IMF Backs “Green Economy” – Is It Good for Developing Countries?

IMF managing director Christine Lagarde announced at a CGD event on Tuesday that the IMF would provide research and analytic support in three areas crucial to sustainable development: carbon pricing, phasing out fossil fuel subsidies and green national accounting, that is, development of new measures of economic progress that take into account environmental costs and benefits not included in Gross Domestic Product (GDP). She also announced that she would be attending the Rio+20 Earth Summit in Brazil next week, a first for an IMF head. (See here for Lawrence MacDonald’s summary and analysis of the speech.)In comments after the speech, Nancy Birdsall singled out the IMF work on new ways to measure economic activity as having far-reaching consequences. I agree. Current measures too often count environmental destruction as a benefit—a forest only counts in GDP when it is cut down and turned into timber. Everybody knows we need a better yardstick. Lagarde’s speech is a welcome endorsement from the citadel of economic orthodoxy of the clear need for new and better measures.In fact, the IMF is a bit of late comer to the issue. The World Bank has been working on green national accounting for years and has recently launched WAVES, Wealth Accounting and the Valuation of Ecosystem Services, and the 50:50 Campaign, which brings together public and private institutions to support factoring natural capital into decision making. The OECD has been studying the issue as well. With these institutions and others now joined by the IMF—all pushing in a similar direction and perhaps competing a bit as well—it may finally be possible win wide acceptance for measures of economic activity that reflect the value of intact natural systems on which we all depend.Not everybody is enthusiastic about the new measures. Although the OECD and the World Bank have both produced green growth reports as inputs to the UN’s Rio + 20 Earth Summit later this month, divisions among countries remain wide, particularly on how to define a "green economy" and whether and how to share the costs of creating one. Some developing countries have expressed skepticism about the green growth agenda, seeing it as a further example of developed countries saying “do as we say, not as we do” and even as a new excuse for protectionism that would make developing country exports less competitive.In thinking about green growth and competitiveness, here are three things to keep in mind:

• Green production processes have domestic benefits as well as costs.  Better environmental management can reduce the loss of GDP from pollution and natural resource degradation.  Lagarde gave the example of 70,000 premature deaths each year from air pollution in India. As in China, the biggest beneficiaries of reduced air pollution would be those who live there. The World Bank has estimated that the annual costs of environmental degradation and resource depletion approach 10 percent of GDP.  The cost of green policies and regulations needs to be offset against these substantial benefits.

• For exports, developing countries should consider whether “green growth” gives them a competitive edge in rich country markets.  Developed country consumers are increasingly scrutinizing the processes (social and environmental conditions) used to produce products they buy and are willing to pay more for products certified to have been produced in a fair and sustainable manner. Examples include certification from the Marine Stewardship Council, the Forest Stewardship Council, and Fair Trade coffee.  Some experts in developed countries are also beginning to think about imposing excise taxes on all products produced in environmentally or socially destructive conditions regardless of where they are produced – such as the so-called carbon-added taxes proposed by my CGD colleague David Wheeler.  For these and other reasons, policies to favor “green” production processes could prove to be a boon to developing countries—especially where labor-intensive activities turn out to be more environmentally sustainable than energy, chemical and capital intensive processes used in countries where labor costs are very high.
• In the case of global public goods, developing countries may be at a disadvantage if they take measures to, for instance, reduce carbon emissions where they would incur additional production costs if competitor countries don’t do the same.  In this case developing  countries should insist on being compensated for their incremental costs or should insist on a global agreement that all countries bear the same costs (e.g., proposals for a global bunker or aviation fuel tax for all shipping and aviation companies).