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 E1 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 en 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
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
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
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 complementarily 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 subsidiarily. 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 fight 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 competetivness. "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
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 good 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.
Herman Daly is currently Senior Research Scholar at the University
of Maryland, School of Public Affairs and a member of the Board of Directors
at Carrying Capacity Network.