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The environment and its effect on today's management.

The increased emphasis on environmental problems in the United States and abroad has fostered a range of proposed public policy programs and countermeasures to deal with current and projected environmental changes. The complexities surrounding some of these issues will require new forms of international consensus and cooperation among countries, particularly between developed and developing countries.

Environmental pollution and resource scarcities, including energy sources are problems of our "closed" planet Earth. Awareness of the depletion of Earth's finite resources had been widespread in 1972 when the Club of Rome published The Limits of Growth. In this book, a simulation model was developed that related such factors as resources, population, food production, available capital and land use. All this was done on a global scale for a closed system, "spaceship" Earth. Based on conservative estimates of known reserve growth rates, the authors estimated the number of years the supply of resources would last. Based on the 1970 dateline for these statistics, the corresponding depletion years for some of the resources include: Petroleum, 2020; natural gas, 2019; aluminum, 2025; zinc, 2020; copper, 2018 and iron, 2143.

Since then, there has been much controversy about the validity of these figures. However, that these finite resources will run out is no longer debated nor that strategies must be developed to cope with the consequences of increasing scarcities as total depletion approaches.

How to cope with resource finiteness, increasing scarcity and environmental problems has already divided developed and developing countries. With many of the known reserves on Earth residing in the developing nations and being extracted by multinationals, confrontation appears inevitable.

In a multinational organization, all affiliated companies exercise management within their national settings while sharing resources with the other companies whenever that seems appropriate. As they develop, some of these companies become even more powerful economic entities than some of the smaller countries in which they operate. While only four of the fifty African countries and seven of the thirty-seven Latin American and Caribbean countries have GNPs greater than $20 billion, it is not uncommon for many of the multinational economic giants to have yearly revenues comparable to that figure. Challenging decisions may emerge as corporate interests and national interests collide. Managers may find themselves in the position of deciding whether to pledge allegiance to the corporation or to the host country. Production planning and control becomes much broader in focus, since corporate and national interests must be blended in the same aggregate plan. This broad focus suggests that tomorrow's managers should develop a global perspective.

What is occurring in petroleum is just the beginning of a series of resource scarcity problems. The stage is set for a chain of dangerous events like restrictions on imports, resource cartels, drastic price changes, quotas, the rise of social tensions in the industrialized nations over the division of an ever more slow-growing or even diminishing product, the prospect of a far more coercive exercise of national power as the means by which we will attempt to bring these disruptions under control, and ultimately, wars of "redistribution" or of "preemptive seizure."

World-class manufacturing will have to flourish under these constraints! Whether managers are ready or not, it will happen one way or the other. A stage in preparing and providing for the future is for management to be informed about what seems to be the point of view of developed and developing countries on the issues of environment and resource scarcities.

Ecological policy in developing


Although there does not yet exist a systematic body of doctrine, the ecological policy of the developed countries contains several elements that were stimulated by important development in academic thought in the sixties and seventies. Boulding, Heilbroner, The Club of Rome, Stobaugh, Yergin and others were influential in warning the world about the consequences of increased resource scarcities and in molding the attitudes of governments and of private sectors in the developed countries in their attitudes and relations with the developing countries.

The popular imagination has been slow in comprehending the economical, political, social and moral implications of a transition from the plain open earth of the early civilizations to the closed global earth of our times. Terms like "open" and "closed" were used by von Bertalanffy in his work on Systems Theory. Systems may be open or closed in respect to its inputs and outputs. In a closed system, the outputs of all parts of the system are linked to the inputs of other parts. In an open system, some structure is maintained in the midst of a throughput from inputs to outputs. The present world economy - |the "econosphere" of Boulding - is open in regard to matter, energy and information.

In terms of the energy system, the econosphere includes inputs of energy needed to create the material throughput and to move matter from the noneconomic set into the economic set or even out of it again. In the process, energy is emitted by the system in a less desirable form, mostly in the form of heat. These inputs of available energy must come either from the sun or from the earth itself. Fossil fuels have been the major source of energy for advanced societies. This capital stock has been irreversibly depleted particularly over the last two centuries.

The concept of entropy is useful in explaining how a system dies. The term entropy originated in thermodynamics. It measures the ability of a system to perform work or activity in the future. Entropy was defined in a negative way, as the potential ability of a system to perform work declines entropy increases. When entropy is maximum, the system is "dead." The famous Second Law of Thermodynamics means that work can be performed and thermal energy transformed into mechanical energy only if there is a difference of temperature between two parts of the system. The transformation of thermal into mechanical energy, however, has a "cost" - it always diminishes the temperature differential and hence diminishes the potential for further work.

Although the concept of entropy could be applied to the information input, the focus here is on the inputs of matter and energy. Since there is no law of increasing material entropy, a closed system in regard to matter is conceivable. However, in regard to the energy system there is no escape from the Second Law of Thermodynamics. The large energy inputs from fossil fuels are temporary. A general consensus among experts seems to emerge that in the short run, say from now until a decade or two beyond the turn of the millennium, known fuel reserves are adequate to meet expected rises in demand. Beyond that the situation remains uncertain.

The development of alternative forms of energy is seen as a means of offsetting inevitable increases in the costs of processing fossil fuels. But uncertainties involving the timetable for the commercial development of solar energy and thermonuclear fusion make it difficult to assess prospects beyond 2020. While we wait for the miracle to happen in this critical transition, conservation remains the most important "source" of energy.

For all these reasons, the closed earth of the future requires economic principles different from those of the open earth of the past. In the economy of the past - the "cowboy economy" as it is called by Boulding - consumption was regarded as a good thing and production likewise. The success of the economy was measured by the amount of throughput from the factors of production, a part of which was extracted from the reservoirs of materials and noneconomic objects, and another part of which was output into the reservoirs of pollution. The Gross Domestic Product has been a rough measure of this total throughput.

By contrast, in the "spaceman" economy, the measure of success is not production and consumption, but the nature, extent, quality and complexity of the total capital stock, including in this the state of the human bodies and minds. Obviously, as Boulding himself recognizes, this idea that both production and consumption are bad things is very strange to developed countries. It is even stranger to developing countries which see no way of breaking away from the vicious circle of underdevelopment and poverty other than to become more affluent, that is, to produce, consume and pollute more.

As portrayed by the helpful image taken from academic sources in the developed countries, our planet could be visualized as a "spaceship earth" where life could only be sustained through maintenance of a delicate equilibrium between the needs of the passengers and the ability of the craft to respond to these needs. This equilibrium could now be menaced by numerous relevant dimensions, the most critical of which are those related to population dynamics, resource constraints, technological developments and pollution. These may be thought of as distinct vectors of the environmental crisis, but their interdependence makes the resulting dynamics highly interactive.

Elaborating the same image, spaceship earth would be divided into two classes of passengers, the first coincident with the technologically advanced countries and the second representative of the technologically less endowed nations, which would necessarily have to trade off positions with a view to maintaining the equilibrium of the vessel.

As regards population, the problem is then focused on the growing number of passengers, which may amount to some eight billion by 2010, a figure that would be reached mainly through population growth in the second class section in which, at the same time the resources would be less abundant. It is predicted that the growth of the combined populations of the developed and developing countries will continue to generate rapidly increasing demands for both minerals and energy-producing resources that are so vital to industrial processes.

Every advance in technology - every application, every invention and every discovery - requires resources from the environment. Historically, technological developments have given rise to new energy and resource requirements without marked advances in energy-saving and energy-producing technologies. There is every reason to believe that future developments in technology will occasion more extensive resource requirements.

A strain would also arise from the inability of the natural elements - soil, water, and atmosphere - to absorb, at adequate rates, the harmful by-products of the growing industrial and agricultural processes. Nuclear radiation; pesticides; fertilizers; the increasing carbon dioxide content of the air resulting from the growth of industrial combustion; the depletion of stratosphere ozone due to the wide use of chlorofluorocarbons (CFCs) as refrigerants in household appliances and air conditioners, and as industrial solvents in foam products and aerosol sprays; the irreversible destruction of rain forests; the oil spills in the oceans and so on have been viewed as the most threatening factors of imbalance.

In order to maintain the equilibrium of the vessel, problems created by population explosion and the use of both previously existing and new technologies, should, in the view of developed countries, now be dealt with globally, irrespective of the unequal distribution, on a world scale, of the benefits and related bad effects on the environment engendered by the Industrial Revolution. Germane to such a global ecological policy is the need for world planning for development which, to be successful, might purposely aim at freezing present relative positions of the two classes inside the vessel.

The "development freezing" alternative has its rationale. According to ecologists in the developed countries, the developing countries can never hope to achieve the consumption patterns of the developed countries simply because the parity is no longer compatible with the existing stocks of natural resources and pollution limits. Were a country such as India to make use of fertilizers at the per capita level of the Netherlands, it would consume one-half of the world's total output of fertilizers. If China were to reach only half of the U.S. level of energy consumption per person using the same mix of sources, it would swamp the atmosphere with carbon dioxide.

Provided the first class already enjoys low average rates of population growth and is unlikely to opt for a slower rate of industrial growth for the sole purpose of guaranteeing a purer atmosphere or cleaner water, the new ecology-saving policy would be more successful if applied in the areas where the environmental crisis has not yet appeared, i.e., in the territory of the second class.

Therefore, the second class should be taught to employ the most effective and expeditious birth control methods and follow an orderly pollution-reducing process of industrialization. The second class should organize production in accordance with environment-saving techniques already tested by the first class or be doomed to socioeconomic stagnation. The World Bank, the International Monetary Fund (IMF) and other international development agencies would economically enforce the environment-saving rules and policies by ascertaining that damaging repercussions on the environment, as defined by their experts, be considered an important factor in determining whether financial assistance should be granted for industrial projects in developing countries. Although military means of enforcement are not in the agenda so far, they might be contemplated as a very real possibility in the future.

Developing countries' viewpoint

The somewhat apathetic attitude on the part of the developing countries regarding the necessity of a global ecological policy does not imply negation of the relevance of the matter or the need for true international cooperation. It is simply that not having enjoyed the opportunity to experience their own industrial revolution, the developing countries have not been stimulated to think about the environmental crisis as posed in the present days.

As indicated in the elements of the ecological policy of the developed countries, the equilibrium of "spaceship earth" would depend on the enforcement of measures bearing on population and on the use of previously existing and new technologies chiefly in the second class of the vessel or, in other words, in the territory of the developing countries. This ecological policy could better succeed if the relative positions of the classes were maintained, for the emergence of one single class would presuppose a considerable change in the living standards of the first class, something that may not be attained in the light of present global socio-economic realities.

A common mistake - particularly among American ecologists and other "wise men" - is to try to superimpose peculiar situations prevailing in developed countries onto the realities of the developing countries. Following this reasoning, if the developed countries are in an ecological crisis, the developing countries must also be in an ecological crisis. The developing countries have, of course their own interpretation of how to secure the equilibrium of the vessel.

In regard to the population problem, the developing countries consider it rather simplistic simplistic to apply Malthus' law of population growth to the so-called threat posed by the population explosion in their territories. These countries have at their disposal a wide array of technological improvements including better techniques of land use leading to increased food supplies, that were unknown in the time of the English parson.

Besides the improvement in the methods of production, the territorial space and habits of consumption in Malthus' thinking were those of the eighteenth century and can hardly be reconciled with the present environmental conditions. In this context the door is left open for the introduction of advanced technologies and management procedures.

Also, the neo-Malthusian statistics do not take into consideration all the important factors that determine the growth of population. The appalling calculations that lead to fantastic figures on the future world population especially in developing countries, disregard the fact that in those countries there has been an increase in life expectancy followed by a decrease in birth rates, so that there is an automatic limit to population growth. This arises from the fact that higher incomes tend to slow down birth rates.

The developing countries also consider too simplistic and fallacious the concept that ecology is disturbed because there are "too many people" or because they "consume too much." There is abundant evidence that the earth is capable of supporting a considerably greater population at much higher levels of consumption. The fact that in half a century mankind found it possible to wage four major and several minor wars with a terrible waste of wealth, is a clear indication that we are not after all so short of resources although we may be short of common sense.

Annual military expenditures of the four most powerful members of the U.N. Security Council - USSR, USA, France and UK - were over one trillion dollars in 1990, a total which exceeds the world's annual exports of all commodities. This is about six times the value of the world production of cereals and about half of the combined GNPs of all countries in Latin America, Asia (excluding Japan) and Africa.

Environmental problems not only pose a compelling argument for disarmament and peace but also call attention to the question of efficiency in the organization of production. It is widely known, but seldom remembered when the availability of natural resources is discussed, that in developed countries billions of dollars are spent every year to purchase so-called farm surpluses. Millions of tons of agricultural products have been regularly stored or destroyed to keep prices up in the world markets. These facts do not tally with the superficial statements which have been made about the irreparable strain being put on natural resources.

By this time it should be clear that most of the existing pollution problems are simply noncomputed social costs of private activities. In a market economy the price system is supposed to play the crucial role of allocating resources and guiding the entrepreneur's rational decision in the production of goods and services. The price system, however, basing itself mainly on the quantitative aspects of the use of money, for which rationality and exactness constitute the departing points of analysis, fails to account appropriately for the benefits and costs distributed among those not party to the transaction. These decision costs and benefits are elegantly called by the economists the "externalities." When the social costs represented by the dumping of chemical wastes into a river are not included in the price of chemical products, incentives are not being created to solve environmental problems.

On the question of the preservation of the environment, as stated by the developed countries, the passenger's survival in "spaceship earth" would call for the enforcement of a drastic decision, globally applied, to maintain a "green area reserve" which would have to coincide mainly with the territories of the developing countries. This step would safeguard against complete exhaustion of the natural elements - soil, atmosphere, and water - still available on the planet thus providing some sort of counteraction to the spoilage of the same natural elements used up in the countries where the benefits of the Industrial Revolution were massively concentrated.

It is hard for the developing countries not to ponder the ethical question raised by this policy, as expressed in the ostensive imbalance between responsibility for the damage and obligation for repair. According to the United States Department of Energy, the United States alone is responsible for one quarter of the world's fossil fuel C02 emission while all the third world countries combined (except China) contribute about the same percentage. The United States, the USSR, the countries of Western Europe and Japan are responsible for two-thirds of the total carbon dioxide emission.

In expressing their concern over the environmental crisis the developing countries seem not willing to accept, without further refinement, the ecological policy devised by the developed countries whose socioeconomic structure was deeply influenced by the unique phenomenon of the Industrial Revolution.

Toward a global ecological policy

The first refinement should be that given the implications for international order, including the freezing of the status quo, any environment-saving policy must necessarily be imbued with a solid and well-informed political approach.

Ecological policy should not depart from the broader framework of socioeconomic development. In this regard a second step of refinement would require a corresponding universal commitment to development if the task of preserving the environment is to be shared by the world community. In this context the developing countries, while rejecting the implementation of any ecological policy that bears in itself elements of socioeconomic stagnation, could only share a common responsibility for the preservation of the environment if it was accompanied and paralleled by a corresponding common responsibility for development. The pollution of poverty is the one that, nationally and internationally, is of real significance for the developing countries and it can be eliminated precisely through population growth, higher incomes, and modern technologies, the factors that ecologists in the developed countries generally consider to be the causes of the pollution of affluence.

Environmental deterioration as it is currently understood in some developed countries, is still a minor localized problem in the developing world. Evidently no country wants any pollution at all. However, each country must evolve its own development plans, exploit its own resources as it thinks suitable and define its own environmental standards. The idea of having such priorities and standards imposed on individual countries or groups of countries, on either a multilateral or a bilateral basis is very hard to be accepted by the developing countries.

It is even more disturbing to see agencies for international development such as the World Bank, the International Monetary Fund and others set up policies in which the ecological issue has become a factor of economic coercion against the less developed countries. It seems reasonable that the preservation of the environments should not exclude the preservation of national sovereignty. Therefore, a third step of refinement should be that any ecological policy globally applied must not be an instrument to suppress wholly or in part the legitimate right of any country to decide its own affairs.

The prospect

In the United States, since the Clean Air Act was enacted in 1970 and amended in 1977, significant reduction in air pollution has been achieved, in spite of continued rapid economic growth. According to EPA data, since 1977: ozone has been reduced 21 percent; carbon monoxide, 32 percent; sulfur dioxide, 37 percent; airborne lead, 87 percent; nitrogen dioxide, 14 percent; and dirt, dust, and particulates, 23 percent.

In November of 1990 President Bush signed the Clean Air Act of 1990, the second amending legislation s1nce the original Act was passed in 1970. The new law calls for reductions in emissions of sulfur dioxide and nitrogen dioxide by half; carbon monoxide from vehicles by 70 percent, and other emissions by 20 percent. The number of toxic chemicals monitored by the EPA would increase from 7 to 250, and industry will be required to control their release by means of the best technology available.

Signs of environmental awareness and a willingness to cooperate on an international level are increasing. A number of international conferences on environmental matters have been held and more are scheduled.

The Montreal Protocol, for example, went into effect in January of 1988. This agreement signed by 31 nations in September of 1987 to control CFCs and halons includes the US, USSR, Japan and the Common Market countries, which together account for 70 percent of global CFC use. Although it made a start while considering some of the problems of developing nations in trying to catch up in basic techniques like refrigeration, few developing countries have signed and ratified the Protocol.

Concern about the extent of the so-called ozone hole at the South Pole led to a revision of the Montreal Protocol. At the substantive meeting in London (June of 1990) the participant governments agreed to accelerate the phasing out of halogenated compounds implicated in stratospheric ozone depletion. The principal issue was the provision of funds to assist newly industrialized countries with the introduction of substitutes for CFCs, with the World Bank used as a channel for funding. India and China agreed to sign the protocol in 1992. Adherence by the great majority of the developing countries is still uncertain.

The hot dry summer of 1988 in the U.S. brought to the forefront a debate among environmental scientists about whether human activities may cause a significant enough increase in the greenhouse effect to result in global warming and drastic climate changes. There is still much uncertainty surrounding scientific predictions. President Bush referred to this uncertainty in his address to a meeting of the UN Intergovernmental Panel on Climate Change (IPCC) held in Washington D.C. in February of 1990 and again at the White House Conference on Science and Economics Research Related to Global Change held in April. He called for further research to provide the scientific evidence on which policies might be based and warned against the economic and social consequences of precipitated action.

Later in the year international political debate moved on to the negotiation of a treaty to coordinate the response to the threat of climate change. The preliminary discussions began in Geneva on September 24, 1990. A climate change convention is expected to be ready for the United Nations Conference on Environment and Development, to be held in Rio de Janeiro, Brazil, in 1992. For the first time the link between environment and development is explicitly recognized in the major theme of a United Nations Conference.

As clearly shown by the recent developments, to the extent that the solutions proposed by the developed countries seek primarily to make the consequences of the Industrial Revolution healthier without necessarily providing a tool for a further extension of its benefits to the group of developing nations, a true global solution to the environment problem will never be achieved.

Environmentalism has been generally at the bottom of the agenda of American companies because the American consumer has not been well informed. Green consumerism, a movement which originated in Europe and has been gaining strength in many industrialized countries assumes that consumers can exercise power through their buying decisions and will do so, if they have the necessary information.

Increasingly, information about the environmental effects of many products is becoming available and influencing consumer buying behavior. As a consequence, companies are moving to adjust their marketing strategies. Manufacturers are finding that a poor environmental reputation can adversely affect sales and profits. This creates the motivation to improve environmental performance, not only of products but also of production facilities.

Clearly, major reorientations of entire industries lie ahead, driven by resource scarcities and environmental problems. Industrial managers must be cognizant of these shifts and the forces behind them. Often, this analysis must be made on a global scale and include social and political variables in addition to technical and economical considerations. An educated, as distinct from an indoctrinated management at all levels is a prerequisite in the closed global earth of our days. A widespread knowledge of the motivating forces of international conflict is an indispensable first step towards international sanity and cooperation.

For further reading

Boulding, K. E., The Meaning of the Twentieth

Century: The Great Transition, New York,

Harper & Row, 1965. "The Economics of the Coming Space-ship Earth,"

in Environmental Quality in a Growing Economy,

Henry Jarrett, ed., Baltimore, MD.: John Hopkins

Press for Resources for the Future, In., 1966,

pp. 3-14. Encyclopaedia Britannica, 1990 and 1991 Books

of the Year, sections on Agriculture and Food

Supplies, Consumer Affairs, Economic Affairs,

Energy, Environment, Military Affairs, and World

Affairs. General Motors Public Interest Report: 1989: General

Motors and the Environment. Heilbroner, R. L., An Inquiry into The Human Prospect,

New York, W. W. Norton, 1974. Kirkpatrick, D., "Environmentalism: The New Crusade,"

Fortune, February 12, 1990, pp. 44-55. Meadows, D. L., et al., The Limits to Growth: A

Report for The Club of Rome's Project on the

Predicament of Mankind. New York. Universe

Books. 1972. Stobaugh, R. and Yergin, D., eds., Energy Future:

Report of the Energy Project at the Harvard

Business School, New York, Ballantine Books,


Dayr A. Reis and John E. Betton are both associate professors of management at the University of Wisconsin, LaCrosse.
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Author:Reis, Dayr A.; Betton, John E.
Publication:Industrial Management
Date:Jan 1, 1992
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