The International Economy, the Environment, and Development

Decline in the 1980s

The African Continent

Latin American Debt

Enabling Sustainable Development

Enhancing the Flow of Resources to Developing Countries

1.1 Increasing the Flow of Finance

1.2 Lending for Sustainable Development

Linking Trade. Environment, and Development

2.1 International Commodity Trade

2.2 Protectionism and International Trade

2.3 'Pollution-intensive' Goods

2.4 The Mandates of Multilateral Trade Forums

Ensuring Responsibility in Transnational Investment

Broadening the Technological Base

4.1 The Diffusion of Environmentally Sound Technologies

4.2 Building Up Technological Capabilities in Developing Countries

A Sustainable World Economy

1. Through the ages, people have reached beyond their own borders to obtain essential, valued, or exotic materials. Today's surer communications and larger trade and capital movements have greatly enlarged this process, quickened its pace, and endowed it with far-reaching ecological implications. Thus the pursuit of sustainability requires major changes in international economic relations.

I. The International Economy, the Environment, and Development

2. Two conditions must be satisfied before international economic exchanges can become beneficial for all involved. The sustainability of ecosystems on which the global economy depends must be guaranteed. And the economic partners must be satisfied that the basis of exchange is equitable; relationships that are unequal and based on dominance of one kind or another are not a sound and durable basis for interdependence. For many developing countries, neither condition is met.

3. Economic and ecological links between nations have grown rapidly. This widens the impact of the growing inequalities in the economic development and strength of nations. The asymmetry in international economic relations compounds the imbalance, as developing nations are generally influenced by - but unable to influence - international economic conditions.

4. International economic relationships pose a particular problem for poor countries trying to manage their environments, since the export of natural resources remains a large factor in their economies, especially those of the least developed nations. The instability and adverse price trends faced by most of these countries make it impossible for them to manage their natural resource bases for sustained production. The rising burden of debt servicing and the decline in new capital flows intensify those forces that lead to environmental deterioration and resource depletion occurring at the expense of long-term development.

5. The trade in tropical timber, for example, is one factor underlying tropical deforestation. Needs for foreign exchange encourage many developing countries to cut timber faster than forests can be regenerated. This overcutting not only depletes the resource that underpins the world timber trade, it causes the lost of forest-based livelihoods, increases soil erosion and downstream flooding, and accelerates the loss of species and genetic resources. International trade patterns can also encourage the unsustainable development policies and practices that have steadily degraded the croplands and rangelands in the drylands of Asia and Africa; an example of that is provided by the growth of cotton production for export in the Sahel region. (See Box 3-1.)

6. Growth in many developing countries also requires external capital inflows. Without reasonable flows, the prospect for any improvements in living standards is bleak. As a result, the poor will be forced to overuse the environment to ensure their own survival. Long-term development thus becomes much harder, and in some cases impossible. Yet trends in the movement of capital are worrying. Net resource flows to developing countries have fallen in real terms; in aggregate, there is now actually an outflow. (See Table 3-1) The increase of international capital flows to developing countries expected over the rest of the 1980s is only half that thought necessary to restore growth to levels where a reduction in poverty can occur./1

7. A mere increase in flows of capital to developing countries will not necessarily contribute to development. Domestic efforts are of paramount importance. More external funding is also required, but it must come in ways that are sensitive to the environmental impacts. The point is that the reduction of poverty itself is a precondition for environmentally sound development. And resource flows from rich to poor flows improved both qualitatively and quantitatively are a precondition for the eradication of poverty.

Table 3-1
Net Transfer of Resources to Capital-Importing Developing Countries
	1979	1980	1981	1982	1983	1984	1985
	(billion dollars)
Net Transfer from Loans (all IDCs)*	30.7	0.8	27.7	0.8	-8.6	-22.0	-41.0
Net Transfer from all Resource Flows (all IDCs)**	41.4	39.3	41.5	10.1	-0.3	-12.5	-31.0
Net Transfer from all Resource Flows (to Latin America)	15.6	11.9	11.4	-16.7	-25.9	-23.2	-30.0
* Net transfers on loans are net capital flows minus net interest paid. All loans, official and private, short and long-term, are included together with IMF credit ** Total net resource flows relate to net loan transfers, grants and net direct investment (less net direct investment income) Source: UN, World Economic Survey 1986 (New York: 1986).

II. Decline in the 1980s

8. The pressures of poverty and rising populations make it enormously difficult for developing countries to pursue environmentally sound policies even in the best of circumstances. But when international economic conditions are bad, the problems can become unmanageable. During the 1980s, economic growth rates declined sharply or even turned negative in much of the Third World, particularly in Africa and Latin America. Over the five years from 1981 to 1985, population growth outstripped economic growth in most developing countries./2

9. Deteriorating terms of trade, rising debt service obligations, stagnating flows of aid, and growing protectionism in the developed market economies caused severe external payment problems. The increased cost of foreign borrowing, at a time when exports were depressed, also helped to plunge many developing countries into debt crises. Austerity programmes laid down by the IMF as a prerequisite for extending credit to meet short-term balance-of-payments needs became particularly onerous after the debt crisis. Growth was cut back and many social objectives fell by the wayside, including those having to do with employment, health, education, environment, and human settlements.

10. This was a radical change from the 1960s and 1970s. Then it was rapid economic growth that was seen as an ecological threat. Now it is recession, austerity, and falling living standards. The decline of the 1980s has aggravated pressures on the environment in several ways:

• Austerity measures and general recessionary conditions have brought sharp declines in per capita incomes and increased unemployment. This forces more people back into subsistence agriculture, where they draw heavily on the natural resource base and thus degrade it.

• Austerity programmes inevitably include government cutbacks in both the staff and expenditure of fledgling, weak environmental agencies, undermining even the minimal efforts being made to bring ecological considerations into development planning.

• Conservation always taken a back seat in times of economic stress. As economic conditions have worsened in developing countries and debt pressures have mounted, planners have tended to ignore environmental planning and conservation in both industrial and rural development projects.

11. The critical situations in sub Saharan Africa and the debt strapped countries of Latin America demonstrate, in an extreme way, the damaging impacts that unreformed international economic arrangements are having on both development and the environment.

1. The African Continent

12. Africa on the whole has been caught up in a series of downward spirals:

• poverty and hunger leading to environmental degradation, deteriorating agriculture, and hence more poverty and hunger;

• falling savings and a neglect of new investment in the wake of growing poverty;

• high infant mortality, poverty, and lack of education;

• high population growth rates; and

• a flight from rural hunger to the cities, leading to explosive levels of urban growth and squalor, compounding the problems of inadequate food supplies.

13. The situation is not everywhere so bleak. Some nations have coped well, and some far-reaching and courageous policy reforms begun in the last few years have begun to bear fruit. Encouragement also comes from South Asia, where a comparable crisis 20 years ago has given way to an upward spiral of rising food production, diminishing (but still vast) poverty, slowing population growth, rising savings and investment, and greater attention to the long-term questions of environmental management and appropriate technology.

14. Among the many causes of the African crisis, the workings of the international economy stand out. Sub-Saharan Africa's economic well-being depends even more than low-income Asia's on developments in the world economy. Within the last decade, many sub-Saharan countries have been hit by adverse trends in commodity terms of trade and external shocks such as higher oil prices, fluctuating exchange rates, and higher interest rates. Over the last 10 years, the prices of major commodities such as copper, iron ore, sugar, ground-nuts, rubber, timber, and cotton have fallen significantly. In 1985, the terms of trade of sub-Saharan countries (except oil-exporting countries) were 10 per cent below 1970 levels. In countries eligible for funds from the International Development Association (IDA), the average fall was well over 20 per cent, with even greater drops in some, including Ethiopia, Liberia, Sierra Leone, Zaire, and Zambia./3

15. The problem has been compounded by growing difficulties in attracting development capital from the industrial world. At the same time, debt repayments and interest charges have risen Debt service rose in sub-Saharan Africa as a whole from 15 per cent of export earnings in 1980 to 31 per cent in 1985./4 This combination of events has led to a situation where net resource transfers to the area fell from an estimated $10 billion a year in 1982 to $1 billion in 1985./5 Thus nations have been able to import far less. In countries eligible for IDA loans, the import volume per person in 1984 was only 62 per cent of the volume in 1970./6 Imports for agriculture - machinery, fertilizers, and pesticides - and of essential supplies to meet basic needs have all been cut. The combination of diverse international and internal factors cut per capita incomes by 16 per cent in sub-Saharan Africa between 1960 and 1985./7

16. The economic difficulties of sub-Saharan countries have had devastating social impacts. Declining per capita rood production has contributed to growing undernourishment. The recent drought placed some 35 million lives at risk in 1984/85, and as the drought receded some 19 million people continued to suffer famine./8 Malnutrition and hunger have weakened much of the population, reducing their productivity, and made more of them (especially children and the old) more susceptible to debilitating diseases and premature death. The crisis has reversed progress in supplying safe drinking water and sanitation.

17. It is now more widely recognized that it is necessary to deal with the long-term causes rather than the symptoms. The vast misery brought on by the drought in Africa is now generally acknowledged, and the world community has responded with a substantial emergency programme. But emergency food aid is only a short-term reaction, and, at best, a partial answer. The roots of the problem lie in national and international policies that have bo far prevented African economies from realizing their full potential for economic expansion and thus for easing poverty and the environmental pressures that it generates.

18. The resolution lies in large part with African decision makers, but the international community also has a heavy responsibility to support Africa's adjustment efforts with adequate aid and trade arrangements and to see to it that more capital flows into poorer nations than out. These two complementary aspects of the resolution of the problems have been fully recognized by the African countries themselves/9 and generally acknowledged by the international community./10 The World Bank estimates that even if external economic conditions are favourable over the next five years, and even if African governments implement key policy reforms, a substantial gap will still remain between the finance or debt relief available on current donor policies and the amounts needed to prevent a further deterioration in the living standards of low-income Africa./11 And there is no money in this grim equation for restoring the damaged environment.

19. The international community must realize that Africa cannot pull itself out of the planet's most serious economic and ecological crisis without much more long-term assistance than is currently envisioned. In addition, greatly increased external financing for development must be accompanied by policy changes that recognize the need to avoid environmental degradation.

2. Latin American Debt

20. Debt is an acute problem for many countries of Africa. But, because of the magnitudes of debt involved, it has had its most visible impact in some middle-income countries - particularly in Latin America. The debt crisis remains a threat to international financial stability, but its main impact so far has been on the process of development, both in its economic and ecological aspects. Of the total world debt of around $950 billion in 1985, roughly 30 per cent was owed by four countries: Argentina, Brazil, Mexico, and Venezuela. Their debts constitute roughly two-thirds of the outstanding loans of banks to developing countries./12

21. In the 1970s, Latin America's economic growth was facilitated by external borrowing. Commercial banks were happy to lend to growing countries rich in natural resources. Then major changes in international conditions made the debt unsustainable. A global recession restricted export markets, and tight monetary policies forced up global interest rates to levels far exceeding any in living memory. Bankers, alarmed by deteriorating creditworthiness, stopped lending. A flight of indigenous capital from developing countries compounded the problem.

22. The ensuing crisis forced governments into austerity policies to cut back imports. As a result, Latin American imports fell by 40 per cent in real terms over three years./13 The consequent economic contraction reduced per capita gross domestic product by an average of B per cent in the eight main Latin American countries./14 Much of the burden was carried by the poor, as real wages fell and unemployment rose. Growing poverty and deteriorating environmental conditions are clearly visible in every major Latin American country.

23. Further, the lack of new credit and the continuing burden of debt service forced these countries to service their debts by running trade surpluses. The net transfers from seven major Latin American countries to creditors rose to almost $39 billion in 1984, and in that year 35 per cent of export earnings went to pay interest on overseas debt./15 This massive drain represents 5 to 6 per cent of the region's GDP, around a third of the internal savings, and nearly 40 per cent of export earnings. It has been achieved by adjustment policies that impose severe and regressively skewed cuts in wages, social services, investment, consumption, and employment, both public and private, further aggravating social inequity and widespread poverty. Pressures on the environment and resources have increased sharply in the search for new and expanded exports and replacements for imports, together with the deterioration and overexploitation of the environment brought about by the swelling number of the urban and rural poor in desperate struggle for survival. A substantial part of Latin America's rapid growth in exports are raw materials, food, and resource-based manufactures.

24. So Latin American natural resources ate being used not for development or to raise living standards, but to meet the financial requirements of industrialized country creditors. This approach to the debt problem raises questions of economic, political, and environmental sustainability. To require relatively poor countries to simultaneously curb their living standards, accept growing poverty, and export growing amounts of scarce resources to maintain external creditworthiness reflects priorities few democratically elected governments are likely to be able to tolerate for long. The present situation is not consistent with sustainable development. This conflict is aggravated by the economic policies of some major industrial countries, which have depressed and destabilized the international economy. In order to bring about socially and environmentally sustainable development it is indispensable, among other elements, for industrial countries to resume internationally expansionary policies of growth, trade, and investment. The Commission noted that, in these circumstances, some debtor countries have felt forced to suspend or limit the outflow of funds.

25. Growing numbers of creditor banks and official agencies are realizing that many debtors simply will not be able to keep servicing their debts unless the burden is eased. Measures under discussion include additional new lending, forgiveness of part of the debt, longer-term rescheduling, and conversion to softer terms. But a necessary sense of urgency is lacking. Any such measures must incorporate the legitimate interests of creditors and debtors and represent a fairer sharing of the burden of resolving the debt crisis.

III. Enabling Sustainable Development

26. Developing countries have sought, for many years, fundamental changes in international economic arrangements so as to make them more equitable, particularly with regard to financial flows, trade, transnational investment, and technology transfer./16 Their arguments must now be recast to reflect the ecological dimensions, frequently overlooked in the past.

27. In the short run, for most developing countries except the largest a new era of economic growth hinges on effective and coordinated economic management among major industrial countries - designed to facilitate expansion, to reduce real interest rates, and to halt the slide to protectionism. In the longer term, major changes are also required to make consumption and production patterns sustainable in a context of higher global growth.

28. International cooperation to achieve the former is embryonic, and to achieve the latter, negligible. In practice, and in the absence of global management of the economy or the environment, attention must be focused on the improvement of policies in areas where the scope for cooperation is already defined: aid, trade, transnational corporations, and technology transfer.

1. Enhancing the Flow of Resources to Developing Countries

29. Two interrelated concerns lie at the heart of our recommendations on financial flows: one concerns the quantity, the other the 'quality of resource flows to developing countries. The need for more resources cannot be evaded. The idea that developing countries would do better to live within their limited means is a cruel illusion. Global poverty cannot be reduced by the governments of poor countries acting alone. At the same time, more aid and other forms of finance, while necessary, are not sufficient. Projects and programmes must be designed for sustainable development.

1.1 Increasing the Flow of Finance

30. As regards the quantity of resources, the stringency of external finance has already contributed to an unacceptable decline in living standards in developing countries. The patterns and the needs of the heavily indebted countries that rely mainly on commercial finance have been described, along with those of low-income countries that depend on aid. But there are other poor countries that have made impressive progress in recent years but still face immense problems, not least in countering environmental degradation. Low-income Asia has a continuing need for large amounts of aid; in general, the main recipients in this region have a good record of aid management. Without such aid it will be much more difficult, to sustain the growth that, together with poverty-focused programmes, could improve the lot of hundreds of millions of the 'absolute poor'.

31. To meet such needs requires that the main donors and lending institutions re-examine their policies. Official development assistance (ODA) levels have stagnated in absolute terms, and most donor countries fall well short of internationally agreed targets. Commercial lending and lending by export credit agencies has fallen sharply. As part of a concerted effort to reverse these trends it is vitally important for development that there should be a substantial increase in resources available to the World Bank and IDA. Increased commercial bank lending is also necessary for major debtors.

1.2 Lending for Sustainable Development

32. In the past, development assistance has not always contributed to sustainable development and in some cases detracted from it. Lending for agriculture, forestry, fishing, and energy has usually been made on narrow economic criteria that take little account of environmental effects For instance, development agencies have sometimes promoted chemical-dependent agriculture, rather than sustainable, regenerative agriculture. It is important therefore that there should be a qualitative as well as a quantitative improvement.

33. A larger portion of total development assistance should go to investments needed to enhance the environment and the productivity of the resource sectors. Such efforts include reforestation and fuelwood development, watershed protection, soil conservation, agroforestry, rehabilitation of irrigation projects, small scale agriculture, low-cost sanitation measures, and the conversion of crops into fuel. Experience has shown that the most effective efforts of this type are small projects with maximum grass-roots participation. The programmes most directly related to the objective of sustainable development may therefore involve higher local costs, a higher ratio of recurrent to capital costs, and a greater use of local technology and expertise.

34. A shift towards projects of this kind would also require donors to re-examine the content of their aid programmes, particularly with regard to commodity assistance, which has sometimes served to reduce rather than enhance the possibilities for sustainable development. (See Chapter 5.)

35. The major priority is for sustainability considerations to be diffused throughout the work of international financial institutions. The roles of the World Bank and the IMF are particularly crucial because their lending conditions are being used as benchmarks for parallel lending by other institutions - commercial banks and export credit agencies. It is important in this context that sustainability considerations be taken into account by the Bank in the appraisal of structural adjustment lending and other policy-oriented lending directed to resource-based sectors - agriculture, fishing, forestry, and energy in particular - as well as specific projects.

36. A similar shift of emphasis is required in respect of adjustment programmes undertaken by developing countries. To date, 'adjustment' - particularly under IMF auspices - has led more often than not to cutbacks in living standards in the interest of financial stabilization. Implicit in many suggested plans for coping with the debt crisis is the growing recognition that future adjustment should be growth-oriented. Yet it also needs to be environmentally sensitive.

37. The IMF also has a mandate for structural adjustment lending, as in its new Structural Adjustment Facility. There has been a strongly expressed demand from developing-country borrowers for the Fund to take into account wider and longer-term development objectives than financial stabilization: growth, social goals, and environmental impacts.

38. Development agencies, and the World Bank in particular, should develop easily usable methodologies to augment their own appraisal techniques and to assist developing countries to improve their capacity for environmental assessment.

2. Linking Trade, Environment, and Development

39. The importance of foreign trade to national development has greatly increased for most countries in the post-war period. (See Table 3-2.) This is one measure of the extent to which trade has made nations, economically and ecologically, more interdependent. Patterns of world trade also have changed markedly. First, the value of trade in manufactured goods grew at a faster rate than that in primary products other than fuel, and a growing number of developing countries have emerged as major exporters of such goods. Manufactured goods now account for twice the value of developing countries' non-oil exports./17 (See Chapter 8.) Second, the industrialized market economies have come to depend more on fuel imports from developing countries, which accounted for 43 per cent of consumption in 1980-81 compared with only 16 per cent in 1959-60 and even less in pre-war years./18

40. The dependence of the developed market economies on other mineral imports from the developing countries has also grown, and the share of these imports in consumption increased from 19 per cent in 1959-60 to 30 per cent in 1980-81./19 Non-renewable resources like fuels and minerals, as well as manufactured goods, are now far more important than tropical products and other agricultural materials in the flow of primary products from developing to industrial countries. In fact, the flow of food grains is in the opposite direction.

41. The main link between trade and sustainable development is the use of non-renewable raw materials to earn foreign exchange. Developing countries face the dilemma of having to use commodities as exports, in order to break foreign exchange constraints on growth, while also having to minimize damage to the environmental resource base supporting this growth. There are other links between trade and sustainable development; if protectionism raises barriers against manufactured exports, for example, developing nations have less scope for diversifying away from traditional commodities. And unsustainable development may arise not only from overuse of certain commodities but from manufactured goods that are potentially polluting.

2.1 International Commodity Trade

42. Although a growing number of developing countries have diversified into manufactured exports, primary commodities other than petroleum continue to account for more than one-third of the export earnings of the group as a whole. Dependence on such exports is particularly high in Latin America (52 per cent) and Africa (62 per cent)./20 The countries recognized as 'least developed' for the purposes of the UN Special Programme use primary commodities for 73 per cent of their export earnings./21

43. Non-oil commodity prices fell during the early 1980s, not only in real but also in nominal terms. By early 1985, the UNCTAD commodity price index was 30 per cent below the 1980 average./22 This recent weakness of commodity prices may not be only a temporary phenomenon. Commodity prices have not yet recovered from the depth of the world recession despite increased economic growth in consuming countries. The reasons may be partly technological (an acceleration in raw material substitution); partly monetary, caused by the high cost of holding stocks of commodities; and partly due to increases in supplies by countries desperate to earn foreign exchange.

Table 3-2
The Growing Importance of Trade
	1950	1982
Economic Group	(exports as a per cent of GDP or NMP)
Developed Market Economies	7.7	15.3
Developing Market Economies	15.5	23.8
Socialist Countries of Eastern Europe	3.4*	16.6*
Socialist Countries of Asia	2.9*	9.7*
* percentages to net material product (NMP).
Source: Based on UNCTAD, Handbook of International Trade and Development Statistics, 1985 Supplement (New York: United Nations, 1985).

44. These countries are turning the terms of trade against themselves, earning less while exporting more. The promotion of increased volumes of commodity exports has led to cases of unsustainable overuse of the natural resource base. While individual cases may not exactly fit this generalization, it has been argued that such processes have been at work in ranching for beef, fishing in both coastal and deep sea waters, forestry, and the growing of some cash crops. Moreover, the prices of commodity exports do not fully reflect the environmental costs to the resource base. In a sense, then, poor developing countries are being caused to subsidize the wealthier importers of their products.

45. The experience of oil has of course been different from that of most other commodities. (See Chapter 7.) It does provide one example of producers combining to restrict output and raise prices in ways that greatly increased export earnings while conserving the resource base and promoting energy saving and substitution on a large scale. Recent events suggest that regulation of the market by producers is very difficult in the long term, whether or not it is desirable in the wider, global interest, and in any event the conditions have not existed for other commodity exporters to operate in a like manner. Any arrangement encompassing measures to enhance the export earnings of producers, as well as to ensure the resource basis, would require consumer as well as producer support.

46. In recent years, Third World commodity exporters have sought to earn more by doing the first-stage processing of raw materials themselves. This first stage often involves subsidized energy, other concessions, and substantial pollution costs. But these countries often find that they do not gain much from this capital- and energy-intensive first-stage processing, as the price spread shifts in favour of downstream products, most of which continue to be manufactured mainly in industrial countries. Tariff escalation in the industrial market economies reinforces this tendency.

47. The main international response to commodity problems has been the development of international commodity agreements to stabilize and raise developing countries' earnings from these exports. But real progress has been very limited and in fact there have been reversals. Moreover, environmental resource considerations have not played any part in commodity agreements, with the notable exception of the International Tropical Timber Agreement./23

48. Commodity agreements have not been easy to negotiate, and regulation of commodity trade has been notoriously controversial and difficult. Current arrangements could be improved in two crucial respects:

• Larger sums for compensatory financing to even out economic shocks - as under the IMF's Compensatory Financing Facility - would encourage producers to take a long-term view, and not to overproduce commodities where production is close to the limits of environmental sustainability during periods of market glut.

• Where producers need to diversify from traditional, single-crop production patterns, more assistance could be given for diversification programmes. The second window of the Common Fund could be used for promoting resource regeneration and conservation./24

49. Individual governments can better use renewable resources such as forests and fisheries to ensure that exploitation rates stay within the limits of sustainable yields and that finances are available to regenerate resources and deal with all linked environmental effects. As for non-renewable resources like minerals, governments should ensure that:

• the leaseholder undertakes exploration aimed at adding to proven reserves at least the amount extracted;

• that the ratio of production to proven reserve remains below a pre-specified limit;

• that the funds generated by royalties are used in a way that compensates for the declining income when the resource deposit is exhausted; and

• that the leaseholder is responsible for land restoration and other environmental control measures in the urea affected by mining.

50. Relevant international organizations such as various UN agencies, the World Bank, and regional groups could develop further their work on model contracts and guidelines incorporating these principles.

2.2 Protectionism and International Trade

51. The increase in protectionism in industrial countries stifles export growth and prevents diversification from traditional exports. The success of some Far Eastern developing countries in increasing exports of labour-intensive manufactured goods shows the development potential of such trace. However, other countries - especially low-income Asian and Latin American nations - seeking to follow the same route have found themselves severely handicapped by growing trade barriers, particularly in textiles and clothing. If developing countries are to reconcile a need for rapid export growth with a need to conserve the resource base, it is imperative that they enjoy access to industrial country markets for non traditional exports where they enjoy a comparative advantage. In many cases, the problems of protectionism relate to manufactures; but there are cases - sugar is a good example - where industrial countries employ agricultural trade restrictions in ways that are damaging ecologically as well as economically. (See Box 3-2.)

2.3 'Pollution-intensive' Goods

52. The processing of certain raw materials - pulp and paper, oil, and alumina, for example - can have substantial environmental side effects. Industrial countries have generally been more successful than developing ones in seeing to it that export product prices reflect the costs of environmental damage and of controlling that damage. Thus in the case of exports from industrial countries, these costs are paid by consumers in importing nations, including those in the Third World. But in the case of exports from developing countries, such costs continue to be borne entirely domestically, largely in the form of damage costs to human health, property, and ecosystems.

53. In 1980 the industries of developing countries exporting to OECD members would have incurred direct pollution control costs of $5.5 billion if they had been required to meet the environmental standards then prevailing in the United States, according to a study conducted for this Commission./25 If the pollution control expenditures associated with the materials that went into the final product are also counted, the costs would have mounted to $14.2 billion. The evidence also suggests that OECD imports from developing countries involve products that entail higher average environmental and resource damage costs than do overall OECD imports./26 These hypothetical pollution control costs probably understate the real costs of environmental and resource damage in the exporting countries. Furthermore, these costs relate only to environmental pollution and net to the economic damage costs associated with resource depletion.

54. The fact that these costs remain hidden means that developing countries are able to attract more investment to export manufactured goods than they would under a more rigorous system of global environmental control. Many Third World policymakers see this as beneficial in that it gives developing countries a comparative advantage in 'pollution-intensive' goods that should be exploited. They also see that passing along more of the real costs could reduce the competitive position of their country in some markets, and thus regard any pressure in this direction as a form of disguised protectionism from established producers. Yet it is in developing countries' own long-term interests that more of the environmental and resource costs associated with production be reflected in prices. Such changes must come from the developing countries themselves.

2.4 The Mandates of Multilateral Trade Forums

55. Although a number of UNCTAD research projects have considered the links between trade and environment, these issues have not been taken up systematically by intergovernmental organizations. The mandates of these organizations - principally GATT and UNCTAD - should include sustainable development. Their activities should reflect concern with the impacts of trading patterns on the environment and the need for more effective instruments to integrate environment and development concerns into international trading arrangements.

56. International organizations dealing with trade will find it easier to reorientate their activities if each nation designates a lead agency with a broad mandate to assess the effects of international trade on sustaining the environmental and resource base of economic growth. This agency could be responsible for raising sustainability issues in the work of UNCTAD, GATT, OECD, CMEA, and other relevant organizations.

3. Ensuring Responsibility in Transnational Investment

57. Overseas investment activity by companies in market economies has grown substantially over the past 40 years. (See Box 3-3.) Foreign affiliates now account for 40 per cent of sales, 33 per cent of net assets, and 56 per cent of net earnings for 380 of the largest industrial corporations in the market economies, according to data compiled by the UN Centre for Transnational Corporations./27 A high proportion of transnational investment is within industrial market economies, another aspect of the growing integration of these economies.

58. Transnationals play an important role as owners, as partners in joint ventures, and as suppliers of technology in the mining and manufacturing sectors in many developing countries, especially in such environmentally sensitive areas as petroleum, chemicals, metals, paper, and automobiles. They also dominate world trade in many primary commodities.

59. In recent years, many developing countries have begun to take a more positive view of the role TNC investment can play in their development process. This has been somewhat influenced by these countries' needs for foreign exchange and their awareness of the role that foreign investment might play in providing it. Effective cooperation with TNCs is possible in creating equal conditions for all parties. This can be attained by a strict observance of the principle of sovereignty of the host country For their part, many corporations have recognized the need to share managerial skills and technological know-how with host country nationals and to pursue profit-seeking objectives within a framework of long-tern sustainable development.

60. But mutual suspicions still exist, usually because of an asymmetry in bargaining power between large corporations and small, poor, developing countries. Negotiations are often made one sided by a developing country's lack of information, technical unpreparedness, and political and institutional weaknesses. Suspicions and disagreements remain, particularly concerning the introduction of new technologies, the development of natural resources, and the use of the environment. If multinationals are to play a larger role in development, these conflicts and suspicions must be reduced.

61. Strengthening the bargaining posture and response of developing countries vis a vis transnationals is therefore critical. Where nations lack indigenous capacity to deal with large TNCs, regional and other international institutions should assist. As indicated earlier, they could expand existing help in the form of model agreements with transnationals for different situations, such an lease agreements for the exploitation of a mineral resource. They could also field technical assistance and advisory teams when a country negotiates with a transnational.

62. Transnational can have a substantial impact on the environment and resources of other countries and on the global commons. Both the home and host countries of TNCs share responsibilities and should work together to strengthen policies in this sphere. For example, information on policies and standards applied to and followed by corporations when investing in their own home country, especially concerning hazardous technologies, should be provided to host countries. Moreover, the policies of some industrialized countries that major investments are subject to prior environmental assessment should be considered for application to investments made elsewhere and should be broadened to include sustainability criteria. The information and recommendations thus arrived at should be shared with the host countries, which of course would retain the final responsibility.

63. Despite their importance, international measures regarding transnational have been generally lacking and have proved extremely difficult to negotiate. The codes of conduct for transnational corporations formulated by the OECD and under discussion in the UN should deal explicitly with environmental matters and the objective of sustainable development. More detailed and specific instruments are needed for other problems. In particular, when introducing a new technology, plant, product, or process, or when setting up a joint venture in a developing country, the parties involved must also recognize and accept certain special responsibilities. (See Chapter 8.)

4. Broadening the Technological Base

64. The promotion of resource productivity is largely the work of domestic economic policy. But the international economy impinges on possibilities for productivity improvement in several ways, particularly in the transfer of technology from one country to another.

4.1 The Diffusion of Environmentally Sound Technologies

65. The promotion of sustainable development will require an organized effort to develop and diffuse new technologies, such as for agricultural production, renewable energy systems, and pollution control. Much of this effort will be based on the international exchange of technology: through trade in improved equipment, technology-transfer agreements, provision of experts, research collaboration, and so on. Hence the procedures and policies that influence these exchanges must stimulate innovation and ensure ready and widespread access to environmentally sound technologies.

66. The real challenge is to ensure that the new technologies reach all those who need them, overcoming such problems as the lack of information and in some cases an inability to pay for commercially developed technologies. The measures required at the national level to deal with these problems are discussed in Part II of this report. However, both these issues also arise in the international diffusion of technology.

67. Developing countries paid about $2 billion in 1960 by way of royalties and fees, mainly to industrial countries./28 The gap in scientific and technological capabilities is particularly wide in areas of direct relevance to the objectives of sustainable development, including biotechnology and genetic engineering, new energy sources, new materials and substitutes, and low-waste and non-polluting technologies.

68. The principal policy issue as regards the impact of payments is the impact of patents and proprietary rights. In 1980, industrialized market economies accounted for 65 per cent of the world total of patents granted, and the socialist countries of Eastern Europe held 29 per cent./29 Developing countries held only 6 per cent, and most of these had been granted to non-residents. Proprietary rights are a key element in the commercial development of technology. But their application in certain areas may hamper the diffusion of environmentally sound technologies and may increase inequities.

69. In the past, publicly funded research provided new technology to small producers, particularly farmers, on a full or subsidized basis. The situation is not very different now, and in areas such as new seed varieties there is some reason to believe proprietary rights could act as a major barrier to developing countries' acquisition of new technologies. International cooperation is essential to maintain the flow of genetic material and to ensure an equitable sharing of gains.

4.2 Building Up Technological Capabilities in Developing Countries

70. At present, most of the global research and development effort is devoted to military purposes or the commercial objectives of large corporations. Little of this is of direct relevance to conditions in developing countries. In many areas the gap in technological capabilities is narrowing, but these efforts must be supported by international assistance, especially in such key areas as biotechnology. Unless action is taken to accumulate biological knowledge, valuable information as well as vital genetic variety will be lost forever, and developing countries will be at a permanent disadvantage in adapting the new biotechnologies to their own needs.

71. Developing countries therefore have to work, individually and together, to build up their technological capabilities. The creation and enhancement of the infrastructure for research and technology is a precondition for such cooperation. The countries concerned could share the burden by establishing cooperative research projects along the lines of the International Agricultural Research Centres./30 Mission-oriented cooperative research ventures could be developed in areas such as dryland agriculture, tropical forestry, pollution control in small enterprises, and low-cost housing. Specific responsibilities would be assigned to institutions and corporations in the participating countries, and the agreement could provide for the equitable sharing and widespread diffusion of the technologies developed.

IV. A Sustainable World Economy

72. If large parts of the developing world are to avert economic, social, and environmental catastrophes, it is essential that global economic growth be revitalized. In practical terms, this means more rapid economic growth in both industrial and developing countries, freer market access for the products of developing countries, lower interest rates, greater technology transfer, and significantly larger capital flows, both concessional and commercial.

73. But many people fear that a more rapidly growing world economy will apply environmental pressures that are no more sustainable than the pressures presented by growing poverty. The increased demand for energy and other non-renewable raw materials could significantly raise the price of these items relative to other goods.

74. The Commission's overall assessment is that the international economy must speed up world growth while respecting the environmental constraints. Some favourable trends have been noted in the pattern of consumption and production in industrial countries, which collectively still consume most of the world's non-renewable resources.

75. Sustaining these trends will make it easier for developing countries to grow by diversifying their own economies. But for them to emerge from dependence a general acceleration of global economic growth is not enough. This would mean a mere perpetuation of existing economic patterns, though perhaps at a higher level of incomes. It must be ensured that the economies of developing countries grow fast enough to outpace their growing internal problems and fast enough for that first leap needed to acquire momentum. A continuation of economic growth and diversification, along with the development of technological and managerial skills, will help developing countries mitigate the strains on the rural environment, raise productivity and consumption standards, and allow nations to move beyond dependence on one or two primary products for their export earnings.

76. Future patterns of agricultural and forestry development, energy use, industrialization, and human settlements can be made far less material-intensive (see Chapters 5, 7, 8, and 9), and hence both more economically and environmentally efficient. Under these conditions, a new era of growth in the world economy can widen the options available to developing countries.

77. Reforms at an international level are now needed to deal simultaneously with economic and ecological aspects in ways that allow the world economy to stimulate the growth of developing countries while giving greater weight to environmental concerns. Such an agenda requires deep commitment by all countries to the satisfactory working of multilateral institutions, such as the multilateral development banks; to the making and observance of international rules in fields such as trade and investment; and to constructive dialogue on the many issues where national interests do not immediately coincide but where negotiation could help to reconcile them.

78. The Commission therefore regrets but cannot ignore the recent decline in multilateral cooperation in general and a negative attitude to dialogue on development in particular. At first sight, the introduction of an environmental dimension further complicates the search for such cooperation and dialogue. But it also injects an additional element of mutual self-interest, since a failure to address the interaction between resource depletion and rising poverty will accelerate global ecological deterioration.

79. New dimensions of multilateralism are essential to human progress. The Commission feels confident that the mutual interests involved in environment and development issues can help generate the needed momentum and can secure the necessary international economic changes that it will make possible.