63883 Ensuring Environmental Sustainability Measuring Progress Toward the 7th Millennium Development Goal THE WORLD BANK Washington, D.C. © 2005 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone 202-473-1000 Internet www.worldbank.org E-mail feedback@worldbank.org All rights reserved. The �ndings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is copyrighted. 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A FREE PUBLICATION Contents Foreword v Ensuring Environmental Sustainability: Measuring Progress Toward the 7th Millennium Development Goal 1 The Evidence: Wealth, Growth, and the Role of Natural Resources 3 Natural Resources and Development 7 Genuine Saving—A New Tool 11 The Role of Fiscal Policy 14 Conclusions 16 Recommendations 17 References 18 iii Foreword T he seventh Millennium Development Goal (MDG)—ensure environmental sustainability—calls on countries to “reverse the losses of environmental resources� by 2015. Making this goal operational has proven to be a challenge for most countries, not least because of a lack of indicators of sustainable development. Every day, decision makers at all levels are faced with choices regarding the use of natural resources and the environmental impacts of development projects and policies. Without sound indicators to guide these choices, it is dif�cult for countries to determine if they are in fact on a sustainable path. Our goal below is to suggest practical solutions for measuring sustainability. The World Bank is publishing a companion volume titled Where is the Wealth of Nations?, which provides estimates of total wealth including produced, natural, and human and institutional capital. Natural capital is a signi�cant share of total wealth in low income countries, greater than the share of produced capital. Yet, on a per-capita basis, many poor countries have experienced declines in both total and natural capital. This is bad news not only from an environmental point of view, but also from a broader development perspective. Measuring the change in total wealth and the change in natural wealth will contribute to providing a comprehensive measure of whether a development path is sustainable. This should go hand in hand with a concerted effort to inventory and value the environmental services that underpin economic activity and human wellbeing. Five years after the Millennium Declaration, the development community and developing countries are one-third of the way to the MDG target date of 2015. There is a shared sense of urgency about meeting the MDGs. However, it would be tragic if the achievements of 2015 are not sustainable because soils have been mined and �sheries and forests depleted. Avoiding this outcome is the true seventh Millennium Development Goal. Ian Johnson Vice President, Sustainable Development The World Bank v Ensuring Environmental Sustainability Measuring Progress Toward the 7th Millennium Development Goal F rom forests, �sheries, and coral reefs, to agricultural land and mineral deposits, human societies depend for their survival upon healthy ecosystems and the sustainable use of these natural resources. This principle underpins the eight Millennium Development Goals (MDGs) that the international community is committed to achieving by 2015 (Box 1). Box 1. The Millennium Development Goals Without a sustainable environmental policy, Goal 1 Eradicate extreme poverty and hunger efforts to reduce poverty, hunger, and child mortality Goal 2 Achieve universal primary education cannot be enduring. Goal 3 Promote gender equality and empower women Achieving environmental Goal 4 Reduce child mortality sustainability presents major challenges. The Goal 5 Improve maternal health Millennium Ecosystem Goal 6 Combat HIV/AIDS, malaria, and other diseases Assessment, 2005, and the Task Force on Goal 7 Ensure environmental sustainability Environmental Sustainability (UN Goal 8 Develop a global partnership for development Millennium Project, 2005) showed recently that the problems of environmental degradation and biodiversity loss require urgent action. However, there is an underlying issue. Until now, there have been no adequate means of measuring environmental sustainability. MDG-7 is committed to reducing by half the numbers of people without access to safe drinking water; improving the lives of at least 100,000 slum dwellers; and reversing the loss of environmental resources. While the �rst two 1 Ensuring Environmental Sustainability objectives contain clear numerical values, the last—reversing the loss of environmental resources—is left to broad interpretation. This inability to set targets or measure progress undermines not only the attempts to improve environmental sustainability but also efforts to meet all other MDGs. This report addresses this shortcoming and suggests two new tools for policy makers to measure environmental sustainability and two new targets to meet. It also calls for more research into better ways of valuing environmental services such as pollination, maintenance of soil nutrients, and water puri�cation. It draws upon a companion World Bank publication, Where Is the Wealth of Nations? (World Bank 2006). This provides a snapshot of all the assets—including natural, produced, human, and institutional capital—underpinning development in 120 countries. It reaches three main conclusions relevant to MDG-7: • Natural resources constitute an extremely important share of the wealth of poor countries. • Total wealth per capita is falling in many of the poorest countries as resources are depleted and their populations grow. • The value of natural resources rises as incomes increase, suggesting development does not always mean environmental depletion. Using these results, this report suggests two new indicators and targets: • Genuine saving per capita (or the overall change in the real per capita wealth of a country) with the target of achieving positive savings by 2015. • The value of natural wealth per capita, with the target of achieving stable or increasing levels of this value by 2015. Adopting these indicators and targets should provide governments with the information and the direction to adopt the right policies—making the most effective investment in natural resource management, changing incentives to prevent overexploitation of the environment, and recognizing more clearly that natural resources can fund sustainable development, provided they are well managed. 2 Measuring Progress Toward the 7 th Millennium Development Goal The Evidence Wealth, Growth, and the Role of Natural Resources I n Where Is the Wealth of Nations? the World Bank publishes what could be termed the millennium capital assessment. It estimates the monetary value of the range of assets—produced, natural, and intangible forms of capital—upon which development depends. While important gaps remain, this comprehensive snapshot of wealth for 120 countries at the turn of the millennium aims to deepen our understanding of the linkages among development outcomes and the level and composition of wealth. It measures on a country-by-country basis: • Total wealth—estimated as future consumption over a generation (or 25 years), measured at present values. • Produced capital—obtained from historical investment data. • Natural capital—based on country-level data on physical stocks and estimates of pro�ts or rents, based on world prices and local costs. • Intangible capital—estimated as the difference between total wealth and the other forms of capital, it includes a wide array of assets such as human capital, quality of institutions, and governance (see box 2). This approach has limitations. The data about some forms of natural wealth such as �sh stocks and water resources are unavailable, as are �gures for some kinds of environmental services. However, the approach still offers new and valuable insights into the relationship between natural capital and development. Examining the value of natural resources has a number of important results. • First, the report shows that the value of natural capital per person rises as income levels increase (�gure 1). This contradicts the received wisdom that economic development automatically leads to depletion of the environment. 3 Ensuring Environmental Sustainability Box 2. Intangible Wealth The bulk of wealth in all countries, from the richest to the poorest, is intangible wealth. Where Is the Wealth of Nations? shows that three factors account for 89 percent of intangible wealth: • the rule of law • education • returns on exported human capital measured through remittances Increasing the average stock of schooling by one year per person increases total wealth per capita by nearly $840 in low-income countries, almost $2000 in middle-income countries, and over $16,000 in high-income countries. A one- point increase in the rule of law index (on a 100-point scale) boosts total wealth by over $100 in low-income countries, over $400 in middle-income countries, and nearly $3000 in high-income countries. Figure 1. Value of Natural Resources Per Person, 2000 10,000 9,000 8,000 7,000 4,775 $ per capita 6,000 5,000 931 4,000 3,000 2,119 2,000 3,825 157 288 1,000 325 1,443 1,089 0 Low-income Middle-income High-income countries countries OECD countries Sub-soil Timber Land Source: World Bank 2006. 4 Measuring Progress Toward the 7 th Millennium Development Goal Table 1. Value of Natural Capital, 2000 ($ per capita) Natural capital Subsoil Timber Group (total) assets resources NTFR PA Cropland Pastureland Low- 1,925 325 109 48 111 1,143 189 income 100% 17% 6% 2% 6% 59% 10% countries Middle- 3,496 1,089 169 120 129 1,583 407 income 100% 31% 5% 3% 4% 45% 12% countries High-income 9,531 3,825 747 183 1,215 2,008 1,552 OECD countries 100% 40% 8% 2% 13% 21% 16% Note: NTFR: Nontimber forest resources. PA: Protected areas. Oil states excluded. Dollar values at market exchange rates. Source: World Bank 2006. A breakdown of the different types of natural capital—including cropland and pastureland, timber resources, and protected areas— shows the critical importance of soil for low-income countries (table 1). With cropland and pastureland accounting for almost 70 percent of natural wealth in these countries, it is clear that maintaining soil quality is crucial to achieving sustainable growth. Soil quality also has a great impact on progress made toward other MDGs such as poverty, hunger, and child mortality. • The importance of natural resources is also shown by analysis of the share of wealth by income group (�gure 2). In all countries, intangible capital is, by far, the largest share. However, for the poorest countries, natural capital is more important than produced capital—again demonstrating how important natural resources are to those countries. This suggests that properly managing natural resources must be a key part of development strategies, particularly since the poorest households in those countries are usually the most dependent on these resources. This analysis also shows how the share of natural resources in total wealth declines as incomes rise. This does not mean that these resources become less important or that they can be exploited indiscriminately. Rather, this demonstrates how intangible assets become more important as countries develop, with the productivity of their people increasing along with the quality of their institutions. 5 Ensuring Environmental Sustainability Figure 2. Shares of Wealth by Income Group, 2000 100 90 80 70 59 68 60 80 Percent 50 40 30 25 13 20 3 10 16 19 17 0 Low-income Middle-income High-income countries countries OECD countries Intangible capital Natural capital Produced capital Source: World Bank 2006. Both these �ndings underline the importance of environmental sustainability to growth. Economic growth is essential to the ability of low-income countries to meet the MDG targets, but growth will be illusory if it is mainly based on consuming assets such as forests, �sheries, and soil nutrients that underpin economies. 6 Measuring Progress Toward the 7 th Millennium Development Goal Natural Resources and Development N atural resources are special economic goods because they are not produced. They are truly a gift of nature. Natural resources play three roles in development. • The �rst, most applicable in the poorest countries, is their role in providing the basis of subsistence. • The second is as a source of development �nance. Commercial natural resources can be important sources of pro�t and foreign exchange. Rents can be used to �nance investments in other forms of wealth. • The third is as a source of environmental services underpinning economies and human well-being. Exhaustible resources, such as minerals and energy, once discovered, can only be depleted. Consuming rents from these resources is literally consuming capital. The prudent policy to adopt, therefore, is investing these rents into other forms of capital. There are no sustainable diamond mines, but there are sustainable diamond-mining countries where capital in one form—diamonds—is transformed into another form such as buildings, machines, or human capital. Living resources, such as forests or �sh stocks, are different and unique because they are potentially sustainable. They can yield sustainable pro�ts or rents, which can be an important source of �nance for development, provided the resources are properly managed. The efforts to address over�shing in Mauritania constitute an example of successful management to the ultimate bene�t of the country’s economy (see box 3). The Practical Application of Sustainable Management Sustainable management of living resources may be the optimal policy goal, but how is this achieved in practice? The need to maintain a balance 7 Ensuring Environmental Sustainability Box 3. Mauritania—Total Fish Catch Mauritanian �shing grew remarkably in the early 1980s and was expected to be a major source of growth in the next two decades, generating jobs, foreign exchange earnings, and budget revenues. However, heavy over�shing and other problems led to a crisis, with sharply lower catches, threatening to undermine the country’s growth prospects. Conservation measures were a central part of an International Monetary Fund-supported adjustment strategy adopted in the 1990s. A series of reforms were introduced, including increased transparency and ef�ciency in allocating �shing rights, stronger surveillance of illegal �shing by both national and foreign operators, a new licensing system for foreign fleets, and �nes for violators. The Mauritanian government also brought in ambitious tax reforms to improve competitiveness, eliminate trade distortions, and make taxation more transparent. This included eliminating export taxes for �sh and improving the management of resources by introducing access rights for deep-sea �shing, licensing for pelagic �shing, and territorial rights for artisanal �shing. These measures proved successful. By 2002, the �shing catch had increased again, contributing to an improvement in the overall economic performance of the Mauritanian economy. Fiscal and balance of payments targets were met, thanks also to high �nancial compensation under a new �shing agreement with the European Union, other tax reform, ongoing �nancial discipline, and an exchange rate policy encouraging external competitiveness. Mauritania—Total Fish Catch 100,000 90,000 80,000 70,000 Metric ton 60,000 50,000 40,000 30,000 20,000 10,000 0 0 2 4 6 8 0 2 4 6 8 0 8 8 8 8 8 9 9 9 9 9 0 19 19 19 19 19 19 19 19 19 19 20 Years Source: World Bank 2005. 8 Measuring Progress Toward the 7 th Millennium Development Goal between forestry and agriculture is a good example, since this remains a central concern in many developing countries, often driven by the increasing food needs of expanding populations. In economic terms, the optimal balance occurs when the value of net agricultural income per hectare is the same as the total economic value (TEV) of the forest. However, the TEV is a broad concept, which must include a wide range of economic activities such as the rents from sustainable timber production, the value of carbon sequestration, and the value of other services that forests provide, such as regulation of water services and biodiversity conservation. Sustainable management of natural capital requires clear and enforced property rights (individual or communal) to provide incentives for investment and long-term management of these resources. It also requires prices that reflect social costs and bene�ts of different management alternatives. Since markets will capture these only imperfectly, there can be grounds for public sector intervention by way of green taxes or by creating a system to pay for environmental services. Valuing environmental services is crucially important (see box 4). The Millennium Ecosystem Assessment divides these services into provisioning services (such as food and �ber, obtained from agro-ecosystems), regulating services (such as the regulation of water flows by forests), cultural services, and supporting services (such as the support of nutrient cycling provided by micro organisms). For many of these services, providers and bene�ciaries are distinct and rarely interact with each other. The consequence is that the services are underprovided and their value is not captured by market prices. For example, upland forest owners have no incentive to preserve watershed services that bene�t downstream water users; therefore, upland forests are overexploited and their worth unmeasured. Many such environmental services are recognized in the analysis in Where Is the Wealth of Nations?, but not explicitly. For example, the value of cropland only implicitly accounts for the value of ecosystems in providing pollination services. Box 4. Valuing Ecosystem Services The Millennium Ecosystem Assessment has shown the myriad ways in which the world’s ecosystems contribute to human well-being. This can be directly, by providing food or recreational activities, or indirectly, by purifying water. The �gure shows the results of one attempt to comprehensively value the services provided by forests in Mediterranean countries. 9 Ensuring Environmental Sustainability Annual Flow of Bene�ts from Forests in Mediterranean Countries 350 300 Mean forest TEV (US$/ha) 250 200 150 100 50 0 50 ia tia co ria isia bl b ey ly al pu ra er Ita oc ug rk oa ic n Re n A lg or Tu Tu rt Cr A M Po Sy Passive use values Carbon sequestration Watershed protection Recreation and hunting NTFPs Grazing Timber and fuelwood Source: Croitoru and Merlo 2005. Typically, national economic accounts are both incomplete and misleading. They usually take into account only the timber bene�ts and some nontimber bene�ts. They also misattribute these bene�ts—water regulation bene�ts appear not as forest bene�ts but as high pro�ts in downstream water-using sectors. Certain bene�ts may appear exaggeratedly high—logging rates that are far in excess of natural growth—while others do not appear at all. These failures mean the real value of ecosystems is often seriously underappreciated, with the result that they are often converted to other, often less bene�cial, uses that threaten both current and future well-being. The last few decades have seen many attempts to better value natural ecosystems. These approaches include measuring the willingness of consumers to pay the cost of substitutes for ecosystems or assessing the impacts of ecosystem change on productivity. Despite this progress, data limitations are a formidable obstacle to valuing ecosystems on a wide scale. The vast majority of studies have focused on valuing small parts of speci�c ecosystems such as water �ltration services in Kampala, Uganda. 10 Measuring Progress Toward the 7 th Millennium Development Goal Genuine Saving—A New Tool T o develop policies for sustainable development, we must measure not just the total value of capital, but changes in this value. Such a broad measure of saving, which includes the depletion of natural resources, will indicate whether an economy is on a sustainable path. Traditional gross saving is simply the amount of gross national income that is not consumed. Genuine saving looks much wider—including the depletion of minerals, energy, and forests, damage from global and local air pollutants, investments in human capital, and depreciation of produced capital. Figure 3 shows how genuine saving is calculated for Bolivia—a country that is failing to save suf�ciently for the future. Figure 3. Calculation of Genuine Saving for Bolivia, 2003 15 Depreciation of fixed capital 10 Education expenditure % GNI 5 Depletion of natural resources 0 Pollution damages 5 Gross Net Net Genuine Genuine saving saving saving plus saving saving education excluding expenditure pollution damages Source: World Bank 2005. 11 Ensuring Environmental Sustainability Regional Trends The regional trends in genuine saving over time shown in �gure 4 tell a powerful story. The strong growth in saving in East Asia, particularly China, is particularly impressive, although a more complete measure taking account of pollution damages and soil degradation would show a more muted performance. The dependence of the Middle East and North Africa Figure 4. Genuine Saving Rates by Region 30 20 10 0 % GNI 10 20 East Asia & Pacific 30 Middle East & North Africa Sub-Saharan Africa 40 1970 1980 1990 2000 Year 30 20 10 0 % GNI 10 20 30 Latin America & Caribbean South Asia Europe & Central Asia 40 1970 1980 1990 2000 Year Source: World Bank 2005. 12 Measuring Progress Toward the 7 th Millennium Development Goal on oil extraction is shown by their generally negative performances. Sub- Saharan Africa is shown to have a genuine saving rate of about zero when resource depletion is considered. South Asia has maintained a gradually rising level of genuine saving compared to the fluctuating saving rate of Latin America and the decline in saving in Eastern Europe and Central Asia. Population growth is an important factor in wealth accumulation, particularly in those developing countries in South Asia and Sub-Saharan Africa where the highest population growth is expected. Unless the growth in total wealth exceeds the population growth rate, total wealth per capita will not increase. As �gure 5 shows, most wealthy countries have positive rates of wealth accumulation per capita. However, people in most poor countries with incomes of less than $1000 per capita have experienced declines in their average wealth. The measure of genuine saving is most useful for developing countries that are heavily dependent upon their natural resources. Where Is the Wealth of Nations? suggests investments in produced capital, along with saving efforts to offset the depletion of natural resources, can increase well-being in low-income countries. Reducing pollution damage can increase saving rates in middle-income countries. The step from saving to investment is crucial—if investments are not ef�cient, then money is wasted, resulting in neither increased capital nor consumption. Figure 5. Genuine Saving Per Capita vs. Income Per Capita, 2000 0.4 0.2 Change in wealth per GNI 0 0.2 0.4 0.6 0.8 10 100 1,000 10,000 100,000 GNI per capita, $ Source: World Bank 2006. 13 Ensuring Environmental Sustainability The Role of Fiscal Policy F or countries with abundant natural resources, using the genuine saving measure highlights large �scal issues for governments concerning revenues, expenditure, and boom-and-bust cycles. Dealing with these issues is not likely to turn �nance ministers into environmentalists, but a sharper focus on the �scal aspects of natural resources can have a substantial impact on economic performance. Box 5 shows how Botswana has successfully managed high natural-resource dependence. Revenue issues. In principle, governments should tax natural resources to the point where the private sector is willing to risk its capital in their exploitation. If the natural resources of a country attract foreign tourists, substantial revenues could also be raised from taxes on entry and accommodation. However, if sectoral policies encourage overexploitation, revenues might not be sustainable. Expenditures. Revenues from exhaustible resources should be ef�ciently reinvested in other assets to maintain national wealth. A broad view should be taken. For example, while spending on protected areas may not seem to make sense at �rst to treasuries, these protected areas may be attractive to tourists, so that investing in them could signi�cantly boost tourism and its related revenues. Fiscal boom-and-bust. Governments can be tempted to increase their expenditures when world prices for natural resources are high. However, when prices fall, it can be hard to rein in spending, leading to �scal imbalances. Fiscal space. Governments want the space or flexibility to spend on desirable projects without jeopardizing �nancial stability. Unfortunately, tax revenues from exhaustible resources do not fully increase �scal space because a portion of these taxes represents the consumption of natural capital. The news that �scal space is not as large as conventionally 14 Measuring Progress Toward the 7 th Millennium Development Goal measured may not be welcomed by some treasuries, but it will be heeded by prudent governments. State-owned enterprises (SOEs): Common in the natural resources sector, these present risks of their own. They are often inef�cient and accumulate �nancial liabilities. If the enterprises are off-budget, their liabilities are not factored into the government’s �scal stance. If they are on-budget, they often do not have the retained earnings to �nance capital spending and risk under-capitalization. Box 5. Botswana—Managing Resources Successfully Since its �rst diamond mine was discovered in 1967, Botswana experienced strong and sustained growth and avoided the problems experienced by other resource-rich countries in Africa and Latin America. The recipe for this success has been a set of policy rules grounded in avoiding �scal de�cits. The government uses a Sustainable Budget Index (SBI) in order to ensure sustainability. This measures the ratio between consumption expenditures and nonresource revenues. As long as the SBI is less than one, the government can be sure that natural-resource capital is not being consumed. Botswana has had its problems. Public investment has often gone into low-growth sectors such as defense and agriculture, while it has crowded out private investment, slowing economic diversi�cation. However, the overall �scal strategy has worked. The government has avoided excessive spending in the good times and drastic spending cuts when diamond prices have fallen, as in the early 1980s and 1991. 15 Ensuring Environmental Sustainability Conclusions P roper management of natural resources is critical to sustainable development and meeting all of the MDGs. Important messages have been brought out here: • Land resources are key to sustainable development in the poorest countries. • The importance of intangible capital emphasizes the need to invest in human capital and the rule of law. • Revenues from exhaustible resources must be reinvested ef�ciently into other forms of capital. • Sound property rights are an important basis for sustainable development. At a more general level, the main �ndings are as follows: • Natural resources play a central role in low-income countries, implying an important link between resource management and sustainable growth in these countries. • There is a decline in wealth per capita in most poor countries. This means it is vital to consider genuine savings per capita when measuring sustainable growth. • Even where poor and middle-income countries have increased wealth per capita, it is unclear that their natural resources are being used as wisely as possible. We cannot be certain that all natural assets can be replaced by produced assets or human capital. To measure progress towards MDG-7, it is therefore prudent to monitor the changes in natural wealth per capita. 16 Measuring Progress Toward the 7 th Millennium Development Goal Recommendations: Measuring Progress Toward MDG-7 T his report, therefore, recommends that two new indicators and targets should be used to track progress on MDG-7: • Genuine savings per capita, with a target of a positive saving rate by 2015. • Value of natural wealth per capita, with a target of this being stable or increasing by 2015. If used, these could provide governments with the tools to better achieve MDG-7 and the other MDGs. For countries that are highly dependent on exhaustible resources, such as Botswana, it is probably not practical to maintain the total value of natural capital per person at constant or increasing levels. However, these countries should still consider the wider bene�ts, particularly the environmental services, that result from investing in other forms of natural capital. This report makes a further recommendation. Work remains to be done in areas such as setting common valuation standards and gathering data to enable international tracking of the value of environmental services. An additional stretch goal for MDG-7 would be increasing research to set up inventories of environmental services, measuring indicators linked to services such as soil nutrient balances, and working toward better valuation of the services. 17 Ensuring Environmental Sustainability References Croitoru, L., and M. Merlo. 2005. “Mediterranean Forest Values.� In M. Merlo and L. Croitoru (eds.) Valuing Mediterranean Forests: Toward Total Economic Value. Wallingford: CABI Publishing. Millennium Ecosystem Assessment. 2005. Ecosystems and Human Well-being: Synthesis. Washington, DC: Island Press. UN Millennium Project. 2005. Environment and Human Wellbeing: A Practical Strategy. Summary version of the report of the Task Force on Environmental Sustainability. New York: The Earth Institute at Columbia University. World Bank. 2005. World Development Indicators 2005. Washington DC: The World Bank. World Bank. 2006. Where Is the Wealth of Nations? Washington DC: World Bank. 18