Speaker: Herman E. Daly
Date: January 14, 1994
Location: The World Bank, Washington, D.C.
EDITOR'S NOTE: Herman E. Daly (1938-) is an American economist recognized as one of the founders of the field of ecological economics and as an eloquent critic of standard economic growth theory. Many people were amazed that the World Bank would hire Daly because for years he taught economics at Louisiana State and wrote articles that severely criticized standard economics. Few thought he would last a month at the Bank. To the credit of both Daly and the Bank, he lasted six years. In 1994 he left to take a professorship in ecological economics at the University of Maryland. The Bank asked him to give a parting address, which he did, to a packed audience.
After six years at the World Bank and having at 55 finally reached the age of both reason and early retirement, I am now returning to academia—to teaching, researching, writing—and chasing after grants. While I am happy about that, I also feel a sense of loss at leaving, especially because I think the Bank will become, and is already becoming, much more environmentally sensitive and literate. It is also, of all places that I have worked, the one where I have had the best colleagues. The person who more than anyone else has fought for the environment in the Bank for over fifteen years is Robert Goodland. Trying to help him, Salah El Serafy, and others, to "green the Bank's economists" has been a high privilege and sometimes even fun. It is also unfinished business. The Vice Presidency for Environmentally Sustainable Development in its first year, under Ismail Serageldin's leadership, has been the most encouraging step forward during my time here. When the critical areas of population and energy are brought under the domain of ESD, it will be even more encouraging.
I should confess that this is a farewell from someone who is not going very far away—only nine miles up the road to the University of Maryland, so I hope to keep contact with many colleagues and with the Bank. But, who can refuse an invitation to give a farewell lecture to (take a parting shot at) such a powerful institution—an institution whose role in the world is, for better or worse, becoming ever more important, and whose imminent fiftieth birthday invites the reassessment characteristic of mid-life? I willingly succumb to the temptation both to pontificate and to prescribe a few remedies for the Bank's middle-aged infirmities.
My prescriptions will be of two kinds, internal and external. First, a few antacids and laxatives to cure the combination of managerial flatulence and organizational constipation giving rise to such a high-pressure internal environment. Second, to improve interactions with the external world, I will prescribe some new eyeglasses and a hearing aid. After age fifty these aids to the body become more necessary and should be accepted, or at least listened to, with as much grace as possible.
Internal Issues: The Workplace and Managerial Environment
Many excellent people work at the World Bank, and usually work very competently and very hard, probably too hard. But, top-down management, misguided by an unrealistic vision of development as the generalization of Northern over consumption to the rapidly multiplying masses of the South has led to many external failures, both economic and ecological. These external failures, due to faulty vision and hearing, will be considered later, but for now I just note that external failure also undermines internal morale. The unrealistic vision of development should be blamed at least as much on academic economic theorists as on World Bank practitioners.
Management should be more open and participatory—at least managers should sometimes ask the advice of their subordinates, even if they are not likely to take it. The Bank should be much more open—there is really not that much to hide—or if there is I am too dumb to see it. The Bank's failures cannot be hid for long. And it is important not to be able to hide those things that it would be tempting to hide, even when temporarily possible. And why one part of the Bank has to hide things form other parts of the Bank, and especially from the Executive Directors, has always puzzled me. I have even heard it said that Executive Directors should be treated like cultivated mushrooms—"kept in the dark and fed manure." Surely that is not being open and participatory!
Forget all this useless and unevenly applied nonsense about clearance for speeches and published articles by professional Bank staff when they are not officially speaking for the Bank. All that should be necessary is a disclaimer stating clearly that the author is not speaking on behalf of the World Bank. Of course if you are speaking on behalf of the Bank, or using some kinds of proprietary information, clearance is obviously necessary. Yes, AMS 14.20 does indeed say that disclaimers do not exempt one from submitting all publications for Bank censorship because disclaimers are said to be "unconvincing". But then I wonder why the Bank itself nearly always puts a disclaimer on published Bank research? Disclaimers are well understood—I can assure you that no one has ever mistaken a paper of mine for a World Bank Policy Statement!
If some Bank office absolutely must be engaged in censoring and "clearing' employee's non-Bank utterances, than the Bank's image is better protected by monitoring the pretentious real estate ads of Bank vice presidents trying to sell their expensive houses by including their high Bank position in the description of the house, as if the prestige of their anti-poverty office should adhere to and be capitalized in the value of their domicile. Other worthy candidates for monitoring would be the internal memos of other vice presidents examining the "impeccable economic logic" of dropping a given load of toxic wastes on the poorest countries. Alternatively, some of the monitoring energy might be spent on controlling construction cost overruns on new Bank buildings in downtown Washington. But don't waste time trying to sensor some little staff economist who, in his theoretical writings, deviates form the Bank's party line favoring free trade, NAFTA, or anything else. Fortunately, some managers are wise enough not to waste their time in this way, and my impression is that those whose duty it is to enforce clearance are very uncomfortable doing so. Without deviance there can be no change.
In sum, my internal workplace advice is: open up, loosen up, listen up, speak up, and don't work weekends on anything you don't enjoy.
External Issues: Advice for Fostering Environmentally Sustainable Development
I have four prescriptions for better serving the goal of environmentally sustainable development through World Bank policy and action. The four prescriptions are presented in order of increasing generality and radicalism. That is, the first two are fairly specific and should, I think, be relatively noncontroversial. The third will be debated by many, and the fourth will be considered outrageous by most Bank economists.
1. Stop counting the consumption of natural capital as income. Income is by definition the maximum amount that a society can consume this year and still be able to consume the same amount next year. Thus sustainability is built into the very definition of income. But the productive capacity that must be maintained intact has traditionally been thought of as manmade capital only, excluding natural capital. We have habitually counted natural capital as a free good. This might have been justified in yesterday's empty world, but in today's full world it is anti-economic. The error of implicitly counting natural capital consumption as income is customary in three areas: (1) the System of National Accounts; (2) evaluation of projects that deplete natural capital; and (3) international balance of payments accounting.
The first (SNA) is well recognized and efforts are underway to correct it—indeed, the World Bank played a pioneering role in this important initiative, and I hope will continue to contribute to "greening the GNP".
The second (project evaluation) is well recognized by standard economics which has long taught the need to count "user cost" (depletion charges) as part of the opportunity cost of projects that deplete natural capital. Bank best practice counts user costs, but average Bank practice ignores it. Uncounted user costs show up in inflated net benefits and an overstated rate of return for depleting projects. This biases investment allocation toward projects that deplete natural capital, and away from more sustainable projects.
Correcting this bias is the logical first step toward a policy of sustainable development. User cost must be counted not only for depletion of non-renewables, but also for projects that divest renewable natural capital by exploiting it beyond sustainable yield. The sink or absorptive services of natural capital, as well as its source or regenerative services, can also be depleted if used beyond sustainable capacity. Therefore a user cost must be charged to projects that deplete sink capacity, such as the atmosphere's ability to absorb CO2, or the capacity of a river to carry off wastes. It is admittedly difficult to measure user cost, but attempting to avoid the issue simply means that we assign to depleted natural capital the precise default value of zero, which is frequently not the best estimate. Even when zero is the best estimate it should be arrived at not by default, but by reasoned calculation based on explicit assumptions about backstop technologies, discount rates, and reserve lifetimes.
Third, in balance of payments accounting the export of depleted natural capital, whether petroleum or timber cut beyond sustainable yield, is entered in the current account, and thus treated entirely as income. This is an accounting error. Some portion of those nonsustainable exports should be treated as the sale of a capital asset, and entered on capital account. If this were properly done, some countries would see their apparent balance of trade surplus converted into a true deficit, one that is being financed by drawdown and transfer abroad of their stock of natural capital. Reclassifying transactions in a way that converts a country's balance of trade from a surplus to a deficit would trigger a whole different set of IMF recommendations and actions. This reform of balance of payments accounting should be the initial focus of the IMF's new interest in environmentally sustainable development. The World Bank should warmly encourage its sister institution to get busy on this—it does not come naturally to them.
2. Tax labor and income less. and tax resource throughput more. In the past it has been customary for governments to subsidize resource throughput to stimulate growth. Thus energy, water, fertilizer, and even deforestation, are even now frequently subsidized. To its credit the World Bank has generally opposed these subsidies. But it is necessary to go beyond removal of explicit financial subsidies to the removal of implicit environmental subsidies as well. By "implicit environmental subsidies" I mean external costs to the community that are not charged to the commodities whose production generates them.
Economists have long advocated internalizing external costs either by calculating and charging Pigouvian taxes (taxes which when added to marginal private costs make them equal to marginal social costs), or by Coasian redefinition of property rights (such that values that used to be public property and not valued in markets, become private property whose values are protected by their new owners). These solutions are elegant in theory, but often quite difficult in practice. A blunter, but much more operational instrument would be simply to shift our tax base away from labor and income on to throughput. We have to raise public revenue somehow, and the present system is highly distortionary in that by taxing labor and income in the face of high unemployment in nearly all countries we are discouraging exactly what we want more of. The present signal to firms is to shed labor, and substitute more capital and resource throughput, to the extent feasible. It would be better to economize on throughput because of the high external costs of its associated depletion and pollution, and et the same time to use more labor because of the high social benefits associated with reducing unemployment.
Shifting the tax base to throughput induces greater throughput efficiency, and internalizes, in a gross, blunt manner the exernalities from depletion and pollution. True, the exact external costs will not have been precisely calculated and attributed to exactly those activities that caused them, as with a Pigouvian tax that aims to equate marginal social costs and benefits for each activity. But those calculations and attributions are so difficult and uncertain that insisting on them would be equivalent to a full-employment act for econometricians and prolonged unemployment and environmental degradation for everyone else. Politically the shift toward ecological taxes could be sold under the banner of revenue neutrality. However, the income tax structure should be maintained so as to keep progressivity in the overall tax structure by taxing very high incomes and subsidizing very low incomes.
But the bulk of public revenue would be raised from taxes on throughput either at the depletion or pollution end. The shift could be carried out gradually by a pre-announced schedule to minimize disruption. This shift should be a key part of structural adjustment, but should be pioneered in the North. Indeed, sustainable development itself must be achieved in the North first. It is absurd to expect any sacrifice for sustainability in the South if similar measures have not first been taken in the North. The major weakness in the World Bank's ability to foster environmentally sustainable development is that it only had leverage over the South, not the North. Some way must be found to push the North also. The Nordic countries and the Netherlands have already begun to do this.
3. Maximize the productivity of natural capital in the short run, and invest in increasing its supply in the long run. Economic logic requires that we behave in these two ways toward the limiting factor of production—i.e. maximize its productivity and invest in its increase. Those principles are not in dispute. Disagreements do exist about whether natural capital is really the limiting factor. Some argue that manmade and natural capital are such good substitutes that the very idea of a limiting factor, which requires that the factors be complementary, is irrelevant. It is true that without complementarity there is no limiting factor. So the question is, are manmade capital and natural capital basically complements or substitutes? Here again we can provide perpetual full employment for econometricians, and I would welcome more empirical work on this, even though I think it is sufficiently clear to common sense that natural and manmade capital are fundamentally complements and only marginally substitutable.
In the past natural capital has been treated as superabundant and priced at zero, so it did not really matter whether it was a complement or a substitute for manmade capital. Now remaining natural capital appears to be both scarce and complementary, and therefore limiting. For example, the fish catch is limited not by the number of fishing boats, but by the remaining populations of fish in the sea. Cut timber is limited not by the number of sawmills, but by the remaining standing forests. Pumped crude oil is limited not by manmade pumping capacity, but by remaining stocks of petroleum in the ground. The natural capital of the atmosphere's capacity to serve as a sink for CO2 is likely to be even more limiting to the rate at which petroleum can be burned than is the source limit of remaining oil in the ground.
In the short run raising the price of natural capital by taxing throughput, as advocated above, will give the incentive to maximize natural capital productivity. Investing in natural capital over the long run is also needed. But how do we invest in something which by definition we cannot make? If we could make it, it would be manmade capital! For renewable resources we have the possibility of fallowing investments, or more generally "waiting" in the Marshalling sense—allowing this year's growth increment to be added to next year's growing stock rather than consuming it. For nonrenewables we do not have this option. We can only liquidate them. So the question is how fast do we liquidate, and how much of the proceeds can we count as income if we invest the rest in the best available renewable substitute? And of course how much of the correctly counted income do we than consume and how much do we invest?
One renewable substitute for natural capital is the mixture of natural and manmade capital represented by plantations, fish farms, etc., which we may call "cultivated natural capital". But even with this important hybrid category we have a complementary combination of natural and manmade capital components—e.g. a plantation forest may use manmade capital to plant trees, control pests, and choose the proper rotation—but the complementary natural capital services of rainfall, sunlight, soil, etc. are still there and eventually still becomes limiting. Also, cultivated natural capital usually requires a reduction in biodiversity relative to natural capital proper.
For both renewable and nonrenewable resources, investments in enhancing throughput productivity are needed. Increasing resource productivity is indeed a good substitute for finding more of the resource. But the main point is that investment should be in the limiting factor, and to the extent that natural capital has replaced manmade capital as the limiting factor, the Bank's investment focus should shift correspondingly. I do not believe that it has. In fact, the failure to charge user cost on natural capital depletion, noted earlier, surely biases investment away from replenishing projects.
4. Move away from the ideology of global economic integration by free trade. free capital mobility, and export-led growth—and toward a more nationalist orientation that seeks to develop domestic production for internal markets as the first option, having recourse to international trade only when clearly much more efficient.
At the present time global interdependence is celebrated as a self-evident good. The royal road to development, peace, and harmony is thought to be the unrelenting conquest of each nation's markets by all other nations. The word "globalist" has politically correct connotations, while the word "nationalist" has come to be pejorative. This is so much the case that it is necessary to remind ourselves that the World Bank exists to serve the interests of its members, which are nation states, nation communities—not individuals, not corporations, not even NGOs. It has no charter to serve the one-world without borders cosmopolitan vision of global integration—of converting many relatively independent national economies, loosely dependent on international trade into one tightly integrated world economic network upon which the weakened nations depend upon for even basic survival.
The model of international community upon which the Bretton Woods institutions rests is that of a "community of Communities", an international federation of national communities cooperating to solve global problems under the principle of subsidiarity. The model is not the cosmopolitan one of direct global citizenship in a single integrated world community without intermediation by nation states. To globalize the economy by erasure of national economic boundaries through free trade, free capital mobility, and free, or at least uncontrolled migration, is to wound fatally the major unit of community capable of carrying out any policies for the common good. That includes not only policy for purely domestic ends, but also international agreements required to deal with those environmental problems that are irreducibly global (C02, ozone depletion). International agreements presuppose the ability of national governments to carry out policies in their support. If nations have no control over their borders they are in a poor position to enforce national laws, including those necessary to secure compliance with international treaties.
Cosmopolitan globalism weakens national boundaries and the power of national and subnational communities, while strengthening the relative power of transnational corporations. Since there is no world government capable of regulating global capital in the global interest, and since the desirability and possibility of a world government are both highly doubtful, it will be necessary to make capital less global and more national. I know that is an unthinkable thought right now, but take it as a prediction—ten years from now the buzz words will be "renationalization of capital" and the "community rooting of capital for the development of national and local economies", not the current shibboleths of export-led growth stimulated by whatever adjustments are necessary to increase global competitiveness. "Global competitiveness" (frequently a thought-substituting slogan) usually reflects not so much a real increase in resource productivity as a standards-lowering competition to reduce wages, externalize environmental and social costs, and export natural capital at low prices while calling it income.
The World Bank should use the occasion of its fiftieth birthday to reflect deeply on the words of John Maynard Keynes: "I sympathize therefore, with those who would minimize rather than those who would maximize, economic entanglement between nations. Ideas, knowledge, art, hospitality, travel—these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible; and, above all, let finance be primarily national."
In Conclusion: These are my parting pontifications and prescriptions—thank you for having invited them, for having listened to them, and for having the patience to put up with me for six years.