Mosteconomistsviewnaturaland manmadecapitalas substitutes
rather than complements.Consequentlyneither factor can be Umiting.Only if factors are
complementary can one be limiting.Ecologicaleconomistssee manmadeand naturalcapital as
fundamentallycomplementaryand therefore emphasizethe importanceof limitingfactors and
changesin the pattern of scarcity.This is a fundamentaldifferencethat needs to be reconciled
throughdebatesuchas thisbook.
To implementsustainability,all projectsshouldmeetthe following criteria:For renewable
resources,the rate of harvestshouldnot exceedthe rate of regeneration(sustainableyield)andthe
rates of waste generationfrom projectsshould not exceed the assimilativecapacityof the
cjwir.vnmnt(sutainabl wvstedisposal).Foornonrenemable resourcesthe ratesof wastegeneration
fromprojectsshallnot exceedthe assimilativecapacityof the environmentandthe depletionof the
nonrenewableresourcesshouldrequirecomparabledevelopmentof renewablesubstitutesfor that
resource.These are safe, minimumsustainability standards;and once met, projectsshouldbe
selectedthat havethe highestratesof return basedon other, moretraditionaleconomiccriteria.

3. Maintaning and Ilmstingin Natural Capitalto EnsureSustainablilty

A minimumnecessaryconditionfor sustainabiityis the maintenanceof the totalnat-
ural capitalstock at or above the current level.Whilea lowerstock of natural capitalmaybe
sustainable,givenouruncertaintyand the direconsequences of guessingwrong,it is best to at least
provisionallyassumethat we are at or belowthe range of sustainablestock levelsand allowno
furtherdeclinein naturalcapital.This'constancyof total naturalcapital"rule can thus be seenas
a prudentminimumconditionfor ensuringsustainability,to be abandonedonlywhensolidevidence
to the contrarycanbe offered.In factwe shouldbeginthe processof reinvestingin naturalcapital
stocksto bringthembackto safe minimum standards.Thereis disagreementbetweentechnological

76
optimists(whoseetechnicalprogresseliminating
allresourceconstraintsto growthanddevelopment)
and technologicalskeptics(whodo not see asmuchscopefor thisapproachand fearirteversibleuse
of tesourcesanddamageto naturalcapital).Bylimitingtotalsystemnaturalcapitalat currentlevels
(preferablybyusinghigherseveranceandconsum,,tion taxes)wecan satisfyboththe skeptics(since
resourceswillbe conservedfor futuregenerations)and the optimists(sincethiswillraisethe price
of naturalcapitalresourcesand morerapidlyinducethe technicalchangetheypredict).Bylimiting
physicalgrowth, only developmentis allowedand this may proceed without endangering
sustainability.

4. PolUyInstuments: EnAronmentalAssurancelkadlng
We need to explorepromisingalternativesto our current commandand controlenvi-
ronmentalmanagementsystems,and to modifyexistinggovernmentagenciesand other institutioins
accordingly.The enormousuncertaintyaboutlocaland transnationaletnironmentalimpactsneeds
to be incorporatedintodecision-making. We alsoneedto betterunderstandthesociological,
cultural,
and politicalcriteriafor acceptanceor rejectionof policyinstrumentL
One exampleof an innovativepolicyinstrumentcurrentlybeing studied is a flexible
environmentalassurancebondingsystemdesignedto incorporateenvironmentalcriteria and
uncertaintyinto the marketsystem,and to inducepositiveenvironmental
technological
innovation
(Perring, 1989;Costanzaand Perrings,1990).
In additionto direct chargesfor knownenvironmentaldamages,a companywouldbe required
to post an assurancebond equal to the current best estimateof the largest potentialfuture
environmentaldamages;the moneywouldbe kept in interest-bearing escrowaccounts.After the
project,the bond(plusa portionof the interest)wouldbe returnedif the fim couldshowthat the
suspecteddamageshad not occurredor wouldnot occur.If they did, the bondwouldbe used to
rehabilitateor repairthe environmentandto compensateinjuredparties.Thus,the burdenof proof
wouldbe shiftedfromthe publicto the resource-userand a strongeconomicincentivewouldbe
providedto researchthe true costsof enironmentaLlydamagingactivitiesand to developcost-
t principlcto 'the
cffccuvcpollu'u'n coi)tfoltechnologies.Thisis an xtensionof the 'polluter pays
polluterpaysfor tuncertainty
aswell."Otherinnovativepolicyinstrumentsincludetradeablepollution
and depletionquotasat both nationaland internationallevels.Alsoworthyof mentionis the newly
emergingGlobalEnvironmental Facilityof the WorldBankwhichwillprovideconcessionary funds
for investmentsthat reduceglobalexternalities.

S. Econoilc Inetlves Lnking Revenuesand Uses

We shouldimplementfeeson the destructiveuseof naturalcapitalto promotemoreefficient
use, and ease up on incometaxes,especiallyon lowincomesin the interestof equity. Fees, taxes
and subsidiesshould be used to changethe pricesof activitiesthat interferewithsustainability
relativeto thosethat are compatiblewithit. Thiscanbe accomplished by usingthe fundsgenerated
to supportan alternativeto undesirableactivitiesthat are being taxed.For examplea tax on all
greenhousegases,with the size of the tax linkedto the impactof each gas could be linkedto
developmentof alternativesto fossilfuel. Gasolinetax revenuescouldbe used to supportmass
transitand bike lane. Currentpoliciesthat subsidizeenvironmentally harmfulactivitiesshouldbe

77
stopped. For eammple,subsidieson virginmaterial extractionshouldbe stopped.ITis willalso allow
reccling options to effectivelycompete. Crop subsidiesthat dramaticallyincrease pesticide and
frtilizer use shouldbe eliminated,and formsof positiveincentivesshouldalsobe used For example,
debt for nature swapsshouldbe supported and should receive much more funding.We shouldalso
offer prestigiousprizes for work that increasesawarenessof or contributesto sustainabilityissues,
such as changes in behavior that develop a culture of maintenance(ie. cars that last for SOyears)
or promotes capital and resourcesavingimprovements(i.e. affordable,efficient housingand water
supplies).

6. EcologIcalEconomicResearch

Whileeconomicshas developedmanyusefultools of analysis,it has not directed these tools

toward the thorny questions that arise when consideringthe concept and implementationof
sustainability.In particular,we need to better understandpreferenceformation,and especiallytime
preferenceformation. We also need to understandhow individualtime preferencesand group time
preferencesmaydiffer, and how the preferencesof institutionsthat willbe criticalto the successor
failure of sustainabilityare established.We have heretofore paid too little attention to ecological
feedbacks.An understandingof these will be criticalto the implementationof sustainabilitygoals.
We need to concentrate on the valuationof important non-marketgoods and servicesprovidedby
ecoytems (Costanzaet al 1989).

7. EcologIcal Economks Education

We need to develop an ecologicaleconomicscore curriculumand degreegrantingprograms

that embodythe skillsof both economicsand ecology.This impliesa curriculumwithsome blending
of physical,chemicaland biologicalsciences and economics.Within this curriculumquantitative
methods are essential but they shouldbe problem directedrather than just mathematicaltools for
their own sake. Experimentation capacityis needed to provide ecologicaleconomicswith a solid
empiricalbase whichis builtupon creativeand comprehensivetheory. We need to developextension
programsthat can effectivelytransferinformationamong both disciplinesand nations.

8L I"ttutional Changes

Institutionswith the fleiabilitynecessaryto dealwith ecologically

sustainabledevelopmentare
lacking.Indeed many financialinstitutionsare built on the assumptionof continuousexponential
growth and will face major restructuringin a sustainableeconomy.Many existinginstitutionshave
fragmentedmandates and policies,and often have not optimaly utilized market and non-market
force to resolveenvironmentalproblems.Theyhave alsoconductedinadequatebenefit/costanalyses
by not incorporatingecologicalcosts; used short-term planning horizons;inappropriatelyassigned
property rights (publicand private) to resources;and not made appropriate use of incentives.

There is a lackof awarenessand educationabout sustainability,the environment,and causes

of environmentaldegradation. In addition, much environmentalknowledge held by indigenous
peoples is being lost, as is knowledgeof species,particularlyin the tropics.Institutionshave been
slowto respond to new informationand shiftsin values,for examplethreats to biodiversityor rapid

78
changesin eommunicationtechnologies.Finally,manyinstitutionsdo notfreelyshareor disseminate
ln, matkondo not prtoidepublc acces to decision-makini, and do not devoteseriousattention
to detmining and representingthe wishesof theirconstituencies.
Minyof theseproblemsare a resultof the inflexiblebureaucraticstructureof manymodern
istitutions.Experience(i.e.Japaneseindustry)hasshownthat lessbureaucratic, moreflexible,more
poer-to-peerinstitutionalstructurescan be muchmore efficientand effective.We need to de-
bureaucratizeinstitutionsso that theycaneffectivelyrespondto the comingchallengesof achieving
sustainabilitY.

Costanza,R (ed) 1991.Ecologicaleconomics:

Thesciecmce
and management
of sustainability.New
York,ColumbiaUniverityPress43Sp.
Costanza,R. and Daly,t . E. 1987.Towardan ecologicaleconomics.
Ecoloal Modeling38: 1-7.
Castanza,R., Farber, S. C. and Maxwell,3. 1989.lThevaluationand managementof wetland
ecosystems.
Ecgical Ecoomi 1: 335-361.
Costanza,R. and Peaings, C R 1990.A flexibleassurancebondingsytem for improveden-
vironmentalmanaement.Ecolical Ecmics 2: 57-76.
Daly,HE and Cobb,J.B. Jr. 1989.For the commongood: redirectingthe economytoward
community,
the environment,and a sustainablefuture. Boston,MA.,BeaconPms 482p.
Perrig C. 1989.Environmental
bondsand the incentie to researchinactivitiesimvolving
uncertain
futureefects Eical Ecoomics 1:95-110.
Pezzey,J. 1989.Economicanaysisof sustainablegrowthand sustainabledevelopment.
Washington
DC.,MmWorldBank EnvironmentDepartment,workingpaper 15: p.
WCED, 1987. Our commonfuture: report of the world commissionon environmentand
development.(The BrundtlandReport).Oxford,OxfordUniversityPress387p.

79
 DEVELPMENT
Chaptr O* FROMGROWTHTO SUSTAINABLE
LesterR. Brown,Sandr Postel,and ChristopherFlain

Fbr muchof thiscentuty,econoic debateshavefocusedon whethercapitalimor socilsm

is the best wayto orgeniz a modemindustraleconomy.Tat argumentnowseemsto be over,as
the nato of easternEuope moveswiftlytowardmarketmechanisms, and as the Sovieteconomy
teeter on the brink of collapse. Yet even before the political dust settles from these
transormations,a new,morefundamentalquestionhasarisn Howcanwedesigna vibranteconomy
systemon whichit depends?
that doesnot destoy the naturalresourcesand environmental
The vast scale and rapid gowth of the $20trillionglobaleconomyare haietd as great
achievementsof our time. But as the pace of envionmentaldeteriorationquickens,the
consequencesof fallingto bridgethe gap betweenthe worings of economicsystemsand natural
ones ae becomingal too clear.'

Redrcting the globaleconomytowardeonntal sutainabilityrequiresfundamental

reformsat boththe intemationaland nationallevels In an agewhentopical deforestationin one
countryreducesthe entireearth'sbiologicalrichness,whenchemicalsrelased on one continentcan
lead to slin cancer on another, and when CO2 emisios anywherehasten climate change
eveywbee, economic polic ng i no lc"gerexclusively
a nationalconcem
Greatlylesseningthe developing world'sdebtburdenis a prerequisitefor an enironmentaly
sustainableworldeconomy. By 1989,the Third World'sexemal debt stood at $12 trilion, 44
percentof itscollectivegrossnationalproduct(GNP). Insomecountris, the figurewasfar higher-
140percentin Egyptand Zaire and a staggering400percentin Mozambique.Developingnations
paid$77bilionin intereston theirdebtsthat year,andrepaid$85billionworthof principaLSince
about 1984,the traditionalfbowof capitalfrom developedto the developingcountrieshas been
increasInglyoffsetbya flowof interestand dividendsin the oppodtedirction. Preiminay data for
al Ow, includinggrants,showa negativeflw to the developing countriesof $2.7biSlionin 1989,
whichcompareswitha positiveflowof $51billionin 1981.2
Lackof capitalhasmadeit nearlyimpossible for developingcountriesto investadequately
in forestprotection,soilconseantion,irigation improvements, moreenergy-efficienttechnologie,
or pollutioncontroldeviceL Evenwore, growingdebts havecompelledthem to sell off natural
resources,oftentheir onlysourceof foreigncurrency.Likea consumerforcedto hock the family
heirloomsto pay creditcardbills,developing counties are plunderingforests,decimatingfisheries,
anddepletingwatersupplies- regardlessof the long-termconsequences.Unfortunatey,no global
pawnbrokeris holdingon to this inheritanceuntilthe worldcan affordto buyit baclk
Reformingforeignaistance is also criticaL Very little of the aid moneydisbursedto
developingcountriesby goernments and internationallendinginstitutionssupportsecologically
sound development. The Wodd Bank, the largestsinglefunder,lacksa coherentvisionof a
sustainableeconomy,and thus its lendingprioritiesoftenrun counterto the goalof creatingone.

s0
Bilateralaid agencies,with a few importantexceptions,do little better. Moreover, the scaleof total
lendingfails far short of that needed to help the Third Worldescape from the overlappingtraps of
poverty,ovepopulation, and ecologicaldecline.

2 Itrments of EconomicReform

At the heart of the dilemmaat the nationallevel is the failureof economiesto incorporate
envimnmentalcosts into private decisions,which results in societyat large bearing them, often in
unanticipatedways. Automobiledriven do not pay the full costsof local air pollutionor long-term
climatechange wben they fll their gas tanks, nor do farmerspick up the whole tab for the health
and ecologicalrisks of usingpesticides.

Many industrialnations now spend 1-2 percent of their total economicoutput on pollution
control, and these figureswill increase in the years ahead. Such large sums spent on capturing
pollutants at the end of the pipe, while necessaty,are to some extent a measure of the economy's
failureto foster practicesthat curb pollutionat its source. Governmentsmandatecatalyticconverters
for cams,but neglect energy-efficienttransport systemsthat would lessen automobile dependence.
They require expensive methods of treating hazardous waste, while doing little to encourage
industriesto reduce their generationof waste.?

Of the manytools governmentscan use to reorient economicbehavior,fsal policiesoffer

some of the most powerfuL In particular,partiallyreplacingincometaxeswith environmentaltaxes
could greatly speed the transition to an environmentallysustainableeconomywithout necessarily
increasingthe total tax burden. Designedto make pricesbetter reflect true costs, a comprehensive
set of environmentaltaxeswould include, for example,levieson carbon emissionsfrom fossilfuels,
hazardous waste, paper produced from virgin pulp, pesticide sales, and groundwater depletion.
Shiftingthe tax base in this waywould help ensure that those causingenvironmentalharm pay the
price, rather than societyas a whole, and therebyencouragemore environmentallysound practices.

i. A VUustiOD oi 51ie

Even if debt is relieved,developmentaid is restructured, and an array of green taxes are

instituted,there remains the vexingproblemof the economy'sscale. Listeningto most economists
and politicians,unlimitedexpansionof the economyseemsnot onlypossiblebut desirable. Political
1A&mn tnut growth as the answer to unemployment,poverty,ailing industries,fiscal crises, and
myriadother societaliDls.To question the wisdomof growthseemsalmostblasphemous,so ingrained
is it in popular thinkingabout how the worldworks.

Yet to agree that creating an environmentallysustainable economy is necessary is to

acknowledgethat limitson some forms of growthare inevitable--inparticularthe consumptionof
physicalresources. Textbook models often portray the economyas a self-containedsystem,with
moneyflowingbetweenconsumersand businessesin a closedloop. In reality,however,the economy
is not isolated. It operates within the boundariesof a global ecosystemwith finite capacitiesto
produce fresh water, form new topsoil, and absorb pollution. As a subset of the biosphere, the
economycannot outgrowits physicallimitsand still remain intact."

$1
 Withan annualoutputof $20trilon, the globaleconomynowproducesin 17dayswhatit
took an entireyear to generatein 1900. Already,economicactivityhasbreachednumerouslocal,
of lakesand forests,
regional,and globalthresholds,resultingin the spreadof deserts,acidification
and the buildupof greenhousegases.If growthproceedsalongthe linesof recentdecades,it is only
a matterof timebeforeglobalsystemscollapseunderthe pressure. 5

One usefldmeasureof the economy'ssizerelativeto the earth'slife-supporting capacityis

the share of the planet's photosyntheticproductnow devotedto humanactivity. 'Net prinaiy
production'is the amountof solareneragfixedby greenplantsthroughphotosynthesis minusthe
energyused by those plants themselves.It is, in essence,the planet'stotal food resource,the
biochemicalenergythat supportsall turmsof animallife,fromearthwormsto humans.
Vitousekand his colleaguesestimatethat 40 percent of the earth's annual net prmay
productionon land nowgoesdirectlyto meet humanneedsor b indirectlyused or destroyedby
humanactivity-leaving 60 percentfor the millionsof other land-basedspecieswithwhichhumans
share the planet. Whileit took all of humanhistoryto reachthis point,the share coulddoubleto
80percentby2030if currentratesof populationgrowthandconsumption continue;ring per capita
consumption couldshortenthe doublingtimeconsiderably. Alongthe way,withpeopleusurpingan
energy,naturalsystemswfllunravelfaster. Eactly
ever largershare of the eartb's life-sustaining
when vital thresholdswillbe crossedirreversiblyis impossibleto say. But as Vitousekand his
colleaguesstate, those'whobelievethat limitsto growtha.e so distantas to be of no consequence
for today'sdecisionmakersappearunawareof thesebiologicalrealities.

4. TowardGreaterEffleecy and Equity

For humanityto avoidthe wholesalebreakdown of naturalsystemsrequiresnotjusta slowing
in the expansionofour numbersbut a shiftfromthe pursuitofgrowthto thatof sustainableprogress
- humanbettermentthat does not comeat the expenseof futuregenerations.The firstand easiest
phasein the transitionis to increasegreatlythe efficiencywithwhichwater,energ, and materials
are used,whichwillallowpeople'sneedsto be satisfiedwithfewerresourcesandlessenvironmental
harm Thisshift is alreadyunderway,but is proceding at a glacialpace comparedwithwhatis
needed.
One exampleof the necessaryapproachis in California.Pioneenngenergypoliciesthere
havefosteredutilityinvestmentsinefficiency,
causingelectricityuseper personto decline03 percent
between 1978and 1988,comparedwitb an 11-percentincreasein the rest of the UnitedStates.
Califonis sufferedno drop in livingstandardsas a result;indeed,theiroverallwelfareimproved
sincetheirelectricitybillswerereducedand theircooking,lighting,and otherelectricalneedswere
7
met withlesssacrificeof air quality.
Producinggoodsand servicesas efficientlyas possibleand with the mostenvironmentally
benigntechnologies availablewillmovesocietiesa longwaytowardsustainability,but it willnotallow
them to achieveit. Continuinggrowthin materialconsumption- the numberof cars and air
conditionets,the amountof paper used, and the like - willeventuallyoverwhelmgainsfrom
efficiency,
causingtotalresourceuse (andall the corresponding environmentaldamage)to rise. A
halvingof pollutionemissionsfromindividualcars,for example,willnot iesultin muchimprovement
in airqualityif the total distancedrivendoubles,as it hasin the UnitedStatessince1965.'

82
 is thusfar moredifficult,asit goes
Ibis aspet of the transitionfromgrowthto sustainability
to the her of people'sconsumption patter In poorercountries,simplymeetingthe basicneeds
of growinghumannumberswill requirethat consumptionof water.energy,and forest products
ineases, even if these resourcesare usedwiththe utmostefficiency.But the wealthierindustdal
countes - especally the dozen that have stabilizedtheir populationsize, includingAustra,
Gemany,Italy,Norway,Sweden,andSwitzerland - are in the best positionto beginsatifyingtheir
needswithno net degradationof the naturalresourcebase. Thes counties couldbe the fist to
benefitfromrealiingthat somegrowthcostsmorethanit is worth,and that an economy'soptimum
sizeis not its maximumsize.

5. QualityoverQutty
GNPbecomesan obsoletemeasureof progres in a socetystrvingto meetpeople'sneeds
as efficientlyas possibleand withthe leastdamageto the environmentWhatcountsi not growth
in output,but the qualityof sevicesrendered.Bicyes andlightrail, for instance,ate lessresource,
intensiveformsof transportationthan automobilesare,and contributelessto GNP. Buta shiftto
masstranit andcyclingfor mostpassengertripswouldenhanceurbanlIfebyeliminating trafficjams,
reducingsnlog,and makingcitiessaferfor pedestrians GNPwouldgodown,but oval well-being
wouldincrease.'
Likwe, investingin water-efficientappliancesand irrigationsystemsinsteadof biding
moredamsand diversioncanalswouldmeetwaterneedswithlessharmto the eno t. Since
massivewaterprojectsconsumemoreresourcesthanefficiencyinvestmentsdo, GNPwouldtend to
decE. But qualityof lifewouldimprove.It becomesclear that strivingto boost GNP is often
inappropriateand counterproductie. As ecologistand phflosopherGarrettHardinputs it, 'For a
statesmanto try to maximizethe GNP is about a sensibleas for a composerof musicto tty to
maxmize the numberof notesin a symphony.""

Abandoninggrowthas an overridinggoaldoesnot and mustnot meanfoaidng the poor.

Risingincomesand materialconsumption are essentialto imprvingwell-beingin muchof the IhW
World. But contraryto whatpoliticalleadersimply,globaleconomicgrowthas currentlymeasured
is not the solutionto poverty. Despitethe fivefoldrise in worldeconomicoutput since1950,1.2
billionpeople- morethan everbefore- livein absolutepovertytoday. More growthof the sort
engineeredin recent decadeswillnot s.ivethe poor, onlystrategiesto more equitablydistribute
inenmePndwealthcan.'2

6 A HigherSocialOrder
Formidablebarriersstand in the wayof shiftingfromgrowthto real progressas the central
goal of economicpolicy. The visionthat growthconjue up of an expandingpie of richesis a
powerfuland convenientpoliticaltool becauseit allowsthe toughissuesof incomeinequalityand
skewedwealthdistrbutionto be avoided.As longasthere is growth,there is hopethat the livesof
the poorcan be betteredwithoutsacrificesfromthe rich. Thereality,however,is that achievingan
environmentally sustainableglobaleconomyis not possiblewithoutthe fortunatelimitingtheir
consumption in order to leaveroomfor the poorto increasetheirs.

83
 With the endingof the coldwar and the fadingof ideologicalbarriers,an opportunityhas
openedto buiWa new worldupon the foundationsof peace. A sustainableeconomyrepresents
nothinglea than a highersocialorder - one asconcernedwithfuturegenerationsaswithour own,
andmorefcwed on the healthof the pt2netand the poorthan on materialacquisitionsandmilitary
might. Whileit is a fundamentallynewendeavor,withmanyuncertaindes,it is far lessriskythan
continuingwithbusinessas usuaL
Note Thisis basedon Stateof the Wo_ld1991NewYork,W.W.Norton& Company.

NOTES

1. The $20-tilliondolar worldeconomyis a WorldWatchInstituteestimatebasedon 1988

gro worldproductfromCentralIntelligence
Agency(CIA),HandbookofEconomicStatistics.1989
(Washington,D.C.:1989),withSovietandEasternEuropegrossnationalproductsextrapolatedfrom
PaulMarer,DollarGNPsof the USSRand EastemEurone(Baltimore:JohnsHopkinsUniversity
Press,1985),with adjustmentto 1990based on growthrates fromInternationalMonetaryFund
(IMF),World Eonomic Outlook(Washington,D.C.: 1990),and CIA Handbookof Economic
Tables Budygetofte United States Govrnl Fisca Year 1990 (WashingtonD.C.: U.S.
Goverment PrintingOffice,1989)
2 WorldBank,WorldDebt Tables1989-1990:
ExternalDebt of DevelogingCountriesVoks
I nd11(Washington,
D.C.:1989);and OECD,DEvelpmrnLn1j (Tn4
able 3-1,p. 123),Paris,
December1990.
3. OECD, OECD in Figures (Pars: 1990);Kit D. Farber, Gary L Rutlege, 'Pollution
Abatementand ControlExpenditures,198487,'Su of CurrentBusiness.US. Departmentof
Commerce,June 1990.
4. See Herman Daly, "Towardsan EnvironmentalMacroeconomics," presentedat MThe
EcologicalEconomicsof Sustainability.
MakingLocalandShortTermGoalsConsistentwithGlobal
andLongTermGoals,-he InternationalSocietyfor EcologicalEconomics, Washington,D. C, May
1990,see alsoPaulR. Ehrlich,'he limits of Substitution:Meta-Resource
Depletionand an New
Economic-EcooicalParadigm," EcologicalEconomics.No.1.1989.
5. 1900GlobalWorldOutputfromLesterR.BrownandSandraPostel,Mresholdsof Change,'
in LesterBrownet. al., State of the World.1987.(Washington,D.C.; W.W.Norton& company,
1987)

6. Peter 1* Vitouseket. al., 'Human Appropriationof the Productsof Photosynthesis,"

Bimi~.ua
June 1986;PRB, 1990WorldPopulationDataSheet
7. US. Departmentof Energy(DOE),EnergyInformationAgency(EIA),StateEnergyDate
Report.QCnsumption
Estimates.1960-19. (Washington,
D.C. 1990);DOE,ELA,AnnualEneF=L

& Total VebicleKilometersfor 1965-1970

fromU.S. Departmentof Commerce,Historical

84
Statsticsof the UnitedStates.ColonialTimesto 1970.BicentennialEdition(Washington,D.C.,
1975);197048fromDOE,EIA,AnnualEnergyReview.198?
9. PRB, 1990WorldPopulationData Sheet.
10. See HazelAnderson,'MovingBeyondEconomism:NewIndicatorsfor CulturallySpecific,
.SustainableDevelopment," in the Caracas Report on AltemativeDevelopmentIndicators,
RedefiningWealth and Prog: New waysto MeasureEconomic.Socialand Environmental
Change(NewYorl The bootstrapPress,1989);Dalyand Cobb,For the CommonFuture.
11. GarrettHardin,"ParamountPositionsinEcological
Economics,"
presentedat MheEcological
Economicm
of sustainability."
12. AlanDurning,Povegrand TheEnvironmentReversingthe DownwardSpiral Washington
D.C.:WorldWatchInstitute,1989)

Ss