SAmMS NS Vol 5 (2002) No 2 277 Can the Environment Wait in a Developing Country? John A Dixon and Gayatri Acharya The World Bank, Washington ABSTRACT Can the environment wait in developing countries? Should countries focus on growth first and wony about cleaning up later? Is there an optimal mix between growth, development, and environmental management? These are all real issues facing the world's community of developing countries. The following presentation suggests that the answer to this question is that the environment does not have to wait. JELQ28 A TALE OF TWO COUNnHES Azerbaijan and Costa Rica may seem to have little in common and, yet, recent work in both countries provides some interesting comparative, if anecdotal, data. First, consider Azerbaijan, one of the world's first oil states. A hundred years ago Baku, the capital, and Azerbaijan were an important center of oil production. The oil boom that began at that time resulted in a number of impressive buildings in Baku - grand avenues, an imposing Opera House, an impressive array of mansions and apartments buildings. Just outside Baku, however, one is met by wasteland all along the shores of the Caspian Sea that is the direct result of the oil boom and associated production. Kilometers of rusty pipelines, pools of blue/greenlblack water and piles of industrial waste line the shore. It is a true environmental disaster, and much valuable Caspian Sea-front real estate is unusable. Azerbaijan is a classic cautionary tale of the danger of the "grow first, clean up later" mentality. Those who benefited from oil extraction over the decades are gone, lost in time and in changes of governments. Now all that remains from the past oil boom are a number of grand buildings in a very poor country, and a tremendous bill for clean-up or remediation measures. Although new oil production may hold out hope for addressing some of these problems, the new R ep ro du ce d by S ab in et G at ew ay u nd er li ce nc e gr an te d by th e P ub lis he r (d at ed 2 00 9) . 278 SAJEMS NS Vol 5 (2002) No 2 developers rightly maintain that they should be held responsible for their actions only, not for the environmental blunders of 10 to 50 years ago. Nonetheless, the costs associated with those blunders will be borne by society at large. Better governance and a different set of political and historical conditions may well have resulted in different outcomes for the country. After all, many of today's developed countries have reached their current levels of economic prosperity despite, and some may argue, because of, over-exploitation of their natural resources. The choices available to countries today are however significantly different due to increased pressure on resources and changes in global, national and local awareness regarding patterns of economic development. Azerbaijan, like other mineral rich countries, faces an interesting choice today of making the most of its oil resources by wisely re-investing the rents from oil exploration in society, thereby achieving more sustainable economic development. Now consider the case of Costa Rica, a small Central American country that has relied on its natural resources for growth. Originally coffee and bananas were the backbone of the economy, and now tourism - eco or otherwise forms a major share of the economy. Costa Rica has successfully marketed itself internationally as a green, environmentally-friendly country and receives large numbers of international visitors each year. In its international advertising it uses the slogan "Costa Rica - No Artificial Ingredients" to sell itself and reinforce this image. Costa Rica faces all the problems most middle-income developing countries (including a high deforestation rate). But Cost Rica has successfully identified a strategy to "grow green" and take care of environmental problems to the extent possible, realising that this benefits both the environment and good for the economy. An important part of this process has been a partnership between the government, the people of Costa Rica and the private sector, all of whom realise that they have an incentive in addressing environmental problems and that these problems affect all of them. IS THERE AN ENVIRONMENT-DEVELOPMENT DICHOTOMY? As these two case studies suggest, there are different paths for development for resource-based countries. It has been suggested that the environment is a luxury good for the rich. A related view is that a country should get rich first and worry about the environment later. These hypotheses are now examined. R ep ro du ce d by S ab in et G at ew ay u nd er li ce nc e gr an te d by th e P ub lis he r (d at ed 2 00 9) . SAJEMS NS Vol 5 (2002) No 2 279 Tbe environment as a lUxury good There is no doubt that in some ways the environment is a lUXury good. In economic terms, this merely means that the environment has an income elasticity of demand greater than 1 (that is, if income grows by 10 per cent, demand for a the "environment" will grow by more than 10 per cent). There is no doubt that some uses of the environment are in fact lUXUry goods - for example, the demand for scuba diving or unique wilderness experiences. For most other types of environmental goods and services, however, demand is usually positive, if not in the luxury good category. Positive income elasticity merely means that as incomes grow, demand for the environment also grows. As such, the demand for a healthy, cleaner environment will grow as incomes increase. In this sense the environment can be considered as an appreciating economic asset - its value will grow in the future as incomes rise. In addition, the environment is a central part of their production system for many: farmers, fishermen and loggers all depend directly on the environment to produce income. In fact, it is precisely the poorest who are most directly dependent on the environment as a source of production. There are also important social-economic linkages between the environment and health and other social factors. In the case of the link between poor water resource management and lack of sanitation, for example, it is found that the negative impacts on health fall heavily on the poorest members of society and that the opportunity costs of time spent collecting drinking water may be much higher than normally thought. In both cases the economic benefits from improved water supplies (both in terms of quality and quantity) may be quite large. The cross-sectoral linkages (especially in terms of health and productivity implications for the poor) of investing in sectors such as water and clean energy are often overlooked by policy makers and growth advocates who suggest that environment is a luxury good. Tbe "grow first, clean Up later" bypothesis As mentioned earlier, there is a wide-spread belief that countries should focus on traditionally-measured economic growth first and only be concerned about the environment afterwards. While it is true that this is the growth path followed by the US and much of Europe, this is known to be a sub-optimal approach. This is true for a number of reasons: Cleaning up after problems have been created (especially from pollution of the air or water) is much more expensive than prevention. Many studies have shown that environmentally friendly development (one that R ep ro du ce d by S ab in et G at ew ay u nd er li ce nc e gr an te d by th e P ub lis he r (d at ed 2 00 9) . 280 SAJEMS NS Vol 5 (2002) No 2 minimizes air or water pollution, or natural resource degradation) often only costs I to 3 per cent more in initial investment costs (and avoids damages that are much costlier to restore afterwards). As seen in Azerbaijan, growing first and cleaning up later often results in no one accepting responsibility for the clean-up - all the funding has dried up and those who created the situation are no longer around. The US has implemented an expensive SuperFund program to clean up abandoned toxic and hazardous waste sites all over the country. The grow first, clean up later philosophy may also result in extinct species and lost genetic opportunities, which consequence is of a permanent nature. Since many environmental problems disproportionately affect the poor, the emphasis on growth without consideration of environmental issues necessarily implies a more limited set of options for poorer communities. A FALSE DICHOTOMY - BUT A DIFFICULT PATH TO CHARTER The supposed Development-Environment Dichotomy is in fact a false dichotomy. The following examples prove this. The tremendous learning of the past 40 to 50 years has shown that it is possible, both technically and economically, to "grow greener" without large, or in some cases, any additional economic costs. Whereas the famous Environmental Kuznets Curves (EKC) hypothesized that as economies grew the environment would initially suffer and only later improve, it is now clear that there are many possibilities to "tunnel through" the Kuznets curve and grow in an environmentally-friendly manner. This is due to technological change as well as policy intervention. For example, modem transportation and energy production are much less polluting than they were 30 or 50 years ago. Similarly, the advent of the computer and high speed communications means that it may be possible to leap frog certain traditional stages in growth. Environmental Kuznets Curves (see Figure 1) are also more complex than initially thought. Although the classic EKC shape is shown in the middle two curves, with urban concentrations of particulate matter and sulphur dioxide, other EKCs take quite different forms: populations without access to safe water or sanitation both decline steadily as incomes increase. More troubling however, is that other measures increase directly with income, as seen in the lower two EKCs representing municipal waste per capita and carbon dioxide emissions per capita. For some pollutants, there is no turning point. R ep ro du ce d by S ab in et G at ew ay u nd er li ce nc e gr an te d by th e P ub lis he r (d at ed 2 00 9) . SAJEMS NS Vol 5 (2002) No 2 281 The original Kuznets curve suggested that a deterioration in income distribution in the early stages of economic growth would be followed by an improvement later. This however, can be a long-tenn outcome and one that is less than desirable in the face of growing poverty levels across the globe. Figure 1 Environmental Kuznets curves Environmental Indicators at different country income levels Population without safe water Urban population without adequate sanitation Perce 100 1,000 1,000 10,000 P