Chapter 3 – The Economy

The Environment Strikes Back: The Economy

AT THE CLOSE OF THE 1980s, with concern at its height for the Amazon’s survival, researchers from the New York Botanical Garden, the Missouri Botanical Garden, and the School of Forestry at Yale University published a joint study on the value of the edible fruits and latex, known as “minor” forest products, harvested from a standing rainforest. The value of the produce, which the rainforest’s inhabitants had for generations collected and sold in local markets, came to $6,330 per hectare, compared to only $2,960 from a hectare cleared for raising cattle, and $3,184 from a hectare of fast-growing tree plantations.

Yet although the land was twice as productive in its pristine state, the importance of the traditional rainforest economy had been denigrated by government and business interests alike, with only “modern” businesses being accorded any respect. The study blamed biased public policy and selective economic accounting: “Tropical timber is sold in international markets and generates substantial amounts of foreign exchange; it is a highly visible export commodity controlled by the government and supported by large federal expenditures.” On the other hand, the study explained, the more valuable “minor” forest products are “collected and sold in local markets by an incalculable number of subsistence farmers, forest collectors, middlemen, and shop-owners. These decentralized trade networks are extremely hard to monitor and easy to ignore in national accounting schemes.” Most financial appraisals of the tropical rainforests simply didn’t bother to count this difficult-to-identify rainforest GNP: the rare attempts made to quantify them had been half-hearted and grossly underestimated their true value, hence the myth that destructive logging and widespread forest clearance would yield more than an intact rainforest.

The same failure to count properly was being made the world over, in the rainforest and outside it. The Philippines, until the 1970s a super-achiever among Third World economies, had relied heavily on its minerals, timber, and other assets to increase its GNP. But the Philippines, like most countries, failed to account for changes in its natural resource stocks. When it sold its trees, for example, its GNP recorded the sale as an economic activity, as was the norm. But the Philippines’ accounts didn’t show the corresponding loss from its balance sheet of the assets (the trees) liquidated to generate that economic activity. Through this method of accounting, all appeared rosy for the Philippines until its forests were virtually wiped out — as happened in the late 1980s. Over a period of 30 years, the forest industry went from being the country’s top foreign exchange earner to being the largest importer of raw materials and one of the largest drains on the country’s foreign exchange reserves. Now destitute, the industry has become a national liability.

Such an accounting method has brought many to ruin. People who come into an inheritance and sell off the family treasures for imprudent investments or extravagances might appear to be successful to themselves and to outsiders. But if the sales don’t generate new wealth, such people become destitute when there’s nothing left to sell.

Most people (and all companies) judge their economic success by the wealth they are accumulating, not by the rate at which they are spending. Countries, however, do not record their physical wealth in their national statistics; they judge their success chiefly through statistics called gross national product (GNP) or gross domestic product (GDP). GNP counts all economic activities as positive — even if the activity diminishes a nation’s store of natural resources — by measuring how much is sold, not how much wealth remains. To improve their country’s GNP, government leaders thus attempt to increase economic activity, with little regard for the activity’s profitability. They are often hailed as economic masters until there’s nothing left to sell.

A study by the U.S.-based World Resources Institute estimated that growth in Indonesia’s gross domestic product, when calculated properly to account for the loss or denigration of its natural resources, was only half the amount officially estimated. Taking into account only three assets — oil, forests, and soils — each of which was depleted to increase the country’s output, Indonesia’s GDP dropped from 7.1 per cent growth to 4 per cent. Had the World Resources Institute included other important assets such as coal, copper, tin, nickel, fisheries, and natural gas, the country’s actual GDP would have been slashed further, possibly even showing a net loss of wealth.

The World Resources Institute’s detailed examination of the degradation of Indonesia’s soils illustrates how the country’s expansion of modern agriculture proved to be a double-edged economic sword. On the central, densely populated islands of Java, Bali, and Madura, clearing steeply sloped highlands of their forest cover to make way for maize and cassava did increase agricultural output. As hillsides were cleared of trees, however, erosion increased dramatically, and each hectare now loses 60 tons of topsoil every year. The sedimentation clogs reservoirs, harbors, and irrigation systems, and harms fisheries and other users of the water downstream. Nutrients are also lost from the soil, which becomes thin and less fertile. Although improved seed varieties and fertilizers helped boost crop yields in the hilly areas, the annual loss of soil fertility, measured as the value of lost farm income, is as large as the annual production increase. In other words, each production increase becomes offset by an equal loss in soil productivity, a senseless bargain that puts Indonesia’s economy on a treadmill.

“Natural resources are treated as gifts of nature rather than as productive assets whose value must be depreciated if they are used up,” the World Resources Institute concluded, adding that “a country could exhaust its mineral resources, cut down its forests, erode its soils, pollute its aquifers, and hunt its wildlife and fisheries to extinction, but measured income would not be affected as these assets disappeared.”

This negation of natural resources is deeply embedded in what has become the principal measure of a nation’s economic progress — the system of national income accounts. Designed during World War II for the U.K. by John Maynard Keynes, the most influential economist of this century, national income accounting — the system that produces GNP and GDP — was soon adopted by other nations as an economic planning tool for war-time and peace. Keynes wanted governments to actively manage their economies to avoid another Great Depression. To serve this interventionist means to an end, he designed a system of national income accounts to allow governments to manipulate consumption, savings, investment, and government expenditures. To stimulate economic activity, governments would incur deficits by spending money on public works and other endeavors, thereby making the national accounts and the national economy look healthier. Limits to government pump-priming due to natural resource constraints were virtually dropped from the economic models of Keynes and his contemporaries: over the previous century productivity had advanced so greatly that resources had come to be treated as infinite. Economics in the Keynesian world of government intervention lost its theoretical underpinnings as the “science of scarcity” articulated by the classical economists Adam Smith, David Ricardo, and John Stuart Mill.

Keynes and the other Brave-New-World economists could hardly be faulted for being dazzled by the 19th century’s extraordinary advances: steamships and railroads were dramatically lowering transport costs while food grains and raw materials came flooding in from North and South America, Australia, Russia, and the imperial colonies. “It was not that Nature herself had become more generous,” explained Robert Heilbroner in his treatise on the history of economic thought. “On the contrary, as the famous Law of Diminishing Returns made clear, Nature yielded up her wealth more grudgingly as she was more intensively cultivated.” No, Heilbroner went on, “the secret to economic growth lay in the fact that each generation attacked Nature not only with its own energies and resources, but with the heritage of equipment accumulated by its forebears.” As that heritage grew — as each generation added its quota of new knowledge, factories, tools, and techniques to the wealth of the past — human productivity grew at an astonishing pace, and Nature’s parsimony began to fade as a determinant of the wealth of nations.

FOR THE HALF CENTURY since the birth of the national income accounts, economic planners and governments the world over have assumed virtually limitless natural resources capable of virtually limitless exploitation, depreciating at such a vanishingly slow rate — if at all — as to not be worth counting. Unlike buildings, equipment, and other man-made assets, which accountants depreciate in value as they are used, the nation’s natural resources are presumed able to generate a steady, unending stream of undiminished future income.

Those same resources, however, can trickle to naught or they can generate a torrent of debt, as the coincidence of debt-ridden and resource-rich economies shows: Mexico, Venezuela, and Nigeria are all oil exporters, and all became heavily indebted. With their economies in irresponsible hands, their national balance sheets deteriorated badly as they sold off their natural resource assets while borrowing wildly against the amount left unsold, using both sources of cash to finance consumption and all-but-worthless investments. In the end they, and the other Third World debtors who borrowed against their resource assets, have been squeezed between a dwindling asset base and soaring debt payments.

Low-income countries tend to be more dependent on their natural resources for employment, revenues, and foreign exchange. Ironically, the system of national accounting by which they measure their economic progress completely ignores their principal asset, sending out signals to exploit their resources when signals to preserve them are most needed.

The disregard for a country’s natural assets stemmed from more than perverse national income accounting conventions: it also stemmed from a nearly total disregard for the value of other people’s activities. The productive endeavors of millions of people have for the past half century been overlooked and left out of the cost-benefit calculations for the world’s great development projects. When a farmer’s fields are expropriated for irrigation canals, when nomadic peoples’ grazing lands are plowed under for cotton plantations, when a community’s forest lands are turned over to loggers, when prime agricultural farmland is submerged by a dam reservoir, assets are destroyed and go unrecorded in the selective and usually secret calculations of the development planners and Third World governments. These lost assets, and the lost productivity that springs from them, silently erode the economic wherewithal of a nation.

The staggeringly large costs of natural resource exploitation have escaped man’s notice for the past century. But these costs will not escape the laws of nature, which in the end always demand an accounting.

Sources and Further Commentary

For information on the study by the New York Botanical Garden, the Missouri Botanical Garden, and the Yale School of Forestry, see “Valuation of an Amazonian Rainforest” by Charles M. Peters, Alwyn H. Gentry and Robert O. Mendelsohn in Nature, vol. 339, June 29, 1989; “Rain forest worth more if uncut, study says” from The New York Times, July 4, 1989; “The Real Value of Rainforests,” The TRF Times, Friends of the Earth, London, U.K. This study counted the value of merchantable fruits and latex, leaving out other “minor” forest products such as oils, fibre, medicinal plants, lianas and small palms because they were too difficult to count. When the value of trees cut for timber on a periodic, selective and sustainable basis — something that is rarely accomplished — was included, the value of the standing rainforest rose to $6,820.

Other studies demonstrate the same economic value from the standing rainforest. The average family on the island of Combu — in a tributary of the Amazon in Brazil’s Para state — can earn U.S. $3,300 a month (twice the Brazilian average) by selling rubber, cocoa and acai, the protein-rich fruit of palm trees. And all that in three days or less a week. Research by a University of Pennsylvania biologist found that 6.25 square meters of jungle cleared for cattle grazing will produce a 125 gram hamburger with 0.01% protein. The same area could also support a Brazil nut tree which produces 30 kilos of nuts with 21% protein. For further details see “Amazon Rainforest Riches” in Environmental Events Record, vol. 1, no. 9, October 1990.

The theory that any economic activity, no matter how environmentally damaging, adds to national economic wealth was applied by the Exxon oil company. Two years after the company’s oil tanker, the Valdez, ran aground dumping 11 million gallons of crude oil into Alaska’s Prince William Sound — the largest oil spill ever — tarring beaches and killing wildlife, Exxon’s director of Alaskan operations declared at a press conference that “The state of Alaska has been impacted but it’s all been good.” Mr. Otto Harrison, the oil giant’s top man in Alaska, was referring to the more than $2 billion that the company spent to hire local families and companies to help clean up the mess. See “Exxon says crude spill windfall for Alaska” by Jerry Dubrowski in The Globe and Mail, Toronto, May 9, 1991.

For details on the history of forestry in the Philippines see “Philippine wood industry faces mounting crisis” in Timber Trades Journal, (351) no. 5879, U.K., October 7, 1989.

For background on national income accounting and the failure to measure environmental asset degradation see Wasting Assets: National Resources in the National Income Accounts by Robert Repetto, William Magrath, Michael Wells, Christine Beer, Fabrizio Rossini, World Resources Institute, Washington, D.C., June 1989; WRI Publications Brief, Washington, D.C., June 1989; “Wasting Assets: The Need for National Resource Accounting” in Technology Review, U.S., January 1989; “The Economy and the Environment: Revising the National Accounts” in the IMF Survey, vol. 19, no. 11, Washigton D.C., June 4, 1990; “Environmental Accounting: Putting a Value on Natural Resources” by John Laird in Our Planet, United Nations Environment Programme, vol. 3, no. 1, 1991.

On the basis of its own calculations, the World Resources Institute shows that in most years between 1971 and 1984 resource depletion either exceeded or offset a good part of gross capital formation. With a fuller accounting of natural resource depletion, it says, it might become obvious that in many years depletion exceeded gross investment, and therefore, that “natural resources were being depleted to finance current consumption expenditures.”

For further background on the treatment of natural resources by various economists, see The Worldly Philosophers: The Lives, Times and Ideas of the Great Economic Thinkers by Robert L. Heilbroner, Simon and Schuster, 1972; Economists And Society: The Development of Economic Thought from Aquinas to Keynes by Joseph Finkelstein, Alfred L. Thimm, Harper and Row, Publishers, New York, 1973. And for further details on John Maynard Keynes and his role in the design of national income statistics, see The Life of John Maynard Keynes by R.F. Harrod, Reprints of Economic Classics, Augustus M. Kelly, New York, 1969; The Age of Uncertainty: A History of Economic Ideas and Their Consequences by John Kenneth Galbraith, Houghton Mifflin Company, Boston, 1977.

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