Green Markets: The Economics of Sustainable Development.

I. Introduction

Theodore Panayotou's book, Green Markets: The Economics of Sustainable Development,(1) addresses one of the most important topics in international trade and international environmental law today: how to produce successful economic development without concomitant destruction of the environment. The phrase coined for this goal is "sustainable development." While sustainable development as a political and legal concept has been debated for several years, the fundamental economic implications of the concept have largely been neglected. Panayotou's book provides an accessible economic analysis of sustainable development that is essential to the formation of appropriate environmental and trade policies.

To understand the significance of the sustainable development concept and the importance of Panayotou's discussion, the concept must be viewed in the context of the development of both international trade and international environmental law. The international trade negotiations of the late 1940's failed to achieve the goal of establishing an International Trade Organization (ITO) to regulate the actions of nations in order to maximize the benefits of world trade.(2) Anticipating the creation of the ITO, the participants entered into an interim agreement referred to as the General Agreement on Tariffs and Trade (GATT).(3) However, when the effort to establish the ITO collapsed, primarily due to the cyclical manifestation of the United States, isolationist tendencies, the signatories to GATT reevaluated the interim agreement and agreed to continue its existence.(4) Since then barriers to international trade have been steadily, albeit often slowly, lowered or eliminated. Most recently, the Uruguay Round of GATT negotiations successfully concluded with substantial reductions in global tariff levels.(5)

International efforts to address the global environment at the 1992 United Nations Conference on Environment and Development (the Rio Conference) can be seen as the beginning of a journey along a similar path.(6) Essentially, the Rio Conference initiated an effort to address global environmental conditions similar to the 1940's effort to address international trade. Thus, the Rio Conference became significant not only because it produced a binding treaty regarding the global environment, but also because it signalled a major step transitional step on the path toward international environmental cooperation. Most importantly, the Rio Conferencees dedicated themselves to the concept of sustainable development as stated in the conference's Declaration of Principles.(7)

Originating in the 1987 report of the United Nations sponsored World Commission on Environment and Development(8) and refined over the past six years,(9) sustainable development acknowledges the need for conservation and protection of the environment as well as the legitimate need of developing nations to provide a better standard of living for their people. The difficulty in giving effect to the principle of sustainable development is that the principle contains an inherent conflict: economic development inevitably changes the environment just as absolute preservation of the environment unavoidably stifles economic development. Panayotou's book examines how this problematic concept need not be considered paradoxical but can be sensibly implemented.

II. Discussion

Panayotou begins his consideration of the topic with several important observations. He first notes that, while human economic and technological developments have provided the means for addressing environmental problems, there are more examples of technological failures than successes. In this he finds three implications: (1) common causes of environmental degradation exist that transcend location, culture, and development; (2) economic growth alone neither causes nor cures environmental degradation; and (3) failure to understand what are insidious environmental problems results either in neglect or in interventions that treat the symptoms rather than the underlying causes."(10)

Panayotou's thesis is that economic growth and environmental protection are not contrary goals and that simultaneous efforts to achieve both can be actually complementary. Panayotou begins his exploration of this idea by pointing out several persistent erroneous assumptions about the interaction between economic growth and environmental safeguards. Panayotou notes that while most governments and environmental groups focus on physical manifestations of environmental degradation, "the physical manifestations of environmental degradation are lagging and misleading indicators of unsustainable development . . . [instead,] economic manifestations of environmental degradation are the most useful indicators for those who wish to pursue sustainable development."(11) The results of this error are well-intentioned but misguided, as are reflexive reactions by environmental groups that call for treatment of the symptoms of governmental mismanagement, such as deforestation, rather than focusing on the root causes of resource misuse. This in turn prevents the formulation of effective policies for remedying the problem of resource mismanagement.(12)

Panayotou's thesis applies to the concept of sustainable development. Unfortunately, Panayotou does not define "sustainable development." This is an important omission because the term has definite legal implications for international trade and international environmental law. The Declaration of Principles of the Rio Conference defined "sustainable development" as "developmental [which] must be fulfilled so as to equitably meet developmental and environmental needs of present and future generations."(13) Further, the numerous references to sustainable development" in the twenty-seven Principles of the Rio Declaration unquestionably establishes that "sustainable development" means that economic growth and preservation of the environment must be concomitant.

Despite the existence of an internationally recognized definition of sustainable development, Panayotou neither refers to an existing definition nor does he provide one of his own. By failing to define the term that is the focus of his analysis, Panayotou forces readers to provide their own definition formed from either implications in Panayotou's book or the readers, own knowledge. Given the importance of the concept to both international law and to the central thesis of Panayotou's book, the failure to define this term transforms the book from an analysis of the economics of sustainable development to an analysis of the economics of resource management.

Nevertheless, the value of Panayotou's book is that it provides information essential to understanding that proper environmental management can be an aid rather than an anchor to economic advancement in developing countries. Thus, Panayotou's analysis supports the conclusion that nations can adhere to sustainable development as a legal principle despite the principle's apparent self-contradiction.

In lucid passages that avoid recondite economic jargon, Panayotou describes how environmental problems result from bad economics and misguided government policies that distort the markets for economic resources. As Panayotou notes

[Environmental problems are caused by] the disassociation of scarcity and price, benefits and costs, rights and responsibilities, actions and consequences . . . . [The result of these market failures is an inducement for] people to maximize their profits not by being efficient and innovative but by appropriating other people's resources and shifting their costs onto others.(14)

According to Panayotou, correcting government policies that permit or encourage these circumstances will ameliorate or eliminate environmental problems.

As a prelude to full discussion of his thesis, Panayotou describes how some environmental degradation is an unavoidable result of human activity.(15) Panayotou's observation exposes a recurring weakness in arguments for environmental preservation: maintaining any ecological state is impossible. Even without humans, ecological systems would continue to rise and fall, new species would arise and existing species would become extinct. Thus, the policy decision is not a choice between development and preservation, but is instead a choice of which direction development should take.

Unfortunately, in his description of the population mechanics of renewable resources, Panayotou himself falls victim to the same mistake of viewing environmental systems as relatively steady states. Panayotou accepts maximum sustainable yield (MSY) as the appropriate standard for determining the proper harvest level of a renewable resource.(16) The current generally recognized harvest standard is that of optimum sustainable yield.(17) One of the reasons MSY no longer enjoys wide acceptance as a management principle is that it only considers the physical output of a system without considering the costs to the harvesters, society, and the environment.(18) MSY also inherently assumes that stock size is relatively constant and predictable from year to year. Although this is possible for land-based resources that are susceptible to quantitative measurement, similar exact measurement of ocean resources has proven elusive.

Panayotou's second error regarding harvest of renewable resources is related to this shortcoming in MSY. Panayotou states that unharvested fisheries and forests reach a natural equilibrium point where net growth is zero.(19) While this may be true in a very general sense over a long period of time, these systems are actually in constant flux, and changes in the environment (even if all human influences could be factored out) result in the constant ebb and flow of the stock in question. In reality, net growth is never zero because any period of time selected for measuring change in stock population is arbitrary.(20) Over time all species populations rise and fall, and thus net growth measured over the entire existence of a species is zero. However, other than for an arbitrarily selected duration, net growth for a species is certainly not zero during the existence of that species. Fortunately, this oversight is not a crucial element of Panayotou's thesis. Nonetheless, failure to recognize the fluctuating patterns of renewable resource populations creates the potential for flawed management schemes which are the focus of the book.

It is in Panayotou's discussion of economic manifestations of environmental degradation that the book is most interesting. However, the book is occasionally more tantalizing than satisfying in this regard. While Panayotou provides an insightful list of types of governmentally mismanaged resources, the examples he uses to illustrate these failings are frustratingly brief. For instance, Panayotou describes the common governmental policy of permitting a scarce resource to be put to an inferior, low-return use when high-return, sustainable use is possible.(21) As an illustration of this questionable policy, he cites Morocco's use of scarce water to irrigate sugar cane fields that demand considerable amounts of water despite the availability of higher-return crops that use far less water.(22) What Panayotou leaves unexplained is the reason for this policy. While it is beyond contravention that governments do engage in policies that are economically questionable, governments usually have valid political motivations for those policies. Without consideration of these political reasons, Panayotou's thesis that economic waste contributes to environmental degradation does not seem to advance the debate over how to reconcile economic growth with environmental preservation.(23)

Not surprisingly, Panayotou advocates allowing market forces to operate without government constriction. On the other hand, Panayotou admits that government involvement is necessary for securing the basic rights (e.g., property rights) essential to a well-functioning market.(24) The more difficult question, which Panayotou does not address, is how one determines where government involvement should stop. Panayotou states that "[t]he government need only provide the initial institutional policy reform necessary to allow the markets to function efficiently."(25) Rather than providing details on how this can be accomplished, Panayotou relaxes and simply says governments can permit markets to function freely by eliminating subsidies, prohibiting monopolies, adjusting tax rates, modifying interest and exchange rates, and adjusting prices.(26) Not only does this return the discussion to its beginning point of determining what and how much government involvement is appropriate, but the difficulty of accomplishing such things in a democratic society is ignored.(27)

Still, Panayotou does clearly explain how well-functioning markets normally allocate resources very efficiently while markets distorted by governmental policies result in environmental degradation.(28) Referring to numerous salient examples, Panayotou contends that environmental mismanagement can often be traced to malfunctioning markets that lack the fundamental conditions necessary for proper operation.(29) For example, Panayotou observes that well-defined, exclusive, secure, enforceable, and transferable property rights are a precondition for efficient management of resources.(30) Once these rights are established, the resource owner will practice responsible management because maintaining a sustainable resource will be in the owner's best economic interest. While this observation seems intuitively correct and will certainly work in many situations, it is severely limited. A resource owner will only act responsibly to maintain the sustainable resource if the effects of mismanagement are likely to manifest themselves within the owner's lifetime.

The economist's response to this objection is to establish a system that would force the effects of mismanagement to be felt within the owners lifetime or ensure that the negative externalities are internalized. Obviously, this would not necessarily result in less government involvement, but only different government involvement. Whether that would result in better government involvement is open to debate, but Panayotou's observation at least points toward the proper goals for legislation.

An even harder problem to solve than that posed by consumption of a resource within an owner's life span is that posed by the difficulties in managing flowing resources that are not susceptible to private ownership such as highly migratory species, or air and water. Panayotou points out that eliminating the presence of unpriced resources should address this concern.(31) For example, Panayotou explains that the user cost of open forest land is zero regardless of the scarcity of the resource.(32) This zero price results in rapid depletion of the resource, and the cost to the private sector of unabated rapacious consumption is zero while the cost to society increases.(33) Panayotou contends that the solution to this problem is first to identify and measure the external social costs and current user costs, then to charge those costs to the consumers through appropriate pricing or taxation.(34) Unfortunately, Panayotou provides no guidance on how to accomplish either the extremely difficult first step in this solution or the politically impossible second step.

Indeed, the frustrating aspect of Panayotou's book is that it does not adequately address implementation of solutions to the problems he illuminates so well. As Panayotou recognizes in his discussion of policy failures and environmental degradation, governmental policies are all too often developed for reasons other than reducing environmental degradation and are often left in place long after they are useful.(35) Yet the book's most promising chapter, "Sustainable Development Through Policy Reform,"(36) is actually the most disappointing part of the book. This topic holds the most promise because the title of the chapter suggests that it contains practical advice for such reform. The discussion, though, is disappointing because while Panayotou advocates general policy directions he ignores the political feasibility of the suggested reforms. For example, Panayotou declares that "[p]olicy reform is simply the restructuring of government intervention from areas of policy failure to areas of policy success."(37) True enough, but one is left hungering for an explanation of how to accomplish a task that is simply stated but not easily accomplished. Panayotou does provide a list of appropriate policy reforms, but the entries on the list are more of an introduction to the subject than truly useful advice for reform. He states, for example, that reform should eliminate "policy distortions that favor environmentally unsound practices" and "correct . . . market failures."(38) Again, while the truth of these statements cannot be disputed, without a follow-up of specific advice such general observations take on the tone of platitudes. Indeed, the last entry on the list of reforms is inscrutable: "[policy reform] should build analytical capability and institutional capacity for analyzing, formulating, and implementing policies and projects that have environmental dimensions."(39) That sounds like good advice, but its meaning is hardly apparent.

Curiously, Panayotou's analysis of policy reform makes only a passing reference to one of the most important intersections of government policy and sustainable development: international trade. While Panayotou refers to trade policies as "critical" to natural resources use and management,(40) he never discusses this connection and leaves the topic after less than a page. This is unfortunate when one considers that the GATT,(41) the United Nations Committee on Trade and Development,(42) the Organization for Economic Cooperation and Development,(43) the World Bank,(44) the International Monetary Fund,(45) the U.S. Office of Technology Assessment,(46) and the U.S. General Accounting Office(47) have all recently concluded studies of the relationship between international trade and the environment.(48) This degree of attention to the subject by these major international organizations and government agencies indicates that any extended discussion of sustainable development must address its connection to international trade policies. While a detailed analysis in this area is clearly outside the scope of Panayotou's study, the importance of the relationship between trade policies and sustainable development merits greater discussion than the momentary treatment he gives it.

Despite the failings of Panayotou's chapter on policy reform, the succeeding chapter, "Role of Development Assistance,"(49) is much stronger. Though this is the book's shortest chapter, it provides useful guides for effective foreign assistance to areas with environmental problems but limited economic resources. Panayotou recognizes that much of the advice in this chapter is general. However, although general guidelines were not helpful when discussing national governmental policies, they are appropriate when addressing institutions that are worldwide in scope and application. Panayotou's sound advice begins with suggesting the creation of pilot policy projects as testing grounds for policy options, followed by policy workshops which harness local and global analytical resources to evaluate possible solutions.(50) In laying out these and other guidelines, Panayotou stresses that "[f]oreign assistance is most effective when it aims to create indigenous demand for and capacity to implement policy change," rather than imposing policy prescriptions through preconditions.(51)

III. Conclusion

Panayotou's study is a valuable examination of the frequently neglected issue of the economic element of environmentally sound development. Humans exist as part of the world ecosystem, and, as does all life on earth, humans cause changes in that ecosystem. This is perhaps the most fundamental of the facts of life. The important distinguishing feature between humans and animals is that humans can choose the type of ecosystem in which we wish to live. That option impresses upon us all the responsibility to choose wisely, not only for ourselves but for those who will follow us. Thus, the importance of Panayotou's book is that it provides us with an understanding of the phenomenon of the interaction between economics and the environment as well as an illuminating introduction to the use of economics for shaping a desirable world environment. (*) Visiting Assistant Professor, Northwestern School of Law of Lewis and Clark College. J.D. 1985, Paul M. Herbert Law Center, Louisiana State University. (1.) Theodore Panayotou, Green Markets: The Economics of Sustainable Development (1993). (2.) See Konrad Von Moltke, The Last Round: The General Agreement on Tariffs and Trade in Light of the Earth Summit, 23 Envtl. L. 519, 521 (1993). (3.) Id. (4.) Id. (5.) Joel Havemann, Domino-effect Pact Will Affect Almost Every American, L.A. Times, Dec. 16, 1993 at 16. (6.) See Daniel C. Esty, Beyond Rio: Trade and the Environment, 23 Envtl. L. 387 (1993). (7.) United Nations Conference on Environment and Development (UNCED), U.N. Doc. A/Conf. 151/5 (June 13, 1992) [hereinafter Rio Declaration]. (8.) World Commission on Environment and Development, Our Common Future (1988). (9.) Oscar Arias, Forward to Panayotou, supra note 1, at xi. (10.) Panayotou, supra note 1, at 1-2. (11.) Id. at 2. (12.) Id. at 5. (13.) Rio Declaration, supra note 7 (emphasis added). (14.) Panayotou, supra note 1, at 26. (15.) Id. at 1-8. (16.) Id. at 5. (17.) Rosenburg et al., Achieving Sustainable Use of Renewable Resources, Science, Nov. 5, 1983, at 828. (18.) See, e.g., H. Gary Knight, Managing the Sea's Living Resources 34-36 (1977); Sanford E, Gaines, Taking Responsibility for Transboundary Environmental Effects, 14 Hasting Int'l & Comp. L. Rev. 781 (1991). (19.) Panayotou, supra note 1, at 5. (20.) Knight, supra note 18, at 7-9. (21.) Panayotou, supra note 1, at 5. (22.) Id. at 9. (23.) Panayotou does point out that a significant contributor to the problem is that governments are more responsive to short-term interests than long-term interests. Id. at 5. However, this observation does not stand out as particularly revelatory, nor does it seem that anything other than longer life-spans of voters (and politicians) will have much of an effect on this part of the problem. (24.) Id. at 27. (25.) Id. at 30. (26.) Id. (27.) Admittedly, detailed discussion of such issues is beyond the scope of Panayotou's book. However, acknowledgement of the potential intractability of these problems would have been better than the somewhat uncomplicated solution provided. (28.) Panayotou, supra note 1, at 33. (29.) Id. at 33-35. (30.) Id. at 35-37. (31.) Id. at 37-38. (32.) Id. at 38. (33.) Id. (34.) Id. at 39. (35.) Id. at 58. (36.) Id. at 105. (37.) Id. at 107 (emphasis added). (38.) Id. (39.) Id. at 110. (40.) Id. at 90. (41.) Results of the Uruguay Round of Multilateral Trade Negotiations, Gatt Doc. MNT/TNC/W/FA (Dec. 1992). (42.) United Nations Conference of Environment and Development (UNCED), U.N. Doc A/Conf. 151/PC/100 (Mar. 31, 1992). (43.) Organization of Economic Cooperation And Development, The OECD Environment Industry: Situation, Prospects and Government Policies (1992). (44.) World Bank, Environmental Growth and Development (1987). (45.) International Organization of Consumer Unions, Buying the Earth: A Consumer Commentary on the Overlap Between Trade and Environmental Problems (1991). (46.) Office of Technology Assessment, U.S. Congress, Trade and Environment: Conflicts and Opportunities (May 1992). (47.) General Accounting Office, U.S. Congress, Competing Economics: America, Europe, and the Pacific Rim (Dec. 1991). (48.) See, e.g., 1992); Office of Technology Assessment, U.S. Congress, Trade and Environment: Conflicts and Opportunities (1992). (49.) Id. at 133. (50.) Id. at 135-36. (51.) Id. at 134.