Previous - Next
Macro-economic accounting: incorporating the environment into national accounts
Resource accounting
Macro-environmental policy formulation
Micro-level policy formulation
In the preceding chapters, it has been argued that the structure of banking does not easily lend itself to comprehensive approaches to environmental concerns. While banks are increasingly aware of their responsibilities to carry out their activities for profit in a manner consistent with environmental concerns and are increasingly required to do so by international and national expectations (and, indeed, by laws in some jurisdictions), there are still constraints on actions they take. Firstly they operate with a foreshortened time horizon; they operate in a "for profit" environment; and they operate in a competitive national and international environment where, if they do not make a profitable loan, some other bank in their country in all likelihood will do so . Furthermore, if the environ mental legislation is quite strict in one country, international investment has the option of seeking out countries where environ mental regulations are weaker or less rigorously enforced. Banks also operate on a project-by-project basis, not on the basis of a broader planning horizon.
Secondly, as noted above, in most developing countries a very small portion of the total financing extended to the agricultural sector comes from banks. The result of this reduced participation of formal banking institutions in the aggregate loan volumes extended to agriculture, is that, while banks certainly need to review the loans that they do make to ensure that they are environmentally benign, a far broader ranging strategy is required if the fundamental problems are to be addressed.
To address the totality of aggregate investment in agriculture, developing societies cannot depend upon a project by project approach. Such an approach is clearly inadequate:
"The traditional approach...fails to confront the real issues, which have much more to do with the way society works than with the technical aspects of natural resource degradation. Environment-related behavior and policy are in fact at the very heart of social, macroeconomic, and sector policies-especially those relating to agriculture, energy, and industry; domestic and foreign investment; fiscal, monetary, and trade policies, income distribution; and regional planning." 27
27 Jeremy J. Warford, "Environmental Management and Economic Policy in Developing Countries" in Gunther Schramm and Jeremy J. Warford, editors, Environmental Management and Economic Development, The Johns Hopkins University for the World Bank, 1989, p. 8.
As regards both forest clearance and agricultural intensification, the issue is "how should we treat the natural environment in order that it can play its part in sustaining the economy as a source of improved living standards?" 28 Free markets may be wonderful servants, but they are often poor masters. Clearly, when these markets work to optimize short-term returns at the cost of the destruction of natural capital, the broader society needs to develop policies that direct these markets toward a more beneficial exploitation of natural resources and a less destructive use of the environment. The natural capital stocks can no longer be considered as an essentially free resource and the financial flows to the agricultural sector, whether deriving from formal banking institutions or from informal markets, must be of concern to the broader society.
28 David W. Pearce and R. Kerry Turner Economics of Natural Resources and the Environment, The Johns Hopkins University Press, 1990, p.43.
Within the confines of the present document, it is only possible to outline some of the more promising approaches to incorporating environmental concerns into the policy making and management apparatus of society.
Macro-economic accounting: incorporating the environment into national accounts
Currently, national income accounting practices do not incorporate the depletion of natural capital stock into the national accounts. Neither the Gross National Product nor any of its variations (Net Domestic Product, for example) include natural resource depletion or degradation. The result is that the sustainability of the national income is understated and there is a hidden decapitalization of the resource base.
Pollution, likewise, is inadequately accounted for. Identification of the output, the damage, and the costs of abatement with its concomitant benefits would both make apparent the cost of industrial development with inadequate environmental controls, as well as guide growth and environmental policy making.
Changing the way in which the national accounts are prepared is far more than a mere accounting change. It fundamentally alters the way growth is conceived and the means by which interrelationships between the elements of growth policy are understood. By an accounting change, what was formerly viewed as an additional cost not essential to an investment is converted into an investment in future growth and sustainability.
Its impact upon the statement of the Gross National Product moves from being a debit to a credit in national infrastructural investment.
To date, most of the dialogue concerning depletion and degradation of resources has not quantified the destruction done to the environment in the name of economic expansion . The quantification of a given resource, and the determination of the number of years that will be required to exhaust it at the present rate of utilization, is a straight forward calculation. Once this calculation is incorporated into the national accounts, the discount rate becomes apparent. 29
29 El Serafy and Lutz in Schramn and Warford, 1989.
The quantification of natural resource degradation poses somewhat more theoretical difficulties. As suggested in Chapter Four, there are a number of theoretical approaches which would be particularly effective in demonstrating the environ mental damage done by assuming that the natural capital is a free good.
Once the steady assault on the environment is manifested quantitatively in national accounts, it becomes increasingly apparent that some significant portion of present growth actually arises from a depletion of the resource base through the progressive destruction of the very foundations upon which society is built. The accounting changes become a stimulus to debate and to political action. National income accounting, which reflects the amount of present growth that is actually induced by consumption in excess of the regenerative capacities of the environment, with this consumption stated in terms of the number of years to exhaustion, can help to make more viable a number of policy alternatives at both the macro and micro levels.
Macro-environmental policy formulation
Environmental policy in many , if not most , countries manifests two clear characteristics. First, it is implemented through a number of national and decentralized institutions and is characterized by duplication, overlapping functions, conflicting goals and a lack of clear policies. The institutions that are charged with carrying them out are often understaffed and, almost without exception, underfunded.
Second, it is still the exception rather than the rule to have an environmental policy statement, such as, for example, the Philippines Strategy for Sustainable Development (PSSD), which articulates a strategy for a community-based resource management program that tries to balance pressure on natural resources with environmental considerations, resource pricing, conservation of biodiversity, property rights reforms, rehabilitation of degraded ecosystems, and pollution control. 30 Even though the enforcement machinery may be in different agencies and lack coordination, and the resource constraint faced by the public sector may not permit its complete articulation, strategy statements such as these provide a benchmark against which progress can be measured.
30 Llanto, 1991.
Micro-level policy formulation
Once the national accounts system is able to measure the impact of society upon the natural resource base, and natural resource accounting systems are established to quantify the discount rate of resources, the policymaking process is stimulated to formulate policies that will help guide the broader society toward a more sustainable pattern of growth.
While there is a broad range of policies that could be undertaken, depending upon the particular circumstances and resource bases of the countries concerned, the fundamental thrust under these variable circumstances should be to slow, halt, and in some cases, even reverse the destruction of the resource base.
Almost all governments are sensitive to the rate of growth of the GNP and to the quantifiable loss of national resources. Once these are included in the national accounts, many constraints on political action are eased. For example, the management of forests on a sustained annual yield basis, the development of tax incentives to encourage agroenergy plantations, especially for large processors which are wood fired, or for on-farm water management and mini hydro systems, become more politically acceptable, as the consequences of these policies are manifested in a concrete form in the national accounts.
The interests of those industries that currently receive government subsidies are intense and focused. By making clearer the rate at which these industries deplete soil, forest, water, and air resources, it becomes easier for society as a whole to mobilize and for governments to respond to the need to review subsidy policies to bring them into line with a new definition of growth. For example, environmentally damaging or soil depleting crops, such as cotton and tobacco, as well as steep hillside cultivation, would be unlikely to be subsidized when the damage to the resource base is quantified, except in cases where a sustainable system is being operated.
Likewise, once the national accounts reflect the true costs of the present pattern of growth, environmental remediations will be viewed in a different light. Industrial retrofittings to reduce pollution and conversion to less polluting energy will be accounted for as investments in present and future growth, rather than as costs to the economy. Even at the local level, the utilization of plant and animal wastes in producing waste gas fuels, and the development and distribution of fuel-efficient stoves, are transformed from costs into growth producing investments.
The redefinition of what constitutes growth and what constitutes consumption could serve to alter fiscal transfer policy. Relatively rarely do local jurisdictions have taxing authority. Most depend upon central government taxes to support their activities. Indeed, intracountry relations could be restructured to reflect the new growth paradigm. One can envisage a situation in which the financial transfers from the national to the local level may be based upon the efforts of local populations to engage in activities defined by the national accounts as investing in producing growth, such as reforestation.
At the international level, there could be both an expansion of the "debt for nature swaps", once it is clear that central economic growth issues worldwide, not just biodiversity and aesthetic considerations in conservation of tropical forests, are at stake in these exchanges. At present, these exchanges are carried out by Non-Governmental Organizations (NGO's) which must still purchase the debt at a percentage (say 20-40%) of its face value from banks. The banks holding this debt cannot be expected to donate it.
However, export import banks, loan guarantee agencies, national governments and supra-national organizations working in developing countries could also play a role. An example follows.
Convinced that exchanging debt for the creation of additional forest reserves in developing countries impacts favourably on the quality of life in their own (developed) country, they might also favour action in this area.
Carrying the logic one step further, an international rediscount facility could be created to reliquidify national lenders who are prepared to make certain types of environmentally beneficial loans. This facility would, in effect, pool the loans for certain types of environmentally beneficial lending, and make a secondary market in the pooled securities, perhaps with government guarantees of interest and/or principal. Such a facility would permit banks to make loans that they would be reluctant to make with their own resources. Instead, they would originate the loan and on sell it to an international facility. This facility would package it with like loans from a large number of countries and sell it perhaps with a guarantee of payment of interest and principal to long term investors. Institutions such as World Bank and/or regional and national development banks could help develop the loan conformity criteria for eligible loans, as well as provide the umbrella under which such a Loan Facility for the World Environment could operate.
Obviously, there is no lack of ideas worthy of serious consideration and no particular approach is advocated in this publication. Ideas are outlined in order to stimulate debate. Fostering the process of redefining the roles of both banks and the informal financial market implies the redefining of society's priorities, developing adequate statistical measures of the effect of humans on the environment in which they live and from which they draw their livelihood, and creating linkages between the developed and the developing countries.