Global Middle Class Initiative: Policy Papers

The American-German Divide

Economic Growth — Wed, 08 Jul 2009 10:01:00 -0400

German Chancellor Angela Merkel has just completed her first official visit to Washington since President Barack Obama took up office. At home Mrs. Merkel has only a few months left to go until an upcoming general election will determine her own political future. This was surely one more reason to send a message of harmony with President Obama back home, as the new U.S. president, much in contrast to his predecessor, enjoys great popularity among German voters. Elections aside, such harmonious gestures can hardly deflect

Jobs Solutions for Our Jobless Recovery

Economic Growth — Tue, 19 May 2009 10:40:00 -0400

This speech was delivered at The New School on May 19, 2009.

Views on the U.S. economy

Financial Markets Do Impact the Environment

adminn — Sat, 01 Mar 2003 00:00:00 -0500

The relation of financial flows and the environment has received much less attention than the impacts of trade, energy programs, sprawl, or pollution creating projects. Perhaps that is not surprising since activities in each of those areas are known to have direct and usually detrimental impacts on environment through changes in land use, soil degradation, pollution emissions, and contributions to global warming, etc. In contrast, both international and domestic financial markets appear relatively clean and detached from environmental impacts -- dealing in paper or electronic transactions, consuming few resources, creating little waste.

A welcome break from this tradition was the first project on Environment and the International Environment undertaken by the New America Foundation in 2000-01.1 That project covered a range of topics relating financial markets to sustainable development. The environment was identified as a critical pillar to achieving sustainable development and a number of recommendations were proposed. This program will look in more detail at how much progress has been made in a number of areas identified in that earlier project. Most of the issues are well known. The questions are how much has been achieved, what are the obstacles to further progress, and what can be done.

For the complete document, please see the attached PDF version.

Sustainable Enterprise

Economic Growth — Fri, 28 Feb 2003 00:00:00 -0500

The fundamental challenge for human institutions in the 21st century is to create and maintain a sustainable combination of economic, social, and natural environmental conditions in an increasingly global and commercial civilization.

This challenge is not now being met. The world economy so far is failing to meet even the basic needs of a large fraction of the human population, or to protect its natural resources and the ecosystems that produce them, even as it creates unprecedented wealth and amenities for a few. The reasons for these failures lie in both economic and political institutions.

An emerging literature in strategic business management proposes that the most promising solutions to these problems lie in entrepreneurial business innovation. The Sustainable Enterprise Model (SEM) asserts that businesses can create greater value, even for themselves, by a more balanced optimization of social, environmental and financial considerations than by a narrowly economic emphasis alone. This model raises important questions, challenges, and potentially opportunities for the international finance and investment community. If the world is to become more sustainable, financial and investment institutions must themselves become "sustainable enterprises."

This paper summarizes the Sustainable Enterprise Model and its implications, highlights unresolved issues and questions about it, and poses a series of recommendations for further discussion and action by the finance and investment community.

For the complete document, please see the attached PDF version.

The Role of Regulation in Mitigating the Impact of International Capital Flows on the Environment

adminn — Wed, 23 Oct 2002 00:00:00 -0400

The large scale movement of capital in the form of financial flows and foreign direct investment is a relatively recent phenomenon despite the fact that international trade has been an important part of commerce throughout the industrial era. Such flows have constituted a major and perhaps defining part of the process of globalization over the past two decades. At the same time, the environmental problems created by industrialization have also grown to have global range, particularly as they are replicated around the world, largely as a result of international capital and technology flows. What were once local problems of resource depletion, air pollution, etc. have grown to include truly global problems such as biodiversity loss and global warming. The impact of international trade on the environment has received significant attention, but the impact of international financial flows has received less. This paper seeks to provide a framework for thinking about the relationship between international investment and the environment, and for identifying areas which may require new types of regulation. This framework is based on a dynamic modeling perspective, where the global economy is seen as a series of nested and interacting systems, governed by dynamic feedback loops.

For the complete document, please see the atttached PDF version.

International Financial Institutions, Environmental Standards and Foreign Direct Investment

Economic Growth — Tue, 15 Oct 2002 00:00:00 -0400

The ongoing debate over the environmental impacts of private foreign direct investment (FDI) has focused primarily on the role of multinational corporations (MNCs) in implementing diverse standards in countries at varying levels of social, economic and political development. Since the international debt crisis of the late 1980s foreign investment flows have become increasingly important, financing current account deficits as well as sustaining economic development. The flow of FDI to developing countries and emerging markets now exceeds official development assistance (ODA) by a factor of five, (Jeucken p. 50) peaking at $220 billion in 1999. Therefore, the environmental impacts of FDI deserve at least as much attention as has been devoted to the impacts associated with structural and project lending by the International Monetary Fund, the World Bank and other, mutilateral and bilateral forms of ODA.

The “race to the bottom” hypothesis, played out in discussions about the appropriate relationship between trade and environmental protection has its counterpart in the literature on FDI. While the relationship between trade and environment is heavily focused on by official actors, nation-states, regional trading blocs and global regulatory institutions such as the WTO, the environment-FDI debate focuses primarily on non-state actors, including MNCs, NGOs and the international financial institutions (IFIs) that facilitate flows of FDI to developing and emerging markets.

The paper proposes to explore the role of IFIs in FDI and the implications their role has for the relationship between investment and the environment. For the complete document, please see the attached PDF version.

Untangling the Knots of Protectionism

Economic Growth — Sun, 01 Sep 2002 00:00:00 -0400

In the months leading up to the votes on Trade Promotion Authority (TPA), President Bush had to buy off powerful domestic constituencies with tariffs on steel and, more recently, increased subsidies for agriculture. Now that he has TPA, the President has wisely reversed course and proposed a far-reaching plan to use the Doha round of trade talks to eliminate the majority of world-government support for agricultural products by 2010. The agricultural proposal, in conjunction with TPA, will hopefully enable the administration to undo years of European Union and U.S. protectionist policy. This will provide benefits to taxpayers, consumers, and developing countries trying to build credible agricultural export markets.

The Doha agricultural proposal, which includes the scrapping of agricultural export subsidies over the next five years and cutting global farm tariffs to fifteen percent by 2010, is the administration's answer to the European Union's mid-term review of the Common Agricultural Policy (CAP) that recommended a shift away from protectionist policies in Europe.

The TPA (or "fast-track" as it is more commonly known) will allow President Bush to aggressively negotiate the deal with greater credibility than previously anticipated, in the knowledge that he will not have to fear drastic changes from Congress on any agreement.

The agriculture proposal was a surprising turn-around from the farm bill the president signed two months ago. That bill -- reminiscent of the more lavish indulgences of European socialism -- increases agricultural spending by more than $80 billion in the next ten years.

President Bush cannot continue to be swayed by agricultural interest groups. Comprehensive agricultural trade liberalization, such as that being proposed, is essential for four reasons.

One, agricultural policy in the developed world has, for the most part, been anti-trade and anti-development. The worst culprits are the European Union and the United States, who for more than half a century have increased spending for their farmers under the guise of income stability for small farmers and the preservation of the rural way of life. This has not only caused a loss of credibility of the industrialized world in the eyes of developing countries -- countries that want to enable their own development through the creation of sustainable agricultural export markets -- but also undermines the developing world's belief in the free trade system in general.

Two, the notion of protectionism is distinctly anti-consumer. Consumers ultimately pay for protectionism twice: through increases in taxation to pay for protectionist measures such as subsidies and through inflated prices of goods made from the protected products. For instance, it is estimated that the average American taxpayer will pay more than $600 for the increases in the farm bill alone.

Three, agricultural subsidies constitute wasteful and indulgent government spending, especially when there are more pressing spending needs, such as education, healthcare, and more recently homeland defense. The EU can also ill-afford its agricultural spending excesses as it attempts to expand. Extravagant, protectionist spending will be almost impossible to justify. European taxpayers will already be paying heavily in the short run for the poorer newcomers and will thus expect Eurocrats to tighten their purse strings in other places.

Four, protectionist agricultural policies in the United States do not contribute to a positive rural redevelopment policy and preserve a dying way of life. As of 2001, seven percent of farmers were producing eighty percent of farm goods. Farming assistance is going, in the most part, to wealthy corporate farmers and not to the more than two million small farms in the United States. Over the past five years, it is estimated that the wealthiest ten percent of farmers received an average of almost $300,000, whereas the other ninety percent only received an average of $1,100 each.

In light of its recent poor performance in trade matters, particularly the pork-laden farm bill and steel tariffs, the administration must not use the Doha agricultural proposal as mere rhetoric. Bush must lead the world community, by example, toward freer and fairer agricultural trade policy. Congress was right to give the president TPA, and he must not disappoint the American people with imprudent trade policy.

America's Consumption Trap

Economic Growth — Sun, 01 Sep 2002 00:00:00 -0400

This week's positive reports showing rising consumer confidence and manufacturing activity have raised hopes that a solid economic recovery is now taking hold. But Washington should not expect its tax coffers to overflow anytime soon or for the economy to return to 1990s-level growth rates. In the short term, the economy still faces an uphill struggle to overcome the excesses of the 1990s -- too much consumption, too much debt, and wildly inflated asset prices -- that are now depressing economic growth. Worse, over the longer term, the country must find a way out of its dependency on debt-led consumption growth that has been financed by capital from abroad, and that means saving and investing more and consuming less.

The dilemma for the administration, Congress, and the Federal Reserve is that the policies they have chosen to stimulate the economy in the short term -- tax cuts aimed at boosting consumer spending and low interest rates aimed at propping up the housing market--may only make the long term structural problem of over-consumption more difficult.

In one sense, Washington's reflexive resort to consumption-led growth is understandable. For much of the past 50 years, our consumer-oriented, low savings economy has performed reasonably well. "As the consumer goes, so goes the American economy" has proven to be a relatively accurate adage. But something fundamental began to change in the 1980s. Not only did shopping replace baseball as the national pastime, but an adult gratification culture began to crowd out our traditional concern for future generations. Consequently, we began to borrow from abroad to pay for ever larger doses of consumer spending -- and in less than a decade, we went from being the world's largest creditor to its largest debtor.

By the late 1990s, America's high consumption-low savings economy had gone into overdrive. Personal savings rates plunged, actually falling into the red for several quarters. Consumer debt increased to 110 percent of disposable income. Our current account ballooned to more than 4 percent of GDP in 2001. And our international debt passed the $2 trillion mark, rising to nearly 25 percent of GDP, a sizeable and growing burden that will be borne by the next generation.

There have, of course, been real gains in American productivity in recent years, and American companies have recaptured the competitive lead in a number of areas. But those gains do not hide the fact that for much of the last two decades we have been living beyond our means. Our high consumption, low savings economy has worked only because our European and Asian allies have been willing to save and produce more than they consume, and then lend us money to buy their goods -- a sort of reverse Marshall Plan. In good years, they have sent enough capital to our shores to support both more consumption and investment, and in the late 1990s, so much that it helped fuel a speculative investment bubble in information technology.

In fact, America's consumption and investment boom was made possible by a corresponding production boom in the industrializing economies of Asia as well as in the more mature Japanese and European economies. New productive capacity abroad comfortably outstripped rising consumption in the United States, creating capacity gluts in many basic consumer goods, from electronics to textiles. As a result, many Asian producers soon suffered from falling rates of return on their investment and staggering debt levels even as American consumers enjoyed bargain prices. The resulting Asian financial crisis had the paradoxical effect of pushing even more capital to the United States, inflating both America's consumer boom and the NASDAQ bubble.

By the time the Bush administration took office, the world economy suffered from serious deflationary imbalances -- a production and debt overhang in Asia mirrored by a consumption and debt overhang in the United States that was being made worse by a collapsing tech bubble. Indeed, so serious was America's consumption and debt overhang that it was reasonable to ask whether the U.S. economy might suffer the same fate that befell the Japanese economy a decade earlier. In Japan's case, the economy was brought to its knees by too much productive capacity, particularly in older less productive sectors of the economy; in the case of the U.S. economy, it has become too dependent on consumption that has to be financed by borrowing from abroad.

Personal consumption now accounts for 69 percent of our nation's gross domestic product and 80 percent of American jobs. A prolonged slowdown in consumer spending would therefore have a ripple effect throughout the economy -- rendering unprofitable huge capital investments made in retail stores, shopping malls, housing, and import-serving industries. It would also have a serious effect on America's greatly expanded financial sector that grew with the stock market boom of the 1990s and the recycling of foreign capital. If foreign capital flows dry up, there would be less money to recycle into consumer and business lending. The nation would need more collection agents, and fewer loan officers.

To head off the worst, U.S. economic officials have settled for a two-track strategy of lower interest rates and deficit-creating tax cuts, aimed at bolstering consumer spending in the hope that this will eventually lead to renewed business confidence. Consumer spending has been so central to the administration's economic strategy that in the aftermath of the September 11 terrorist attacks, President Bush elevated it to a patriotic duty. And in the short term, at least, American consumers have delivered, carrying the economy through the bursting of the tech bubble, the war on terrorism, and accounting scandals to a modest recovery.

But consumer spending has held up not because incomes have risen by all that much, but because consumers have taken on more debt, mostly by borrowing against rapidly rising housing prices. With interest rates at record low levels, mortgage refinancing has boomed as households have used their homes as collateral in order to consume more. But borrowing against inflated real estate to fund consumption is as dangerous as betting on the NASDAQ boom. At some point, housing prices will soften, and households will have no choice but to rebalance their balance sheets, sending the economy into a tailspin, unless the administration can find some new way to prop up consumer spending.

In short, U.S. economic officials have opted for an economic strategy that only reinforces the structural weaknesses of the American economy. That strategy can work only as long as foreign investors are willing to finance America's current account deficit. When investors grow tired of holding American assets, a painful adjustment will begin. A few optimists believe that day can be postponed indefinitely. But a falling dollar (the dollar is now at a 15-month low vis-a-vis the euro) and a weakening stock market suggest the process may have already begun.

Indeed, there is a perceptible shift in investor psychology that does not bode well for America's consumption dependent economy. In the 1990s, investors threw money at our financial markets, not only because of the prospect of higher returns, but because they believed the United States had the deepest and most transparent capital markets that were underpinned by a superior accounting and legal system. In the jargon of the street, the United States was both the growth and restructuring play of the 1990s. But with the NASDAQ crash, Enron and the other accounting scandals, the shine has come off the U.S. market.

By contrast, Europe and Asia are beginning to attract investor attention -- Europe because of the growing confidence in the euro and Asia because countries like South Korea and even Japan have begun to make painful reforms to make their economies both more consumer and investor friendly. South Korea, for example, has stopped shoveling money into loss-making chaebols, and has begun to establish a reliable consumer credit market that is fueling domestic-led growth for the first time in 50 years. As a result, capital is beginning to flow back to Asia, and Europeans have begun to conclude they would be better off investing in the success stories of Central and Eastern Europe than in another American bubble. Increasingly, Europe and Asia look like the growth and restructuring plays of this next decade.

If continued, these changes will be good not only for Asia and Europe but for the world economy as a whole. However, in the near term, they may advance the day of reckoning for the American consumption-dependent economy. The irony is that the more Asian and Europe change and restructure the more vulnerable the United States becomes to its consumption dependence and the more it will need to follow suit with its own reforms and restructuring.

American policymakers therefore need to begin to think about a radically different set of economic and social policies. One logical place to start as an alternative to the administration's effort to prop up an inflated consumer sector would be more public investment in our children -- more money for our schools, for our teachers, for our care-givers, and for the computers and other knowledge-enhancing technology needed to make our young people more productive citizens. It is only by investing in productive future adults that we will be able to both grow our economy and retire the debts we accumulated from our two-decade old shopping spree.

Making Markets Pay for Stewardship

Economic Growth — Sun, 10 Feb 2002 00:00:00 -0500

Executive Summary

Some of the most promising ways to bring about rural poverty alleviation and conservation around the world involve innovative ways to increase the control that the rural poor can exercise over their natural resource base and to pay them for their sustainable stewardship of environmental functions and services. These approaches can make use of market instruments through innovative ways of valuing environmental goods and services, establishing exchange arrangements, and expanding the use of traditional common property practices like common-pool assets regimes that are particularly appropriate for the sustainable management of natural resources, and delivery of environmental services. Exciting new experiences have resulted from creative actions by committed communities, governments, civil society and NGOs, and businesses. What is needed now is to expand their use, and improve the enabling frameworks needed for their success. To this end, this paper presents recent experiences and and a conceptual framework on which to base a set of actions at national and international level that NGOs and aid agencies may want to pursue, among them:

At international level

Expanding efforts in rich countries to create a demand for global environmental services both inside and outside of conventional markets. These efforts should concentrate on goods and services that are particularly important to global environmental sustainability and can contribute to improve rural poor livelihood in developing countries. Creating such interest and demand is essential to overcoming the problems caused by the public goods aspects of the environment, making people understand the real value of these services, and convincing them to pay for them. Action on this initiative should include a combination of educational and marketing programs. While it should be concentrated in rich countries which have the wealth to purchase or support environmental stewardship, major elements should also be directed toward developing countries to increase their understanding and to promote local stewardship schemes, which may benefit from international experience.
Creating a stewardship compensation fund or funds to pay poor people and communities for stewardship services. Both the public good nature of many critical environmental services and the vast income differential between developed and developing countries argue for establishing mechanisms to compensate the poor for appropriate stewardship. Given the variety of programs that could be supported and the difficulties of creating another large international fund like the GEF, it seems better to encourage different aid agencies and international NGOs to create or expand separate funds aimed at promoting and compensating specific aspects of global environmental stewardship. They should be flexible and have a minimum of administrative overhead. They should be used both to start up new initiatives and to provide long-term funding in cases where the global public good aspect of the program is substantial. In some cases, there may be reason to institutionalize the transfers where a long-term partner can be found.
Extending the application of EIAs and compensation of affected local people to all international investment flows that involve resource extraction (broadly defined) or other significant impacts on the environment. Much of the most severe damage to the environment is the result of exploitation and extraction of natural resources. A large part of these extracted resources enter into international trade. Governments and companies involved usually reap large profits and consumers benefit from the use of the resource converted into a commodity. All too often, the local people in areas where the resources are extracted are deprived of their livelihoods or worse, and the local environment destroyed. In view of the profits made and benefits derived, action should focus on assuring adequate compensation of those most seriously affected. Even though many of these costs normally do not enter the market, or are explicitly excluded by government decision, they are real costs on the people and environments involved. While there may need to be adjustments in EIA processes to extend their range, a major priority of those who want to preserve the environment and promote poverty reduction should be to assure that all relevant international investments respect environmental sustainability and promote poverty reduction in their direct as well as indirect impacts, rather than impoverishing local populations. This will require a multifaceted campaign of NGOs and aid agencies, supported by popular pressure in the developed countries.

At national levels

Establishing appropriate enabling legislation to permit common property systems and enforceable environmental stewardship agreements among communities. There are many aspects of current legal frameworks in developing countries (and developed countries) that need reform to encourage more environmental stewardship. A high priority is reforming property regimes to allow and encourage common property arrangements. It is important that civil society groups mobilize and express popular support for such reforms and increase the participation of local people in such schemes. International groups can provide some assistance, and aid programs can support such reforms actively. The enabling environment must encompass both the regulatory reforms and increased encouragement for cooperation among communities who supply and consume environmental services.
Creating active support for appropriate stewardship agreements. Because of the public good nature of many of the environmental services, public intervention is usually necessary to put in place compensation agreements. Actions should involve regulatory changes as discussed in this paper. While the state is likely to be a key player in many of these arrangements, the initiative can and often does come from other sectors of society. NGOs have initiated many of the successful programs reviewed in this paper. Developing better community level governance will be important, both to secure the provision of environmental services and to assure equitable distribution of the payments received for those services.
Establish a market framework for stewardship agreements and other forms of compensation for environmental services: Most stewardship arrangements will benefit from functioning within a market framework. It is an efficient means to obtain the results, once the overall objectives and values are established. A market framework can minimize the need for direct government involvement and maximize local involvement and responsibility. Yet creating appropriate market structures may need considerable external assistance. In addition to the rights and institutional factors discussed in this paper, aid is needed to establish a basis for pricing environmental services, for evaluating the costs imposed on local communities due to environmental degradation from extraction activities, and for monitoring the results so that medium and longer term agreements can be consummated. Mechanisms then need to be designed and enforced by governments to assure that the appropriate payments are made for the services provided or for the loss of benefits. Sometimes this can be done with relatively simple processes. Other times, it may require substantial interventions to assure that environmental services are valued and priced appropriately. Both NGOs and governments may need to invest in producing the information required to set standards, monitor outcomes on a regular basis, and enforce contracts. Governments should be encouraged to improve environmental regulations that are conducive to market solutions, including setting caps, establishing quality guidelines, and publicizing environmental information relevant to market agreements.

The above proposals are consistent with the prevailing reliance on market mechanisms, while compensating for well-known market imperfections. These flaws in the market system must be overcome to better address society's fundamental goal of improving human well-being and environmental management in a sustainable manner.

I. INTRODUCTION

Two of the 21st Century's most important challenges are the eventual elimination of absolute poverty and the sustainable management of the environment. These goals have been recognized in the Millennium Development Goals of the OECD for 2015. However, in the policy and practices of many stakeholders these goals usually are not linked. The failure to address poverty alleviation and environmental sustainability in an holistic manner is a reflection of flawed conventional wisdom, be it that environmental sustainability is a luxury that can only be addressed once higher levels of income are attained; or that environmental resources and services are not important for the poor and for poverty alleviation.

Both traditional approaches and recent innovations have demonstrated the contrary. There are many ways that an improved environment can help the poor and that poverty alleviation can go hand in hand with a better environment. In this paper, we will review some recent experiences with innovative ways to a) increase the control of the rural poor over natural resources and enhance their capacity to manage those resources sustainably; and b) engage the poor productively in environmental stewardship and compensate them for doing so.

In the following section, we summarize the extent of rural poverty, its linkages to environmental sustainability, and how uncontrolled exploitation of natural resources contributes to poverty. The third section briefly discuss the economic value of sustaining environmental services. These sections cover well-charted ground and are included to outline the justification for pursuing new methods of compensation.

The fourth section reviews property rights and particularly common pool approaches as tools that could be used to increase the rural poor control over natural resources, and the opportunities to manage those resources sustainably. In the fifth section we discuss market failures in the handling of public goods that lead to the abuse of natural resources and to the augmentation of poverty in many rural areas. The sisth section briefly discusses markets and equity considerations. Finally, in section seven we suggest ways of using market instruments to compensate environmental stewards and identifying common structures that must be promoted to do so.

II. THE RURAL POOR AND THEIR ACCESS TO NATURAL RESOURCES

In all developing countries for which data is available, save two, the incidence of rural poverty exceeds urban poverty, often by a factor of two or three. At least 3 billion people survive on less than $2 per day, over one billion live below $1 per day (the World Bank's definition of absolute poverty). Nearly a billion suffer from malnutrition. More than half of these poor live in rural areas and depend on sustainable access to natural resources and assets for their subsistence. In addition to income measures, other measures of well-being, such as health care, basic education, access electricity and communications are lower than in urban areas. These areas also tend to have much less influence in government decisions, which can be attributed to a combination of lower education levels and more limited access and voice in national matters. While urban poor are not a primary focus in this paper, they often suffer from water pollution, flooding, and other negative environmental impacts that have their origins in the poor management of rural lands.

People living in rural areas can be marginalized, both by reduced access to natural resources and public services. Close to half of the rural population, approximately 1.5 billion people, live on marginal land. These lands are classified as marginal due to terrain that is mountainous, forested, arid, or composed of poor soils. In many cases, rural people have been forced onto these marginal land by population pressures, displacement from their traditional living areas, political forces, or by their inability to find other means of supporting themselves. Although the overwhelming majority of all rural people depend on natural resources for their livelihoods, legal land and use rights for communities are rare, and while accurate data is not available, most poor people in developing countries' rural areas do not have clear title to their lands.

Most rural poor are engaged in some type of pastoral activity, with subsistence agriculture as their primary source of income. Those not engaged in subsistence agriculture are engaged in extractive industries such as logging, mining, etc. Yet, few rural dwellers have legal rights to natural resources extracted from the land where they live. These rights are usually claimed by the state and often granted to large firms which take little or no responsibility for the welfare of people living in exploited areas. The Grasberg Mine in Iryan Jaya, Indonesia, (See Box 1) is one of the most striking examples of the abuse of both the environment and of the local people. In this example, the Amungme people had neither legal rights to the resources being mined nor legal recourse to hold PT-Freeport Indonesia responsible for the social and environmental consequences of its actions.

Box 1: Indonesia: The Grasberg mine
The Grasberg mine, located in the eastern Indonesia, is the world's largest open-cut gold and copper mine. The mine is owned and operated by PT-Freeport Indonesia, with approximately 80% of the shares owned by Freeport McMoRan and 10% by the Indonesian government. Mineral rights were granted by the government to the mine with no recognition of the rights or livelihoods of the local people who had lived in the area for centuries and depended on its agricultural and animal resources for their livelihoods. The extensive mining practices destroyed many of their sources of livelihood and forced many, often entire villages, to relocate with little or no compensation. Neither locals nor environmental experts were consulted on how to run the mine to minimize social and environmental impacts. PT Freeport has been involved in grievous human rights violations, the death of local people, the destruction of local water quality and a sacred mountain, and serious long term environmental threats posed by mining activities. The local inhabitants, represented by LEMASA, the Amungme Tribal Council, have been vocal and insistent in protesting their treatment by PT-Freeport. After decades of protesting the company within Indonesia, the Amungme have brought their case for redress against the abuses of PT Freeport to New Orleans, Louisiana, the home of the parent company. In response to the change of power in Indonesia in combination with pressure from communities and activists, PT-Freeport has made some changes in policy, although Amungme tribal leaders accuse Freeport of merely making policy without implementing it.
Source: Kennedy, D, 1998

In too many cases, opportunities to maintain the livelihood of the rural poor have been destroyed by non-sustainable activities promoted by outside investors interested in mining the area's natural resources. When the area's extractive resources are exhausted and the outside investors move on, local inhabitants are usually left with neither a job nor any longer a resource base on which they can support themselves. These conditions occur in developing as well as developed countries, as illustrated by the history of West Virginia, USA (See Box 2).

In the last 50 years, rapid population growth has greatly increased pressure on rural resources for subsistence, led to unsustainable farming practices, and pushed more people into marginal areas. When such pressures cannot be restrained, land regimes often degenerate into 'open access' situations, where there are no limitations on the use of an asset or property. The resource will be overexploited as any number of agents may try to extract as much value as possible. As a result, the total value provided by the resource is reduced and its productive capacity may be unsustainably depleted. Additionally, many new nation states have claimed rights to the natural resources traditionally managed by local communities and granted exploitation rights to government or private agencies from outside the areas, further impoverishing local communities.

Box 2: West Virginia, USA: Resource Extraction and External Investment

In the mid nineteenth century, West Virginia comprised a near unbroken forest, covering more than 15.5 million acres. However, between 1880 and 1920, the state was almost completely deforested by absentee landowners abetted by corrupt state government. The influence of large absentee landowners continues today. From the turn of the century, external capital investment was employed to exploit natural resources. Almost no capital existed in the sparsely populated mountains, so the majority of capital was invested by 'foreign' or 'absentee' owners and firms, which acquired a disproportionate influence over West Virginia, both economically and politically. Once the forests were cleared, local West Virginians were left with a state ravaged by severe water pollution, flooding, fires, and landslides. Much of the employment was temporary and transient, and opportunities were few after the timber was extracted. The expansion of coal mining offered additional employment opportunities, at further cost to the environment and local health.

Extractive industries, such as mining and timber, still provide employment opportunities within the state, but the advance of technology has eliminated many jobs previously performed by human hands. A major mountain-top removal coal mine employs only 70-90 workers in all, many from out of state. As of 1998, West Virginia ranked 50th in the nation in terms of median household income and 3rd in terms of the percent of population below the poverty line, with a rate of 17.8% as compared to the national average of 12.7%.
Source: US Census Bureau. http://www.census.gov/statab/www/states/wv.txt and Lewis, 1998.

III. THE ECONOMIC VALUE OF A SUSTAINABLE ENVIRONMENT

While rural environments are being eroded by the needs of the poor and the lack of concern of the rich, numerous studies have shown that the current rate of use of most natural resources already exceeds sustainable use levels, even when it only manages to provides one sixth of the world's population with an affluent life-style and about one third with an acceptable one. The needs of the poorest half of the world's population still must be provided for.

Already, the foot-print of environmental consumption of the wealthy nations greatly exceeds the environmental area of those countries. They are drawing on the environmental resource base of the rest of the world and on reserves of environmental wealth that are being exhausted. These studies also suggest that if the whole world's population were to live at the level of a median OECD country, the environmental foot-print would be the equivalent of at least three Earths, given today's consumption patterns, institutions, and technology.

Admittedly, there have been important technical and consumption changes that have reduced the resource input per unit of GDP, and have resulted in an increase in food production, that, if distributed evenly throughout the world's population, would be enough to feed everyone. These improvements, however, have not been sufficient to reduce the total number of people living in poverty. Nor have these changes occurred fast enough to reduce overall resources' consumption. World output growth exceeds efficiency and productivity gains, so total consumption of resources continues to grow. The implications of these patterns are obvious: either a change in consumption patterns, institutions, and technology drastically to reduce demands on resources, or an improvement in the management of those resources to increase their sustainability or a mix of the above is needed to stop the further deterioration of the world's environment.

From a market economic perspective this over-consumption of natural resources can be attributed to the fact that throughout history, most environmental services, and many environmental goods have been treated as free to be used as needed. In earlier times, the environment was vast in relation to human use, and extractive activities had little impact. Environmental goods could be had for the taking on a first come first serve basis. This perception of the environment as an inexhaustible free good has persisted long after the reality has changed.

While it is useful to bring this economic perspective to the analysis of the over-exploitation of environmental goods and services, it is important to keep certain characteristics of the environment in mind. Most market goods and services are produced and maintained as discrete objects separable from other goods and services. Environmental goods and services, in contrast, are part of an ecosystem which functions as a complex, integrated system in delivering its services, rather than as a collection of separable elements. Services such as water purification, climate moderation, flow management, and siltation control, do not stem from a particular component of an ecosystem (such as a group of trees or pile of minerals), but from the integral functioning of the whole system. Removing or significantly changing one part can disrupt the whole systemic function.

For example, assuring environmental sustainability is not something that can be confined to protecting a specific area or a discrete set of resources, though such protection may be necessary in certain circumstances. We need to address the system in a holistic manner to make sure that the system will continue to provide the desirable services over time. The extent of such ecosystems is generally larger than could be owned by an individual or even a corporation and may include both public and private lands. Indeed, ecosystems may be interconnected in such an elaborate manner that it is not possible to define precise boundaries. A broader community viewpoint is required to balance different needs and uses, taking proper account of the benefits and costs of competing uses and placing values on the systemic effects as well as on the various individual components.

All the above explain the difficulty faced by markets, and society at large, when trying to put a value to environmental services. Yet, in the last few decades a host of studies have show that in situ environmental services may be much more valuable than the commodities that are extracted from them. A recent study estimated that the value of environmental services provided by ecosystems functioning in place (water purification, flood control, etc.) totals about $33 trillion a year (1996), or slightly more than the world's GDP of $29 trillion in that year. These values were estimated as the cost of providing equivalent services by installing plants that provide similar results, such as water purification plants, or as the costs imposed on users by the lack of services, such as the health costs of breathing polluted air. Obviously, many other services cannot be quantified in market terms, but are valued by many societies. Viewed as a provider of services, nature is a gigantic enterprise and deserves careful management to avoid significant losses in the value of the services it provides.

Many local studies have also found that the values of the services rendered in situ greatly exceed the values of extracting and commoditizing specific goods, such as timber or minerals. Box 3 summarizes a detailed calculation made for a forest in Indonesia to this effect. Such studies indicate where services are the most valuable and in need of protection. Specific studies such as this example in Indonesia demonstrate in concrete terms the value of environmental services in local areas. Proper valuation of local resources will be an important foundation of the stewardship agreements discussed below.

Box 3: Indonesia: Forest Valuation

Indonesia has established an extensive system of national parks to protect its environmental resources. To justify the maintenance of these parks, efforts have been undertaken to estimate the value of the services provided by the parks. In 1999, Conservation International sponsored a study of the Mt. Gede-Pangrango National Park located in central Java. This park is among the oldest in Indonesia and encompasses more than 15,000 ha. of forest reserve. It is surrounded by several hundred thousand ha. of buffer (production forests), transition (agriculture) and watershed zones that benefit from the services of the park.

Careful monetary estimates were made of the benefits provided by sound park management due to tourism, water supply for agriculture, water for household use, and sediment control. Benefits were also recognized but not measured for non-timber forest products, biodiversity, air quality, carbon sequestration, risk management, research and education, and existence or option values. The quantified benefits were compared to the costs of park management and the opportunity costs of foregone timber extraction in the park. The identified benefits were nearly one and a half times the costs of management and foregone timbering. The total would have been even larger if the other benefits could have been quantified

This exercise demonstrates that environmental services of an ecosystem can be very valuable in terms of improved production (water for rice, sediment control) and improved quality of life (water for households, tourism). However, in many cases, these services are not treated as market goods and sold, as for example timber would have been. Although the Mt. Gede-Pangrango National Park is not in danger of being exploited, the calculations demonstrate that for many unprotected areas, the benefits from timbering, which accrue to very few, are probably outweighed by the costs imposed on local people through loss of water, sedimentation, etc.; creating negative results and increasing local poverty.
Source: Valuation of Mt. Gede-Pangrango National Park, Conservation International (Indonesia), Natural Resource Management Program, 1999.

In addition to the difficulty of valuing environmental services, assessing environmental issues requires a longer time frame than markets, or political decision-makers, are usually comfortable dealing with. Some natural cycles are relatively short, such as seasonal crops or rainfall. Other cycles can last for decades, such as tree regeneration or fish stock recovery. Still others, such as the reformation of topsoil or climate change, extend well beyond human life spans. Some effects are irreversible, such as the deforestation of the high Alps (due to soil loss), species extinction (over-fishing), or toxic pollution around many mined areas. Thus, innovative stewardship solutions to environmental problems require working from a conceptual framework that is both broad enough to include the ecosystem-based nature of environmental goods and long-term enough to account for nature's longer cycles.

IV. PROPERTY RIGHTS AND COMMON POOL RESOURCES

PRIVATE PROPERTY REGIMES

Market economies are based on private property ownership of goods. The concept is relatively simple when applied to produced economic goods, most of which have a life span shorter that the owner and which do not have broad impacts beyond their own physical mass. The issue of property rights for land and natural assets is more complex, and inherent flaws in the concept and application of property rights to natural resources create serious threats to both sustainability and rural poverty alleviation.

At a national level, different states have allocated land use rights in different manners. In some countries, all land is held by the state and then allocated to specific uses. In others, some land may be held in reserve by the state for conservation or other purposes, some may remain in public ownership, but be licensed for specific uses, and some may be transferred to private ownership - all with varying degrees of enforcement under a variety of specific systems. Once lands are privately owned, they are treated as a private good, subject to some limitations. The result is a variety of mixed regimes, and there is no strong evidence that any one is better for assuring environmental sustainability, poverty alleviation, or growth.

The economic success of private property regimes depends on an extensive legal and governmental infrastructure, whether the protagonists have enough surplus income to use the costly legal system, and whether there are mechanisms to recognize public goods and enforce community interests. Unfortunately for many developing countries, and particularly for the rural poor, these conditions are not realized in practice. Registration of land for individuals, especially for the poor, can be exceedingly burdensome, if even possible in practice. Numerous environmental problems can result from misguided registration rules, such as requiring the conversion of land to commercial uses (e.g. pasture) to obtain a title, regardless of the best use of the land. Another problem in areas with weak institutions is that even if property rights can be assigned to local individuals, often the rights are not enforced and individuals are still left without legal recourse.

Furthermore many modern states use land titling as a way to ignore or abrogate traditional land rights and management techniques, thereby depriving large numbers of rural poor of their traditional natural resources and access to sustainable livelihoods. Lack of clear individual or community property rights in many rural areas is a major factor explaining poverty as well as abuse. Individuals who do not have secure access to their resources have little incentive to manage their land for future benefits. They may not be eligible for credit, nor have access to extension services, nor the ability to access markets to sell their products.

As for the management of environmental services through private property rights, most modern property rights regimes do not specify responsibilities for the impacts of use of environmental resources on those outside of the property line, such as pollution, water diversion, siltation, etc. Spillover of negative environmental impacts can also arise from the segregation and allocation of different components of an integrated environmental system, e.g. mineral or timber or other rights can be sold or licensed separately from the rest of the ecosystem. Market forces can then lead to the exploitation of that specific good with no concern for the impact of that exploitation on the remaining components of the ecosystem or related societies. When these impacts are significant, the whole community has a right and responsibility to act, usually through the action of the government. Naturally, this may lead to conflict, between individual property rights and society at large as exemplified by the case in Box 4

Box 4: United States: Conflicts over Property Rights and the Environment

Within the United States, conflicts persist between private and community interests . The rights of owner include the right of possession, the right to control how the land is used, the right to enjoy the benefits (income and intangible benefits) of the land, and the right to give, sell, encumber, or bequeath rights to others. The state retains the right to tax the land, the right of eminent domain, the right to control use to ensure protection of public interest, and the right to claim the land if there are no legal heirs. In addition, the state lays claim to wildlife that inhabits private lands. Where the state wants to exercise a public interest, such as protecting endangered species (biodiversity) or water quality, it has to contend with the sanctity of those property rights. For example, the Endangered Species Act of 1973 made it a crime to "take" an endangered or threatened plant or animal species. This conflicts with a "taking" under the Fifth Amendment of the US Constitution , which requires that the government pay "just compensation" when a property owner's rights are lost due to government action, like the construction of a road through private property. These disputes resulted in a significant impact on local populations and long drawn out court battles, such as the well publicized spotted owl debate in Oregon.
Source: McEvoy, 1998

COMMON-POOL PROPERTY REGIMES

Typically conventional state and private property systems do not directly take the systemic aspects of natural resources into account. They ignore the impacts that the single purpose use (or abuse) of a resource can have on others outside that area. Proper ecosystem management requires taking into consideration a larger area than a private agent or licensee could normally be expected to manage and a wider range of impacts on ecosystem beneficiaries. In some cases, state management can fulfill these functions, but not always. One type of property regime that provides a means to do so is common-pool property.

The analysis of common-pool property regimes by Elinor Ostrom and her colleagues has greatly enriched our understanding of the value of community approaches to natural resource management issues. Common-pool property is characterized by several attributes. First, it is larger than one single local owner can afford. Second, there are multiple beneficiaries of the property's output. Third, producing that output is a result of integral functions of the property as a whole. As a result, management of the property as a common unit produces greater output more efficiently than division into many discrete units managed independently, and there are inherent incentives for equitable allocation of the benefits.

Both global and local ecosystems have many characteristics of common pool property and would benefit from common property management techniques in order to assure sustainability. The challenge is finding ways to meld common pool approaches with conventional private property systems. At the simplest level, this involves encouraging communities to manage their own resources sustainably and to assure their livelihoods. Often, changes in management can occur voluntarily. For example, rice and sugarcane producers in Colombia organized to create 12 water user associations that voluntarily agreed to increase user fees to finance improvement of stream flow and reduction of sedimentation in their irrigation canals (Perrot-Maitre and Davis, 2001). In the Dominican Republic, when farmers linked deforestation in the Nizao catchment to the reduction of seasonal stream flows, they voluntarily adopted limits on tree cutting that were more stringent than government requirements (Tognetti, 2001). But more frequently, some external encouragement is required, as in the case of the forest management project in India cited at the beginning of this paper.

Common or community property land management systems have evolved throughout the world in a variety of circumstances. Within a community, use rights can be assigned in a variety of ways. For example, the use of particular plots of land may be assigned to families over long periods of time. The amount can be adjusted based on family size and need, and each family often has plots in different areas to offset risks of climatic variation during the year. These systems seek to address efficient production needs, as well as equity considerations and risk management. Success depends on strong community institutions, enforceable rights to their resources, and the capacity to limit access to members of the community. They perform well, if the broader national institutions permit and encourage such arrangements, such as the formation of community managed forests in Nepal (See Box 6). These systems are particularly adapted to managing resources such as community forests, irrigation systems, and other assets that have to be managed on a scale too large for individual ownership, but which require cooperation from the whole community to enjoy the benefits.

The scope for expanding these community property regimes in developing countries is quite large and requires the adaptation of legal systems in many countries. Government bureaucracies also have to accept delegation of authority to these communities - subsidiarity. In many cases, community building would also be required to create and expand the necessary social capital to exercise effective management of the common pool assets. Conditions for developing common pool resources within a community are shown in Box 5. Not only are such changes likely to lead to more sustainable management of the natural resources, but they will provide improved and more sustainable livelihoods for the communities involved.

BOX 5: ATTRIBUTES FOR COMMON-POOL RESOURCES:

Attributes for the Resource:

Feasible Improvement: The resources conditions are not at a point of deterioration such that it is useless to organize or so underutilized that little advantage results from organizing.
Indicators: Reliable and valid indicators of the conditions of the resource system are frequently available at reasonable cost.
Predictability: The flow of resource units is relatively predictable.
Spatial extent: The resource system is sufficiently small, given the transport and communication technology in use, that appropriators can develop accurate knowledge of the external boundaries and internal microenvironments.

Attributes of the Users:

Salience: Users are dependant on the resource for a major portion of their livelihood or other variable of importance to them.
Common Understanding: Users have a shared image of the resource (as defined above) and how their actions affect each other and the resource system.
Discount Rate: Users have a sufficiently low discount rate in relation to the future benefits to be achieved from the resource.
Distribution of Interests: Users with higher economic and political assets are similarly affected by a current pattern of use.
Trust: Users trust each other to keep promises and relate to one another with reciprocity.
Autonomy: Users are able to determine access and harvesting rules without external authorities countermanding them.
Prior Organizational Experience: users have learned to least minimal skills in organization through participation in other local associations or learning about the ways then neighboring groups have organized.

Source: Ostrom, 1999,

SOME EXAMPLES OF SUCCESFULL COMMON POOL PROGRAMS

Since 1978, Nepal has been creating community-managed forests by transferring limited property rights from government to community control (See Box 6). Nationwide, the legal rights to manage over 250,000 hectares of national forest have been transferred to user groups, creating economic incentives for locals to sustainably manage their resource base for both profit and their own needs. Similar programs have been successful in India (See Box 7) and Thailand.

Box 6: Nepal: Community Forest User Groups in the Makalu Barun Conservation Area

In 1978, the Government of Nepal embarked on a program to transfer limited property rights from previously nationally managed forestlands to community forest user groups. Within the Makalu Barun Conservation Area, the Mountain Institute aided the government to transfer 6,250 hectares of forestland from government control to 71 community user groups. Although the government still retains title to the land, the transfer of control gave locals a legal means to increase their revenue from natural resources. The cost of the transfer of limited property rights is borne by the national population in terms of lost sales revenues.

In order to receive management authority, user groups were required to show that the forest resources would be sustainably managed. Before the change in ownership, local people paid a high price to the central government to use the forests. In addition, villagers had high incentives to illegally extract forest resources both due to lack of personal consequence and the nonactive stewardship role of the government. Consequentially, significant resource degradation as well as negative social repercussions occurred. Now the groups have the authority to decide on user fees, to collect fees, and to impose penalties for community members who violate management practices. As of 1996, more than 2000 households had been given stewardship rights and have received the revenue generated from these resources. The majority of user groups have generated funds that are being invested back into the community. Source: The Mountain Institute, 1997.

Box 7: India Community Forest Project in Madhya Pradesh

In the province of Madhya Pradesh, India, local communities (with financial support from the and the World Bank) undertook a Joint Forest Management project that included a transfer of timber harvest rights from the state to joint community management. Nearly half a million families now participate and now receive 100 percent of the value of non-timber forest products (and revenues from sustainable harvest of the timber), estimated in total to be worth $125 million per year, or about $280 per household per year. Migration has declined, local investment has increased, and numerous environmental benefits have resulted. 5.5 million hectares of forests are being protected from grazing and unmanaged forest use. Villagers have reported an increase in the water table, as well as in wildlife populations and biodiversity. In this example, both the environment and local inhabitants have benefited
Source: Arnold, J.E.M. 1998,

V. MARKETS AND ENVIRONMENTAL SERVICES

Belief in markets has become conventional wisdom throughout much of the world today. Indeed, markets have contributed a great deal to increasing incomes, improving standards of living, and delivering more efficient production. However, there is no single model of a market-based economy. Different cultures and societies place different relative weights on values outside the markets and create regulatory structures to balance those values with the functioning of the market.

Well-functioning market systems are not self-creating and have not yet proven to be the 'natural' economic system that will arise in the absence of any regulation. In fact, well-functioning market economies require a great deal of institutional infrastructure and regulation to operate. A large part of this infrastructure and regulatory system is designed to offset market imperfections and assure that non-market values are respected. These structures determine many of the characteristics of any particular market and how it deals with other goals, such as the environment and poverty alleviation. Thus it important to understand the basic imperfections in markets in order to be able to design beneficial interventions to overcome them.

The Role of Public Goods and Public Bads: Market theory is based on the production and trade of discrete private goods. These goods have the characteristics of rivalry and exclusion. Rivalry means that the owner's use or consumption of a good reduces the amount available for anyone else to consume. Exclusion means that whoever owns the good can exclude others from its use. Pure public goods, on the other hand, are characterized by the opposite: non-excludability and non-rivalry. No one can be prevented from using a public good, and use by anyone does not reduce its availability for use by others. A lighthouse is a classic example of a pure public good - once in place, no-one can be prevented from benefiting from it, and anyone's benefiting from it does not prevent another from benefiting. Scenic views have similar characteristics.

In practice, there are few pure public goods, but there are many goods that have significant public goods elements. Education is an example of a partial public good. The individual obtains private benefit, for which (s)he may pay. But society at large also benefits from having educated individuals, and the provider of the education does not capture this benefit. The public benefits from basic education are greater, so it is more frequently provided by the public, while higher education has more individual benefit, and is more likely to be paid for by the individual.

Conversely, markets can also produce negative goods (things that cause harm) or 'bads,' In the case of private bads, the producer would pay the recipient for the harm produced (for example liability in a car crash). However, there are also many public or partial public negative goods. Pollution and congestion are well known examples. If a farmer applied a pesticide to his field that damaged his neighbors farm due to runoff, that would be a negative externality the first farmer would usually not have to pay for.

Private markets will produce a sub-optimal amount (under-produce) partial public goods because private producers cannot capture all the benefits that these goods deliver. By the same token, markets will tend to over-produce partial public bads, because their producers are not charged for the damage they inflict upon others. These positive or negative impacts of public goods that are not captured by (or charged to) the producer are often called 'externalities,' or costs and benefits that are external to the normal market transaction. Unless these externalities can be incorporated into the transaction, or 'internalized,' markets generate sub-optimal outcomes.

Environmental goods and services have many properties of public goods in that they typically have significant non-rivalry and non-excludability characteristics and produce significant externality benefits for a large number of people, both directly and indirectly. And conversely with 'bads.' As a consequence, markets by themselves will not devote adequate resources to stewardship of ecosystems that produce environmental goods (watershed protection, biodiversity, soil management) and will not constrain production of environmental bads (air and water pollution, erosion).

External intervention is often needed to rectify market-based misallocations. These interventions can range from command and control legislation, such as the Clean Air Act in the United States which mandates changes to increase air quality, to creative application of market instruments to align market incentives with environmental goals.

Here we are particularly interested in exploring market opportunities to pay the rural poor for the provision of environmental services and functions, or what is often called their role of 'environmental stewardship' to reflect the traditional concept of humans having stewardship responsibility for the world around us. Numerous examples exist in both rich and poor countries of arrangements that use beneficial aspects of market systems to remunerate the stewardship for environmental services, and we believe that there is an enormous potential to expand the use of these arrangements.

Two general steps must be taken to adapt environmental public goods (or bads) to market instruments. First, some external intervention is needed that will increase the rivalry or excludability of the environmental public good in question and grant some proprietary rights to stewards of that good so that they can market they environmental service and be compensated for it. Second, the profits generated by the creation of these markets need to be equitably distributed to the stewards that provide the good and to the community at large

For example, a 'virtual' market can be created for certain environmental services by placing a limit or cap on the production of that good, or bad; thereby creating a marketplace for trading in that capped good. In the case of mitigating air pollution, an acceptable level of emissions may be established for a given airshed, and permits are issued to participants to emit up to a certain level. These permits can then be traded to obtain the most cost-efficient reduction in emissions. This approach has been effective in reducing sulfur emissions in the US, and is being proposed for CO2 emissions. In effect, the process converts the public good value of clean air to a marketable good (emission permits), which are scarce and can attain a market value. The degree of scarcity (number of permits), is set by non-market forces based on health sciences and public opinion on how clean the air should be. Within such a framework, markets work.

Variation on this model has been applied in some developing countries. In Chiapas, Mexico, the Scolel-Te ("growing trees") Pilot Project for Community Forestry and Carbon Sequestration is financed by revenues from a greenhouse gas mitigation agreement with the International Automobile Federation, which is committed to offsetting the carbon emissions resulting from sponsored car races. Farmers receive 60-80 percent of the resource rent, and the remaining funds are used for administration costs. (Scherr et al, 2001)] In Bolivia, the largest forest-based carbon project in the world has created a potential net carbon benefit of 6-8 million metric tons of carbon over 30 years. Carbon offsets generated from this project are shared among the Government of Bolivia and the three energy company investors. The government offset proceeds are allocated to specified biodiversity priorities in Bolivia. (See Box 4).

Box 8: BOLIVIA: THE NOEL KEMPFF CLIMATE ACTION PROJECT

The Noel Kempff Mercado National Park, Bolivia, covers over 1.5 million hectares in one of the most biologically diverse areas in the world. Since 1997, almost half of this area is managed through the Noel Kempff Mercado Climate Action Project, the largest forest-based carbon project in the world. Project participants include the Government of Bolivia, Fundación Amigos de la Naturaleza (FAN), the Nature Conservancy, and three U.S.-based energy companies. The project has been given $9.6 million (U.S.) for the first 10 of 30 years, including a permanent endowment of $1.5 million.

Project activities have contributed to biodiversity protection through park expansion, and improved soil, water, and air quality through the cessation of logging on two million acres of land. The most recent mid-term estimates indicated a potential net carbon benefit of 6-8 million metric tons of carbon over 30 years. Carbon offsets generated from this project are shared among the Government of Bolivia and the three energy company investors. In the case of the government offsets, proceeds would be allocated to various specified biodiversity priorities in Bolivia.

Local participation is emphasized in this project. FAN has hired approximately half of the park guards from the local communities and established revolving funds for microenterprises such as heart-of-palm plantings, to help take pressure off of the forest lands. In addition, the project is assisting the local communities in their efforts to attain legal status as indigenous peoples and to secure land tenure.

Carbon benefits from the project are expected to last in perpetuity, considering both that the site lies within the National Park and a permanent endowment has been established to fund protection activities beyond the 30-year life of the Project. Project developers have shown that logging concessionaires would have continued harvesting timber on the property and much of the land in the project site would have been cleared without the guidelines of the project. Source: The Nature Conservancy, 2000

A more modest and better known approach is to charge uses of what was before a free environmental service, like access to a national park or other protected areas. For instance in the Annapurna Conservation area in Nepal, visitors pay an entrance fee of $12, which is channeled back to local people through the Kind Mahendra Trust for Nature Conservation, a local NGO. As of 1997, over $400,000 had been collected, enough to cover operation costs for the park as well as regional development programs. In Kigali, Rwanda, a user fee of $200 per day is charged by the National Park office for tourists who want to view the mountain gorilla in its natural habitat. Funds are used to cover park expenses and salaries for the staff. In these cases, excludability has been created by closing a park and limiting entry.

Of utmost importance when considering user or entrance fees to fund compensation for environmental stewardship is the assurance that the funds are channeled directly back to participating local communities. The local reinvestment of these funds has the potential to create strong incentives for increased local stewardship activities. In both the case of air pollution and national parks, public intervention sets a certain parameter (supply or price) and individual agents then responded in a quasi market situation.

Enhancing local community management rights to their own resources addresses many of the stewardship and poverty alleviation objectives, but by no means all issues of resource management. The challenges of sustainable resource management often extend beyond individual communities. Better environmental management then requires stewardship actions by those in an area where the benefits originate (let us say 'upstream'), while the beneficiaries are located in a different area (let us say 'downstream'). In these cases, the common pool resources span two or more communities, and they have to find ways to work together to increase their mutual benefits. The situation becomes more complicated when the benefits of improved stewardship are not shared by the community that does the stewardship, but by those downstream. In these cases, there are two relatively distinct communities that share a common pool resource and a transaction external to each community is required to achieve the enhanced common benefit. The beneficiaries have to compensate the providers.

The partnership between New York City and the Catskills farmers (See Box 9) is a good example of a downstream community compensating an upstream community. In France, Perrier-Vittel, the world's largest bottler of natural mineral water, has succeeded in reducing non-point pollution through payments to upstream farmers who agree to switch to less intensive dairy farming technology. Payments are based on the reduced profitability associated with the change in technology (Perrot-Maitre and Davis, 2001). In Quito, the capital city of Ecuador, funds raised through a small increase in water fees were allocated to the maintenance of protected areas within the watershed providing water for the city (Tognetti, 2001). These are examples of how pairs of communities have worked out a way for those downstream to pay for the public good of clean water by financing the protection of crucial upstream areas. In Costa Rica, two contrasting case studies illustrate the potential of these negotiations between upstream and downstream residents (See Box 10).

Box 9: New York City, USA: Watershed Agricultural Program

In the early 1990s, New York City and the Environmental Protection Agency (EPA) were concerned about the potential decrease in water quality due to runoff from barnyards and faulty sewage treatment systems upstream. New York was facing the possibility of having to build a $6 billion water filtration system. A recent partnership between New York city and the upstate farmers of the Catskill mountains, who inhabit the watershed feeding the city's reservoirs protects 1,900 square miles of watershed from further degradation while at the same time allowing for the growth of upstate communities. What started out as a potentially expensive and exhaustive battle has turned into a model project. In January 1997, the historic NYC Watershed Memorandum of Agreement (MOA) was signed, bringing together the rural and urban inhabitants of New York with the hope of benefiting the mountain inhabitants, city dwellers, and the environment.

New York city agreed to fund $35.2 million for farmers in the Catskills to purchase or build pollution abatement devices. Participating farmers must convince at least 85 percent of the 400 farmers in the watershed to join them. On average, a farm will receive $75,000 for improvements such as cement manure pipes, fencing to improve cattle feeding, and riverside tree planting. The Watershed Agricultural Council, consisting of 21 members, meets to disburse the city funds to participating farmers. The program is voluntary and completely run by the farmers themselves.

Numerous benefits are already materializing through this partnership. The primary social benefit is renewed trust between upstate farmers and city residents. Income for farmers is not only increased due to city funding, but their productivity is expected to improve in nine out of ten cases due to expected improvements made on their properties. Downstream water consumers benefit by avoiding the cost of a water filtration system, and the incentives for conservation have been created by direct payments to participating farmers. The price of water was increased slightly, but by far less than would have been the case if the treatment plant had been built. The incremental revenue was reinvested in protecting the watershed. This case study illustrates the benefits possible across the board when downstream users must pay for the maintenance of the watersheds as well as the cost of the water.
Source: The Mountain Institute. 1997.

While the source of all environmental goods and services are rooted in their locality, impacts and benefits can be

When the environmental services accrue mostly to the local community a common pool systems of resources management, as described in section IV , may be all that is needed. Locally used environmental good and services plus the revenues of sales outside the community would be distributed within the community by agreed mechanisms.

For cross community stewardship services, were the benefits are directly enjoyed by a distant group, as the cases described in Boxes 9 and 10, more complex arrangements need to be in place. There has to be a means of valuing the stewardship service provided and a method of reaching agreement between the providers and beneficiaries to transfer an acceptable compensation payment. These functions can occur between communities, between a single agent and a community, through an independent third party such as an NGO, or through government action. Because benefit payments are involved, it is normally possible to use market functions as a tool to achieve the goals of improving sustainability and compensating the stewards (usually the poor). However, since the environmental services in question typically have public goods attributes, the state or the larger community will usually have to establish the structural interventions that will allow market instruments to function, or that allow community-to-community arrangements to work (some specific issues of valuation of services and transfer mechanisms will be discussed in the next section).

The effectiveness of common-pool asset management offers valuable lessons in how to improve sustainability and increase compensation to the poor. They move beyond conventional market systems to embrace common goals and benefits, and they illustrate the possibility of using market tools to achieve more sustainable results. To work for stewardship arrangements of the kind discussed in this paper, common pool property schemes depend on recognition of demand for environmental benefits, on infrastructure that encourages common property based transactions, and on mechanisms that reinforce the trust necessary for such transactions to take place.

BOX 10: COSTA RICA: HYDROELECTRIC INVESTMENT IN UPSTREAM STEWARDSHIP PRACTICES

In Costa Rica, private landowners are compensated by the National Government and Energia Global, a private hydroelectric company, when forest cover is maintained or increased in watershed areas. To pay for these services, the Government of Costa Rica established a fund, consisting largely of a 5% tax on fossil fuel, through the National Forest Office and National Fund for Forest Financing (FONAFIFO). The help of a local NGO, FUNDECOR (Fundacion para el Desarrollo de la Cordillera Volcanica Central), was enlisted to provide volunteer administrative expenses.

Due to low water storage capacity, Energia Global hopes both to increase the regularity of stream flow and to reduce reservoir sedimentation by paying for landowner services. The company believes that increased forest cover will help to achieve both of these objectives. Payments of $48 per hectare are made directly to individual landowners through the local NGO. Payments are not based on the value of the hydroelectrical services, but on the approximate equivalent of the opportunity cost of foregone land development, which is primarily cattle ranching.

On the national level, the Ministry of Environment is attempting to expand this project to the national electricity and water utility companies. In this case study, FONAFIFO had already been established, and FUNDECOR was also already set up as an NGO and willing to contribute its services voluntarily. Expanding this concept to the national utility companies will require much more complex changes in institutional and regulatory arrangements.

One important point to keep in mind with the FONAFIFO case is that the hydroelectric company was concerned about sedimentation and stream regularity, not simply water yield, due to limited water storage capacity. However in another case in Costa Rica, Arenal, even the combination of government payments for reforestation and the elimination of ranching subsidies did not provide enough incentive to reforest steep slopes. In addition to generating greater upstream landholder returns, the increased water yield resulting from the deforestation outweighed the downstream costs of sedimentation, because the yield was of direct benefit to a hydroelectric facility. Despite the many similarities between the two projects in Costa Rica, cattle ranching was found to produce a higher net present value than reforestation for landowners in Arenal, as the downstream hydroelectric company valued water yield over decreased sedimentation
Source: Chomitz, Kenneth M., Brenes, and L. Constantino. 1998

VI. Markets and Equity

We must recognize that markets by themselves do not address equity issues yet equity considerations must brought to bear on markets. For the purposes of this paper, we will concentrate on two issues relating to equity. The first involves taking steps to assure that the poor are not deprived of their rightful access to natural resources so that they can assure their own sustainable livelihoods (a property rights issue). The second involves encouraging and developing ways to compensate the poor who can act as stewards of environmental resources for downstream beneficiaries (a public good issue).

Addressing these equity issues provides a powerful additional reason to promote compensation for environmental stewardship. As previously discussed, population pressures and economic development have forced many poor onto marginal areas where they may not be able to achieve sustainable livelihoods. In some cases, their attempts to do so many lead to further degradation. In other cases, they are in a position to help provide more sustainable environmental management if given the right incentives. As noted above, unaided markets are not able to properly value and compensate for these services and additional interventions are needed.

Establishing markets that support stewardship requires that the providers have certain rights and responsibilities in the ecosystems where they do their stewardship. Perhaps more important, people living in areas of important natural resources must benefit from the resources, even if they do not have the means to exploit the resources. A number of countries collect taxes or royalties on the extraction of resources and part of those funds may be earmarked to go back to the area affected. Since these are often poor and rural areas, however, such transfers rarely take place, which increase inequity. This must be rectified so that the rural poor receive a fair share of the revenues from exploitation of their resources.

There is an important international equity issue to be addressed as well. Many of the most pressing challenges to improve stewardship for both local and international environmental services occur in poor countries. However strong the desire in these countries to improve environmental services, they often lack the resources to generate adequate compensation. This is particularly true when the environmental degradation is due to extraction and export of a natural resource. In those cases, world prices, determined by the wealthy countries determine the benefits from exploitation. The lost benefits or damage occurs in the poor exporting country where the people may not be able to raise the funds to compensate potential stewards for improved local services. This inequity in incomes needs to be addressed through international compensation where the potential damages are significant. Moreover, the benefits from environmental sustainability on a global level are greater to those with higher incomes and more to lose.

The critical point here is to recognize that markets and private property systems are completely agnostic on equity issues. Those concerns stem from more fundamental human and cultural values, and those values need to be imposed on economic systems to achieve the desired results. The stewardship approaches proposed here are one potentially powerful instrument that can be used to enhance both environmental and income aspects of equity. The next section will examine in more detail the tools that can be applied effectively in this quest.

VII. CONCLUSIONS: TOOLS TO LINK POVERTY REDUCTION AND SUSTAINABILITY

Promoting stewardship programs requires actions on several fronts that can be pursued by NGOs and aid organizations as well as civil society and committed governments. The actions outlined below should proceed in parallel by the best means possible, which will vary by country and circumstances.

Expanding recognition of the importance and value of environmental services to individual and community well-being despite their non-market characteristics.
Involving local people in resource management wherever possible and paying them sufficiently for their services.
Reforming property rights to recognize and encourage community property systems where appropriate.
Providing institutional mechanisms for structuring and enforcing stewardship agreements and encouraging their enactment.
Strengthening procedures to assure that local people receive adequate compensation for the exploitation of resources in their areas by others.
Improving methods for valuing environmental services so that stewardship and environmental mitigation agreements for compensation can be reached on market based principles where possible.
Establishing appropriate funds to pay for stewardship services, especially for global environment services and cases where the benefits are too diffuse for market based mechanisms.

Let us now examine what needs to be done in each of these areas.

Expanding recognition of environmental services: Programs need to be expanded to educate the public about the importance of environmental stewardship and the possibility of using market, quasi-market, and non-market means to satisfy these demands. The voluntary programs enacted by communities in the Dominican Republic and Colombia, once it was locally understood that their clean water was in danger, illustrate the importance and possibility of using education programs to give local communities the facts. It is important that people understand the role of the environment in providing the basic resources that support life and improved living standards, the current threats to its capacity to meet expanding needs sustainably, and the ways in which more sustainable practices can be implemented effectively. Part of this goal can be achieved through expanded education programs to build public awareness. Even in developing countries, polls show growing concern about environmental issues.

General public education campaigns are an important part of increasing awareness. These programs should be directed at the general public, at governments, and at the business communities. The content needs to be adapted for each audience, but should focus on how they can work individually and together to achieve greater sustainability. Examples of successful programs should be made widely available and praised. People and enterprises should be encouraged to follow such examples. Such general programs should be augmented with more direct work with communities and businesses who might be directly involved in stewardship agreements and other means of improving sustainability.

Education programs along the lines described above are already provided by environmental groups and other organizations, but more is needed. Publicity programs should emphasize the links between poverty and the environment and the potential for positive compensation programs modeled on the examples provided above based on new techniques. If done correctly, these programs have the potential not only to empower local communities by sharing success stories, but also to eventually affect both markets and governments as public opinion changes.

Involving local people in resource management and paying for their services: Local people are often very knowledgeable about managing their local environments, and they are adaptable to innovations that can increase their ability to manage the land. The knowledge, skills, dedication, and creativity of local people are perhaps the most important resources we have to improve sustainability. This resource can be tapped in a variety of ways, depending on the circumstances and flexibility of national systems. Options range from park management to production of specialized products, and there are many interesting examples across the range.

Creating national parks is an important aspect of conserving environmental resources. Rather than trying to exclude traditional dwellers from these areas, they should be used to manage and protect these lands. Indeed, the more that they can be involved in managing conservation areas, the greater their interest in protecting the resources. Projects in Nepal (Makalu-Barun) and Peru (Huascaran) are good examples. Even more striking, in Rwanda, the local population, who worked as rangers in the Varunga Park (home of the mountain apes) protected the apes and the park during years of civil strife, because they had a vested interest in the long term preservation of the park and the tourist income it generated. By investing more effort in getting local people involved, governments working with NGOs can greatly improve conservation and increase incomes of the indigenous people in these areas. What is critical is that the programs be designed to generate income from fees etc. and that the local people be directly compensated from that income, plus supplements if needed due to broader public good aspects of the conservation.

Even without the creation of parks, significant reductions in rural poverty and environmental improvements can be achieved by granting local communities rights to their local resources and establishing community management programs such as those undertaken in Nepal, India, or Thailand. Enhanced common property schemes (discussed below) offer many benefits.

In addition to within community common property management, environmental resources can be managed across communities through agreements between upstream stewards and downstream beneficiaries to enhance environmental services. Some of these develop on their own (Vichy water) between private sector agents. Some arise with some public involvement, such as in Costa Rica, to help organize individuals and groups reach mutually beneficial agreements, sometimes with some income supplements. Some arise through the intervention of international NGOs and agencies, as was the case with the Nature Conservancy in the climate project in Bolivia. Where successful, these arrangements combine aspects of common-pool property management, valuing and marketing public goods, and supportive institutional arrangements as discussed above. As the benefits of such arrangements come to be more widely known, there will be fertile ground for further innovation. NGOs and aid agencies can play an important role in designing and encouraging such activities by spreading information, helping create them, providing supplemental funding, and monitoring results. And governments can provide more facilitating institutional structures for their operation.

As the market demand for environmental services, both directly and indirectly (e.g. through organically produced goods) grows, private sector firms become more interested. Where goods, particularly those from developing countries that can be certified as produced in environmentally sound way, are valued (consumers are willing to pay a premium), market can generate demand for the stewardship services. Timber from forests certified as sustainably managed is beginning to penetrate markets in Europe and North America under programs fostered by the Sustainable Forestry Initiative or the Forest Stewardship Council.

In a growing number of cases, products are being marketed under 'fair trade' programs that encourage production and marketing of environmentally sustainable products that generate positive returns for low-income producers. Starbucks has made an agreement with sustainable coffee producers in the Chiapas region of Mexico under an arrangement promoted by Conservation International. The Body Shop initiated procurement from sustainable local producers in a number of developing countries beginning in the early 1990s. As public awareness of these programs increases and as more producers and intermediaries are attracted to sustainable production, these programs will have a greater impact on promoting sustainability and improving the incomes of the rural poor. Many of them also have the advantage of marketing tangible goods rather than environmental services. There is also a very large on-going effort to develop carbon trading markets in developing countries with support from many NGOs and international agencies. That is covered adequately elsewhere and will not be addressed in any detail here.

While all of these approaches use market instruments in one form or another, a great deal of public effort from governments and NGOs has been needed to get them going, and often to maintain them. This reflects both the public goods aspects of many of these services and the efforts normally required to innovate new business models. The successes suggest that more efforts should be pursued in these areas. As demonstrated above, partnerships of international and local NGOs have been very effective in initiating many of these arrangements. Building on these experiences, more work in this area will be rewarding.

There is a growing interest in sustainable business models, which will increase the receptivity of the business sector to move into many of these activities. A number of leading business schools are developing and expanding concentrations on environmentally sustainable business, such as Corporate Environmental Management Program at the University of Michigan and the Center for Sustainable Enterprise at the University of North Carolina. NGOs should strengthen partnerships with these programs to promote more activities in developing countries. These kinds of activities are among the most promising avenues for NGOs and aid agencies to work with governments and the business community to promote better environmental stewardship.

Reforming property rights to recognize community property systems: It is essential to establish a property rights basis for potential stewards to exercise adequate control over the natural resources they can manage. In most cases, this will require specific legislation to recognize some form of community property and clarify the rights of communities to exercise control over the critical environmental aspects of their resources. In countries where there is extensive private ownership of natural resources and rural land, it may be sufficient to encourage cooperative use of the land, as is the case in the New York City watershed. However, if the ownership is largely outside the community, then it will be important for legislation to recognize certain rights of indigenous people to control use of their local natural resources to avoid the worst impacts of degradation and pollution, or to be adequately compensated when degradation cannot be avoided.

Admitting the role of communities in managing their local resources is fundamentally a recognition of the public goods aspects of local environmental resources and of the rights of local residents to be protected from degradation and deprivation of sources of livelihood. The transfer of limited property rights from the government to communities in both Nepal (See Box 7) and India are good examples of establishing local management and of the ensuing benefits.

Revising property legislation can be a lengthy task, and it requires support from both local and international groups in developing countries. Aid agencies can promote these changes as parts of their overall efforts to assist governance reforms. Local groups can help implement improvements within expanded interpretations of existing legislation as well as helping design new regulations. International NGOs can offer expertise and broader experience as needed. Once the capacity for community management is enlarged, it will be important to provide increasing official and civil society support for community ownership programs and help develop means for local people to earn sufficient incomes from use of local assets, including by marketing sustainable yields from local products. In all activities, potential and actual stewards should participate as full partners, with concrete incentives to act as stewards, instead of being treated as marginal and impotent, as is so often the case today.

Providing institutional mechanisms for stewardship agreements: Providing fair compensation for environmental stewardship along the lines discussed above requires solid institutional arrangements, particularly when they span more than one community. In many cases, such agreements might arise out of conflicts over the use of a resource or allocation of benefits. Often, some of the parties involved may not be educated and may be distrustful of authorities. They may also have been the object of discrimination. Thus, community building is essential to form a common position for negotiations on one or both sides. Communication and trust must be established between participants, and agreements need to be monitored and enforced. NGOs and civil societies can play an important role in building communities and establishing the basis for trust. This role can be enhanced if these groups have some additional funds to put into the deal, or have access to other compensation funds. If done well, such community and trust building is likely to spread beyond the particular agreement in question and help achieve broader development goals. For example, in the case of the New York City watershed agreement, city residents and Catskills farmers had to overcome years of distrust before they were able to work together. Their willingness to overcome this obstacle resulted in a partnership that is being watched by policymakers internationally.

Both national and international NGOs should be involved in providing support for stewardship agreements, as each brings different attributes and skills. The coordination between local, national, and international groups would depend on the country and circumstances involved. National groups would have more local knowledge and better rapport with local communities, while international groups usually would have access to more resources and contacts. In addition, usually international groups are less susceptible to pressures from national interest groups and better able to bring international attention and support for desirable programs. It is essential, however, that national and international groups play a supporting role and allow the local stewards to be involved in and, to the degree possible, active creators of the evolution of stewardship agreements.

Within this context, it is vitally important for national government to be sure that the national regulatory and legal regimes permit and encourage these kinds of arrangements in terms of permitting appropriate stewardship contracts, providing necessary enforcement of the terms, and monitoring results. In addition, governments can play an important role in encouraging such arrangements to achieve national environmental and poverty alleviation goals with less direct public involvement. To the extent that such agreements use payments between private groups, even if supplemented by the government, such as the fund set up to finance landowner payments in Costa Rica, it will reduce the cost to the state achieving the same level of poverty alleviation and environmental improvement. Improving stewardship and increasing community development will also have a number of side benefits.

In addition to helping directly with community building and promoting individual stewardship agreements, NGOs and civil society should work to promote the complementary reforms in governments and the application of environmental polices. Obviously, receptivity of governments will vary, but generating positive demand for and helping create stewardship programs that are generally beneficial should be acceptable in many countries.

Assuring that local people are compensated for the exploitation of local resources: A common cause of rural impoverishment is the effective expropriation of access to local resources by governments in order to exploit and license the exploitation of natural resources. This may be done in the name of development and national interests, and the extraction of the resources may be justified, but impoverishing local people who have depended on resources from that area for their livelihoods is not justified. Indeed, if the revenues from the exploitation of the resources cannot cover the compensation of local people with traditional rights and still generate a profit, then the overall exploitation is not actually economically viable and amounts to a forced transfer of assets from the local people to the exploiter, such as in the cases of the Grasberg mine or West Virginia.

Most international aid agencies already have regulations that require appropriate environmental impact assessments and compensation of displaced and otherwise affected people for projects they support. This is commendable, but covers only a small share of projects that exploit natural resources. Many developers avoid seeking support of agencies because of these requirements. Interesting, most Official Export Credit Agencies do not have such requirements and have been involved in financing a number of projects with severe negative impacts on the environment and local people. While a number of governments also have such regulations, they are much less effectively enforced. This poses a severe problem for both poverty alleviation and the environment.

A high priority for aid agencies as well as international and national NGOs should be ensure appropriate legislation is in place to prevent such exploitation from occurring. The next priority is to be sure that such legislation is enforced. Since, in many cases, the exploiter is a multinational corporation, pressure should also be put on the corporation's home government and financial agents to assure proper respect for the local environment and society. There are cases where this has happened, and such actions should be pursued more broadly. In the case of the Antamina Mining Company, a copper and zinc mine operating in Peru, the construction of a transport road through a national park and World Heritage Site was averted due to pressure from both national and international sources. The new road design not only avoided environmentally sensitive areas, but proved to be more economically viable to the company in the long run. In such cases, simply bringing public attention to the problem can have an impact, both directly and indirectly. Public attention can encourage action on the part not only of the public in the affected country, but also occasionally among consumers of the product abroad, such as was the case the international community discovered the linkage between the ivory trade and rapidly depleting number of elephants.

There is controversy over extending environmental impact assessment requirements for mitigation and compensation of affected persons to all investment in developing countries. Many argue that the requirements of the World Bank and other aid agencies are 'gold plated' standards derived from developed country rules. They are not readily transferable to developing countries, nor can most of those countries afford to apply them to all projects. While protecting the rights of local people, compensating them, and stemming environmental degradation are equally important in all countries, it is true that developing countries lack the resources to do as extensive a job as developed countries. To address this problem aid agencies and NGOs should work with interested governments to design locally adapted environmental impact procedures that the government can and will apply to all projects in the country, perhaps providing some additional funding to get the program started. These programs should meet minimum standards and be 'owned' by the country. Once in place, they can be strengthened and improved over time. This is possible and has been achieved in Eritrea, one of the world's poorest countries.

Improving the valuation of environmental services: Once the demand for improving environmental services is enhanced, some mutually agreeable value has to be placed on the stewardship service in question. Since many of these goods and services do not trade in a normal market, regular supply and demand forces are not available to establish a price. A variety of other mechanisms have been developed, such as establishing the costs of remediation without the environmental service (building a water treatment plant in the case of the NYC water supply), costs of supplying the stewardship (the Bolivia sequestration case), imputed value from surveys, and other forms of estimation.

In cases where limits and caps on emissions can be established and enforced, it is possible to create virtual markets, which will determine prices by market forces, as is being done with sulfur trading in the US and being proposed for carbon trading both nationally and internationally. This method requires clear caps and adequate monitoring. It also poses a difficult question of how to distribute the initial permits. If they are given to the current polluters (grandfathered), this represents a windfall to those who have created the problem, but politically it is usually the easiest route. More equitable is to auction the permits and use the revenues to support other public activities, including remediation of past harm from the emissions and compensation for those adversely affected. This allocation question will be critically important for carbon trading as the amounts involved will reach into the billions of dollars.

In the end, the pricing and/or marketing mechanisms have to be negotiated by the supplier and user groups, often with the intermediation of the government, environmental agencies, or NGOs. In some cases, full costs are borne by the direct beneficiaries. In some cases where the benefits are much broader, intermediary groups, either governments or NGOs, intervene and provide some payments in the name of the public good, The valuation depends on a number of factors, including the income of the beneficiaries and relative political and economic power. Where beneficiaries are poor, their direct ability to pay is limited, and additions by the government or other source may be necessary. This is not a case of welfare, but of providing necessary public services, such as clean water or air. Where the stewards are poor, the payments need to be adjusted to assure adequate livelihoods, to provide real incentives to perform the stewardship services, and to discourage cheating.

Governments should provide a basis for evaluation of environmental goods through better data collection and dissemination. There is also an important role for local and international NGOs to conduct appropriate studies and analyses to try to determine values of alternate uses of natural resources and ecosystems. This is informative of relative priorities and helps establish the basis of subsequent negotiations. The Indonesia forest case (See Box 3) provides useful information about alternative uses that may be helpful in other areas. Where possible, communities who may be involved in stewardship agreements should be included in these studies to increase their ownership of the results. As noted above, it may not always be possible to set specific values on environmental services, but relevant ranges can be established to serve as a basis of negotiations.

Valuation work at both global and local levels has begun, but it needs to progress much faster and farther. Where such values are calculated, they need to be more broadly publicized and incorporated into economic decision making. Even if a compensation plan cannot be worked out, the costs and values of environmental services can influence decisions and inform the public about the relevant impacts. Important work along these lines has already been done. For example, the World Bank has developed an indicator of genuine savings, which measures the net level of savings of a country taking into account use of natural resources and development of human capital. For nearly all countries, this level is savings is substantially below conventional measures of savings, indicating their development paths are less sustainable than otherwise indicated. The World Bank has also calculated the annual loss due to environmental pollution and degradation for several countries. It runs about 4-6% of GDP, another indication that real development is proceeding less rapidly than thought. These measures should be more widely disseminated and used in decision making, by governments, civil society, and aid agencies. At both local and national levels, more efforts are needed to value environmental services and make the results widely known.

Establishing appropriate funds for stewardship services: The public good nature of environmental services means that markets will not always generate the optimum level of these services. Sometimes quasi markets can be established to achieve desirable levels of production, but not always. When the benefits are too diffuse or difficult to quantify, it may not be possible to effect a full market transaction. In these cases, additional funds will be needed to supplement those funds that can be raised from quasi market arrangements, as in the case in Costa Rica where government funds supplemented those based on market transactions. The more general the benefit, the more likely that a common fund will be needed to remunerate providers of stewardship. Such funds can be raised from taxes in the public domain, or from private contributions. For example, in the United States, Defenders of Wildlife makes payments to ranchers who have lost livestock to wolves from a fund raised by private contributions to protect wolves.

In the public domain, national funds have been raised in many circumstances to fund environmental improvements. Many are from general tax revenues. Some are from special purpose taxes or user fees, such as in Kigali, Rwanda, where visitors pay to see mountain gorillas in their natural habitat. What is critical is that the funds so raised be appropriately allocated to remediation or maintenance of the environmental services in question. In too many cases, such funds are not really used to improve environmental sustainability or to compensate adequately those who could provide stewardship. For example, park fees should be allocated to paying the rangers and others who manage the park, perhaps augmented by other revenues. In developing countries, more attention needs to be directed toward creating and managing such funds by governments and NGOs.

International funds along these lines are also to be recommended - both because of the global nature of many of the environmental public goods and because of the impact of large income disparities on the relative demand for natural resources. The Global Environmental Fund (GEF) is an important step in this direction. It is directed at compensating countries for the additional expense of addressing global environmental issues in a defined set of projects. It is not aimed at reducing poverty at the same time, though to their credit, staff of the World Bank, UNDP, and UNEP strive to address poverty issues in their project in the poorer countries. Given the growing concern in developed countries and among their aid organizations over both the environment and poverty, serious consideration should be given to creating an environmental compensation fund or funds specifically to assist projects aimed at providing compensation to the poor who can work on environmental stewardship. The existence of such funds and their active promotion would encourage more efforts to work out stewardship arrangements linking environmental sustainability and poverty alleviation. Needless to say, every effort should be made to keep the bureaucracy in such funds to a minimum and to rely as much as possible on local community organizations.

Living in the modern world, it is easy to forget that all our well-being and creature comforts depend on the extraction, transformation, and delivery of natural resources. So the challenge we are facing is not to stop using environmental resources. We couldn't survive without them. Nor is the challenge to fix arbitrary limits on their use , which would prevent others from attaining acceptable standards of living. The challenge is to manage our environmental assets and resources so that they can contribute to improved standards of living for the poor in ways that promote sustainable use of environmental resources and preservation of environmental amenities. The vast variety of services available in modern economies and the pleasures of relatively unspoiled natural attractions are highly desirable; indeed, they are the aspiration of the three billion people living in poverty. The proposals outlined above constitute a critical step is realizing those aspirations.

Stopping the Giveaway of Canada's Forests

Economic Growth — Sun, 01 Oct 2000 00:00:00 -0400

Canadian provincial governments have a long-standing policy of subsidizing their lumber mills, to the detriment of the U.S. lumber industry, U.S. landowners and the environment. Recently, a coalition of Canadian lumber companies, some lumber consumers, and others have aimed to change the longstanding U.S. policy of combating those subsidies. Under the veil of protecting consumers, this group aims to terminate the current U.S.- Canada agreement, which contains the damage from Canada’s forestry regime, and ensure that no action is taken to offset the subsidies. With the U.S.-Canada Softwood Lumber Agreement (SLA) due to expire in March of 2001, a spirited debate on Canadian lumber subsidies and the measures taken to counter them is likely in the coming months.

Although it has garnered limited attention in the United States, this dispute is nearly two decades old. In 1986, to counter subsidies, the United States imposed a 15 percent duty on Canadian softwood lumber imports. Subsequently, the U.S. and Canadian governments reached a series of agreements designed to offset these subsidies. The most recent of these is the 1996 SLA.

At the heart of this dispute are different means of charging for the use of forest resources. In the United States, timberlands are held by private landowners and state and federal governments. The right to cut timber from public and private land is sold at auction or through other competitive means. Though there are some restrictions on log exports from public lands in the Pacific Northwest, the United States is the world’s leading exporter of logs and unprocessed timber.

In Canada, the vast bulk of timberlands are owned by Canadian provincial and federal governments. The prices for the right to cut timber from this land -- known as stumpage fees -- are set administratively. These Canadian stumpage rates are set very low - only one-third to one-fourth of the market value of the rights -- in order to subsidize the Canadian lumber industry. To further boost production, Canadian companies are obligated by their government licenses to cut trees even when prices are low.

For the complete document, please see the attached PDF version.

Economic Development, Accelerated Tariff Liberalization & The Environment

Economic Growth — Mon, 01 Nov 1999 04:00:00 -0500

Despite claims to the contrary, evidence points to the fact that economic development is ultimately beneficial to the environment. The issues were first officially linked in the public's mind with the publication of Our Common Future (the Brundtland Report) in 1987, which provided much of the intellectual framework for the United Nations Conference on Environment and Development's 1992 "Earth Summit" in Rio De Janeiro.

In the five years since the publication of the Brundtland Report, economists have consistently found that:

At the national level, rising incomes lead to improved access to basic sanitation, easing environmental pressures;
Evidence indicates that as per-capita real GDP increases, there is a decline in the emission of certain harmful pollutants, a relationship known as the Environmental Kuznets Curve;
Countries with higher GDP levels tend to have more sophisticated environmental policies and invest more in pollution abatement equipment.

As a force of economic development, international trade can contribute to these environmental benefits. The fear that less-developed countries will systematically lower their environmental policies to attract polluting industries from countries with more stringent environmental policies has not been borne out by the evidence.

For the complete document, please see the attached PDF version below.

Taiwan in the WTO

Economic Growth — Mon, 01 Nov 1999 00:00:00 -0500

The 1990s have been a time of change and achievement for Taiwan (a.k.a. the Republic of China). Politically, Taiwan has undergone a dramatic transition from an authoritarian government to a true democracy. On the economic front, Taiwan has continued to grow and prosper. With a 258 billion dollar economy, Taiwan has established itself as the world’s twelfth largest trading power. Taiwan has a multi-billion dollar annual trading relationship with the United States, Japan, Germany, Korea, France and a number of other countries. Taiwan is a producer of advanced manufactured products from semiconductors to computers to steel.

Taiwan has also tried to establish its own "international space" in its complex relationship with mainland China. The decades long dispute over the status of Taiwan in relation to the People’s Republic of China (PRC) has impaired international recognition and participation in international organizations for Taiwan. Without taking provocative steps, however, Taiwan has tried to establish an increased presence in international organizations, such as the Asia Pacific Economic Council (APEC) and the World Health Organization (WHO). Through most of the decade, one of Taiwan’s most important objectives in this regard has been to secure membership in the world trading system, now represented by the World Trade Organization (WTO).

In many ways, WTO membership is a logical step for Taiwan. First, membership in the WTO does not necessarily require recognition of the party joining as an independent state. For example, Hong Kong joined the world trading system in 1986, though it was at the time under the control of Great Britain on territory leased from China.1 Second, given its trading success, Taiwan is already recognized as a responsible trading partner by most countries and extended most of the benefits of WTO membership. After some negotiations, there is now wide consensus that Taiwan is qualified for WTO membership.

As is the case with so many international issues involving Taiwan, the PRC complicates matters. For more than thirteen years,2 the PRC has itself been trying to join the WTO, but there have been numerous problems. Ongoing disputes with many important WTO members and a trading regime that did not meet WTO standards, has kept the PRC outside the WTO. There has been significant progress in recent talks between the United States and the PRC which may lay the groundwork for PRC WTO membership in the not too distant future. Still, PRC accession remains less than certain. Unfortunately, the PRC has attempted to link its WTO membership to that of Taiwan. There is no precedent for such a linkage under the WTO and most major countries have, at least publicly, repudiated the linkage. Still the PRC insists that it should be allowed to join the WTO before Taiwan. Even though it is not a member of the WTO, the PRC may be able to convince some of its close allies in the WTO to act on its behalf to slow Taiwan’s membership.

Despite these hurdles, Taiwan has succeeded in having a WTO working party formed to consider its application and completing bilateral negotiations with all members of the working group. Shortly, the working group could close its work and send the package for Taiwan’s membership to the larger WTO General Council for a final vote on membership.3 To provide some perspective on these upcoming events, this monograph seeks to trace the history of the issue, examine the results of the WTO accession negotiations with Taiwan, and estimate the likely economic impact of Taiwan’s membership on the economies of Taiwan’s trading partners.

For the complete document, please see the attached PDF version.